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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, 2003
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
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1090 ENTERPRISE DRIVE, MEDINA, OHIO 44256
(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)
AMERICAN STOCK EXCHANGE
(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 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 $5,297,214 at September 30, 2002. 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.
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. [ ]
8,440,847
(Number of Common Shares outstanding as of June 23, 2003.)
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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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 "Corrpro" and the
"Company" mean Corrpro Companies, Inc. and its consolidated subsidiaries unless
the context indicates otherwise.
RECENT EVENTS
The Company has retained an investment banking firm to assist in its
efforts to recapitalize its balance sheet and refinance its currently
outstanding Senior Notes and Revolving Credit Facility. The refinancing process
is ongoing and the Company is currently having discussions with various parties
in order to effect a refinancing transaction. There can be no assurance,
however, that the Company will be able to obtain other financing or as to the
terms and conditions under which such financing may be available.
The Company is currently in default of certain financial ratios required to
be maintained under it Senior Note and Revolving Credit Facility agreements. In
addition, the Revolving Credit Facility is scheduled to expire on July 31, 2003
and the Company is required to make a $7.6 million principal payment on the
Senior Notes by July 31, 2003. The Company is also, at the current time, not
able to provide any assurances regarding its ability to make the $7.6 million
Senior Note principal payment that is due on July 31, 2003. Further information
about our Long-Term Debt is included in Note 3, Long-Term Debt, Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.
The Company has had preliminary discussions with its lenders regarding an
amendment to the Revolving Credit Facility which would, among other things,
extend the maturity date of the Revolving Credit Facility beyond July 31, 2003.
The Company intends to continue its efforts to obtain such an amendment,
however, there can be no assurances that the Company will be able to negotiate
such an amendment at all or under terms and conditions acceptable to it.
Until such time when the Company is able to refinance the Senior Notes and
Revolving Credit Facility it will attempt to negotiate arrangement with its
lenders to, among other things, waive the covenant violations under the Senior
Notes and Revolving Credit Facility agreement, extend the maturity of the
Revolving Credit Facility beyond July 31, 2003 and defer the principal payments
due under the Senior Notes. If the Company is not able to negotiate mutually
acceptable arrangements with its existing lenders, events could occur that would
have a material adverse effect on the Company's liquidity and financial
condition and could result in its inability to operate as a going concern. If
the Company is unable to operate as a going concern, it may file, or have no
alternative but to file, bankruptcy or insolvency proceedings or pursue a sale
or sales of assets to satisfy creditors.
PRODUCTS AND SERVICES
Corrpro provides corrosion control related services, systems, equipment and
materials to the infrastructure, environmental and energy markets. Our products
and services include (i) corrosion control engineering services, systems and
equipment ("corrosion control"), (ii) coatings services ("coatings") and (iii)
pipeline integrity and risk assessment services.
CORROSION CONTROL. Corrpro's specialty in the corrosion control market is
cathodic protection. We offer a comprehensive range of services in this area,
which include 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, the iron ore is subjected to a refining process that
adds energy. Once the steel is put back into the environment, it begins to
revert back to
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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 including anodes, rectifiers and corrosion monitoring probes used in
cathodic protection and corrosion monitoring systems. Corrosion control
represented approximately 79%, 65% and 74% of our revenues in fiscal years 2003,
2002 and 2001, respectively.
COATINGS. Corrpro offers 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 represented approximately 16%, 30% and 21% of our
revenues in fiscal years 2003, 2002 and 2001, respectively.
PIPELINE INTEGRITY AND RISK ASSESSMENT SERVICES. Corrpro offers 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 years 2003, 2002 and 2001.
DISPOSITIONS
In July 2002, the Company's Board of Directors approved a formal business
restructuring plan. The multi-year plan includes a series of initiatives to
improve operating income and reduce debt. The Company intends to sell non-core
business units and use the proceeds to reduce debt. The Company has engaged
outside professionals to assist in the disposition of the 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 have been eliminated and the
non-core domestic and international units are reported as discontinued
operations. Prior-year financial statements have been reclassified to reflect
these non-core units as discontinued operations, which are also referred to as
"assets and liabilities held for sale."
