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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-12282
CORRPRO COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1422570
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1090 ENTERPRISE DRIVE, MEDINA, OHIO 44256
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 723-5082
SECURITIES REGISTERED PURSUANT SECURITIES REGISTERED PURSUANT TO
TO SECTION 12(b) OF THE ACT: SECTION 12(g) OF THE ACT:
COMMON SHARES WITHOUT PAR VALUE NONE
------------------------------- ----------------
(TITLE OF CLASS) (TITLE OF CLASS)
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [X]
The aggregate market value of common shares held by nonaffiliates of the
Registrant was approximately $10,695,825 at September 30, 2004. For purposes of
this calculation, the Registrant deems the common shares held by its Directors,
executive officers and holders of 10% or more of its common shares to be common
shares held by affiliates.
8,787,843
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(Number of common shares outstanding as of June 21, 2005.)
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents are incorporated from prior filings (see Part IV of this
Annual Report on Form 10-K).
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1
CORRPRO COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
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Item 1: Business.................................................................................................. 3
Item 2: Properties................................................................................................ 20
Item 3: Legal Proceedings......................................................................................... 21
Item 4: Submission of Matters to a Vote of Security Holders....................................................... 22
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ........................................................................................ 23
Item 6: Selected Financial Data................................................................................... 24
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation...................... 25
Item 7A: Quantitative and Qualitative Disclosures about Market Risk................................................ 38
Item 8: Consolidated Financial Statements and Supplementary Data.................................................. 39
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 69
Item 9A: Controls and Procedures................................................................................... 69
PART III
Item 10: Directors and Executive Officers of the Registrant........................................................ 70
Item 11: Executive Compensation.................................................................................... 73
Item 12: Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......... 79
Item 13: Certain Relationships and Related Transactions............................................................ 83
Item 14: Principal Accountant Fees and Services.................................................................... 84
PART IV
Item 15: Exhibits and Financial Statement Schedules ............................................................... 85
Signatures................................................................................................ 91
2
PART I
ITEM 1. BUSINESS
GENERAL
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.
RECENT EVENTS
On June 29, 2005, we submitted to the American Stock Exchange ("AMEX")
notice of our intent to withdraw our common shares from listing on the AMEX,
filed an application for voluntary delisting from the AMEX of our common shares
with the Securities and Exchange Commission ("SEC") and filed a Form 15 with the
SEC to deregister our common shares under the Securities Exchange Act of 1934,
as amended. These actions were the result of a determination by our Board of
Directors that it was in the best interests of us and our shareholders to
terminate our status as a reporting company.
Favorable factors (among others) that were considered by the Board in
making this determination included:
- the considerable costs associated with remaining a reporting company
including legal, auditing, accounting and other expenses;
- the significant amount of time expended by management in connection
with meeting our reporting company obligations;
- the lack of an active trading market for our common shares;
- the lack of analyst coverage for our common shares;
- the unlikelihood that we would access the public capital markets for
our foreseeable financing needs; and
- the difficulty of utilizing the public equity capital markets as a
source of financing due to the limited market for our shares.
Prior to making its decision, our Board of Directors also carefully
examined, analyzed and evaluated the benefits of being a reporting company and
the potential disadvantages, including possible effects on price and liquidity,
to our common shares being quoted on the Pink Sheets (or not at all) as compared
to trading on the AMEX.
A special committee of four independent directors was formed to evaluate
whether the Company should delist and deregister. The special committee, after
analyzing the issues discussed above and consulting with independent legal and
financial advisors, unanimously recommended to our Board of Directors that
delisting and deregistering were in the best interests of the Company and our
shareholders.
The full Board of Directors concurred with the recommendation of the
special committee and concluded that it would be in the best interests of us and
our shareholders to delist from AMEX and deregister from the Exchange Act.
Management was directed to file an application for voluntary delisting with the
SEC and the AMEX and to file a Form 15 with the SEC to deregister our common
shares from the Exchange Act.
Costs associated with maintaining our reporting company status have
increased in recent years in the areas of auditing fees, legal fees, board fees
and insurance premiums. We expect certain of these costs would continue to
increase
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in the areas of auditing fees and Sarbanes-Oxley Section 404 internal controls
compliance and attestation costs. These expenses do not include the salaries and
time of our employees who are required to devote considerable attention to our
public company reporting and compliance obligations. Certain of these costs may
continue after we deregister under the Exchange Act and delist from the AMEX,
due to the quotation of our shares on the Pink Sheets quotation system, which we
hope to maintain. These continuing costs would include (but often at a reduced
level) stock transfer agent fees, audit fees and directors and officers
insurance premiums, as well as the costs associated with providing company
information to market makers and broker-dealers.
Our obligation to file periodic reports with the SEC, including quarterly
and annual reports containing our financial statements, was suspended upon the
filing of the Form 15 with the SEC. In addition, trading in our common shares on
the AMEX has been suspended. The price of our common shares could suffer a
significant decline as a result of this decision to delist and deregister.
Notwithstanding our decision to delist and deregister our common shares,
we currently intend to continue to hold annual meetings and to provide our
shareholders and the interested public with audited financial statements on an
annual basis. We also intend to comply with all information and notice
requirements under Ohio law and our articles of incorporation and code of
regulations.
For a discussion of the significant risks associated with being a
non-reporting company, please see "Factors Influencing Future Results and
Accuracy of Forward Looking Information."
PRODUCTS AND SERVICES
We provide corrosion control related services, systems, equipment and
materials to the infrastructure, environmental and energy markets. Our products
and services include:
- corrosion control engineering services, systems, equipment and
materials ("corrosion control");
- coatings services ("coatings"); and
- pipeline integrity and risk assessment services.
CORROSION CONTROL. Our specialty in the corrosion control market is
cathodic protection. We offer a comprehensive range of services in this area,
which includes the design, manufacture, installation, maintenance and monitoring
of cathodic protection systems. Cathodic protection is an electrochemical
process that prevents corrosion for new structures and stops the corrosion
process for existing structures. It can provide a cost-effective alternative to
the replacement of corroding structures. In order to understand how cathodic
protection works, it is helpful to first understand the corrosion process.
Steel, the most common metal protected by cathodic protection, is produced from
iron ore. To produce steel, iron ore is subjected to a refining process that
adds energy. Once steel is put back into the environment, it begins to revert
back to its original state (i.e., iron ore) by releasing the added energy back
into the surrounding environment. This process of dispersing energy is called
corrosion. Cathodic protection electrodes, called anodes, are placed near, and
connected to, the structure to be protected (i.e., the cathode). Anodes are
typically made from cast iron, graphite, aluminum, zinc or magnesium. A cathodic
protection system works by passing an electrical current from the anode to the
cathode. This process maintains the energy level on the cathode, thus stopping
it from corroding. Instead, the anode corrodes, sacrificing itself to maintain
the integrity of the structure. In order for the electrical current to pass from
the anode to the cathode, they both must be in a common environment. Therefore,
cathodic protection can only be used to protect structures that are buried in
soil, submerged in water or encased in concrete. Structures commonly protected
against corrosion by the cathodic protection process include oil and gas
pipelines, offshore platforms, above and underground storage tanks, ships,
electric power plants, bridges, parking garages, transit systems and water and
wastewater treatment equipment.
In addition to cathodic protection, our corrosion control services include
corrosion engineering, material selection, inspection services, advanced
corrosion research and testing. We also sell a variety of materials and
equipment
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used in cathodic protection and corrosion monitoring systems, including anodes,
rectifiers and corrosion monitoring probes. Corrosion control revenues as a
percentage of our total revenues were approximately 79% for fiscal year 2005,
85% for fiscal year 2004 and 86% for fiscal year 2003.
COATINGS. 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. Coatings
services include research, testing, evaluation and application of coatings. In
addition, we provide project management services for coatings maintenance
programs, including condition surveys, failure analysis, selection of site
surface preparation methods and selection and application of coatings. We also
provide specialized coatings application services for structures with aggressive
corrosion conditions such as the inside and outside of storage tanks and
pipelines. Coatings revenues as a percentage of our total revenues were
approximately 16% for fiscal year 2005, 11% for fiscal year 2004 and 10% for
fiscal year 2003.
PIPELINE INTEGRITY AND RISK ASSESSMENT SERVICES. We offer a comprehensive
line of pipeline integrity, risk assessment and inspection services, including
assessment, surveys, inspection, analysis, repairs and ongoing maintenance. By
offering a wide range of services, we are able to provide pipeline owners with
one-stop shopping for the preservation of their pipeline systems. Pipeline
integrity and risk assessment services represented approximately 5% of our
revenues in fiscal year 2005, 4% in fiscal year 2004 and 5% in fiscal year 2003.
DISPOSITIONS
In July 2002, our 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. We
engaged outside professionals to assist in the disposition of our domestic and
international non-core business units. Prior to the quarter ended September 30,
2002, our 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."
During fiscal 2003, we disposed of four non-strategic business units.
First, in March 2003, we sold our Bass-Trigon Software business unit for $3.2
million and recognized a gain of $0.2 million. Also, in March 2003, we sold our
Rohrback Cosasco Systems subsidiary and recorded a note receivable for $6.2
million, which we collected during fiscal 2004 and recognized a gain of $1.8
million. We also disposed of two smaller international offices resulting in a
net gain of $0.1 million during fiscal 2003. The net proceeds from these
dispositions were used to reduce our then outstanding debt.
In the second quarter of fiscal 2004, our Board of Directors removed our
European Operations from discontinued operations. Our Board of Directors
concluded that our value would be enhanced by maintaining our 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, we reported quarterly and annual
results of our European Operations in our continuing operations, and prior-year
financial statements have been reclassified to reflect our European Operations
as continuing operations.
During fiscal 2004, we substantially completed the sales of our Middle
East subsidiaries, and we recorded impairment charges relating to our Middle
East Operations of $3.5 million. During the first quarter of fiscal 2004, we
sold our Asia Pacific Operations for a net loss of $46,000 after taking into
account an impairment charge on net assets that was recorded during the fourth
quarter of fiscal 2003 totaling $1.6 million. The net proceeds from these
dispositions were used to reduce our then outstanding debt.
In the fourth quarter of fiscal 2005, the decision was made to sell CSI
Coating Services, a division of our Corrpro Canada subsidiary. We substantially
completed this sale in March 2005 and we recorded a note receivable for $2.2
5
million, which we collected in April 2005 and recognized a net loss of $0.1
million. The net proceeds from this disposition were used to pay down debt in
April 2005. Effective as of the year ended March 31, 2005, the CSI Coating
Services business is reported as discontinued operations. Prior-year financial
statements were reclassified to reflect the Coating Services business as
discontinued operations, which is also referred to as "assets and liabilities
held for sale." For further information about our discontinued operations see
Note 2, Assets and Liabilities Held for Sale, Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K.
SEGMENTS
We have organized our operations into three business segments by
geographic region: Domestic Core Operations, Canadian Operations and European
Operations. Our former non-core domestic, Middle East, Asia Pacific and CSI
Coating Services operations are reported as discontinued operations. Our
business segments and a description of the products and services they provide
are described below:
DOMESTIC CORE OPERATIONS. Our Domestic Core Operations segment provides
products and services, which include corrosion control, coatings and pipeline
integrity and risk assessment. We provide 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.
Revenues relating to this segment totaled $90.4 million (or 67% of consolidated
revenues) for fiscal year 2005, $87.4 million (or 70% of consolidated revenues)
for fiscal year 2004 and $79.3 million (or 71% of consolidated revenues) for
fiscal 2003.
CANADIAN OPERATIONS. Our 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. Revenues relating to this segment totaled $27.9 million (or 21% of
consolidated revenues) for fiscal year 2005, $24.1 million (or 19% of
consolidated revenues) for fiscal year 2004 and $19.3 million (or 17% of
consolidated revenues) for fiscal year 2003.
EUROPEAN OPERATIONS. Our 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. Revenues relating to this segment
totaled $16.3 million (or 12% of consolidated revenues) for fiscal year 2005,
$13.1 million (or 11% of consolidated revenues) for fiscal year 2004 and $13.4
million (or 12% of consolidated revenues) for fiscal year 2003.
Further information about our business segments is included in Note 11,
Business Segments, Notes to Consolidated Financial Statements included in Item 8
of this Annual Report on Form 10-K.
SALES AND MARKETING
We market our products and services in the United States, Canada and
Europe primarily through our sales personnel. The technical nature of our
products and services requires a highly trained, professional sales force, and,
as a result, many of our sales personnel have engineering or technical expertise
and experience. Due to the problem solving experience of our engineering staff,
potential and existing customers regularly seek out advice from our technical
personnel, which can also result in business opportunities on an ongoing basis.
6
SOURCES AND AVAILABILITY OF RAW MATERIALS
With regard to our corrosion control services, we assemble components of
cathodic protection systems, which include aluminum, zinc, magnesium and other
metallic anodes. With regard to our coatings-related services, we manufacture,
develop and apply coatings. We do not believe that we are dependent upon any
single outside vendor as a source of supply and we believe that sufficient
alternative sources of supply for the same, similar or alternative products are
available. The prices paid for our raw materials may be affected by, among other
things, energy, petroleum, steel and other commodity prices, tariffs and duties
on imported materials, and foreign currency and exchange rates. We may
experience higher energy and petroleum prices in fiscal year 2006 than we
experienced in fiscal year 2005, based on increasing prices for such
commodities.
INTELLECTUAL PROPERTY
Through internal development programs and strategic acquisitions, we have
assembled an extensive array of technologies protected by a significant number
of trade and service marks, patents, trade secrets and other proprietary rights.
As of March 31, 2005, we were the licensee of certain patents and held a
significant number of patents and pending patent applications. Expiration dates
of such patents range from 2005 to 2021. In addition, we maintain a significant
number of trade and service marks and trade secrets. Although we believe that
our intellectual property has value, we consider the quality and timely delivery
of our products, the service we provide to our customers and the technical
knowledge and skills of our personnel to be more important in our ability to
compete. While our intellectual property rights may be of importance to
individual components of our operations, our business as a whole is not
materially dependent on any single intellectual property right or such
intellectual property rights as a group.
RESEARCH AND DEVELOPMENT
Our engineering and product development activities are primarily directed
toward designing new products and services to meet the specific requirements of
our customers. Product development costs were minimal in fiscal 2005, 2004 and
2003. While we stress the importance of our research and development programs,
the expense and market uncertainties associated with the development and
successful introduction of new products are such that there can be no assurance
that we will realize future revenues from new products.
SEASONAL TRENDS
Each of our segments is subject to seasonal fluctuations that may affect
our operating performance. 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. 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.
FOREIGN OPERATIONS
The Company's foreign operations are subject to the usual risks of
operating in foreign jurisdictions. They include, but are not limited to,
exchange controls, currency restrictions and fluctuations, changes in local
economics and changes in political conditions.
CUSTOMERS
We sell our products and services to a broad range of customers. During
the fiscal year ended March 31, 2005, no one customer accounted for more than
10% of our sales. We do not believe that the loss of any one customer would have
a material adverse effect on our business.
7
We sell products and services to the U.S. government and agencies thereof,
including the U.S. Navy. Sales to these customers as a percentage of our net
sales were approximately 9% for fiscal year 2005, 9% for fiscal year 2004 and 8%
for fiscal year 2003. Our contracts with the U.S. government contain standard
provisions permitting the government to terminate these contracts without cause.
In the event of termination, we are entitled to receive reimbursement on the
basis of the work completed (cost plus a reasonable profit). In addition, many
of our contracts with the U.S. government are subject to certain completion
schedule requirements that include liquidated damages in the event schedules are
not met as the result of circumstances within our control. Government
procurement programs are also subject to budget cutbacks and policy changes that
could impact the revenue for, or alter the demand for, our products or services.
Accordingly, our future sales to the government are subject to these budgetary
and policy changes.
BACKLOG
Backlog consists of our anticipated revenue from the uncompleted portions
of our existing contracts and contracts whose award is reasonably assured. As of
March 31, 2005, our backlog of uncompleted work was $45.5 million, compared to
$50 million as of March 31, 2004. We believe that the backlog figures are firm,
subject to the cancellation and modification provisions contained in various
contracts. We estimate that a substantial portion of our backlog as of March 31,
2005 will be filled during fiscal 2006. The level of our backlog at any
particular time is not necessarily indicative of our future operating
performance.
COMPETITIVE CONDITIONS
Within the corrosion control market, we face competition from a large
number of domestic and international companies, most of which we believe are
considerably smaller than we are. Although some of our competitors offer a broad
range of corrosion control engineering services, systems and products, we do not
believe that any of our competitors offer the comprehensive range of products
and services that we provide. In the service area, we compete principally on the
basis of quality, customer service and technical expertise and capabilities, and
on price, particularly when we are providing construction and installation
services. In the product area, we typically compete on the basis of quality,
service and price.
GOVERNMENT REGULATIONS
Other than as disclosed under "Item 3 - Legal Proceedings," we believe
that our current operations and our current use of property, plant and equipment
conform in all material respects to applicable environmental laws and
regulations, and we have not experienced, nor do we anticipate, any material
claim or material capital expenditure in connection with environmental laws and
other regulations impacting our operations. Further information about
environmental and foreign regulatory risks is included under this Item in
"Factors Influencing Future Results and Accuracy of Forward Looking
Information." Circumstances or developments that are not currently known as well
as the future cost of compliance with environmental laws and regulations could
be substantial and could have a material adverse effect on our results of
operations and financial condition.
EMPLOYEES
As of March 31, 2005, we had 716 employees, 256 of whom were located
outside the United States. We believe that our relationship with our employees
is good.
8
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," "will" 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:
AS A NON-REPORTING COMPANY, WE WILL NOT BE REQUIRED TO SUPPLY AS MUCH
INFORMATION TO OUR SHAREHOLDERS AND INVESTING PUBLIC. Certain of our public
filing obligations under the Exchange Act (including the obligation to file
Forms 10-K, 10-Q and 8-K) have been suspended, and we anticipate that all filing
obligations with the SEC will cease on September 27, 2005. As a result, we will
no longer be complying with the SEC reporting requirements and standards for
disclosure of public information set out in the Exchange Act. Since we will not
be complying with such reporting obligations or meeting such standards, the
level of disclosure about us that is available to the public will likely be
reduced. Without this level of disclosure, you may find it more difficult to
obtain information about the Company, to liquidate your holdings and to find
securities analyst's or news media's coverage on our common shares. In addition,
this lower level of public information may adversely affect the price of our
common shares.
AS A NON-REPORTING COMPANY, WE WILL NO LONGER BE SUBJECT TO SEC AND AMEX
CORPORATE GOVERNANCE REQUIREMENTS. The Pink Sheets quotation service and Pink
Sheets traded companies are not regulated by the SEC. In addition, unlike AMEX
listed companies, Pink Sheets traded companies do not have any corporate
governance standards or similar requirements, so we will not be required to have
independent directors, an independent audit committee, an independent
compensation committee, a code of conduct, or to seek shareholder approval for
certain actions or be subject to Sarbanes-Oxley compliance matters such as
certification of financial statements, prohibitions against personal loans, code
of ethics or audit committee approval of related party transactions.
THE PRICE AND LIQUIDITY OF YOUR SHARES MAY SUFFER AS A RESULT OF BEING
QUOTED ON THE PINK SHEETS AS COMPARED TO THE AMEX. There is generally
significantly less liquidity and greater volatility on the Pink Sheets as
compared to the AMEX, and there may be delays in the timing of transactions and
a reduction in securities analyst's and news media's coverage regarding our
common shares. Investors will likely find it more difficult to acquire, dispose
of or obtain accurate quotations for our common shares. In addition, because
there is currently a very limited volume of trading in our common shares, our
stock may be more likely to fluctuate due to broad market fluctuations, general
market conditions, fluctuations in our operating results, future securities
offerings by us, changes in the market's perception of our business,
announcements made by us or our competitors and general industry conditions.
There can be no assurance that an active trading market for our common stock
will ever develop on the Pink Sheets. In addition, the price of our common stock
could suffer a significant and sustained decrease as a result of becoming a
non-reporting company.
WE DO NOT HAVE CONTROL OVER THE QUOTATION OF OUR COMMON SHARES ON THE PINK
SHEETS. The quotation of our common shares in the Pink Sheets is subject to at
least one market maker's willingness to quote our common shares. Accordingly, it
is outside of the Company's control whether our common shares will continue to
be quoted on the Pink Sheets. If our common shares are no longer quoted in the
Pink Sheets:
- there will be no active trading market for our shares;
- the liquidity and price of our common shares would likely be
materially and adversely affected;
- you may be unable to sell your common shares;
9
- brokers and Depository Trust Company may no longer hold our common
shares in street name; and
- we may become a reporting company again.
WE MAY BE UNABLE TO BECOME OR REMAIN A NON-REPORTING COMPANY AND THEREFORE
WOULD NOT RECEIVE THE ANTICIPATED BENEFITS OF BEING A NON-REPORTING COMPANY.
While we believe that it is in our best interest to become a non-reporting
company, the following factors could result in us remaining or returning to
reporting company status:
- our application to voluntarily delist our common shares from the
AMEX may not be accepted by the AMEX and/or the SEC;
- our Form 15 to deregister from the Exchange Act may not go effective
due to intervention by the SEC;
- we may once again become subject to the reporting requirements of
the Exchange Act based on our number of holders of record.
If these or other factors prevent us from becoming or remaining a
non-reporting company, we will be unable to take advantage of the cost savings
and other benefits that we believe would result from being a non-reporting
company. In addition, if we are delisted from the AMEX, but remain a reporting
company, it would be unlikely that we would be able to resume our listing on the
AMEX or become listed on any other exchange or national automated quotation
system.
WE MAY NOT RECEIVE THE BENEFITS THAT WE ANTICIPATE FROM BEING A
NON-REPORTING COMPANY. There can be no assurance that we will in fact realize
the positive effects that we believe will result from delisting or
deregistering. We may be unable to reduce our expenses as estimated, future
costs avoidance may not be realized and our management and employees may be
unable to focus more of their time and resources on operating the Company. If we
are unable to achieve the benefits that we anticipated from becoming a
non-reporting company, our results of operations and the price of our common
shares may be adversely affected.
OUR ABILITY TO RAISE CAPITAL MAY BE IMPAIRED BY BEING A NON-REPORTING
COMPANY. A public reporting company generally has more ready access to public
markets for equity and debt financings and generally will obtain more favorable
interest rates on bank financings. As a non-reporting company, we may have
difficulty raising capital to fund our operations or growth on terms that are
acceptable to us. If we are unable to obtain such capital, our operations could
be adversely affected and we may be unable to fund operations.
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 this Annual
Report on Form 10-K and in our other periodic reports filed with the SEC. 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 connection with its
investigation of accounting irregularities discovered in 2002 at our former
Australian subsidiary, on January 20, 2004, the SEC filed a civil injunctive
action against us in the United States District Court for the Northern District
of Ohio Eastern Division. Simultaneously with the filing of the complaint,
without admitting or denying the SEC's allegations, we consented to the entry of
a final judgment permanently enjoining us from future violations of certain
provisions of the federal securities laws. We also agreed to certain
undertakings designed to ensure our compliance with the federal securities laws.
In addition to
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complying with the other terms of the injunction, we were required to continue
previously adopted remedial measures, and during our fiscal years ending March
2004 and 2005 and are required during our fiscal year ending March 2006, to:
- engage a qualified outside firm to perform the internal audit
function or designate an employee director of internal audit who
would perform certain audit procedures and report directly to the
Audit Committee;
- require internal audit to prepare a confidential business report and
submit it to the SEC at the end of the fiscal year describing
certain aspects of the audit preparation, procedures and findings;
and
- maintain an anonymous hotline on which any activity affecting the
Company's financial results may be reported to the Audit Committee.
We have and will continue to incur costs, which may be significant, in
complying with these undertakings. 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, severe penalties against us and our
officers and directors, and may have an impact on our business, financial
condition and results of operations. Additionally, the existence of the SEC
investigation and subsequent settlement and injunction may adversely affect our
reputation with our customers and suppliers and have an adverse impact on our
revenues and expenses.
