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 JUNE 30, 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 August 11, 2004, 8,450,442 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 6-15
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-22
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 23
ITEM 4. Controls and Procedures 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Restated
See Note 1
June 30, March 31,
2004 2004
(Unaudited) (Audited)
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,823 $ 2,498
Accounts receivable, net 27,312 24,139
Other receivables, net -- 768
Inventories 9,968 9,807
Prepaid expenses and other 5,776 5,974
----------- -----------
Total current assets 44,879 43,186
----------- -----------
Property, Plant and Equipment, net 6,951 7,149
Other Assets:
Goodwill 14,410 14,560
Other assets 8,024 7,974
Deferred income taxes 767 763
----------- -----------
Total other assets 23,201 23,297
----------- -----------
$ 75,031 $ 73,632
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 8,175 $ 5,279
Accounts payable 10,242 10,894
Accrued liabilities and other 9,422 10,874
----------- -----------
Total current liabilities 27,839 27,047
----------- -----------
Long-Term Debt:
Long-term debt, net of current portion 17,286 18,154
Senior secured subordinated notes, net of discount
of $4,072 at June 30, 2004 and $4,130 at March 31, 2004 9,928 9,870
----------- -----------
Total long-term debt 27,214 28,024
----------- -----------
Other Long-Term Liabilities 4,225 4,186
Warrants 29,036 16,830
Commitments and Contingencies -- --
Series B Cumulative Redeemable Voting Preferred Stock,
without par value, liquidation value of $13,449, net of discount 274 274
Shareholders' Equity (Deficit):
Common shares 2,276 2,276
Additional paid-in capital 46,266 46,266
Accumulated deficit (61,188) (50,555)
Accumulated other comprehensive loss (290) (95)
Common shares in treasury, at cost (621) (621)
----------- -----------
Total shareholders' equity (deficit) (13,557) (2,729)
----------- -----------
$ 75,031 $ 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
Months Ended
June 30,
--------------------
2004 2003
-------- --------
Revenues $ 34,110 $ 33,052
Operating cost and expenses:
Cost of sales 23,138 21,984
Selling, general & administrative expenses 8,385 7,976
-------- --------
Operating income 2,587 3,092
Other income (expense):
Change in fair value of warrants (12,206) --
Interest expense (1,305) (1,479)
-------- --------
Income (loss) from continuing operations
before income taxes (10,924) 1,613
Provision (benefit) for income taxes (291) 353
-------- --------
Income (loss) from continuing operations (10,633) 1,260
Discontinued operations:
Loss from operations, net -- (381)
Loss on disposal, net of income taxes -- (46)
-------- --------
Net income (loss) (10,633) 833
Dividends attributable to preferred stock 449 --
-------- --------
Net income (loss) available to common shareholders $(11,082) $ 833
======== ========
Earnings (loss) per share - Basic:
Income (loss) from continuing operations
(net of dividends attributable to preferred stock) $ (1.31) $ 0.15
Discontinued operations -- (0.05)
-------- --------
Net income (loss) available to common shareholders $ (1.31) $ 0.10
======== ========
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations
(net of dividends attributable to preferred stock) $ (1.31) $ 0.13
Discontinued operations -- (0.04)
-------- --------
Net income (loss) available to common shareholders $ (1.31) $ 0.09
======== ========
Weighted average shares -
Basic 8,443 8,408
Diluted 8,443 9,383
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)
Three Months Ended
June 30,
-------------------
2004 2003
-------- -------
Cash flows from operating activities:
Net income (loss) $(10,633) $ 833
Adjustments to reconcile net income (loss)
to net cash provided by continuing operations:
Loss on discontinued operations -- 427
Depreciation and amortization 686 795
Change in fair value of warrants 12,206 --
Deferred income taxes 1 (5)
Gain (loss) on sale of assets (11) 2
Changes in operating assets and liabilities:
Accounts and notes receivable (2,558) 1,489
Inventories (250) (435)
Prepaid expenses and other 167 (999)
Other assets (98) (244)
Accounts payable and accrued expenses (1,953) (735)
-------- -------
Total adjustments 8,190 295
-------- -------
Net cash provided (used) by continuing operations (2,443) 1,128
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (173) (158)
Proceeds from disposal of property, plant and equipment -- 41
-------- -------
Net cash used by investing activities (173) (117)
-------- -------
Cash flows from financing activities:
Net borrowing from new revolving credit facility 2,476 --
Payment of senior secured notes (224) --
Payment of old revolving credit facility and other debt -- (1,923)
Payment of financing cost (302) --
-------- -------
Net cash provided (used) by financing activities 1,950 (1,923)
-------- -------
Effect of changes in foreign currency exchange rates on cash (9) 140
-------- -------
Cash used for discontinued operations -- (161)
-------- -------
Net decrease in cash (675) (933)
Cash and cash equivalents at beginning of year 2,498 7,037
-------- -------
Cash and cash equivalents at end of period $ 1,823 $ 6,104
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for:
Income taxes $ (558) $ 429
Interest $ 991 $ 1,275
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 three months ended June 30, 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.