During fiscal 2003, four non-strategic business units were sold. These
dispositions included Rohrback Cosasco Systems, Bass Trigon Software and two
smaller international offices. The proceeds from these dispositions were used to
pay down debt. 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 Form 10-K.
On March 20, 2002, the Company announced that it had discovered accounting
irregularities caused by apparent internal misconduct in its Australian
subsidiary. The accounting irregularities involved the overstatement of revenues
and understatement of expenses by the Australian companies. The irregularities
were discovered by Corrpro management in connection with an internal review of
the subsidiary's working capital
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management practices and cash flow problems inconsistent with the subsidiary's
reported results. Upon discovering the irregularities, the Company immediately
began an internal investigation conducted under the direction of the Audit
Committee of its Board of Directors. The Audit Committee subsequently retained
special counsel in connection with the investigation and retained the forensic
investigation unit of the accounting firm Deloitte Touche Tohmatsu.
The Australian subsidiary appointed an administrator and commenced
voluntary administration proceedings, a process under Australian law providing
relief from creditors of Australian companies. As a result of the appointment,
the Company no longer controlled the Australian subsidiary and the Company
recorded a charge to earnings in the fiscal fourth quarter ended March 31, 2002
for its loss on investment related to the subsidiary.
On April 24, 2002, the creditors of the Australian subsidiary resolved that
the Administrators of the Australian subsidiary should enter into a Deed of
Company Arrangement. The Deed of Company Arrangement became effective May 1,
2002. The arrangement required the Australian subsidiary to make unsecured
payments to the Administrators for the Administrator's fees, certain employee
benefit programs and unsecured creditors. The Company is not required to fund
any of these unsecured payments. The Company did guarantee payment of the
Australian subsidiary's bank debt, which totaled $1.1 million at March 31, 2003.
This amount is classified as current portion of Long-Term Debt.
On October 1, 2002, the Australian subsidiary sold its business assets
(excluding cash, accounts receivable and certain trademarks) for a purchase
price of $0.6 million. The cash proceeds (except amounts held in escrow) from
the business asset sale were remitted to the Administrator of the Australian
subsidiary in accordance with the Deed of Company Arrangement. The remaining
assets (primarily accounts receivable) are also being liquidated and those
proceeds have been remitted to the Administrator. After satisfying the
obligations under the Deed of Company Arrangement, the Administrator remitted
back to the Australian subsidiary excess funds. The excess funds were used by
the Australian subsidiary to pay post-petition creditors.
During fiscal 2003, the Administrator issued a payment to all unsecured
creditors. The Company is an unsecured creditor for intercompany balances due
from the Australian subsidiary. The Company received $0.6 million on February 7,
2003 from the Administrator.
SEGMENTS
We have organized our operations into two business segments: Domestic Core
Operations and Canadian Operations. Our non-core domestic and international
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 consists of
operations that service the United States. Products and services include
corrosion control, coatings, pipeline integrity, risk assessment and inspection
services. This segment provides corrosion control products and services to a
wide-range of customers in a number of industries, including energy, utilities,
water and wastewater treatment, chemical and petrochemical, pipelines, defense
and municipalities. In addition, this segment provides coatings services to
customers in the entertainment, aerospace, transportation, petrochemical and
electric power industries, as well as the United States military. Finally, the
Domestic Core Operations segment includes a production facility in the United
States that assembles and distributes cathodic protection products, such as
anodes, primarily to the United States market. Revenues relating to this segment
totaled $85 million (or 82% of consolidated revenues), $102 million (or 83% of
consolidated revenues) and $96 million (or 80% of consolidated revenues) during
fiscal 2003, 2002 and 2001, respectively.
