Leading the world to better performance
GP STRATEGIES CORPORATION
Annual Report 2006
A company’s competitive advantage is directly related
to the effectiveness of its people.
GP’s vision is to be the most respected and preferred leader
in performance improvement.
To our SHAREHOLDERS
GP’s Mission Statement
We improve an organization’s performance and competitiveness
through the effective integration of people, processes, and technologies.
We accomplish this by providing innovative training solutions
in long-term partnership with our customers.
In our shareholders letter last year, we wrote about our transition from a technology-based holding company
to a focused performance improvement company. We are excited to update you on the progress made in
2006. With our aggressive global expansion strategies, the acquisition of Sandy Corporation, and our efforts
in Training Business Process Outsourcing (BPO), we believe that we are increasingly being recognized as a
leading innovator in our industry. In 2007, we hope to continue on this path with organic growth, cross-
selling initiatives, global expansion, and strategic acquisitions.
STRATEGIC SUCCESSES
One of our strategic objectives in 2006 was to add custom sales training to our service offerings. This was
accomplished in two ways. In early 2006 we completed the acquisition of Peters Management Consultancy
(PMC) in the United Kingdom. Later in the year we signed a definitive agreement to acquire Sandy
Corporation (Sandy) from ADP. The transaction closed on January 23, 2007.
PMC is a leading provider of training and other performance improvement services to financial services and
retail companies in the United Kingdom. This has been a nice addition to the range of services we can offer
our European clients.
Sandy offers custom sales training and print-based and electronic publications primarily to the U.S.
automotive industry, a market it has served for over 30 years. We expect that Sandy will generate in excess
of $60 million of revenue on an annual basis, and the transaction should be accretive to earnings in 2007.
The acquisition of Sandy will enhance our existing service offerings by adding custom product sales training
to our offering mix. Sandy has an exceptional reputation for providing dealership product sales training
solutions to manufacturers in the U.S. automotive industry. We look forward to exporting Sandy’s solutions
offerings worldwide.
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Today we are stronger than we were a year ago, and we look forward
to continuing that trend in 2007.
These acquisitions are consistent with our strategy of being a full-service provider of custom learning
solutions to Fortune 500, government, and other commercial customers.
In 2006, we also focused on other major goals and made significant inroads:
• Expand our customer and revenue base.
We continued our global expansion, primarily in Asia Pacific and Europe, and increased
our capabilities to gain and retain customers, as organizations increasingly need consistent
support around the world. In addition to traditional new business efforts, we also worked
on strategic alliances to round out our capabilities and increase our customer base.
• Develop our Training BPO Practice.
The trend among companies today is to outsource strategic training initiatives to reduce
overall costs. To support this trend, our Training BPO practice focused on improving
productivity, reducing cost, and increasing revenue. This focus helped to reinforce our
position as one of the leading providers of tuition administration services and training
outsourcing services in the world. Our efforts resulted in the addition of new customers in
2006 and the renewal of numerous contracts with existing customers. In addition, we have
started to see success in cross-selling our other services to our BPO clients. In 2007 we
expect to remain a leader in training outsourcing services.
3
FISCAL YEAR 2006
We expanded our global client base, increased our scope of work with existing clients, and achieved strong
operating results, validating our strategic business model and improving our competitiveness in the training
outsourcing marketplace. We were able to achieve these results despite the downturn that we experienced
from our Process, Energy and Government segment, which has seen a diversion of funding due to the war
efforts in Iraq and Afghanistan.
Adjusted EBITDA, excluding non-recurring items of $14.8 million for 2006, was up $2.1 million, or
17 percent, compared to 2005.
Revenue of $178.8 million for fiscal year 2006 was up $3.2 million from 2005. Net cash provided from
operations was $14.9 million.
THE MANAGEMENT TEAM
We retained the seasoned management team we assembled to drive GP’s greater success in a global economy.
Their innovation and deep understanding of the outsourcing marketplace represents a strong differentiator
as we continue to increase our value in the eyes of our customers, prospects, employees, and shareholders.
Scott Greenberg
Chief Executive Officer
Doug Sharp
President
Karl Baer
Executive Vice President, Manufacturing and Strategic Planning
Tom Davis
Executive Vice President, Homeland Security and Energy
Sharon Esposito-Mayer
Executive Vice President & Chief Financial Officer
Ken Crawford
Senior Vice President, General Counsel & Secretary
OTHER GP OPERATIONS
We agree with industry experts who anticipate that human capital and training will remain the greatest
competitive advantage between multinational organizations. With an aging workforce in the U.S. and
increasing globalization, attracting, developing, and retaining skilled workers will be the primary challenge
businesses face as they compete for their share of the worldwide market. We are perfectly positioned to help
customers overcome these challenges.
4
GLOBAL BPO INITIATIVES
General Physics (UK) Ltd. expanded its BPO services to leading high-technology and semiconductor
companies in Europe. Operating from locations in the UK, France, and Germany, GP provided a fully
managed service covering the continent and other countries, with services delivered in The Netherlands,
Israel, Denmark, Spain, Belgium, Norway and Italy. Services in 2007 will be further expanded to cover
Switzerland and emerging markets in Eastern Europe.
Our expansion into the Asia Pacific region opens the door to multinationals that need Training BPO services
there. Our services enable our clients to rapidly launch the same or similar service offerings from U.S. to
offshore markets in China, India, Singapore, Malaysia, and other regions of Asia. We look forward to our
continued growth in 2007. By focusing on process improvement, systems development, and new customer
additions, we will remain a leader in training outsource services.
ACHIEVING STRATEGIC OBJECTIVES IN THE PROCESS ENGINEERING SECTOR
A key differentiator as a training company has been our engineering expertise, with more than 30 years of
experience providing engineering and technical training services in the government and commercial sectors.
We continued this trend in 2006 by providing services in engineering, design, and construction of alternative
fueling facilities.
With the retirement of many experienced personnel in the petrochemical industry, a major effort is
underway to build programs to provide skilled and capable operations and maintenance personnel. We are
a primary provider to the petrochemical industry for the analysis, design, development, and implementation
of technical training for their operators, maintenance technicians, and engineering support personnel.
We are assisting many of the largest refining and chemical manufacturing companies to build these training
programs. It is expected that this effort will continue to grow as the world’s appetite for petroleum-based
products expands.
The demonstration of hydrogen (H2) as a viable fuel for motor vehicles has been part of the President’s
plan to reduce U.S. dependence on foreign oil since 2003. As the need to find alternative fuel sources
increases, we continue to expand our services to support development of local delivery systems. We have
constructed H2 refueling stations in California, Michigan and Florida. We were also the engineer of record
for two of the stations.
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We continue to provide engineering design-build services for Liquefied Natural Gas (LNG) and Liquid to
Compressed Natural Gas (LCNG) refueling stations. Over the last 12 years, GP has provided professional
engineering services supporting the construction of more than 25 LNG/LCNG facilities.
PAVING THE WAY FOR CONTINUED GROWTH IN E-LEARNING
Our e-learning organization has helped several Fortune 1000 customers implement Learning Management
System (LMS) technologies and develop web-based training, including sales, leadership, and technical skills
training, and closely supports our BPO organization. Key components of our BPO initiatives include the
implementation and hosting of learning infrastructure and the development of customer training materials.
The U.S. government’s e-Training initiative, led by the Office of Personnel Management (OPM), is
transforming learning by creating a premier e-learning environment that supports the development of the
federal workforce through simplified one-stop access to high quality e-learning products, tools, and services.
In support of this initiative, we host learning management systems for the Department of Energy (DOE);
Department of Transportation (DOT); Federal Aviation Administration; United States Department of
Agriculture (USDA); Internal Revenue Service (IRS); Bureau of Alcohol, Tobacco, Firearms, and
Explosives; NASA; Department of Veterans Affairs; and the National Science Foundation. A key component
of hosting the LMS for a federal agency is the security of the data. In 2006, the OPM recertified that our
hosting services are in compliance with Federal Information Security Management Act (FISMA) standards.
We are assisting federal agencies with the selection and implementation of other technology-based solutions
to support their training initiatives, including the implementation of Learning Content Management Systems
for the IRS and DOE. Over 600,000 government employees receive their training from GP-hosted web sites.
As a leader in providing e-learning training solutions, GP has been asked to participate in many steering
committees for federal agencies because of our understanding, experience, and involvement with learning
infrastructure. During the past year, GP developed custom web-based courseware for the USDA and the
DOT, as well as the Comptroller of the Currency and the National Institute of Corrections.
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LEADING THE WAY IN THE ENERGY SECTOR WITH PROPRIETARY TECHNOLOGY
The continuing benefits of our technology-driven services to power generating facilities were proven through
revenue and profit growth in 2006. Our industry-leading web-based training (WBT) product for plant
operating and maintenance personnel, GPiLearn™, expanded to over 140 clients in 2006. This online
training solution delivered by GP’s training professionals demonstrated its value in helping our clients
address one of the critical issues facing the power generation industry today—the “brain drain” associated
with the retirement of experienced workers over the next five years.
We also released Version 9 of EtaPRO™, our real-time performance monitoring and optimization system
installed in over 250 generating plants. The combined footprint of these products continues to expand and
now covers plants in 30 countries worldwide.
CAPITALIZING ON EXPANDING NEEDS FOR MANUFACTURING TRAINING
AND CONSULTING WORLDWIDE
Our Manufacturing Group delivered another year of revenue growth. Our technical training services
prospered as a result of focusing on clients’ needs in the Metals, Electronics, and Semiconductor industries,
resulting in expanded business with existing customers and new business with prospects who became
customers. We have also realized successful growth within our Pharmaceutical and Life Sciences customer
base in the areas of technical training and documentation, event management and planning, and information
technology support services.
As our expansion into the Asia Pacific region continues to mature, the Manufacturing Group is leading the
push to develop business opportunities in technical training, plant launch, and quality services as our
existing clients seek to expand their operations into the region, desiring consistent support in their U.S. and
off-shore markets. In addition, we increased our performance improvement and consulting capabilities in
response to customer demands for lean, Six Sigma, and performance consulting services here and abroad.
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OUR PEOPLE
For over 40 years, a key element of our success has been our ability to attract and retain key talent with both
industry and training expertise. With more than 1,500 employees, we possess strong technical and training
experience. Our employees include expert planners and disciplined workers with strong project
management skills and the ability to stay focused on strategic goals.
We take great pride in our people. Their unique backgrounds and expertise, combined with strong
communications skills, have helped us develop a reputation for excellence in training, technical services,
engineering, and best practices.
OUR CUSTOMER RELATIONSHIPS
Offering customized solutions, GP has been a loyal strategic partner to hundreds of the most competitive
organizations in the world. Our proven methodologies, talented personnel and innovative tools have
demonstrated our value by improving our customers’ organizational performance. We are proud to
report that we have maintained relationships with 60 percent of our top 25 customers for five or more
years—a testament to the quality services we provide.
THE FUTURE — CLEAR STRATEGY FOR GROWTH
With strong customer relationships, a confident business environment, and burgeoning global expansion, we
anticipate many opportunities to expand our involvement with many of our existing customers in 2007, both
through cross-selling and adapting our services for use overseas.
As our successes grow, we also gain more value in the eyes of the prospects we are aggressively pursuing in
multiple sectors. One of our biggest strengths is our breadth of services and industry specializations, making
our offerings attractive to a broad range of companies who seek to increase their competitiveness through
performance improvement and human capital development.
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Moving forward, we see opportunities for growth in the following areas:
•
Strategic acquisitions that help expand our service capabilities, industry specializations, and
geographic coverage.
• Global expansion by pursuing opportunities with multinationals, as well as with local businesses,
reaching new marketplaces in areas of fast growth worldwide.
• Continuous improvement of our products, solutions, people, processes, and technology to increase
our value in the eyes of customers and prospects — i.e., practicing what we preach.
• Aggressive development by pursuing cross-selling opportunities among our established client base
and continuing to acquire new customers who appreciate superior quality, responsive service and
innovative solutions.
One thing we’ve learned in our more than 40 years of delivering training, engineering and consulting
services, is that we know what we’re doing when it comes to performance improvement.
Together our customers, people, and shareholders have made GP a respected
and trusted leader. Moving forward, there is no limit to what we can do.
Scott N. Greenberg
Douglas E. Sharp
Chief Executive Officer
President
9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:58) Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
(cid:134) Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the transition period from
to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
(State of Incorporation)
6095 Marshalee Drive, Suite 300, Elkridge, MD
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
13-1926739
21075
(Zip Code)
(410) 379-3600
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Name of each exchange on which registered:
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:58)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:134) No (cid:58)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:58) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)
Accelerated filer (cid:58)
Non-accelerated filer (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes (cid:134) No (cid:58)
The aggregate market value of the outstanding shares of the Registrant’s Common Stock, par value $.01 per share, held by non-affiliates as of
June 30, 2006 was approximately $110,447,000.
The number of shares outstanding of the registrant’s Common Stock as of February 28, 2007:
Class
Common Stock, par value $.01 per share
DOCUMENTS INCORPORATED BY REFERENCE
Outstanding
16, 423,493 shares
Portions of the registrant’s definitive Proxy Statement for its 2007 Annual Meeting of Stockholders are incorporated herein by reference into
Part III hereof.
Table of Contents
PART I
Page
Cautionary Statement Regarding Forward-Looking Statements
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
1
1
7
12
12
13
13
13
16
17
30
31
71
71
72
73
73
73
74
74
75
83
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements within 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 reflect our current expectations concerning future
events and results. We use words such as “expects”, “plans”, “intends”, “believes”, “may”, “will” and
“anticipates” to indicate forward-looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to differ materially from those expressed
or implied by these forward-looking statements, including, but not limited to, those factors set forth under Item
1A - Risk Factors and those other risks and uncertainties detailed in 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, 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.
PART I
Item 1:
Business
General Development of Business
GP Strategies Corporation (“GP Strategies” or the “Company”) was incorporated in Delaware in 1959. The
Company is a New York Stock Exchange (NYSE) listed company traded under the symbol GPX. The
Company’s business consists of its training, engineering, and consulting business operated by its subsidiary,
General Physics Corporation (“General Physics” or “GP”). General Physics is a workforce development
company that seeks to improve the effectiveness of organizations by providing training, management consulting,
e-Learning solutions and engineering services that are customized to meet the specific needs of clients.
References in this report to the “Company,” “we” and “our” are to GP Strategies and its subsidiaries,
collectively.
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of
Sandy Corporation, a leader in custom product sales training and part of the ADP Dealer Services division of
ADP, Inc. (“ADP”). The Sandy Corporation business (“Sandy Corporation”) is run as an unincorporated division
of General Physics. Sandy Corporation offers custom sales training and print-based and electronic publications
primarily to the automotive industry. The purchase price at closing consisted of approximately $5.2 million in
cash paid to ADP with cash on hand and the assumption of certain liabilities by General Physics to complete
contracts, subject to post-closing adjustments. The Company currently anticipates that the final cash purchase
price will be approximately $4.4 million after post-closing adjustments, based on the final closing balance sheet
of Sandy Corporation as of the effective date of the acquisition. In addition, General Physics may be required to
pay ADP up to an additional $8.0 million, contingent upon Sandy Corporation achieving certain revenue targets
1
(as defined in the purchase agreement) during the two twelve-month periods following the completion of the
acquisition.
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 Capital Stock (“Class B Stock”) at a price of $8.30 per share, and the exchange of 600,000 shares of its
Class B Stock into 600,000 shares of Common Stock for 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.
On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems, Inc.
(“GSE”) through a dividend to the Company’s stockholders. GSE is a stand alone public company which
provides simulation solutions and services to energy, process and manufacturing industries worldwide. On
September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common stock for each share
of the Company’s Common Stock or Class B Stock held on the record date of September 19, 2005. Following the
spin-off, the Company ceased to have any ownership interest in GSE and the operations of GSE have been
reclassified as discontinued in the Company’s consolidated statements of operations for 2005 and prior periods
presented herein. The Company provided corporate support services to GSE pursuant to a management services
agreement which extended through December 31, 2006 (see Note 16 to the accompanying Consolidated
Financial Statements).
On November 24, 2004, the Company completed the tax-free spin-off of National Patent Development
Corporation (“NPDC”). NPDC is a stand alone public company owning all of the stock of MXL Industries, Inc.
(“MXL”), an interest in Five Star Products, Inc. (“Five Star”), and certain other non-core assets. Subsequent to
the spin-off, the results of operations of NPDC are presented as discontinued in the Company’s consolidated
statements of operations for 2004 and prior periods presented herein. The Company provides certain corporate
support services to NPDC pursuant to a management services agreement (see Note 16 to the accompanying
Consolidated Financial Statements).
Organization and Operations
Through its General Physics subsidiary, the Company provides training, engineering, consulting and technical
services to leading companies in the automotive, steel, power, oil and gas, chemical, energy, electronics and
semiconductor, pharmaceutical and food and beverage industries, as well as to the government sector, and
focuses on developing long-term relationships with Fortune 500 companies, their suppliers and government
agencies. General Physics is a global leader in performance improvement, with four decades of experience in
providing solutions to optimize workforce performance. Since its incorporation in 1966, General Physics has
provided clients with the products and services they need to successfully integrate their people, processes and
technology.
As of December 31, 2006, the Company operated through General Physics’ two reportable business segments: 1)
Process, Energy & Government; and 2) Manufacturing & Business Process Outsourcing (BPO). The Company is
organized by operating group, primarily based upon the services performed and markets served by each group.
Each operating group consists of strategic business units (SBUs) and business units (BUs) which are focused on
providing specific products and services to certain classes of customers or within targeted markets. Across
operating groups, SBUs and BUs, the Company integrates similar service lines, technology, information, work
products, client management and other resources. Communications and market research, accounting, finance,
legal, human resources, information systems and other administrative services are organized at the corporate
level. Business development and sales resources are aligned with operating groups to support existing customer
2
accounts and new customer development. The Company’s reportable business segments represent an aggregation
of its operating groups in accordance with the aggregation criteria in Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131). Further information regarding the Company’s business segments is discussed below.
Process, Energy & Government
The Process, Energy & Government segment provides engineering consulting, design and evaluation services
involving facilities, the environment, processes and systems, staff augmentation, curriculum design and
development, and training and technical services primarily to federal and state governmental agencies, large
government contractors, petroleum and chemical refining companies, and electric power utilities.
Manufacturing & BPO
The Manufacturing & BPO segment provides training, curriculum design and development, staff augmentation,
e-Learning services, system hosting, integration and help desk support, business process and training
outsourcing, and consulting and technical services to large companies in the automotive, steel, pharmaceutical,
electronics, and other industries as well as to governmental clients.
Business Segment Information
For financial information about the Company’s segments and geographic operations and revenue, see Note 15 to
the accompanying Consolidated Financial Statements.
Products and Services
For businesses, government agencies and other organizations, General Physics offers services and products
spanning the entire lifecycle of production facilities. General Physics’ products and services include plant,
equipment and process launch assistance; operations and maintenance practice training and consulting services;
curriculum development and delivery; facility and enterprise change and configuration management; lean
enterprise consulting; plant and process engineering review and re-design; business continuity planning and
support services; alternative fuels engineering consulting, facility design and construction services; business
process outsourcing; training outsourcing; e-Learning hosting, consulting and systems implementation; and
development and delivery of information technology (IT) training on an enterprise-wide scale. General Physics’
personnel bring a wide variety of professional, technical and military backgrounds together to create cost-
effective solutions for modern business and governmental challenges. The Company’s primary product and
service categories are discussed in more detail below.
Training and Performance Improvement. General Physics provides training services and products to support
existing, as well as the launch of new, plants, products, equipment, technologies and processes. The range of
services includes fundamental analysis of a client’s training needs, curriculum design, instructional material
development (in hard copy, electronic/software or other format), information technology service support and
delivery of training. Training products include instructor and student training manuals, and instructional
materials suitable for web-based and blended learning solutions. General Physics’ instructional delivery
capabilities include traditional classroom, structured on-the-job training (OJT), just-in-time methods, computer-
based, web-based, video-based and the full spectrum of e-Learning technologies. General Physics’ e-Learning
services enable the Company to function as a single-source e-Learning solutions provider through its integration
services and hosting, the development and provisioning of proprietary content and the aggregation and
distribution of third party content.
3
Business Process Outsourcing. General Physics provides end-to-end business process outsourcing solutions,
including the management of its customers’ training departments, as well as administrative processes, such as
tuition assistance program management, vendor management, call center / help desk administration and learning
management system (LMS) administration. General Physics automates much of its customers’ tuition
reimbursement programs by utilizing its own proprietary software, Tuition Outsourced Processing Services
(TOPS). GP also provides meeting and event planning services, including needs assessment, site selection,
contract negotiations, logistics and room setup, onsite coordination and support, accommodations management
and pre and post-event reporting.
