SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 1-12282
CORRPRO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1422570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1090 ENTERPRISE DRIVE, MEDINA, OHIO 44256
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 723-5082
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of February 9, 2005, 8,775,010 Common Shares, without par value, were
outstanding.
1
CORRPRO COMPANIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-16
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-35
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 36
ITEM 4. Controls and Procedures 36
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 37
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
ITEM 3. Defaults Upon Senior Securities 37
ITEM 4. Submission of Matters to a Vote of Security Holders 37
ITEM 5. Other Information 37
ITEM 6. Exhibits 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31, March 31,
2004 2004
(Unaudited) (Audited)
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,051 $ 2,498
Accounts receivable, net of allowance for doubtful accounts of
$567 at December 31, 2004 and $729 at March 31, 2004 26,694 24,139
Other receivables, net -- 768
Inventories 8,858 9,807
Prepaid expenses and other 4,771 5,974
-------- --------
Total current assets 44,374 43,186
-------- --------
Property, Plant and Equipment, net 7,453 7,149
Other Assets:
Goodwill 15,376 14,560
Other assets 7,309 7,974
Deferred income taxes 744 763
-------- --------
Total other assets 23,429 23,297
-------- --------
$ 75,256 $ 73,632
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 5,822 $ 5,279
Accounts payable 8,192 10,894
Accrued liabilities and other 11,376 10,874
-------- --------
Total current liabilities 25,390 27,047
-------- --------
Long-Term Debt:
Long-term debt, net of current portion 15,553 18,154
Senior secured subordinated notes, net of discount
of $3,944 at December 31, 2004 and $4,130 at March 31, 2004 10,056 9,870
-------- --------
Total long-term debt 25,609 28,024
-------- --------
Other Long-Term Liabilities 4,202 4,186
Warrants 16,998 16,830
Commitments and Contingencies -- --
Series B Cumulative Redeemable Voting Preferred Stock,
without par value, liquidation value of $14,372, net of discount 274 274
Shareholders' Equity (Deficit):
Common shares 2,361 2,276
Additional paid-in capital 46,122 46,266
Accumulated deficit (45,919) (50,555)
Accumulated other comprehensive loss 766 (95)
Common shares in treasury, at cost (547) (621)
-------- --------
Total shareholders' equity (deficit) 2,783 (2,729)
-------- --------
$ 75,256 $ 73,632
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues $ 36,502 $ 32,939 $ 108,035 $ 100,424
Operating cost and expenses:
Cost of sales 25,710 22,388 74,913 67,310
Selling, general & administrative expenses 8,374 7,703 24,967 23,567
--------- --------- --------- ---------
Operating income 2,418 2,848 8,155 9,547
Other income (expense):
Change in fair value of warrants 4,494 -- (168) --
Other income 648 -- 1,046 --
Interest expense (1,389) (1,843) (4,002) (4,931)
--------- --------- --------- ---------
Income from continuing operations
before income taxes 6,171 1,005 5,031 4,616
Provision for income taxes 756 358 1,186 1,366
--------- --------- --------- ---------
Income from continuing operations 5,415 647 3,845 3,250
Discontinued operations:
Gain (loss) from operations, net -- (205) 791 (3,809)
Loss on disposal, net of income taxes -- -- -- (46)
--------- --------- --------- ---------
Net income (loss) 5,415 442 4,636 (605)
Dividends attributable to preferred stock 469 -- 1,372 --
--------- --------- --------- ---------
Net income (loss) available
to common shareholders $ 4,946 $ 442 $ 3,264 $ (605)
========= ========= ========= =========
Earnings (loss) per share - Basic:
Income from continuing operations
(net of dividends attributable to preferred stock) $ 0.20 $ 0.07 $ 0.10 $ 0.39
Discontinued operations -- (0.02) 0.03 (0.46)
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ 0.20 $ 0.05 $ 0.13 $ (0.07)
========= ========= ========= =========
Earnings (loss) per share - Diluted:
Income from continuing operations
(net of dividends attributable to preferred stock) $ 0.02 $ 0.07 $ 0.10 $ 0.35
Discontinued operations -- (0.02) 0.03 (0.41)
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ 0.02 $ 0.05 $ 0.13 $ (0.06)
========= ========= ========= =========
Weighted average shares -
Basic 8,752 8,420 8,550 8,412
Diluted 25,853 9,361 25,873 9,396
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
December 31,
---------------------
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 4,636 $ (605)
Adjustments to reconcile net loss
to net cash provided by continuing operations:
(Gain) loss on discontinued operations (791) 3,855
Depreciation and amortization 2,065 1,943
Change in fair value of warrants 168 --
Stock options exercised from Treasury Shares -- 25
Deferred income taxes 1 (138)
Gain (loss) on sale of assets 2 (16)
Changes in operating assets and liabilities:
Accounts and other receivables (1,505) (299)
Inventories 1,191 (430)
Prepaid expenses and other 1,321 (1,309)
Other assets (163) (1,350)
Accounts payable and accrued expenses (2,959) 19
------- -------
Total adjustments (670) 2,300
------- -------
Net cash provided by continuing operations 3,966 1,695
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (873) (517)
Proceeds from disposal of property, plant and equipment 11 125
------- -------
Net cash used by investing activities (862) (392)
------- -------
Cash flows from financing activities:
Net borrowing from new revolving credit facility (677) --
Payment of term loan (1,794) --
Payment of old revolving credit facility and other debt -- (4,655)
Net Proceeds from stock options 14 9
------- -------
Net cash (used) by financing activities (2,457) (4,646)
------- -------
Effect of changes in foreign currency exchange rates on cash 115 475
------- -------
Cash provided by discontinued operations 791 1,311
------- -------
Net increase (decrease) in cash 1,553 (1,557)
Cash and cash equivalents at beginning of year 2,498 7,037
------- -------
Cash and cash equivalents at end of period $ 4,051 $ 5,480
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Income taxes $ 735 $ 967
Interest $ 3,001 $ 3,834
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements include the
accounts of Corrpro Companies, Inc. and its subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The information furnished in the accompanying interim consolidated
financial statements has not been audited by independent accountants. In the
opinion of management, the interim consolidated financial statements include all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation of the consolidated financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the nine months ended December 31, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2005, or any other period. The interim consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K/A
for the fiscal year ended March 31, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates.
Stock-based compensation
As permitted by the Statement of Financial Accounting Standard ("SFAS"),
No. 123, "Accounting for Stock-Based Compensation," the Company accounts for
employee stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and the Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock-Based Compensation, an interpretation of APB
Opinion No. 25" and related interpretations. Stock-based compensation related to
non-employees is based on the fair value of the related stock or options in
accordance with SFAS No. 123 and its interpretations. Expense associated with
stock-based compensation is amortized over the vesting period of each individual
award. The following table illustrates the effect on net income (loss) and
income (loss) per common share as if the Black-Scholes fair value method
described in SFAS No. 123 had been applied to the Company's stock option plans:
6
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) available to common shareholders:
As reported $ 4,946 $ 442 $ 3,264 $ (605)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all awards 22 28 1,052 273
--------- --------- --------- ---------
Pro forma income (loss) available
to common shareholders $ 4,924 $ 414 $ 2,212 $ (878)
========= ========= ========= =========
Basic earnings (loss) per
share available to common shareholders:
As reported $ 0.20 $ 0.05 $ 0.13 $ (0.07)
Pro Forma $ 0.20 $ 0.05 $ 0.09 $ (0.10)
Diluted earnings (loss) per
share available to common shareholders:
As reported $ 0.02 $ 0.05 $ 0.13 $ (0.06)
Pro Forma $ 0.02 $ 0.04 $ 0.09 $ (0.09)
Total stock-based employee compensation expense for the nine months ended
December 31, 2004, was primarily comprised of stock options issued to purchase
612 common shares at an exercise price of $2.55 per share, which were
immediately vested upon issuance, which occurred during the second quarter of
fiscal 2005 at a Black-Scholes fair value of $1.67 per share.
NOTE 2. ASSETS AND LIABILITIES HELD FOR SALE
In July 2002, the Company's Board of Directors approved a formal business
restructuring plan. The multi-year plan included a series of initiatives to
improve operating income and reduce debt by selling non-core business units. The
Company engaged outside professionals to assist in the disposition of its
domestic and international non-core business units. Prior to the quarter ended
September 30, 2002, the Company's non-core domestic and international units were
reported as the Other Operations and International Operations reporting
segments. Effective as of the quarter ended September 30, 2002, the Other
Operations and the International Operations reporting segments were eliminated
and the non-core domestic and international units were reported as discontinued
operations. Prior-year financial statements were reclassified to reflect these
non-core units as discontinued operations, which were also referred to as
"assets and liabilities held for sale."
In the second quarter of fiscal 2004, the Company's Board of Directors
removed the Company's European Operations from discontinued operations. The
Board concluded that the Company's value would be enhanced by maintaining its
European presence rather than by selling the European Operations at that time,
based in part on the strength of the local management team, the similar
characteristics of the served markets, and the favorable prospects for this
business. Therefore, effective in the second quarter of fiscal 2004, the Company
reported quarterly and annual results of its European Operations in its
continuing operations, and prior-year financial statements have been
reclassified to reflect its European Operations as continuing operations.
Statements of operations for discontinued operations for the three months
and nine months ended December 31, 2004 and 2003 are shown below:
7
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
--------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ----------- -----------
Revenues $ -- $ 2,837 $ -- $ 8,913
Operating cost and expenses:
Cost of sales -- 2,242 -- 6,929
Selling, general & administrative expenses -- 733 (791) 5,471
---------- ---------- ---------- ----------
Operating income (loss) -- (138) 791 (3,487)
Loss on disposal -- -- -- 46
Interest expense -- 67 -- 322
---------- ---------- ---------- ----------
Income (loss) from discontinued operations
before income taxes -- (205) 791 (3,855)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from discontinued operations $ -- $ (205) $ 791 $ (3,855)
========== ========== ========== ==========
During the second quarter of fiscal 2005, the Company reversed provisions
for certain receivables totaling $791 related to the sale of the Company's
Middle East subsidiaries. The Company had previously taken provisions against
these receivables in discontinued operations. Collection of these receivables
occurred in September 2004 and October 2004. In addition, during the first
quarter of fiscal 2005, the Company collected a note receivable of $768 as final
payment for the sale of the Middle East subsidiaries.
The Company did not allocate interest to discontinued operations in fiscal
2005 and allocated interest to discontinued operations of $67 for the three
months ended December 31, 2003 and $322 for the nine months ended December 31,
2003, based on estimated proceeds from the discontinued operations dispositions
that were used to pay down the Company's then-outstanding Revolving Credit
Facility and Senior Notes. The interest rate used to calculate the allocated
interest expense was the weighted average interest rate of the then-outstanding
Revolving Credit Facility and Senior Notes.