CANADIAN OPERATIONS. Our Canadian Operations segment provides corrosion
control, pipeline integrity and inspection services to customers in Canada which
are primarily in the oil and gas industry. These customers include pipeline
operators and petrochemical plants and refineries. The Canadian Operations
segment also includes production facilities that assemble products such as
anodes and rectifiers. Revenues relating to this segment totaled $19 million (or
18% of consolidated revenues), $21 million (or 17% of
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consolidated revenues) and $24 million (or 20% of consolidated revenues) during
fiscal 2003, 2002 and 2001, respectively.
Further information about our business segments is included in Note 9,
Business Segments, Notes to Consolidated Financial Statements included in Item 8
of this Form 10-K.
SALES AND MARKETING
We market our products and services in the United States and Canada
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 result in business opportunities on an ongoing basis.
SOURCES AND AVAILABILITY OF RAW MATERIALS
We assemble certain components of cathodic protection systems, which
include aluminum, zinc, magnesium and other metallic anodes. 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.
PATENTS AND LICENSES
We own patents, patent applications and licenses relating to certain of our
products and processes. While our rights under the patents and licenses are of
importance to individual components of our operations, our business as a whole
is not materially dependent on any one patent or license or on the patents and
licenses as a group.
SEASONAL TRENDS
Our business is somewhat seasonal as winter weather can adversely impact
our operations. Therefore, our revenues during the fourth quarter of our fiscal
year (i.e., January through March) are typically lower than revenues during each
of the other three fiscal quarters.
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. The realization of the Company's
foreign net assets held for sale are also affected by currency restrictions and
fluctuations.
CUSTOMERS
Sales are made to a broad range of customers. During the fiscal year ended
March 31, 2003, 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 materially adverse
effect on our business.
We sell products and services to the U.S. government and agencies and
municipalities thereof, including the U.S. Navy. Sales to these customers
accounted for approximately 9%, 16% and 10% of our net sales in fiscal 2003,
2002 and 2001, respectively. 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). These contracts are also subject to renegotiation of profits. In
addition, government procurement programs are 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.
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BACKLOG
Our backlog of unshipped orders was approximately $45 million, $44 million
and $46 million as of March 31, 2003, 2002 and 2001, respectively. We estimate
that a substantial portion of our backlog of orders at March 31, 2003 will be
filled during fiscal 2004.
COMPETITIVE CONDITIONS
Within the corrosion control market, we face competition from a large
number of domestic and international companies, all of which we believe are
considerably smaller than Corrpro. Only a few of these competitors offer a broad
range of corrosion control engineering services, systems and products and 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, technical expertise and capabilities and
customer service, although price is a consideration, particularly when we are
providing construction and installation services. In the product area, we
typically compete on the basis of quality, service and price.
RESEARCH AND DEVELOPMENT
Our engineering and product development activities are primarily directed
toward designing new products and services to meet customers' specific
requirements. Product development costs were minimal in fiscal 2003 and 2002 and
amounted to approximately $0.7 million in fiscal 2001.
GOVERNMENT REGULATIONS
We believe that our current operations and our current use of property,
plant and equipment conform in all material respects to applicable laws and
regulations. Other than as disclosed under "Item 3 -- Legal Proceedings", 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.
EMPLOYEES
As of March 31, 2003, we had 948 employees, 418 of whom were located
outside the United States.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD LOOKING INFORMATION
This document includes certain statements that may be deemed
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on management's expectations and beliefs
concerning future events and discuss, among other things, anticipated future
performance and revenues, expected growth and future business plans. Words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" or variations of such words and similar expressions are intended to
identify such forward-looking statements. We believe that the following factors,
among others, could affect our future performance or the price and liquidity of
our common shares and cause our actual results to differ materially from those
that are expressed or implied by forward-looking statements, or diminish the
liquidity of our common shares: our ability to further extend, amend or
refinance our existing debt, including the availability to us of external
sources of financing and capital (the failure to receive such financing would
have a material adverse effect on our results of operations and financial
condition) and the terms and timing thereof; our ability to successfully divest
our non-core and international business units and the timing, terms and
conditions of such divestitures; the ultimate outcome of the SEC's and the
Australian Securities and Investment Commission's investigation of accounting
irregularities; the impact of any litigation or regulatory process related to
the financial statement restatement process, including the class action
litigation already filed (the dismissal of which has been appealed); our mix of
products and services; the timing of jobs; the availability and value of larger
jobs; qualification requirements and termination provisions relating to
government jobs; the impact of inclement weather on our operations; the impact
of energy prices on us and our customers' businesses; adverse developments in
pending litigation or regulatory matters; the impact of existing, new or changed
regulatory initiatives; our ability to satisfy the listing and trading
requirements of the AMEX (which, if not satisfied,
5
could result in the suspension of trading -- as occurred in August 2002 -- or
delisting of our shares from the exchange, which could diminish the liquidity of
our common shares) or any other national exchange on which our shares are or
will be listed or otherwise provide a trading venue for our shares; and the
impact of changing global political and economic conditions. 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.