Consulting. Consulting services include not only training-related consulting services, but also more traditional
business management, engineering and other disciplines. General Physics is able to provide high-level lean
enterprise consulting services, as well as training in the concept, methods and application of lean enterprise and
other quality practices, organizational development and change management. General Physics also provides
engineering consulting services to support regulatory and environmental compliance, modification of facilities
and processes, plant performance improvement, reliability-centered maintenance practices and plant start-up
activities. Consulting services also include operations continuity assessment, planning, training and procedure
development. Consulting products include proprietary training and reference materials.
Technical Support and Engineering. General Physics is staffed and equipped to provide engineering and
technical support services and products to clients. General Physics has civil, mechanical and electrical engineers
who provide consulting, design and evaluation services regarding facilities, processes and systems. General
Physics believes that it is a leader in the design and construction of alternative fuel stations, cryogenic systems
and high pressure systems. Technical support services include procedure writing and configuration control for
capital intensive facilities, plant start-up assistance, logistics support (e.g., inventory management and control),
implementation and engineering assistance for facility or process modifications, facility management for high
technology training environments, staff augmentation and help-desk support for standard and customized client
desktop applications. Technical support products include General Physics’ proprietary EtaPRO™ and Virtual
Plant software applications that serve the power generation and petrochemical industries.
Company Information Available on the Internet
The Company’s internet address is www.gpstrategies.com. Additional information about General Physics may
be found at www.gpworldwide.com. The Company makes available free of charge through its internet site, its
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendment
to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, (the “Exchange Act”) as soon
as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and
Exchange Commission.
Contracts
Through General Physics, the Company currently performs under fixed price (including fixed-fee per
transaction), time-and-materials and cost-reimbursable contracts. General Physics’ contracts with the U.S.
Government have predominantly been cost-reimbursable contracts and fixed-price contracts. General Physics is
required to comply with Federal Acquisition Regulations and Government Cost Accounting Standards with
respect to services provided to the U.S. Government and its agencies. These Regulations and Standards govern
the procurement of goods and services by the U.S. Government and the nature of costs that can be charged with
respect to such goods and services. All such contracts are subject to audit by a designated government audit
agency, which in most cases is the Defense Contract Audit Agency (the DCAA). The DCAA has audited the
Company’s contracts through 2003 without any material disallowances.
4
The following table illustrates the Company’s percentage of total revenue attributable to each type of contract for
the year ended December 31, 2006:
Fixed-price (including fixed-fee per transaction)
Time-and-materials, including fixed rate
Cost-reimbursable
Total revenue
65%
22
13
100%
Fixed-price contracts provide for payment to the Company of pre-determined amounts as compensation for the
delivery of specific products or services, without regard to the actual costs incurred. The Company bears the risk
that increased or unexpected costs required to perform the specified services may reduce the Company’s profit or
cause the Company to sustain a loss, but the Company has the opportunity to derive increased profit if the costs
required to perform the specified services are less than expected. Fixed-price contracts generally permit the client
to terminate the contract on written notice; in the event of such termination the Company would typically be paid
a proportionate amount of the fixed price.
Time-and-materials contracts generally provide for billing of services based upon the hourly billing rates of the
employees performing the services and the actual expenses incurred multiplied by a specified mark-up factor up
to a certain aggregate dollar amount. The Company’s time-and-materials contracts include certain contracts
under which the Company has agreed to provide training, engineering and technical services at fixed hourly
rates. Time-and-materials contracts generally permit the client to control the amount, type and timing of the
services to be performed by the Company and to terminate the contract on written notice. If a contract is
terminated, the Company is typically paid for the services it has provided through the date of termination.
Cost-reimbursable contracts provide for the Company to be reimbursed for its actual direct and indirect costs plus
a fee. These contracts also are generally subject to termination at the convenience of the client. If a contract is
terminated, the Company is typically reimbursed for its costs through the date of termination, plus the cost of an
orderly termination and paid a proportionate amount of the fee.
International
The Company also conducts its business outside of the United States in Canada, the United Kingdom, Mexico,
Singapore, Malaysia, India and in other countries primarily through its wholly owned subsidiaries General
Physics (UK) Ltd., General Physics Corporation Mexico, S.A. de C.V., General Physics Asia, Pte. Ltd., General
Physics (Malaysia) Sdn Bhd, and GP Consulting (India) Private Limited. Through these subsidiaries, the
Company is capable of providing substantially the same services and products as are available to clients in the
United States, although modified as appropriate to address the language, business practices and cultural factors
unique to each client and country. In combination with its subsidiaries, the Company is able to coordinate the
delivery to multi-national clients of services and products that achieve consistency on a global, enterprise-wide
basis. Revenue from operations outside the United States represented approximately 12% of the Company’s
consolidated revenue for the year ended December 31, 2006 (see Note 15 to the accompanying Consolidated
Financial Statements).
Customers
As of December 31, 2006, the Company provided services to over 500 customers. Significant customers include
multinational automotive manufacturers, such as General Motors Corporation, Ford Motor Company,
Mercedes-Benz and DaimlerChrysler Corporation; commercial electric power utilities, such as Bruce Power,
L.P., First Energy, Mid-American Energy Company, Public Service Electric & Gas Company and Entergy
Operations, Inc.; governmental agencies, such as the U.S. Department of Defense, U.S. Department of Treasury,
Office of Personnel Management, and U.S. Social Security Administration; U.S. government prime contractors,
5
such as Bechtel National, Inc., Washington Group International, and Unisys Corporation; and other large
multinational companies, such as Cisco Systems, Inc., Texas Instruments, Motorola, Eli Lilly & Co., IBM
Corporation, United Technologies Corporation, Agilent Technologies, Inc., The Boeing Company, Chevron
Texaco, J.B. Poindexter & Co., and United States Steel Corporation. Revenue from the U.S. Government
accounted for approximately 29% of the Company’s revenue for the year ended December 31, 2006. Revenue
was derived from many separate contracts with a variety of government agencies that are regarded by the
Company as separate customers. In 2006, revenue from the Department of the Army, which is included in U.S.
Government revenue, accounted for approximately 13% of the Company’s revenue. No other customer
accounted for more than 10% of the Company’s revenue in 2006.
Employees
The Company’s principal resource is its personnel, almost all of whom work for General Physics. As of
December 31, 2006, the Company had 1,205 employees and over 100 adjunct instructors and consultants. In
connection with the acquisition of Sandy Corporation on January 23, 2007, the Company acquired an additional
294 employees. The Company’s future success depends to a significant degree upon its ability to continue to
attract, retain and integrate into its operations instructors, engineers, technical personnel and consultants who
possess the skills and experience required to meet the needs of its clients.
The Company utilizes a variety of methods to attract and retain personnel. We believe that the compensation and
benefits offered to our employees are competitive with the compensation and benefits available from other
organizations with which we compete for personnel. In addition, the Company encourages the professional
development of its employees, both internally via GP University (its own internal training resource) and through
third parties, and also offers tuition reimbursement for job-related educational costs. The Company believes its
relations with its employees are good.
Competition
The Company faces a highly competitive environment. The principal competitive factors are the experience and
capability of service personnel, performance, quality and functionality of products, reputation and price.
Consulting services such as those provided by the Company are performed by many of the customers themselves,
large architectural and engineering firms that have expanded their range of services beyond design and
construction activities, large consulting firms, information technology companies, major suppliers of equipment,
degree-granting colleges and universities, vocational and technical training schools, continuing education
programs, small privately held training providers and individuals and independent service companies similar to
the Company. The training industry is highly fragmented and competitive, with low barriers to entry and no
single competitor accounting for a significant market share. Some of the Company’s competitors offer services
and products at lower prices that are similar to those of the Company, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources than the Company. There can be no
assurance that the Company will be successful against such competition.
Marketing
As of December 31, 2006, the Company had approximately 40 employees dedicated primarily to marketing its
services and products. The Company uses attendance at trade shows, presentations of technical papers at industry
and trade association conferences, press releases, public courses and workshops given by Company personnel to
serve an important marketing function. The Company also does selective advertising and sends a variety of sales
literature to current and prospective clients. By staying in contact with clients and looking for opportunities to
provide further services, the Company sometimes obtains contract awards or extensions without having to
undergo competitive bidding. In other cases, clients request the Company to bid competitively. In both cases, the
Company submits proposals to the client for evaluation. The period between submission of a proposal to final
6
award can range from 30 days or less (generally for noncompetitive, short-term contracts), to a year or more
(generally for large, competitive multi-year contracts).
Backlog
The Company’s backlog for services under executed contracts and subcontracts was approximately $85.3 million
and $78.9 million as of December 31, 2006 and 2005, respectively. The Company anticipates that most of its
backlog as of December 31, 2006 will be recognized as revenue during 2007. However, the rate at which services
are performed under certain contracts, and thus the rate at which backlog will be recognized, is at the discretion
of the client and most contracts are, as mentioned above, subject to termination by the client upon written notice.
Environmental Statutes and Regulations
The Company provides environmental engineering services to its clients, including the development and
management of site environmental remediation plans. Due to the increasingly strict requirements imposed by
Federal, state and local environmental laws and regulations (including, without limitation, the Clean Water Act,
the Clean Air Act, Superfund, the Resource Conservation and Recovery Act and the Occupational Safety and
Health Act), the Company’s opportunities to provide such services may increase.
The Company’s activities in connection with providing environmental engineering services may also subject the
Company to such Federal, state and local environmental laws and regulations. Although the Company
subcontracts most remediation construction activities and all removal and offsite disposal and treatment of
hazardous substances, the Company could still be held liable for clean-up or violations of such laws as an
“operator” or otherwise under such Federal, state and local environmental laws and regulations with respect to a
site where it has provided environmental engineering and support services. The Company believes, however, that
it is in compliance in all material respects with such environmental laws and regulations.
Item 1A: Risk Factors
Set forth below and elsewhere in this report and in other documents the Company files with the U.S. Securities
and Exchange Commission are risks and uncertainties that could cause the Company’s actual results to differ
materially from the results contemplated by the forward-looking statements contained in this report and other
public statements made by the Company.
Our holding company structure could adversely affect our ability to pay our expenses and long-term debt
obligations.
Our principal operations are conducted through our General Physics subsidiary. General Physics’ Credit
Agreement currently limits its ability to loan, dividend or otherwise pay funds to us, which could adversely affect
our ability to pay our expenses and long-term debt obligations which mature in 2008 (see Note 9 to the
accompanying Consolidated Financial Statements).
As of December 31, 2005, we identified a material weakness in our internal control over financial reporting and
cannot assure you that we will not find further such weaknesses in the future.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct an annual review and evaluation of our
internal control over financial reporting and to include a report on, and an attestation by our independent
registered public accountants, KPMG LLP, of the effectiveness of these controls. In the course of our assessment
of the effectiveness of our internal control over financial reporting as of December 31, 2005, we identified a
material weakness in our internal control over financial reporting, arising from deficiencies with respect to our
accounting for income taxes. To remediate this material weakness, during 2006 we revised our processes and
procedures over the accounting for income taxes, hired a new tax director who we believe provides the Company
with the necessary technical skills to perform, review and analyze complex tax accounting activities, and
7
implemented an independent review of our annual tax provision computations by an independent registered
public accounting firm. We concluded that our internal control over financial reporting was effective as of
December 31, 2006. See Item 9A, Controls and Procedures.
Despite our remediation of the material weakness in our internal control over financial reporting that was
reported for the year ended December 31, 2005, we cannot assure you that deficiencies or weaknesses in our
controls and procedures will not be identified in the future. Any such weaknesses or deficiencies could harm our
business and operating results, result in adverse publicity and a loss in investor confidence in our financial
reports, which in turn could have an adverse effect on our stock price, and, if they are not properly remediated,
could adversely affect our ability to report our financial results on a timely and accurate basis.
Failure to continue to attract and retain qualified personnel could harm our business.
Our principal resource is our personnel. A significant portion of our revenue is derived from services and
products that are delivered by instructors, engineers, technical personnel and consultants. Our success depends
upon our ability to continue to attract and retain instructors, engineers, technical personnel and consultants who
possess the skills and experience required to meet the needs of our clients. In order to initiate and develop client
relationships and execute our growth strategy, we must maintain and continue to hire qualified salespeople. We
must also continue to attract and develop capable management personnel to guide our business and supervise the
use of our resources. Competition for qualified personnel can be intense. We cannot assure you that qualified
personnel will continue to be available to us. Any failure to attract or retain qualified instructors, engineers,
technical personnel, consultants, salespeople and managers in sufficient numbers could adversely affect our
business and financial condition.
The loss of our key personnel, including our executive management team, could harm our business.
Our success is largely dependent upon the experience and continued services of our executive management team
and our other key personnel. The loss of one or more of our key personnel and a failure to attract, develop or
promote suitable replacements for them may adversely affect our business.
Our revenue and financial condition could be adversely affected by the loss of business from significant
customers, including the U.S. Government and automotive manufacturers.
For the years ended December 31, 2006, 2005 and 2004, revenue from the U.S. Government represented
approximately 29%, 40%, and 38% of our revenue, respectively. However, the revenue was derived from a
number of separate contracts with a variety of government agencies we regard as separate customers. Most of our
contracts and subcontracts, including those with the U.S. Government, are subject to termination on written
notice, and therefore our operations are dependent on our customers’ continued satisfaction with our services and
their continued inability or unwillingness to perform those services themselves or to engage other third parties to
deliver such services.
Government contracts are also subject to various uncertainties, restrictions and regulations, including oversight
audits by government representatives and profit and cost controls. If we fail to comply with all of the applicable
regulations, requirements or laws, our existing contracts with the government could be terminated and our ability
to seek future government contracts or subcontracts could be adversely affected. In addition, the funding of
government contracts is subject to Congressional appropriations. Budget decisions made by the U.S.
Government are outside of our control and could result in a reduction or elimination of contract funding. A shift
in government spending to other programs in which we are not involved or a reduction in general government
spending could have a negative impact on our financial condition. The government is under no obligation to
maintain or continue funding our contracts or subcontracts.
8
Our acquisition of Sandy Corporation on January 23, 2007 resulted in a significant concentration of business in
the U.S. automotive industry, and specifically a significant concentration of revenue from one predominant
customer, General Motors. The loss of this customer, an economic downturn, continued cost-cutting or other
severe impact on the U.S. automotive industry in general could adversely impact our financial condition as well
as the profitability of Sandy Corporation and our ability to achieve anticipated benefits of the acquisition.
Our business and financial condition could be adversely affected by government limitations on contractor
profitability and the possibility of cost disallowance.
A significant portion of our revenue and profit is derived from contracts and subcontracts with the U.S.
Government. The U.S. Government places limitations on contractor profitability; therefore, government related
contracts may have lower profit margins than the contracts we enter into with commercial customers.
Furthermore, U.S. Government contracts and subcontracts are subject to audit by a designated government
agency. Although we have not experienced any material cost disallowances as a result of these audits, we may be
subject to material disallowances in the future.
We enter into fixed price contracts which could result in reduced profits or losses if we have cost overruns.
A significant portion of our revenue is attributable to contracts entered into on a fixed-price basis. This allows us
to benefit from cost savings, but we carry the burden of cost overruns. If our initial estimates are incorrect, or if
unanticipated circumstances arise, we could experience cost overruns which would result in reduced profits or
losses on these contracts. Our financial condition is dependent on our ability to maximize our earnings from our
contracts. Lower earnings caused by cost overruns could have a negative impact on our financial results.
We maintain a workforce based upon anticipated staffing needs. If we do not receive future contract awards or if
these awards are delayed or reduced in scope or funding, we may incur significant costs.
Our estimates of future staffing requirements depend in part on the timing of new contract awards. We make our
estimates in good faith, but our estimates could be inaccurate or change based on new information. In the case of
larger projects, it is particularly difficult to predict whether we will receive a contract award and when the award
will be announced. In some cases the contracts that are awarded require staffing levels that are different,
sometimes lower, than the levels anticipated when the work was proposed. The uncertainty of contract award
timing and changes in scope or funding can present difficulties in matching our workforce size with our contract
needs. If an expected contract award is delayed or not received, or if a contract is awarded for a smaller scope of
work than proposed, we could incur significant costs resulting from reductions in staff.
Failure to keep pace with technology and changing market needs could harm our business.
Our future success will depend upon our ability to gain expertise in technological advances rapidly and respond
quickly to evolving industry trends and client needs. We cannot assure you that we will be successful in adapting
to advances in technology, addressing client needs on a timely basis, or marketing our services and products in
advanced formats. In addition, services and products delivered in the newer formats may not provide comparable
training results. Furthermore, subsequent technological advances may render moot any successful expansion of
the methods of delivering our services and products. If we are unable to develop new means of delivering our
services and products due to capital, personnel, technological or other constraints, our business and financial
condition could be adversely affected.
Changing economic conditions in the United States or the United Kingdom could harm our business and
financial condition.
Our revenues and profitability are related to general levels of economic activity and employment primarily in the
United States and the United Kingdom. As a result, any significant economic downturn or recession in one or
9
both of those countries could harm our business and financial condition. A significant portion of our revenues is
derived from Fortune 500-level companies and their international equivalents, which historically have adjusted
expenditures for external training during economic downturns. If the economies in which these companies
operate weaken in any future period, these companies may not increase or may reduce their expenditures on
external training, and other products and services supplied by us, which could adversely affect our business and
financial condition.
Our financial results are subject to quarterly fluctuations.
We experience, and expect to continue to experience, fluctuations in quarterly operating results. In addition, we
provide domestic preparedness and emergency management services, including hurricane and other disaster
recovery services, which can result in revenue volatility associated with the unpredictability of certain events
occurring and the need for these types of services. Consequently, you should not deem our results for any
particular quarter to be necessarily indicative of future results. These fluctuations in our quarterly operating
results may vary because of, among other things, the overall level of performance improvement services and
products sold, the gain or loss of material clients, the timing, structure and magnitude of acquisitions, the
commencement or completion of client engagements or custom services and products in a particular quarter, and
the general level of economic activity. Downward fluctuations may result in a decline in the trading price of our
Common Stock.
Our revenue and financial condition could be adversely affected by cutbacks by United States domestic
automobile manufacturers.
With the acquisition of Sandy Corporation, the Company will substantially increase the percentage of revenue it
derives from the U.S. automotive industry. During 2007, we expect that a significant portion of our revenues
will be derived from contracts awarded by General Motors Corporation and its affiliates. In recent years,
General Motors and other U.S. domestic auto manufacturers have reported substantial losses and reduced vehicle
sales, resulting in efforts to restructure their operations to become more competitive. Further cost-cutting, or a
decision to cease or reduce awards to General Physics or Sandy Corporation, could adversely affect our business
and financial condition.
Competition could adversely affect our performance.
The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor
accounting for a significant market share. Our competitors include several large publicly traded and privately
held companies, vocational and technical training schools, degree-granting colleges and universities, continuing
education programs and thousands of small privately held training providers and individuals. In addition, many
of our clients maintain internal training departments. Some of our competitors offer similar services and products
at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and
other resources. Moreover, we expect to face additional competition from new entrants into the training and
performance improvement market due, in part, to the evolving nature of the market and the relatively low
barriers to entry. We cannot provide any assurance that we will be able to compete successfully, and the failure
to do so could adversely affect our business and financial condition.
We are subject to potential liabilities which are not covered by our insurance.
We engage in activities in which there are substantial risks of potential liability. We provide services involving
electric power distribution and generation, nuclear power, chemical weapons destruction, environmental
remediation, engineering design and construction management. We maintain a consolidated insurance program
(including general liability coverage) covering companies we currently own, including General Physics, as well
as certain risks associated with companies we no longer own, including GSE and NPDC. Claims by or against
any covered insured could reduce the amount of available insurance coverage for the other insureds and for other
10
claims. In addition, certain liabilities may not be covered at all, such as deductibles, self-insured retentions,
amounts in excess of applicable insurance limits and claims that fall outside the coverage of our policies.
Although we believe that we currently have appropriate insurance coverage, we do not have coverage for all of
the risks to which we are subject and we may not be able to obtain appropriate coverage on a cost-effective basis
in the future.
Our policies exclude coverage for incidents involving nuclear liability and we may not be covered by United
States laws or industry programs providing liability protection for licensees of the Nuclear Regulatory
Commission (typically utilities) for damages caused by nuclear incidents; we are not a licensee and few of our
contracts with clients have contained provisions waiving or limiting their liability. Therefore, we could be
materially and adversely affected by a nuclear incident.
Certain environmental risks, such as liability under the Comprehensive Environmental Response, Compensation
and Liability Act, as amended (“Superfund”), also may not be covered by our insurance. We provide
environmental engineering services, including the development and management of site environmental
remediation plans. Although we subcontract most remediation construction activities, and in all cases
subcontract the removal and off-site disposal and treatment of hazardous substances, we could be subject to
liability relating to the environmental services we perform directly or through subcontracts. Specifically, if we
were deemed under federal or state laws, including Superfund, to be an “operator” of sites to which we provide
environmental engineering and support services, we could be subject to liability. Our insurance policies may not
provide coverage for these risks. Various mechanisms exist whereby the U.S. Government may limit liability for
environmental claims and losses or indemnify us for such claims or losses under governmental contracts.