OUR PRINCIPAL SHAREHOLDER IS A CONTROLLING SHAREHOLDER. As of March 31,
2005, CorrPro Investments, LLC ("CPI") beneficially owned approximately 57.8% of
our common shares, assuming the exercise of its warrant to purchase an aggregate
of 12,113,744 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 Cumulative Redeemable Voting 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 March 31, 2005, we had outstanding:
- options to purchase an aggregate of approximately 3,192,071, shares
of our common shares that were issued pursuant to our stock option
plans; and
- warrants to purchase an aggregate of approximately 16,952,632 shares
of our common shares, which represents approximately 58.5% 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 some 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 30.5% 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;
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- 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,
a minimum fixed charge coverage ratio and comply with, among other things,
leverage ratios. During the fourth quarter of fiscal 2005, we exceeded by $32
thousand the amount of capitalized lease obligations as defined in and permitted
under our loan agreement. Our lender agreed to waive the violation that occurred
and the parties have entered into an amendment to the loan agreement increasing
the amount of capitalized lease obligations permitted thereunder. We were in
compliance with all other covenants at March 31, 2005. Our ability to meet these
financial ratios and tests under our loan 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 our senior secured credit facility and our lenders will be
entitled to, among other things, accelerate the debt outstanding under the
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 our senior secured credit facility or acceleration of the debt outstanding
under our loan agreements would have a material adverse effect on our financial
condition and operations. In addition, our 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 March 31, 2005, we
had approximately $28.3 million of total consolidated debt. In addition, we have
approximately $8.5 million available under our senior secured credit facility.
Subject to the limits contained in our 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 could have lower debt service obligations and greater
financial resources than we do;
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- 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 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. This, to a certain extent, is 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 fund 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 refinance any of
our indebtedness 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. 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 take 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.
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 other severe storms, 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 products and services we provide to our customers in the energy
markets are, to some extent, deferrable 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;
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- 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
(OPEC);
- the ability or willingness of host country government entities to
fund their budgetary commitments; and
- technological advances.
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, as well as lower revenues and margins.
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;
- audit our contract-related costs and fees, including allocated
indirect costs; and
- control and potentially prohibit the export of our products.
Government procurement programs are subject to budget reductions and
reallocations as well as policy changes. 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 contacts with the U.S. government are terminated, our business,
results of operations and financial condition could be materially adversely
affected.
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In addition, the U.S. government's competitive bidding process may
adversely affect our revenues. We obtain most of the dollar volume of our U.S.
government contracts through a competitive bidding process, and competitive
bidding presents a number of risks, 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, 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 WOULD 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, a reduction or an 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 the
amount of surety bonds then outstanding in favor of us and 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.
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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 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 larger
projects, which can result from a number of factors, including market
conditions, can have a negative impact on our operating results.
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 matters, including matters involving alleged property
damage or personal injury.
16
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 lost 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.
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 as 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.
17
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 with which we do business.
Further, 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.
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 our 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, and
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 oil and gas 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 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 and reduce
debt. In addition, our senior secured credit facility limits the payment of cash
dividends and requires us to remit and prepay, on an annual basis until our term
loan is paid in full, 50% of our excess Cash Flow (as defined in our senior
secured credit facility). 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.
18
DECLINES IN THE STOCK MARKET AND PREVAILING INTEREST RATES RESULT IN
REDUCTIONS IN OUR PENSION FUND ASSET VALUES IN THE UNITED KINGDOM, WHICH HAVE
CAUSED AND 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.
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ITEM 2. PROPERTIES
As of March 31, 2005, our continuing operations utilized five locations
that are owned by us as well as over thirty locations that are leased from
unrelated third parties. Some property locations may contain multiple
operations, such as an office and warehouse facility. Owned and leased
facilities with greater than 5,000 square feet are listed below.
Location Segment Description Owned/Leased
- ---------------------------- ------------- ----------------------------------------- ------------
Bakersfield, California Domestic Core Office and Warehouse Facility Leased
Belle Chasse, Louisiana Domestic Core Office and Warehouse Facility Leased
Brampton, Ontario Canadian Ops. Office and Warehouse Facility Leased
Conyers, Georgia Domestic Core Office and Warehouse Facility Leased
Dorval, Quebec Canadian Ops. Office and Warehouse Facility Leased
Durley, Southampton, UK European Ops. Office and Warehouse Facility Leased
Edmonton, Alberta Canadian Ops. Office, Production and Warehouse Facility Owned
Estevan, Saskatchewan Canadian Ops. Office and Warehouse Facility Owned
Glendale, Arizona Domestic Core Office and Warehouse Facility Leased
Houston, Texas Domestic Core Office and Warehouse Facility Leased
Medina, Ohio Corporate Corporate Headquarters Owned
Medina, Ohio Domestic Core Office and Warehouse Facility Owned
Norfolk, Virginia Domestic Core Office and Warehouse Facility Leased
Ocean City, New Jersey Domestic Core Office Facility Leased
San Diego, California Domestic Core Office and Warehouse Facility Leased
San Leandro, California Domestic Core Office, Production and Warehouse Facility Leased
Sand Springs, Oklahoma Domestic Core Office, Production and Warehouse Facility Leased
Santa Fe Springs, California Domestic Core Office and Warehouse Facility Leased
Streamwood, Illinois Domestic Core Office and Warehouse Facility Leased
Stockton-on-Tees, UK European Ops. Office, Production and Warehouse Facility Owned
West Chester, Pennsylvania Domestic Core Office and Warehouse Facility Leased
We consider the properties owned or leased by us to be generally
sufficient to meet our requirements for office, production and warehouse space.
We do not consider any one of our properties to be significant, since we believe
that if it becomes necessary or desirable to relocate any of our office,
production and warehouse facilities, other suitable properties could be found.
Our owned properties are subject to mortgages or other security interests under
our senior secured credit agreement and senior note facility and other bank
credit arrangements.
20
ITEM 3. LEGAL PROCEEDINGS
ASSESSMENT STANDARD. During fiscal 2001, we discovered that a former
employee used an incorrect assessment standard in connection with the evaluation
of whether certain underground storage tanks located at as many as 67 sites were
eligible for upgrade using cathodic protection. Such evaluations were done using
one of the approved assessment methodologies. The tanks at these sites, which
are located in five states, were subsequently upgraded using cathodic
protection, which arrests corrosion. These tanks are also subject to ongoing
leak detection requirements. Based on our review of available information and
governmental records, we believe that there have not been any releases from the
affected tanks as a result of the actions of the former employee. We have
contacted, and in October and November 2000 met with, officials from the
Environmental Protection Agency ("EPA") and officials from the corresponding
environmental protection agencies of the five states involved to discuss this
matter. It is our understanding that none of the states or the EPA intend to
take any enforcement action as a result of the use of the inaccurate standard by
the former employee. We are currently working with the states to develop and
implement field investigation procedures to assess the current status of the
affected sites. We have completed certain field investigation procedures in
three of the states in which affected sites are located. We have been informed
by one of the other states that, based on continuing monitoring and leak
detection procedures already required to be performed by site owners and
operators, no additional field work procedures will be required in that state.
There are currently no outstanding claims or demands that have been asserted by
any of the affected owners and operators. Based on currently available
information, including our experience in the fieldwork conducted to date, we do
not believe that the cost of field investigation procedures for this matter will
have a material effect on our future operations, financial position or cash
flows.
CLASS ACTION LAWSUIT. We were 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 the
accounting irregularities discovered in our 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 alleged violations of
anti-fraud provisions of the federal securities laws resulting in artificially
inflated prices of our common shares during the class period. The complaint
seeks unspecified compensatory damages, fees and expenses on behalf of the
putative class.
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.
COMPLIANCE ORDER. In January 2003, we received a Consolidated Compliance
Order and Notice of Potential Penalty from the Louisiana Department of
Environmental Quality pursuant to which the department alleges that our foundry
operations failed to submit required storm water monitoring information as
required by law. The alleged failure relates to periods subsequent to the
cessation of our foundry operations. We have appealed the matter and the
department has agreed to engage an informal resolution of the matter. Subject to
execution of the appropriate documents, the parties have agreed to settle this
matter. Based on current available information, we do not believe that it is
reasonably possible that the settlement will have a material effect on our
future operations, financial position or cash flows.
We are subject to other legal proceedings and claims from time to time
which arise in the ordinary course of business.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON SHARES
Our common shares were traded on the AMEX until June 29, 2005 under the
symbol "CO." On June 29, 2005 we submitted to the AMEX notice of our intent to
withdraw from listing, filed an application for voluntary delisting with the SEC
and filed a Form 15 with the SEC to deregister our common shares under the
Exchange Act. Since then our common shares have been quoted on the Pink Sheets,
however there can be no assurance that our common shares will continue to be so
quoted.
The following table sets forth the high and low closing prices for our
common shares on the American Stock Exchange for the fiscal periods indicated.
FISCAL 2005 FISCAL 2004
--------------------- ----------------------
HIGH LOW HIGH LOW
----- ----- ----- ------
First Quarter $2.63 $1.15 $0.70 $0.33
Second Quarter 1.95 1.26 1.87 0.37
Third Quarter 1.29 0.75 2.30 0.86
Fourth Quarter 1.14 0.68 1.52 0.90
HOLDERS OF RECORD
On June 21, 2005, there were 185 holders of record of our common shares.
DIVIDENDS
We have never paid any cash dividends on our common shares. Our senior
secured credit facility and senior secured subordinated notes prohibit us from
paying cash dividends on our common shares without the consent of the parties
thereto. In addition, the terms of our Series B Preferred Stock prohibit us from
paying cash dividends on our common shares without the approval of a majority of
the holders of our Series B Preferred Stock. We currently anticipate that we
will retain all future earnings for use in our business and do not anticipate
paying any cash dividends in the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
The financial data presented below for each of the five years ended March
31, should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $134,644 $ 124,630 $111,907 $ 128,249 $ 126,316
Operating income (loss) 9,214 8,161 1,558 3,967 (481)
Other income 5,237 -- -- -- --
Interest expense 5,095 9,001 6,291 5,289 4,713
-------- --------- -------- --------- ---------
Income (loss) before income taxes from
continuing operations 9,356 (840) (4,733) (1,322) (5,194)
Income tax provision (benefit)(1) 1,200 790 (277) 11,072 (675)
-------- --------- -------- --------- ---------
Income (loss) from continuing operations 8,156 (1,630) (4,456) (12,394) (4,519)
-------- --------- -------- --------- ---------
Net income (loss)(2) $ 8,500 $ (5,479) $(28,825) $ (18,217) $ (8,281)
======== ========= ======== ========= =========
INCOME(LOSS) PER SHARE FROM
CONTINUING OPERATIONS-
Basic $ 0.26 $ (0.19) $ (0.53) $ (1.53) $ (0.58)
Diluted 0.08 (0.19) (0.53) (1.53) (0.58)
NET INCOME (LOSS)-
Basic $ 0.30 $ (0.65) $ (3.43) $ (2.24) $ (1.07)
Diluted 0.09 (0.65) (3.43) (2.24) (1.07)
OTHER DATA:
Total assets $ 71,671 $ 73,406 $ 78,966 $ 109,993 $ 137,200
Working capital, excluding net assets held for sale 17,422 15,749 (28,809) (38,148) 30,110
Net assets held for sale -- 2,962 8,864 36,925 35,305
Total debt 28,266 33,303 51,241 62,686 68,175
Shareholders' equity (deficit) 6,661 (2,729) 1,199 23,857 41,518
(1) Includes a valuation allowance of $10,472 in fiscal 2002, related to our
deferred tax asset. See Note 1, Summary of Significant Accounting
Policies, Notes to Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K for further information.
(2) Includes a cumulative effect of change in accounting principle of $18,238
in fiscal 2003, related to our evaluation of goodwill. See Note 1, Summary
of Significant Accounting Policies, Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K for
further information.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis contains certain statements that
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The following discussion should be
read in conjunction with the consolidated financial statements, accompanying
notes and selected financial data appearing elsewhere in this Annual Report on
Form 10-K and may contain certain statements that constitute "forward-looking
statements." Words such as "anticipates," "expects," "intends," believes,"
"seeks," "estimates" or variations of such words and similar expressions are
intended to identify such forward-looking statements. A number of risks,
uncertainties and other factors may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Important
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements appear elsewhere in this Annual Report on Form 10-K. See "Business -
- - Factors Influencing Future Results and Accuracy of Forward Looking
Information."
OVERVIEW
Founded as an Ohio corporation in 1984, Corrpro became a public company in
1993 and our common shares were traded on the AMEX until June 29, 2005 under the
symbol "CO." On June 29, 2005 we submitted to the AMEX notice of our intent to
withdraw from listing, filed an application for voluntary delisting with the SEC
and filed a Form 15 with the SEC to deregister our common shares under the
Exchange Act. Since then our common shares have been quoted on the Pink Sheets.
Unless otherwise indicated, in this report, the terms "we," "us," "our,"
"Corrpro" and the "Company" mean Corrpro Companies, Inc. and its consolidated
subsidiaries.
We extend our clients' asset lives by providing corrosion control and
other services to help maintain their cash flow objectives by minimizing their
operating risk. 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, surveys,
inspection, analysis, repairs and ongoing maintenance.
25
During fiscal 2003, 2004, and 2005, we developed plans for restructuring
our business to improve our gross margin and operating income. Specifically,
during fiscal 2003, 2004, and 2005, we disposed of certain international
operations, including our Middle East and Asia Pacific operations, and other
non-strategic business units and used the proceeds from these dispositions to
reduce our outstanding indebtedness. See "Item 1 Business - Dispositions."
Further, 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 CPI 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 from the sale of preferred stock, notes, warrants and from the facility
(a) to repay in full our prior revolving credit facility and all of our
outstanding senior notes and (b) for working capital and other purposes. We
believe that continuing to enhance our capital structure will be critical in our
efforts to expand our business and achieve our other business objectives.
On June 29, 2005, we submitted to the AMEX notice of our intent to
withdraw our common shares from listing, filed an application for voluntary
delisting of our common shares with the SEC and filed a Form 15 with the SEC to
deregister our common shares under the Exchange Act. Our obligation to file
periodic reports with the SEC, including quarterly and annual reports containing
our financial statements, was suspended upon the filing of the Form 15 with the
SEC, and we expect the filing to become effective on September 27, 2005. In
addition, trading in our common shares on the AMEX has been suspended. We
anticipate considerable cost savings as a result of becoming a non-reporting
company; however our access to public capital markets may be reduced.
HIGHLIGHTS OF DEVELOPMENTS
Our revenues from continuing operations of $30.5 million for the fourth
quarter of fiscal 2005 were $2.2 million, or 7.8%, greater than the fourth
quarter of fiscal 2004. For our fiscal 2005 year, our revenues from continuing
operations increased $10.0 million, or 8%, to $134.6 million. Our operating
income from continuing operations was $1.1 million for the fourth fiscal quarter
and $9.2 million for the fiscal year, compared to an operating loss of $0.9
million in the previous fiscal year's fourth quarter and operating income of
$8.2 million for fiscal 2004.
Primarily due to increased revenues, non-cash mark to market income, other
income, lower interest and financing expenses, and discontinued operations,
reported net income improved by $8.6 million to $3.9 million in the fourth
quarter of fiscal 2005 compared to the fourth quarter loss of $4.8 million in
the fourth quarter of fiscal 2004 and by $14.0 million to $8.5 million for the
full fiscal 2005 year over a net loss of $5.5 million in fiscal 2004.
In March 2005, we substantially completed the sale of CSI Coating
Services, a division of our Corrpro Canada subsidiary. We recorded a note
receivable for $2.2 million, which we collected in April 2005 and recognized a
net loss of $0.1 million. The net proceeds from this disposition were used to
pay down debt in April 2005.
On June 29, 2005, we submitted to the AMEX notice of our intent to
withdraw our common shares from listing, filed an application for voluntary
delisting of our common shares with the SEC and filed a Form 15 with the SEC to
deregister our common shares under the Exchange Act. Our obligation to file
periodic reports with the SEC, including quarterly and annual reports containing
our financial statements, was suspended upon the filing of the Form 15 with the
SEC, and we expect the filing to become effective on September 27, 2005. In
addition, trading in our common shares on the AMEX has been suspended. We
anticipate considerable cost savings as a result of becoming a non-reporting
company; however our access to public capital markets may be reduced.
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
26
change materially as conditions both within and beyond our control change. The
following is a discussion of our critical accounting policies and the related
management assumptions and estimates necessary in determining certain of the
reported values on our financial statements. Our critical accounting policies,
including the assumptions and estimates underlying them, are more fully
described in Note 1, Summary of Significant Accounting Policies, Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K.
REVENUE RECOGNITION. We record income from construction and engineering
contracts under the percentage-of-completion method, using costs incurred to
date in relation to estimated total costs of the contracts, to measure the stage
of completion. Original contract prices are adjusted for change orders and
claims when the change order or claim has been approved by the customer. Cost
budgets are revised, when necessary, in the amounts that are reasonably
estimated based on the project leaders' knowledge of the project as well as our
historical experience. The cumulative effects of changes in estimated total
contract costs and revenues are recorded in the period in which the facts
requiring such revisions become known, and are accounted for using the
percentage-of-completion method. At the time it is determined that a contract is
expected to result in a loss, the entire estimated loss is recorded. We
recognize revenue from product sales upon shipment and transfer of ownership.
ACCOUNTS RECEIVABLE. We record estimated allowances for uncollectible
accounts receivable based upon the number of days the accounts are past due, the
current business environment, and specific information such as bankruptcy or
liquidity issues of customers. Historically, losses for uncollectible accounts
receivable have been within management's range of estimates. Corrosion control
services and products are provided to a large number of customers with no
substantial concentration with an individual customer.
INVENTORIES. Inventories are valued at the lower of cost or market with
cost being determined on the first-in, first-out method. Management periodically
reviews inventories for excess and obsolete goods based upon a combination of
historical and forecasted usage. Additionally, discrete provisions are made when
facts and circumstances indicate that particular inventories will not be
utilized. If future market conditions are different than those estimated, a
change to the valuation of inventory may be required and would be reflected in
the period the conditions change.
ASSET IMPAIRMENT. We periodically evaluate whether events and
circumstances have occurred that indicate the remaining estimated useful life of
any long-lived or intangible asset may warrant revision or that the remaining
balance of the asset may not be recoverable. If factors indicate that the
long-lived assets should be evaluated for possible impairment, we use an
estimate of the related asset's net undiscounted cash flows from operations over
the remaining life to determine recoverability. The measurement of the
impairment would be based on the amount by which the carrying value of the asset
exceeds its fair value.
During fiscal 2004, we recorded an impairment charge relating to our
Middle East operations totaling $3.5 million based on the current market value
of these operations. This impairment charge was included in results from
discontinued operations. During fiscal 2003, we recorded an impairment charge
relating to our Asia Pacific operations totaling $1.6 million based on the
current market value of these operations and additionally recorded impairment
charges totaling $0.9 million based on a market value analysis for our European
and Middle East operations. The Asia Pacific and Middle East operations were
reported as discontinued operations and were sold in fiscal 2004.
In July 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), were
issued by the Financial Accounting Standards Board. SFAS 141 eliminates the
pooling-of-interests method for business combinations and requires the use of
the purchase method. SFAS 142 changes the accounting for goodwill and indefinite
life intangibles from an amortization approach to a non-amortization approach,
and requires periodic tests for impairment of these assets. Upon our adoption of
SFAS 142 on April 1, 2002, the provisions of SFAS 142 required the
discontinuance of amortization of goodwill and indefinite life intangibles that
had been recorded in connection with previous business combinations. We
completed impairment testing under SFAS 142 and recorded an impairment loss, as
of April 1, 2002, totaling $18.2 million of which $15.0 million related to
discontinued operations and $3.2 million related to continuing operations. The
loss was recognized as the cumulative effect of a change in accounting
principle. This
27
impairment testing is also done annually in the fourth quarter and such testing
resulted in no additional impairment as of March 31, 2005.
INCOME TAXES. We use the liability method whereby income taxes are
recognized during the fiscal year in which transactions enter into the
determination of financial statement income. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences
between financial statement and tax basis of assets and liabilities. We recorded
a valuation allowance for our net domestic deferred tax assets carryforwards of
$10.5 million in the fourth quarter of fiscal 2002. We maintained a valuation
allowance at March 31, 2005 and intend to maintain a full valuation allowance
for our net domestic deferred tax assets and net operating loss carryforwards
until sufficient positive evidence exists to support the reversal of the
remaining reserve. Until such time, except for foreign tax provisions, we expect
to have no reported tax provision, net of valuation allowance adjustments. In
the event we were to determine, based on the existence of sufficient positive
evidence, that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the valuation allowance
would increase income in the period such determination was made. See Note 7,
Income Taxes, Notes to Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K for additional information regarding income
taxes.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2005 COMPARED TO YEAR ENDED MARCH 31, 2004
REVENUES. Revenues from continuing operations for fiscal 2005 totaled $
134.6 million, compared with $124.6 million for fiscal 2004, an increase of
$10.0 million, or 8.0%. Revenues from the discontinued operations were $4.8
million in fiscal 2005 compared to $15.5 million in the prior fiscal year. The
decrease in discontinued operations is primarily attributable to the inclusion
in fiscal 2004 of revenues from business units which were sold during fiscal
2004.
Domestic Core Operations. Revenues for fiscal 2005 relating to the
Domestic Core Operations totaled $90.4 million compared to prior-year results of
$87.4 million, an increase of $3.0 million or 3.3%. During fiscal 2005, our
Domestic Core Operations segment experienced revenue decreases of $0.8 million
in corrosion control services and products and an increase of $2.9 million in
coatings services, and an increase of $0.9 million in pipeline and risk
assessment services.
Our regional operations experienced a net revenue decline of $0.7 million
during fiscal 2005. We recorded $1.2 million less in revenue for our Anchorage,
Alaska office which we closed in fiscal 2005. Due to regional variations in
general business conditions, our eastern operations' revenues were $0.8 million
lower than in fiscal 2004 while our south central and western operations
reported sales increases of $0.4 million and $0.9 million, respectively.
We experienced a year-over-year increase in our coatings revenue to U. S.
Government customers of $0.9 million primarily as a result of $2.3 million in
increased revenue attributable to governmental contract work with the U.S.
Marines. This increase was offset by the loss of a general contract for certain
Navy projects on which we were a subcontractor which resulted in a
year-over-year decrease in revenue of $1.3 million. As a result of the lost
subcontract, we closed the three offices that performed the work that generated
these revenues. Due to reduced governmental funding of our federal coatings work
in the fourth quarter of fiscal 2005, effective January 2005 we downsized our
federal coatings operations in San Diego, California. While the reduction of
funding for such work was short-lived, as funding for our San Diego coatings
operations was reinstated by May 2005, there can be no assurance that we will
not experience further and greater shortfalls in revenues due to further funding
reductions.
Our commercial coatings operations experienced a $1.8 million
year-over-year revenue increase, primarily as a result of a large commercial
aquarium coating project and a second large coating project performed by our
Bakersfield, California office. These increased revenues were offset by losses
at other commercial coatings operations, including the loss of $0.6 million in
revenues from our now closed Chicago, Illinois area coatings operations and a
loss of $0.6 million in revenues from our Louisiana coatings inspection
operations.
28
Other business units in our Domestic Core Operations contributed an
incremental $0.7 million in revenues in fiscal 2005 compared to fiscal 2004,
primarily as a result of our initiative developed in our fourth fiscal quarter
to enhance our revenues by establishing aggressive goals for incremental
corrosion control material sales.
Canadian Operations. The revenues for our Canadian Operations increased in
fiscal 2005 by $3.8 million from $24.1 million to $27.9 million, an increase of
15.8%. Approximately $1.6 million of this increase was due to the strengthening
of the Canadian dollar against the U.S. dollar in fiscal 2005 compared to fiscal
2004. The remaining increase was primarily due to general increased business
activity, increased materials sales, and the acceleration of certain
construction and other projects.