All phases of our operations are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control. Any one of
such influences, or a combination, could materially affect the accuracy of the
forward-looking statements and the assumptions on which the statements are
based. Some important factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements include the following:
OUR ABILITY TO OBTAIN EXTENSIONS, AMENDMENTS AND WAIVERS UNDER OUR DEBT
AGREEMENTS AND AVAILABILITY OF ADDITIONAL SOURCES OF FINANCING AND CAPITAL. The
Company is currently in default of certain financial ratios required to be
maintained under the current debt agreements which includes its net worth
covenant and its operating income before depreciation and amortization financial
covenant. During fiscal 2003, we had amended our Revolving Credit Facility and
Senior Notes in September 2002 because we were not in compliance with the
provisions, including certain financial covenants, of these agreements as a
result of matters related to the accounting irregularities at our Australian
subsidiary. As amended, the Revolving Credit Facility expires on July 31, 2003,
and it will be necessary for us to amend this Revolving Credit Facility to
extend the expiration date. If we are unable to negotiate a further amendment to
the Revolving Credit Facility, which, among other things, extends the maturity
of the Revolving Credit Facility beyond July 31, 2003, it will be necessary for
us to refinance or repay this debt. We cannot assure that we will be able to
accomplish such a transaction on terms acceptable to us or at all. Failure to do
so would have a material adverse effect on our liquidity and financial condition
and could result in our inability to operate as a going concern. If we are
unable to operate as a going concern, we may file, or may have no alternative
but to file, bankruptcy or insolvency proceedings or pursue a sale or sales of
assets to satisfy creditors. In addition, the Senior Notes, as amended, require
a principal payment of $7.6 million by July 31, 2003 and monthly principal
payments of $0.4 million commencing on August 15, 2003. We cannot assure that we
will be able to make these payments when due, which will result in our being in
default under the Senior Notes and, in that event, the Senior Notes lender may
pursue its remedies against us for such a default, including acceleration of
principal, which would have a material adverse effect on our liquidity and
financial condition and could result in our inability to operate as a going
concern. If we are unable to operate as a going concern, we may file, or may
have no alternative but to file, bankruptcy or insolvency proceedings or pursue
a sale or sales of assets to satisfy creditors. We intend to seek other
financing during fiscal 2004 to pay down the Senior Notes and the Revolving
Credit Facility. There can be no assurance, however, that we will be able to
obtain other financing or as to the terms and conditions under which such
financing may be available.
THE EFFECTIVENESS OF OUR BUSINESS RESTRUCTURING PLAN. In July 2002, our
Board of Directors approved a formal business restructuring plan. The multi-year
plan includes a series of initiatives to improve operating income and reduce
debt. We intend to sell non-core business units and use the proceeds to reduce
debt. To assist, we have engaged the firm of Carl Marks Consulting Group LLC and
a managing director of Carl Marks has joined us in the role of Chief
Restructuring Officer to manage the plan's implementation. While we expect that
operating income improvements combined with debt reduction will result from the
business restructuring plan in the long term, it is uncertain at this time to
what extent such operating income improvements and debt reduction will be
achieved as a result of the business restructuring plan and the terms and/or
timing thereof. We cannot assure that the business restructuring plan will be
successful in enhancing our ability to pursue financing alternatives acceptable
to us. During fiscal 2003, four non-strategic business units were sold. These
dispositions included Rohrback Cosasco Systems, Bass Trigon Software and two
smaller international offices. The proceeds from these dispositions were used to
pay down debt. 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 Form 10-K.