Restatement of March 31, 2004 Consolidated Balance Sheet
As part of the recapitalization and refinancing, the Company issued
warrants associated with the Series B Preferred Stock and the senior secured
subordinated notes of 12,113,744 and 3,936,967, respectively on March 30, 2004.
As of March 31, 2004, the proceeds from these issuances were allocated between
the Series B Preferred Stock and the related warrant and the senior secured
subordinated notes and the related warrant, respectively, based on a calculation
of the fair value of the warrants that included a "blockage" discount. During
the preparation of the Company's June 30, 2004 consolidated financial
statements, it was determined that the value of these warrants should not
include a "blockage" discount factor.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), paragraph 315,
defines the fair value as follows: `the definition of fair value in this
Statement precludes an entity from using a "blockage" factor (that is, a premium
or discount based on the relative size of the position held, such as a large
proportion of the total trading units of an instrument) in determining the fair
value of a large block of financial instruments. The definition of fair value
requires that fair value be determined as the product of the number of trading
units of an asset times a quoted market price if available.'
Consistent with the foregoing discussion, the Company restated its
March 31, 2004 consolidated balance sheet to reflect an increase in the
allocation of the proceeds to the warrants, a corresponding decrease in the
allocation of the proceeds to the Series B Preferred Stock and senior secured
subordinated notes, and
6
conforming changes as of March 31, 2004. The Company also restated its
consolidated statement of cash flows for the year ended March 31, 2004 to
reflect related changes in the allocations to "Net proceeds from issuance of
Preferred Shares and warrants" and "Payment of financing costs." The changes
contained in the restatement were a non-cash event and did not affect the
consolidated statements of operations and shareholders' equity (deficit).
The following table sets forth the relevant items on the consolidated
balance sheet presentation as of March 31, 2004 as originally reported and as
restated.
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004
---------------------
As
Previously As
Reported Restated
---------- --------
Other Assets:
Other assets 7,055 7,974
---------- --------
Total other assets 22,378 23,297
---------- --------
Total Assets $ 72,713 $ 73,632
========== ========
Long-Term Debt:
Senior secured subordinated notes, net of discount $2,932 as
originally stated and $4,130 as restated 11,068 9,870
---------- --------
Total long-term debt 29,222 28,024
---------- --------
Warrants 8,994 16,830
Serial Preferred Shares:
Serial Preferred Shares issued and outstanding 13 shares of
Series B Cumulative Redeemable Voting Preferred Stock,
without par value, Liquation value of $13,000 5,993 274
Total Liabilities and Shareholders' Equity (Deficit) $ 72,713 $ 73,632
========== ========
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 ("FASB") Interpretation No. ("FIN") 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:
7
FOR THE THREE
MONTHS ENDED
JUNE 30,
---------------------
2004 2003
---------- -------
Net income (loss) available to common shareholders:
As reported $ (11,082) $ 833
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all awards 21 214
---------- -------
Pro forma income (loss) available to common shareholders $ (11,103) $ 619
========== =======
Basic earnings (loss) per share available to common shareholders:
As reported $ (1.31) $ 0.10
Pro Forma $ (1.32) $ 0.07
Diluted earnings (loss) per share available to common shareholders:
As reported $ (1.31) $ 0.09
Pro Forma $ (1.32) $ 0.07
For purposes of this pro forma, the fair value of each option grant was
estimated using the Black-Scholes option-pricing model. The significant
assumptions used were a risk-free interest rate of 4.8%, an expected volatility
of 118.7%, an expected life of 10 years and no expected dividends.
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 our 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.
Operating gains or losses have been experienced with the disposition of
the non-core assets at the time of disposal during implementation of the
restructuring plan. Statements of operations for the discontinued operations for
the three months ended June 30, 2003 are shown below.