European Operations. The revenues for our European Operations increased in
fiscal 2005 by $3.2 million from $13.1 million to $16.3 million, an increase of
24.4%. Approximately $1.3 million of this increase was due to the strengthening
of the British pound against the U.S. dollar in fiscal 2005 compared to fiscal
2004. The remaining increase was primarily due to general increased business
activity, including increased engineering services revenues.
GROSS PROFIT. Consolidated gross profit margins were 30.8% for fiscal year
2005 compared to 31.8% for the prior-year period. Our consolidated gross profit
was $1.8 million greater in fiscal 2005 than in fiscal 2004. The decrease in
gross profit margins are attributable primarily to problems with our now closed
Chicago, Illinois coatings operation (impact was $0.4 million) and losses
associated with the loss of a general contract for certain Navy projects on
which we were a subcontractor (impact was $0.8 million).
Increased revenues in fiscal 2005 resulted in an increase in gross profit
of $3.1 million, which was offset by several factors, including the loss of a
key contract at our now closed Anchorage, Alaska office (lost gross profit was
$0.3 million); problems with our now closed Chicago, Illinois coatings'
operation (lost gross profit was $0.4 million); the loss of a general contract
for certain Navy projects on which we were a subcontractor (lost gross profit
was $0.8 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses totaled $32.3 million (24.0% of revenues) for
fiscal year 2005 compared to $31.5 million (25.3% of revenues) for fiscal 2004.
SG&A was lower in fiscal 2005 as a percentage of revenues than in fiscal 2004
due to increased revenues and because SG&A expenses for fiscal 2004 included
$1.5 million related to professional fees associated with our former lender
requirements and $1.1 million for severance and retirement benefits associated
with our former Chief Executive Officer.
Our SG&A expenses for fiscal 2005 include a charge to earnings of $0.8
million as a result of the reduction in force we implemented in December 2004.
We have also experienced increased compensation costs of approximately $0.4
million, increased costs associated with our healthcare benefits of
approximately of $0.4 million and management fees of $0.4 million. 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. Operating income from
continuing operations totaled $9.2 million for fiscal year 2005 compared to $8.2
million in fiscal 2004, an increase in earnings of $1.0 million. Our Domestic
Core Operations achieved operating income that was $0.2 million less in fiscal
2005 compared to fiscal 2004. Our Canadian Operations and European Operations
reported operating income results in fiscal 2005 that were $1.0 million and $0.5
million, respectively, greater than fiscal 2004. Approximately $0.4 million of
these increases is due to the weakening of the U.S. dollar against the Canadian
dollar and the British pound.
Our fiscal 2005 corporate related costs include a charge to earnings of
$0.8 million as a result of the reduction in force we implemented in December
2004. Overall, we expect to continue to realize the benefits of these cost
reductions and the closure of several underperforming offices in future periods.
The cost reductions may be offset to some extent by increases in our sales and
marketing expenditures that we are planning in order to help drive our future
growth.
INTEREST EXPENSE. Interest expense totaled $5.1 million for fiscal year
2005 compared to $9.0 million in fiscal 2004. The reduction is a result of our
refinancing and recapitalization transaction completed in the fourth quarter of
29
fiscal 2004. As a result of the refinancing, in fiscal 2004 we expensed deferred
financing costs of $1.3 million and yield maintenance amounts of $2.2 million
that were due under previous debt arrangements.
INCOME TAX PROVISION. We recorded a provision, net of a $0.5 million
refund attributable to net operating loss carrybacks, for income taxes of $1.2
million for the year ended March 31, 2005 compared to a provision for income
taxes of $0.8 million recorded for the year ended March 31, 2004. Because 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 in effect
in the countries in which we operate. Further, the $4.3 million income recorded
for marking the Company's warrants to market is not a taxable item for the
Company. We have not otherwise realized the tax benefits of losses in our
Domestic Core Operations for which a previously recorded valuation allowance has
been provided. 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.
The refinancing and recapitalization transaction resulted in a change of control
for income tax purposes as defined in U.S. tax law. As such, we will be limited
as to how much of our net operating loss carryforwards will be available for use
in future periods.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing
operations totaled $8.2 million in fiscal year 2005 compared to a loss of $1.6
million in fiscal year 2004, an improvement of $9.8 million which includes
income of $4.3 million as a result of marking Company warrants to market. The
balance of the fiscal 2005 improvement was primarily the result of improved
revenue levels, other income of $0.8 million as a result of currency translation
adjustments required to value in Canadian currency certain debt incurred by our
Canadian Operations and which is payable in U.S. currency, and $3.9 million in
lower interest expense.
DISCONTINUED OPERATIONS. Income from discontinued operations, net of
income taxes, for the year ended March 31, 2005, was $0.5 million compared to a
loss, net of income taxes, of $3.8 million in fiscal year 2004, an improvement
of $4.3 million. The income in fiscal 2005 is attributable to the collection of
certain fully reserved receivables associated with the sale of our Middle East
subsidiary. This income was offset somewhat by losses incurred by the operations
of the Company's CSI Coating Services division which was sold in fiscal 2005.
The loss on that disposal was $0.1 million. The loss from discontinued
operations in fiscal 2004 is primarily attributable to a $3.5 million impairment
charge on net assets related to our Middle East Operations.
NET INCOME (LOSS). Net income totaled $8.5 million for the year ended
March 31, 2005, compared to a net loss of $5.5 million in fiscal year 2004, an
improvement of $14.0 million. As discussed above, the improvement is
attributable to increased revenue levels, income recognized to mark Company
warrants to market, other income, lower interest expense, and discontinued
operations.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
After taking into account dividends attributable to the Company's
preferred stock that was issued in the Company's March 2004 refinancing and
recapitalization, net income attributable to common shareholders was $6.6
million for the year ended March 31, 2005 compared to a loss of $5.5 million for
the fiscal year ended March 31, 2004. There were no dividends accumulated for
fiscal 2004. The Series B Preferred Stock accumulates cumulative quarterly
dividends at an annual rate of 13.5%. The dividends are not reflected as a
liability or as a reduction to shareholders equity until such time as they are
declared. The liquidation value of the Series B Preferred Stock is disclosed on
the Consolidated Balance Sheets. As of March 31, 2005, there were accumulated
dividends of $1.9 million under the Series B Preferred Stock. None of the
accumulated preferred dividends have been declared or paid.
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 $12.0 million. Our trailing 12 months' Adjusted EBITDA was less than $12.0
million for the quarters ended September 30, 2004 and December 31, 2004. CPI,
the holder of our preferred shares, waived its right to require us to accumulate
the dividend at 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. Our trailing twelve months' Adjusted EBITDA for March
30
31, 2005 exceeded $12.0 million. There can be no assurance that our Adjusted
EBITDA will exceed such amount in the future or that if our Adjusted EBITDA does
not exceed such amount we will be able to obtain a waiver of compliance in the
future.
INCOME (LOSS) PER SHARE - BASIC
Income per share - basic totaled $0.30 per share for the year ended March
31, 2005, compared to a loss per share of $0.65 for the year ended March 31,
2004. Income (loss) per share - basic is computed based on weighted common
shares outstanding and by deducting from net income (loss) available to common
shareholders the amount of dividends attributable to preferred shareholders. The
weighted average number of shares used in calculating basic income or loss per
share is computed by using the weighted average number of common shares
outstanding for the period.
INCOME (LOSS) PER SHARE - DILUTED
Income per share on a fully diluted basis totaled $0.09 per share for the
year ended March 31, 2005, compared to a loss per fully diluted share of $0.65
for the year ended March 31, 2004. The weighted average number of shares used in
calculating fully diluted loss per share is computed based on the number of
common shares issued and outstanding. On March 30, 2004, we completed our
recapitalization 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 accumulated preferred stock
dividend.
YEAR ENDED MARCH 31, 2004 COMPARED TO YEAR ENDED MARCH 31, 2003
REVENUES. Revenues from continuing operations for fiscal 2004 totaled
$124.6 million, compared with $111.9 million for fiscal 2003, an increase of
$12.7 million, or 11.4%. Revenues from discontinued operations were $15.5
million in fiscal 2004 compared to $32.6 million in the prior fiscal year. The
decrease in discontinued operations is primarily attributable to the sale of
four non-strategic business units in fiscal 2004.
Revenues for fiscal 2004 relating to the Domestic Core Operations totaled
$87.4 million compared to prior-year results of $79.3 million, an increase of
$8.1 million or 10.2%. The increase was primarily related to a large well casing
project being run out of our Houston office that generated $5.7 million in
revenues in fiscal 2004 compared to $0.4 million in the year-earlier period. In
addition, our commercial coatings offices experienced increased revenues of $2.1
million in fiscal 2004 compared to the year-earlier period, primarily due to
increased activity levels in our Chicago and Bakersfield offices as well as
increased inspection revenues in our Lafayette office. These increases were
partially offset by decreases in several areas of our Domestic Core Operations.
Our Eastern Region offices experienced a revenue decline of $0.2 million in
fiscal 2004 compared to the year-earlier period, primarily as a result of lower
revenues from a large bridge project in fiscal 2004 compared to the year-earlier
period. Also, our Waterworks business experienced a $0.6 million revenue decline
in fiscal 2004 compared to the year-earlier period. This decrease is attributed
to the Federal EPA mandate that all municipal water systems serving 3,300 or
more customers perform and file security and vulnerability assessments with the
EPA. As a result of this mandate, municipal water systems have been deferring
infrastructure maintenance as a means of allocating funds to pay for these
assessments.
Revenues from our Canadian Operations for fiscal 2004 totaled $24.1
million compared to $19.3 million, for fiscal 2003, an increase of $4.8 million,
or 24.9%. Approximately $2.6 million of this increase was due to the
strengthening of the Canadian dollar against the U.S. dollar in fiscal 2004
compared to fiscal 2003. The remaining increase was primarily due to increased
volume of material and rectifier sales as well as an increase in the energy
segment of our business.
Revenues from our European Operations for fiscal 2004 totaled $13.1
million compared to $13.4 million, for fiscal 2003, a decrease of $0.3 million,
or 2.2%. This decrease was primarily due to lower revenues received from a large
31
contract to perform work on underground storage tanks in the United Kingdom and
was partially offset by approximately $2.0 million due to the strengthening of
the British pound against the U.S. dollar in fiscal 2004 compared to fiscal
2003.
GROSS PROFIT. Consolidated gross profit margins were 31.8% for fiscal year
2004 compared to 31.9% for the prior-year period. Gross margins benefited in
fiscal 2004 from the restructuring plans and cost containment programs
implemented in fiscal 2001 and 2002 as well as our Board of Directors decision
to approve a formal business restructuring plan in July 2002 which included the
closure of underperforming offices, a wage and salary freeze and restrictions on
travel and entertainment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $31.5 million (25.3% of revenues) for fiscal
year 2004 compared to $34.1 million (30.5% of revenues) for fiscal 2003.
Selling, general and administrative expenses for year ended March 31, 2004,
included $1.5 million related to professional fees associated with our lender
requirements and $1.1 million for severance and retirement benefits associated
with our former Chief Executive Officer. Fiscal year 2003 included $2.9 million
in professional fees related to lender requirements, $2.1 million of pension
expense related to our European Operations and a $0.5 million impairment charge
recorded for our European Operations. Selling, general and administrative
expenses improved due to cost containment and restructuring plans mentioned
above as well as our Board of Directors plan also mentioned above. An
activity-based analysis was performed to eliminate our non-value added costs. In
addition, we realized benefits pertaining to the closure of underperforming
offices. We also reduced headcount in corporate overhead areas. Headcount was
reduced in both fiscal 2002 and 2003, which resulted in annual savings in each
year of approximately $4.0 million. We restricted travel and entertainment to
essential, revenue producing ventures as well as restricting the purchase of
advertising materials, catalogs, office supplies and other discretionary
overhead items. Also, we had favorable claims experience in our health care
costs in both fiscal 2004 and fiscal 2003.
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS. Operating income from
continuing operations totaled $8.2 million for fiscal year 2004 compared to $1.6
million in fiscal 2003, an increase in earnings of $6.6 million. This increase
is primarily related to higher restructuring costs incurred in fiscal 2003 and
improved revenues generated during the fiscal year 2004.
INTEREST EXPENSE. Interest expense totaled $9.0 million for fiscal year
2004 compared to $6.3 million in fiscal 2003. We completed our refinancing and
recapitalization transaction in the fourth quarter of fiscal 2004. As a result
of the refinancing, we expensed deferred financing costs associated with the
previous lenders of $1.3 million in fiscal year 2004. In addition, we expensed
yield maintenance amounts required under previous debt arrangements of $2.2
million in fiscal year 2004 and $1.0 million in fiscal 2003.
INCOME TAX PROVISION. We recorded a provision for income taxes of $0.8
million for the year ended March 31, 2004 compared to an income tax benefit of
$0.3 million recorded for the year ended March 31, 2003. Our effective tax rate
is based on the statutory rates in effect in the countries in which we operate.
We recorded a provision greater than the statutory tax rate of 34% since we were
unable to realize the tax benefits of losses in our Domestic Core Operations for
which a previously recorded valuation allowance has been provided.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations totaled
$1.6 million in fiscal year 2004 compared to a loss of $4.5 million in fiscal
year 2003, an improvement of $2.9 million. The fiscal 2004 improvement was the
result of improved revenue levels, improved operating efficiencies and our
overall efforts to streamline operations.
DISCONTINUED OPERATIONS. Loss from discontinued operations, net of income
taxes, for the year ended March 31, 2004, was $3.8 million compared to a loss,
net of income taxes, of $6.1 million in fiscal year 2003, an improvement of $2.3
million. The loss in fiscal 2004 is primarily attributable to a $3.5 million
impairment charge on net assets related to our Middle East Operations.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. During fiscal 2003,
we, with the assistance of independent valuation experts, completed our initial
assessment test and concluded that certain of our goodwill was
32
impaired. Effective April 1, 2002, we recognized a transitional impairment
charge of $18.2 million as the cumulative effect of a change in accounting
principle to reduce the carrying values of certain indefinite lived intangible
assets and goodwill to estimated fair values as required by SFAS No. 142. This
is a non-cash charge and does not impact compliance with the financial covenants
contained in our lender agreements.
NET LOSS. Net loss totaled $5.5 million for the year ended March 31, 2004,
compared to a net loss of $28.8 million in fiscal year 2003, an improvement of
$23.3 million, which was primarily attributable to $18.2 million of non-cash
goodwill impairment charges as a result of a change in accounting principle in
fiscal 2003, improved revenue levels, improved operating efficiencies and our
overall efforts to streamline operations.
Loss per share on a fully diluted basis totaled $0.65 per share for the
year ended March 31, 2004, compared to a loss per fully diluted share of $3.43
for the year ended March 31, 2003. 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
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.
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 selling preferred stock and warrants for $13.0 million, secured subordinated
notes and warrants for $14.0 million and entering into a $40.0 million senior
secured credit facility. Our secured credit facility provides for 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 Note 3 - - Long-Term Debt and Note 5 - - Series B
Cumulative Redeemable Voting Preferred Stock, notes to consolidated financial
statements in Item 8 of this Annual Report on Form 10-K.
Our ability to raise capital may be impaired by being a non-reporting
company. A public reporting company generally has more ready access to public
markets for equity and debt financings.
CASH FLOW. 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.
During fiscal 2005, our continuing operations provided net cash of $1.8
million compared to $1.6 million in fiscal 2004. The $1.8 million of net cash
provided by operations in fiscal 2005 was driven by strong net income of $8.5
million as well as depreciation and amortization of $2.8 million. These
favorable amounts were offset by the change in the fair value of warrants of
$4.3 million, an increase in working capital (exclusive of cash and current
debt) of $5.0 million and other changes of $0.2 million. During fiscal 2005, we
paid $2.5 million in principal toward our term loan and reduced the principal
outstanding under our revolving credit facilities by $2.8 million. Our capital
expenditures were $1.3 million in fiscal 2005 compared to $0.5 million in fiscal
2004.
At March 31, 2005, we had working capital (current assets less current
liabilities) of $17.4 million, compared to working capital of $18.7 million at
March 31, 2004, a decrease of $1.3 million. Changes in the following items
increased our working capital in fiscal 2005. Our accounts receivable increased
by $0.7 million in fiscal 2005 due to higher revenue levels in fiscal 2005.
Notes receivable increased $1.3 million, reflective of the note we received in
connection with the sale of our CSI Coatings Services operation. The note was
collected in fiscal 2006. Our prepaid expenses and other current assets
increased $1.7 million primarily due to advance funding our U.S. payroll which
was payable on April 1, 2005. Our accounts payable increased by $0.3 million due
to increased business activity. The increases in our working capital were offset
by a decrease in cash ($1.4 million), reduced assets held for sale ($3.6
million), lower inventory ($0.1 million), and lower accrued liabilities and
liabilities held for sale ($1.8 million). We used cash at the end
33
of fiscal 2005 to fund our payroll due April 1, 2005. At March 31, 2005 our
accrued liabilities and liabilities held for sale were $1.8 million less than on
March 31, 2004.
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 2006.
SENIOR SECURED CREDIT FACILITY. At March 31, 2005, the amount available
for borrowing under our revolving credit facility was $8.5 million. This
availability takes into account $0.4 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.
At March 31, 2005, the outstanding balance on our term loan was $18.0
million. 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 generally increases 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. Further, we are required to make certain
mandatory prepayments, including from the proceeds of certain asset sales. The
net proceeds of our sale of our CSI Coating Services operations were applied to
our term loan in fiscal 2006. Our loan agreement also 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. In addition, our senior secured
credit facility requires us to remit and prepay, on an annual basis until our
term loan is paid in full, 50% of our excess Cash Flow (as defined in our senior
secured credit facility). The first such payment of excess Cash Flow is due in
June 2005 and is computed to be $1.6 million. During the fourth quarter of
fiscal 2005, we exceeded by $32 thousand the amount of capitalized lease
obligations as defined in and permitted under our loan agreement. Our lender
agreed to waive the violation that occurred and the parties have entered into an
amendment to the loan agreement increasing the amount of capitalized lease
obligations permitted thereunder. We were in compliance with all other covenants
at March 31, 2005.
SENIOR SECURED SUBORDINATED NOTES. Our $14.0 million senior secured
subordinated notes do not require principal payments. The notes are due on March
29, 2011. 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. During the
fourth quarter of fiscal 2005, we exceeded by $32 thousand the amount of
capitalized lease obligations as defined in and permitted under our loan
agreement. Our lender agreed to waive the violation that occurred and the
parties have entered into an amendment to the loan agreement increasing the
amount of capitalized lease obligations permitted thereunder. We were in
compliance with all other covenants at March 31, 2005.
SERIES B CUMULATIVE REDEEMABLE VOTING PREFERRED STOCK. The securities
purchase agreement pursuant to which we issued 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 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 March 31, 2005. 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.
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,
including a covenant to maintain a trailing 12 months Adjusted EBITDA (as
defined in the securities purchase agreement) of $12.0 million or more, the
annual dividend rate will increase to 16.5% for each subsequent calendar
34
quarter during which we fail to comply with such financial covenants. CPI
waived its right to require us to accumulate the dividend at 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. Our trailing twelve
months' Adjusted EBITDA for March 31, 2005 exceeded $12.0 million. There can be
no assurance that our Adjusted EBITDA will exceed such amount in the future or
that if our Adjusted EBITDA does not exceed such amount we will be able to
obtain a waiver of compliance in the future.
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 the Board of Directors out of funds legally available there.
The terms of our 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 accumulates cumulative quarterly dividends at
an annual rate of 13.5%. The dividends are not reflected as a liability or as a
reduction to shareholders equity until such time as they are declared. The
liquidation value of the Series B Preferred Stock is disclosed on the
Consolidated Balance Sheets. As of March 31, 2005, there were accumulated
dividends of $1.9 million under the Series B Preferred Stock. None of the
accumulated preferred dividends have been declared or paid.
35
CONTRACTUAL OBLIGATIONS. The following table summarizes our known contractual
obligations at March 31, 2005:
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 $ 4 $ 4 $ -- $ -- $ --
Term Loan, Due 2009 18,000 6,652 11,348 -- --
Senior Secured Subordinated Notes(1) 14,000 -- -- -- 14,000
Other Debt Obligations 136 -- 136 -- --
Management Fee 2,800 400 1,200 800 400
Operating Leases 7,025 2,183 2,692 1,068 1,082
--------- --------- ------- ------- -------
Total Contractual Cash
Obligations $ 41,965 $ 9,239 $15,376 $ 1,868 $15,482
========= ========= ======= ======= =======
(1) The Senior Secured Subordinated Notes is net of discount of $3,874 as
reported on the consolidated financial statements.
The expected timing of the payments of the obligations above is estimated
based on current, known information and does not include employment obligations.
The timing of payments and the actual amounts of the payments may be different,
depending on various factors, including changes, if any, to agreed-upon amounts
for some obligations. Any amounts disclosed as contingent or milestone-based
obligations are dependent on the achievement of the milestones or the occurrence
of the contingent events and may vary significantly.
RELATED PARTY TRANSACTIONS
On March 30, 2004, we entered into a services agreement with Wingate
Partners III, L.P., an affiliate of CPI. The services agreement provides that
Wingate Partners agrees to consult with our Board of Directors in such a manner
and on such business and financial matters as would be reasonably requested from
time to time by our Board, including financial advisory, management advisory,
strategic planning, monitoring and other related services, in exchange for which
we will pay an annual non-refundable services fee of $0.4 million payable
quarterly in advance, to such persons designated by Wingate Partners. In lieu of
paying any quarterly installment of the services fee in cash, we may, at our
option, or if we are restricted from paying any such quarterly installment in
cash under, or the Board determines that payment of such quarterly installment
in cash would result in a default under, the terms of our senior secured credit
facility or senior secured subordinated notes, delay payment and accrue any
unpaid portion of the services fee, without interest. In fiscal 2005, we paid
Wingate Partners III, L.P. $0.4 million in cash for their services. The services
agreement has an initial term of eight years, which will automatically renew for
successive one year periods thereafter unless either party notifies the other of
its desire to terminate the services agreement.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 153 (SFAS 153), Exchanges of
Nonmonetary Assets-an amendment of APB Opinion No. 29, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
153 addresses the measurement of exchanges of nonmonetary assets and amends APB
No. 29, Accounting for Nonmonetary Transactions. This statement is effective for
us beginning with our first quarter in fiscal 2006. We do not expect the
adoption of SFAS 151 to have a material impact on our results of operations,
financial position or disclosures.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 (SFAS 151), Inventory Costs-An Amendment of ARB No. 43,
Chapter 4 "Inventory Pricing". SFAS 151 amends and clarifies financial
accounting and reporting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted
36
material (spoilage) under ARB No. 43. This statement is effective for us
beginning with our first quarter in fiscal 2006. We do not expect the adoption
of SFAS 151 to have a material impact on our results of operations, financial
position or disclosures.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (SFAS 123 - revised),
Share-Based Payments. This statement is a revision of FASB No. 123 Accounting
for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS 123
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This revision is
effective for us beginning with our first quarter in fiscal 2007. We do not
expect the adoption of this revision to have a material impact on our results of
operations, financial position or disclosures.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
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. We do not enter into interest rate or foreign
currency transactions for speculative purposes.
INTEREST RATE RISK
Our primary interest rate risk exposure results from our revolving credit
and term loan facilities, senior secured subordinated notes and various smaller
lines of credit that we maintain with foreign banks. If interest rates were to
increase 200 basis points (2%) from March 31, 2005 rates, and assuming no
changes in debt from the March 31, 2005 levels, the additional annual interest
expense would be approximately $0.6 million.
FOREIGN OPERATIONS AND FOREIGN CURRENCY EXCHANGE RISK
Our foreign subsidiaries generally conduct business in local currencies.