During fiscal 2004, the Company substantially completed the sale of its
Middle East subsidiaries after recording impairment charges relating to these
operations of $3,530. In March 2004, the Company recorded a remaining note
receivable for $768, which the Company collected in the first quarter of fiscal
2005, for its Middle East subsidiaries. During the first quarter of fiscal 2004,
the Company sold its Asia Pacific operations for a net loss of $46 after taking
into account an impairment charge on net assets which was recorded during the
fourth quarter of fiscal 2003 totaling $1,575.
NOTE 3 - INVENTORIES
December 31, March 31,
2004 2004
------------ ---------
Inventories consist of the following:
Component parts and raw material $5,180 $5,156
Finished goods 3,678 4,651
------ ------
$8,858 $9,807
====== ======
8
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
December 31, March 31,
2004 2004
------------ ---------
Property, plant and equipment consist of the following:
Land $ 578 $ 548
Buildings and improvements 6,410 6,153
Equipment, furniture and fixtures 17,502 17,242
-------- --------
24,490 23,943
Less: Accumulated depreciation (17,037) (16,794)
-------- --------
$ 7,453 $ 7,149
======== ========
NOTE 5 - EARNINGS PER SHARE
Basic earnings per common share ("EPS") is generally calculated by
dividing net income (loss) attributable to common shareholders by the weighted
average number of common shares outstanding. However, the Company's issuance of
warrants (see Note 11-- Series B Cumulative Redeemable Voting Preferred Stock),
which are considered to be a "Participating Security" by Financial Accounting
Standards No. 128 for Earnings Per Share (EPS) calculations, EITF Topic D-95,
Effect of Participating Convertible Securities on the Computation of Basic
Earnings requires those securities be included in the computation of basic EPS
if the effect is dilutive. Furthermore, Topic D-95 requires that the dilutive
effect to be included in basic EPS be calculated using either the "if-converted"
method or the "two-class" method. The Company has elected to use the two-class
method. Also, in accordance with the provisions of SFAS No. 128, diluted EPS for
the periods with net income have been determined by dividing net income
available to common shareholders by the weighted average number of common shares
and potential common shares outstanding for the period. Diluted EPS for periods
with a net loss is calculated by dividing the net loss available to common
shareholders by the weighted average number of common shares outstanding.
9
Basic earnings per share for the three months and nine months ended
December 31 are calculated using the two-class method as follows:
Basic EPS -- Two-Class Method:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) available
to common shareholders $ 4,946 $ 442 $ 3,264 $ (605)
Less: Income (loss) from discontinued operations -- (205) 791 (3,855)
------- ------- ------- -------
$ 4,946 $ 647 $ 2,473 $ 3,250
Amount allocable to common shareholders (1) 35.3% 100.0% 34.8% 100.0%
Rights to undistributed income $ 1,746 $ 647 $ 861 $ 3,250
Basic earnings per share from continuing operations $ 0.20 $ 0.07 $ 0.10 $ 0.39
======= ======= ======= =======
(1) Basic weighted average
common shares outstanding 8,752 8,420 8,550 8,412
Weighted average additional common shares
assuming exercise of warrants 16,051 -- 16,051 --
------- ------- ------- -------
Weighted average common equivalent
shares assuming warrants exercised 24,803 8,420 24,601 8,412
======= ======= ======= =======
Amount allocable to common shareholders 35.3% 100.0% 34.8% $ 100.0%
======= ======= ======= =======
Diluted EPS:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
2004 2003 2004 2003
-------- --------- --------- ---------
Net income (loss) available
to common shareholders $ 4,946 $ 442 $ 3,264 $ (605)
Less: Income (loss) from discontinued operations -- (205) 791 (3,855)
-------- -------- -------- --------
4,946 647 2,473 3,250
Less: Change in fair value of warrants 4,494 -- (168) --
-------- -------- -------- --------
452 647 2,641 3,250
======== ======== ======== ========
Amount allocable to common shareholders 100.0% 100.0% 100.0% 100.0%
Rights to undistributed income $ 452 $ 647 $ 2,641 $ 3,250
Diluted earnings per share from continuing operations $ 0.02 $ 0.07 $ 0.10 $ 0.35
======== ======== ======== ========
Weighted average common shares outstanding 8,752 8,420 8,550 8,412
Dilutive effect of assumed exercise
of previous lender warrants * 920 765 1,121 838
Dilutive effect of warrants 16,051 -- 16,051 --
Dilutive effect of stock options 130 176 151 146
-------- -------- -------- --------
Diluted weighted average shares outstanding 25,853 9,361 25,873 9,396
======== ======== ======== ========
* See Note 12 - Previous Lender Warrants
10
NOTE 6 - STOCK PLANS
The Company granted stock options to purchase 3,160 common shares under
the 2004 Long-Term Incentive Plan during the nine months ended December 31,
2004. During the nine months ended December 31, 2004, 8 stock options issued
under the 1997 Long-Term Incentive Plan, were exercised at prices ranging from
$0.63 to $1.69 per share. In addition, stock options previously granted to
purchase 1,182 and 123 common shares at exercise prices ranging from $0.32 to
$12.10 per share expired or were forfeited, during the nine months ended
December 31, 2004 and 2003, respectively.
NOTE 7 - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is reported separately from
retained earnings and additional paid-in-capital in the consolidated balance
sheets. Items considered to be other comprehensive income (loss) include
adjustments made for foreign currency translation (under SFAS No. 52) and
pensions (under SFAS No. 87).
Components of other accumulated comprehensive income (loss) consist of the
following:
DECEMBER 31, MARCH 31,
2004 2004
------------ ----------
Translation adjustment $ 921 $ 60
Pensions (155) (155)
----- -----
$ 766 $ (95)
===== =====
Components of comprehensive loss consist of the following:
Nine Months Ended December 31,
2004 2003
------- --------
Net income (loss) $ 4,636 $ (605)
Other Comprehensive income:
Translation adjustment 861 1,641
------- -------
Total comprehensive loss $ 5,497 $ 1,036
======= =======
NOTE 8 - PRODUCT WARRANTIES
In the normal course of business, the Company provides warranties for its
products and services and indemnifies its customers for losses arising out of
its activities. Generally, the Company provides warranties that the products it
distributes are free from defects in material and that its services are
performed in accordance with applicable specifications. In addition, the Company
has certain indemnity obligations to its customers for losses arising out of its
activities, either through express agreement or by operation of law.
At December 31, 2004, accrued warranty costs were not material to the
consolidated balance sheets.
11
NOTE 9 - BUSINESS SEGMENTS
The Company has organized its operations into three business segments:
Domestic Core Operations, Canadian Operations and European Operations. The
Company's former non-core domestic, Middle East and Asia Pacific Operations are
reported as discontinued operations. Its business segments and a description of
the products and services they provide are described below:
Domestic Core Operations. The Company's Domestic Core Operations segment
provides corrosion control. It specializes in cathodic protection, which is an
electrochemical process that prevents corrosion in new structures and stops the
corrosion process in existing structures. The Domestic Core Operations segment
offers a comprehensive range of services in this area, including the design,
manufacture, installation, maintenance and monitoring of cathodic protection
systems, corrosion engineering, material selection, inspection services,
advanced corrosion research and testing. The Company provides these products and
services to a wide-range of customers in a number of industries, including
energy, utilities, water and wastewater treatment, chemical and petrochemical,
pipelines, defense and municipalities. In addition, this segment provides
coatings services to customers in the entertainment, aerospace, transportation,
petrochemical and electric power industries, as well as the United States
military. Finally, the Domestic Core Operations segment includes a production
facility in the United States that assembles and distributes cathodic protection
products, such as anodes, primarily to the United States market. The Domestic
Core Operations segment also provides our pipeline customers with one-stop
shopping for the preservation of their pipeline systems through our
comprehensive offering of pipeline integrity, risk assessment and inspection
services, including assessment, surveys, inspection, analysis, repairs and
ongoing maintenance.
Canadian Operations. The Company's Canadian Operations segment provides
corrosion control, coating, pipeline integrity and risk assessment services to
customers in Canada that are primarily in the oil and gas industry. These
customers include pipeline operators and petrochemical plants and refineries.
The Canadian Operations segment has a production facility that assembles
products such as anodes and rectifiers.
European Operations. The Company's European Operations segment provides
corrosion control products and services to customers in the petroleum, utility,
industrial, marine and offshore exploration and production markets, as well as
to governmental entities in connection with their infrastructure assets.
12
Financial information relating to the Company's operations by segment are
presented below:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue:
Domestic Core Operations $ 22,438 $ 21,918 $ 70,621 $ 67,381
Canadian Operations 9,387 7,641 25,203 23,195
European Operations 4,677 3,380 12,211 9,848
--------- --------- --------- ---------
$ 36,502 $ 32,939 $ 108,035 $ 100,424
========= ========= ========= =========
Operating Income:
Domestic Core Operations $ 3,263 $ 3,582 $ 10,984 $ 11,655
Canadian Operations 1,718 1,426 5,015 4,697
European Operations 505 205 1,041 1,015
Corporate Related Costs and Other (3,068) (2,365) (8,885) (7,820)
--------- --------- --------- ---------
$ 2,418 $ 2,848 $ 8,155 $ 9,547
========= ========= ========= =========
NOTE 10 - REVOLVING CREDIT FACILITY AND SENIOR NOTES
Long-term debt at December 31, 2004 and March 31, 2004 consisted of the
following:
DECEMBER 31, MARCH 31,
2004 2004
------------ ---------
Revolving Credit Facility $ 2,515 $ 2,779
Term Loan 18,682 20,500
Senior Secured Subordinated Notes,
due 2011, net of discount (1) 10,056 9,870
Other 178 154
------- -------
31,431 33,303
Less: current portion 5,822 5,279
------- -------
$25,609 $28,024
======= =======
(1) The Senior Secured Subordinated Notes are net of discounts of $3,944 at
December 31, 2004 and $4,130 at March 31, 2004.
SENIOR SECURED CREDIT FACILITY. On March 30, 2004, the Company entered
into a $40,000 revolving credit, term loan and security agreement with
CapitalSource Finance, LLC ("CapitalSource") that expires on March 30, 2009.
Initial borrowings were used to repay existing indebtedness. The revolving
credit facility provides for a maximum principal amount of $19,500. Borrowings
under the revolving credit facility are limited to borrowing base amounts as
defined. The interest rate on the revolving credit facility is at prime plus
1.75%, which was 7.00% at December 31, 2004. The Company is also required to pay
an unused line fee of 0.75% on the unused portion of the revolving credit
facility and a collateral management fee of 0.50% based on the funded portion of
the revolving credit facility. The revolving credit facility includes a credit
sub-facility of $7,000 for the issuance of standby letters of
13
credit. Standby letter of credit fees are 3.0% on the undrawn face amount of all
outstanding standby letters of credit. At December 31, 2004, the Company had
$2,515 outstanding under the revolving credit facility. The Company also had
$5,349 of outstanding letters of credit as of December 31, 2004. Total
availability under the revolving credit facility at December 31, 2004 was
approximately $9,960, after giving consideration to borrowing base limitations.