Nonetheless, incurrence of any substantial Superfund or other environmental liability could adversely affect our
business and financial condition by reducing profits or causing us to incur losses related to the cost of resolving
such liability.
Some of our policies, such as our professional liability insurance policy, provide coverage on a “claims made”
basis covering only claims actually made during the policy period currently in effect. To the extent that a risk is
not insured within our then available coverage limits, insured under a low-deductible policy, indemnified against
by a third party or limited by an enforceable waiver or limitation of liability, claims could be material and
adversely affect our financial condition.
Acquisitions are part of our growth strategy and may not be successful.
We expect to continue to pursue selective acquisitions of businesses as part of our growth strategy. Acquisitions
may bring us into businesses we have not previously conducted and expose us to risks that are different than
those we have traditionally experienced. We can provide no assurances that we will be able to find suitable
acquisitions or that we will be able to consummate them on terms and conditions favorable to us, or that we will
successfully integrate and manage acquired businesses.
On January 23, 2007, we completed the acquisition of certain assets and the business of Sandy Corporation.
While we believe that this acquisition will be accretive to our earnings and we will be able to successfully
integrate its operations into our business, we can provide no assurances that our expectations will prove to be
accurate. Sandy Corporation’s business is heavily oriented toward providing sales training to auto manufacturers
in the U.S. domestic automotive industry. Developments in that industry, as well as differences between General
Physics and Sandy Corporation’s cultures and, certain unforeseen factors or other risks may cause our actual
results to differ from our expectations.
We are subject to potential liabilities related to operations we have discontinued.
11
In November 2004, we completed the spin-off to our stockholders of the shares of stock we owned in NPDC.
Prior to the spin-off, we provided certain financial guarantees and entered into transactions involving assets
owned by NPDC or subsequently contributed by us to NPDC. We also have outstanding debt that is
collateralized by certain real property which was transferred to NPDC in connection with the spin-off. We also
continued to guarantee certain lease obligations and indebtedness of NPDC subsequent to the spin-off. We no
longer have the assets of NPDC available to us to use to satisfy these obligations, and if NPDC fails to satisfy
obligations for which we continue to guarantee, we could be responsible for satisfying those obligations, which
could materially and adversely impact our financial condition.
Our stockholder rights plan and authorized preferred stock could make a third-party acquisition of us difficult.
We have a stockholder rights plan. Our stockholder rights plan would cause substantial dilution to any person or
group that attempts to acquire us on terms not approved in advance by our Board of Directors. In addition, our
certificate of incorporation allows us to issue up to 5,000,000 shares of preferred stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any further
vote or action by the stockholders. The stockholder rights plan, the ability to issue preferred stock and certain
provisions in our by-laws may have the effect of delaying, discouraging or preventing a change in control that
might otherwise be beneficial to stockholders and might adversely affect the market price of our Common Stock.
Our certificate of incorporation may discourage foreign ownership of our Common Stock.
The United States Departments of Energy and Defense have policies regarding foreign ownership, control or
influence over government contractors who have access to classified information, and inquire as to whether any
foreign interest has beneficial ownership of 5% or more of a contractor’s or subcontractor’s voting securities. If
either Department determines that an undue risk to the defense and security of the United States exists, it may,
among other things, terminate the contractor’s or subcontractor’s existing contracts. Our certificate of
incorporation allows us to redeem or require the prompt disposition of all or any portion of the shares of our
Common Stock owned by a foreign stockholder beneficially owning 5% or more of the outstanding shares of our
Common Stock if either Department threatens termination of any of our contracts as a result of such an
ownership interest. These provisions may have the additional effect of delaying, discouraging or preventing a
change in control and might adversely affect the market price of our Common Stock.
Item 1B: Unresolved Staff Comments
None.
Item 2:
Properties
The following information describes the material physical properties owned or leased by the Company and its
subsidiaries.
As of December 31, 2006, the Company had leases for approximately 30,700 square feet in an office building in
Elkridge, Maryland for its corporate headquarters office and approximately 128,000 square feet of office,
classroom and warehouse space at various other locations throughout the United States, the United Kingdom,
Canada, Mexico, Malaysia, India and China.
Effective January 23, 2007 in connection with the acquisition of Sandy Corporation, the Company assumed
leases for approximately 71,600 square feet of office space in Troy, Michigan and Long Beach, California and
approximately 4,800 square feet of warehouse space in Long Beach, California.
The facilities owned or leased by the Company are considered to be suitable and adequate for their intended uses
and are considered to be well maintained and in good condition.
12
Item 3:
Legal Proceedings
We discuss our legal proceedings in Note 18 to the accompanying Consolidated Financial Statements.
Item 4:
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by
this report.
PART II
Item 5: Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s Common Stock, $0.01 par value, is traded on the New York Stock Exchange. The following
table presents the Company’s high and low market prices for the last two fiscal years. During the periods
presented below, the Company has not paid any cash dividends.
Quarter
Quarter
First
Second
Third
Fourth
First
Second
Third
Fourth
$
$
2006
High
Low
8.15 $
7.88
7.75
8.45
2005
6.97
6.60
7.05
7.26
High
Low
8.60 $
8.39
9.01
9.06
6.92
7.00
7.58
6.90
The number of shareholders of record of the Common Stock as of February 28, 2007 was 1,222 and the closing
price of the Common Stock on the New York Stock Exchange on that date was $8.96.
The Company has not declared or paid any cash dividends on its Common Stock during the two most recent
fiscal years. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable
future and intends to retain future earnings to finance the growth and development of its business, as well as to
continue to fund the repurchase of its Common Stock in the open market, as authorized in connection with the
share repurchase and exchange transaction on January 19, 2006 (see Note 14 to the accompanying Consolidated
Financial Statements). In addition, the General Physics Credit Agreement (see Item 7) contains restrictive
covenants, including a prohibition on the payment of dividends. General Physics is currently restricted under the
Credit Agreement from paying dividends or management fees to the Company in excess of $1.0 million in any
fiscal 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, of which
approximately $1,880,000 remains available.
13
Performance Graph
The following graph assumes $100 was invested on December 31, 2001 in GP Strategies Common Stock, and
compares the share price performance with the Education Training Services Index (Hemscott Group Index) and
the NYSE Market Index. This chart does not reflect the Company’s dividend to its shareholders of shares of
NPDC in November 2004 and shares of GSE in September 2005. Values are as of December 31 of the specified
year assuming that all dividends were reinvested.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG GP STRATEGIES CORP.,
NYSE MARKET INDEX AND HEMSCOTT GROUP INDEX
S
R
A
L
L
O
D
250
225
200
175
150
125
100
75
50
25
0
2001
2002
2003
2004
2005
2006
GP STRATEGIES CORP.
NYSE MARKET INDEX
HEMSCOTT GROUP INDEX
ASSUMES $100 INVESTED ON DEC. 31, 2001
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006
Company / Index
Name
December
31, 2001
December
31, 2002
December
31, 2003
December
31, 2004
December
31, 2005
December
31, 2006
GP Strategies
$100.00
$132.89
$210.53
$196.05
$214.74
$218.42
Education &
Training Services
NYSE Market
Index
100.00
106.49
175.70
185.60
162.68
141.11
100.00
81.69
105.82
119.50
129.37
151.57
14
Issuer Purchases of Equity Securities
The following table provides information about the Company's share repurchase activity for the three months
ended December 31, 2006:
Issuer Purchases of Equity Securities
Month
October 1-31, 2006
November 1-30, 2006
Total number
of shares
purchased (1)
Average
price paid
per share
-
-
-
-
Total number
of shares
purchased as
part of publicly
announced program (2)
Approximate
dollar value of
shares that may yet
be purchased under
the program
-
-
-
-
December 1-31, 2006
401,967
$
8.30
144,039
$
1,880,000
(1)
(2)
Includes 257,928 shares surrendered by employees and directors to exercise stock options and satisfy the
related tax withholding obligations.
Represents shares repurchased in the open market in connection with the Company's share repurchase
program which was authorized by the Company's Board of Directors and publicly announced on January 19,
2006. The repurchase program permits the Company to 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.
There is no expiration date for the repurchase program.
15
Item 6:
Selected Financial Data
The selected financial data presented below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements
and the notes thereto included elsewhere in this report. Our consolidated statement of operations data for the
years ended December 31, 2006, 2005, and 2004 and our consolidated balance sheet data as of December 31,
2006 and 2005 have been derived from our audited consolidated financial statements included elsewhere in this
report. Our consolidated statement of operations data for the years ended December 31, 2003 and 2002 and our
consolidated balance sheet data as of December 31, 2004, 2003, and 2002 have been derived from audited
consolidated financial statements, which are not presented in this report.
On September 30, 2005, we completed the spin-off of our majority ownership interest in GSE, and on
November 24, 2004, we completed the spin-off of NPDC. The results of operations of GSE and NPDC have been
reclassified as discontinued in the consolidated statements of operations for all periods presented.
Statement of Operations Data
2006
Years ended December 31,
2005
2003
2004
(In thousands, except per share amounts)
Revenue
Gross profit
Interest expense
Gain on litigation settlement, net
Gain on arbitration award, net
Income (loss) from continuing operations
before income taxes
Income (loss) from continuing operations (1)
Income (loss) from discontinued operations,
net of income taxes
Net income (loss)
Diluted income (loss) per share:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Balance Sheet Data (2)
Cash and cash equivalents (3)
Short-term borrowings
Working capital
Total assets
Long-term debt, including current maturities
Stockholders’ equity
$
$
$
$
178,783 $
26,566
1,558
—
—
175,555 $
24,991
1,518
5,552
—
164,458 $
19,339
1,937
—
13,660
133,875 $
15,401
2,903
—
—
11,710
6,642
—
6,642
15,224
8,457
(1,244)
7,213
14,017
22,266
254
22,520
(6,691)
(7,839)
(437)
(8,276)
2002
142,237
15,366
2,467
—
—
(3,590)
(3,766)
(1,462)
(5,228)
0.40 $
—
0.40 $
0.45 $
(0.07)
0.38 $
1.22 $
0.01
1.23 $
(0.46) $
(0.02)
(0.48) $
(0.24)
(0.10)
(0.34)
2006
8,660 $
—
23,142
121,400
10,926
79,731
December 31,
2005
2003
2004
(In thousands, except per share amounts)
18,118 $
—
34,804
134,641
11,380
94,342
2,417 $
6,068
20,601
156,035
11,051
91,620
4,416 $
26,521
17,998
188,323
14,861
92,812
2002
1,516
22,058
780
144,905
6,912
92,982
(1)
(2)
During 2004, based upon an assessment of the realizability of the Company's deferred tax assets, management considered it more
likely than not that its deferred tax assets would be realized and reduced its deferred tax valuation allowance by $12.2 million,
resulting in a net income tax benefit for the year ended December 31, 2004.
On September 30, 2005, the Company distributed net assets of $6.8 million in connection with the spin-off of its majority ownership
interest in GSE. On November 24, 2004, the Company distributed net assets of $26.0 million to NPDC in connection with its spin-
off.
(3) Cash and cash equivalents include one-time cash receipts associated with the EDS arbitration award and litigation settlement in 2005.
16
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
General Overview
The Company’s business consists of its principal operating subsidiary, General Physics, a global training,
engineering, and consulting company that seeks to improve the effectiveness of organizations by providing
training, management consulting, e-Learning solutions and engineering services and products that are customized
to meet the specific needs of clients. Clients include Fortune 500 companies and manufacturing, process and
energy companies and other commercial and governmental customers. General Physics is a global leader in
performance improvement, with four decades of experience in providing solutions to optimize workforce
performance.
As of December 31, 2006, the Company operated through its two reportable business segments:
• Process, Energy & Government – this segment provides engineering consulting, design and evaluation
services regarding facilities, the environment, processes and systems, staff augmentation, curriculum
design and development, and training and technical services primarily to federal and state governmental
agencies, large government contractors, petroleum and chemical refining companies, and electric power
utilities.
• Manufacturing & BPO - this segment provides training, curriculum design and development, staff
augmentation, e-Learning services, system hosting, integration and help desk support, business process
and training outsourcing, and consulting and technical services to large companies in the automotive,
steel, pharmaceutical, electronics, and other industries as well as to governmental clients.
We discuss our business in more detail in Item 1.Business and the risk factors affecting our business in Item 1A.
Risk Factors.
Strategy
The Company’s primary strategy is the growth of its core businesses within General Physics. The Company
plans to execute its growth strategy by focusing on the following key initiatives:
• Sales Training – The Company has historically provided technical training services and believes that
there is a significant market demand for custom sales training services. The Company took the first step
of this initiative through the completion of its acquisition of Sandy Corporation on January 23, 2007.
Sandy Corporation is a leader in custom product sales training and has primarily served manufacturing
customers in the U.S. automotive industry for over 30 years. The acquisition will enhance the
Company’s existing service offerings by adding custom product sales training to its offering mix. The
Company plans to support the needs of Sandy Corporation’s current customers and intends to expand its
offerings worldwide and offer its unique innovative solutions to existing clients of the Company. In order
to achieve expansion of sales training services, the Company plans to strategically pursue other selected
markets where it believes it can leverage its existing capabilities.
•
International Expansion – The Company has witnessed an increased demand for additional services in
foreign countries from existing multinational customers based in the United States and Europe. The
Company believes the greatest area of potential growth is in Asia. The Company has taken steps toward
achieving its international growth strategy in the following areas:
o
India – In January 2007, the Company opened an office in Chennai, India, to support existing
customers and a growing presence in Asia. The Company primarily provides BPO and technical
17
training services to an existing semi-conductor customer through its India office, and plans to
expand business in this region.
o China – The Company recently began leasing office space in Shanghai, China and is evaluating
several potential opportunities with new and existing customer relationships. The Company
believes it can expand its technical training services to the automotive industry in China and
plans to leverage the capabilities from its acquisition of Sandy Corporation in this area.
o Singapore – The Company has maintained an office in Singapore for several years and primarily
provides training outsourcing services. The Company has added resources there and believes it
can expand its existing service offerings in this region to new and existing multinational
companies.
o Malaysia – Through its subsidiary in Kuala Lumpur, Malaysia, the Company has provided
professional services to the power generation industry in Asia on a continuous basis since at least
1998. During that period, the Company has primarily provided training, operations, maintenance,
and engineering services to many of the large fossil power, and steam and power generating
facilities. The Company believes it can expand these services and provide training and BPO
services in this region as well.
• Training and Business Process Outsourcing (BPO) – The Company has experienced significant growth
in recent years in its Manufacturing & BPO group primarily due to the expansion of Training & BPO
services, which include the management and administration of customers’ training departments and other
administrative functions. The Company believes there is a large potential for additional growth for these
service offerings across all industries. The Company plans to continue its focus on marketing these
services to new and existing customers, as well as internationally as discussed above.
Significant Events
Acquisitions
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of
Sandy Corporation, a leader in custom product sales training and part of the ADP Dealer Services division of
ADP. The Sandy Corporation business is run as an unincorporated division of General Physics. Sandy
Corporation offers custom sales training and print-based and electronic publications primarily to the automotive
industry. The purchase price at closing consisted of approximately $5.2 million in cash paid to ADP with cash on
hand and the assumption of certain liabilities by General Physics to complete contracts, subject to post-closing
adjustments. The Company currently anticipates that the final cash purchase price will be approximately $4.4
million after post-closing adjustments based on the final closing balance sheet of Sandy Corporation as of the
effective date of the acquisition. In addition, General Physics may be required to pay ADP up to an additional
$8.0 million, contingent upon Sandy Corporation achieving certain revenue targets (as defined in the purchase
agreement) during the two twelve-month periods following the completion of the acquisition.
On February 3, 2006, the Company completed the acquisition of Peters 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, 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. No contingent payments were paid by the Company as PMC did not achieve the performance targets
specified in the purchase agreement 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
consolidated financial statements since the date of acquisition.
18
Restructuring of Capital Stock
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 into 600,000
shares of Common Stock for 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 shares of Class B Stock collectively represented
approximately 41% of the aggregate voting power of the Company because 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 of cash on hand was used for the
repurchase and exchange transaction.
Elimination of Class B Stock
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
Stock (the “Amendment”). At the Company’s annual meeting on September 14, 2006, the stockholders voted to
approve the Amendment. The Amendment was filed with the Delaware Secretary of State and was effective
September 15, 2006.
Share Repurchase Program
In connection with the capital stock restructuring discussed above, 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. During the year ended December 31, 2006, the Company repurchased
approximately 420,000 shares of its Common Stock in the open market for a total cost of approximately $3.1
million. There is no expiration date for the repurchase program.
Results of Operations
Operating Highlights
Year ended December 31, 2006 compared to the year ended December 31, 2005
For the year ended December 31, 2006, the Company had net income of $6.6 million, or $0.40 per diluted share,
compared to $7.2 million, or $0.38 per diluted share, for the year ended December 31, 2005. The decrease in net
income was primarily due to the gain on litigation settlement net of legal fees and expenses of $5.6 million
during 2005 which did not recur in 2006, offset by increased operating income in 2006 of $1.4 million, the
components of which are discussed below, and a loss from discontinued operations of $1.2 million, or $0.07 per
diluted share, in 2005 which did not recur in 2006. The increase in diluted earnings per share is also partially
attributable to the decrease in common shares outstanding during 2006 compared to 2005 as a result of the capital
stock restructuring discussed above. Diluted weighted average shares outstanding were 16.7 million in 2006
compared to 18.9 million in 2005.
19
Revenue
Process, Energy & Government
Manufacturing & BPO
Years ended December 31,
2006
2005
(Dollars in thousands)
$
$
77,469 $
101,314
85,953
89,602
178,783 $
175,555
Process, Energy & Government revenue decreased $8.5 million or 9.9% during the year ended December 31,
2006 compared to 2005. The decrease in revenue is primarily due to a $10.7 million decline in government
funding for the Domestic Preparedness Equipment Technical Assistance Program (DPETAP) contract during
2006. A scheduling delay on an environmental engineering contract also resulted in a decrease in revenue of $3.7
million in 2006 compared to 2005. In addition, there was a decrease in revenue of $1.9 million due to the
completion of a chemical demilitarization project which ended in 2006. These decreases were offset by an
increase in hurricane recovery services revenue of $3.1 million, an increase of $1.5 million on construction jobs
primarily for wastewater treatment, an increase of $1.4 million in lean six sigma services, an increase of $1.1
million related to a hydrogen fuel station design and construction contract, and an increase of $0.7 million related
to a liquefied natural gas (LNG) fueling station project.
Manufacturing & BPO revenue increased $11.7 million or 13.1% during the year ended December 31, 2006
compared to 2005. The increase in revenue is due to the following: a $8.4 million increase due to the expansion
of business process outsourcing services with new and existing customers, a $4.1 million increase from our
international operations in the United Kingdom (primarily resulting from the PMC acquisition in February 2006
which resulted in a $2.9 million revenue increase as well as an increase in BPO services), a $2.7 million increase
in lean manufacturing services, and a $1.8 million increase in other technical services provided primarily to a
pharmaceutical customer. These net increases in revenue were offset by the following decreases in revenue: a
change in contract scope with a business process outsourcing customer during 2005 which resulted in a decrease
in revenue of $2.7 million during the first two quarters of 2006 compared to 2005, a $1.5 million revenue
decrease in government e-Learning implementation services due to fewer implementations taking place during
the third and fourth quarters of 2006 compared to 2005, and net decreases of $1.1 million on various other
contracts.
Gross profit
Process, Energy & Government
Manufacturing & BPO
Years ended December 31,
2006
% Revenue
2005
% Revenue
$
$
13,188
13,378
26,566
(Dollars in thousands)
17.0% $
13.2%
14.9% $
16,212
8,779
24,991
18.9%
9.8%
14.2%
Process, Energy & Government gross profit of $13.2 million or 17.0% of revenue for the year ended December
31, 2006 decreased by $3.0 million or 18.7% when compared to gross profit of approximately $16.2 million or
18.9% of revenue for the year ended December 31, 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.
20
Manufacturing & BPO gross profit of $13.4 million or 13.2% of revenue for the year ended December 31, 2006
increased by $4.6 million or 52.4% when compared to gross profit of approximately $8.8 million or 9.8% of
revenue for the year ended December 31, 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 2006 compared to 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 expenses increased $0.2 million or 1.6% from $14.0 million for the year ended December 31, 2005 to
$14.3 million for the year ended December 31, 2006. The increase is primarily due to increases in indirect labor
costs, stock-based compensation expense and board of director fees during 2006 compared to 2005, offset by a
reversal of a prior restructuring accrual of $0.3 million by our operations in the United Kingdom in 2006 which
did not occur in 2005.
Interest expense
Interest expense increased 2.6% from $1.5 million for the year ended December 31, 2005 to $1.6 million for the
year ended December 31, 2006. The slight increase is primarily due to higher short-term borrowing levels during
2006 compared to 2005.