8
FOR THE THREE MONTHS ENDED
JUNE 30,
2003
--------------------------
Revenues $ 3,466
Operating cost and expenses:
Cost of sales 2,684
Selling, general & administrative expenses 974
-------
Operating loss (192)
Loss on disposal 46
Interest expense 189
-------
Loss from discontinued operations
before income taxes (427)
Provision for income taxes --
-------
Loss from discontinued operations $ (427)
=======
The Company allocated interest to discontinued operations of $189 for the
three months ended June 30, 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 interest expense allocated 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 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
June 30, March 31,
2004 2004
-------- ---------
Inventories consist of the following:
Component parts and raw material $ 5,248 $ 5,156
Finished goods 4,720 4,651
-------- ---------
$ 9,968 $ 9,807
======== =========
9
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
June 30, March 31,
2004 2004
-------- --------
Property, plant and equipment consist of the following:
Land $ 542 $ 548
Buildings and improvements 6,033 6,153
Equipment, furniture and fixtures 16,409 17,242
-------- --------
22,984 23,943
Less: Accumulated depreciation (16,033) (16,794)
-------- --------
$ 6,951 $ 7,149
======== ========
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss)
available to common shareholders for the period by the weighted average number
of common shares outstanding for the period, which was 8,443 and 8,408 for the
three months ended June 30, 2004 and 2003, respectively. Diluted EPS for the
period has been determined by dividing net income (loss) available to common
shareholders by the weighted average number of common shares and potential
common shares outstanding for the period, which was 8,443 and 9,383 for the
three months ended June 30, 2004 and 2003, respectively. Potential common shares
consist only of unexercised stock options and warrants. On March 30, 2004, the
Company completed a recapitalization that resulted in the issuance of warrants
exercisable for Common Shares. In accordance with generally accepted accounting
principles for "Participating Securities," these warrants will be included in
the weighted average shares calculation only in periods in which the Company
generates net income available to common shareholders. Net income available to
common shareholders represents net income less the annual preferred stock
dividend.
NOTE 6 - STOCK PLANS
The Company granted no options under the 1997 Option Plan and the
Non-Employee Director Option Plan, during the three months ended June 30, 2004
and 2003, respectively. During the three months ended June 30, 2004, a total of
8 stock options were exercised at prices ranging from $0.63 to $1.69. In
addition, options previously granted to purchase 901 and 15 common shares at
exercise prices ranging from $0.32 to $12.10 expired, were cancelled or were
forfeited, during the three months ended June 30, 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).
10
Components of other accumulated comprehensive income (loss) consist of the
following:
JUNE 30, MARCH 31,
2004 2004
--------- ---------
Translation adjustment $ (135) $ 60
Pensions (155) (155)
--------- ---------
Ending Balance $ (290) $ (95)
========= =========
Components of comprehensive income (loss) consist of the following:
Three Months Ended June 30,
2004 2003
----------- ----------
Net income (loss) $ (10,633) $ 833
Other Comprehensive income (loss):
Translation adjustment (195) 637
----------- ----------
Total comprehensive income (loss) $ (10,828) $ 1,470
=========== ==========
NOTE 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits." This revision requires
additional disclosures to those in the original SFAS No. 132 about assets,
obligations, cash flows and the periodic benefit cost of deferred benefit
pension plans and other deferred benefit post-retirement plans. The required
information should be provided separately for pension plans and for other
post-retirement benefit plans. This statement revision is in effect for the
Company's fiscal years ended June 14, 2004, and interim periods beginning after
June 15, 2004, for foreign plans. The adoption of this revision is not expected
to have a material impact on its results of operations or financial position.
In November 2003, the Emerging Issues Task Force ("EITF") issued EITF
03-06, "Participating Securities and the Two-Class Method under FASB Statement
No. 128", FASB Statement No. 128, "Earning Per Share". This EITF provides
clarification on the earning per share calculation for participating securities
as defined under FASB No. 128. The EITF is effective for the reporting period
after March 31, 2004. Prior period earnings per share amounts presented for
comparative purposes should be restated to conform to the guidance in the
consensus. The Company adopted this EITF in the first quarter of fiscal 2005.
NOTE 9 - PRODUCT WARRANTIES
In the normal course of business, the Company provides warranties and
indemnifications for its products and services. The Company provides warranties
that the products it distributes are in compliance with prescribed
specifications. In addition, the Company has indemnity obligations to its
customers for these products, which have also been provided to the Company from
its suppliers, either through express agreement or by operation of law.
At June 30, 2004, accrued warranty costs were not material to the
consolidated balance sheets.
11
NOTE 10 - 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 products and services, which include corrosion control, coatings and
pipeline integrity and risk assessment. The Company provides these products and
services to a wide-range of customers in the United States 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.
Canadian Operations. The Company's Canadian Operations segment provides
corrosion control, 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 markets, as well as to governmental entities in
connection with their infrastructure assets.