The revolving credit agreement expires on March 30, 2009. However, in
accordance with EITF 95-22 "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that include both a Subjective
Acceleration Clause and a Lock-Box Arrangement," the Company is required to
classify all of its outstanding debt under the Revolving Credit Facility as a
current liability.
The term loan facility provided for an original principal amount of
$20,500. The term loan bears interest at prime plus 3.5% subject to a floor of
7.5%. The term loan requires the Company to make monthly principal payments from
inception to March 1, 2009. Within each year, the amount of the monthly payments
is fixed, but the annual amount per year increases each year. In addition,
notwithstanding any other provisions in the revolving credit, term loan and
security agreement, the Company is required to pay 50% of its excess cash flow,
as defined, each year, starting with the year ending March 31, 2005, to further
pay down the term loan. At December 31, 2004, the outstanding balance on the
term loan was $18,682.
The Company's payments under the term loan for each of the years ended
March 31 are scheduled to be:
TOTAL 2005 2006 2007 2008 2009
------- ------- ------- ------- ------- -------
Term Loan, due 2009 $18,682 $ 682 $ 3,500 $ 4,000 $ 4,500 $ 6,000
Borrowings under the revolving credit, term loan and security agreement
are secured by a first priority security interest in the Company's domestic and
Canadian accounts receivable, inventories, certain intangibles, machinery and
equipment and owned real estate. The Company has also pledged slightly less than
two-thirds of the capital stock of two of its foreign subsidiaries. The
agreement requires the Company to maintain certain financial ratios and places
limitations on its ability to pay cash dividends, incur additional indebtedness,
make investments including acquisitions, and take certain other actions. The
Company was in compliance with these covenants at December 31, 2004.
SENIOR SECURED SUBORDINATED NOTES. On March 30, 2004, the Company entered
into a $14,000 senior secured subordinated note and equity purchase agreement
with American Capital Strategies, Ltd. ("American Capital"). Initial borrowings
were used to repay existing indebtedness. The interest rate on the senior
secured subordinated notes is 12.5%. The notes do not require principal payments
and are due on March 29, 2011. The senior secured subordinated notes are secured
by a lien on the Company's Domestic and Canadian accounts receivable,
inventories, certain intangibles, machinery and equipment and owned real estate
and are subordinated in lien priority only to the liens in favor of the senior
lender. In addition, the holder of the senior secured subordinated notes
received a warrant to purchase 3,936 common shares at an exercise price of $.001
per share. The warrant has a put right pursuant to which the holder may require
the Company to redeem the warrant for cash after seven years or upon the
occurrence of certain other conditions. The put price is the fair market value
of the common shares on the date of the exercise of the put. Valuations were
performed to determine the fair market value of this warrant at March 31, 2004
and at December 31, 2004. The fair market value at March 31, 2004 was $4,130 and
at December 31, 2004 was $4,169. A non-cash adjustment of $39 was recorded as an
expense in the consolidated statement of operations for the nine months ended
December 31, 2004 to
14
record the change in valuation. This adjustment was recorded as a liability on
the Company's balance sheet. The fair market value of the warrant is required to
be updated on a quarterly basis. The primary input into the calculation of this
valuation is the market price of the common shares. As the Company's stock price
increases, the value of the warrant will increase and as the stock price
decreases, the value of the warrant will decrease. The change in the value of
the warrant will be recorded as income if the stock price decreases, or as
expense if the stock price increases. This non-cash charge has the potential to
cause volatility in reported results. In addition, the warrant agreement
provides for the warrant to participate in dividend distributions, even if the
warrant has not been exercised. However, the warrant is not required to
participate in losses. The warrant is considered to be a "Participating
Security" by Financial Accounting Standards No. 128 for EPS calculations (see
Note 5 - Earnings Per Share). This means that the warrant is included in the
weighted average share calculation only in periods in which the Company
generates net income available to common shareholders. As such, the Company's
EPS calculations also have the potential to be volatile. The senior secured
subordinated note and equity purchase agreement requires the Company to maintain
certain financial ratios and places limitations on its ability to pay cash
dividends, incur additional indebtedness, make investments including
acquisitions, and take certain other actions. The Company was in compliance with
these covenants at December 31, 2004.
The Company believes that cash generated by operations and amounts
available under its credit facilities will be sufficient to satisfy its
liquidity requirements for at least the next twelve months.
NOTE 11 - SERIES B CUMULATIVE REDEEMABLE VOTING PREFERRED STOCK
On March 30, 2004, the Company entered into a securities purchase
agreement with CorrPro Investments, LLC ("CPI") providing for a $13,000 private
equity investment. The proceeds were used to repay existing indebtedness. Under
the terms of the securities purchase agreement, the Company issued 13 shares of
newly-created Series B Preferred Stock. In addition, the purchaser received a
warrant to purchase 12,114 shares of common shares at an exercise price of $.001
per share. Valuations were performed to determine the fair market value of this
warrant at March 31, 2004 and at December 31, 2004. The fair market value at
March 31, 2004 was $12,700 and at December 31, 2004 was $12,829. A non-cash
adjustment of $129 was recorded as an expense in the consolidated statement of
operations for the nine months ended December 31, 2004 to record the change in
valuation. This adjustment was recorded as a liability on the Company's balance
sheet. The fair market value of the warrant is required to be updated on a
quarterly basis. The primary input into the calculation of this valuation is the
market price of the common shares. As the Company's stock price increases, the
value of the warrant will increase and as the stock price decreases, the value
of the warrant will decrease. The change in the value of the warrant will be
recorded as income if the stock price decreases, or as expense if the stock
price increases. This non-cash charge has the potential to cause volatility in
reported results. In addition, the warrant agreement provides for the warrant to
participate in dividend distributions, even if the warrant has not been
exercised. However, the warrant is not required to participate in losses. The
warrant is considered to be a "Participating Security" by Financial Accounting
Standards No. 128 for Earnings Per Share (EPS) calculations (see Note 5 -
Earning Per Share). This means that the warrant is included in the weighted
average share calculation only in periods in which the Company generates net
income available to common shareholders. As such, the Company's EPS calculations
also have the potential to be volatile. The securities purchase agreement
requires the Company to maintain certain financial ratios and places limitations
on its ability to incur additional indebtedness, make investments including
acquisitions, and take certain other actions. In addition, the Series B
Preferred Stock is redeemable at the option of the holders of Series B Preferred
Stock upon the occurrence of certain events, none of which are probable as of
December 31, 2004.
15
The Series B Preferred Stock will accrue cumulative quarterly dividends at
an annual rate of 13.5%. In the event the Company does not maintain Earnings
Before Interest, Taxes and Depreciation as defined in the securities purchase
agreement ("Adjusted EBITDA"), of $12.0 million for the twelve months preceding
any quarterly dividend payment date, the annual dividend rate will increase to
16.5% for each subsequent calendar quarter during which the Company fails to
comply with such financial covenant. At December 31, 2004, the Company had
Adjusted EBITDA of less than $12.0 million for the trailing twelve months.
CorrPro Investments, LLC, our preferred shareholder, has waived this increase in
dividend rate with respect to quarterly earnings whose rates are measured by our
Adjusted EBITDA for the periods ending September 30, 2004 and December 31, 2004.
Dividends on the Series B Preferred Stock are payable either (i) in cash
if then permitted under the terms of our outstanding senior indebtedness and/or
subordinated indebtedness or (ii) in additional shares of Series B Preferred
Stock. Dividends payable in cash would be paid when, as and if declared by the
Board of Directors out of funds legally available. The terms of our senior
financing indebtedness prohibit, unless approved by the senior lender, the
payment of any cash dividends on the Series B Preferred Stock while such senior
indebtedness is outstanding.
The Series B Preferred Stock will rank, with respect to the payment of
dividends and rights upon liquidation, dissolution or winding up of the Company,
senior to the common shares and each other class or series of capital stock of
the Company whose terms do not expressly provide that such class or series shall
rank equal or senior to the Series B Preferred Stock with respect to the payment
of dividends or rights upon liquidation, dissolution or winding up
(collectively, "Junior Stock").
The liquidation preference of each share of Series B Preferred Stock is
$1,000 per share, plus any accrued and unpaid dividends thereon. As a result of
the accumulated dividends, the liquidation value of the Series B Preferred Stock
was $14,372 at December 31, 2004. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Series B
Preferred Stock will be entitled to receive the liquidation preference per share
of Series B Preferred Stock in effect on the date of such liquidation,
dissolution or winding up, plus an amount equal to any accrued but unpaid
dividends thereon as of such date before any distribution or payment is made to
the holders of Junior Stock.
NOTE 12 - PREVIOUS LENDER WARRANTS
During the first nine months of fiscal 2005, 325 warrants issued to its
lenders under its previous Revolving Credit Facility and Senior Notes were
exercised. The warrants issued to the previous Revolving Credit Facility lender
permitted the lender to purchase 467 common shares at a purchase price of $0.01
per share at any time after July 31, 2003 until September 23, 2012, and the
warrants issued to the previous Senior Notes lender permitted the lender to
purchase 467 common shares at a purchase price of $0.01 per share at any time
after July 31, 2003 until September 23, 2012. For purposes of financial
reporting, these warrants were valued at $313 each and the aggregate amount of
$626 increased paid-in-capital and reduced short-term and long-term debt. In
connection with our refinancing and recapitalization, effective March 30, 2004,
the warrants were subject to certain adjustments and, as a result, each was
adjusted upward by 227 common shares at a new adjusted exercise price of
$0.00631 per share.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Founded as an Ohio corporation in 1984, Corrpro became a public company in
1993 and is listed on the American Stock Exchange under the symbol CO. Unless
otherwise indicated, in this report, the terms "we," "us," "our," "Corrpro" and
the "Company" mean Corrpro Companies, Inc. and its consolidated subsidiaries.
We preserve and sustain our clients' assets through:
- Prevention, by way of our cathodic protection and coatings services
and products;
- Correction, utilizing our engineering and consulting services to
solve technical problems;
- Repair, through our construction and field services; and
- Monitoring and resurveying of installed systems, including our
pipeline and risk assessment services.
We serve thousands of customers around the world who rely on us to provide
these services for their oil and gas pipelines, above and underground storage
tanks, water systems, electric power equipment, transportation systems, bridges,
power plants, marine vessels, military facilities and other assets.
Our comprehensive range of service and product offerings includes:
- Corrosion control engineering services, systems, equipment and materials.
Our specialty in the corrosion control market is cathodic protection,
which is an electrochemical process that prevents corrosion in new
structures and stops the corrosion process in existing structures. We
offer a comprehensive range of services in this area, including the
design, manufacture, installation, maintenance and monitoring of cathodic
protection systems, corrosion engineering, material selection, inspection
services, advanced corrosion research and testing.