Changes in foreign currency exchange rates could impact the translation of our
investments in foreign operations and our foreign currency denominated earnings,
cash flows and assets. During fiscal 2005, we recorded a favorable foreign
currency translation adjustment of $0.7 million in our stockholders' equity
related to net assets located outside the United States. This foreign currency
translation adjustment resulted primarily from the weakening of the United
States dollar in relation to the Canadian dollar and the British pound. Our
foreign operations are also subject to other customary risks of operating in a
global environment, such as unstable political situations, the effect of local
laws and taxes, tariff increases and regulations and requirements for export
licenses, the potential imposition of trade or foreign exchange restrictions and
transportation delays.
38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Corrpro Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Corrpro
Companies, Inc. and subsidiaries as of March 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the three-year period ended March 31, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corrpro
Companies, Inc. and subsidiaries as of March 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 2005, in conformity with U.S. generally accepted
accounting principles.
As discussed in note 1, to the accompanying consolidated financial
statements, effective April 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets.
/s/ KPMG LLP
Cleveland, Ohio
June 29, 2005
39
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
(In Thousands)
ASSETS
2005 2004
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,056 $ 2,496
Accounts receivable, less allowance for doubtful accounts of
$440 and $664 at March 31, 2005 and 2004, respectively 23,834 23,070
Note receivable 2,151 768
Inventories 9,478 9,610
Prepaid expenses and other 7,629 5,943
Assets held for sale -- 3,645
-------- --------
Total current assets 44,148 45,532
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 512 491
Buildings and improvements 6,032 5,801
Equipment, furniture and fixtures 16,526 15,280
-------- --------
23,070 21,572
Less accumulated depreciation (17,110) (15,876)
-------- --------
Property, plant and equipment, net 5,960 5,696
-------- --------
OTHER ASSETS:
Goodwill, net 14,352 13,667
Deferred income taxes 267 537
Deferred financing costs 5,670 6,226
Other assets 1,274 1,748
-------- --------
Total other assets 21,563 22,178
-------- --------
$ 71,671 $ 73,406
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
40
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
2005 2004
--------- ---------
CURRENT LIABILITIES:
Revolving credit facility $ 4 $ 2,779
Current portion of long-term debt 6,652 2,500
Accounts payable 10,770 10,469
Accrued liabilities and other 9,300 10,390
Liabilities held for sale -- 683
--------- ---------
Total current liabilities 26,726 26,821
--------- ---------
LONG-TERM DEBT
Long-term debt, net of current portion 11,484 18,154
Senior secured subordinated notes, net of discount of
$3,874 and $4,130 at March 31, 2005 and 2004, respectively 10,126 9,870
--------- ---------
Total long-term debt 21,610 28,024
--------- ---------
OTHER LONG-TERM LIABILITIES 3,896 4,186
WARRANTS 12,504 16,830
COMMITMENTS AND CONTINGENCIES -- --
SERIAL PREFERRED SHARES
Serial Preferred Shares issued and outstanding 13 shares of
Series B Cumulative Redeemable Voting Preferred Stock,
without par value, liquidation value of $14,857, net of discount 274 274
SHAREHOLDERS' EQUITY (DEFICIT):
Common Shares, voting, no par value, at stated value; 40,000 shares
authorized; 8,834 and 8,507 shares issued in 2005 and 2004, respectively;
8,788 and 8,443 shares outstanding in 2005 and 2004, respectively 2,361 2,276
Additional paid-in capital 46,034 46,266
Accumulated deficit (42,055) (50,555)
Accumulated other comprehensive income (loss) 769 (95)
Common Shares in treasury, at cost;
46 and 64 shares held in 2005 and 2004, respectively (448) (621)
--------- ---------
Total shareholders' equity (deficit) 6,661 (2,729)
--------- ---------
$ 71,671 $ 73,406
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
41
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(In Thousands, Except Per Share Data)
2005 2004 2003
--------- --------- ---------
Revenues $ 134,644 $ 124,630 $ 111,907
Operating costs and expenses:
Cost of sales 93,149 84,971 76,202
Selling, general and administrative expenses 32,281 31,498 34,147
--------- --------- ---------
Operating income 9,214 8,161 1,558
Other income (expense):
Change in fair value of warrants 4,326 -- --
Other income 911 -- --
Interest expense (5,095) (9,001) (6,291)
--------- --------- ---------
Income (loss) from continuing operations before
Income taxes 9,356 (840) (4,733)
Provision (benefit) for income taxes 1,200 790 (277)
--------- --------- ---------
Income (loss) from continuing operations 8,156 (1,630) (4,456)
Discontinued operations:
Income (loss) from operations, net of income taxes 468 (3,803) (8,226)
Gain (loss) on disposals, net of income taxes (124) (46) 2,095
--------- --------- ---------
Income (loss) before Cumulative effect of change in accounting
principle 8,500 (5,479) (10,587)
Cumulative effect of change in accounting principle -- -- (18,238)
--------- --------- ---------
Net Income (loss) 8,500 (5,479) $ (28,825)
Dividends attributable to preferred stock 1,857 -- --
--------- --------- ---------
Net income (loss) available to common shareholders $ 6,643 $ (5,479) $ (28,825)
========= ========= =========
Earnings (loss) per share - Basic:
Income (loss) from continuing operations
(net of dividends attributable to preferred stock) $ 0.26 $ (0.19) $ (0.53)
Discontinued operations 0.04 (0.46) (0.73)
--------- --------- ---------
Income (loss) before Cumulative effect of change in accounting
principle 0.30 (0.65) (1.26)
Cumulative effect of change in accounting principle -- -- (2.17)
--------- --------- ---------
Net Income (loss) $ 0.30 $ (0.65) $ (3.43)
========= ========= =========
Weighted average shares outstanding - Basic 8,606 8,419 8,387
========= ========= =========
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations
(net of dividends attributable to preferred stock) $ 0.08 $ (0.19) $ (0.53)
Discontinued operations 0.01 (0.46) (0.73)
--------- --------- ---------
Income (loss) before Cumulative effect of change in accounting
principle 0.09 (0.65) (1.26)
Cumulative effect of change in accounting principle -- -- (2.17)
--------- --------- ---------
Net Income (loss) $ 0.09 $ (0.65) $ (3.43)
========= ========= =========
Weighted average shares outstanding - Diluted 25,869 8,419 8,387
========= ========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
42
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(In Thousands)
ACCUMULATED
OTHER
COMMON SHARES COMPRE- COMMON
------------- ADDITIONAL ACCUM- HENSIVE SHARES
PAR PAID-IN ULATED INCOME IN
NUMBER VALUE CAPITAL DEFICIT (LOSS) TREASURY TOTAL
------- -------- --------- -------- ------- -------- -------
March 31, 2002 8,257 $ 2,276 $ 46,993 $(16,251) $(7,002) $ (2,159) $23,857
Comprehensive Loss:
Net loss -- -- -- (28,825) -- -- (28,825)
Write-off Translation adjustment
related to Discontinued operations -- -- -- -- 3,301 -- 3,301
Write-off of minimum pension liability
related to Discontinued operations -- -- -- -- 498 -- 498
Cumulative translation adjustment -- -- -- -- 1,606 -- 1,606
-------
Total Comprehensive Loss -- -- -- -- -- -- (23,420)
Issuance of 934 Stock Warrants -- -- 626 -- -- -- 626
Issuance of 151 Treasury Shares 151 -- (1,059) -- -- 1,195 136
----- -------- --------- -------- ------- -------- -------
March 31, 2003 8,408 2,276 46,560 (45,076) (1,597) (964) 1,199
Comprehensive Loss:
Net loss -- -- -- (5,479) -- -- (5,479)
Minimum pension liability, net
of tax of $66 -- -- -- -- (155) -- (155)
Cumulative translation adjustment -- -- -- -- 1,657 -- 1,657
-------
Total Comprehensive Loss -- -- -- -- -- -- (3,977)
Issuance of 35 Treasury Shares 35 -- (294) -- -- 343 49
----- -------- --------- -------- ------- -------- -------
March 31, 2004 8,443 2,276 46,266 (50,555) (95) (621) (2,729)
Comprehensive Income:
Net income -- -- -- 8,500 -- -- 8,500
Minimum pension liability, net
of tax of $60 -- -- -- -- 142 -- 142
Cumulative translation adjustment -- -- -- -- 722 -- 722
-------
Total Comprehensive Income -- -- -- -- -- -- 9,364
Issuance of 327 common shares 327 85 (82) -- -- -- 3
Issuance of 18 Treasury Shares 18 -- (150) -- -- 173 23
----- -------- --------- -------- ------- -------- -------
March 31, 2005 8,788 $ 2,361 $ 46,034 $(42,055) $ 769 $ (448) $ 6,661
===== ======== ========= ======== ======= ======== =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
43
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(In Thousands)
2005 2004 2003
-------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 8,500 $ (5,479) $ (28,825)
Adjustments to reconcile net income (loss)
to net cash provided by continuing operations:
Income (loss) on discontinued operations (344) 3,849 5,823
Depreciation and amortization 2,796 3,449 2,952
Change in fair value of warrants (4,326) -- --
401(k) matching contributions in Treasury shares -- -- 136
Minimum pension liability -- -- 498
Deferred income taxes 161 (38) (1,014)
Gain on sale of assets 35 36 --
Cumulative effect of change in accounting principle -- -- 18,238
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts and notes receivable (1,953) 1,204 903
Inventories 321 (1,077) 1,619
Prepaid expenses and other (1,573) (1,668) (1,140)
Other assets (487) (736) (438)
Accounts payable and accrued expenses (1,296) 2,066 3,889
-------- ---------- ----------
Total adjustments (6,666) 7,085 31,466
-------- ---------- ----------
Net cash provided by continuing operations 1,834 1,606 2,641
-------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,313) (475) (303)
Proceeds from disposal of property, plant and equipment (9) (166) 483
-------- ---------- ----------
Net cash provided (used) by investing activities (1,322) (641) 180
-------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) from new revolving credit facility (2,775) 2,779 --
Net borrowings (payments) of new term loan (2,518) 20,500 --
Net proceeds from issuance of Preferred Shares and warrants -- 12,974 --
Proceeds from senior subordinated notes and warrants -- 14,000 --
Payment of old senior notes -- (27,108) (1,609)
Payment of old revolving credit facility and other debt -- (24,500) (9,707)
Payment of financing cost -- (6,200) (203)
Net proceeds from issuance of common shares 26 49 --
-------- ---------- ----------
Net cash used by financing activities (5,267) (7,506) (11,519)
-------- ---------- ----------
Effect of changes in foreign currency exchange rates on cash 9 (16) 154
-------- ---------- ----------
Cash provided by discontinued operations 3,306 2,053 10,728
-------- ---------- ----------
Net increase (decrease) in cash (1,440) (4,504) 2,184
Cash and cash equivalents at beginning of year 2,496 7,000 4,816
-------- ---------- ----------
Cash and cash equivalents at end of year $ 1,056 $ 2,496 $ 7,000
======== ========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
44
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(In Thousands, Except Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION AND BASIS OF PRESENTATION
The 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.
Certain fiscal 2004 and 2003 amounts have been reclassified to conform with the
fiscal 2005 presentation.
The Company's operations provide corrosion control engineering and
services, systems and equipment to the infrastructure, environmental and energy
markets throughout the world.
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
approved a resolution to keep the European Operations and remove them from
discontinued operations. After careful deliberation, the Board concluded that
due to the strength of the local management team, the similar characteristics of
the served markets, and the favorable prospects for this business, the Company's
value would be enhanced by maintaining its European presence rather than by
selling the operations at this time. Therefore, effective in the second quarter
of fiscal 2004, the Company reported quarterly and annual results of the
European Operations in its continuing operations. Prior-year financial
statements have been reclassified to reflect the European Operations as
continuing operations.
In the fourth quarter of fiscal 2005, the decision was made to sell CSI
Coating Services, a division of the Company's Corrpro Canada subsidiary.
Effective as of the quarter ended March 31, 2005, the CSI Coating Services
business is reported as discontinued operations. Prior-year financial statements
have been reclassified to reflect CSI Coating Services as discontinued
operations, which is also referred to as "assets and liabilities held for sale."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with an original maturity of three months or less.
ACCOUNTS RECEIVABLE
The Company records estimated allowances for uncollectible accounts
receivable based upon the number of days the accounts are past due, the current
business environment and specific information such as bankruptcy or liquidity
issues of customers. Historically, losses for uncollectible accounts receivable
have been within management's estimates. Corrosion control services and products
are provided to a large number of customers with no substantial concentration
with an individual customer. The Company performs ongoing credit evaluations of
its customers' financial condition.
45
Accounts receivable are presented net of allowances for doubtful accounts
of $440 and $664 at March 31, 2005 and 2004, respectively. Bad debt expense
totaled $(18), $193 and $467 in fiscal 2005, 2004 and 2003, respectively. Trade
receivables written off, net of recoveries of prior years write-offs, totaled
$206, $124 and $1,703 in fiscal 2005, 2004 and 2003, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market with cost being
determined on the first-in, first-out method. Inventories consist of the
following at March 31, 2005 and 2004:
2005 2004
------- -------
Component parts and raw materials $ 5,055 $ 5,000
Finished goods 4,423 4,610
------- -------
$ 9,478 $ 9,610
======= =======
Disposals of obsolete inventory, net of proceeds, totaled $71, $84 and
$149 in fiscal 2005, 2004 and 2003, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed when incurred. The cost
and accumulated depreciation for property, plant and equipment sold, retired or
otherwise disposed of are removed from the accounts and resulting gains or
losses are reflected in income.
Substantially all of the Company's operations compute depreciation on the
straight-line method. Depreciation for the Company's Canadian operations segment
is computed on the declining balance method. Estimated useful lives range from
25 to 40 years for buildings and from 4 to 10 years for equipment, furniture and
fixtures. Leasehold improvements are depreciated over the term of the lease. For
income tax reporting purposes, depreciation is computed principally using
accelerated methods.
Depreciation expense totaled $1,221 $1,292 and $1,729 in fiscal 2005, 2004
and 2003, respectively.
GOODWILL, PATENTS AND OTHER INTANGIBLES
The Company accounts for goodwill and other intangibles based on Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The Company completed its initial impairment testing as of
April 1, 2002 under SFAS 142 and recorded an impairment loss totaling $18,238 of
which $15,058 related to discontinued operations and $3,180 related to
continuing operations. The loss is being recognized as the cumulative effect of
a change in accounting principle. This impairment testing is also done annually
in the fourth quarter and such testing indicated no additional impairment as of
March 31, 2005, 2004 and 2003.
Goodwill balances as of March 31, 2005 totaled $14,352 compared to $13,667
at March 31, 2004. The increase in goodwill was the result of Canadian foreign
currency translation adjustments.
In determining the fair value of the reporting units for SFAS 142, the
Company uses the income approach, market approach and the allocation of market
capitalization as its measures of valuation to periodically review the
impairment of goodwill.
Included in other assets are amortizable assets consisting primarily of
patents, trademarks and covenants not to compete. Such assets, with a net book
value of $690 and $888 at March 31, 2005 and 2004, respectively, are amortized
46
on the straight-line method over their estimated useful lives ranging from 4 to
20 years. Amortization expense for such assets totaled $228, $237 and $217 in
fiscal 2005, 2004 and 2003, respectively. Amortization expense is anticipated to
be approximately $230 for each of the next five fiscal years.
The Company uses an undiscounted cash flow method to periodically review
the net realizable value of other intangible assets and believes that such
assets are realizable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded value of cash and cash equivalents, receivables, payables,
accrued liabilities, short-term borrowings and assets and liabilities held for
sale approximates fair value because of the short maturity of these instruments.
The recorded value of the Company's long-term debt is considered to approximate
fair value based on the borrowing rates currently available to the Company for
loans with similar terms and maturities.
REVENUE RECOGNITION
The Company records income from construction and engineering contracts
under the percentage-of- completion method, using costs incurred to date in
relation to estimated total costs of the contracts, to measure the stage of
completion. Original contract prices are adjusted for change orders and claims
when the change order or claim has been approved by the customer. Cost budgets
are revised, when necessary, in the amounts that are reasonably estimated based
on the Project Leaders' knowledge of the project as well as the Company's
historical experience. The cumulative effects of changes in estimated total
contract costs and revenues are recorded in the period in which the facts
requiring such revisions become known, and are accounted for using the
percentage-of-completion method. At the time it is determined that a contract is
expected to result in a loss, the entire estimated loss is recorded. Accounts
receivable includes $849 and $1,180 at March 31, 2005 and 2004, respectively, of
amounts billed but not paid by customers under retainage provisions of
contracts. Prepaid expenses and other includes $4,166 and $2,853 at March 31,
2005 and 2004, respectively, of amounts related to costs and estimated earnings
in excess of billings on uncompleted contracts. Accrued liabilities and other
includes $845 and $1,423 at March 31, 2005 and 2004, respectively, of amounts
related to billings in excess of costs and estimated earnings on uncompleted
contracts. The Company recognizes revenue from product sales upon shipment and
transfer of ownership.
PRODUCT DEVELOPMENT EXPENSES
Expenditures for product development costs were minimal in fiscal 2005,
2004 and 2003.
WARRANTIES
In the normal course of business, we provide warranties and
indemnifications for our products and services. We provide warranties that the
products we distribute are in compliance with prescribed specifications. In
addition, we have indemnity obligations to our customers for these products,
which have also been provided to us from our suppliers, either through express
agreement or by operation of law.
For the year ended March 31, 2005, warranty costs were not material to the
consolidated financial statements.
INCOME TAXES
The Company uses the liability method whereby income taxes are recognized
during the fiscal year in which transactions enter into the determination of
financial statement income. Deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between
financial statement and tax basis of assets and liabilities. The Company
maintains a full valuation allowance for its net domestic deferred tax assets
and net operating loss carryforwards. The Company intends to maintain a full
valuation allowance for its net domestic deferred tax assets until sufficient
positive evidence exists to support the reversal of the remaining reserve. Until
such time, except for
47
foreign and state tax provisions, the Company will have no reported tax
provision, net of changes in the valuation allowance. In the event the Company
was to determine, based on the existence of sufficient positive evidence, that
it would be able to realize its deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the valuation allowance would increase
income in the period such determination was made. See Note 7, Income Taxes,
Notes to Consolidated Financial Statements of the Company for additional
information regarding income taxes.
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 5 - 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.
COMPREHENSIVE INCOME (LOSS)
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:
MARCH 31, MARCH 31,
2005 2004
--------- ---------
Translation adjustment $ 782 $ 60
Pensions (13) (155)
--------- ---------
Ending Balance $ 769 $ (95)
========= =========
Components of comprehensive income (loss) consist of the following:
TWELVE MONTHS ENDED MARCH 31,
2005 2004
-------- --------
Net income (loss) $ 8,500 $ (5,479)
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustment 722 1,657
Pensions 142 (155)
-------- --------
Total comprehensive income (loss) $ 9,364 $ (3,977)
======== ========
48
FOREIGN CURRENCY TRANSLATION
The functional currency of each foreign subsidiary is the respective local
currency. Assets and liabilities are translated at the year-end exchange rates
and revenues and expenses are translated at average exchange rates for the
period. Resulting translation adjustments are recorded as a component of
shareholders' equity in other comprehensive income (loss).
FINANCIAL STATEMENT ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from these 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
(for the fiscal years ended):
2005 2004 2003
-------- -------- ----------
Net income (loss) available to common shareholders:
As reported $ 6,643 $ (5,479) $ (28,825)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards $ 1,069 $ 893 $ 256
-------- -------- ----------
Proforma income (loss) available to common shareholders $ 5,574 $ (6,372) $ (29,081)
Basic earnings (loss) per share available to
common shareholders:
As reported $ 0.30 $ (0.65) $ (3.43)
Pro Forma $ 0.21 $ (0.76) $ (3.47)
Diluted earnings (loss) per share available to
common shareholders:
As reported $ 0.09 $ (0.65) $ (3.43)
Pro Forma $ 0.04 $ (0.76) $ (3.47)
All options were granted at an exercise price equal to the market price of
the Company's common stock at the date of the grant or two times the market
price of the Company's common stock at the date of the grant . The
weighted-average fair value price at the date of grant for options granted
during fiscal 2005, 2004 and 2003 was $2.79, $1.52 and $0.32 per option,
respectively. For purposes of this pro forma, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model. The significant assumptions used were risk-free interest rates ranging
from 3.3% to 4.75%, expected volatility of 79.8% for 2005, 118.7% for 2004 and
142.0% for 2003, an expected life of 10 years and no expected dividends. As a
result of the change in control in fiscal 2004, 854 options vested.
49
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 this 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.
Assets and liabilities held for sale consisted of the following at
March 31, 2004:
Cash $ 2
Accounts Receivable 1,068
Inventory 198
Prepaid Expenses 31
Property, plant and equipment, net 1,454
Goodwill and Other Assets 892
-------
Assets held for sale $ 3,645
=======
Current Liabilities $ 909
Deferred Taxes & Minority Interest (226)
-------
Liabilities held for sale $ 683
=======
There were no net assets or liabilities held for sale at March 31, 2005.
50
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 years ended March 31, 2005, 2004 and 2003 are shown below.
FOR THE TWELVE
MONTHS ENDED
MARCH 31,
----------------------------------------
2005 2004 2003
-------- --------- ---------
Revenues $ 4,806 $ 15,512 $ 32,622
Operating cost and expenses:
Cost of sales 4,249 11,605 22,222
Selling, general & administrative expenses (24) 6,994 16,559
-------- --------- ---------
Operating income (loss) 581 (3,087) (6,159)
(Gain) loss on disposal 124 46 (2,095)
Interest expense 365 930 2,071
-------- --------- ---------
Income (loss) from discontinued
operations before income taxes 92 (4,063) (6,135)
Provision for income taxes (252) (214) (4)
-------- --------- ---------
Income (loss) from discontinued operations $ 344 $ (3,849) $ (6,131)
======== ========= =========
The Company allocated interest to discontinued operations of $365, $930
and $2,071 for fiscal 2005, 2004 and 2003, respectively, based on estimated
proceeds from the discontinued operations dispositions that were used to pay
down the Revolving Credit Facility and Senior Notes (see Note 3, Long-Term
Debt). The interest rate used to calculate the interest expense allocated was
the weighted average interest rate of the Revolving Credit Facility and Senior
Notes.
In March 2005, we substantially completed the sale of our Canadian
Coatings Business and we recorded a note receivable for $2.2 million, which we
collected in April 2005 and recognized a net loss of $0.1 million. The net
proceeds from this disposition were used to pay down debt in April 2005.
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. During fiscal 2003, the Company disposed of four
non-strategic business units. First, in March 2003, the Company sold its
Bass-Trigon Software business unit for $3,150 and recognized a gain of $194.
Also, in March 2003, the Company recorded a note receivable for $6,232, which
the Company collected in fiscal 2004, for its Rohrback Cosasco Systems
subsidiary and recognized a gain of $1,809. The Company also disposed of two
smaller international offices resulting in a net gain of $92 during fiscal 2003.
The net proceeds from dispositions were used to pay down debt.
During fiscal 2003, the Company recorded an impairment charge relating to
its Asia Pacific operations totaling $1,575 based on current market value of
these operations and additionally recorded an impairment charge totaling $450
based on market value analysis of its Middle East operations. Additionally, an
impairment charge totaling $450, based on a market value analysis, was recorded
for its European operations which is now reported in continuing operations in
fiscal 2003. Also during fiscal 2003, discontinued operations recorded charges
to selling, general and administrative expenses totaling $3,813 related to
currency translation.