Financial information relating to the Company's operations by segment are
presented below:
FOR THE THREE MONTHS ENDED
JUNE 30,
2004 2003
----------- -----------
Revenue:
Domestic Core Operations $ 25,149 $ 23,978
Canadian Operations 5,740 5,697
European Operations 3,221 3,377
----------- -----------
$ 34,110 $ 33,052
=========== ===========
Operating Income:
Domestic Core Operations $ 4,123 $ 4,421
Canadian Operations 1,181 974
European Operations 136 354
Corporate Related Costs and Other (2,853) (2,657)
----------- -----------
$ 2,587 $ 3,092
=========== ===========
12
NOTE 11 - REVOLVING CREDIT FACILITY AND SENIOR NOTES
Long-term debt at June 30, 2004 and March 31, 2004 consisted of the
following:
JUNE 30, MARCH 31,
2004 2004
-------- ---------
Term Loan $20,046 $20,500
Senior Secured Subordinated Notes,
due 2011, net of discount (1) 9,928 9,870
Revolving Credit Facility 5,255 2,779
Other 160 154
------- -------
35,389 33,303
Less: current portion 8,175 5,279
------- -------
$27,214 $28,024
======= =======
(1). The Senior Secured Subordinated Notes are net of discounts of $4,072 at
June 30, 2004 and $4,130 at March 31, 2004.
On March 30, 2004, the Company entered into a $40.0 million revolving
credit, term loan and security agreement 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 $19.5 million. 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 6.0% at June 30, 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 $7.0 million for the issuance of standby letters of credit.
Standby letter of credit fees are 3.0% on the undrawn face amount of all
outstanding standby letters of credit. At June 30, 2004, the Company had $5.3
million outstanding under the revolving credit facility. The Company also had
$6.6 million of outstanding letters of credit as of June 30, 2004. Total
availability under the revolving credit facility at June 30, 2004, was
approximately $3.5 million, after giving consideration to the borrowing base
limitations under the revolving credit facility.
The term loan facility provided for an original principal amount of $20.5
million. 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. The amount of the monthly payments are fixed, but
the monthly amount 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 June 30, 2004, the outstanding balance on the term loan was $20.0 million.
The following represents the Company's commitment under the agreement for each
of the years ended March 31: $2.5 million 2005, $3.5 million 2006, $4.0 million
2007, $4.5 million 2008 and $6.0 million 2009.
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
13
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
June 30, 2004.
On March 30, 2004, the Company entered into a $14.0 million senior secured
subordinated note and equity purchase agreement. 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 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 3.9 million shares of the Company's Common Shares at an exercise price
of $.001. The warrants have put rights to redeem for cash after seven years or
certain other conditions. The put price is the fair market value of the common
stock on the date of the exercise of the put. A valuation was performed to
determine the fair market value of this warrant at March 31, 2004 and at June
30, 2004. The fair market value at March 31, 2004 was $4,130 and at June 30,
2004 was $7,122. A non-cash adjustment of $2,992 was recorded as an expense in
the consolidated statement of operations. This value of the warrant is 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
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 decreases. The change in the value of the
warrant will be recorded as income or expense in future period quarterly
results. This non-cash charge has the potential to cause volatility in reported
results in future periods. 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.
Therefore, the warrant is considered to be a "Participating Security" by
Financial Accounting Standards No. 128 for Earnings Per Share (EPS)
calculations. 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
June 30, 2004.
The Company believes that cash generated by operations and amounts
available under its credit facilities will be sufficient to satisfy its
liquidity requirements through at least fiscal 2005.
NOTE 12 - SERIES B CUMULATIVE REDEEMABLE VOTING PREFERRED STOCK
On March 30, 2004, the Company entered into a securities purchase
agreement with a purchaser providing for a $13.0 million private equity
investment. The proceeds were used to repay existing indebtedness. Under the
terms of the securities purchase agreement, the Company issued 13,000 shares of
newly-created Series B Preferred Stock. In addition, the purchaser received a
warrant to purchase 12.1 million shares of Common Shares at an exercise price of
$.001. A valuation was performed to determine the fair market value of this
warrant at March 31, 2004 and at June 30, 2004. The fair market value at March
31, 2004 was $12,700 and at June 30, 2004 was $21,914. A non-cash adjustment of
$9,214, which was recorded as an expense in the consolidated statement of
operations. This value was recorded as a liability on the Company's balance
sheet.
14
The fair market value of the warrant is required to be updated on a quarterly
basis. The primary input into 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 decreases.
The change in the value of the warrant will be recorded as income or expense in
future period quarterly results. This non-cash charge has the potential to cause
volatility in reported results in future periods. 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. Therefore, the warrant is considered to be a
"Participating Security" by Financial Accounting Standards No. 128 for Earnings
Per Share (EPS) calculations. 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. The Company was in
compliance with these covenants at June 30, 2004. 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
June 30, 2004.
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 certain
financial covenants 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 covenants.
Dividends on the Series B Preferred Stock are payable either (i) in cash
if then permitted under the terms of the 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 thereof. The terms of the
senior financing prohibit, unless approved by the lender, the payment of any
cash dividends on the Series B Preferred Stock while such debt 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 Stock and each other class or series of capital stock of
the Company the terms of which 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. The liquidation
value of the Series B Preferred Stock was $13,449 at June 30, 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Corrpro Companies, Inc. was founded in 1984 and is organized under the
laws of the State of Ohio. As used in this report, the terms "we," "us," "our,"
"Corrpro" and the "Company" mean Corrpro Companies, Inc. and its consolidated
subsidiaries unless the context indicates otherwise.