- Coatings services. We offer a wide variety of coatings-related services
designed to provide our customers with longer coatings life, reduced
corrosion, improved aesthetics and lower life-cycle costs for their coated
structures.
- Pipeline integrity and risk assessment services. We provide our pipeline
customers with one-stop shopping for the preservation of their pipeline
systems through our comprehensive offering of pipeline integrity, risk
assessment and inspection services, including assessment, survey,
inspection, analysis, repair and ongoing maintenance.
HIGHLIGHTS OF DEVELOPMENTS
Our revenues have increased for both the quarter (by 10.9%) and
year-to-date period (by 7.6%).
Primarily as a result of lower gross profits, our operating income for the
periods reported is less than the prior year's comparable periods.
To improve our business model, drive further sales growth, and achieve
further efficiencies, we
17
implemented the following actions:
- We implemented a net reduction in force of approximately 50 individuals,
or 6 percent of our worldwide personnel.
- The total cost of this initiative, most of which was charged to our
third fiscal quarter's earnings, will be approximately $0.8 million,
consisting primarily of severance benefits.
- With the concurrence of the Company's lenders and preferred stock
holder, we were able to reduce the potential impact of the charge
for purposes of measuring our compliance with applicable financial
covenants.
- This action was implemented not merely to reduce our operating and
administrative expenses, but to allow us to invest in sustaining our
growth strategy and improve efficiencies in our sales, services, and
administration.
- We commenced a search for a new executive to lead our U.S. operations. Our
executive vice president of U.S. operations has left the Company.
- We closed an underperforming coatings office in Chicago.
- As previously disclosed, we closed our Anchorage, Alaska office due to the
loss of a contract on which it depended.
- We stepped up our sales, marketing and recruiting efforts for regulated
transportation and storage, water, and department of defense markets that
we believe present the most strategic opportunities.
- We launched our Corrpro Compliance Services Division. This new Division,
which is part of our Domestic Core Operations, was formed to pursue and
develop the resurvey and after-market services opportunities for corrosion
control systems and associated infrastructure, initially in the U.S.
underground storage tank regulatory compliance market.
We are not in compliance with applicable continued listing standards of
the American Stock Exchange and there can be no assurances that we will be able
to comply. If we are unable to comply with, or meet an exception to, applicable
Exchange requirements as of March 17, 2005, the Exchange is likely to de-list
our common shares from the Exchange. Please see "-Factors Influencing Future
Results and Accuracy of Forward Looking Information" below.
A. RESULTS OF OPERATIONS COMPARED WITH PRIOR PERIODS
REVENUES.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, % ENDED DECEMBER 31, %
2004 2003 CHANGE CHANGE 2004 2003 CHANGE CHANGE
------- -------- -------- ------- ------ ------ ------ ------
REVENUE ($ IN MILLIONS):
Domestic Core Operations $ 22.4 $ 21.9 $ 0.5 2.3% $ 70.6 $ 67.4 $ 3.2 4.7%
Canadian Operations 9.4 7.6 1.8 23.7 25.2 23.2 2.0 8.6
European Operations 4.7 3.4 1.3 38.2 12.2 9.8 2.4 24.5
------ ------ ------ ------ ------ ------
Consolidated $ 36.5 $ 32.9 $ 3.6 10.9% $108.0 $100.4 $ 7.6 7.6%
====== ====== ====== ====== ====== ======
During the current reported three-month and nine-month periods, our
Domestic Core Operations segment experienced revenue increases in corrosion
control services and products, coatings services, and pipeline and risk
assessment services. Our revenue gains were offset by diminished revenues in
some areas. We experienced a shortfall in federal coatings revenue of $0.2
million for the quarter and $0.6 year-to-date compared to the prior year's
periods due to the loss of a general contract for certain navy projects on which
we were a subcontractor. As a result, we closed the three offices that performed
the work that generated these revenues. We closed our Chicago, Illinois area
coatings operations; revenue attributable to this office was $0.6 million less
than in the prior year's quarter and $0.4 less than in the prior fiscal
year-to-date period. Revenues attributable to our now closed Anchorage, Alaska
office were $0.4 less than the prior year's quarter and $0.9 less than the prior
year's nine month period.
Due to reduced governmental funding of our federal coatings work, in
January 2005, we
18
downsized our federal coatings operations in San Diego, California. Although by
itself the San Diego coatings operations may not be material to the Company as a
whole, reductions in government funding can affect our federal coatings
operations on a nationwide basis. While we believe that the cessation of funding
for such work may be short-lived and primarily affect only our San Diego
operations in the short term, there can be no assurance that such funding will
be reinstated or that we will experience no further shortfalls in revenues due
to further funding reductions.
Due to general increased business activity, our Canadian Operations and
European Operations segments posted revenue gains for both the quarter and
fiscal year-to-date.
Our fourth fiscal quarter is historically our lowest quarter for revenues
due to the seasonality of our business. Several new large projects are pending
and may commence during the fourth quarter; however, the size, profitability and
timing of these and other large projects cannot be predicted with substantial
certainty. In addition, as we complete large projects, our ability to secure
further large projects can cause fluctuations in our revenue rates and can
impact our profitability.
GROSS PROFIT.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 CHANGE 2004 2003 CHANGE
------------ ------------ ------ ------------ ------------ ------
GROSS PROFIT ($ IN
MILLIONS) $10.8 $10.6 $ 0.2 $33.1 $33.1 $ --
% of Revenue 29.6% 32.0% 30.7% 33.0%
Our consolidated gross profit was $0.2 million greater than last year's
third quarter and was flat compared to the prior year-to-date period. Even
though gross profit decreased as a percentage of revenues, as a result of
increased revenues our gross profit was the same as or higher than the prior
periods.
Increased revenues resulted in increases in gross profit of $1.1 million
for the quarter and $2.3 million year-to-date which were offset by the loss of a
key contract at our now closed Anchorage, Alaska office (gross profit was $0.1
million less for the quarter and $0.3 million less for the nine-month period);
problems with our now closed Chicago, Illinois coatings' operation (gross profit
was $0.2 million less for the quarter and $0.4 million less for the nine-month
period); the loss of a general contract for certain Navy projects on which we
were a subcontractor (our gross profit for our Federal coatings work was $0.2
million less for the quarter and $0.4 million less for the nine-month period);
reduced field services revenue, resulting in a shift in mix to lower margin shop
work at our Canadian coatings operations (gross profit was $0.3 million less for
the quarter and $0.8 million less for the nine-month period), and a shift in the
business mix at our European Operations from higher margin service revenues to
material sales (gross profit was $0.1 million less for the quarter and $0.5
million less for the nine-month period).
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 CHANGE 2004 2003 CHANGE
------------ ------------ ------ ------------ ------------ ------
SG&A ($ IN MILLIONS) $ 8.4 $ 7.7 $ 0.7 $ 25.0 $ 23.6 $ 1.4
% of revenue 22.9% 23.4% 23.1% 23.5%
Our Selling, General & Administrative (SG&A) expenses for the quarter and
nine months, as a percent of revenues, were less than the prior year's quarter
and nine months.
SG&A has been lower as a percentage of revenues due to increased revenues.
Our SG&A expenses increased during the quarter primarily due to a charge to
earnings of $0.8 million as a result of the reduction in force we implemented in
December 2004. The incremental year-to-date increase in SG&A is due to
compensation costs, medical insurance expenses and management fees which exceed
those incurred in the prior year's comparable period. As a result of the recent
reduction in force, we expect a more favorable cost structure. We also made
changes in our medical benefits plan designed to mitigate the impact that rising
health care costs have had on our business.
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS.
FROM CONTINUING OPERATIONS FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2004 2003 CHANGE 2004 2003 CHANGE
------ ------ ------ ------ ------ ------
Operating Income:
Domestic Core Operations $ 3.3 $ 3.6 $(0.3) $11.0 $11.6 $(0.6)
Canadian Operations 1.7 1.4 0.3 5.0 4.7 0.3
European Operations 0.5 0.2 0.3 1.0 1.0 --
Corporate Related Costs and other (3.1) (2.4) (0.7) (8.8) (7.8) (1.0)
===== ===== ===== ===== ===== =====
Consolidated $ 2.4 $ 2.8 $(0.4) $ 8.2 $ 9.5 $(1.3)
===== ===== ===== ===== ===== =====
Consolidated Operating Income 6.6% 8.6% 7.5% 9.5%
as a % of revenues
Our consolidated operating income, in absolute terms and as a percent of
revenues, was less than prior year's periods. Our Canadian Operations were
adversely impacted by an unfavorable business mix and low gross profit margins
in its CSI Coating Services division.
Each of our segments reduced its operating expenses as a percentage of its
revenues. In spite of lower gross margins, the increase in revenues experienced
by our Canadian Operations and our European Operations was sufficient to result
in operating income equal to or above their operating income for the prior
year's periods.
Our corporate related costs included a charge to earnings of $0.8 million
as a result of the reduction in force we implemented in December 2004. We expect
to realize the benefits of these cost reductions commencing in our fourth
quarter ending March 31, 2005. These cost reductions may be offset to some
extent by increases in our sales, marketing and recruiting expenditures that we
are planning in order to help drive our growth.
20
OTHER INCOME (EXPENSE), INCOME TAX PROVISION (BENEFIT), INCOME (LOSS) FROM
CONTINUING OPERATIONS, AND DISCONTINUED OPERATIONS.
($ IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 CHANGE 2004 2003 CHANGE
------------ ------------ ------ ------------ ------------ -------
OTHER INCOME (EXPENSE) $ 3.8 $ (1.8) $ 5.6 $ (3.2) $ (4.9) $ (1.7)
INCOME TAX PROVISION $ 0.8 $ 0.4 $ 0.4 $ 1.2 $ 1.3 $ (0.1)
(BENEFIT)
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ 5.4 $ 0.6 $ 4.8 $ 3.8 $ 3.3 $ 0.5
DISCONTINUED OPERATIONS $ -- $ (0.2) $ 0.2 $ 0.8 $ (3.9) $ 4.7
Our Other Income (Expense) takes the following into account:
- We recognized $0.7 million for the quarter and $1.0 million year-to-date
in favorable currency translation adjustments made to certain debt held by
our Canadian Operations but payable in U.S. dollars.
- As noted in the Overview above, Other Income includes the effect of
marking to market the Company's outstanding warrants issued in our March
2004 refinancing and recapitalization.
- Interest expense is less than in the prior year's comparable periods
because our debt is less as a result of our March 2004 refinancing and
recapitalization.
With respect to our Income Tax Provision, we maintain a full valuation
allowance on our domestic net deferred tax assets. We provide for income taxes
primarily for our Canadian Operations and European Operations. The expense is
based upon applicable statutory tax rates.