Other income
Other income increased $0.7 million from $0.2 million for the year ended December 31, 2005 to $1.0 million for
the year ended December 31, 2006. The increase was primarily due to an increase in income from a joint venture
during 2006 compared to 2005. Other income for 2006 includes $0.5 million of income from a joint venture, for
which $0.3 million was included in revenue during 2005.
Gain on litigation settlement
The Company recognized a gain of $5.6 million for the litigation settlement proceeds paid by EDS in 2005, net
of legal fees and expenses, which did not recur in 2006. See Note 18 to the accompanying Consolidated Financial
Statements for further details.
Income taxes
Income tax expense was $5.1 million for the year ended December 31, 2006 compared to $6.8 million for the
year ended December 31, 2005. The decrease in income tax expense was primarily due to a decrease in income
from continuing operations before income taxes in 2006 compared to 2005. As of December 31, 2006, the
Company had federal net operating loss carryforwards of $22.4 million, which expire during 2022 and 2023. The
effective income tax rate was 43.3% and 44.4% for the years ended December 31, 2006 and 2005, respectively
(see Note 11 to the accompanying Consolidated Financial Statements).
Year ended December 31, 2005 compared to the year ended December 31, 2004
For the year ended December 31, 2005, the Company had income from continuing operations before income
taxes of $15.2 million compared to $14.0 million for the year ended December 31, 2004. The improved results
were primarily due to increased operating income of $4.7 million for General Physics’ two business segments, a
decrease in general and administrative expenses of $4.4 million at the corporate level, and a decrease in interest
expense of $0.4 million. Corporate general and administrative expenses in 2004 included corporate overhead
expenses that were for the benefit of both continuing and discontinued operations, which were not allocated to
discontinued operations unless they were solely attributable to NPDC. These increases were offset by a decrease
of $8.1 million in income relating to the EDS litigation in 2005 compared to 2004. In 2005, the Company
recognized a gain on the litigation settlement, net of legal fees and expenses, of approximately $5.6 million
21
compared to a gain on the arbitration award, net of legal fees and expenses, of approximately $13.7 million in
2004.
Revenue
Process, Energy & Government
Manufacturing & BPO
Years ended December 31,
2005
2004
(Dollars in thousands)
$
$
85,953 $
89,602
84,193
80,265
175,555 $
164,458
Process, Energy & Government revenue increased $1.8 million or 2.1% during the year ended December 31,
2005 compared to 2004. The increase in revenue is primarily due to increased contract scopes with several of our
existing government and energy customers to provide various training, engineering, and domestic preparedness
services. These increases were offset by decreases in revenue due to the completion of various non-recurring
contracts during 2005, a $0.3 million write-off related to a management consulting and emergency management
services contract, and a decrease in revenue related to hurricane recovery services performed in 2005 compared
to 2004. Revenue from hurricane recovery services, primarily in the State of Louisiana, totaled approximately
$2.3 million in 2005 compared to similar services provided in the State of Florida totaling approximately $5.4
million in 2004.
Manufacturing & BPO revenue increased $9.3 million or 11.6% during the year ended December 31, 2005
compared to 2004. The increase in revenue is due to net increases of approximately $7.3 million of revenue from
training and business process outsourcing services provided to customers primarily in the electronics industry,
net increases of approximately $2.6 million of revenue from increased system implementation and hosting
services primarily to the federal government, and net increases of approximately $2.0 million of revenue from
other professional development and training courses provided primarily to customers in the steel and
manufacturing industries. The Company expanded the scope of services provided to new and existing business
process and training outsource customers. These increases in revenue were slightly offset by other decreases in
revenue, primarily due to the change in contract scope with a business process outsourcing customer during 2005
which resulted in a decrease in revenue of $5.4 million.
Gross profit
Process, Energy & Government
Manufacturing & BPO
Years ended December 31,
2005
% Revenue
2004
% Revenue
$
$
16,212
8,779
24,991
(Dollars in thousands)
18.9% $
9.8%
14.2% $
14,727
4,612
19,339
17.5%
5.7%
11.8%
Process, Energy & Government gross profit of $16.2 million or 18.9% of revenue for the year ended December
31, 2005 increased by $1.5 million or 10.1% when compared to gross profit of approximately $14.7 million or
17.5% of revenue for the year ended December 31, 2004. This increase in gross profit was primarily driven by an
increase in revenue from training services provided to our government and energy customers, excluding the
decreases in revenue discussed above. The increase in gross profit as a percentage of revenue is primarily due to
22
a decrease in overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the
same rate as our revenue growth.
Manufacturing & BPO gross profit of $8.8 million or 9.8% of revenue for the year ended December 31, 2005
increased by $4.2 million or 90.4% when compared to gross profit of approximately $4.6 million or 5.7% of
revenue for the year ended December 31, 2004. This increase in gross profit was primarily driven by an increase
in revenue from business process outsourcing and training outsourcing services as well as a decrease in lower
margin subcontractor utilization and an increase in higher margin internal labor utilization on several business
process outsourcing contracts. The Company experienced increased gross profit as a percentage of revenue
during 2005 as it continued to expand services provided to new and existing customers. Additionally,
infrastructure costs have not increased at the same rate as our revenue growth, resulting in increased profitability.
Selling, general and administrative expenses
SG&A expenses decreased $3.5 million or 20.0% from $17.5 million for the year ended December 31, 2004 to
$14.0 million for the year ended December 31, 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 resulted in lower
overhead costs in 2005 compared to 2004. SG&A expense in 2004 included corporate overhead expenses that
were for the benefit of both continuing and discontinued operations. Only those costs that were solely
attributable to NPDC were allocated to discontinued operations in 2004. NPDC pays the Company a fee
pursuant to the management services agreement, which is reflected as a reduction of SG&A expense in the
accompanying consolidated statement of operations (see Note 16 to the accompanying Consolidated Financial
Statements for further details). The decrease in corporate SG&A also includes a decrease in executive
compensation in 2005 compared to 2004. In 2004, SG&A expense included an incentive payment of $2.0
million to the Company’s former Chief Executive Officer, which did not recur in 2005 (see Note 16 to the
accompanying Consolidated Financial Statements for further details). These decreases in corporate SG&A were
offset by an increase in SG&A at General Physics primarily due to an increase in staff and an increase in the
provision for uncollectible accounts receivable.
Interest expense
Interest expense decreased $0.4 million or 21.6% from $1.9 million for the year ended December 31, 2004 to
$1.5 million for the year ended December 31, 2005. The decrease was primarily attributable to General Physics’
repayment of its short-term borrowings in January 2005 with the proceeds received from the arbitration award.
Other income
Other income decreased $0.3 million or 52.4% from $0.5 million for the year ended December 31, 2004 to $0.2
million for the year ended December 31, 2005. The decrease was primarily due to a decrease in interest income
primarily from the arbitration award in 2004 which did not recur in 2005.
Gain from litigation settlement and arbitration award
The Company recognized a gain of $5.6 million from the litigation settlement proceeds paid by EDS in the fourth
quarter of 2005, net of legal fees and expenses, compared to a gain of $13.7 million from the arbitration award in
2004, net of legal fees and expenses (see Note 18 to the accompanying Consolidated Financial Statements).
Income taxes
Income tax expense was $6.8 million for the year ended December 31, 2005 compared to an income tax benefit
of $8.2 million for the year ended December 31, 2004. In assessing the realizability of its deferred tax assets,
management considered it more likely than not that its deferred tax assets would be realized and reduced its
deferred tax valuation allowance by $12.2 million in 2004. This was offset by the current tax provision of $4.0
23
million, resulting in a net income tax benefit of $8.2 million in 2004. As of December 31, 2005, the Company
had federal net operating loss carryforwards of $31.1 million, which expire during 2022 and 2023.
Liquidity and Capital Resources
Working Capital
As of December 31, 2006, the Company had cash and cash equivalents totaling $8.7 million. The Company
believes that cash generated from operations and borrowings available under the General Physics Credit
Agreement ($20.0 million of available borrowings as of December 31, 2006) will be sufficient to fund the
working capital and other requirements of the Company for at least the next twelve months.
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of
Sandy Corporation, a leader in custom product sales training and part of the ADP Dealer Services division of
ADP. The Sandy Corporation business is run as an unincorporated division of General Physics. Sandy
Corporation offers custom sales training and print-based and electronic publications primarily to the automotive
industry. The purchase price at closing consisted of approximately $5.2 million in cash paid to ADP with cash on
hand and the assumption of certain liabilities by General Physics to complete contracts, subject to post-closing
adjustments. The Company currently anticipates that the final cash purchase price will be approximately $4.4
million after post-closing adjustments based on the final closing balance sheet of Sandy Corporation as of the
effective date of the acquisition. In addition, General Physics may be required to pay ADP up to an additional
$8.0 million, contingent upon Sandy Corporation achieving certain revenue targets (as defined in the purchase
agreement) during the two twelve-month periods following the completion of the acquisition.
The Company’s working capital decreased $11.7 million during 2006 from $34.8 million at December 31, 2005
to $23.1 million at December 31, 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 above, offset by cash generated
from operations during 2006.
Cash Flows
Year ended December 31, 2006 compared to the year ended December 31, 2005
The Company’s cash balance decreased $9.5 million from $18.1 million as of December 31, 2005 to $8.7 million
at December 31, 2006. The decrease in cash and cash equivalents during the year ended December 31, 2006
resulted from cash provided by operating activities of $14.9 million, offset by cash used in investing activities of
$1.6 million, and cash used in financing activities of $22.9 million. Cash flows from discontinued 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 dates of the spin-offs
of GSE and NPDC.
Cash provided by operating activities was $14.9 million for the year ended December 31, 2006 compared to
$19.3 million in 2005. The decrease in cash provided by operating activities compared to the prior year is
primarily due to the receipt of proceeds from the EDS arbitration award of $13.8 million in January 2005, offset
by increases in net working capital changes of $11.0 million during 2006 compared to 2005. During 2005,
working capital changes included an $8.3 million decrease in accounts payable and accrued expenses which
included the payout of $5.0 million of the EDS arbitration proceeds to NPDC pursuant to the spin-off agreement.
Excluding this item, net changes in working capital increased $6.0 million during 2006 compared to 2005.
24
Cash used in investing activities was $1.6 million for the year ended December 31, 2006 compared to $1.0
million in 2005. The increase in cash used in investing activities is primarily due to $0.6 million of cash paid in
connection with the acquisition of PMC, net of $0.8 million cash acquired pursuant to such acquisition.
Cash used in financing activities was $22.9 million for the year ended December 31, 2006 compared to $2.6
million for 2005. The increase in cash used in financing activities is primarily due to $20.9 million of cash used
in connection with the capital stock restructuring (including transaction costs) and $3.1 million of cash used for
repurchases of common stock in the open market during 2006. In addition, cash used in financing activities
during 2005 included the following items which did not recur in 2006: net repayments of short-term borrowings
of $6.1 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 and short-term borrowings by GSE of $1.2 million.
Year ended December 31, 2005 compared to the year ended December 31, 2004
The Company’s cash balance increased $15.7 million from $2.4 million as of December 31, 2004 to $18.1
million at December 31, 2005. The increase in cash and cash equivalents during the year ended December 31,
2005 resulted from cash provided by operating activities of $19.3 million, offset by cash used in investing
activities of $1.0 million, and cash used in financing activities of $2.6 million. Cash flows from discontinued
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
dates of the spin-offs of GSE and NPDC.
Cash provided by operating activities was $19.3 million for the year ended December 31, 2005 compared to $4.2
million in 2004. The increase in cash compared to the prior period is primarily due to receipt of proceeds from
the EDS arbitration award of $13.8 million in January 2005 (including post-award interest) and the receipt of
proceeds from the litigation settlement of $5.6 million in December 2005. This increase in cash flows from
operating activities was offset by a decrease in net income of approximately $15.3 million. Additionally, there
was a decrease in other operating items in 2005 compared to 2004 primarily due to a decrease in accrued
expenses related to the payout of $5 million of the EDS arbitration proceeds to NPDC in 2005, which was
accrued for as of December 31, 2004.
Cash used in investing activities was $1.0 million for the year ended December 31, 2005 compared to $1.4
million in 2004. The decrease in cash used in investing activities is primarily due to a decrease in cash proceeds
from the sale of marketable securities by NPDC of approximately $0.6 million in 2004 that did not recur in 2005,
offset by a decrease in capital expenditures for property, plant and equipment of approximately $0.8 million
during 2005 compared to 2004. In 2004, cash used for capital expenditures included $0.7 million related to the
discontinued operations of GSE and NPDC.
Cash used in financing activities was $2.6 million for the year ended December 31, 2005 compared to $4.9
million for the same period of 2004. The decrease in cash used in financing activities is primarily due to net cash
proceeds of $2.0 million in 2005 from GSE’s issuance of subordinated debt, as well as additional borrowings by
GSE of approximately $1.2 million under General Physics’ Credit Agreement during 2005, prior to the spin-off.
Additionally, the Company contributed $0.8 million of cash to GSE in 2005 and $2.5 million of cash to NPDC in
2004 in connection with the spin-offs. Cash used in financing activities also decreased as a result of an increase
of $0.5 million of cash proceeds from the issuance of Common Stock, primarily for the exercise of employee
stock options, in 2005 compared to 2004. These increases in cash were offset by a decrease in cash due to the
repayment by General Physics of its short-term borrowings of $6.1 million in 2005 compared to repayments of
short-term borrowings and long-term debt of approximately $3.0 million in 2004.
25
Long-term Debt and Short-term Borrowings
In August 2003, the Company issued and sold to four Gabelli funds $7.5 million in 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 the Company’s Common Stock at an
exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7.5 million.
The Gabelli Notes are secured by a mortgage on the Company’s former property located in Pawling, New York
which was distributed to NPDC. In addition, at any time that less than $1.9 million principal amount of the
Gabelli Notes are outstanding, the Company may defease the obligations secured by the mortgage and obtain a
release of the mortgage. Subsequent 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 year ended December 31, 2006, Gabelli exercised 197,823 GP
Warrants for a total exercise price of $1,157,000, which was paid in the form of $140,000 cash and delivery of
$1,017,000 of the Gabelli Notes. As of December 31, 2006, there were 786,293 GP Warrants, each with an
exercise price of $5.85 outstanding and exercisable. During January and February 2007, Gabelli exercised an
additional 362,431 warrants for a total exercise price of $2,120,000, which further reduced the principal balance
of the Gabelli Notes.
In October 2003, the Company issued a five-year 5% note due in full in October 2008 in the principal amount of
$5,250,955 to ManTech International (ManTech). Interest is payable quarterly. Each year during the term of the
note, ManTech has the option to convert up to 20% of the original principal amount of the note into Common
Stock of the Company at the then market price of the Company’s Common Stock, but only in the event that the
Company’s Common Stock is trading at $10 per share or more. In the event that less than 20% of the principal
amount of the note is not converted in any year, such amount not converted will be eligible for conversion in
each subsequent year until converted or until the note is repaid in cash.
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 3.00%. Based upon the financial
performance of General Physics, the interest rate can be reduced (as of December 31, 2006, the rate was LIBOR
plus 2.50% for General Physics). The Credit Agreement also contains certain restrictive covenants. General
Physics is currently restricted under the Credit Agreement from paying dividends and management fees to the
Company in excess of $1.0 million in any fiscal 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. As of December 31, 2006, the Company had no borrowings outstanding under the
Credit Agreement, and had approximately $20,043,000 of available borrowings based upon 80% of eligible
accounts receivable and 80% of eligible unbilled receivables.
26
Contractual Payment Obligations
The Company enters into various agreements that result in contractual obligations in connection with its business
activities. These obligations primarily relate to our financing arrangements (such as long-term debt and capital
and operating leases), purchase commitments under non-cancelable contracts for certain products and services,
and contractual obligations to certain of the Company’s officers under employment contracts. The following
table summarizes the Company’s total contractual payment obligations as of December 31, 2006 (in thousands):
2007
2008 –
2009
Payments due in
2010 –
2011
After
2011
Long-term debt:
Principal
Interest
Total
Capital lease commitments
Operating lease commitments
Purchase commitments *
Employment agreements
$
— $
652
652
30
3,513
1,960
1,743
11,734 $
452
12,186
—
3,743
426
349
— $
—
—
—
2,467
314
—
— $
—
—
—
3,781
—
—
Total
11,734
1,104
12,838
30
13,504
2,700
2,092
Total
$
7,898 $
16,704 $
2,781 $
3,781 $
31,164
* Excludes purchase orders for goods and services entered into by the Company in the ordinary course of business, which are non-
binding and subject to amendment or termination within a reasonable notification period.
Off-Balance Sheet Commitments
Subsequent to the spin-off of NPDC on November 24, 2004, the Company continues to guarantee certain
operating leases for Five Star’s New Jersey and Connecticut warehouses, aggregating $1.6 million annually
through the first quarter of 2007. In addition, the Company continues to guarantee the repayment of one debt
obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate outstanding
balance as of December 31, 2006 was $1.1 million. The Company’s guarantee expires upon the maturity of the
debt obligation in March 2011.
Subsequent to the spin-off of GSE on September 30, 2005, the Company continued to guarantee GSE’s
borrowings under General Physics’ Credit Agreement (under which $1.5 million was allocated for use by GSE).
As of December 31, 2005, GSE had borrowings of $1,182,000 under the Credit Agreement. In March 2006,
GSE repaid its borrowings in full and ceased to be a Borrower under the Credit Agreement.
As of December 31, 2006, the Company had three outstanding letters of credit totaling $121,000, which expire in
2007, and three outstanding performance bonds totaling $3,626,000, which expire in 2007.
The Company does not have any off-balance sheet financing except for operating leases and letters of credit
entered into in the normal course of business and the items disclosed above.
Management Discussion of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
27
Certain of our accounting policies require higher degrees of judgment than others in their application. These
include revenue recognition, valuation of accounts receivable, impairment of intangible assets, including
goodwill, and valuation of deferred tax assets, which are summarized below. In addition, Note 2 to the
accompanying Consolidated Financial Statements includes further discussion of our significant accounting
policies.
Revenue Recognition
The Company provides services under time-and-materials, cost-reimbursable, and fixed-price (including fixed-
fee per transaction) contracts to both government and commercial customers. Each contract has different terms
based on the scope, deliverables and complexity of the engagement, requiring the Company to make judgments
and estimates about recognizing revenue. Revenue is recognized as services are performed.
Under time-and-materials contracts, as well as certain government cost-reimbursable and certain fixed-price
contracts, the contractual billing schedules are based on the specified level of resources the Company is obligated
to provide. As a result, for these “level-of-effort” contracts, the contractual billing amount for the period is a
measure of performance and, therefore, revenue is recognized in that amount.
Revenue under government fixed price and certain commercial contracts is recognized using the percentage of
completion method in accordance with the American Institute of Certified Public Accountants Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.
Under the percentage-of-completion method, management estimates the percentage-of-completion based upon
costs incurred as a percentage of the total estimated costs. When total cost estimates exceed revenues, the
estimated losses are recognized immediately. The use of the percentage-of-completion method requires
significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the
length of time to complete the project, the nature and complexity of the work to be performed, and anticipated
changes in estimated salaries and other costs. Estimates of total contract revenues and costs are continuously
monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract
progresses. When revisions in estimated contract revenues and costs are determined, such adjustments are
recorded in the period in which they are first identified.
For commercial fixed-fee per transaction contracts, revenue is recognized during the period in which services are
delivered in accordance with the pricing outlined in the contracts. For other commercial fixed price contracts
which typically involve a discrete project, such as development of training content and materials, design of
training processes, software implementation, or engineering projects, the contractual billing schedules are not
based on the specified level of resources the Company is obligated to provide. These discrete projects generally
do not contain milestones or other reliable measures of performance. As a result, revenue on these arrangements
is recognized using the percentage-of-completion method based on the relationship of costs incurred to total
estimated costs expected to be incurred over the term of the contract. The Company believes this methodology is
a reasonable measure of proportional performance since performance primarily involves personnel costs and
services are provided to the customer throughout the course of the projects through regular communications of
progress toward completion and other project deliverables. In addition, the customer typically is required to pay
the Company for the proportionate amount of work and cost incurred in the event of contract termination.
Certain of the Company’s fixed price commercial contracts contain revenue arrangements with multiple
deliverables. The Company applies the separation guidance in Emerging Issues Task Force (EITF) 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21), for these types of contracts. Revenue
arrangements with multiple deliverables are evaluated to determine if the deliverables can be divided into more
than one unit of accounting. For contracts determined to have more than one unit of accounting, the Company
recognizes revenue for each deliverable based on the revenue recognition policies discussed above; that is, the
Company recognizes revenue in accordance with work performed and costs incurred, with fee being allocated
28
proportionately over the service period. Within each multiple deliverable project, there is objective and reliable
fair value across all units of the arrangement, as discounts are not offered or applied to one deliverable versus
another, and the rates bid across all deliverables are consistent.