We provide a comprehensive range of corrosion control engineering
services, systems, equipment and materials, coatings services, and pipeline
integrity and risk assessment services to a wide variety of customers in the
North American and European infrastructure, environmental and energy markets,
including the U.S. government and its agencies. Our operations are organized
into three business segments by geographic region: Domestic Core Operations,
Canadian Operations and European Operations. Our former non-core domestic,
Middle East and Asia Pacific operations are reported as discontinued operations.
Our specialty in the corrosion control market is cathodic protection,
which is an electrochemical process that prevents corrosion for new structures
and stops the corrosion process for 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. In addition, 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. We also 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, surveys, inspection, analysis, repairs and
ongoing maintenance.
We believe that we have enhanced our capital structure by implementing
initiatives designed to reduce our outstanding indebtedness. During fiscal 2003
and fiscal 2004, we disposed of our Middle East operations, Asia Pacific
operations and four other non-strategic business units and used the proceeds
from such dispositions to reduce our outstanding indebtedness. In addition, on
March 30, 2004, we completed a refinancing and recapitalization pursuant to
which we (i) issued and sold 13,000 shares of our Series B Preferred Stock and a
warrant to purchase 12,113,744 of our common shares to CorrPro Investments, LLC
for aggregate consideration of $13.0 million, (ii) issued and sold $14.0 million
of our secured subordinated notes and a warrant to purchase 3,936,967 of our
common shares to American Capital and (iii) entered into a $40.0 million senior
secured credit facility with CapitalSource, we used the proceeds therefrom to
repay our prior revolving credit facility and senior notes and for working
capital purposes. We believe that our new capital structure will be critical in
our efforts to expand our business and achieve our other business objectives.
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2003
REVENUES. Revenues from continuing operations for the three months ended
June 30, 2004 totaled $34.1 million, compared with $33.1 million for the year
earlier period, an increase of $1.0 million, or 3.0%.
Revenues for the three months ended June 30, 2004 relating to the Domestic
Core Operations
16
totaled $25.1 million compared to prior-year results of $24.0 million, an
increase of $1.1 million or 4.6%. The increase was primarily related to a large
well casing project managed out of our Houston office that generated $1.3
million in revenues in the first fiscal quarter of 2005 compared to $0.7 million
in the year-earlier period. In addition, our material sales business experienced
increased revenue levels of $0.2 million, primarily due to improved market
conditions. Our Eastern Region offices experienced revenue growth of $0.6
million over the prior year, which was attributable to pipeline integrity work.
Our federal government coatings division experienced revenue growth of $0.4
million for the first quarter of fiscal 2005 compared to the year-earlier
period. These increases were partially offset by our commercial coatings
division, which experienced decreased revenue levels of $0.6 million in the
first fiscal quarter of 2005 compared to the year-earlier period, primarily due
to market weaknesses.
Revenues from our Canadian Operations for the three months ended June 30,
2004 and 2003 totaled $5.7 million. Our Canadian Operations were impacted by
reduced product sales of approximately $0.3 million which was offset by
increased engineering and pipeline work.
Revenues from our European Operations for the first quarter of fiscal 2005
totaled $3.2 million compared to $3.4 million, in the prior-year period, a
decrease of $0.2 million, or 5.9%. This decrease was primarily due to lower
service revenues attributed to a delay in our work on a large contract which
was partially offset by increased product sales.
GROSS PROFIT. Consolidated gross profit margin was 32.2% for the three
months ended June 30, 2004 compared to 33.5% for the prior-year period. The
decrease in consolidated gross profit margin related to the following factors:
- Contractor problems in our federal government coatings
division. Our federal government coatings division for certain
ship classes was negatively impacted by problems that our
prime contractor is experiencing with the U.S. Navy. These
problems resulted in the cessation of a contract with the
Navy. These problems caused scheduling issues that negatively
impacted our gross profit margin by approximately $0.2 million
for our federal government coatings division. In response to
the circumstances involving this Navy subcontract, in August
2004 the Company closed three offices that primarily serviced
that subcontract.
- Our Commercial Coatings division has a contract which
negatively effected margins. Our commercial coatings division
has one project that has negatively affected its gross profit
margin by approximately $0.1 million. This contract was
completed in the first quarter of fiscal 2005.
- Performance associated with our European Operations. Our
European operations experienced a decline in its gross profit
margin of approximately $0.1 million due to a change in the
mix of business with less higher margin engineering work and
lower utilization rates.