All of our discontinued operations were sold prior to the end of our
fiscal year ended March 31, 2004. Year-to-date we recorded $0.8 million of other
income related to the collection of certain fully reserved receivables
associated with our former Middle East operations. Prior year figures include
the losses recorded on the sales of discontinued operations.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 CHANGE 2004 2003 CHANGE
------------ ------------ ------- ------------ ------------ ------
($ IN MILLIONS, EXCEPT PER
SHARE DATA)
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 4.9 $ 0.4 $ 4.5 $ 3.3 $ (0.6) $ 3.9
PER SHARE - BASIC $ 0.20 $ 0.05 $ 0.13 $ (0.07)
PER SHARE - DILUTED $ 0.02 $ 0.05 $ 0.13 $ (0.06)
We accumulated $0.5 million in the quarter and $1.4 million year-to-date
for the preferred share dividend as required. The dividend rate is 13.5%.
The rate at which our preferred stock accumulates dividends increases to
16.5% for each fiscal quarter in which our trailing twelve months' Adjusted
EBITDA, as computed at the end of the immediately preceding quarter, is less
than $12 million. For the second consecutive fiscal quarter our
21
trailing 12 months' Adjusted EBITDA was less than $12.0 million. CorrPro
Investments LLC, the holder of our preferred shares, has waived its right to a
dividend rate of 16.5% with respect to quarterly dividends whose rates are
measured by our Adjusted EBITDA for the periods ending September 30, 2004 and
December 31, 2004. None of the accumulated preferred dividends have been
declared or paid.
As a result of the reduction in force described in the Overview, we expect
to incur lower operating and administrative expenses, which should have the
effect of improving our Adjusted EBITDA. There can be no assurance that our
Adjusted EBITDA will exceed $12.0 million or that if our Adjusted EBITDA does
not exceed $12.0 million that we will be able to obtain a waiver of compliance
in the future.
The weighted average number of shares used in calculating income per share
is computed by using the weighted average number of common shares and potential
common shares outstanding for the period. The weighted average number of shares
used in calculating loss per share is computed based on the number of common
shares issued and outstanding. On March 30, 2004, we completed our
recapitalization and refinancing transaction, which resulted in the issuance of
warrants exercisable for 16.1 million common shares. In accordance with
generally accepted accounting principles for "Participating Securities", these
warrants are to be included in the weighted average shares calculation only in
periods in which we generate net income available to common shareholders. Net
income available to common shareholders represents net income less the annual
preferred stock dividend payable to the holder of our Series B Cumulative
Redeemable Voting Preferred Stock.
B. LIQUIDITY AND CAPITAL RESOURCES
The financing of our ongoing business depends primarily on our ability to
generate free cash flow and our ability to cover immediate working capital and
other needs through borrowings under our revolving credit facilities. As
previously reported, we refinanced and recapitalized our business in March 2004
by (i) issuing and selling 13 thousand shares of our Series B Preferred Stock
and a warrant to purchase 12.1 million of our common shares to CorrPro
Investments, LLC for aggregate consideration of $13.0 million, (ii) issuing and
selling $14.0 million of our secured subordinated notes and a warrant to
purchase 3.9 million of our common shares to American Capital and (iii) entering
into a $40.0 million senior secured credit facility with CapitalSource including
a $19.5 million revolving credit facility. For further information concerning
our preferred stock, secured subordinated notes and our senior secured credit
facility, please see Notes 10 and 11 to our financial statements included
herein.
Generally, our primary source of liquidity is our cash flow from
operations. In addition, we may supplement our liquidity by accessing our
revolving credit facility. At December 31, 2004, the amount available for
borrowing under our revolving credit facility was $10.0 million. This
availability takes into account $2.5 million of outstanding borrowings and $5.3
million in letters of credit outstanding under the revolving credit facility as
well as applicable borrowing base limitations.
During the nine-month period ended December 31, 2004, our continuing
operations provided net cash of $4.0 million compared to $1.7 million in the
prior year's period. This increase of $2.3 million was primarily due to improved
operating results of $0.5 million and improved operating asset and liability
management of $1.2 million compared to the prior year's period. Fiscal year to
date, we paid $1.8 million in principal toward our term loan and reduced the
principal outstanding under our revolving credit facilities by $0.7 million. Our
capital expenditures were $0.9 million. We anticipate that our capital
expenditures for the remainder of fiscal year 2005 will be approximately $0.2
million.
22
Fluctuations in our working capital accounts generally are a result of the
seasonal nature of our business. At our fiscal year ended March 31, 2004, our
receivables were seasonally low and we had begun to increase the amount of our
inventory in anticipation of our business needs. While our receivables at
December 31, 2004 were $2.6 million higher than at March 31, 2004, during the
quarter ended December 31, 2004, as our business headed toward its seasonally
slower period, we collected receivables and used inventory. Accordingly, our
accounts receivable decreased by $2.3 million during the quarter and our
inventory decreased by over $1.0 million compared to both March 31, 2004 and
September 30, 2004. Our prepaid and other assets decreased by $1.2 million from
March 31, 2004, primarily related to reduction in our prepaid expenses.
Our short-term borrowings and current portion of long-term debt increased
by $0.5 million compared to March 31, 2004. Our term loan provides that monthly
principal payments increase each fiscal year through maturity in fiscal 2009.
Accordingly, the portion of the term loan included in short term borrowings and
current portion of long-term debt increases annually based on the applicable
payment schedule. Conversely, the long-term portion of our term loan decreases
over time based on scheduled payments being applied to principal. Our accounts
payable decreased by $2.7 million compared to March 31, 2004 due to our efforts
to lower the number of days we take to pay our vendors.
As of December 31, 2004, our cash and cash equivalents were $4.1 million,
an increase of $1.6 million over the balance at March 31, 2004. Under our
secured credit agreement, our excess U.S. cash is swept and applied to reduce
our revolving credit facility. Our cash balance at December 31, 2004 includes
cash and cash equivalents held by our U.S. Operations, Canadian Operations and
European Operations as well as items which have not cleared our U.S. account.
Our trailing twelve months' Adjusted EBITDA has been below $12.0 million
for the last two quarters. We believe that we have taken appropriate actions to
improve our business model, however, there can be no assurance that our
liquidity will not be adversely affected. Nevertheless, we believe that our
existing cash balances, cash generated by operations, and amounts available
under our credit facilities will be sufficient to satisfy our liquidity
requirements for at least the next twelve months.
CONTRACTUAL OBLIGATIONS. The following table summarizes our contractual
obligations at December 31, 2004:
PAYMENTS DUE BY PERIOD
-----------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
(IN THOUSANDS) TOTAL ONE YEAR YEARS YEARS YEARS
------- --------- ------- ------- -------
Indebtedness:
Revolving Credit Facility
due 2009 (1) $ 2,515 $ 2,515 $ -- $ -- $ --
Term Loan, due 2009 18,682 3,307 11,680 3,695 --
Senior Secured Subordinated Notes (2) 14,000 -- -- -- 14,000
Other Debt Obligations 178 -- 178 -- --
Management Fee 2,900 400 1,200 800 500
Operating Leases 6,805 2,816 3,108 731 150
------- ------- ------- ------- -------
Total Contractual Cash
Obligations $45,080 $ 9,038 $16,166 $ 5,226 $14,650
======= ======= ======= ======= =======
23
(1) The revolving credit agreement expires on March 30, 2009. However, in
accordance with EITF 95-22 "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement", we are
required to classify all of our outstanding debt under the Revolving
Credit Facility as a current liability.
(2) The Senior Secured Subordinated Notes are net of discount of $3,944 at
December 31, 2004 as reported on the consolidated financial statements.
C. FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD LOOKING
INFORMATION
This document includes certain statements that may be deemed
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on management's expectations and beliefs
concerning future events and discuss, among other things, anticipated future
performance and revenues, expected growth and future business plans. Words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" or variations of such words and similar expressions are intended to
identify such forward-looking statements. In addition, any forward-looking
statement speaks only as of the date on which such statement is made and we do
not undertake any obligation to update any forward-looking statements, whether
as a result of new information, future events or otherwise. We believe that the
following factors, among others, could affect our future performance or the
price and liquidity of our common shares and cause our actual results to differ
materially from those that are expressed or implied by forward-looking
statements, or diminish the liquidity of our common shares:
OUR COMPLIANCE WITH THE LISTING STANDARDS AND REPORTING REQUIREMENTS OF
THE STOCK EXCHANGE ON WHICH OUR COMMON SHARES TRADE. We are required by the
American Stock Exchange to maintain certain listing standards and meet certain
reporting requirements in order for our common shares to continue trading and to
remain listed on the exchange. The exchange notified us in September 2003 that
we were not in compliance with the shareholders' equity requirement of its
continued listing requirements and that we should submit a plan to regain
compliance. In December 2003, the American Stock Exchange accepted the plan that
we submitted in accordance with its request. Under the plan, we have until March
17, 2005 to regain compliance with the Exchange continued listing standards.
On July 20, 2004, the Exchange notified us that we were not in compliance
with additional thresholds of the shareholders' equity requirement and that we
should submit a revised plan to regain compliance with the $6.0 million
shareholders' equity requirement of its continued listing requirements. In
August 2004, we submitted a revised plan to the Exchange to regain compliance in
accordance with its request.
In our August 2004 plan, we included information in support of our
position that we met an exception to the minimum stockholders' equity listing
standard. Under applicable provisions of the Exchange's rules, the Exchange will
not normally consider de-listing the securities of a company if it has at least
1.1 million shares publicly held, a market value of publicly held shares of at
least $15 million and 400 round lot shareholders.
In December 2004, the Exchange notified us that it did not concur with our
position that we met
24
this exception as we did not meet the requirement that we have a market value of
publicly held shares in excess of $15 million. The Exchange did not concur with
our position that some or all of our outstanding warrants should be included in
the current market value of our common stock. The Exchange asked us to submit
information demonstrating our ability to comply with the stockholders' equity
listing standard as of March 17, 2005.
In January 2005, we submitted further information to the Exchange. Our
ability to satisfy the shareholders' equity standards will depend on
- the income we generate through March 17, 2005;
- changes in foreign currency values which affect our
shareholders' equity; and
- changes in our stock price, due to the fact that we are
required to mark outstanding warrants to market based on the
price of our common stock.
The most significant factor in determining whether we will meet the
continued listing standard is likely to be our stock price on March 17, 2005.
Our earnings are significantly impacted by changes in the price of our common
stock. If our share price increases compared to the price at December 31, 2004,
we will take a charge to earnings which will reduce our shareholders' equity,
and it would be unlikely that we would satisfy the applicable shareholders'
equity standard. On the other hand, if our share price declines, as compared to
the price at December 31, 2004, we will recognize income, which will increase
our shareholders' equity and our ability to meet the listing standards. Since we
are unable to predict our share price as of March 17, 2005, we are unable to
assess with any certainty whether our shareholders' equity will then satisfy the
applicable exchange listing requirement. In addition, a significant increase in
our share price may cause the value of our shares that are publicly held to
exceed $15 million and thereby satisfy the fair market value exception to the
shareholders' equity listing standard.