As part of the Company’s on-going operations to provide services to its customers, incidental expenses, which
are commonly referred to as “out-of-pocket” expenses, are billed to customers, either directly as a pass-through
cost or indirectly as a cost estimated in proposing on fixed-price contracts. Out-of-pocket expenses include
expenses such as airfare, mileage, hotel stays, out-of-town meals and telecommunication charges. The
Company’s policy provides for these expenses to be recorded as both revenue and direct cost of services in
accordance with the provisions of EITF 01-14, Income Statement Characterization of Reimbursements Received
for “Out-of-Pocket” Expenses Incurred.
Valuation of Accounts Receivable
Trade accounts receivable are recorded at invoiced amounts. The allowance for doubtful accounts is estimated
based on historical trends of past due accounts, write-offs and specific identification and review of past due
accounts. The allowance for doubtful accounts was $0.7 million at December 31, 2006.
Impairment of Intangible Assets, Including Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead
tested for impairment at least annually. The goodwill impairment test requires the Company to identify its
reporting units (as defined in SFAS No. 131) and obtain estimates of the fair values of those units as of the
testing date. These estimates are formed by evaluating historical trends, current budgets, operating plans and
industry data. For the years ended December 31, 2006, 2005, and 2004, the estimated fair values of each
reporting unit exceeded their respective carrying values, indicating the underlying goodwill of each unit was not
impaired at the respective testing dates. The timing and frequency of our goodwill impairment tests are based on
an ongoing assessment of events and circumstances that would more than likely reduce the estimated fair value
of a reporting unit below its carrying value. The Company will continue to monitor its goodwill for impairment
and conduct formal tests when impairment indicators are present. A decline in the fair value of any reporting unit
below its carrying value is an indicator that the underlying goodwill of the unit is potentially impaired. This
would require a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. An
impairment loss would be required for the amount in which the carrying value of a reporting unit’s goodwill
exceeded its implied fair value. The implied fair value of the reporting unit’s goodwill would become the new
cost basis of the reporting unit’s goodwill.
Valuation of Deferred Tax Assets
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered. In assessing the
realizability of the deferred tax assets, the Company considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the periods in which temporary differences are
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon these factors, management believes it
is more likely than not that the Company will realize the benefits of deferred tax assets, net of the valuation
allowance. The valuation allowance relates to both foreign and domestic net operating loss carryforwards for
which the Company does not believe the benefits will be realized. As of December 31, 2006, the Company had
federal net operating loss carryforwards of $22.4 million, which expire during 2022 and 2023.
29
Accounting Standards Issued and Adopted
We discuss recently issued and adopted accounting standards in Note 2 to the accompanying Consolidated
Financial Statements.
Item 7A:
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate, market risks and currency fluctuations. In the normal
course of business, the Company employs internal processes to manage its exposure to interest rate, market risks
and currency fluctuations. The Company’s objective in managing its interest rate risk is to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company
estimates that the fair value of its long-term debt approximates its carrying amount because the stated interest
rates approximate prevailing market rates.
The Company is exposed to the impact of currency fluctuations because of its international operations. The
Company’s net investment in its foreign subsidiaries, including intercompany balances, at December 31, 2006
was not significant, and accordingly, fluctuations in foreign currency did not have a material impact on the
Company’s financial position.
The Company’s revenues and profitability are related to general levels of economic activity and employment in
the United States and the United Kingdom. As a result, any significant economic downturn or recession in one or
both of those countries could harm our business and financial condition. A significant portion of the Company’s
revenues is derived from Fortune 500 level companies and their international equivalents, which historically have
adjusted expenditures for external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not increase or may reduce their
expenditures on external training, which could adversely affect the Company’s business and financial condition.
30
Item 8:
Financial Statements and Supplementary Data
Financial Statements of GP Strategies Corporation and Subsidiaries:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2006 and 2005
Consolidated Statements of Operations – Years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders’ Equity and Comprehensive Income – Years
ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows – Years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Page
32
35
36
37
38
40
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the accompanying consolidated balance sheets of GP Strategies Corporation and subsidiaries as
of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006.
In connection with our audits of the consolidated financial statements, we also have audited the financial
statement schedule listed under item 15a(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of GP Strategies Corporation and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2, of the notes to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, on January 1, 2006 and Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, on December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of GP Strategies Corporation and subsidiaries internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 14, 2007 expressed an unqualified opinion on management’s assessment of, and the effective
operation of, internal control over financial reporting.
Baltimore, Maryland
March 14, 2007
32
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited management's assessment, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting (Item 9A(b)), that GP Strategies Corporation maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). GP Strategies Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that GP Strategies Corporation maintained effective internal control
over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Also, in our opinion, GP Strategies Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
33
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of GP Strategies Corporation and subsidiaries as of December
31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006,
and the related financial statement schedule, and our report dated March 14, 2007, expressed an unqualified
opinion on those consolidated financial statements.
Baltimore, Maryland
March 14, 2007
34
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2005
(In thousands, except shares and par value per share)
Current assets:
Assets
Cash and cash equivalents
Accounts and other receivables, less allowance for doubtful accounts
of $665 in 2006 and $1,166 in 2005
Costs and estimated earnings in excess of billings on
uncompleted contracts
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net of accumulated amortization of $916 in 2006
and $692 in 2005
Deferred tax assets
Other assets
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt
Accounts payable and accrued expenses
Billings in excess of costs and estimated earnings on
uncompleted contracts
Total current liabilities
Long-term debt less current maturities
Other noncurrent liabilities
Total liabilities
Stockholders’ equity:
Preferred stock, par value $0.01 per share
Authorized 10,000,000 shares; issued none
Common stock, par value $0.01 per share
Authorized 25,000,000 shares; issued 17,828,644 shares in 2006 and
17,116,575 shares in 2005 (of which 1,860,876 shares in 2006
and 2,379 shares in 2005 are held in treasury)
Class B capital stock, par value $0.01 per share
Additional paid-in capital
Accumulated deficit
Treasury stock at cost
Unearned compensation
Accumulated other comprehensive loss
Note receivable from stockholder
Total stockholders’ equity
See accompanying notes to consolidated financial statements.
35
2006
2005
$
8,660 $
18,118
26,628
11,257
1,115
5,296
52,956
1,859
56,815
645
7,420
1,705
27,079
11,487
1,174
4,762
62,620
1,857
57,483
647
10,391
1,643
$
$
121,400 $
134,641
30 $
22,903
6,881
29,814
10,896
959
41,669
71
20,315
7,430
27,816
11,309
1,174
40,299
—
—
178
—
159,042
(65,558)
(13,167)
—
(640)
(124)
79,731
$
121,400 $
171
12
168,737
(71,710)
(29)
(1,133)
(1,087)
(619)
94,342
134,641
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2006, 2005 and 2004
(In thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (including interest income of
$329 in 2006, $296 in 2005 and $317 in 2004)
Gain on litigation settlement, net of legal fees and expenses
Gain on arbitration award, net of legal fees and expenses
2006
2005
2004
$
178,783 $
152,217
175,555 $
150,564
164,458
145,119
26,566
14,262
12,304
1,558
964
—
—
24,991
14,039
10,952
1,518
238
5,552
—
19,339
17,545
1,794
1,937
500
—
13,660
14,017
(8,249)
22,266
254
Income from continuing operations before income taxes
11,710
15,224
Income tax expense (benefit)
Income from continuing operations
5,068
6,642
6,767
8,457
Income (loss) from discontinued operations, net of income taxes
—
(1,244)
Net income
$
6,642 $
7,213 $
22,520
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
15,818
16,731
18,169
18,946
17,678
18,307
Per common share data:
Basic
Income from continuing operations
Income (loss) from discontinued operations
Net income
Diluted
Income from continuing operations
Income (loss) from discontinued operations
Net income
See accompanying notes to consolidated financial statements.
$
$
$
$
0.42 $
—
0.42 $
0.40 $
—
0.40 $
0.47 $
(0.07)
0.40 $
0.45 $
(0.07)
0.38 $
1.26
0.01
1.27
1.22
0.01
1.23
36
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S
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005, and 2004
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Collection of deposit in escrow, including interest
Gain on arbitration award, net
Deferred income taxes
Issuance of stock for retirement savings plan
and non-cash compensation expense
Minority interests
Changes in other operating items, net of effect
of acquisition:
Accounts and other receivables
Inventories
Costs and estimated earnings in excess of
billings on uncompleted contracts
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Billings in excess of costs and estimated
earnings on uncompleted contracts
Other
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property, plant and equipment
Acquisition, net of cash acquired
Additions to intangible assets
Proceeds from sales of marketable securities
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Repayment of short-term borrowings
Capital stock restructuring
Repayment of note receivable from shareholder
Repurchases of common stock in the open market
Proceeds from issuance of common stock
Cash settlement of stock options
Repayment of long-term debt
Short-term borrowings by GSE
Proceeds from issuance of subordinated convertible note by GSE
Distribution of cash of GSE and NPDC in spin-offs
Deferred financing costs (by GSE in 2005)
Payments on obligations under capital leases
Net cash used in financing activities
38
2006
2005
2004
$
6,642 $
7,213 $
22,520
2,209
—
—
4,070
1,439
—
1,213
—
230
(1,154)
1,564
(1,203)
(92)
14,918
(944)
(632)
—
—
21
(1,555)
—
(20,860)
495
(3,140)
1,061
(299)
—
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—
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(121)
(22,864)
3,090
13,798
—
5,789
1,233
(953)
2,237
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(2,561)
(8,257)
(1,725)
(435)
19,348
(1,028)
—
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—
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—
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860
—
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—
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—
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(4,851)
(continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005, and 2004
(In thousands)
Effect of exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing and financing activities:
Reduction in carrying value of Gabelli Notes upon exercise of
detachable stock purchase warrants
Issuance of Common Stock for share settlement of stock options
Distribution of non-cash net assets of GSE and NPDC in
connection with spin-offs
See accompanying notes to consolidated financial statements.
2006
2005
2004
43
(44)
93
(9,458)
18,118
15,701
2,417
8,660 $
18,118 $
(1,999)
4,416
2,417
744 $
514 $
784 $
1,160 $
2,383
639
859 $
518 $
— $
— $
—
—
— $
5,978 $
23,514
$
$
$
$
$
$
39
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(1) Description of Business and Basis of Presentation
GP Strategies Corporation (the “Company”) was incorporated in Delaware in 1959. As of December 31,
2006, the Company’s business consists of its training, engineering, and consulting business operated by its
subsidiary, General Physics Corporation (“General Physics” or “GP”). General Physics is a workforce
development company that seeks to improve the effectiveness of organizations by providing training,
management consulting, e-Learning solutions and engineering services that are customized to meet the
specific needs of clients.
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the
business of Sandy Corporation (“Sandy”), a leader in custom product sales training and part of the ADP
Dealer Services division of ADP, Inc. (“ADP”). Sandy Corporation, which is run as an unincorporated
division of General Physics, offers custom sales training and print-based and electronic publications
primarily to the automotive industry. The purchase price at closing was consisted of approximately $5.2
million in cash paid to ADP with cash on hand and the assumption of certain liabilities by General Physics
to complete contracts, subject to post-closing adjustments. The Company currently anticipates that the final
cash purchase price will be approximately $4.4 million after post-closing adjustments based on the final
closing balance sheet of Sandy Corporation as of the effective date of the acquisition. In addition, General
Physics may be required to pay ADP up to an additional $8.0 million, contingent upon Sandy Corporation
achieving certain revenue targets (as defined in the purchase agreement) during the two twelve-month
periods following the completion of the acquisition.
On February 3, 2006, the Company completed the acquisition of Peters 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. PMC is included in the
Company’s Manufacturing & BPO segment and its results are included in the consolidated financial
statements since the date of acquisition.
On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems,
Inc. (“GSE”) through a dividend to the Company’s stockholders. GSE is a stand alone public company
which provides simulation solutions and services to energy, process and manufacturing industries
worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE
common stock for each share of the Company’s Common Stock or Class B Capital 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 GSE have been reclassified as discontinued in
the Company’s consolidated statements of operations for 2005 and prior periods presented (see Note 3).
The Company continued to provide corporate support services to GSE pursuant to a management services
agreement through December 31, 2006 (see Note 16).
On November 24, 2004, the Company completed the tax-free spin-off of National Patent Development
Corporation (“NPDC”). NPDC is a stand alone public company owning all of the stock of MXL
Industries, Inc. (“MXL”), an interest in Five Star Products, Inc. (“Five Star”), and certain other non-core
assets. Subsequent to the spin-off of NPDC, the results of operations of NPDC are presented as
discontinued for 2004 (see Note 3).
40
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the operations of the Company and its majority-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of short-term highly liquid investments with original maturities of
three months or less.
(c) Allowance for Doubtful Accounts Receivable
Trade accounts receivable are recorded at invoiced amounts. The allowance for doubtful accounts is
estimated based on historical trends of past due accounts, write-offs and specific identification and
review of past due accounts.
(d) Foreign Currency Translation
The functional currency of the Company’s international operations is the respective local currency.
The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts
using current exchange rates in effect at the balance sheet date and for revenue and expense accounts
using the weighted average exchange rates prevailing during the year. The unrealized gains and
losses resulting from such translation are included as a component of other comprehensive income
(loss).
(e) Revenue Recognition
The Company provides services under time-and-materials, cost-reimbursable, and fixed-price
(including fixed-fee per transaction) contracts to both government and commercial customers. Each
contract has different terms based on the scope, deliverables and complexity of the engagement,
requiring the Company to make judgments and estimates about recognizing revenue. Revenue is
recognized as services are performed.
Under time-and-materials contracts, as well as certain government cost-reimbursable and certain
fixed-price contracts, the contractual billing schedules are based on the specified level of resources
the Company is obligated to provide. As a result, for these “level-of-effort” contracts, the contractual
billing amount for the period is a measure of performance and, therefore, revenue is recognized in
that amount.
Revenue under government fixed price and certain commercial contracts is recognized using the
percentage of completion method in accordance with the American Institute of Certified Public
Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Under the percentage-of-completion method, management
estimates the percentage-of-completion based upon costs incurred as a percentage of the total
estimated costs. When total cost estimates exceed revenues, the estimated losses are recognized
immediately. The use of the percentage-of-completion method requires significant judgment relative
to estimating total contract revenues and costs, including assumptions relative to the length of time
41
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
to complete the project, the nature and complexity of the work to be performed, and anticipated
changes in estimated salaries and other costs. Estimates of total contract revenues and costs are
continuously monitored during the term of the contract, and recorded revenues and costs are subject
to revision as the contract progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first identified.
For commercial fixed-fee per transaction contracts, revenue is recognized during the period in which
services are delivered in accordance with the pricing outlined in the contracts. For other commercial
fixed price contracts which typically involve a discrete project, such as development of training
content and materials, design of training processes, software implementation, or engineering
projects, the contractual billing schedules are not based on the specified level of resources the
Company is obligated to provide. These discrete projects generally do not contain milestones or
other reliable measures of performance. As a result, revenue on these arrangements is recognized
using the percentage-of-completion method based on the relationship of costs incurred to total
estimated costs expected to be incurred over the term of the contract. The Company believes this
methodology is a reasonable measure of proportional performance since performance primarily
involves personnel costs and services are provided to the customer throughout the course of the
projects through regular communications of progress toward completion and other project
deliverables. In addition, the customer typically is required to pay the Company for the proportionate
amount of work and cost incurred in the event of contract termination.
Certain of the Company’s fixed price commercial contracts contain revenue arrangements with
multiple deliverables. The Company applies the separation guidance in Emerging Issues Task Force
(EITF) 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), for these types of
contracts. Revenue arrangements with multiple deliverables are evaluated to determine if the
deliverables can be divided into more than one unit of accounting. For contracts determined to have
more than one unit of accounting, the Company recognizes revenue for each deliverable based on the
revenue recognition policies discussed above; that is, the Company recognizes revenue in accordance
with work performed and costs incurred, with fee being allocated proportionately over the service
period. Within each multiple deliverable project, there is objective and reliable fair value across all
units of the arrangement, as discounts are not offered or applied to one deliverable versus another,
and the rates bid across all deliverables are consistent.
As part of the Company’s on-going operations to provide services to its customers, incidental
expenses, which are commonly referred to as “out-of-pocket” expenses, are billed to customers,
either directly as a pass-through cost or indirectly as a cost estimated in proposing on fixed-price
contracts. Out-of-pocket expenses include expenses such as airfare, mileage, hotel stays, out-of-town
meals and telecommunication charges. The Company’s policy provides for these expenses to be
recorded as both revenue and direct cost of services in accordance with the provisions of EITF 01-
14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
Incurred.
(f) Comprehensive Income
Comprehensive income consists of net income, net unrealized gains (losses) on available-for-sale
securities, and foreign currency translation adjustments.
42
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(g) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Major additions and improvements are capitalized,
while maintenance and repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized in operations when
realized.
Depreciation of property, plant and equipment is recognized on a straight-line basis over the
following estimated useful lives:
Class of assets
Buildings and improvements
Machinery, equipment, and furniture
and fixtures
Leasehold improvements
Useful life
5 to 40 years
3 to 10 years
Shorter of asset life or term of lease
(h)
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and intangibles subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized at the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and
are no longer depreciated.
(i) Goodwill and Intangible Assets
The Company’s intangible assets include costs incurred to obtain contract rights and to acquire
customer-related intangible assets in business combinations, and are amortized on a straight-line
basis over their estimated useful lives.
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill
and intangible assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at least annually or more
frequently if events and circumstances indicate that the asset might be impaired in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). The goodwill impairment test requires the Company to identify
its reporting units and obtain estimates of the fair values of those units as of the testing date. A
reporting unit is an operating segment as defined in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS No. 131). The Company estimates the fair values of
its reporting units using discounted cash flow valuation models. An impairment loss is recognized to
the extent that the carrying amount exceeds the reporting unit’s fair value. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over their respective
43
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
estimated useful lives to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
For the years ended December 31, 2006, 2005, and 2004, the Company tested its goodwill, as of
December 31, at the reporting unit level in accordance with SFAS No. 142 and concluded no
impairment charge was required. The Company does not have any intangible assets with indefinite
useful lives.
(j) Other Assets
Other assets include deferred financing costs, certain software development costs, and an investment
in a joint venture. Deferred financing costs are amortized on a straight-line basis over the terms of
the related debt and such amortization is classified as interest expense in the consolidated statements
of operations. The Company capitalizes the cost of internal-use software in accordance with
Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. These costs consist of payments made to third parties and the salaries of
employees working on such software development and are amortized using the straight-line method
over their estimated useful lives, typically three to five years. The Company accounts for a 5%
interest in a joint venture partnership under the equity method of accounting because significant
influence exists due to certain factors, including representation on the partnership’s Board of
Directors and voting rights.
(k)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis
and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date.
(l) Earnings per Share
Basic earnings per share is computed by dividing earnings by the weighted average number of
common shares outstanding during the periods. Diluted EPS reflects the potential dilution of
common stock equivalent 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 equivalent shares consist of stock options, non-vested stock
units, and warrants to purchase shares of common stock computed under the treasury stock method,
using the average market price during the period. The following 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:
44
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Year ended December 31,
2005
2006
2004
(In thousands)
Non-dilutive instruments
Dilutive common stock equivalents
577
913
574
777
1,954
629
(m) Stock-Based Compensation
Pursuant to the stock-based incentive plans which are described more fully in Note 13, the Company
grants stock options, restricted stock, stock units, and equity to officers, employees, and members of
the Board of Directors.
As discussed in more detail in the Accounting Standards Adopted section later in this Note, the
Company adopted SFAS No. 123 Revised, Share-Based Payment (SFAS No. 123R) on January 1,
2006. SFAS No. 123R requires companies to recognize compensation expense for all equity-based
compensation awards issued to employees that are expected to vest. Equity-based compensation
awards include stock options, restricted stock, stock units and any other share-based payments.
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 awards expected to vest in
compensation expense in the period of change. The Company does not capitalize any portion of its
stock-based compensation. The Company estimates the fair value of its stock options on 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 on the U.S. Treasury
yield curve in effect at the time of grant.
Prior to the adoption of SFAS No. 123R on January 1, 2006, the Company applied the intrinsic-
value-based method of accounting prescribed by Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees (APB No. 25), to account for its stock-based
compensation awards. Under this method, compensation expense for stock options was recorded on
the date of grant only if the current market price of the underlying stock exceeded the exercise price
of the options. The following table illustrates the pro-forma effect on net income and earnings per
share for all outstanding stock-based compensation awards in each period that the fair value
provisions of SFAS No. 123R were not in effect (dollars in thousands, except per share data):
45
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Net income – as reported
$
7,213 $
22,520
Year ended December 31,
2005
2004
Add: stock-based compensation expense
determined under intrinsic value method and
included in reported net income, net of tax
Deduct: stock-based compensation expense
determined under the fair-value-based
method for all awards, net of tax
Pro forma net income
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
183
351
(433)
(959)
6,963 $
21,912
0.40 $
0.38 $
0.38 $
0.37 $
1.27
1.24
1.23
1.20
$
$
$
$
$
The per share weighted average fair value of the Company’s stock options granted during 2005 and
2004 was $3.35 and $1.47, respectively, on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life
(n) Use of Estimates
2005
2004
—%
3.56%
53.51%
4.0 years
—%
1.70%
32.24%
2.0 years
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, the Company evaluates the estimates used, including but not limited to those related
to revenue recognition, the allowance for doubtful accounts receivable, impairments of goodwill and
other intangible assets, self-insurance liabilities, and income taxes. Actual results could differ from
these estimates.