51
3. LONG-TERM DEBT:
Long-term debt at March 31, 2005 and 2004 consisted of the following:
2005 2004
-------- ---------
Term Loan $ 18,000 $ 20,500
Senior Secured Subordinated Notes,
due 2011, net of discount of $3,874 and
$4,130 at March 31, 2005 and 2004, respectively 10,126 9,870
Revolving Credit Facility 4 2,779
Other 136 154
-------- ---------
28,266 33,303
Less: current portion 6,656 5,279
-------- ---------
$ 21,610 $ 28,024
======== =========
On March 30, 2004, the Company entered into a $40,000 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 $19,500. 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 7.50% and 5.75% at March 31, 2005 and 2004, respectively. 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
credit. Standby letter of credit fees are 3.0% on the undrawn face amount of all
outstanding standby letters of credit. The Company had $4 thousand and $2,779
outstanding under the revolving credit facility at March 31, 2005 and 2004,
respectively. The Company also had $5,321 and $6,141 of outstanding letters of
credit as of March 31, 2005 and 2004, respectively. Total availability under the
revolving credit facility was $8,523 and $4,528 at March 31, 2005 and 2004,
respectively, after giving consideration to the borrowing base limitations under
the revolving credit facility. The Company paid $248 and $3,084 in fiscal 2005
and 2004, respectively, for deferred financing costs, which is classified in
other assets on the Consolidated Balance Sheets. This amount will be amortized
over the life of the debt, using the effective interest rate method.
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
7.50%. 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.
This payment is computed to be $1,556 for the year ended March 31, 2005. The
outstanding balance on the term loan was $18,000 and $20,500 at March 31, 2005
and 2004, respectively.
The Company's payments under the term loan, including the excess cash flow
payment for fiscal 2005, for each of the years ended March 31 are scheduled to
be:
TOTAL 2006 2007 2008 2009 2010
--------------------------------------------------
Term Loan, due 2009 $18,000 $6,652 $4,000 $4,500 $2,848 $0
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. During
the fourth quarter of fiscal 2005, the Company exceeded by $32 thousand the
52
amount of capitalized lease obligations as defined in and permitted under the
loan agreement. The Company's lender agreed to waive the violation that occurred
and the parties have entered into an amendment to the loan agreement increasing
the amount of capitalized lease obligations permitted thereunder. The Company
was in compliance with all other covenants at March 31, 2005.
On March 30, 2004, the Company entered into a $14,000 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 3,937 shares of the Company's common shares at an exercise price of
$.001. A valuation was performed to determine the fair market value of the
warrants at March 31, 2004. This value was recorded as a liability on the
Company's balance sheet and the debt balance was recorded at a discount. The
amount of the discount will be amortized using the effective interest method
over the life of the senior secured subordinated debt agreement. 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 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 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. During the fourth quarter of
fiscal 2005, the Company exceeded by $32 thousand the amount of capitalized
lease obligations as defined in and permitted under the loan agreement. The
Company's lender agreed to waive the violation that occurred and the parties
have entered into an amendment to the loan agreement increasing the amount of
capitalized lease obligations permitted thereunder. The Company was in
compliance with all other covenants at March 31, 2005. Company paid $61 and
$1,342 in fiscal 2005 and 2004, respectively, for deferred financing costs
related to the senior secured subordinated note, which is classified in other
assets on the Consolidated Balance Sheets. This amount will be amortized over
the life of the debt, using the effective interest rate method.
On March 30, 2004, the Company entered into a securities purchase
agreement with a purchaser 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 13,000 shares of newly-created
Series B Preferred Stock. In addition, the purchaser received a warrant to
purchase 12,114 common shares at an exercise price of $.001. A valuation was
performed to determine the fair market value of the warrants at March 31, 2004.
This value was recorded as a liability on the Company's balance sheet and the
Series B Preferred Stock was recorded net of the value of the warrant. 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 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 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
53
additional indebtedness, make investments, including acquisitions, and taker
certain other actions. The Company was in compliance with these covenants at
March 31, 2005.
Previous Revolving Credit Facility. In March 1999, the Company entered
into an $80,000 revolving credit facility that originally expired on April 30,
2002 (the "Revolving Credit Facility"). Initial borrowings were used to repay
existing domestic bank indebtedness. Through a series of subsequent amendments,
the size of the Revolving Credit Facility was reduced to $26,400 and the
expiration date was extended to March 31, 2004. Borrowings under the Revolving
Credit Facility were limited to borrowing base amounts as defined. The Revolving
Credit Facility provided for interest on borrowings at prime plus 5.0% and
required the Company to pay a facility fee of 1.0% on the commitment amount. The
Revolving Credit Facility was repaid on March 30, 2004. The Company expensed
deferred financing costs of $225 for the twelve months ended March 31, 2004.
Senior Notes. In January 1998, the Company issued, through a private
placement, $30,000 of Senior Notes that were due 2008 (the "Senior Notes").
Through a series of subsequent amendments, the terms and conditions of the
Senior Notes were modified to, among other things, change the interest rate
payable on the Senior Notes and to defer certain principal payments thereunder.
The Senior Notes, as amended, provided for interest at 11.35% until March 31,
2004. The Senior Notes were repaid on March 30, 2004. The Company expensed
deferred financing costs of $1,026 for the twelve months ended March 31, 2004.
Within the Senior Notes Agreement was a yield maintenance amount
provision, which ensured that the lender was paid the entire interest amount of
the Senior Notes. The yield maintenance amount provisions applied to certain
optional prepayments of principal under the Senior Notes and provided that the
Senior Notes were subject to prepayment, in whole at any time or from time to
time in part, at the option of the Company, at 100% of the principal amount so
prepaid plus interest thereon to the prepayment date and the yield maintenance
amount, if any, with respect to each Senior Note. Any partial prepayment of the
Senior Notes, which met certain criteria, were applied against the principal
amount of the Senior Notes scheduled to become due in the inverse order of
maturity thereof. The Company paid and expensed yield maintenance amounts of
$2,085 for the twelve months ended March 31, 2004 as interest expense on the
Consolidated Statement of Operations.
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 2006.
Cash paid for interest totaled $3,715, $4,966 and $6,083 for fiscal years
2005, 2004, and 2003, respectively.
4. 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 5-- 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.
54
Basic earnings per share using the two-class method are calculated as
follows:
Basic EPS -- Two-Class Method:
2005 2004 2003
-------- ------- ---------
Net income (loss) available
to common shareholders $ 6,643 $(5,479) $ (28,825)
Less: Income (loss) from discontinued operations 344 (3,849) (6,131)
-------- ------- ---------
Less: Cumulative effect of change in accounting principle -- -- (18,238)
-------- ------- ---------
$ 6,299 $(1,630) $(4,456)
Amount allocable to common shareholders (1) 34.9% 100.0% 100.0%
Rights to undistributed income $ 2,198 $(1,630) $ (4,456)
Basic earnings per share from continuing operations $ 0.26 $ (0.19) $ (0.53)
======== ======= =========
(1) Basic weighted average
common shares outstanding 8,606 8,419 8,387
=========
Weighted average additional common shares
assuming exercise of warrants 16,051 -- --
-------- ------- ---------
Weighted average common equivalent
shares assuming warrants exercised 24,657 -- 8,387
Amount allocable to common shareholders 34.9% 100.0% 100.0%
======== ======= =========
Diluted EPS:
2005 2004 2003
-------- ------- ---------
Net income (loss) available
to common shareholders $ 6,643 $(5,479) $ (28,825)
Less: Income (loss) from discontinued operations 344 (3,849) (6,131)
-------- ------- ---------
Less: Cumulative effect of change in accounting principle -- -- (18,238)
-------- ------- ---------
6,299 (1,630) (4,456)
Less: Change in fair value of warrants 4,326 -- --
-------- ------- ---------
1,973 (1,630) (4,456)
-------
Amount allocable to common shareholders 100.0% 100.0% 100.0%
Rights to undistributed income $ 1,973 $(1,630) $ (4,456)
Diluted earnings per share from continuing operations $ 0.08 $ (0.19) $ (0.53)
======== ======= =========
Weighted average common shares outstanding 8,606 8,419 8,387
Dilutive effect of assumed exercise
of previous lender warrants 1,066 -- --
Dilutive effect of warrants 16,051 -- --
Dilutive effect of stock options 146 -- --
-------- ------- ---------
Diluted weighted average shares outstanding 25,869 8,419 8,387
======== ======= =========
55
5. SERIES B CUMULATIVE REDEEMABLE VOTING PREFERRED STOCK:
The Series B Preferred Stock will accrue cumulative quarterly
dividends at an annual rate of 13.5%. The dividends are not reflected as a
liability or as a reduction to shareholders equity until such time as they are
declared. The liquidation value of the Series B Preferred Stock is disclosed on
the Consolidated Balance Sheets. None of the accumulated preferred dividends
have been declared or paid. 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. 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.
Under the terms of the Series B Preferred Stock, a liquidation,
dissolution or winding up of the Company shall be deemed to include any sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the capital stock or assets of the
Company or a merger, consolidation or other transaction or series of related
transactions in which the Company's shareholders immediately prior to such
transaction do not retain a majority of the voting power in the surviving
entity, unless the holders of a majority of the then-outstanding shares of
Series B Preferred Stock affirmatively vote or consent in writing that any such
transaction shall not be treated as a liquidation, dissolution or winding up.
The Series B Preferred Stock is redeemable at the option of the holders of
a majority of the outstanding Series B Preferred Stock upon the occurrence of
any of the following events with respect to the Company:
- the occurrence of any change in beneficial ownership, merger,
consolidation, sale or other disposition of assets, or other
similar type event that constitutes a "change of control" or
similar-termed event, or a breach or other triggering event,
under the terms of our senior indebtedness and/or subordinated
indebtedness;
- the acceleration of any amounts due under the senior
indebtedness and/or subordinated indebtedness;
- any issuance or sale of the Company's equity securities in a
public or private offering resulting in aggregate net proceeds
to the Company in excess of $20.0 million;
- any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary; or
- the occurrence of certain bankruptcy and insolvency events.
56
In addition, if then permitted by the holders of the senior indebtedness
and/or subordinated indebtedness, the Series B Preferred Stock would be
redeemable at the option of a majority of the holders of Series B Preferred
Stock upon the occurrence of any of the following events with respect to the
Company:
- the acquisition of 20% or more of the outstanding voting
securities of the Company by any person or group, other than
through the ownership or acquisition of the Series B Preferred
Stock, the Purchaser Warrant, or the shares of Common Stock
issued upon exercise of the Purchaser Warrant;
- a consolidation or merger involving the Company, other than a
consolidation or merger under a transaction in which (i) the
outstanding voting stock of the Company remains outstanding or
(ii) the beneficial owners of the outstanding voting stock of
the Company immediately prior to such transaction beneficially
own less than 80% of the voting stock of the surviving entity
immediately following such transaction;
- the sale, transfer, assignment, lease, conveyance or other
disposition in one or a series of transactions in excess of
20% of the assets of the Company, or assets of the Company
resulting in aggregate net proceeds to the Company in excess
of $20.0 million; or
- the aggregate amount of indebtedness of the Corporation is
equal to or less than $2.0 million.
Each share of Series B Preferred Stock shall entitle the holder thereof to
vote on all matters voted on by the holders of Common Stock, voting together
with the holders of Common Stock and all other voting stock of the Company as a
single class at all annual, special and other meetings of the shareholders of
the Company. Initially the Series B Preferred Stock will have approximately 51%
of the total voting power of the Company. Such percentage is subject to
adjustment based on shares outstanding in the future at any particular time. The
percentage of voting power is mathematically calculated as follows: In any vote
in which the holders of Series B Preferred Stock are entitled to vote with the
holders of Common Stock, each share of Series B Preferred Stock shall entitle
the holder thereof to cast that number of votes equal to the quotient of (i) the
product of (A) 1.0408, multiplied by (B) the total number of votes that may be
cast by the holders of all Post Transaction Fully Diluted Shares as of the
record date for such vote, divided by (ii) 13,000. Future issuances of voting
securities of the Company not contemplated in the securities purchase agreement
will proportionately reduce the voting power of the Series B Preferred Stock.
In addition to the foregoing, the approval of the holders of a majority of
the outstanding Series B Preferred Stock, voting separately as a class, is
required to:
- amend, modify or alter any provision of the Amended Articles or the
Amended Code of Regulations that adversely affect the rights of the
holders of the Series B Preferred Stock;
- consummate a merger or consolidation of the Company or sale in
excess of 40% of the assets of the Company;
- consummate a liquidation, dissolution, winding up, recapitalization
or reorganization of the Company;
- effect any material acquisition or series of acquisitions, joint
venture or strategic alliance involving the Company;
- pay any dividends or distributions on, or make any other payment in
respect of, any capital stock of the Company, except for dividends
and distributions payable (i) on the Series B Preferred Stock or on
any shares of capital stock of the Company ranking equal or senior
to the Series B Preferred Stock, or (ii) to the holders of Common
Stock in the form of additional shares of Common Stock;
- authorize, designate, sell or issue any capital stock or debt
securities (other than, with respect to debt securities,
57
any senior indebtedness) of the Company and/or its subsidiaries, except
for (i) issuances of shares of Common Stock after the initial issue date
of the Series B Preferred Stock issuable upon exercise of options or
rights granted to directors, officers or employees of the Company under
existing or future option plans of the Company, provided that the
aggregate amount of such issuances do not exceed 15% of the Post
Transaction Fully Diluted Shares, (ii) issuances of Common Stock upon
exercise of the Existing Warrants or (iii) issuances of Common Stock upon
exercise of the Warrants; or
- redeem or purchase any capital stock of the Company, except for (i)
redemptions of Series B Preferred Stock contemplated by the terms of the
Amended Articles, and (ii) payments to holder of the senior secured
subordinate note upon exercise of its right to require the Company to
redeem or repurchase the Warrant or the shares of Common Stock issuable
upon exercise of the Warrant.
The terms of the Series B Preferred Stock also provide that for so long as
at least 40% of the shares of Series B Preferred Stock issued at the Closing
remain outstanding, the holders of Series B Preferred Stock will have the right
to appoint a majority of the full Board of Directors.
After the initial issue date of the Series B Preferred Stock, the Company
cannot issue or sell any capital stock or debt securities (other than senior
secured indebtedness of the Company) unless prior to such issuance or sale, each
holder of Series B Preferred Stock has first been given the opportunity to
purchase, on the same terms and conditions on which such securities are proposed
to be issued or sold by the Company, such holder's proportionate share of 51% of
the securities to be issued or sold by the Company. Holders of Series B
Preferred Stock will not have preemptive rights to purchase:
- shares of Common Stock issued after the initial issue date of the Series B
Preferred Stock upon exercise of options or rights granted to directors,
officers or employees of the Company under existing or future option plans
of the Company, provided that the aggregate amount of such shares does not
exceed 15% of the Post Transaction Fully Diluted Shares;
- shares of Common Stock issuable upon exercise of the Existing Warrants;
- shares of Common Stock issuable upon exercise of the Warrants;
- shares of Common Stock issuable upon conversion of convertible securities
of the Company outstanding on the initial issue date of the Series B
Preferred Stock; or
- shares of Series B Preferred Stock issued in accordance with the terms of
the Amended Articles.
Shares of Series B Preferred Stock generally may be sold or otherwise
transferred to a single purchaser in one transaction involving all of the
outstanding Series B Preferred Stock. Any other sale or transfer of Series B
Preferred Stock must be approved by a committee of disinterested directors of
the Board of Directors, which consent may not be unreasonably withheld. If a
committee of disinterested members of the Board of Directors approves all future
transfers of Series B Preferred Stock, then such approval will be irrevocable
and be binding upon the Company as to any future transfer of Series B Preferred
Stock.
6. LEASES:
The Company leases certain office and warehouse space and equipment under
operating leases and capital leases, which expire at various dates through 2015.
Future minimum rental payments under long-term lease agreements are as follows:
$2,233 in 2006, $1,686 in 2007, $1,103 in 2008, $621 in 2009, $447 in 2010 and
$1,084 after 2010 with a cumulative total of $7,174. In addition, the Company
rents other properties on a month-to-month basis.
Total rental expense was $4,625, $4,384 and $4,364 for fiscal 2005, 2004
and 2003, respectively.
58
7. INCOME TAXES:
Components of income (loss) from continuing operations before income
taxes as follows:
2005 2004 2003
------- -------- --------
United States $ 4,408 $ (3,713) $ (4,633)
Foreign 4,948 2,873 (100)
------- -------- --------
$ 9,356 $ (840) $ (4,733)
======= ======== ========
Components of the provision for income taxes for continuing
operations by jurisdiction follow:
2005 2004 2003
------- ------- --------
Current -- Federal $ (473) $ 24 $ --
-- State and local -- -- 120
-- Foreign 1,403 821 542
------- ------- --------
930 845 662
Deferred -- Federal -- -- --
-- State and local -- -- --
-- Foreign 270 (55) (939)
------- ------- --------
270 (55) (939)
------- ------- --------
$ 1,200 $ 790 $ (277)
======= ======= ========
Differences between the statutory United States federal income tax rate
(34%) and the effective income tax rate for continuing operations are as
follows:
2005 2004 2003
------- ------- --------
Federal income tax provision (benefit)
at statutory rate $ 3,181 $ (286) $ (1,609)
State income taxes, net -- (82) 78
Foreign tax rate differential (23) (211) 761
Change in warrant liability (1,471) -- --
Meals and entertainment 167 151 169
Valuation allowance (375) 1,210 364
Other (279) 8 (40)
------- ------- --------
Effective income tax $ 1,200 $ 790 $ (277)
======= ======= ========
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities were comprised of the following at March 31, 2005 and
2004:
2005 2004
------ -------
DEFERRED TAX ASSETS
Bad debts $ 130 $ 183
Other accruals 982 899
Uniform cost capitalization 15 19
Accrued expenses 1,029 1,031
Pension and other benefit accruals 689 718
Minimum tax credit 557 557
Federal net operating loss carryforwards 4,460 2,877
State net operating loss carryforwards 895 772
Other 388 1,573
------ ---------
Total deferred tax assets 9,145 8,629
59
2005 2004
-------- --------
DEFERRED TAX LIABILITIES
Property, plant and equipment (172) (274)
Other (103) (635)
-------- --------
Total deferred tax liabilities (275) (909)
-------- --------
Valuation allowance (8,603) (7,183)
-------- --------
Total net deferred taxes $ 267 $ 537
======== ========
In fiscal year 2002, the Company established a full valuation allowance
for its net domestic deferred tax assets due to its recurring losses. The
valuation allowance was calculated in accordance with SFAS 109. The Company
intends to maintain a full valuation allowance on its net domestic deferred tax
assets including net operating loss carryforwards until sufficient positive
evidence exists to support a reversal of the remaining allowance.
Undistributed earnings of foreign subsidiaries amounted to $21,361 as of
March 31, 2005. Deferred income taxes are not provided on these earnings as it
is intended that these earnings are indefinitely re-invested in these entities.
On October 2, 2004, The American Jobs Creation Act (AJCA) was signed into law.
The AJCA allows for a deduction of 85 percent of certain foreign earnings that
are repatriated, as defined in the AJCA. The Company may elect to apply this
provision to qualifying earnings repatriations in fiscal 2006. The Company has
not yet evaluated the effects of the repatriation provision. Therefore, the
amounts considered for repatriation and the potential amount of income tax have
not been determined.
The Company had state net operating loss carryforwards and federal net
operating loss carryforwards, which expire through 2023. The Company also has
federal credit carryforwards relating to non-expiring alternative minimum tax
credits. As a result of the refinancing and recapitalization transaction Corrpro
experienced a change of control for income tax purposes as defined in U.S. tax
law. As such, our net operating loss carryforwards available for use are limited
as defined in section 382 of the U.S. tax code. Accordingly, the deferred tax
asset associated with the federal net operating loss carryforwards, was reduced
by $4,183 in fiscal 2004, as well as the corresponding valuation allowance.
Cash paid for income taxes totaled $720, $1,394 and $552 for fiscal 2005,
2004 and 2003, respectively.
8. EMPLOYEE BENEFIT PLANS:
The Company's European Operations has a contributory defined benefit
pension plan. Employees of such foreign subsidiary no longer accrue benefits
under the plan, however, the Company continues to be obligated to fund prior
period benefits. The Company funds the plan in accordance with recommendations
from independent actuaries. Pension benefits generally depend on length of
service and job grade.
The following table sets forth the change in benefit obligation, change in
plan assets, funded status, Consolidated Balance Sheets presentation, net
periodic pension benefit cost and the relevant assumptions for the Company's
defined benefit pension plan at March 31:
2005 2004
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,794 $ 5,168
Service cost -- --
Interest cost 356 288
Assumption change (57) (88)
Effects of currency translation 182 886
Benefits paid (161) 540
-------- --------
Benefit obligation at end of year $ 7,114 $ 6,794
60
2005 2004
------- --------
Change in plan assets
Fair value of plan assets at beginning of year $ 4,253 $ 3,031
Employer contributions 342 253
Benefits paid (161) (88)
Effects of currency translation 109 504
Investment return 429 553
------- --------
Fair value of plan assets at end of year $ 4,972 $ 4,253
Funded status $(2,142) $ (2,541)
Amounts recognized in Consolidated Balance Sheets
Accrued benefit liability $(2,123) $ (2,320)
Minimum pension liability (19) (221)
2005 2004 2003
------- -------- --------
Net periodic pension benefit cost
Service cost $ -- $ -- $ --
Interest cost 356 288 247
Expected return on assets (271) (215) (274)
Net amortization and deferral -- -- 749
------- -------- --------
Net periodic pension cost $ 85 $ 73 $ 722
Weighted-average assumptions as of March 31
Discount rate 5.30% 5.25% 5.00%
Long-term rate of return on plan assets 6.30% 6.50% 8.00%
Rate of increase in compensation level N/A N/A N/A
Plan Assets
The Company's weighted-average plan asset allocations by asset category
were as follows:
2005 2004
---- ----
Equity securities 49% 55%
Debt securities 29% 27%
Real estate 0% 0%
Other - cash 22% 18%
In determining the investment policies and strategies for plan assets, the
Company periodically receives professional investment advice. At the most recent
review it was decided that the Company's asset allocation was overweight in
equities. As a result, future Company contributions to the scheme are being
invested in cash and debt securities as opposed to equities.
The Company's equity investments comprise a consensus fund index. This
fund is based on the average UK pension fund's asset distribution, comprising a
broad spread of investments across the UK, Europe, North America and Asia.
The Company's debt securities comprise a gilt fund, consisting of UK
government-issued debt, together with a corporate bond fund.
The expected long-term rate of return on assets are as follows:
Equity securities - 8.0%
Debt securities - 5.0%
Other - cash - 4.0%
The long-term expected return on equity securities has been taken as a
real return of 5.0%, together with an inflation assumption of 3.0%. The
long-term expected return on debt securities has been taken as the current yield
on a mix of gilts and investment grade corporate bonds, while the rate for cash
has been based on the current short-term UK inter-bank lending rate.
61
The Company expects to contribute approximately $330 to this plan in the
year ending March 31, 2006.
Future benefit payments are expected to be paid as follows: $129 in 2006,
$137 in 2007, $168 in 2008, $200 in 2009, $214 in 2010 and $ 1,520 in years 2011
to 2015.
The Company also maintains the Corrpro Companies, Inc. 401(k) Savings Plan
for all eligible employees in the United States under Section 401(k) of the
Internal Revenue Code. The Company may, at its discretion, make contributions to
the plan. In addition, the plan permits matching contributions. Effective
October 1, 2000, the Company began matching employee contributions with treasury
shares. Effective April 6, 2002, the Company suspended the Company match and no
matching contributions were made with respect to fiscal 2004. Effective May 1,
2004 the Company reinstated its Company match whereby the Company matches a
portion of employees' contributions in cash. For fiscal year 2004 the Company
issued 0 treasury shares for the Company's matching portion. Total matching
contributions in cash and treasury shares totaled $210, $0 and $199 in fiscal
2005, 2004 and 2003, respectively.
The Company has entered into an agreement with one of its former
executives, which provides, among other things, that such employee shall be
eligible to receive retirement income, with a lifetime survivor benefit, in an
amount equal to 50% of base salary. The Company has provided for this deferred
compensation benefit in the accompanying Consolidated Balance Sheets.