If the Exchange determines for any reason, including non-compliance with
its listing standards, that our common shares should be de-listed from the
Exchange:
- the market liquidity and price of our common shares would likely be
negatively affected;
- it may be more difficult to dispose of, or to obtain accurate
quotations of, our common shares;
- we may be unable to list our shares for trading on any exchange or
quotation on any automated quotation system;
- we may not remain a reporting company; and
- we could face difficulty raising capital necessary for our continued
operations.
There can be no assurances that we will be able to comply with applicable
continued listing standards or any exceptions thereto. If we are unable to
comply with the continued listing requirements of the Exchange by March 17,
2005, the Exchange is likely to de-list our common shares from the Exchange. The
Exchange could also elect to notify us of its decision to de-list our shares
earlier than March 17, 2005.
25
We have commenced the process of investigating alternatives to continued
listing on the Exchange, including alternative trading venues such as the Over
the Counter Bulletin Board or the Pink Sheets. There can be no assurances that
our shares will not be de-listed or that trading will not be suspended, or, if
our shares are suspended, that trading would be permitted to resume.
ADVERSE DEVELOPMENTS IN PENDING LITIGATION OR REGULATORY MATTERS COULD
NEGATIVELY IMPACT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
From time to time, we are involved in litigation and regulatory proceedings,
including those disclosed in "Item 3 - Legal Proceedings" of our Annual Report
on Form 10-K for the fiscal year ended March 31, 2004, and in our other periodic
reports filed with the Securities and Exchange Commission. There are always
significant uncertainties involved in litigation and regulatory proceedings and
we cannot guarantee the result of any particular action. Regulatory compliance
is often complex and subject to variation and unexpected changes, including
changing interpretations and enforcement agendas affecting the regulatory
community. We may need to expend significant financial resources in connection
with legal and regulatory procedures and our management may be required to
divert attention from other portions of our business. If, as a result of any
proceeding, a judgment is rendered, decree is entered or administrative action
is taken against us or our customers, it may materially and adversely affect our
business, financial condition and results of operations.
OUR COMPLIANCE WITH THE SEC SETTLEMENT. In addition to significant
expenditures we may have to make to comply with the terms of the SEC settlement
described in "Item 3 - Legal Proceedings - SEC Enforcement Proceeding" of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004, we must
comply with the terms of the permanent injunction and the undertakings, which
require us to take affirmative actions to ensure compliance with federal
securities laws. Our failure to adequately comply with the provisions of the
injunction or any of the undertakings therein may result in additional
enforcement action by the SEC, and/or severe penalties against us and our
officers and directors, and may have an impact on our business, financial
condition and results of operations.
OUR PRINCIPAL SHAREHOLDER IS A CONTROLLING SHAREHOLDER. As of March 31,
2004, CPI beneficially owned approximately 58.9% of our common shares, assuming
the exercise of its warrant to purchase an aggregate of 12.1 million of our
common shares. In addition, CPI has the right to vote 51% of the voting power of
Corrpro and to elect a majority of our Board of Directors through its ownership
of our Series B Preferred Stock. As a result, CPI has the ability to determine
the outcome of all matters requiring approval by our shareholders, including the
election and removal of directors and any proposed merger, consolidation or sale
of all or substantially all of our assets. In addition, CPI could dictate the
management of our business and affairs. This concentration of ownership could
have the effect of delaying, deferring, or preventing a change in control, or
impeding a merger or consolidation, takeover, or other business combination that
could be favorable to our shareholders. This significant concentration of share
ownership and voting power may adversely affect the trading price for our common
shares because investors often perceive disadvantages in owning stock in
companies with controlling shareholders.
OUR SHAREHOLDERS ARE EXPOSED TO DILUTION AND OTHER RISKS ASSOCIATED WITH
OUR OUTSTANDING WARRANTS AND OPTIONS. As of December 31, 2004, we had
outstanding:
- options to purchase an aggregate of approximately 3.3 million shares
of our common shares that were issued pursuant to our stock option
plans; and
26
- warrants to purchase an aggregate of approximately 17.0 million
shares of our common shares, which represents approximately 58.4% of
our common shares on a fully diluted basis, that were issued in
connection with financing arrangements.
All of these warrants, which have nominal exercise prices, and many of
these options have exercise prices below the current market price of our common
shares. In addition, we may issue additional stock, warrants and/or options
pursuant to stock option plans or to raise capital in the future. Assuming the
exercise of all warrants and options, our current outstanding common shares
would represent approximately 30.2% of our common shares. The significant number
of common shares issuable upon exercise of these warrants and options could have
any or all of the following effects:
- the exercise of these options and warrants may have an adverse
effect on the market value of our common shares;
- the existence of these options and warrants may adversely affect the
terms on which we can obtain additional equity financing; and
- to the extent the exercise prices of these options and warrants are
less than the net tangible book value of our common shares at the
time these options and warrants are exercised, our shareholders will
experience immediate dilution in the net tangible book value of
their investment.
OUR DEBT INSTRUMENTS CONTAIN COVENANTS THAT LIMIT OUR OPERATING AND
FINANCIAL FLEXIBILITY. On March 30, 2004, we entered into a new $40.0 million
senior secured credit facility and issued $14.0 million of senior secured
subordinated notes, which replaced our previous $26.4 million revolving credit
facility and $24.4 million of senior notes. Both the new senior secured credit
facility and the new senior secured subordinated notes require us to maintain a
minimum level of earnings before interest, taxes, and depreciation/amortization,
and a minimum fixed charge coverage ratio and to comply with, among other
things, leverage ratios. Our ability to meet these financial ratios and tests
under our new credit agreements is affected by our results of operations and by
events beyond our control. We may be unable to satisfy these ratios and tests.
If we fail to comply with these ratios and tests, and we are unable to obtain a
waiver for such failure, no further borrowings would be available under the new
senior secured credit facility. Our lenders would be entitled to, among other
things, accelerate the debt outstanding under the new credit agreements so that
it is immediately due and payable and ultimately foreclose on our assets that
secure the debt. Any significant inability to draw on the new senior secured
credit facility or acceleration of the debt outstanding under the new credit
agreements would have a material adverse effect on our financial condition and
operations. In addition, our new senior secured credit facility restricts our
ability and the ability of certain of our subsidiaries to, among other things:
- incur additional debt and make certain investments or acquisitions;
- incur or permit to exist certain liens;
- sell, lease or transfer assets; and
- merge or consolidate with another company.
OUR LEVEL OF INDEBTEDNESS AND OTHER DEMANDS ON OUR CASH RESOURCES COULD
MATERIALLY AFFECT OUR OPERATIONS AND BUSINESS STRATEGY. As of December 31, 2004,
we had approximately $31.4 million
27
of total consolidated debt, net of debt discount of $3.9 million. In addition,
we have approximately $10.0 million available under our new senior secured
credit facility. Subject to the limits contained in our new credit agreements
and our other debt agreements, our total consolidated debt could increase due to
this additional borrowing capacity. In addition to the debt service requirements
on our outstanding debt, we have other demands on our cash resources, including,
among others, capital expenditures and operating expenses. Our level of
indebtedness and the significant debt servicing costs associated with that
indebtedness could significantly impact on our operations and business strategy.
For example, they could:
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the amount of
our cash flow available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
the industries in which we compete;
- place us at a competitive disadvantage compared to our competitors,
some of which have lower debt service obligations and greater
financial resources than we do;
- limit our ability to borrow additional funds;
- increase our vulnerability to general adverse economic and industry
conditions; and
- result in our failure to satisfy the financial covenants contained
in our new credit agreements or in other debt agreements, which, if
not cured or waived, could have a material adverse effect on our
business, financial condition or results of operations.
WE MAY BE UNABLE TO GENERATE A SUFFICIENT AMOUNT OF CASH FLOW TO SERVICE
OUR DEBT. Our ability to make payments on and to refinance our indebtedness and
to fund planned capital expenditures will depend on our ability to generate cash
in the future. Our ability to generate future cash flows, to a certain extent,
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. If we are unable to generate
sufficient cash flow from operations, achieve currently anticipated operating
improvements or have access to future borrowings, we may be unable to repay our
indebtedness or to meet our other liquidity needs. In addition, we may need to
refinance all or a portion of our indebtedness on or before maturity, and we may
be unable to do so on commercially reasonable terms or at all.
THE MANNER IN WHICH WE ARE REQUIRED TO ACCOUNT FOR OUR OUTSTANDING
WARRANTS COULD IMPACT OUR RESULTS OF OPERATIONS. Under applicable accounting
rules and regulations, we are required to use mark-to-market accounting to value
our outstanding warrants. This accounting treatment will result in charges and
credits to our results of operations which are based on the market price for our
common shares. In accordance with the mark-to-market accounting method, if the
market price for our common shares on the last day of our fiscal quarter is
higher than that of the previous quarter, we are required to take a charge
against our earnings for that quarter. Conversely, if the market price for our
common shares on the last day of our fiscal quarter is lower than that of the
previous quarter, we are required to make a credit to our earnings for that
quarter. Due to the large percentage of our fully diluted common shares that is
issuable upon exercise of our outstanding warrants, the changes to our reported
earnings as a result of such accounting treatment could be significant.
28
OUR OPERATIONS CAN BE ADVERSELY IMPACTED BY INCLEMENT WEATHER. A large
portion of our service activity is performed in the field. Therefore, adverse
climatic conditions, such as cold weather, snow, heavy or sustained rainfall,
hurricanes and typhoons, may reduce the level of our service activity or result
in work stoppages. Working under inclement weather conditions can also reduce
our efficiencies, which can have a negative impact on our profitability. As is
common in our industry, we typically bear the risk of delays caused by some, but
not all, adverse weather conditions. If these adverse climatic conditions
present unusual intensity, occur at abnormal periods or last longer than usual
in major geographic markets, especially during peak construction periods, we
could experience a material adverse effect on our results of operations and
profitability.
OUR BUSINESS IS SEASONAL. Since a large portion of our business can be
adversely impacted by inclement weather, we usually experience a reduction in
sales during our fourth fiscal quarter reflecting the effect of the winter
season in our principal markets in North America and Europe. Accordingly, our
results in any one quarter are not necessarily indicative of annual results or
continuing trends.
OUR BUSINESS IS HIGHLY DEPENDENT ON THE LEVEL OF EXPENDITURES BY ENERGY
COMPANIES. The purchase and use of the products and services we provide to our
customers in the energy markets can be, to some extent, deferred in the event
that these customers reduce their capital and discretionary maintenance
expenditures. The level of spending on these types of expenditures can be
influenced by a number of factors beyond our control, including:
- current and projected oil, gas and power prices;
- the demand for electricity;
- the abilities of oil, gas and power companies to generate, access
and deploy capital;
- exploration, production and transportation costs;
- the discovery rate of new oil and gas reserves;
- the sale and expiration dates of oil and gas leases and concessions;
- regulatory restraints on the rates that power companies may charge
their customers;
- local and international political and economic conditions;
- worldwide economic activity;
- economic and political conditions in the Middle East and other
oil-producing regions;
- coordination by the Organization of Petroleum Exporting Countries,
or OPEC;
- the ability or willingness of host country government entities to
fund their budgetary commitments; and
- technological advances.