(o) Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash equivalents, accounts receivable,
accounts payable and short-term borrowings approximate estimated market values because of short-
maturities and interest rates that approximate current rates. The estimated fair value for the
46
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Company’s long-term debt approximates the carrying amount as the stated interest rates approximate
prevailing market rates. Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates.
(p) Leases
The Company leases various office space, machinery and equipment under noncancelable operating
leases which have minimum lease obligations. Several of the leases contain provisions for rent
escalations based primarily on increases in real estate taxes and operating costs incurred by the
lessor. Rent expense is charged to operations as incurred except for escalating rents, which are
charged to operations on a straight-line basis over the terms of the leases.
(q) Legal Expenses
The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary
course of business. Legal costs for services rendered in the course of these proceedings are charged
to expense as they are incurred.
(r) Reclassifications
During the year ended December 31, 2006, the Company reflected $0.5 million of income from a
joint venture within other income. For both the years ended December 31, 2005 and 2004, $0.3
million was reflected in revenue related to this joint venture. Certain other amounts in 2005 have
been reclassified to conform with the presentation for 2006.
(s) Accounting Standards Issued
FIN No. 48
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN
No. 48). FIN No. 48 prescribes a recognition 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 No. 48 would equal the largest amount of tax 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 No. 48 was effective as of January 1, 2007 for calendar-
year companies. In applying the new accounting model prescribed by FIN No. 48, companies were
required to determine and assess all material positions existing as of the adoption date, including all
significant uncertain positions, in all tax years, that are still subject to assessment or challenge under
relevant tax statutes. The Company will adopt FIN No. 48 effective January 1, 2007. The Company
is currently still evaluating the impact of this standard, but at this time does not expect its adoption to
have a material impact on its consolidated financial statements.
47
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
SFAS No. 157
In September 2006, the FASB issued SFAS 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. 157,
but at this time does not expect its adoption to have a material impact on its consolidated financial
statements.
(t) Accounting Standards Adopted
SFAS No. 123R
In December 2004, the FASB issued SFAS No. 123R which revised SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), and superseded 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:
Year ended December 31, 2006
As Reported
Including
SFAS No. 123R
Adoption
Pro-Forma
Excluding
SFAS No. 123R
Adoption
Impact
(In thousands, except per share data)
Income from continuing operations
before income taxes
$
11,710 $
11,874 $
Net income
Net cash provided by operating activities
Net cash used in financing activites
Earnings per share - basic
Earnings per share - diluted
6,642
14,918
(22,864)
0.42
0.40
6,740
14,918
(22,864)
0.43
0.40
(164)
(98)
—
—
(0.01)
—
48
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
SAB No. 108
In September 2006, the Securities and Exchange Commission (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 the carryover or reversal of prior year uncorrected misstatements should be considered
when quantifying misstatements in current year financial statements. SAB No. 108 requires
companies to apply a dual approach that considers both the amount by which the current year
income statement is misstated (“rollover approach”) and the cumulative amount by which the current
year balance sheet is misstated (“iron-curtain approach”), and to evaluate whether either approach
results in quantifying an error that is material in light of relevant quantitative and qualitative factors.
Prior to the issuance of SAB No. 108, many companies applied either the rollover or iron-curtain
approach for purposes of assessing materiality of misstatements. Upon adoption, SAB No. 108
allows a one-time cumulative effect adjustment to beginning of year retained earnings for those prior
year misstatements that were not material under the Company’s prior approach, but that are deemed
material under SAB No. 108. The Company adopted SAB No. 108 for its annual financial statements
for the year ended December 31, 2006.
During the course of its review of the income tax provision for the year ended December 31, 2006,
the Company identified three individual errors related to prior year transactions which were
determined to be material under SAB No. 108, but were not material to its prior years financial
statements under the rollover method. The nature and amounts of each of these errors are discussed
in more detail below.
o The Company determined that it had been improperly accounting for differences between
the book and tax basis of goodwill related to certain acquisitions which were completed
during the 1990’s. The Company concluded that its goodwill balance was overstated by
$1,668,000 and its deferred tax liability balance was overstated by $954,000 as of January
1, 2006. This error accumulated over several years beginning in 1994.
o The Company determined that it had been improperly accounting for a deferred tax liability
related to detachable stock purchase warrants which were issued with long-term debt in
2003. The Company concluded that its deferred tax liability balance was overstated by
$503,000 as of January 1, 2006.
o The Company determined that its foreign net operating loss carryforwards were overstated
by $279,000 as of January 1, 2006 due to write-offs which should have been made
beginning in 1999.
The Company determined that these errors were not material to prior year financial statements under
its previous rollover method because they were immaterial to the consolidated statements of
operations for each of the prior years impacted. In accordance with SAB No. 108, the Company
reduced retained earnings as of January 1, 2006 by $490,000 to correct these errors on its
consolidated balance sheet. The total cumulative effect adjustment of the initial adoption of SAB No.
108 on the Company’s January 1, 2006 balance sheet resulted in a decrease to retained earnings of
$490,000, a decrease to goodwill of $1,668,000, and an increase to deferred tax assets of $1,178,000.
49
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(3) Discontinued Operations
Under SFAS No. 144, discontinued businesses are removed from the results of continuing operations and
are classified as discontinued in the consolidated statements of operations through the effective date of
disposal. The following table sets forth the components of income (loss) from discontinued operations for
the years ended December 31, 2005 and 2004 (in thousands):
Revenue
Operating income (loss)
Interest expense
Income tax expense
Income (loss) from discontinued
operations, net of income taxes
$
2005
2004
17,617 $
(2,479)
251
208
133,581
2,027
1,284
573
(1,244)
254
Discontinued operations for the years ended December 31, 2005 and 2004 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 year ended December 31, 2004 also includes the results of MXL
and Five Star, which were distributed to NPDC in connection with the spin-off effective November 24,
2004.
The Company provided corporate support services to GSE pursuant to a management services agreement
which extended through December 31, 2006 (see Note 16). For the nine months ended September 30,
2005 and for the year ended December 31, 2004, the Company recorded revenues for services provided to
GSE of $525,000 and $608,000, 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 accompanying
consolidated statements of operations for the period from January 1, 2005 through September 30, 2005 (the
effective date of the spin-off) and for the year ended December 31, 2004.
(4) Acquisitions
Sandy Corporation
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the
business of Sandy, which was part of the ADP Dealer Services division of ADP. Sandy Corporation, which
is run as an unincorporated division of General Physics, offers custom sales training and print-based and
electronic publications primarily to the automotive industry. The purchase price at closing consisted of
approximately $5,200,000 in cash paid to ADP with cash on hand and the assumption of certain liabilities
by General Physics to complete contracts, subject to post-closing adjustments. The Company currently
anticipates that the final cash purchase price will be approximately $4,400,000 after post-closing
adjustments, based on the final closing balance sheet of Sandy Corporation as of the effective date of the
acquisition. In addition, General Physics may be required to pay ADP up to an additional $8,000,000,
contingent upon Sandy achieving certain revenue targets (as defined in the purchase agreement) during the
two twelve-month periods following the completion of the acquisition. The Company is currently in the
process of finalizing the purchase price allocation for the net assets acquired, including the valuation of
50
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
certain intangible assets, in accordance with SFAS No. 141, Business Combinations (SFAS No. 141). The
Company plans to file a Form 8-K/A by April 10, 2007 which will include the purchase price allocation
and the pro-forma impact of the acquisition on the Company’s consolidated financial statements for the
year ended December 31, 2006.
Peters Management Consultancy Ltd.
On February 3, 2006, the Company completed the acquisition of PMC, a performance improvement and
training company in the United Kingdom. The Company acquired 100% ownership of PMC for a
purchase price of $1,331,000 in cash, 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.
No contingent payments were paid by the Company as PMC did not achieve the performance targets
specified in the purchase agreement during the first year following completion of the acquisition. In
connection with the acquisition and in accordance with SFAS No. 141, the Company recorded $894,000 of
goodwill, representing the excess of the purchase price over the fair value of the net assets acquired and
$146,000 of third party acquisition costs, and $200,000 of customer-related intangible assets. PMC is
included in the Company’s Manufacturing & BPO segment and its results are included in the consolidated
financial statements since the date of acquisition. The pro-forma impact of the PMC acquisition is not
material to the Company’s results of operations for the year ended December 31, 2006.
The Company’s purchase price allocation for the net assets acquired is as follows:
Cash
Accounts receivable and other current assets
Property, plant and equipment, net
Goodwill
Intangible assets
$
Total assets
Accounts payable, accrued expenses and
other liabilities
Billings in excess of costs and estimated
earnings on uncompleted contracts
Total liabilities assumed
845
840
88
894
200
2,867
736
654
1,390
Net assets acquired
$
1,477
51
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(5) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2006 and 2005 were as follows (in thousands):
Beginning of year balance
Foreign currency translation
GSE goodwill balance distributed in spin-off
SAB No. 108 cumulative effect adjustment (Note 2)
Reduction of goodwill in accordance with SFAS No. 109
Acquisition of PMC (Note 4)
End of year balance
2006
2005
57,483 $
265
—
(1,668)
(159)
894
56,815 $
63,867
(141)
(6,243)
—
—
—
57,483
$
$
Intangible assets, which consist primarily of contract rights and customer-related intangible assets with
finite lives, are being amortized to expense over their estimated useful lives. As of December 31, 2006, the
Company’s intangible assets with finite lives had a weighted average remaining useful life of 4.6 years. As
of December 31, 2006, the Company had no intangible assets with indefinite useful lives. Amortization
expense of intangible assets included in continuing operations for 2006, 2005 and 2004 was $218,000,
$188,000, and $82,000, respectively. Amortization expense for intangible assets is estimated to be
$197,000 in 2007, $142,000 in 2008, $88,000 in 2009, and $73,000 in 2010, 2011 and 2012.
(6) Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Machinery, equipment and vehicles
Furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
December 31,
2006
2005
$
$
5,218 $
1,391
376
6,985
(5,126)
1,859 $
4,846
1,418
355
6,619
(4,762)
1,857
Depreciation expense included in continuing operations in 2006, 2005, and 2004 was $916,000, $850,000,
and $1,143,000, respectively.
52
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(7) Short-Term Borrowings
General Physics has a $25 million Financing and Security Agreement (the “Credit Agreement”), as
amended, with a bank that expires on August 12, 2007 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 Company continued to guarantee GSE’s borrowings under the Credit Agreement (for which
$1,500,000 was allocated for use by 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.
The interest rate on the Credit Agreement is at the daily LIBOR market index rate plus 3.00%. Based upon
the financial performance of General Physics, the interest rate can be reduced (as of December 31, 2006
the rate was LIBOR plus 2.50% for General Physics). 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 December 31, 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 under the Credit Agreement from paying dividends or management fees to the
Company in 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 shares of its outstanding
Common Stock in the open market (see Note 14).
As of December 31, 2006, the Company had no borrowings outstanding under the Credit Agreement, and
had approximately $20,043,000 of available borrowings based upon 80% of eligible accounts receivable
and 80% of eligible unbilled receivables.
(8) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
Trade accounts payable
Accrued salaries, vacation and benefits
Amount payable to NPDC
Other accrued expenses
December 31,
2006
2005
7,000 $
8,482
251
7,170
5,733
7,852
1,201
5,529
22,903 $
20,315
$
$
53
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(9) Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
2006
2005
6% conditional subordinated notes due 2008 (a)
ManTech note (b)
Capital leases
$
Less warrant related discount, net of accretion
Less current maturities
6,483 $
5,251
30
11,764
(838)
10,926
(30)
$
10,896 $
7,500
5,251
93
12,844
(1,464)
11,380
(71)
11,309
(a)
In August 2003, the Company issued and sold to four Gabelli Funds $7,500,000 in aggregate
principal amount of 6% Conditional Subordinated Notes due 2008 (the Gabelli Notes) and 937,500
warrants (GP Warrants), each entitling the holder thereof to purchase (subject to adjustment) one
share of the Company’s Common Stock 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 commencing on
December 31, 2003 and mature in August 2008. The Gabelli Notes are secured by a mortgage on the
Company’s former property located in Pawling, New York which was distributed to NPDC in
connection with the spin-off on November 24, 2004. In addition, at any time that less than
$1,875,000 of the principal amount of the Gabelli Notes are outstanding, the Company may defease
the obligations secured by the mortgage and obtain a release of the mortgage by depositing with an
agent for the Noteholders, bonds or government securities with an investment grade rating by a
nationally recognized rating agency which, without reinvestment, will provide cash on the maturity
date of the Gabelli Notes in an amount not less than the outstanding principal amount of the Gabelli
Notes.
Subsequent to the spin-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. During the year ended December 31,
2006, Gabelli exercised 197,823 GP Warrants for a total exercise price of $1,157,000 which was
paid in the form of $140,000 cash and delivery of $1,017,000 of the Gabelli Notes. As of December
31, 2006, there were 786,293 GP Warrants with an exercise price of $5.85 outstanding and
exercisable. During January and February 2007, Gabelli exercised an additional 362,431 warrants for
a total exercise price of $2,120,000 which further reduced the principal balance of the Gabelli Notes.
54
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
The fair value of the GP Warrants at the date of issuance was $2,389,000, which reduced long-term
debt in the accompanying consolidated balance sheets 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 $468,000, $426,000, and $372,000 for the years ended December 31, 2006, 2005,
and 2004, respectively. The exercises of the GP Warrants during 2006 for which the exercise price
was paid by delivery of the Gabelli Notes resulted in a decrease of $859,000 in the carrying value of
the Gabelli Notes, which was reclassified to equity to reflect the issuance of shares of Common
Stock upon exercise.
In connection with the spin-off of NPDC, the Company contributed the Pawling property, subject to
the mortgage, to MXL. MXL assumed the mortgage, but without liability for repayment of the
Gabelli Notes or any other obligations of the Company under the Note and Warrant Purchase
Agreement (other than foreclosure on such property). If there is a foreclosure on the mortgage for
payment of the Gabelli Notes, the Company has agreed to indemnify MXL for loss of the value of
the property.
(b)
In October 2003, the Company issued a five-year 5% note due in full in October 2008 in the
principal amount of $5,250,955 to ManTech International. Interest is payable quarterly. Each year
during the term of the note, the holder of the note has the option to convert up to 20% of the original
principal amount of the note into Common Stock of the Company at the then market price of the
Company’s Common Stock, but only in the event that the Company’s Common Stock is trading at
$10 per share or more. In the event that less than 20% of the principal amount of the note is not
converted in any year, such amount not converted will be eligible for conversion in each subsequent
year until converted or until the note is repaid in cash.
Aggregate annual maturities of long-term debt as of December 31, 2006 are $30,000 in 2007 and
$11,734,000 in 2008.
(10) Employee Benefit Plan
The Company offers a Retirement Savings Plan (the Plan) to its employees. Eligible employees may elect
to contribute at any time, and contributions begin as soon as administratively feasible thereafter. The Plan
permits pre-tax contributions to the Plan by participants pursuant to Section 401(K) of the Internal
Revenue Code (IRC). The Plan requires that the Company match at least 25% of the participants’
contributions, up to the first 7% of base compensation for employees who have completed one year of
service. The Company may make additional matching contributions at its discretion. In 2006, 2005, and
2004, the Company matched 50% of participants’ contributions in cash and/or shares of its Common
Stock, up to the first 7% of participants’ base compensation. In 2006, 2005 and 2004, the Company
contributed 124,782, 125,165, and 135,921 shares of the Company’s Common Stock directly to the Plan
with a value of approximately $920,000, $986,000, and $971,000, respectively, which was recognized as
expense in the consolidated statements of operations. In addition, the Company’s matching contribution for
2006 included $180,000 of cash contributions to the Plan.
55
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(11) Income Taxes
Income tax expense (benefit) for the years ended December 31, 2006, 2005 and 2004 is as follows (in
thousands):
Income tax expense (benefit) from
continuing operations
Income tax expense from
discontinued operations
2006
Years ended December 31,
2005
2004
$
$
5,068 $
6,767 $
(8,249)
—
208
5,068 $
6,975 $
573
(7,676)
The components of income tax expense (benefit) from continuing operations are as follows (in thousands):
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total income tax expense
(benefit)
2006
Years ended December 31,
2005
2004
$
70 $
715
213
998
3,757
231
82
4,070
136 $
642
200
978
4,902
1,100
(213)
5,789
267
298
268
833
(7,768)
(1,412)
98
(9,082)
$
5,068 $
6,767 $
(8,249)
The deferred tax expense (benefit) excludes activity in the net deferred tax assets relating to amounts
recorded directly to stockholders’ equity. Income before income tax expense (benefit) generated from
foreign entities was approximately $766,000, $198,000, and $404,000, respectively, in 2006, 2005 and
2004.
56
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
The difference between the expense (benefit) for income taxes included in income from continuing
operations computed at the statutory rate and the reported amount of tax expense (benefit) is as follows:
Federal income tax rate
Foreign, state and local taxes net of
Federal benefit
Permanent differences
Valuation allowance adjustments
Change in effective rate, primarily net
operating loss carry forwards
Tax impact of foreign losses for which
no U.S. tax benefit has been provided
Other
Effective tax rate
2006
December 31,
2005
2004
35.0%
35.0%
35.0%
7.6
2.5
—
—
(2.3)
0.5
43.3%
4.9
1.1
3.1
—
(0.4)
0.7
44.4%
5.2
1.8
(87.0)
(17.0)
0.6
2.5
(58.9)%
As of December 31, 2006, the Company had $22,400,000 of Federal net operating loss carryforwards,
which expire during 2022 and 2023, and $1,900,000 of available credit carryovers which may be carried
over indefinitely. The Company had $600,000 of foreign net operating loss carryforwards for which a full
valuation allowance has been provided.
57
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
The tax effects of temporary differences between the financial reporting and tax basis of assets and
liabilities that are included in the net deferred tax assets (liabilities) are summarized as follows
(in thousands):
December 31,
2006
2005
Deferred tax assets:
Allowance for doubtful accounts
Accrued liabilities
Net Federal, State and Foreign operating loss carryforwards
Tax credit carryforwards
Deferred tax assets
Deferred tax liabilities:
Intangible assets, property and equipment, principally
due to difference in depreciation and amortization
Net deferred tax assets
Less valuation allowance
Net deferred tax assets, net of valuation allowance
$
266 $
1,005
9,092
1,902
12,265
2,756
9,509
(974)
8,535
453
500
12,790
1,693
15,436
2,903
12,533
(968)
11,565
In assessing the realizability of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income during the periods in which
temporary differences are deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
upon these factors, management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance.
Management evaluates its projections of future taxable income each reporting period and adjusts the
valuation allowance as necessary. During 2005, the Company recorded an increase in its valuation
allowance related to foreign and state net operating losses by $579,000, based on historical losses in
foreign jurisdictions and uncertainty regarding the utilization of certain state net operating loss
carryforwards. During 2004, the spin-off of NPDC was completed, the arbitration gain was recognized,
and projected taxable income was revised in light of the Company’s structure subsequent to the spin-off.
Accordingly, the Company reduced its valuation allowance related to net operating losses by $12,197,000
due to management’s assessment of the Company’s ability to realize its overall deferred tax assets.
58
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(12) Comprehensive Income
The following are the components of comprehensive income (in thousands):
Net income
$
6,642 $
7,213 $
22,520
2006
Years ended December 31,
2005
2004
Other comprehensive income,
before income tax benefit:
Net unrealized loss on available-for-
sale securities
Fair value change on interest rate
swap
Foreign currency translation
adjustments
Income tax benefit
—
—
452
7,094
—
(12)
—
(411)
6,790
5
Comprehensive income
$
7,094 $
6,795 $
(1,703)
(82)
237
20,972
687
21,659
As of December 31, 2006 and 2005, accumulated other comprehensive loss, net of tax, was $640,000 and
$1,087,000, respectively, and consisted primarily of foreign currency translation adjustments.
(13) Stock-Based Compensation
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 4,423,515 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.
The following table summarizes the pre-tax stock-based compensation expense included in reported net
income (in thousands):
59
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Non-qualified stock options
Restricted stock and stock units
Board of Director stock grants
Total stock-based compensation
expense (pre-tax)
$
$
2006
Years ended December 31,
2005
2004
164 $
308
46
518 $
— $
249
51
300 $
—
536
40
576
The Company recognized a deferred income tax benefit of $189,000, $117,000 and $225,000, respectively,
during the years ended December 31, 2006, 2005, and 2004. As of December 31, 2006, the Company had
non-qualified stock options and restricted 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, vest over a period up to ten years, and expire at various
terms up to ten years from the date of grant.