Excluding the negative impact associated with the above factors, our
consolidated gross profit margin was relatively flat compared to the prior year
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $8.4 million (24.6% of revenues) for the three
months ended June 30, 2004 compared to $8.0 million (24.1% of revenues) for the
prior-year period. Selling, general and administrative expenses for the first
quarter of fiscal 2005 included increases of $0.2 million related to
compensation cost, $0.2 million related to increased medical cost and $0.1
million related to management fees associated with the new investment group as
more fully described in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Related Party Transactions" in
our Annual Report on Form 10-
17
K/A for the year ended March 31, 2004.
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS. Operating income from
continuing operations totaled $2.6 million for the three months ended June 30,
2004 compared to $3.1 million in the prior year period, a decrease of $0.5
million. This decrease is primarily related to the negative effects on our
consolidated gross profit margin discussed above and as well as increased
selling, general and administrative expenses in the first quarter of fiscal 2005
compared to the prior year period.
OTHER INCOME (EXPENSE). Other expenses in the first quarter of fiscal 2005
totaled $13.5 million compared to $1.5 million in the prior year period, an
increase of $12.0 million. Included in other expenses for the first quarter of
fiscal 2005 is a non-cash charge of $12.2 million for the change in fair value
of the warrants issued to the holders of our senior secured subordinated notes
and preferred stock. The primary input into the valuation of these warrants is
the market price of our common shares. As the market price of our common shares
increases, the value of these warrants will increase, and as the market price of
our common shares decreases, the value of these warrants decreases. The change
in the value of the warrants will be recorded as a non-cash charge or benefit to
earnings in future period quarterly results. The valuation of the warrants has
the potential to cause volatility in our reported results in future periods.
Also included in other income (expense) for the first quarter of fiscal 2005 was
interest expense of $1.0 million and amortization of deferred financing costs of
$0.3 million.
INCOME TAX PROVISION(BENEFIT). We recorded a benefit for income taxes of
$0.3 million for the three months ended June 30, 2004 compared to an income tax
provision of $0.4 million recorded for the year earlier period. In the first
quarter of fiscal 2005, we received a federal income tax refund of $0.5 million
due to the filing of an amended return for the fiscal year 1997. This refund was
offset by the provisions for our Canadian Operations and European Operations.
Our effective tax rate is based on the statutory rates in effect in the
countries in which we operate. We intend to maintain a full valuation allowance
on our domestic net deferred tax assets including net operating loss
carryforwards associated with losses generated prior to our refinancing and
recapitalization transaction.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Loss from continuing operations
totaled $10.6 million in the first quarter of fiscal 2005 compared to income
from continuing operations of $1.3 million in the prior year period, a decrease
of $11.9 million. This decrease was primarily related to the change in fair
value of certain of our outstanding warrants, as described above.
DISCONTINUED OPERATIONS. All of our discontinued operations were sold
prior to the end of our fiscal year ended March 31, 2004, and we therefore
had no discontinued operations to report in the first quarter of fiscal 2005.
Loss from discontinued operations, net of income taxes, for the three months
ended June 30, 2003 was $0.4 million.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS. Net loss totaled $10.6
million for the three months ended June 30, 2004, which was further reduced by
$0.4 million for the accumulated dividend for preferred stock bringing the net
loss available to common shareholders to $11.1 million compared to net income
available to common shareholders of $0.8 million in the year earlier period, a
decrease of $11.9 million, which was primarily attributable to a $12.2 million
non-cash charge relating to the change in fair value of certain of our
outstanding warrants, as described above.
Loss per share on a fully diluted basis totaled $1.31 per share for the
first quarter of fiscal 2005, compared to income per fully diluted share of
$0.09 for the first quarter of fiscal 2004. The weighted
18
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 will 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
CASH FLOW. At June 30, 2004, we had working capital of $17.0 million,
compared to $16.1 million at March 31, 2004, an improvement of $0.9 million.
This improvement in working capital was due to a number of factors, the most
significant of which was the increase in accounts receivable as we enter our
seasonably busiest time of the year. Accounts receivable increased by $3.2
million in the first quarter of fiscal 2005. The increase in accounts receivable
was partially offset by a decrease in prepaid expenses of $0.2 million, a
decrease in cash of $0.7 million and the receipt of a receivable related to the
sale of our Middle East Operations. Accounts payable and accrued liabilities
decreased $2.1 million in the first quarter of fiscal 2005 primarily due to
increased short-term borrowings from our revolving credit facility of $2.5
million to fund our working capital needs.
During the first three months of fiscal 2005, cash used by operating
activities totaled $2.4 million, compared to cash provided by operating
activities of $1.1 million in the same period of the prior fiscal year. The
overall decrease in cash generated from operating activities was primarily due
to the fact that we entered into our seasonably busiest time of the year as well
as increased revenue levels, which increased our accounts receivable balance.
During this period, our working capital was funded through financing activities,
which totaled $2.0 million of financing during the first quarter of fiscal 2005.