9. SHAREHOLDERS' EQUITY:
Shareholder Rights Plan
On July 23, 1997, the Company adopted a Shareholder Rights Plan and
declared a dividend of one Right on each outstanding common share of the
Company. Each Right would entitle shareholders to buy, upon certain triggering
events, one one-hundredth of a newly created Series A Junior Participating
Preferred Share at an exercise price of $75 (subject to certain adjustments).
The record date for the distribution was August 7, 1997.
Subject to certain exceptions, Rights will become exercisable only after a
person or group acquires 20% or more of the Company's common shares or announces
a tender offer for 20% or more of the Company's common shares. The Company's
Board of Directors can redeem the Rights at $0.01 per Right at any time before a
person acquires 20% or more of the Company's common shares. If a person or group
acquires 20% or more of the Company's common shares, each Right will entitle
holders, other than the acquiring party, to purchase common shares of the
Company having a market value of twice the exercise price of the Right. If,
after the Rights have become exercisable, the Company merges or otherwise
combines with another entity, each Right then outstanding will entitle its
holder to purchase a number of the acquiring party's common shares having a
market value of twice the exercise price of the Right. The Plan also contains
other customary provisions and is similar to plans adopted by many other
companies. The Shareholder Rights Plan was terminated on March 30, 2004.
Warrants
On March 30, 2004, the Company completed a recapitalization that resulted
in the issuance of warrants to its Series B Preferred Stockholder (see Note 3 -
- - Long-Term Debt) exercisable for 12,114 common shares. The warrants are
exercisable any time after March 30, 2004 until March 30, 2014. The warrants are
for duly authorized, validly issued, fully paid and nonassessable shares, at a
purchase price of $0.001 per share. 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.
On March 30, 2004, the Company completed a recapitalization that resulted
in the issuance of warrants to its Senior Secured Subordinated Note holder (see
Note 3 - Long-Term Debt) exercisable for 3,937 common shares. The
62
warrants are exercisable any time after March 30, 2004 until March 30, 2011. The
warrants are for duly authorized, validly issued, fully paid and nonassessable
shares, at a purchase price of $0.001 per share. 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.
During fiscal 2005, 325 warrants issued to its previous 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 shares at a purchase price of $0.01 per share exercisable any time
after July 31, 2003 until September 23, 2012 and the warrant issued to the
Senior Notes lender permitted the lender to purchase 467 shares at a purchase
price of $0.01 per share exercisable any time after July 31, 2003 until
September 23, 2012. For purposes of financial reporting, the 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 refinancing and
recapitalization, effective March 30, 2004, the warrants were subject to certain
adjustments and as a result they each were adjusted upward by 227 shares
outstanding at a new adjusted exercise price of $0.00631.
10. STOCK PLANS:
In June 1999, the Company adopted an Employee Stock Purchase Plan under
which employees have a systematic long-term investment opportunity to own
Company shares. Shareholder approval for such adoption was obtained on July 22,
1999. The Employee Stock Purchase Plan has been suspended.
The Company has options outstanding under various option plans including
the 2004 Long-Term Incentive Plan (the "2004 Option Plan"), the 1997 Long-Term
Incentive Plan (the "1997 Option Plan") and the 1997 Non-Employee Directors'
Stock Option Plan (the "1997 Directors Plan"). The Company's 1994 Corrpro Stock
Option Plan (the "1994 Plan") and the 1994 Corrpro Outside Directors' Stock
Option Plan (the "Directors Plan") were terminated upon adoption of the 1997
Option Plan and the 1997 Directors Plan. In addition, prior to its initial
public offering in September 1993, the Company issued stock options under
various arrangements.
The 2004 Option Plan was adopted on June 10, 2004, subject to shareholder
approval, which was obtained on August 26, 2004. The 2004 Option Plan provides
for the granting of up to 4,543 incentive stock options, non-qualified stock
options, reload options, restricted stock, stock appreciation rights, restricted
stock units, performance awards, dividend equivalent rights or other awards to
officers, key employees and consultants of the Company. The option price per
share will generally be the fair market value of the Company's common shares on
the date of grant or higher and the term of the options will not exceed 10
years. The 2004 Option Plan will terminate on June 10, 2014.
The 1997 Option Plan was adopted on April 28, 1997, subject to shareholder
approval, which was obtained on July 23, 1997. The 1997 Option Plan, as amended,
provides for the granting of up to 469 non-qualified stock options, stock
appreciation rights, restricted stock awards or stock bonus awards to officers,
key employees and consultants of the Company. In addition, the 1997 Option Plan
provides that shares exercised, forfeited or otherwise terminated under
previously granted stock awards, other than awards under the 1994 Directors
Plan, will also be available for grant under the new plan. The option price per
share will generally be the fair market value of the Company's common shares on
the date of grant and the term of the options will not exceed 10 years. The 1997
Option Plan will terminate on April 28, 2007. On April 30, 1998, the Company
adopted an amendment to the 1997 Option Plan increasing the number of shares
available for issuance by 300.
The 1997 Directors Plan was also adopted on April 28, 1997. The 1997
Directors Plan provides for the granting of up to 63 non-qualified stock options
to current and future non-employee directors of the Company. Under this plan,
each non-employee director will annually be granted options to purchase 3 common
shares. The option price per share will be the fair market value of the
Company's common shares on the date of grant and the term of the options will be
10 years. The 1997 Directors Plan will terminate on April 28, 2007.
63
Shares for issuance under equity compensation plans do not include the
Company's 2001 Non-Employee Directors' Stock Appreciation Rights Plan which has
not been approved by its shareholders. Under this plan, non-employee directors
received a one-time grant of vested stock appreciation rights as part of their
compensation for serving as directors. The stock appreciation rights entitle
each eligible director to be paid in cash, subject to the applicable terms and
conditions of the grant, on or after May 17, 2006, the amount of appreciation in
the fair market value of 10,000 common shares between May 17, 2001 and May 17,
2006. Currently, three former non-employee directors hold such stock
appreciation rights.
Stock option activity for the Company during fiscal 2005, 2004, and 2003
was as follows:
NUMBER OF SHARES 2005 2004 2003
- -------------------------------------- ------- ------- ------
Options outstanding, beginning of year 1,352 1,399 1,303
Granted 3,260 108 270
Exercised (20) (35) -
Expired, canceled or surrendered (1,400) (120) (174)
------- ------- ------
Outstanding, end of year 3,192 1,352 1,399
------- ------- ------
Exercisable, end of year 835 1,226 270
Available for grant, end of year 1,351 289 248
Price range of options:
Granted $ 0.88 to $ 1.52 to $ 0.32 to
$ 3.98 $ 1.69 $ 1.24
Exercised $ 0.32 to $ 0.32 to N/A
$ 1.69 $ 0.59
Options outstanding, end of year $ 0.32 to $ 0.32 to $ 1.30 to
$ 12.00 $ 13.78 $13.78
Of the options shares outstanding at March 31, 2005, 3,168 shares
outstanding were in a price range of $0.32 to $3.98. The remaining 24 option
shares outstanding were at a price range from $5.94 to $12.00.
11. BUSINESS SEGMENTS:
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 this 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
64
European Operations in its continuing operations, and prior-year financial
statements have been reclassified to reflect its European Operations as
continuing operations.
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, Asia Pacific and CSI Coating
Services 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. Revenues relating to this segment totaled $90,358 (or 67%
of consolidated revenues), $87,493 (or 70% of consolidated revenues) and $79,251
(or 71% of consolidated revenues) during fiscal 2005, 2004 and 2003,
respectively. The Domestic Core operations had goodwill of $5,485 at March 31,
2005 and $6,460 at March 31, 2004.
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. Revenues relating to this segment totaled $27,937 (or 21%
of consolidated revenues), $24,071 (or 19% of consolidated revenues) and $19,254
(or 17% of consolidated revenues) during fiscal 2005, 2004 and 2003,
respectively. The Canadian operations had goodwill of $8,867 at March 31, 2005
and $8,100 at March 31, 2004.
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. Revenues relating to this segment
totaled $16,349 (or 12 % of consolidated revenues), $13,066 (or 11% of
consolidated revenues) and $13,402 (or 12% of consolidated revenues) during
fiscal 2005, 2004 and 2003, respectively. The European operations had no
goodwill as of March 31, 2005 and 2004, respectively.
Financial information relating to the Company's operations by
segment are presented below:
2005 2004 2003
--------- --------- ---------
Revenue:
Domestic Core Operations $ 90,358 $ 87,493 $ 79,251
Canadian Operations 27,937 24,071 19,254
European Operations 16,349 13,066 13,402
--------- --------- ---------
$ 134,644 $ 124,630 $ 111,907
========= ========= =========
Operating Income (Loss):
Domestic Core Operations $ 13,779 $ 14,088 $ 10,659
Canadian Operations 5,525 4,153 3,634
European Operations 1,531 947 (865)
Corporate Related Costs and Other (11,621) (11,027) (11,870)
--------- --------- ---------
$ 9,214 $ 8,161 $ 1,558
========= ========= =========
65
2005 2004 2003
-------- -------- --------
Total Assets:
Domestic Core Operations $ 32,256 $ 23,181
Canadian Operations 25,144 32,626
European Operations 8,202 7,448
Corporate Related Assets and Other 6,069 6,506
Assets held for Sale - 3,645
-------- --------
$ 71,671 $ 73,406
======== ========
Capital Expenditures:
Domestic Core Operations $ (883) $ (323) $ (190)
Canadian Operations (191) (36) (48)
European Operations (50) (28) (45)
Corporate Related Capital Expenditures (189) (88) (20)
-------- -------- --------
$ (1,313) $ (475) $ (303)
======== ======== ========
Depreciation and Amortization:
Domestic Core Operations $ 1,593 $ 989 $ 1,747
Canadian Operations 503 247 281
European Operations 48 82 103
Old Lender Warrants - 409 -
Corporate Related Depreciation and Amortization 652 1,722 821
-------- -------- --------
$ 2,796 $ 3,449 $ 2,952
======== ======== ========
12. LEGAL MATTERS:
ASSESSMENT STANDARD. During fiscal 2001, the Company discovered that a
former employee used an incorrect assessment standard in connection with the
evaluation of whether certain underground storage tanks located at as many as 67
sites were eligible for upgrade using cathodic protection. Such evaluations were
done using one of the approved assessment methodologies. The tanks at these
sites, which are located in five states, were subsequently upgraded using
cathodic protection, which arrests corrosion. These tanks are also subject to
ongoing leak detection requirements. Based on the Company's review of available
information and governmental records, the Company believes that there have not
been any releases from the affected tanks as a result of the actions of the
former employee. The Company has contacted, and in October and November 2000 met
with, officials from the Environmental Protection Agency ("EPA") and officials
from the corresponding environmental protection agencies of the five states
involved to discuss this matter. It is the Company's understanding that none of
the states or the EPA intend to take any enforcement action as a result of the
use of the inaccurate standard by the former employee. The Company is currently
working with the states to develop and implement field investigation procedures
to assess the current status of the affected sites. The Company has completed
certain field investigation procedures in three of the states in which affected
sites are located. The Company has been informed by one of the other states
that, based on continuing monitoring and leak detection procedures already
required to be performed by site owners and operators, no additional field work
procedures will be required in that state. There are no currently outstanding
claims or demands that have been asserted by any of the affected owners and
operators.
COMPLIANCE ORDER. In January 2003, the Company received a Consolidated
Compliance Order and Notice of Potential Penalty from the Louisiana Department
of Environmental Quality pursuant to which the department alleges that the
Company's foundry operations failed to submit required storm water monitoring
information as required by law. The alleged failure relates to periods
subsequent to the cessation of the Company's foundry operations. The Company has
appealed the matter and the department has agreed to engage an informal
resolution of the matter. Subject to execution of the appropriate documents, the
parties have agreed to settle this matter.
The Company is subject to other legal proceedings and claims from time to
time which arise in the ordinary course of business.
66
13. RELATED PARTY TRANSACTIONS:
On March 30, 2004, we entered into a services agreement with Wingate
Partners III, L.P. ("Wingate Partners"), an affiliate of CorrPro Investments,
LLC. The services agreement provides that Wingate Partners agrees to consult
with the Board of Directors in such a manner and on such business and financial
matters as would be reasonably requested from time to time by the Board,
including financial advisory, management advisory, strategic planning,
monitoring and other related services, in exchange for which we will pay an
annual non-refundable services fee of $400 payable quarterly in advance, to such
persons designated by Wingate Partners. In lieu of paying any quarterly
installment of the services fee in cash, we may, at our option, or if we are
restricted from paying any such quarterly installment in cash under, or the
Board determines that payment of such quarterly installment in cash would result
in a default under, the terms of our new senior secured credit facility or
senior secured subordinated notes, delay payment and accrue any unpaid portion
of the services fee, without interest. For the year ended March 31, 2005 the
Company paid Wingate Partners III, L.P. $400 in cash for their services. The
services agreement will have an initial term of eight years, which term will
automatically renew for successive one year periods thereafter unless either
party notifies the other of its desire to terminate the services agreement.
67
SUPPLEMENTAL FINANCIAL INFORMATION
Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of
operations of the Company for the fiscal years ended March 31, 2005 and 2004.
The sum of the quarterly per share figures does not equal annual per share
figures due to rounding.
Three Months Ended 06/30/04 09/30/04 12/31/04 03/31/05 Total
- ---------------------------------------------- -------- -------- -------- -------- -----
(In Thousands, Except per Share Data)
Revenues $ 33,094 $ 35,757 $ 35,315 $ 30,478 $134,644
Operating income (loss) 2,581 3,026 2,530 1,077 $ 9,214
Net Income (loss) from continuing operations (10,579) 9,043 5,548 4,144 8,156
Net income (loss) (10,633) 9,854 5,415 3,864 8,500
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ (1.25) $ 1.07 $ 0.63 $ 0.47 $ 0.26
Net income (loss) (1.26) 1.17 0.62 0.44 0.30
Weighted average number of shares - Basic 8,443 8,453 8,752 8,778 8,606
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ (1.25) $ 0.35 $ 0.21 $ 0.16 $ 0.08
Net income (loss) (1.26) 0.38 0.21 0.15 0.09
Weighted average number of shares - Diluted 8,443 25,876 25,853 25,846 25,869
Three Months Ended 06/30/03 09/30/03 12/31/03 03/31/04 Total
- ---------------------------------------------- -------- -------- -------- -------- -----
(In Thousands, Except per Share Data)
Revenues $ 31,218 $ 32,932 $ 32,209 $ 28,271 $124,630
Operating income (loss) 2,842 3,400 2,859 (940) 8,161
Net Income (loss) from continuing operations 1,152 1,351 739 (4,872) (1,630)
Net income (loss) 833 (1,880) 442 (4,874) (5,479)
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ 0.14 $ 0.16 $ 0.09 $ (0.58) $ (0.19)
Net income (loss) 0.10 (0.22) 0.05 (0.58) (0.65)
Weighted average number of shares - Basic 8,408 8,408 8,420 8,436 8,419
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ 0.12 $ 0.14 $ 0.08 $ (0.52) $ (0.19)
Net income (loss) 0.09 (0.20) 0.05 (0.52) (0.65)
Weighted average number of shares - Diluted 9,383 9,356 9,361 9,353 8,419
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Controls and Procedures.
Following the commencement of an internal review of its accounting records
and procedures and the investigation initiated by our Audit Committee of the
Board of Directors in connection with the restatement process (the "Audit
Committee Investigation"), we made a number of significant changes that
strengthened the internal controls over our financial accounting, reporting and
disclosure procedures (the "Reporting and Disclosure Procedures"). These changes
included, but were not necessarily limited to, (i) communicating clearly and
consistently a tone from senior management regarding the proper conduct in these
matters, (ii) strengthening the North American financial management
organizational reporting chain, (iii) requiring stricter account reconciliation
standards, (iv) updating and expanding the distribution of our business conduct
questionnaire, (v) requiring quarterly as well as annual business units written
representations, (vi) expanding the financial accounting procedures in the
current year, (vii) commencing a comprehensive, team-based process to further
assess and enhance the efficiency and effectiveness of our financial processes,
including support efforts which better integrate current and evolving financial
information system initiatives, and addressing any remaining weaknesses, and
(viii) establishing an internal audit function.
We will continue the process of identifying and implementing corrective
actions where required to improve the effectiveness of our Reporting and Control
Procedures. Significant supplemental resources will continue to be required to
prepare the required financial and other information during this process. The
changes made to date as discussed above have enabled us to restate our previous
filings where required, as well as subsequently prepare and file the remainder
of the required periodic reports.
(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 Annual Report on Form 10-K. Based on
that evaluation, and subject to inherent limitations on the effectiveness of
internal controls as described below, the Senior Officers have concluded that to
their knowledge as of the end of the period covered by this Annual Report on
Form 10-K, 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 fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
(c) Inherent Limitations on the Effectiveness of Controls.
A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, a control system is subject to implementation based
on the cost effectiveness of such controls. Further, because of the inherent
limitations in all control systems, including faulty judgments in decision
making or breakdowns resulting from simple errors or mistakes, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. Additionally, controls can be circumvented by
individual acts, collusion or by management override of the controls in place.
Over time, controls may become inadequate because of changes in conditions, or
deterioration of the degree of compliance with the policies or procedures. Due
to the inherent limitation of control systems, misstatements due to error or
fraud may occur and not be detected. Given such inherent limitations, the Senior
Officers and other members of our management do not expect our disclosure
controls or procedures to prevent all possible instances of error and fraud.
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
JOSEPH P. LAHEY, Age 58, Mr. Lahey has been a director and Corrpro's President
and Chief Executive Officer since May 2004. Prior to joining Corrpro, Mr. Lahey
served as Chairman, President and Chief Executive Officer of Pluris Capital
Advisors, Inc., a private investment firm, from 2002 to April 2004. From 1996
until 2002, Mr. Lahey was President and Chief Executive Officer of Furmanite
Worldwide, Inc., a specialty technical services firm delivering a broad
portfolio of engineering solutions to the energy and power supply chain markets
for the maintenance of offshore and land-based drilling operations, pipelines,
refineries and power generation facilities. Mr. Lahey previously held senior
executive positions with leading firms that serve other major markets in which
Corrpro is active, including six years experience as President and Chief
Executive Officer of Barnard and Burk Group, Inc., a supplier of fabrication,
engineering construction and maintenance services to the process industry. Mr.
Lahey received his Bachelor of Science in Mechanical Engineering and M.B.A. from
the University of Pittsburgh.
MICHAEL K. BAACH, Age 50, Mr. Baach has been Executive Vice President of Corrpro
since April 1993. Prior to that he served as our Senior Vice President from 1992
until April 1993. Before that, Mr. Baach was Vice President of Sales and
Marketing since our formation in 1984.
DAVID H. KROON, Age 55, Mr. Kroon has been Executive Vice President of Corrpro
since April 1993. Prior to that he served as Senior Vice President from our
formation in 1984 to April 1993.
BARRY W. SCHADECK, Age 54, Mr. Schadeck has been Executive Vice President of
Corrpro since June 1995 and President of Corrpro Canada, Inc., our wholly-owned
subsidiary, since its formation in May 1994. Before joining us, Mr. Schadeck
served as President since April 1993 and Chief Financial Officer since 1979 of
Commonwealth Seager Group, our wholly-owned subsidiary, since 1993.
ROBERT M. MAYER, Age 42, Mr. Mayer has been Senior Vice President, Chief
Financial Officer and Treasurer of Corrpro since November 2002. Prior to that,
Mr. Mayer served as our Vice President and Corporate Controller from August
2000, Assistant Treasurer from January 2002 and Assistant Corporate Controller
from January 1998 until August 2000. Prior to that, Mr. Mayer was with Premier
Farnell PLC, most recently as Director of Finance. Mr. Mayer has prior
experience with Ernst & Young, where he was an Audit Manager.
JOHN D. MORAN, Age 47, Mr. Moran has been our General Counsel since December
1996, Secretary since January 2002, Senior Vice President since July 2000. He
served as our Assistant Secretary from December 1996 to January 2002 and Vice
President from October 1998 until July 2000. Prior to that, Mr. Moran was
in-house counsel and Secretary for Sealy Corporation for 10 years and served as
Secretary. Mr. Moran also has prior experience with Grant Thornton, where he was
a senior tax accountant.
JAY I. APPLEBAUM, Age 43, Mr. Applebaum has been a director of Corrpro since
March 2004. Mr. Applebaum is a Principal of various Wingate entities, including
the indirect general partner of each of Wingate Partners II, L.P. and Wingate
Partners III, L.P. Mr. Applebaum joined Wingate in 1989. Prior to joining
Wingate, Mr. Applebaum participated in the formation of Plexus Financial
Services, Inc., a holding company for various printing and service related
businesses. Prior to joining Plexus Financial Services, Mr. Applebaum was
employed by Salomon Brothers Inc where he served with the firm's Merger and
Acquisition Group in New York. Mr. Applebaum has previously served as a director
of other privately held Wingate portfolio companies. Mr. Applebaum received his
B.B.A. from the University of Texas at Austin.
THOMAS P. BRIGGS, Age 57, Mr. Briggs has been a director of Corrpro since
September 2004. Prior to that time, Mr. Briggs was Senior Vice President, Chief
Financial Officer, and Secretary for Horizon Organic Holding Corporation, a
publicly held organic food company, from 2000 until its recent sale in 2004.
From 1990 to 2000, he was Vice
70
President Finance for Leprino Foods Company, a privately held food manufacturer.
In addition to positions he held with two Big Four accounting firms, Mr. Briggs
served as Vice President and Chief Financial Officer for Calvin Exploration and
for Energetics, Inc., both publicly traded oil and gas exploration companies,
and for Sanford Homes Corporation, a privately held homebuilder and land
developer.
JAMES A. JOHNSON , Age 51, Mr. Johnson has been Chairman of Corrpro's Board of
Directors since March 2004. Mr. Johnson is a Principal of various Wingate
entities, including the indirect general partner of each of Wingate Partners II,
L.P. and Wingate Partners III, L.P. Mr. Johnson joined Wingate in 1990. From
1980 to 1990, Mr. Johnson was a Principal with Booz-Allen & Hamilton, an
international management consulting firm. Mr. Johnson has served as a director
of United Stationers Inc., a publicly held wholesale distributor of office
products, and Kevco, Inc., a publicly held distributor of building products to
the manufactured housing industry, which filed a bankruptcy petition under
Chapter 11 of the United States Bankruptcy Code on February 2, 2001. Mr. Johnson
currently serves as a director of several other privately held Wingate portfolio
companies. Mr. Johnson received his B.S. in Industrial Engineering from Stanford
University and his M.B.A. from the Stanford Graduate School of Business.
JEFFREY N. MACDOWELL, Age 40, Mr. MacDowell has been a director of Corrpro since
August 2004. Mr. MacDowell has been a Principal with American Capital
Strategies, Ltd., a publicly-traded buyout and mezzanine fund with capital
resources exceeding $3 billion, since April 2001. From July 1998 to April 2001,
Mr. MacDowell was Vice President -- -- Finance and Corporate Development of
Dynamex Inc., a publicly-traded provider of same-day delivery and logistics
services with $250 million in revenues. Mr. MacDowell currently serves on the
board of directors of three privately held companies. Mr. MacDowell graduated
magna cum laude from Southern Methodist University with a Bachelor of Science in
Mechanical Engineering.
EMILIO T. PENA, Age 49, Mr. Pena has been a director of Corrpro since August
2004. Mr. Pena currently serves as President and Chief Executive Officer of both
Illumina Energy Group LP ("Illumina") and Emil T. Pena Interests, Inc. ("EPII").