Summarized information for the Company’s non-qualified stock options is as follows:
Number of
options
Weighted
average
exercise price
Weighted
average
remaining
contractual
term
Aggregate
intrinsic
value
Stock Options
Outstanding at December 31, 2005
1,411,345 $
4.83
Granted
Exercised/settled
Forfeited
Expired
Outstanding and expected to
vest at December 31, 2006
Exercisable at December 31, 2006
—
(809,151)
(719)
(29,367)
572,108 $
562,467 $
4.36
6.47
4.81
5.48
5.46
1.68 $
1,466,000
1.69 $
1,447,000
On December 28, 2006, the Company settled 464,907 outstanding and exercisable stock options held by
Company officers and directors for an amount of shares of the Company’s Common Stock equivalent to
the fair value of the respective stock options. In addition, on December 28, 2006, the Company settled
154,567 outstanding and exercisable stock options held by certain Company employees for cash payments
totaling $299,000, which represented the fair value of those stock options on the settlement date.
The total intrinsic value realized by participants on stock options exercised and/or settled was $3,057,000,
$1,190,000, and $656,000 during the years ended December 31, 2006, 2005 and 2004, respectively. The
60
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
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 $921,000, $1,400,000, and $860,000 during the years
ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, the Company had
$23,000 of unrecognized compensation related to the unvested portion of outstanding stock options
expected to be recognized through July 2007.
Restricted Stock & Stock Units
In addition to stock options, the Company issues restricted stock units to key employees and members of
the Board of Directors 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. In accordance with SFAS No.
123R, the Company recognizes the value of the market price of the underlying stock on the date of grant to
compensation expense over the requisite service period. Upon vesting, the stock units are settled in shares
of the Company’s Common Stock. Summarized share information for the Company’s restricted stock units
is as follows:
Year ended
December 31,
2006
(In shares)
Weighted
average
grant date
fair value
(In dollars)
Outstanding and unvested, beginning of period
Granted
Vested
Forfeited
Outstanding and unvested, end of period
182,000
14,000
(12,000)
(3,000)
181,000
$
$
7.54
7.42
7.51
7.54
7.53
The total intrinsic value realized by participants upon the vesting of stock units was $99,000 and $77,000
during the years ended December 31, 2006 and 2005, respectively. In addition, the Company granted
76,000 shares of common stock during 2005 which were fully vested at grant because they were
attributable to 2004 service. These shares have a restriction on sale until December 31, 2007 and the total
intrinsic value realized by the recipients on the date of grant for these awards was $536,000. As of
December 31, 2006, the Company had unrecognized compensation cost of $824,000 related to the
unvested portion of its outstanding stock units expected to be recognized over a weighted average
remaining service period of 3.2 years.
61
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(14) Common Stock and Class B Stock
The holders of Common Stock are entitled to one vote per share and prior to the capital stock restructuring
discussed below, the holders of Class B Stock were entitled to ten votes per share on all matters without
distinction between classes, except when approval of a majority of each class is required by statute. Shares
reserved for issuance of Common Stock are primarily related to stock-based compensation (see Note 13),
warrants (see below), and the conversion of long-term debt (see Note 9).
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 into 600,000 shares of Common Stock for 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 the restructuring, the 1,200,000 outstanding shares of Class B Stock collectively represented
approximately 41% of the aggregate voting power of the Company because 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.
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 Stock (the “Amendment”). At the Company’s annual meeting on September 14, 2006,
the stockholders voted to approve the Amendment. The Amendment was filed with the Delaware Secretary
of State and was effective September 15, 2006.
In connection with the repurchase and exchange transactions, 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. Pursuant to the General Physics’ Credit Agreement, as
amended, the lender has permitted the borrowers 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 7). During the year ended December 31, 2006, the Company repurchased approximately
420,000 shares of its Common Stock in the open market for a total cost of approximately $3,140,000.
Warrants
As of December 31, 2006, there were outstanding warrants to purchase 300,000 and 786,293 shares of the
Company’s Common Stock at exercise prices of $2.67 and $5.85 per share, respectively, as adjusted in
accordance with the anti-dilution provisions of the warrant agreements. These warrants are exercisable at
any time and expire in June 2011 and August 2008, respectively.
62
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(15) Business Segments
The Company operates through its two reportable business segments: 1) Process, Energy & Government;
and 2) Manufacturing & Business Process Outsourcing (BPO). The Company is organized by operating
group primarily based upon the services performed and markets served by each group. The reportable
business segments represent an aggregation of the Company’s operating segments in accordance with the
aggregation criteria in SFAS No. 131. 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 consolidated
statements of operations through the effective date of the spin-off.
The Process, Energy & Government segment provides engineering consulting, design and evaluation
services regarding facilities, the environment, processes and systems, staff augmentation, curriculum
design and development, and training and technical services primarily to federal and state governmental
agencies, large government contractors, petroleum and chemical refining companies, and electric power
utilities.
The Manufacturing & BPO segment provides training, curriculum design and development, staff
augmentation, e-Learning services, system hosting, integration and help desk support, business process and
training outsourcing, and consulting and technical services to large companies in the automotive,
pharmaceutical, electronics, and other industries as well as to governmental clients.
For the years ended December 31, 2006, 2005 and 2004, sales to the United States government and its
agencies represented approximately 29%, 40%, and 38%, 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%, 20%, and 19% of the Company’s revenue for the years ended
December 31, 2006, 2005, and 2004, respectively. No other customer accounted for more than 10% of the
Company’s revenue in 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.
The following table sets forth the revenue and operating results attributable to each reportable segment and
includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated
income before income taxes (in thousands):
63
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Revenue:
Process, Energy & Government
Manufacturing & BPO
Operating income (loss):
Process, Energy & Government
Manufacturing & BPO
Corporate and other
Interest expense
Other income, gain on litigation settlement,
net, and gain on arbitration award, net,
Income from continuing
$
$
$
Years ended December 31,
2005
2006
2004
77,469 $
101,314
85,953 $
89,602
84,193
80,265
178,783 $
175,555 $
164,458
7,797 $
6,685
(2,178)
12,304
(1,558)
964
10,419 $
2,633
(2,100)
10,952
(1,518)
5,790
9,046
(773)
(6,479)
1,794
(1,937)
14,160
operations before income taxes
$
11,710 $
15,224 $
14,017
Additional information relating to the Company’s business segments is as follows (in thousands):
Identifiable assets:
Process, Energy & Government
Manufacturing & BPO
Corporate and other
Goodwill:
Process, Energy & Government
Manufacturing & BPO
December 31,
2006
2005
46,630 $
68,070
6,700
54,009
73,337
7,295
121,400 $
134,641
December 31,
2006
2005
21,070 $
35,745
56,815 $
22,570
34,913
57,483
$
$
$
$
64
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Additions to property, plant and equipment:
Process, Energy & Government
Manufacturing & BPO
GSE and NPDC
Corporate and other
Depreciation and amortization:
Process, Energy & Government
Manufacturing & BPO
GSE and NPDC
Corporate and other
2006
Years ended December 31,
2005
2004
$
$
$
$
112 $
496
—
336
944 $
209 $
866
—
1,134
2,209 $
48 $
596
124
260
71
786
691
236
1,028 $
1,784
237 $
734
844
1,275
3,090 $
178
882
1,582
1,442
4,084
Identifiable assets by business segment are those assets that are used in the Company’s operations in each
segment. Corporate and other assets consist primarily of cash and cash equivalents, other assets, and
deferred tax assets. Amounts reflected for GSE and NPDC are for periods prior to the respective spin-off
dates (see Note 3).
Information about the Company’s revenue in different geographic regions, which are attributed to
countries based on location of customers, is as follows (in thousands):
United States
United Kingdom
Other
2006
Years ended December 31,
2005
2004
$
$
156,783 $
16,420
5,580
178,783 $
157,343 $
12,879
5,333
175,555 $
148,938
11,010
4,510
164,458
Information about the Company’s total assets in different geographic regions is as follows (in thousands):
United States
United Kingdom
Other
December 31,
2006
2005
$
$
111,923 $
7,843
1,634
121,400 $
128,543
4,353
1,745
134,641
65
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(16) Related Party Transactions
Refer to Note 14 for a description of certain transactions pursuant to which the Company repurchased or
exchanged shares of its Common Stock and Class B Stock held by certain related parties.
Related Party Transactions with Company Officers
On April 1, 2002, the Company’s then Chief Executive Officer (CEO) entered into an incentive
compensation agreement with the Company pursuant to which he was eligible to receive from the
Company up to five payments of $1,000,000 each, based on the closing price of the Company’s Common
Stock sustaining or averaging increasing specified levels over periods of at least 10 consecutive trading
days. On June 11, 2003, July 23, 2003, December 22, 2003, November 3, 2004 and December 10, 2004, he
earned an incentive payment of $1,000,000 each. The Company recorded compensation expense of
$2,000,000 and $3,000,000 for the years ended December 31, 2004 and 2003, respectively, which was
included in selling, general and administrative expense during those years.
To the extent there were any outstanding loans from the Company to the CEO at the time an incentive
payment was payable, the Company had the right to off-set the payment of such incentive payment first
against the outstanding accrued interest under such loans and next against any outstanding principal. The
Company applied the entire incentive compensation earned by the CEO during 2004 and 2003 against the
accrued interest and principal balances on his outstanding loans.
As of December 31, 2006 and 2005, the Company had a note receivable from the Company’s former CEO,
of approximately $124,000 and $619,000, respectively, after offsetting his incentive compensation earned
in 2004 and 2003, as discussed above. The note bears interest at the prime rate and is secured by certain
assets owned by him. All unpaid principal on the loans and accrued interest are due on May 31, 2007. In
addition, as of December 31, 2006 and 2005, the Company had other employee advances, unsecured loans
and accrued interest receivable from him, totaling $58,000 and $353,000, respectively. On January 19,
2006 in connection with the share repurchase and exchange transaction (see Note 14), he repaid
approximately $853,000 of approximately $972,000 of total indebtedness (including principal and interest)
owed by him to the Company.
As of December 31, 2006 and 2005, the Company had loans receivable from other Company officers of
approximately $25,000 and $43,000, respectively.
Management Services Agreements Between NPDC and the Company
Prior to the spin-off, NPDC was a wholly-owned subsidiary of the Company. In connection with the spin-
off, NPDC entered into a separate management agreement with the Company pursuant to which the
Company would provide certain general corporate services to NPDC. As of December 31, 2006, the
Company had four employees, including the CEO and Chief Legal Officer, who also provided services to
NPDC under a management services agreement, for which the Company was reimbursed for such services.
Services under the agreement relate to executive financial services, corporate legal services, corporate
secretarial administrative support and executive management consulting. The term of the agreement
extends for three years from the date of the spin-off, or through November 24, 2007, and may be
terminated by either NPDC or the Company on or after July 30, 2006 with 180 days prior written notice,
with the exception of fees relating to compensation for NPDC’s CEO for which NPDC is liable through
66
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
May 31, 2007 pursuant to his employment agreement. For the years ended December 31, 2006 and 2005,
NPDC paid the Company management fees of $925,000 and $1,141,000, respectively, as compensation for
these services, which are reflected as a reduction of selling, general and administrative expense in the
Company’s consolidated statements of operations.
NPDC continued to occupy a portion of corporate office space leased by the Company through the end of
lease on December 31, 2006. Pursuant to the management services agreement, a portion of the
management fee paid by NPDC to the Company represents compensation for use of this space. Subsequent
to expiration of the lease on December 31, 2006, NPDC is leasing the office space on a month-to-month
basis.
Management Services Agreement Between GSE and the Company
Pursuant to a management services agreement, the Company provided corporate support services to GSE.
GSE paid the Company an annual fee of $685,000 for these services and can terminate the agreement by
providing sixty days written notice. The management services agreement can be renewed by GSE for
successive one-year terms and was renewed through December 31, 2006. Subsequent to the spin-off of
GSE effective September 30, 2005, the Company provided GSE with corporate support services through
the end of the term on December 31, 2006.
(17) Commitments, Guarantees, and Contingencies
Commitments
Operating Leases
The Company has various noncancelable leases for real property and machinery and equipment. Such
leases expire at various dates with, in some cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows (in thousands):
2007
2008
2009
2010
2011
Thereafter
Total
Real
property
Machinery and
equipment
Total
$
$
2,342 $
1,834
1,486
1,376
1,082
3,781
11,901 $
1,171 $
322
101
9
—
—
1,603 $
3,513
2,156
1,587
1,385
1,082
3,781
13,504
Certain of the leases contain provisions for rent escalation based primarily on increases in a specified
Consumer Price Index, real estate taxes and operating costs incurred by the lessor. Rent expense included
67
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
in continuing operations was approximately $3,196,000, $3,541,000, and $3,834,000 for 2006, 2005 and
2004, respectively.
Employment Agreements
The Company has employment agreements with certain of its officers, which provide for committed
compensation of $1,743,000 and $349,000 in 2007 and 2008, respectively. The Company’s employment
agreements have various employment terms expiring through 2008, and contain non-compete covenants
and change of control and termination provisions.
Guarantees
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’s guarantee of
Five Star’s leases remained in effect subsequent to the spin-off of NPDC.
Subsequent to the spin-off of NPDC, the Company continues to guarantee the repayment of one debt
obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate
outstanding balance as of December 31, 2006 was $1,105,000. The Company’s guarantee expires upon the
maturity of the debt obligation in March 2011.
The Company continued to guarantee GSE’s borrowings under the Credit Agreement (for which
$1,500,000 was allocated for use by GSE) subsequent to the spin-off on September 30, 2005. As of
December 31, 2005, GSE had borrowings of $1,182,000 under the Credit Agreement. In March 2006,
GSE repaid its borrowings in full and ceased to be a Borrower under the Credit Agreement (see Note 7).
(18) Litigation
In November 2005, the Company settled its remaining fraud claims against Electronic Data Systems
Corporation (EDS) and Systemhouse in connection with the Company’s 1998 acquisition of Learning
Technologies. Pursuant to the 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 with a spin-
off agreement with NPDC, the Company made an additional capital contribution to NPDC for
approximately $1,201,000 of the settlement 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
16). As of December 31, 2006, the Company has a remaining payable to NPDC of $251,000 for this
additional capital contribution, which is included in accounts payable and accrued expenses on the
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
68
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
13, 2005, the Bankruptcy Court heard arguments on a summary judgment motion that MCI had made
before filing for bankruptcy. 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. A decision on the motion for summary judgment has
not been issued. Pursuant to the spin-off agreement with NPDC, the Company will contribute to NPDC
50% of any proceeds received, net of legal fees and taxes, 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 operating
results of the Company.
(19) Quarterly Information (unaudited)
The Company’s quarterly financial information has not been audited but, in management’s opinion,
includes all adjustments necessary for a fair presentation.
Revenue
Gross profit
Income from
continuing operations
Net income
Earnings per share:
Basic
Diluted
$
$
$
Three months ended
March 31,
2006
June 30,
2006
September 30,
2006
December 31,
2006
Year ended
December 31,
2006
43,528 $
5,762
45,779 $
6,957
44,051 $
6,910
45,425 $
6,937
178,783
26,566
1,369
1,369
1,745
1,745
1,747
1,747
1,781
1,781
0.08 $
0.08 $
0.11 $
0.11 $
0.11 $
0.11 $
0.11 $
0.11 $
6,642
6,642
0.42
0.40
The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects
of rounding and dilution as a result of issuing common shares during the year.
69
(Continued)
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Revenue
Gross profit
Income from
continuing operations
Loss from discontinued
operations, net of income taxes
Net income
Per common share data
Basic:
Income from
continuing operations
Loss from discontinued
operations, net of
income taxes
Net income
Diluted:
Income from
continuing operations
Loss from discontinued
operations, net
of income taxes
Net income
$
$
$
$
$
Three months ended
March 31,
2005
June 30,
2005
September 30,
2005
December 31,
2005
Year ended
December 31,
2005
43,560 $
5,544
43,659 $
6,368
44,059 $
6,688
44,277 $
6,391
175,555
24,991
842
(374)
468
1,441
(221)
1,220
1,459
(417)
1,042
4,715
(232)
4,483
8,457
(1,244)
7,213
0.05 $
0.08 $
0.08 $
0.25 $
0.47
(0.02)
0.03 $
(0.01)
0.07 $
(0.02)
0.06 $
(0.01)
0.24 $
(0.07)
0.40
0.04 $
0.08 $
0.07 $
0.25 $
0.45
(0.02)
0.02 $
(0.01)
0.07 $
(0.02)
0.05 $
(0.01)
0.24 $
(0.07)
0.38
The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects
of rounding and dilution as a result of issuing common shares during the year.
(20) Subsequent Events
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the
business of Sandy Corporation, a leader in custom product sales training and part of the ADP Dealer
Services division of ADP. See Note 4 for further details.
During January and February 2007, Gabelli exercised an aggregate of 362,431 warrants for a total exercise
price of $2,120,000, which reduced the principal balance of the Gabelli Notes (see Note 9).
70
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management including our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13-15(e) of the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of December 31, 2006 were effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rule 13a-15(f). Our internal control processes and procedures are designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our
consolidated financial statements in accordance with United States generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that reasonably allow us to
record, process, summarize, and report information and financial data within prescribed time periods and in
accordance with Rule 13-15(e) of the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of internal control over financial reporting as of December
31, 2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control – Integrated Framework (“COSO Framework”). Based upon our evaluation, we
concluded that our internal control over financial reporting was effective as of December 31, 2006.
Management’s assessment of the effectiveness of its internal control over financial reporting as of December 31,
2006 has been audited by KPMG LLP, an independent registered public accounting firm, whose report appears in
Item 8.
(c) Changes in Internal Control over Financial Reporting
As discussed previously and more fully in Item 9A of our Annual Report on Form 10-K dated March 16, 2006,
for the year ended December 31, 2005 we previously reported a material weakness in our account reconciliation
and management review controls over the accounting for income taxes due to a lack of adequate tax accounting
expertise.
To remediate this weakness, we implemented changes in certain of our internal controls over financial reporting
during the year ended December 31, 2006, as follows: we hired a new Director of Tax who we believe provides
the Company with the necessary technical skills to review and analyze complex tax accounting activities; we
revised our processes and procedures over the accounting for income taxes; we implemented an independent
review of our annual tax provision computations by an independent registered public accounting firm.
71
Except as noted above, during the fourth quarter of fiscal 2006, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B: Other Information
None.
72
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be either set forth under the Election of Directors and Executive
Officers of the Registrant sections in the Proxy Statement for the 2007 Annual Meeting of Shareholders and
incorporated herein by reference or provided in an amendment to this Form 10-K.
Item 11. Executive Compensation
The information required by this item will be either set forth under the Directors’ Compensation, Executive
Compensation, and Compensation Committee Report on Executive Compensation sections in the Proxy
Statement for the 2007 Annual Meeting of Shareholders and incorporated herein by reference or provided in an
amendment to this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The additional information required by this item will be either set forth in the Security Ownership of Certain
Beneficial Owners and Management section in Proxy Statement for the 2007 Annual Meeting of Shareholders
and incorporated herein by reference or provided in an amendment to this Form 10-K.
Equity Compensation Plan information as of December 31, 2006
Plan category:
Equity compensation plans not approved by security holders:
(a) Number of securities to be issued upon exercise
of outstanding options (1)
(b) Weighted average exercise price of outstanding
options (1)
(c) Number of securities remaining available for future
issuance under equity compensation plans (excluding
securities reflected in row (a)) (2)
Equity compensation plans approved by security holders:
(a) Number of securities to be issued upon exercise
of outstanding options, warrants and rights
(b) Weighted average exercise price of outstanding
options, warrants and rights
(c) Number of securities remaining available for future
issuance under equity compensation plans
Non-Qualified
Stock Option
Plan
Incentive
Stock Plan
572,108
$ 5.48
1,361,180
—
—
1,721,000
(1) Does not include warrants to purchase 300,000 shares of Common Stock with an exercise price of $2.67
per share, as adjusted following the spin-offs of NPDC and GSE, and warrants to purchase 786,293 shares
issued and sold to four Gabelli funds in conjunction with the 6% Conditional Subordinated Notes due 2008
at an exercise price of $5.85 per share, as adjusted following the spin-offs of NPDC and GSE.
(2) Does not include shares of Common Stock that may be issued to directors of the Company as director fees.
73
For a description of the material terms of the Company’s Non-Qualified Stock Option Plan and Incentive Stock
Plan, see Note 13 to the accompanying Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be either set forth in the Certain Relationships and Related
Transactions section in the Proxy Statement for the 2007 Annual Meeting of Shareholders and incorporated
herein by reference or provided in an amendment to this Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required by this item will be either set forth in the Principal Accounting Fees and Services
section in the Proxy Statement for the 2007 Annual Meeting of Shareholders and incorporated herein by
reference or provided in an amendment to this Form 10-K.