SENIOR SECURED CREDIT FACILITY. On March 30, 2004, we entered into a $40.0
million 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 $19.5 million. 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 6.0% at June 30, 2004. We are 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
$7.0 million for the issuance of standby letters of credit. Standby letter of
credit fees are 3.0% on the undrawn face amount of all outstanding standby
letters of credit. At June 30, 2004, we had $5.3 million outstanding under the
revolving credit facility and $6.6 million of outstanding letters of credit.
Total availability under the revolving credit facility at June 30, 2004, was
approximately $3.5 million, after giving consideration to the borrowing base
limitations under the revolving credit facility.
The term loan facility provided for an original principal amount of $20.5
million. The term loan bears interest at prime plus 3.5% subject to a floor of
7.5%. The term loan requires us to make monthly principal payments from
inception to March 1, 2009. The amount of the monthly payments are fixed, but
the monthly amount increases each year. In addition, notwithstanding any other
provisions in the revolving credit, term loan and security agreement, we are
required to pay 50% of our excess cash flow,
19
each year, to further pay down the term loan. At June 30, 2004, the outstanding
balance on the term loan was $20.0 million.
Borrowings under the revolving credit, term loan and security agreement
are secured by a first priority security interest in our domestic and Canadian
accounts receivable, inventories, certain intangibles, machinery and equipment
and owned real estate. We have also pledged slightly less than two-thirds of the
capital stock of two of our foreign subsidiaries. The agreement requires us to
maintain certain financial ratios and limits our ability to pay cash dividends,
incur additional indebtedness and make investments, including acquisitions, and
to take certain other actions specified therein. We were in compliance with
these covenants at June 30, 2004.
SENIOR SECURED SUBORDINATED NOTES. On March 30, 2004, we entered into a
senior secured subordinated note and equity purchase agreement with American
Capital Strategies, Ltd. ("American Capital") pursuant to which we sold $14.0
million of our senior secured subordinated notes and a warrant to purchase
3,936,967 of our common shares to American Capital. Initial borrowings were used
to repay existing indebtedness. The interest rate on the senior secured
subordinated notes is 12.5%. The senior secured subordinated notes do not
require principal payments and the notes are due on March 29, 2011. The senior
secured subordinated notes are secured by a lien on our domestic and Canadian
accounts receivable, inventories, certain intangibles, machinery and equipment
and owned real estate subordinated in lien priority only to the liens in favor
of CapitalSource. The senior secured subordinated note and equity purchase
agreement requires us to maintain certain financial ratios and limits our
ability to pay cash dividends, incur additional indebtedness, make investments,
including acquisitions, and to take certain other actions specified therein. We
were in compliance with these covenants at June 30, 2004.
SERIES B CUMULATIVE REDEEMABLE VOTING PREFERRED STOCK. On March 30, 2004,
we entered into a securities purchase agreement with CorrPro Investments, LLC
("CPI") pursuant to which we sold 13,000 shares of our Series B Preferred Stock
and a warrant to purchase 12,113,744 of our common shares to CPI for aggregate
consideration of $13.0 million. We used these proceeds to repay our outstanding
indebtedness. The securities purchase agreement requires us to maintain certain
financial ratios and limits our ability to incur additional indebtedness, make
investments, including acquisitions, and to take certain other actions specified
therein. We were in compliance with these covenants at June 30, 2004. 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 June 30, 2004.
The Series B Preferred Stock accrues cumulative quarterly dividends at an
annual rate of 13.5%. In the event we do not maintain certain financial
covenants 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 we fail to comply with such financial covenants.
Dividends on the Series B Preferred Stock are payable either (i) in cash
if then permitted under the terms of our outstanding senior secured credit
facility and/or senior secured subordinated notes or (ii) in additional shares
of Series B Preferred Stock. Dividends payable in cash would be paid when, as
and if declared by our Board of Directors out of funds legally available
thereof. The terms of our senior secured credit facility prohibit, unless
approved by the lender, the payment of any cash dividends on the Series B
Preferred Stock while such debt is outstanding.
CONTRACTUAL OBLIGATIONS. The following table summarizes our contractual
obligations at June
20
30, 2004:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
TOTAL ONE YEAR YEARS YEARS YEARS
------- --------- -------- ------ -------
(IN THOUSANDS)
Indebtedness:
Revolving Credit Facility due 2009 $ 5,255 $ 5,255 $ -- $ -- $ --
Term Loan, due 2009 20,046 2,727 12,333 4,986 --
Senior Secured Subordinated Notes (1) 14,000 -- -- -- 14,000
Other Debt Obligations 160 -- 160 -- --
Management Fee 3,100 400 1,200 800 700
Operating Leases 6,805 2,816 3,108 731 150
------- --------- -------- ------ -------
Total Contractual Cash
Obligations $49,366 $ 11,198 $16,801 $6,517 $14,850
======= ========= ======== ====== =======
(1). The Senior Secured Subordinated Notes are net of discount of $4,072
at June 30, 2004 as reported on the consolidated financial statements.