Illumina is an energy services technology and power marketing company focused on
providing energy consulting, aggregation and management, as well as information
management and power generation development to the rapidly expanding and
changing United States and Mexico markets. EPII is a government affairs company
representing clients at the federal, state and local levels as well as in Mexico
and Latin America. Mr. Pena previously served in the U.S. Department of Energy
from March 2000 to January 2001 as the Deputy Assistant Secretary for the Office
of Natural Gas and Petroleum Technology, Office of Fossil Energy. In this
position, he was responsible for administering oil and gas programs, including
research and development, planning and environmental analysis, and import and
export activities. From 1985 to 2000, Mr. Pena headed EPII. Mr. Pena was the
Assistant Director, Public Affairs Field Operations at Atlantic Richfield
Company from 1981 to 1985. Mr. Pena also served in various public affairs
positions at the Miller Brewing Company and LoVaca Gathering Company. Mr. Pena's
professional affiliations and civic activities include U.S., Mexico Chamber of
Commerce board, NARUC/DOE Energy Market Access Partnership board, Texas
Mid-Continent Oil and Gas Association, and Latin American Management Association
board. Mr. Pena holds an M.A. in Environmental Management from the University of
Texas, San Antonio, Texas, and a Bachelor of Arts in Political Science, History
and Sociology from Texas A&I University, Kingsville, Texas.
JASON H. REED, Age 37, Mr. Reed has been a director of Corrpro since March 2004.
Mr. Reed is a Principal of various Wingate entities, including the indirect
general partner of each of Wingate Partners II, L.P. and Wingate Partners III,
L.P. Mr. Reed joined Wingate in 1998. Prior to joining Wingate, Mr. Reed was a
Case Leader at Boston Consulting Group, an international management consulting
firm. Over the course of his six-year career in consulting, Mr. Reed worked on
numerous projects in the area of corporate strategy and operational improvement.
Mr. Reed serves as a director for two privately held Wingate portfolio
companies. Mr. Reed received his B.S. in Economics and Finance from Oklahoma
State University, his M.S. in Finance from the London School of Economics, and
his M.B.A. from the Harvard Business School.
WILLIAM R. SEELBACH, Age 57, Mr. Seelbach has been a director of Corrpro since
August 2004. Mr. Seelbach is currently the President and Chief Executive Officer
of the Ohio Aerospace Institute ("OAI"), a non-profit organization whose mission
is to assist Ohio's aerospace industry through collaborative research, education
and
71
training. Prior to joining OAI in 2003, Mr. Seelbach was the President of Brush
Engineered Materials, Inc. ("BEM"), a $500 million New York Stock Exchange
("NYSE") company focused on high performance engineered materials. At BEM, Mr.
Seelbach had direct responsibility for its beryllium and beryllium alloy
businesses, including BEM's mining and refinery operations, its copper beryllium
alloy businesses and all of BEM's international operations. Mr. Seelbach held
senior executive positions within BEM since 1998. From 1986 to 1998, Mr.
Seelbach was the Chairman and Chief Executive Officer of Inverness Partners, a
limited liability company whose purpose was to acquire Midwestern manufacturing
companies. Mr. Seelbach is a member of the Board of Directors of OMNOVA
Solutions, Inc., a $750 million NYSE company that is a major innovator of
decorative and functional surfaces, emulsion polymers and specialty chemicals.
Mr. Seelbach is also a director of several privately held manufacturing
companies. He holds an M.B.A. from the Stanford Graduate School of Business and
a Bachelor of Science degree in Electrical Engineering and Operations Research
from Yale University.
STANFORD SPRINGEL, Age 58, Mr. Springel has been a director of Corrpro since
August 2004. Mr. Springel is a Managing Director at Alvarez & Marsal Holdings,
LLC, a global professional services firm that specializes in leading troubled
companies through the turnaround, restructuring, and bankruptcy processes. Prior
to joining Alvarez & Marsal in January 2003, Mr. Springel provided similar
services as an independent contractor to companies experiencing financial
difficulties. In the past five years, Mr. Springel has worked with a variety of
companies and industries, generally in the role of Chief Executive Officer or
Chief Restructuring Officer, including SLI Holdings International LLC, a
manufacturer and supplier of lighting systems; Cannondale Corporation, a leading
manufacturer of high-end bicycles; U.S. Aggregates, Inc., an integrated
construction materials business with aggregate, asphalt and ready-mixed concrete
operations; and Omega Environmental, Inc., a provider of construction,
maintenance, and environmental services to gasoline stations. Mr. Springel is a
member of the board of directors of three privately held companies, SLI Holdings
International, LLC, London Fog Industries, Inc. and Pinebrook Capital. Mr.
Springel received his Bachelor of Arts degree from Dickinson College.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on a review of reports filed by our directors, executive officers
and beneficial holders of 10% or more of our shares, and upon information
provided by those persons, all SEC stock ownership reports required to be filed
by those reporting persons with respect to Fiscal 2005 our last fiscal year were
timely made, with the exception that the Form 4, Statement of Changes in
Beneficial Ownership of Securities, filed on August 6, 2004 for Mr. George A.
Gehring, Jr. was inadvertently filed late.
CODE OF CONDUCT AND CODE OF ETHICS
Corrpro has adopted a Code of Conduct applicable to all directors,
officers and employees of the company. In addition, we have adopted a Code of
Ethics for Senior Financial Officers, applicable to the Chief Executive Officer,
the Chief Financial Officer, the Controller, and any other person performing
similar functions. The Code of Ethics is available at Corrpro's website at
www.corrpro.com. Any amendments to the Code of Ethics, and any waivers of its
provisions with respect to the Chief Executive Officer, the Chief Financial
Officer, the Controller, and any other person performing similar functions, will
be posted on Corrpro's website at www.corrpro.com.
72
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Compensation
The following table sets forth the annual and long-term compensation paid
or accrued for the benefit of our named executive officers for services rendered
to Corrpro during fiscal years 2005, 2004, and 2003.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
- ---------------------------------------------------------------------------------------- ---------------
OTHER
ANNUAL SECURITIES
NAME AND PRINCIPAL FISCAL COMPEN- UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS SATION OPTIONS COMPENSATION(1)
- ------------------------ ------ -------- -------- ------- ----------- ---------------
Joseph P. Lahey 2005 $261,250 $ 60,000 - 400,000 $ 1,398
Chief Executive Officer 2004 - - - - -
and President(2) 2003 - - - - -
Joseph W. Rog 2005 23,750 - - 479,250 311,319
Chairman of the Board, 2004 285,000 100,000 - 45,000 -
Chief Executive Officer 2003 285,000 - - - 877
and President(3)
Michael K. Baach 2005 180,000 5,000 273,250 52,679
Executive Vice 2004 180,000 85,500 - 18,750 -
President 2003 180,000 - - 10,000 554
David H. Kroon 2005 170,000 45,000 263,875 51,746
Executive Vice 2004 170,000 85,000 - 18,750 -
President 2003 170,000 - - 10,000 523
Robert M. Mayer 2005 150,000 20,000 205,750 50,995
Senior Vice President, 2004 150,000 85,500 - -
Chief Financial Officer 2003 150,000 - 20,000 120
And Treasurer
Barry W. Schadeck 2005 180,000 56,000 308,250 50,000
Executive Vice 2004 180,000 75,000 - - -
President and President 2003 180,000 - - 10,000 -
of Corrpro Canada, Inc.
73
- ------------
(1) Pursuant to the Amendment and Termination Agreements described below under
"Employment and Change and Control Agreements," as partial consideration to the
executives who forfeited all rights to payment under the Change in Control
Agreements, in fiscal 2005 the Company made a payment of $50,000 each to Messrs.
Rog, Baach, Kroon, Schadeck and Mayer. The amount above includes severance paid
for fiscal 2005 in connection with the termination of Mr. Rog's ($261,250)
employment contract. The balance of the respective total amounts in this column
for each individual represents matching contributions under Corrpro's 401(k)
retirement savings plan.
(2) Effective May 3, 2004, Mr. Lahey joined Corrpro as its Chief Executive
Officer and President.
(3) Effective March 30, 2004, Mr. Rog resigned as Chairman of the Board, but
remained a member of the Board with a term expiring at the 2004 Annual Meeting
held on August 26, 2004. Effective May 3, 2004, Mr. Rog resigned as Chief
Executive Officer and President of Corrpro.
Option Grants in Last Fiscal Year
The following table provides information regarding the grant of stock
options to each of the named executive officers in fiscal 2005.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
------------------------------------------------------ ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
OPTION TERM(2)
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTION(S) EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL 2005 SHARE DATE 5% 10%
- ----------------- ---------- ------------- --------- ---------- -------- ------------------
Joseph P. Lahey 200,000 6.2 1.99 07/07/2014 $250,300 $ 634,310
200,000 6.2 3.98 07/07/2014 500,600 1,268,619
Joseph W. Rog 114,000 3.5 1.99 07/07/2014 142,671 361,556
114,000 3.5 3.98 07/07/2014 285,342 723,113
206,250(3) 6.4 2.55 06/30/2011 330,759 838,209
45,000(3) 1.4 1.52 03/30/2008 43,016 109,012
Michael K. Baach 108,500 3.4 1.99 07/07/2014 135,788 344,113
108,500 3.4 3.98 07/07/2014 271,576 688,226
56,250(3) 1.8 2.55 06/30/2011 90,207 228,602
David H. Kroon 108,500 3.4 1.99 07/07/2014 135,788 344,113
108,500 3.4 3.98 07/07/2014 271,576 688,226
46,875(3) 1.5 2.55 06/30/2011 75,173 190,502
Robert M. Mayer 101,750 3.1 1.99 07/07/2014 127,340 322,705
101,750 3.1 3.98 07/07/2014 254,680 645,410
2,250 0.1 2.55 06/30/2011 3,608 9,144
Barry W. Schadeck 108,500 3.4 1.99 07/07/2014 135,788 344,113
108,500 3.4 3.98 07/07/2014 271,576 688,226
91,250(3) 2.8 2.55 06/30/2011 146,336 370,844
- -----------------
(1) The options are subject to the terms of the applicable option agreements and
the provisions of the Corrpro 2004 Long-Term Incentive Plan. The options
exercisable at $1.99 per share and $3.98 per share shown in the table above vest
in equal annual increments on the first, second, third, fourth and fifth
anniversaries of the grant date. The options
74
exercisable at $2.55 per share shown in the table above fully vested on July 8,
2004. The options exercisable at $1.52 shown in the table above vest in equal
annual increments on the first, second and third anniversaries of November 19,
2004.
(2) The potential realizable value set forth in the table above illustrates the
values that would be realized upon exercise of the option immediately prior to
the expiration of its term, assuming the specified compounded rates of
appreciation on the common shares over the term of the option. The use of the
assumed 5% and 10% annual rates of stock price appreciation is established by
the SEC. The ultimate value of the options depends on actual future prices of
the common shares. Market conditions and other factors can influence those
future values, and the amounts shown above are not intended by Corrpro to
forecast possible appreciation of the price of the common shares.
(3) The options shown in the table above were issued pursuant to the terms of
the Termination and Amendment Agreement described under the caption "Employment
Agreements and Change in Control."
AGGREGATED OPTION EXERCISES IN FISCAL 2005
AND MARCH 31, 2005 OPTION VALUES
The following table provides information regarding the exercise of options
by each of the named executive officers during fiscal 2005 and the number of
unexercised stock options held at March 31, 2005 by each of the named executive
officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 2005 MARCH 31, 2005
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
- ----------------- ----------- -------- ----------- ------------- ------------- -------------
Joseph P. Lahey None N/A 0 400,000 $ 0 $ 0
Joseph W. Rog None N/A 221,250 258,000 0 0
Michael K. Baach None N/A 72,500 229,500 4,500 0
David H. Kroon None N/A 63,125 229,500 4,500 0
Robert M. Mayer None N/A 18,917 206,833 7,500 1,500
Barry W. Schadeck None N/A 101,250 217,000 4,500 0
Employment and Change in Control Agreements
Until May 3, 2004, Mr. Rog served as Corrpro's Chief Executive Officer and
President. Mr. Rog was employed under an employment agreement, as amended, dated
November 2, 2000. In connection with Corrpro's March 2004 refinancing and
recapitalization and the termination of Mr. Rog's Change in Control Agreement,
Mr. Rog's November 2000 employment agreement was replaced with an employment
agreement effective as of March 30, 2004. In accordance with its provisions, the
March 2004 employment agreement was terminated, subject to certain provisions
which survived termination, in May 2004.
The applicable employment agreements provided for the payment of Mr. Rog's
base salary and such other compensation as determined by the Board of Directors
from time to time. Other compensation included bonuses, stock options and
incentive compensation.
- --------
(1) Includes certain options that terminated effective June 28, 2004 in
connection with the refinancing and recapitalization of Corrpro. The number of
options that so terminated with respect to each named executive officer was Mr.
Rog (234,250), Mr. Baach (73,250), Mr. Kroon (63,875), Mr. Schadeck (108,250)
and Mr. Mayer (5,750).
75
The agreements provided that Mr. Rog may not compete with Corrpro during
the term of the agreements and for as long as Mr. Rog receives retirement income
payments from Corrpro. Mr. Rog had earned the right to receive retirement income
with a lifetime survivor benefit to his spouse in an amount equal to 50% of his
base salary (commencing on the first day of the month following the termination
of the severance payments described below) provided that certain conditions are
satisfied. In accordance with an employment agreement between Corrpro and Mr.
Rog dated March 30, 2004, Mr. Rog resigned as President and Chief Executive
Officer, effective May 3, 2004.
Mr. Rog became entitled to severance as consideration for his execution of
an Agreement and General Release in connection with his resignation. Corrpro is
obligated to pay two years of severance at the rate of Mr. Rog's base salary and
auto allowance in effect at the time of his resignation, plus a payment equal to
one full year's participation in Corrpro's annual bonus plan for our fiscal year
ended March 31, 2004 at the 100% level. Mr. Rog received a bonus of $100,000 for
fiscal 2004. Mr. Rog is eligible to earn and be paid 1/12 year's participation
in Corrpro's annual bonus plan in effect during fiscal 2005, to be paid within
the time period prescribed by such plan. Mr. Rog and his spouse are entitled to
continue any medical or other insurance coverage in effect at the time of
resignation for a period of twenty-four months, subject to the terms of the
applicable Corrpro sponsored plan.
In November 2000, Corrpro and each of Messrs. Baach and Kroon signed
employment agreements, under which each serves as an Executive Vice President.
In November 2002, Corrpro and Mr. Mayer signed an employment agreement, under
which he serves as a Senior Vice President. Each of these agreements are
effective through March 31, 2006 and provide for the payment of base salaries,
subject to annual adjustment, severance payments approximately equal to two
years' (one year, in the case of Mr. Mayer) salary plus benefits in the event of
termination without cause, medical and other insurance coverage, disability
benefits and participation in Corrpro's annual bonus plan. Mr. Schadeck's
services are provided through one of Corrpro's Canadian subsidiaries. This
subsidiary has engaged Mr. Schadeck under a management services agreement which
provides for base level compensation and bonuses based on performance. The
agreements with the named executive officers generally restrict the officers
from competing for two years (one year, in the case of Mr. Mayer) following
termination.
Mr. Lahey became Corrpro's Chief Executive Officer and President on May 3,
2004. Mr. Lahey is employed under an employment agreement having an initial term
through April 30, 2006, which has been extended through April 30, 2007 in
accordance with applicable renewal provisions. Under this agreement, Mr. Lahey
serves as Corrpro's Chief Executive Officer and President as well as a director
of Corrpro. The agreement provides for Mr. Lahey to be nominated as a Corrpro
director for so long as he serves as Corrpro's Chief Executive Officer.
Mr. Lahey's employment agreement provides for his base salary, vacation,
participation in Corrpro's annual incentive bonus plan with a target payout of
50% of his base salary, automobile allowance, temporary living allowance,
reimbursement of certain travel expenses, participation in Corrpro sponsored
employee benefit and executive benefit plans, and participation in other welfare
and fringe benefit plans. Mr. Lahey is entitled to a grant of stock options (as
described below) and such other compensation as determined by the Board of
Directors from time to time. Mr. Lahey's base salary is subject to annual
review.
Pursuant to the terms of Mr. Lahey's employment agreement, Corrpro issued
to Mr. Lahey an option to purchase 200,000 common shares with an exercise price
equal to $1.99 and an option to purchase 200,000 common shares with an exercise
price equal to $3.98.
Mr. Lahey may not compete with Corrpro during the term of the agreement
and for as long as Mr. Lahey receives severance payments from Corrpro. Corrpro
may terminate Mr. Lahey's employment for good cause (as defined in the
agreement), in which case Corrpro will pay Mr. Lahey his base salary earned
through termination and auto allowance, if any, with no further obligation to
him except as required by law.
Corrpro may have to pay severance to Mr. Lahey if specified events occur.
These events include termination of his employment at a time when Corrpro is in
breach of its obligations under the agreement or termination of the
76
agreement by Corrpro without good cause. If termination occurs, Corrpro must pay
two years of severance at the rate of Mr. Lahey's base salary and auto
allowance, if any, in effect at the time of termination. Mr. Lahey also would be
entitled to continue any medical or other insurance coverage in effect at the
time of termination for a period of twenty-four months.
In November 2000, Corrpro entered into Change of Control Agreements with a
number of executive officers, including Messrs. Rog, Baach, Kroon and Schadeck
in order to retain these individuals in the event of a change in control. Such
change in control agreements obligated Corrpro to make aggregate payments in
excess of $2.5 million to these individuals in the event of a change in control.
Effective October 23, 2003, Corrpro and the named executive officers, who were
represented by independent counsel, negotiated and executed Amendment and
Termination Agreements with respect to the change in control agreements.
Pursuant to the Amendment and Termination Agreements, the executives forfeited
all rights to payment under the Change in Control Agreements upon the
satisfaction of certain closing conditions in connection with the refinancing
and recapitalization of the company.
Pursuant to the terms of the Amendment and Termination Agreements:
- the employment agreements of each of these executives were extended
from March 31, 2005 to March 31, 2006;
- Corrpro reserved an amount of common shares for issuance upon
exercise of existing and future stock options that may be granted to
employees, officers and directors from time to time, but which, in
the aggregate, shall not exceed the amount as provided in the 2004
Long-Term Incentive Plan;
- each of these executives was issued new options to purchase 200,000
shares of Corrpro's common shares; on July 8, 2004 the Company
issued to each of these executives 100,000 options at an exercise
price of $1.99 and 100,000 options at an exercise price of $3.98;
new options were issued to such executives equal to the number of
previously granted options that expired pursuant to their terms
because of the change in control effected by the March 2004
refinancing and recapitalization; and
- each of these executives received a $50,000 cash bonus during fiscal
2005.
BOARD COMPENSATION
Retainer and Fees
During our last fiscal year, Corrpro paid non-employee directors (unless
waived) an annual retainer of $20,000. Corrpro also paid non-employee directors
(unless waived) $1,000 ($1,200 for a committee chairperson) for each in-person
Board or committee meeting attended and $350 ($550 for a committee chairperson)
for each telephonic Board or committee meeting attended. Each of Messrs.
Applebaum, Briggs, Johnson, MacDowell, Pena, Reed, Seelbach and Springel
currently qualify as non-employee directors for purposes of retainers and fees.
Pursuant to a waiver of compensation letter, however, Messrs. Applebaum,
Johnson, and Reed waived and relinquished their rights to any and all claims to
receive cash compensation or equity securities for their services as director
until the earlier of the last day of their service as a director designated to
receive cash compensation or equity securities for his services as a director by
the holders of the Series B Preferred Stock and the last day of their employment
with Wingate and /or its affiliates. Mr. MacDowell also qualifies as a
non-employee director for purposes of retainers and fees. Mr. MacDowell,
however, receives the same compensation as Messrs. Applebaum, Johnson and Reed
pursuant to the terms of the Note and Equity Purchase Agreement between Corrpro
and ACAS and has also similarly waived his rights to receive cash compensation
or equity securities for his services as a director. Corrpro also reimburses all
of its directors for reasonable out-of-pocket expenses incurred in attending
Board and committee meetings.
Under the 2001 Non-Employee Directors' Stock Appreciation Rights Plan,
which became effective May 17, 2001, a one-time grant of vested stock
appreciation rights was made to non-employee directors then serving on the Board
77
at an exercise price of $2.10 per share. The stock appreciation rights entitle
each participant to be paid in cash, subject to the applicable terms and
conditions of the grant, on or after May 17, 2006, the amount of appreciation in
the fair market value over the exercise price of 10,000 Corrpro common shares
between May 17, 2001 and May 17, 2006.
Deferred Compensation Plan
Eligible directors may elect to defer payment of all or any part of their
retainer and fees under the Deferred Compensation Plan for Outside Directors.
Participating directors elect an investment model which determines the return on
their deferred funds. The investment model can include common shares. Deferred
portions are payable in a lump sum, over a period of five (5) years or over a
period of ten (10) years. The director specifies in advance the date on which
payments will begin. Payments may be accelerated if the director dies or becomes
disabled.
Outside Directors' Stock Option Plan
Under the 2004 Long-Term Incentive Plan of Corrpro Companies, Inc. (the
"2004 Long-Term Incentive Plan"), that was approved by the shareholders at the
Company's 2004 Annual Meeting, each non-employee director is eligible for an
award of a non-qualified stock option for 10,000 common shares immediately upon
becoming a non-employee director. On September 30th of each calendar year, each
non-employee director is also eligible for an award of a non-qualified stock
option for 7,500 common shares if the non-employee director was not first
elected to serve on the Board of Directors of Corrpro within the twelve (12)
months immediately preceding such date and is serving as a non-employee director
on such date and the date immediately following such date. Awards made to
non-employee directors shall be with terms and conditions otherwise consistent
with the provisions of the 2004 Plan.
Each of Messrs. Applebaum, Johnson, Reed and MacDowell currently qualify
as non-employee directors for purposes of the 2004 Long-Term Incentive Plan. As
stated above, however, Messrs. Applebaum, Johnson, Reed and MacDowell waived and
relinquished their rights to any and all claims to receive cash compensation or
equity securities for their services as director.
78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table presents information known to Corrpro about the
beneficial ownership of the common shares as of June 17, 2005, unless otherwise
indicated, by (i) each of the named executive officers of Corrpro; (ii) each
director of Corrpro; and (iii) all of the directors and executive officers as of
June 17, 2005 as a group.
The number and percentage of the common shares beneficially owned is
determined under the rules of the SEC and is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any common shares for which a person has sole or shared
voting power or investment power and also any common shares underlying options,
warrants or convertible securities that are exercisable or convertible by that
person within 60 days of June 17, 2005.
Unless otherwise indicated in the footnotes, each person listed in the following
table has sole voting power and investment power over the shares of Common Stock
listed as beneficially owned by that person. Percentage of beneficial ownership
is based on 8,787,843 common shares outstanding on June 17, 2005.
AMOUNT AND NATURE OF PERCENT OF COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP BENEFICIALLY OWNED(1)
- ------------------------ -------------------- -----------------------
Jay I. Applebaum(2) 12,113,744 58.0%
Michael K. Baach(3) 225,746 2.5
Thomas P. Briggs - -
James A. Johnson(2) 12,113,744 58.0
David H. Kroon(4) 355,852 4.0
Joseph P. Lahey(5) 80,000 *
Jeffrey N. MacDowell - -
Robert M. Mayer(6) 70,336 *
Emilio T. Pena - -
Jason H. Reed(2) 12,113,744 58.0
Joseph W. Rog(7) 571,095 6.3
Barry W. Schadeck (8) 144,650 1.6
William R. Seelbach 15,000 *
Stanford Springel - -
All directors and executive
officers as a group
(15 persons) (9) 13,566,731 62.7
- ------------------------------
* Less than one percent (1%).
(1) An individual's percentage of common shares beneficially owned is not equal
to such individual's percentage of total voting power because the beneficial
ownership calculation does not include the voting power of the shares of Series
B Preferred Stock and includes shares that may be acquired within 60 days of
June 17, 2005, through the exercise of stock options. As of June 17, 2005, 100%
of the Series B Preferred Stock issued on March 30, 2004 was outstanding.
Therefore, under the terms of the Articles, the holders of the Series B
Preferred Stock have the right, voting with the holders of the common shares as
a single class, to cast a number of votes equal to approximately 51% of the
total voting power of Corrpro.