74
Part IV
Item 15: Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this Report:
(1) Financial Statements of GP Strategies Corporation and Subsidiaries (Part II, Item 8):
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2006 and 2005
Consolidated Statements of Operations – Years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders’ Equity and Comprehensive Income –
Years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows – Years ended December 31, 2006, 2005 and
2004
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Schedules other than Schedule II are omitted as not applicable or required.
(3) Exhibits required by Item 601 of Regulation S-K.
Exhibit number
2.1
3.1
3.2
3.3
3.4
Asset Purchase Agreement, dated as of December 22, 2006, between General Physics
Corporation and ADP, Inc. Incorporated herein by reference to Exhibit 2.1 of the
Registrant’s Form 8-K filed on December 29, 2006.
Restated Certificate of Incorporation of the Registrant filed on October 6, 1995.
Incorporated herein by reference to Exhibit 3 of the Registrant’s Form 10-Q for the
quarter ended September 30, 1995.
Amendment to the Registrant’s Restated Certificate of Incorporation filed on January 24,
1997. Incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 10-K for
the year ended December 31, 1996.
Amendment to the Registrant’s Restated Certificate of Incorporation filed on March 5,
1998. Incorporated herein by reference to Exhibit 3.1 of the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 1997.
Amendment to the Registrant’s Restated Certificate of Incorporation filed on September
15, 2006. Incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 10-Q
for the quarter ended September 30, 2006.
75
Exhibit number
3.5
3.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Certificate of Designations, Preferences and Rights of Series A Junior Participating
Preferred Stock of the Registrant dated June 23, 1997. Incorporated herein by reference to
Exhibit 3.3 of the Registrant’s Form 10-K for the year ended December 31, 2004.
Amended and Restated By-Laws of the Registrant. Incorporated herein by reference to
Exhibit 1 of the Registrant’s Form 8-K filed on September 1, 1999.
1973 Non-Qualified Stock Option Plan of the Registrant, as amended on December 28,
2006. *
GP Strategies Corporation 2003 Incentive Stock Plan. Incorporated herein by reference to
Exhibit 4 of the Registrant’s Form 10-Q for the quarter ended September 30, 2003.
General Physics Corporation 2004 Bonus Plan. Incorporated herein by reference to
Exhibit 10.3 of the Registrant’s Form 10-K for the year ended December 31, 2004.
Employment Agreement, dated as of June 1, 1999, between the Registrant and Jerome I.
Feldman. Incorporated herein by reference to Exhibit 10 of the Registrant’s Form 10-Q
for the quarter ended June 30, 1999.
Amended and Restated Incentive Compensation Agreement dated as of June 11, 2003
between the Registrant and Jerome I. Feldman. Incorporated herein by reference to
Exhibit 10 to the Registrant’s Form 10-Q for the quarter ended September 30, 2003.
Amendment dated as of October 1, 2003 to the Amended and Restated Incentive
Compensation Agreement dated June 11, 2003 between GP Strategies Corporation and
Jerome I. Feldman. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Form 10-Q for the quarter ended September 30, 2003.
Amended and Restated Incentive Compensation Agreement dated November 17, 2003
between GP Strategies Corporation and Jerome I. Feldman. Incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended
September 30, 2003.
Stock Exchange Agreement dated January 19, 2006 by and between the Registrant and
Jerome I. Feldman. Incorporated herein by reference to Exhibit 10.3 of the Registrant’s
Form 8-K dated January 25, 2006.
Employment Agreement, dated as of July 1, 1999, between the Registrant and Scott N.
Greenberg. Incorporated herein by reference to Exhibit 10.1 of the Registrant’s
Form 10-Q for the quarter ended September 30, 1999.
Amendment, dated January 21, 2005, to Employment Agreement dated as of July 1, 1999
between the Company and Scott N. Greenberg. Incorporated herein by reference to
Exhibit 10.1 of the Registrant’s Form 8-K filed on January 25, 2005.
Lock-Up Agreement between the Registrant and Scott N. Greenberg in connection with a
stock grant authorized by the Compensation Committee of the Board of Directors on
March 23, 2005. Incorporated herein by reference to Exhibit 10.3 of the Registrant’s
Form 10-Q for the quarter ended June 30, 2005.
76
Exhibit number
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Separation Agreement, dated as of September 3, 2002, between General Physics
Corporation and John C. McAuliffe. Incorporated herein by reference to Exhibit 10 of the
Registrant’s Form 8-K filed on September 4, 2002.
Employment Agreement dated as of May 1, 2001 between the Registrant and Andrea D.
Kantor. Incorporated herein by reference to Exhibit 10 of the Registrant’s Form 10-Q for
the quarter ended June 30, 2001.
Amendment, dated January 21, 2005, to Employment Agreement dated as of May 1,
2001 between the Company and Andrea D. Kantor. Incorporated herein by reference to
Exhibit 10.3 of the Registrant’s Form 8-K filed on January 25, 2005.
Stock Unit Agreement between the Registrant and Andrea D. Kantor dated April 11,
2005. Incorporated herein by reference to Exhibit 10.5 of the Registrant’s Form 10-Q for
the quarter ended June 30, 2005.
Employment Agreement, dated as of July 1, 1999, between the Registrant and Douglas E.
Sharp. Incorporated herein by reference to Exhibit 10.11 of the Registrant’s Form 10-K
for the year ended December 31, 2003.
Amendment, dated January 21, 2005, to Employment Agreement dated as of July 1, 1999
between the Company and Douglas E. Sharp. Incorporated herein by reference to Exhibit
10.2 of the Registrant’s Form 8-K filed on January 25, 2005.
Lock-Up Agreement between the Registrant and Douglas E. Sharp in connection with a
stock grant authorized by the Compensation Committee of the Board of Directors on
March 23, 2005. Incorporated herein by reference to Exhibit 10.4 of the Registrant’s
Form 10-Q for the quarter ended June 30, 2005.
Employment Agreement, dated August 16, 2005, between the Registrant and Sharon
Esposito-Mayer. Incorporated herein by reference to Exhibit 10.19 of the Registrant’s
Form 10-K for the year ended December 31, 2005.
Stock Unit Agreement, dated April 11, 2005, between the Registrant and Sharon
Esposito-Mayer. Incorporated herein by reference to Exhibit 10.20 of the Registrant’s
Form 10-K for the year ended December 31, 2005.
Form of Employment Agreement between the Registrant’s subsidiary, General Physics
Corporation and certain officers. Incorporated herein by reference to Exhibit 10.1 of the
Registrant’s Form 10-Q for the quarter ended June 30, 2005.
Form of Stock Unit Agreement between the Registrant’s subsidiary, General Physics
Corporation and certain officers. Incorporated herein by reference to Exhibit 10.2 of the
Registrant’s Form 10-Q for the quarter ended June 30, 2005.
Asset Purchase Agreement, dated as of June 3, 1998, by and among SHL Systemhouse
Co., MCI Systemhouse Corp., SHL Computer Innovations Inc., SHL Technology
Solutions Limited and General Physics Corporation. Incorporated herein by reference to
Exhibit 10.1 of the Registrant’s Form 8-K dated June 29, 1998.
77
Exhibit number
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Preferred Provider Agreement, dated as of June 3, 1998, by and among SHL
Systemhouse Co., MCI Systemhouse Corp., SHL Computer Innovations Inc., SHL
Technology Solutions Limited and General Physics Corporation. Incorporated herein by
reference to Exhibit 10.2 of the Registrant’s Form 8-K dated June 29, 1998.
Financing and Security Agreement dated August 13, 2003 by and between General
Physics Corporation, MXL Industries, Inc. and Wachovia Bank National Association.
Incorporated herein by reference to Exhibit 10.10 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2003.
Guaranty of Payment Agreement dated August 13, 2003 by GP Strategies Corporation
for the benefit of Wachovia Bank, National Association. Incorporated herein by reference
to Exhibit 10.11 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003.
First Amendment dated March 30, 2004 to the Financing and Security Agreement dated
August 13, 2003. Incorporated herein by reference to Exhibit 10.27 of the Registrant’s
Form 10-K for the year ended December 31, 2005.
Second Amendment dated July 2, 2004 to the Financing and Security Agreement dated
August 13, 2003. Incorporated herein by reference to Exhibit 10.28 of the Registrant’s
Form 10-K for the year ended December 31, 2005.
Third Amendment dated July 30, 2004 to the Financing and Security Agreement dated
August 13, 2003. Incorporated herein by reference to Exhibit 10.29 of the Registrant’s
Form 10-K for the year ended December 31, 2005.
Fourth Amendment dated January 19, 2006 to the Financing and Security Agreement
dated August 13, 2003 by General Physics Corporation, Skillright, Inc., GSE Systems,
Inc., GSE Power Systems, Inc., MSHI, Inc. and Wachovia Bank, National Association.
Incorporated herein by reference to Exhibit 10.5 of the Registrant’s Form 8-K dated
January 25, 2006.
Forbearance letter dated August 4, 2005. Incorporated herein by reference to the
Registrant’s Form 10-Q for the quarter ended June 30, 2005.
Waiver letter dated February 17, 2006. Incorporated herein by reference to Exhibit 10.32
of the Registrant’s Form 10-K for the year ended December 31, 2005.
Rights Agreement, dated as of June 23, 1997, between the Registrant and Computershare
Investor Services LLC, as Rights Agent, which includes, as Exhibit A thereto, the
Resolution of the Board of Directors with respect to Series A Junior Participating
Preferred Stock, as Exhibit B thereto, the form of Rights Certificate and as Exhibit C
thereto the form of Summary of Rights. Incorporated herein by reference to Exhibit 4.1 of
the Registrant’s Form 8-K filed on July 17, 1997.
Amendment, dated as of July 30, 1999, to the Rights Agreement dated as of June 23,
1997, between the Computershare Investor Services LLC, as Rights Agent. Incorporated
herein by reference to Exhibit 4.2 of the Registrant’s report on Form 8-A12B/A filed on
August 2, 1999.
78
Exhibit number
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
Amendment, dated as of December 16, 1999, to the Rights Agreement dated as of
June 23, 1997, between the Registrant and Computershare Investor Services LLC, as
Rights Agent. Incorporated herein by reference to Exhibit 4.2 of the Company’s report on
From 8-A12B/A filed on December 17, 1999.
Agreement dated, December 29, 1998, among the Registrant, Jerome I. Feldman and
Martin M. Pollak. Incorporated herein by reference to Exhibit 10.11 of the Registrant’s
Form 10-K for the year ended December 31, 1998.
Stock Exchange Agreement dated January 19, 2006 by and between the Registrant and
Martin M. Pollak. Incorporated herein by reference to Exhibit 10.4 of the Registrant’s
Form 8-K dated January 25, 2006.
Subscription Agreement dated as of October 19, 2001 between the Registrant and
Bedford Oak Partners, L.P. Incorporated herein by reference to Exhibit 10.21 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
Subscription Agreement dated as of May 3, 2002 by and between the Registrant and
Bedford Oak Partners, L.P. Incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Form 10-Q for the quarter ended March 31, 2002.
Stock Repurchase Agreement dated January 19, 2006 by and between the Registrant and
Bedford Oak Partners, L.P. Incorporated herein by reference to Exhibit 10.2 of the
Registrant’s Form 8-K filed on January 25, 2006.
Stock Purchase Agreement dated as of May 3, 2002 by and between the Registrant and
EGI-Fund (02-04) Investors, L.L.C. Incorporated herein by reference to Exhibit 10.1 to
the Registrant’s Form 10-Q for the quarter ended March 31, 2002.
Stock Repurchase Agreement dated January 19, 2006 by and between the Registrant and
EGI-Fund (02-04) Investors, L.L.C. Incorporated herein by reference to Exhibit 10.1 of
the Registrant’s Form 8-K filed on January 25, 2006.
Subscription Agreement dated as of May 3, 2002 by and between the Registrant and
Marshall Geller. Incorporated herein by reference to Exhibit 10.4 to the Registrant’s
Form 10-Q for the quarter ended March 31, 2002.
Form of Officer’s Pledge Agreement. Incorporated herein by reference to Exhibit 10.33
to the Registrant’s Form 10-K for the year ended December 31, 2002.
Form of Officer’s Promissory Note. Incorporated herein by reference to Exhibit 10.34 to
the Registrant’s Form 10-K for the year ended December 31, 2002.
Sublease Agreement dated as of December 13, 2002 between the Registrant and Austin
Nichols & Company, Inc. Incorporated herein by reference to Exhibit 10.35 to the
Registrant’s Form 10-K for the year ended December 31, 2002.
79
Exhibit number
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
Lease Agreement dated as of July 5, 2002 between the Registrant’s wholly owned
subsidiary, General Physics Corporation and Riggs Company. Incorporated herein by
reference to Exhibit 10.36 to the Registrant’s Form 10-K for the year ended
December 31, 2002.
Note and Warrant Purchase Agreement dated August 8, 2003 among GP Strategies
Corporation, National Patent Development Corporation and Gabelli Funds, LLC.
Incorporated herein by reference to Exhibit 10.0 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2003.
Form of GP Strategies Corporation 6% Conditional Subordinated Note due 2008 dated
August 14, 2003. Incorporated herein by reference to Exhibit 10.01 to the Registrant’s
Form 10-Q for the quarter ended June 30, 2003.
Form of GP Strategies Corporation Warrant Certificate dated August 14, 2003.
Incorporated herein by reference to Exhibit 10.02 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2003.
Mortgage Security Agreement and Assignment of Leases dated August 14, 2003 between
GP Strategies Corporation and Gabelli Funds, LLC. Incorporated herein by reference to
Exhibit 10.04 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003.
Registration Rights Agreement dated August 14, 2003 between GP Strategies and Gabelli
Funds, LLC. Incorporated herein by reference to Exhibit 10.05 to the Registrant’s Form
10-Q for the quarter ended June 30, 2003.
Indemnity Agreement dated August 14, 2003 by GP Strategies Corporation for the
benefit of National Patent Development Corporation and MXL Industries, Inc.
Incorporated herein by reference to Exhibit 10.07 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2003.
Subordination Agreement dated August 14, 2003 among GP Strategies Corporation,
Gabelli Funds, LLC, as Agent on behalf of the holders of the Company’s 6% Conditional
Subordinated Notes due 2008 and Wachovia Bank, National Association. Incorporated
herein by reference to Exhibit 10.08 to the Registrant’s Form 10-Q for the quarter ended
June 30, 2003.
Purchase and Sale Agreement dated October 21, 2003 by and between GP Strategies
Corporation and ManTech International. Incorporated herein by reference to Exhibit 10.1
to the Registrant’s Form 8-K dated October 23, 2003.
Teaming Agreement dated October 21, 2003 by and between GP Strategies Corporation
and ManTech International. Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Form 8-K dated October 23, 2003.
$5,250,955 Promissory Note dated October 21, 2003 of GP Strategies Corporation.
Incorporated herein by reference to Exhibit 10.3 of the Registrant’s Form 8-K dated
October 23, 2003.
80
Exhibit number
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
18
19
20
21
22
23
28
Management Service Agreement dated January 1, 2004 between the Registrant and GSE
Systems, Inc. Incorporated herein by reference to Exhibit 10.60 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2003.
the Registrant and National Patent
Form of Management Agreement between
Development Corporation. Incorporated herein by reference to Exhibit 10.1 of National
Patent Development Corporation Form S-1, Registration No. 333-118568.
Amendment dated July 1, 2005, to the Management Agreement dated July 30, 2004
between the Registrant and National Patent Development Corporation. Incorporated
herein by reference to Exhibit 10.7 of the Registrant’s Form 10-Q for the quarter ended
June 30, 2005.
Form of Management Agreement between National Patent Development Corporation and
the Registrant. Incorporated herein by references to Exhibit 10.2 of National Patent
Development Corporation Form S-1, Registration No. 333-118568.
Termination Agreement dated June 30, 2005 of the Management Agreement dated July
30, 2004, between National Patent Development Corporation and the Registrant.
Incorporated herein by reference to Exhibit 10.8 of the Registrant’s Form 10-Q for the
quarter ended June 30, 2005.
Form of Tax Sharing Agreement between the Registrant and National Patent
Development Corporation. Incorporated herein by reference to Exhibit 10.4 of National
Patent Development Corporation Form S-1, Registration No. 333-118568.
Form of Distribution Agreement between
the Registrant and National Patent
Development Corporation. Incorporated herein by reference to Exhibit 2.1 of National
Patent Development Corporation Form S-1, Registration No. 333-118568.
Code of Ethics Policy. Incorporated herein by reference to Exhibit 14.1 of the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.
Form of Indemnification Agreement. Incorporated herein by reference to Exhibit 10.1 of
the Registrant’s Form 8-K dated December 23, 2005.
Not Applicable
Not Applicable
Not Applicable
Subsidiaries of the Registrant*
Not Applicable
Consent of KPMG LLP, Independent Registered Public Accounting Firm*
Not Applicable
81
Exhibit number
31.1
31.2
32.1
* Filed herewith.
Certification of Chief Executive Officer*
Certification of Chief Financial Officer*
Certification Pursuant to Section 18 U.S.C. Section 1350*
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Dated: March 14, 2007
By /s/ Scott N. Greenberg
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Principal executive officer and director:
By /s/ Scott N. Greenberg
Chief Executive Officer and Director
Principal financial and accounting officer:
By /s/ Sharon Esposito-Mayer
Executive Vice President and Chief Financial Officer
Directors:
/s/ Harvey P. Eisen
/s/ Jerome I. Feldman
/s/ Marshall S. Geller
/s/ Richard Pfenniger
/s/ Ogden R. Reid
Chairman of the Board
Director
Director
Director
Director
83
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Schedule of Valuation and Qualifying Accounts
Schedule II
(In thousands)
Allowance for doubtful accounts (A)
Year ended December 31, 2006:
Year ended December 31, 2005:
Year ended December 31, 2004:
Balance at
beginning
of year
$
$
$
1,166
917
1,739
Additions
Deductions
(B)
120
535
191
(621) $
(286) $
(1,013) $
Balance at
end of
year
665
1,166
917
(A) Deducted from accounts and other receivables on Consolidated Balance Sheets.
(B) Write-off of uncollectible accounts, net of recoveries. For the years ended December 31, 2005 and 2004,
deductions include allowance distributed in the spin-offs of GSE Systems, Inc. ($22) and National Patent
Development Corporation ($418), respectively.
S-1
CORPORATE DIRECTORY AND CORPORATE DATA
BOARD OF DIRECTORS
CORPORATE OFFICERS
Harvey P. Eisen 1 2 3
Non-Executive Chairman of the Board,
and Chairman and Managing Member of
Bedford Oak Management, LLC
Scott N. Greenberg 1
Chief Executive Officer
Jerome I. Feldman 1
Chairman of the Executive Committee and
Chairman, President and Chief Executive
Officer of National Patent Development
Corporation
Marshall S. Geller 1 2 3 4
Co-Founder and Senior Managing Director of
St. Cloud Capital
Richard C. Pfenniger, Jr. 2 3 4
Chairman, President and Chief Executive
Officer of Continucare Corporation
Ogden R. Reid 4
Chairman of the Audit Committee,
Former U.S. Congressman and
Former U.S. Ambassador to Israel
1
2
3
4
Member of the Executive Committee
Member of the Compensation Committee
Member of the Nominating/Corporate Governance Committee
Member of the Audit Committee
OPERATING COMPANY
General Physics Corporation
6095 Marshalee Drive, Suite 300
Elkridge, MD 21075
CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP
111 South Calvert Street
Baltimore, MD 21202
REGISTRAR AND TRANSFER AGENT
Computershare Investor Services LLC
P.O. Box A3504
Chicago, IL 60690-3504
312.360.5430
Scott N. Greenberg
Chief Executive Officer
Douglas E. Sharp
President
Karl Baer
Executive Vice President
L. Thomas Davis
Executive Vice President
Sharon Esposito-Mayer
Executive Vice President &
Chief Financial Officer
Kenneth L. Crawford
Senior Vice President,
General Counsel & Secretary
INFORMATION AVAILABLE TO
SHAREHOLDERS
Copies of the Company’s Annual Report on
Form 10-K, proxy statement, press releases,
committee charters, corporate governance
guidelines, code of business conduct, code of
ethics and other documents are available through
GP Strategies’ home page on the Internet at:
www.gpstrategies.com. Copies of these materials
also are available without charge upon written
request to the Secretary at:
6095 Marshalee Drive, Suite 300
Elkridge, MD 21075
CERTIFICATIONS REGARDING PUBLIC
DISCLOSURES AND LISTING STANDARDS
As required by the Sarbanes-Oxley Act of 2002,
we have filed the Chief Executive Officer and
Chief Financial Officer certifications in our 2006
Annual Report on Form 10-K. In addition, the
annual certification of the Chief Executive
Officer regarding compliance by GP Strategies
with the corporate governance listing standards
of the New York Stock Exchange was submitted
without qualification following the 2006 annual
meeting of shareholders.
GP STRATEGIES CORPORATION
6095 Marshalee Drive
Suite 300
Elkridge, MD 21075 USA
800.727.6677