We believe that cash generated by operations and amounts available under
our credit facilities will be sufficient to satisfy our liquidity requirements
through at least fiscal 2005.
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.
A number of risks and uncertainties could cause our actual results to
differ materially from those that are expressed or implied by these
forward-looking statements, including our compliance with the listing standards
and reporting requirements of the stock exchange on which our common shares
trade, adverse developments in pending litigation or regulatory matters, our
level of indebtedness and other demands on our cash resources, limitations on
our operating and financial flexibility related to covenants in our debt
instruments, risks related to our controlling shareholder, and potential
dilution and other risks associated with our outstanding warrants and options.
Additional risks and uncertainties that could cause our actual results to differ
materially from those that are expressed or implied by these forward-looking
statements are set forth in "Item 1. Business - Factors Influencing Future
Results and Accuracy of Forward Looking Information" in our Annual Report on
Form 10-K/A for the year ended March 31, 2004.
21
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."
E. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits." This revision requires
additional disclosures to those in the original SFAS No. 132 about assets,
obligations, cash flows and the periodic benefit cost of deferred benefit
pension plans and other deferred benefit post-retirement plans. The required
information should be provided separately for pension plans and for other
post-retirement benefit plans. This statement revision is in effect for our
fiscal years ended June 14, 2004, and interim periods beginning after June 15,
2004, for foreign plans. The adoption of this revision is not expected to have a
material impact on our results of operations or financial position.
In November 2003, the Emerging Issues Task Force ("EITF") issued EITF
03-06, "Participating Securities and the Two-Class Method under FASB Statement
No. 128", FASB Statement No. 128, "Earning Per Share". This EITF provides
clarification on the earning per share calculation for participating securities
as defined under FASB No. 128. The EITF is effective for the reporting period
after March 31, 2004. Prior period earnings per share amounts presented for
comparative purposes should be restated to conform to the guidance in the
consensus. We adopted this EITF in the first quarter of fiscal 2005.
22
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 three months of fiscal 2005, we recorded an unfavorable
foreign currency translation adjustment of $0.2 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.
Except as set forth above, we did not experience any significant changes
in interest rate or foreign currency exchange risk during the first three 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.
23
ITEM 4. CONTROLS AND PROCEDURES
(b) Evaluation of Disclosure 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 Exchange Act) 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 first fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in our legal proceedings as disclosed
in our Annual Report on Form 10-K/A for the year ended March 31, 2004.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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 April 14, 2004, the Registrant filed a Report on Form 8-K,
reporting under Items 1 and 7 thereof the announcement of the
completion of its recapitalization transactions.
2. On June 22, 2004, the Registrant filed a Report on Form 8-K,
reporting under Items 5 and 7 thereof the announcement of the
completion of the sale of its Middle East operations.
3. On June 22, 2004, the Registrant furnished a Report on Form 8-K,
reporting under Item 12 thereof the announcement of the financial
results for its fourth quarter and fiscal year ended March 31, 2004.
4. On June 22, 2004, the Registrant filed a Report on Form 8-K,
reporting under Items 5 and 7 thereof the announcement of Joseph P.
Lahey being named President and CEO.
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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: August 16, 2004 /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
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EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
10.1* The 2004 Long-Term Incentive Plan of Corrpro Companies, Inc., effective
as of June 10, 2004. (1)
10.2* Form of Nonqualified Stock Option Agreement under the 2004 Long-Term
Incentive Plan of Corrpro Companies, Inc. for certain Executive
Officers of the Company and the schedule thereto.
10.3* Form of Nonqualified Stock Option Agreement under the 2004 Long-Term
Incentive Plan of Corrpro Companies, Inc. for certain Executive
Officers of the Company and the schedule thereto.
10.4* Nonqualified Stock Option Award Agreement under the 2004 Long-Term
Incentive Plan of Corrpro Companies, Inc. between the Company and
Joseph W. Rog.
10.5* Nonqualified Stock Option Award Agreement under the 2004 Long-Term
Incentive Plan of Corrpro Companies, Inc. between the Company and
Joseph W. Rog.
10.6* Nonqualified Stock Option Award Agreement under the 2004 Long-Term
Incentive Plan of Corrpro Companies, Inc. between the Company and
Joseph P. Lahey.
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
-----------------------
* Management contract or compensatory plan or arrangement identified
pursuant to Item 6(A) of this Quarterly Report on Form 10-Q.
(1) A copy of this exhibit contained in our Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange Commission on July 29,
2004 is incorporated herein by reference.
27