29
A sustained reduction in capital and discretionary maintenance
expenditures by our energy customers has in the past, and may in the future,
have a negative impact on our business and will likely result in decreased
demand for our services, low margins and lower revenues.
OUR REVENUES HAVE BEEN DEPENDENT ON GOVERNMENT CONTRACTS IN THE PAST. In
previous years, we have derived a significant portion of our revenues from
contracts with agencies of the United States government. Our contracts with the
U.S. government expose us to various business risks, including, but not limited
to the ability of the U.S. government to unilaterally:
- suspend us from receiving new contracts pending resolution of
alleged violations of procurement laws or regulations;
- terminate existing contracts;
- reduce the value of existing contracts;
- control and potentially prohibit the export of our products.
Any of our U.S. government contracts can be terminated by the U.S.
government either for its convenience or if we default by failing to perform
under the contract. Termination for convenience provisions provide only for our
recovery of costs incurred or committed, settlement expenses and profit on the
work completed prior to termination. Termination for default provisions provide
for us to be liable for excess costs incurred by the U.S. government in
procuring undelivered items from another source. If our contracts with the U.S.
government are terminated, our business, results of operations and financial
condition could be materially adversely affected.
In addition, the U.S. government's competitive bidding process may
adversely affect our revenues. We obtain most of our U.S. government contracts
through a competitive bidding process, and competitive bidding presents a number
of risks and costs, including, but not limited to:
- the need to compete against companies or teams of companies that may
be long-term, entrenched incumbents for a particular contract for
which we are competing;
- the need to compete on occasion to retain existing contracts that
may have in the past been awarded to us on a sole-source basis; and
- the substantial costs and managerial time and effort, including
design, development and marketing activities, necessary to prepare
bids and proposals for contracts that may not be awarded to us.
If we are unable to win particular contracts that are awarded through the
competitive bidding process, we may be unable to operate in the market for
services that are provided under those contracts for a number of years. If we
are unable to consistently retain existing contracts or win new contract awards
over any extended period, our business, prospects, financial condition and
results of operations could be adversely affected.
OUR DEPENDENCE ON FIXED-PRICE CONTRACTS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS. A substantial portion of our projects are currently performed
on a fixed-price basis. Under a fixed-price contract, we agree on the price that
we will receive for the entire project, based upon a defined scope,
30
which includes specific assumptions and project criteria. If our estimates of
our costs to complete the project are below the actual costs that we may incur,
our margins will decrease, and we may incur a loss. The revenue, cost and gross
profit realized on a fixed-price contract will often vary from our estimates
because of unforeseen conditions or changes in job conditions and variations in
labor and equipment productivity over the term of the contract. If we are
unsuccessful in mitigating these risks, we may realize gross profits that are
different from those originally estimated and reduced profitability or losses on
projects. Depending on the size of a project, these variations from estimated
contract performance could significantly impact our operating results for any
quarter or year. In general, our turnkey contracts to be performed on a
fixed-price basis involve an even greater risk of significant variations from
our estimates. This is a result of the long-term nature of these contracts as
well as the interrelationship of the integrated services to be provided under
these contracts, whereby unanticipated costs or delays in performing part of the
contract can have compounding effects by increasing costs of performing other
parts of the contract.
WE USE PERCENTAGE-OF-COMPLETION ACCOUNTING FOR CONTRACT REVENUE WHICH MAY
RESULT IN MATERIAL ADJUSTMENTS THAT AFFECT OUR OPERATING RESULTS. We recognize
contract revenue using the percentage-of-completion method. Under this method,
estimated contract revenue is accrued based generally on the percentage that
costs to date bear to total estimated costs, taking into consideration physical
completion. Estimated contract losses are recognized in full when determined.
Accordingly, contract revenue and total cost estimates are reviewed and revised
periodically as the work progresses and as change orders are approved, and
adjustments based upon the percentage of completion are reflected in contract
revenue in the period when these estimates are revised. These estimates are
based on management's reasonable assumptions and our historical experience and
are only estimates. Variations of actual results from these assumptions or our
historical experience could be material. To the extent that these adjustments
result in an increase, reduction or elimination of previously reported contract
revenue, we would recognize a credit or a charge against current earnings, which
could be material.
WE ARE REQUIRED TO OBTAIN SURETY BONDS IN CONNECTION WITH OUR BUSINESS.
Government contracting agencies and some private contracting parties from time
to time require prime contractors to furnish surety bonds guaranteeing their
performance and payment to all subcontractors and suppliers of material and
equipment under the contract. Our ability to obtain surety bonds depends upon
our capitalization, working capital, past performance, management expertise and
other variable factors. Surety companies consider such factors in light of (i)
the amount of surety bonds then outstanding in favor of us and (ii) their
current underwriting standards, which may change from time to time. Our ability
to obtain new projects may be restricted if we are unable to obtain adequate
surety bonds.
WE ARE SUBJECT TO PRIME CONTRACTOR LIABILITIES ON PROJECTS THAT WE
UNDERTAKE. We act as prime contractor on some of the construction projects that
we undertake. As prime contractor, we are responsible for the performance of the
entire contract, including subcontract work. Thus, we are subject to risks
associated with the failure of one or more subcontractors to perform as
anticipated. Claims may be asserted against us for construction defects,
personal injury or property damage caused by subcontractors, and if successful
these claims could expose us to liability. If unforeseen events occur with
respect to our subcontractors, including bankruptcy of, or an uninsured or
under-insured loss claimed against, our subcontractors, we may be responsible
for the losses or other obligations of those subcontractors. If any of these
situations occur, our business and results of operations could be adversely
affected.
WE ARE EXPOSED TO LIABILITIES BEYOND OUR CONTROL AS A SUBCONTRACTOR. On
projects in which we
31
act as a subcontractor, if the general contractor or other subcontractors fail
to perform their obligations or cause delays or failures in the project,
- we may not receive all or a portion of the distributions or payments
to which we are entitled in connection with the project;
- the project may be terminated by the customer; and
- we may be exposed to litigation or other claims in connection with
any such delay or failure.
OUR PROFITABILITY CAN BE IMPACTED BY OUR MIX OF PRODUCTS AND SERVICES.
Given that our selling, general and administrative costs are largely fixed in
terms of dollars, our profitability is dependent upon the amount of gross profit
that we are able to realize. We typically generate higher gross profit margins
on pure engineering service projects than on those projects that include a
material or installation component. In addition, our gross profit margins can be
negatively impacted when we utilize subcontractors. Therefore, a shift in mix
from engineering services to more construction and installation type work or an
increase in the amount of subcontracting costs could have a negative impact on
our operating results. In addition, certain of the products that we sell have
gross profit margins that are considerably lower than our overall average gross
profit margin. A shift in mix which results in a greater percentage of revenues
relating to these lower margin products would also have a negative impact on our
operating results.
THE TIMING OF PROJECTS CAN IMPACT OUR PROFITABILITY. There are a number of
factors, some of which are beyond our control, that can cause our projects to be
delayed and thus negatively impact our profitability for the related period.
These factors include the availability of labor, equipment or materials,
customer scheduling issues, delays in obtaining required permits and adverse
weather conditions. In addition, when we work as a subcontractor on a project,
our portion of the project can be delayed as a result of various factors
affecting the general contractor for such project.
THE AVAILABILITY AND VALUE OF LARGER PROJECTS CAN IMPACT OUR
PROFITABILITY. While the majority of our projects are relatively small, we can
have a number of individual contracts in excess of $1 million in progress at any
particular time. These larger contracts typically generate more gross profit
dollars than our average size projects. Therefore, the absence of or inability
to replace larger projects, which can result from a number of factors, including
market conditions, can have a negative impact on our operating results. To the
extent that any of our offices are dependent on such large contracts, the loss
of or inability to replace any such contract or contracts can detrimentally
affect such offices.
OUR BUSINESS EXPOSES US TO SIGNIFICANT LIABILITIES UNDER ENVIRONMENTAL AND
OTHER GOVERNMENTAL REGULATIONS. We and our customers are subject to various
federal, state, local and foreign environmental, health and safety laws and
regulations. These laws and regulations affect our operations by imposing
standards for the protection of health, welfare and the environment. Significant
fines and penalties may be imposed for non-compliance with environmental laws
and regulations, and some environmental laws provide for joint and several
strict liability for remediation of releases of hazardous substances, rendering
a company liable for environmental damage, without regard to negligence or fault
on the part of such company. These laws and regulations may expose us to
liability arising out of the conduct of operations or conditions caused by
others, or for our acts which were in compliance with all applicable laws at the
time these acts were performed. We may also be subject from time to time to
legal proceedings brought by private parties or governmental authorities with
respect to environmental
32
matters, including matters involving alleged property damage or personal injury.
WE MAY INCUR SIGNIFICANT COSTS OR BE REQUIRED TO ALTER THE MANNER IN WHICH
WE CONDUCT OUR BUSINESS IN RESPONSE TO CHANGES IN GOVERNMENT REGULATIONS.
Federal, state, local and foreign environmental, health and safety laws and
regulations laws are becoming increasingly complex and stringent. The risks of
substantial costs related to compliance with these laws and regulations are an
inherent part of our business, and future conditions may develop, arise or be
discovered that create substantial environmental compliance costs. Compliance
with environmental legislation and regulatory requirements may prove to be more
limiting and costly than we anticipate. New laws and regulations or stricter
enforcement of existing laws and regulations could require us to incur
significant costs or alter the manner in which we conduct our business.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO POLITICAL AND ECONOMIC RISKS.
A significant portion of our revenue is derived from operations outside the
United States. The scope and extent of our operations outside of the United
States means that we are exposed to the risks inherent in doing business abroad.
These risks include, but are not limited to:
- foreign currency restrictions, which may prevent us from
repatriating foreign currency received in excess of local currency
requirements and converting it into U.S. dollars or other fungible
currency;
- expropriation of assets, by either a recognized or unrecognized
foreign government, which can disrupt our business activities and
create delays and corresponding losses;
- civil uprisings, riots and war, which can make it impractical to
continue operations, adversely affect both budgets and schedules and
expose us to losses;
- availability of suitable personnel and equipment, which can be
affected by government policy, or changes in policy, which limit the
importation of skilled craftsmen or specialized equipment in areas
where local resources are insufficient;
- government instability, which can cause investment in capital
projects by our potential customers to be withdrawn or delayed,
reducing or eliminating the viability of some markets for our
services; and
- decrees, laws, regulations, interpretations and court decisions
under legal systems, including unexpected changes in taxation and
environmental or other regulatory requirements, which are not always
fully developed and which may be retroactively applied and cause us
to incur unanticipated and/or unrecoverable costs as well as delays
which may result in real or opportunity costs.