79
(2) CPI is the record holder of a warrant to purchase up to 12,113,744 common
shares of Corrpro. Wingate Affiliates III, L.P. ("Affiliates") and Wingate
Partners III, L.P. ("WPIII") are members of CPI. Wingate Management Company III,
L.P.("WMC") is the general partner of WPIII. Wingate Management Limited III, LLC
("WML") is the general partner of Affiliates and WMC. Messrs. Applebaum, Johnson
and Reed are Principals and Managers of WML. Messrs. Applebaum, Johnson and Reed
also serve as directors of Corrpro. Each of WPIII, WMC, WML, Affiliates and
Messrs. Applebaum, Johnson and Mr. Reed may be deemed to be the indirect
beneficial owner of the common shares that may be acquired by CPI upon exercise
of the warrant. Each such person expressly disclaims any such beneficial
ownership. Pursuant to the Amended and Restated Limited Liability Company
Agreement of CPI, (i) Affiliates, in its capacity as a member of CPI, may
acquire direct beneficial ownership of 392,135 of such shares within 60 days of
June 17, 2005 and (ii) WPIII, in its capacity as a member of CPI, may acquire
direct beneficial ownership of 9,337,967 of such shares within 60 days of June
17, 2005. See the Form 3 and Form 13D jointly filed by CPI, WPIII, WMC, WML,
Affiliates, Jay I. Applebaum, James A. Johnson and Jason H. Reed on April 9,
2004.
(3) Includes 115,900 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(4) Includes 106,525 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(5) Includes 80,000 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(6) Includes 59,617 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(7) Includes 266,850 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(8) Includes 144,650 common shares that may be acquired within 60 days of June
17, 2005 through the exercise of stock options.
(9) Includes an aggregate of 833,042 common shares that may be acquired within
60 days of June 17, 2005 through the exercise of stock options and 12,113,744
shares, without duplication, issuable upon exercise of a warrant.
BENEFICIAL OWNERS OF 5% OR MORE
The following table sets forth information regarding the number and
percentage of common shares and Series B Preferred Stock held by all persons and
entities who are known by Corrpro to beneficially own 5% or more of Corrpro's
outstanding common shares or Series B Preferred Stock. The information regarding
beneficial ownership of common shares and Series B Preferred Stock by the
entities identified below is included in reliance on reports filed with the SEC
by such entities, except that the percentage is based upon Corrpro's
calculations made in reliance upon the number of common shares and Series B
Preferred Stock reported to be beneficially owned by such entity in such report
and 8,787,843 common shares and 13,000 shares of Series B Preferred Stock
outstanding on June 17, 2005.
80
SHARES OF PERCENTAGE OF
PERCENTAGE OF SERIES B SERIES B
COMMON PREFERRED PREFERRED
COMMON SHARES SHARES STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED(1) OWNED OWNED
- ------------------------------------ ------------- ------------- ------------ -------------
CorrPro Investments, LLC(1)(2) 12,113,744 58.0% 13,000 100%
American Capital Strategies, Ltd.(3) 3,936,967 30.9 - -
JB Capital Partners L.P.(4) 541,200 5.8 - -
Joseph W. Rog(5) 571,095 6.3 - -
- -------------------------
(1) An individual's percentage of common shares beneficially owned is not equal
to such individual's percentage of total voting power because the beneficial
ownership calculation does not include the voting power of the shares of Series
B Preferred Stock and includes shares that may be acquired within 60 days of
June 17, 2005, through the exercise of stock options. As of June 17, 2005, 100%
of the Series B Preferred Stock issued on March 30, 2004 was outstanding.
Therefore, under the terms of the Articles, the holders of the Series B
Preferred Stock have the right, voting with the holders of the common shares as
a single class, to cast a number of votes equal to approximately 51% of the
total voting power of Corrpro.
(2) The address of the principal offices of CorrPro Investments, LLC is 750
North St. Paul Street, Suite 1200, Dallas, Texas 75201. Based solely upon
information contained in a Schedule 13D jointly filed by CPI, WPIII, WMC, WML,
Affiliates, Jay I. Applebaum, James A. Johnson and Jason H. Reed on April 9,
2004, consists solely of warrants held of record by CPI which are exercisable
for 12,113,744 common shares. Affiliates and WPIII are members of CPI. WMC is
the general partner of WPIII. WML is the general partner of WMC and Affiliates.
Each of Messrs. Applebaum, Johnson and Reed is a Principal and Manager of WML.
Messrs. Applebaum, Johnson and Reed serve as directors of Corrpro. Each of
WPIII, WMC, WML, Affiliates and Messrs. Applebaum, Johnson and Mr. Reed may be
deemed to be the indirect beneficial owner of the common shares that may be
acquired by CPI upon exercise of the warrant. Each such person expressly
disclaims any such beneficial ownership. Pursuant to the Amended and Restated
Limited Liability Company Agreement of CPI, (i) Affiliates, in its capacity as a
member of CPI, may acquire direct beneficial ownership of 392,135 of such shares
within 60 days of June 17, 2005 and (ii) WPIII, in its capacity as a member of
CPI, may acquire direct beneficial ownership of 9,337,967 of such shares within
60 days of June 17, 2005. Each of CPI, WPIII, WMC and WML may be deemed to have
sole power to vote or to direct the vote and sole power to dispose or to direct
the disposition of 12,113,744 common shares that may be acquired by CPI upon
exercise of the warrant. Affiliates may be deemed to have sole power to vote or
to direct the vote and sole power to dispose or to direct the disposition of
392,135 common shares that may be acquired by Affiliates pursuant to the LLC
Agreement. Each of Messrs. Applebaum, Johnson and Reed may be deemed to have
shared power to vote or to direct the vote and shared power to dispose or to
direct the disposition of 12,113,744 shares of Common Stock that may be acquired
by CPI upon exercise of the warrant.
(3) The address of the principal offices of American Capital Strategies, Ltd. is
2 Bethesda Metro Center, 14th Floor Bethesda, Maryland 20814. Based solely upon
information contained in a Schedule 13D filed by American Capital Strategies,
Ltd., on April 9, 2004, consists solely of warrants which are exercisable for
3,936,967 common shares.
(4) The address of the principal offices of JB Capital Partners, L.P. is 5 Evan
Place, Armonk, New York 10504. Based solely upon information contained in a
Schedule 13D jointly filed by JB Capital Partners, L.P. and Alan W. Weber on
December 29, 2003. JB Capital Partners, L.P. reported that it had shared voting
and dispositive power with respect to 506,200 shares. Alan W. Weber reported
that he had sole voting and dispositive power with respect to 35,000 shares and
shared voting and dispositive power with respect to 506,200 shares.
81
(5) Based upon information contained in a Schedule 13G filed by Joseph W. Rog on
February 14, 2005, as updated by company records regarding stock options, Mr.
Rog reported that he had sole voting and dispositive power with respect to
484,955 shares and shared voting and dispositive power with respect to 40,540
shares.
Equity Compensation Plan Information
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES WEIGHTED AVERAGE FOR FUTURE ISSUANCE
TO BE ISSUED UPON EXERCISE PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED IN THE FIRST
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN)
- ------------------------------------------------------ -------------------- ----------------- ----------------------
Equity compensation plans approved by security holders 3,192,070 $2.65 1,350,584
Equity compensation plans not approved by security
holders(1) - - -
--------- ----- ---------
Total 3,192,070 $2.65 1,350,584
========= ===== =========
(1) Does not include Corrpro's 2001 Non-Employee Directors' Stock Appreciation
Rights Plan which has not been approved by its shareholders. Under this plan,
certain former non-employee directors received a one-time grant of vested stock
appreciation rights as part of their compensation for serving as directors. The
stock appreciation rights entitle each participant to be paid in cash, subject
to the applicable terms and conditions of the grant, on or after May 17, 2006,
the amount of appreciation in fair market value of 10,000 common shares between
May 17, 2001 and May 17, 2006. Currently, three such former non-employee
directors hold such stock appreciation rights. Moreover, this does not include
shares authorized for payment of bonuses totaling 25,000 of which 22,500 are
still available. Further, this does not include Corrpro's Employee Stock
Purchase Plan, which has been suspended, with authorized shares totaling 375,000
of which 300,068 shares are still available.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is an officer or
employee, or former officer or employee of Corrpro. No interlocking relationship
exists between the members of Corrpro's Board or Compensation Committee and the
board of directors or compensation committee of any other company.
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 30, 2004, Corrpro entered into a services agreement with Wingate
Partners, an affiliate of CPI. Wingate Management Company III, L.P. ("WMC") is
the general partner of Wingate Partners. WML is the general partner of WMC. Each
of Messrs. Applebaum, Johnson, and Reed is a Principal and Manager of WML.
Messrs. Applebaum, Johnson and Reed serve as directors of Corrpro. The services
agreement provides that Wingate Partners agrees to consult with the Board of
Directors in such a manner and on such business and financial matters as would
be reasonably requested from time to time by the Board, including financial
advisory, management advisory, strategic planning, monitoring and other related
services, in exchange for which Corrpro will pay an annual non-refundable
services fee of $400,000 payable quarterly in advance, to such persons
designated by Wingate Partners. In lieu of paying any quarterly installment of
the services fee in cash, Corrpro may, at its option, or if Corrpro is
restricted from paying any such quarterly installment in cash under, or the
Board determines that payment of such quarterly installment in cash would result
in a default under, the terms of our new senior secured credit facility or
senior secured subordinated notes, delay payment and accrue any unpaid portion
of the services fee, without interest. The services agreement will have an
initial term of eight (8) years, which term will automatically renew for
successive one year periods thereafter unless either party notifies the other of
its desire to terminate the services agreement.
83
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees paid to KPMG for fiscal year 2005 were as follows:
Audit Fees Audit-Related Fees Tax Fees Other Fees
- ---------- ------------------ -------- ----------
$ 365,283 $ 14,819 $ 15,861 $ 0
- ---------- ------------------ -------- ----------
Audit Fees. Audit fees consist of fees billed for professional services
rendered for the audit of Corrpro's annual financial statements and review of
the interim financial statements included in quarterly reports, as well as
services that are normally provided by KPMG in connection with statutory and
regulatory filings.
Audit-related Fees. Audit-related fees generally include fees for
assurance and related services performed by the independent auditor that are
reasonably related to the performance of the audit or review of financial
statements and may include, among others, employee benefit plan audits, due
diligence related to mergers and acquisitions, internal control reviews, and
consultation regarding financial accounting and reporting standards.
Tax Fees. Tax fees include fees for tax compliance and tax advisory and
consulting services. The services for the fees disclosed under this category
include tax return preparation and technical tax advice provided to Corrpro's
International operations.
Consistent with its charter, the Audit Committee reviews and pre-approves
all audit and non-audit services. The Audit Committee may delegate this
responsibility to one or more designated members of the Audit Committee,
provided that any pre-approvals so delegated are reported to the Audit Committee
at its next regularly scheduled meeting.
84
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS ARE INCLUDED IN
PART II, ITEM 8 OF THIS ANNUAL REPORT ON FORM 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2005 and 2004
Consolidated Statements of Operations for the years ended March 31,
2005, 2004 and 2003
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended March 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended March 31,
2005, 2004 and 2003
Notes to Consolidated Financial Statements
85
(a) (3) INDEX TO EXHIBITS:
EXHIBIT
NO. EXHIBIT
- ------- -----------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated Code of Regulations of the Company. (2)
4.1 Specimen certificate for the Common Shares. (3)
4.2 Securities Purchase Agreement dated December 15, 2003 by and between the Company and CorrPro
Investments, LLC. (4)
4.3 Note and Equity Purchase Agreement dated March 30, 2004 by and among the Company, CCFC, Inc., Ocean
City Research Corp., Corrpro International, Inc. (collectively, "US Borrowers"), Corrpro Canada,
Inc., Commonwealth Seager Holdings Ltd., and Borza Inspections Ltd. (collectively, "Canadian
Borrowers"), and American Capital Financial Services, Inc., as Agent, and the Purchasers thereto. (5)
4.4 Form of Senior Secured Subordinated Note to the Note and Equity Purchase Agreement dated March 30,
2004 by and among the US Borrowers, and American Capital Financial Services, Inc., as Agent, and the
Purchasers thereto. (5)
4.5 Form of Senior Secured Subordinated Note to the Note and Equity Purchase Agreement dated March 30,
2004 by and among the Canadian Borrowers, and American Capital Financial Services, Inc., as Agent,
and the Purchasers thereto. (5)
4.6 Revolving Credit, Term Loan and Security Agreement dated March 30, 2004 among the US Borrowers and
Canadian Borrowers, and CapitalSource Finance LLC and other Lenders thereto. (5)
4.7 Form of Revolving Note to the Revolving Credit, Term Loan and Security Agreement dated March 30, 2004
between the US Borrowers, and CapitalSource Finance LLC and other Lenders thereto. (5)
4.8 Form of Revolving Note to the Revolving Credit, Term Loan and Security Agreement dated March 30, 2004
between the Canadian Borrowers, and CapitalSource Finance LLC and other Lenders thereto. (5)
4.9 Form of Term Note to the Revolving Credit, Term Loan and Security Agreement dated March 30, 2004
between the US Borrowers, and CapitalSource Finance LLC and other Lenders thereto. (5)
4.10 Form of Term Note to the Revolving Credit, Term Loan and Security Agreement dated March 30, 2004
between the Canadian Borrowers, and CapitalSource Finance LLC and other Lenders thereto. (5)
4.11 Security Agreement dated as of March 30, 2004 between the US Borrowers and American Financial
Services, Inc., as Agent, for the Purchasers thereto. (5)
4.12 Security Agreement dated as of March 30, 2004 between the Canadian Borrowers and American Financial
Services, Inc., as Agent, for the Purchasers thereto. (5)
4.13 Security Agreement dated as of March 30, 2004 between the Canadian Borrowers and CapitalSource
Finance LLC, as Agent, for the Lenders thereto. (5)
4.14 Common Stock Purchase Warrant issued to CorrPro Investments, LLC dated as of March 30, 2004. (5)
86
4.15 Common Stock Purchase Warrant issued to American Capital Strategies, Ltd. dated as of March 30, 2004.
(5)
4.16 Investor and Registration Rights Agreement by and between CorrPro Investments, LLC and the Company
dated as of March 30, 2004. (5)
4.17 Services Agreement by and between the Company and Wingate Partners III, LP dated as of March 30,
2004. (5)
4.18 Common Stock Purchase Warrant issued to Bank One, NA dated as of September 23, 2002. (6)
4.19 Common Stock Purchase Warrant issued to The Prudential Insurance Company of America dated as of
September 23, 2002. (6)
4.20 Registration Rights Agreement dated as of September 23, 2002 between the Company and Bank One, NA.
(6)
4.21 Registration Rights Agreement dated as of September 23, 2002 between the Company and The Prudential
Insurance Company of America. (6)
4.22 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. (7)
4.23 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. (7)
**4.24 First Amendment and Waiver dated June 29, 2005 to Note and Equity Purchase Agreement dated March 30,
2004 by and among the US Borrowers, and American Capital Financial Services, Inc., as Agent, and the
Purchasers thereto.
**4.25 First Amendment and Waiver dated June 29, 2005 to Revolving Credit, Term Loan and Security Agreement
dated March 30, 2004 among the US Borrowers and Canadian Borrowers, and CapitalSource Finance LLC and
other Lenders thereto.
*10.1 Corrpro Companies, Inc. 2001 Non-Employees Directors' Stock Appreciation Rights Plan and form of
Award Agreement. (8)
*10.2 1997 Long-Term Incentive Plan of Corrpro Companies, Inc. (9)
*10.3 1997 Non-Employee Directors' Stock Option Plan. (9)
10.4 Corrpro Companies, Inc. Employee Stock Purchase Plan. (10)
10.5 Amendment to 1997 Long-Term Incentive Plan of Corrpro Companies, Inc. (11)
*10.6 Form of Indemnification Agreement for certain Officers and Directors of the Company and schedules
thereto. (12)
*10.7 Form of Executive Officer Employment Agreement by and between the Company and certain executive
officers and schedule thereto. (12)
*10.8 Form of Change in Control Agreement entered into between the Company and certain of its executive
officers and schedule thereto. (12)
10.9 Form of Indemnification Agreement for certain Directors of the Company and schedule thereto. (13)
87
*10.10 Employment Agreement effective March 31, 2004 by and between the Company and Joseph W. Rog. (13)
10.11 Amendment and Termination Agreement by and between the Company and Joseph W. Rog. (13)
10.12 Agreement and General Release by and between the Company and Joseph W. Rog effective as of May 3,
2004. (13)
10.13 Employment Agreement effective as of May 3, 2004 by and between the Company and Joseph P. Lahey. (13)
10.14 Form of Amendment and Termination Agreement by and between the Company and certain executive officers
and schedule thereto. (13)
*10.15 Form of Amendment to Executive Officer Employment Agreement by and between the Company and
certain executive officers and schedule thereto. (13)
10.16 Waiver of Director's Compensation executed by Joseph W. Rog, effective May 3, 2004. (13)
10.17 Form of Waiver of Director's Compensation effective March 30, 2004 and schedule thereto. (13)
*10.18 Company Incentive Option Plan as amended. (3)
*10.19 Company Deferred Compensation Plan. (14)
*10.20 The 2004 Long-Term Incentive Plan of Corrpro Companies, Inc., effective as of June 10, 2004. (15)
*10.21 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. (16)
*10.22 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. (16)
*10.23 Nonqualified Stock Option Award Agreement under the 2004 Long-Term Incentive Plan of Corrpro
Companies, Inc. between the Company and Joseph W. Rog. (16)
*10.24 Nonqualified Stock Option Award Agreement under the 2004 Long-Term Incentive Plan of Corrpro
Companies, Inc. between the Company and Joseph W. Rog. (16)
*10.25 Nonqualified Stock Option Award Agreement under the 2004 Long-Term Incentive Plan of Corrpro
Companies, Inc. between the Company and Joseph P. Lahey. (16)
**10.26 Consulting Agreement dated April 1, 2004 by and between Commonwealth Seager Holdings Ltd. and
Corrtech Consulting Group.
**10.27 Supplement to schedule related to Form of Indemnification Agreement for certain Officers and
Directors of the Company and schedules thereto and Form of Executive Officer Employment Agreement by
and between the Company and certain executive officers and schedule thereto.
**10.28 Supplement to schedule related to Form of Indemnification Agreement for certain Directors of the
Company.
88
21.1 Subsidiaries of the Company. (13)
**23.1 Consent of KPMG LLP.
**31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
**31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
**32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------
* Management contract or compensatory plan or arrangement identified
pursuant to Item 15(a)(3) of this Annual Report on Form 10-K.
** Filed herewith.
(1) A copy of this exhibit filed as Exhibit 3.1 to our Current Report on
Form 8-K filed April 14, 2004 is incorporated herein by reference.
(2) A copy of this exhibit filed as Exhibit 3.2 to our Current Report on
Form 8-K filed April 14, 2004 is incorporated herein by reference.
(3) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibit 4.1 (Stock certificate specimen), and 10.25
(Incentive Option Plan) to our Registration Statement on Form S-1
(Registration No. 33-64482) and are hereby incorporated by reference.
(4) A copy of this exhibit filed as Exhibits 10.1 to our Current Report on
Form 8-K filed December 12, 2003 is incorporated herein by reference.
(5) Copies of the exhibits filed to which this footnote applies were filed,
respectively as Exhibits 10.4 (Note & Equity Purchase Agreement), 10.6
and 10.7 (form of Senior Secured Subordinated Note), 10.10 (Revolving
Credit, Term Loan and Security Agreement), 10.11 and 10.12 (form of
Revolving Note), 10.13 and 10.14 (form of Term Note), 10.8 and 10.9
(American Financial Services, Inc. Security Agreement), 10.15
(CapitalSource Finance, LLC Security Agreement), 10.1 (CorrPro
Investments, LLC Warrant), 10.5 (American Capital Strategies, Ltd.
Warrant), 10.2 (Investor & Registration Rights Agreement), and 10.3
(Services Agreement) to our Current Report on Form 8-K filed April 14,
2004, and are incorporated herein by reference.
(6) Copies of the exhibits filed to which this footnote applies were filed,
respectively, as Exhibits 4.1 (Bank One Purchase Warrant), 4.2
(Prudential Purchase Warrant), 4.3 (Bank One Rights Agreement), 4.4
(Prudential Rights Agreement), 10.1 (Sixth Amendment to Credit
Agreement) and 10.2 (Prudential Amendment) to our Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2002 and is
incorporated herein by reference.
(7) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 4.1 and 4.2 to our Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2004, and are hereby
incorporated by reference.
89
(8) A copy of this exhibit filed as Exhibit 4.9 to our Annual Report on
Form 10-K for the period ended March 31, 2002 is hereby incorporated by
reference.
(9) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 4.4 (1997 Long-Term Inventive Plan) and 4.5
(1997 Non-Employee Directors' Stock Option Plan) to our Registration
Statement on Form S-8 filed October 24, 1997 (SEC File No. 333-38767),
and are hereby incorporated by reference.
(10) A copy of this exhibit contained in our Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange Commission on June
16, 1999 is incorporated herein by reference.
(11) A copy of this exhibit filed as Exhibit 4.5 to our Registration
Statement on Form S-8 filed January 19, 2000 (SEC File No. 333-94989)
is incorporated herein by reference.
(12) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 10.1 (Form of Employment Agreement), 10.2
(Change in Control Agreement) and 10.3 (Indemnification Agreement) to
our Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2000, and are hereby incorporated by reference.
(13) Copies of the exhibits filed to which this footnote applies were filed,
respectively, as Exhibit 10.8 (Form of Indemnification Agreement,
Exhibit 10.10 (Rog Employment Agreement), Exhibit 10.11 (Rog Amendment
and Termination Agreement), Exhibit 10.12 (Rog Agreement and General
Release), Exhibit 10.13 (Lahey Employment Agreement), Exhibit 10.14
(Form of Amendment and Termination Agreement and schedule thereto),
Exhibit 10.15 (Form of Amendment to Executive Officer Employment
Agreements and schedule thereto), Exhibit 10.17 (Rog Waiver of
Director's Compensation), Exhibits 10.18 (Form of Waiver of Director's
Compensation and schedule thereto), and Exhibit 21.1 (Subsidiaries) to
our Annual Report on Form 10-K for the period ended March 31, 2004 and
are hereby incorporated by reference.
(14) A copy of the exhibit filed to which this footnote applies was filed on
Form 10-K for the period ended March 31, 2001 and are hereby
incorporated by reference.
(15) 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.
(16) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 10.2 through 10.6 to our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2004, and are hereby
incorporated by reference.
(b) EXHIBITS
See "Index to Exhibits" at Item 15(a) above.
90
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Form 10-K for the
fiscal year ended March 31, 2005 to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORRPRO COMPANIES, INC.
June 30, 2005 By: /s/ Joseph P. Lahey
-------------------------------
Joseph P. Lahey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
June 30, 2005 /s/ Joseph P. Lahey
-------------------------------
Joseph P. Lahey
President and Chief Executive Officer
(Principal Executive Officer)
June 30, 2005 /s/ Robert M. Mayer
-------------------------------
Robert M. Mayer
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
June 30, 2005 /s/ James A. Johnson
-------------------------------
James A. Johnson
Chairman of the Board of Directors
June 30, 2005 /s/ Jay I. Applebaum
-------------------------------
Jay I. Applebaum, Director
June 30, 2005 /s/ Jason H. Reed
-------------------------------
Jason H. Reed, Director
June 30, 2005
-------------------------------
William R. Seelbach, Director
June 30, 2005 /s/ Stanford Springel
-------------------------------
Stanford Springel, Director
June 30, 2005 /s/ Emil T. Pena
-------------------------------
Emil T. Pena, Director
June 30, 2005 /s/ Thomas P. Briggs
-------------------------------
Thomas P. Briggs, Director
June 30, 2005 /s/ Jeffery N. MacDowell
-------------------------------
Jeffery N. MacDowell, Director
91