We cannot predict the nature of foreign governmental regulations
applicable to our operations that may be enacted in the future. In many cases,
our direct or indirect customer will be a foreign government, which can increase
our exposure to these risks. U.S. government-imposed export restrictions or
trade sanctions under the Export Administration Act, the Trading with the Enemy
Act or similar legislation or regulation may also impede our ability, or the
ability of our customers, to operate or continue to operate in specific
countries. These factors could have a material adverse effect on our financial
condition and results of operation.
33
THE INTERNATIONAL NATURE OF OUR BUSINESS EXPOSES US TO FOREIGN CURRENCY
FLUCTUATIONS THAT MAY AFFECT OUR ASSET VALUES, RESULTS OF OPERATIONS AND
COMPETITIVENESS. We are exposed to the risks of foreign currency exchange rate
fluctuations because a significant portion of our net sales and certain of our
costs, assets and liabilities are denominated in currencies other than the U.S.
dollar. These risks include a reduction in our asset values, net sales,
operating income and competitiveness. For those countries outside the United
States where we have significant sales, a devaluation in the local currency will
reduce the value of our local inventory as presented in our financial
statements. In addition, a stronger U.S. dollar will result in reduced revenue,
operating profit and shareholders' equity due to the impact of foreign exchange
translation on our financial statements. Lastly, fluctuations in foreign
currency exchange rates may make our products more expensive for customers to
purchase or increase our operating costs, thereby adversely affecting our
competitiveness and our profitability.
TERRORIST ATTACKS AND MILITARY CONFLICTS MAY ADVERSELY AFFECT OUR
OPERATIONS, OUR ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH. The continued
threat of terrorism and the impact of military and other action, including U.S.
military operations in Iraq, will likely lead to continued volatility in prices
for crude oil and natural gas and could affect the markets for our operations.
In addition, future acts of terrorism could be directed against companies
operating both outside and inside the United States. The U.S. government has
issued public warnings that indicate that pipelines and other energy assets
might be specific targets of terrorist organizations. These developments have
subjected our operations to increased risks and, depending on their ultimate
magnitude, could have a material adverse effect on our business, adversely
impact our ability to raise additional capital if needed or restrict our
anticipated growth.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH CHANGING GLOBAL, POLITICAL
AND ECONOMIC CONDITIONS. Changing political and economic conditions regionally
or worldwide can adversely impact our business. Deteriorating political and
general economic conditions may result in customers delaying or canceling
contracts and orders for our products and services, difficulties and
inefficiencies in the performance of our services including work stoppages, and
difficulties in collecting payment from our customers. As a result, such
conditions can negatively impact our results of operations and our cash flows.
THE LOSS OF ONE OR MORE KEY EMPLOYEES, OR FAILURE TO ATTRACT AND RETAIN
OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE, COULD DISRUPT OUR OPERATIONS AND
ADVERSELY AFFECT OUR FINANCIAL RESULTS. Our continued success depends on the
active participation of our key employees. The loss of key personnel could
adversely affect our operations. We believe that our success and continued
growth are also dependent upon our ability to attract and retain skilled
personnel. We believe that our wage rates are competitive; however, a
significant increase in the wages paid by other employers could result in a
reduction in our workforce, increases in the wage rates we pay, or both. If
these events occur for any significant period of time, our revenues and
profitability could be diminished and our growth potential could be impaired.
Further, if we are unable to attract and retain skilled workers, our business
will be adversely affected. Our operations depend substantially upon our ability
to continue to retain and attract project managers, project engineers, skilled
construction workers and equipment operators. Our ability to expand our
operations is impacted by our ability to increase our labor force. The demand
for skilled workers in our industry is currently high and the supply is limited.
As a result of the cyclical nature of the industry as well as the physically
demanding nature of the work, skilled workers may choose to pursue employment in
other fields.
OUR BUSINESS INVOLVES HAZARDS AND OPERATIONAL RISKS, AND WE MAY FAIL TO
MAINTAIN ADEQUATE INSURANCE COVERAGE TO PROTECT US AGAINST THESE RISKS.
Insufficient insurance coverage and increased
34
insurance costs could adversely impact our cash flows, financial condition and
results of operations. Although we maintain insurance coverage that we believe
is commercially reasonable for our business circumstances, we are not fully
insured against all risks. The occurrence of a significant event that is not
fully insured against could have a material adverse effect on our financial
condition. Our insurance does not cover every potential risk associated with
providing our products and services. We cannot be certain that insurance
coverage will be available in the future on commercially reasonable terms or
that the insurance proceeds received for any covered loss or damage will be
sufficient to restore the loss or damage without a negative impact on our
financial condition.
WE HAVE NO PLANS TO PAY DIVIDENDS ON OUR COMMON SHARES. We have no plans
to pay dividends on our common shares in the foreseeable future. We intend to
invest our future earnings, if any, to fund our anticipated growth. In addition,
our senior secured credit facility limits the payment of cash dividends. Any
payment of future dividends on our common shares will be at the discretion of
our board of directors and will depend upon, among other things, our earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions applying to the payment of any such dividends, and other
considerations that our board of directors deems relevant.
DECLINES IN THE STOCK MARKET AND PREVAILING INTEREST RATES COULD RESULT IN
REDUCTIONS IN OUR PENSION FUND ASSET VALUES IN THE UNITED KINGDOM, WHICH MAY
CONTINUE TO CAUSE A SIGNIFICANT REDUCTION IN OUR NET WORTH. In the fiscal year
ended March 31, 2002, as a result of lower investment performance caused by
lower stock market returns and a decline in prevailing interest rates, our
projected pension fund asset values in the United Kingdom decreased. The
reduction in asset values required that we take a non-cash after-tax charge to
accumulated other comprehensive loss, which is a component of shareholders'
equity. Primarily as a result of a negative return on our pension fund assets
and further reductions in interest rate levels in fiscal year 2003, we were
required to further reduce shareholders' equity. We may be required to take
further charges related to pension liabilities in the future and these charges
may be significant. We continue to review our assumptions regarding rates of
return and discount rates in light of the factors mentioned above and other
relevant considerations, and our future pension expense may further increase as
a result.
D. CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements in conformity with
accounting principles generally accepted in the United States requires
management to use assumptions and estimates, some of which are significant, to
determine certain of the reported values on our financial statements. Although
management bases its assumptions and estimates on historical experience and
other factors that management considers relevant, these assumptions and
estimates could change materially as conditions both within and beyond our
control change. As such, some accounting policies have a significant impact on
the amounts reported in these financial statements, in particular in the areas
of revenue recognition for construction and engineering contracts, determining
the allowance for uncollectible accounts, asset impairment and deferred tax
assets. A summary of our critical accounting policies can be found in our Annual
Report on Form 10-K/A for our fiscal year ended March 31, 2004 in Note 1 -
Summary of Significant Accounting Policies, Notes to Consolidated Financial
Statements, and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies."
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our operations are exposed to continuing
fluctuations in foreign currency values and interest rates that can affect the
cost of operating and financing our business. We do not enter into interest rate
or foreign currency transactions for speculative purposes.
During the first nine months of fiscal 2005, we recorded a favorable
foreign currency translation adjustment of $0.9 million in our stockholders'
equity (deficit) related to net assets located outside the United States. This
foreign currency translation adjustment resulted primarily from the United
States dollar conversion of our Canadian and European Operations.
Our primary interest rate risk exposure results from our variable interest
rates from our Senior Secured Credit Facility. If interest rates were to
increase 200 basis points (2%) from the rates at December 31, 2004, and assuming
no changes in debt from the December 31, 2004 levels, the additional annual
expense would be approximately $0.6 million on a pre-tax basis.
Except as set forth above, we did not experience any significant changes
in interest rate or foreign currency exchange risk during the first nine months
of fiscal 2005. Our interest rate and foreign currency exchange risk exposure is
described in more detail in "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk" in our Annual Report on Form 10-K for the year ended March
31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (the "Senior
Officers"), with the participation of other members of our management, have
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, and subject to inherent
limitations on the effectiveness of internal controls as described under "Item
9A. Controls and Procedures" in our Annual Report on Form 10-K/A for the year
ended March 31, 2004, the Senior Officers have concluded that to their knowledge
as of the end of the period covered by this Quarterly Report on Form 10-Q, our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by us is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
There were no changes in our internal control over financial reporting
that occurred during our third fiscal quarter of 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, Corrpro was named as a defendant in a purported
class action suit filed on June 24, 2002, in the United States District Court,
Northern District of Ohio, Eastern Division. The complaint also named certain of
our former and current officers and directors as defendants. The lawsuit arose
out of accounting irregularities discovered in our former Australian subsidiary.
The complaint was purportedly filed on behalf of all persons who purchased our
common shares during the period April 1, 2000 through March 20, 2002 and alleges
violations of anti-fraud provisions of the federal securities laws resulting in
artificially inflated prices of our common shares during the class period.
On or about May 27, 2003, the District Court granted, with prejudice, the
defendants' motions to dismiss the amended and consolidated class action
complaint. On June 24, 2003, the plaintiffs filed a notice of appeal. In
November 2004, the United States Circuit Court of Appeals for the 6th Circuit
affirmed the decision of the District Court.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. For identification of the exhibits attached hereto, see the Exhibit
Index following the signature page of this Form 10-Q.
B. Reports on Form 8-K
1. On November 16, 2004, the Registrant filed a Report on Form 8-K,
reporting under Items 2 and 9 thereof the announcement of the financial results
for its second quarter and six months ended September 30, 2004.
2. On December 8, 2004, the Registrant filed a Report on Form 8-K,
reporting under items 5, 8 and 9 thereof the announcement that George A.
Gehring, Jr., its executive vice president of U.S. operations, will be leaving
the Registrant effective as of January 7, 2005.
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SIGNATURES
Pursuant to the requirements 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.
CORRPRO COMPANIES, INC.
(Registrant)
Date: February 14, 2005 /s/ Joseph P. Lahey
---------------------------
Joseph P. Lahey
President
and Chief Executive Officer
/s/ Robert M. Mayer
---------------------------
Robert M. Mayer
Senior Vice President, Chief
Financial Officer
39
EXHIBIT INDEX
Exhibit
No. Exhibit
4.1 Waiver executed by CorrPro Investments, LLC and the Registrant pursuant to
Article Fourth of the Registrant's Amended and Restated Articles of
Incorporation for the EBITDA Test Period for September 30, 2004
4.2 Waiver executed by CorrPro Investments, LLC and the Registrant pursuant to
Article Fourth of the Registrant's Amended and Restated Articles of
Incorporation for the EBITDA Test Period for December 31, 2004
31.1 Rule 13a-14(a) Certification Chief Executive Officer
31.2 Rule 13a-14(a) Certification Chief Financial Officer
32.1 Section 1350 Certification Chief Executive Officer
32.2 Section 1350 Certification Chief Financial Officer
40