6
OUR REPUTATION AND FINANCIAL CONDITION COULD BE AFFECTED BY THE SECURITIES
LITIGATION AND RELATED INVESTIGATIONS AND/OR A RESTATEMENT OF FINANCIAL
STATEMENTS. On March 20, 2002, we first announced that we had become aware of
accounting irregularities caused by apparent internal misconduct in our
Australian subsidiary and that, to the extent that the accounting irregularities
materially affect previously filed financial statements, we restated our audited
financial statements for our fiscal year which ended March 31, 2001 as well as
unaudited financial information for the first nine months through December 31,
2001 of our fiscal year ended March 31, 2002, as previously released. In
addition, we recorded a charge to earnings for our loss on investment related to
the subsidiary. This charge was taken in the Company's fiscal fourth quarter
ended March 31, 2002. Subsequent to this announcement, a purported class action
lawsuit was filed against us and certain of our current and former directors and
officers, asserting claims under the federal securities laws, which was
dismissed with prejudice in May 2003. In June 2003, the plaintiffs filed a
notice of appeal from the order of dismissal. In addition to significant
expenditures we may have to make to defend ourselves in these matters and the
related significant financial penalties that might be imposed on us if the
plaintiffs prevail, the publicity surrounding the litigation and the SEC inquiry
of these matters could affect our reputation with our customers and suppliers
and have an impact on our financial condition and results of operations.
OUR COMPLIANCE WITH THE LISTING STANDARDS AND REPORTING REQUIREMENTS OF THE
STOCK EXCHANGE ON WHICH OUR COMMON SHARES TRADE. We are required by the stock
exchange on which we list our common shares for trading to maintain certain
listing standards and meet certain reporting requirements in order to continue
trading and to remain listed on that exchange. The exchange does not use any
precise mathematical formula to determine whether a security warrants continual
trading on the exchange. Each case is considered on the basis of all relevant
facts and circumstances. The exchange has adopted certain guidelines under which
it will normally give consideration to suspending dealings in, or removing, a
security from listing. The exchange will normally consider suspending dealings
in, or removing from the list, securities of a company which does not meet such
guidelines. We do not currently have a sufficient amount of shareholders' equity
to meet the guidelines. If we cannot demonstrate that we will be in compliance
within a limited time frame, our common shares may not be allowed to trade on
the stock exchange, although we would pursue an alternative national trading
venue and it may make it more difficult for us to raise funds through the sale
of our securities. In addition, it may make it more difficult for an investor to
dispose of, or to obtain accurate quotations of, our common shares and
negatively impact the market price. Our shares had been suspended from trading
on the American Stock Exchange in August 2002, because of, among other reasons,
the late filing of our Form 10-K/A for the fiscal year ended March 31, 2002.
There can be no assurances that trading will not be suspended again and if so,
that trading would be permitted to resume.
ADVERSE DEVELOPMENTS IN PENDING LITIGATION OR REGULATORY MATTERS. From time
to time, we are involved in litigation and regulatory proceedings, including
those disclosed in "Legal Proceedings" of this annual report and in our other
periodic reports filed with the Securities and Exchange Commission. There are
always significant uncertainties involved in litigation and regulatory
proceedings and we cannot guarantee the result of any 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 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 jobs than on those jobs that include
a material or installation component. In addition, our gross profit margins also
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.
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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 JOBS CAN IMPACT OUR PROFITABILITY. There are a number of
factors, some of which are beyond our control, that can cause 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 weather. In
addition, when we are working as a subcontractor on a project, our portion of
the project can be delayed as a result of factors relating to other contractors.
THE AVAILABILITY AND VALUE OF LARGER JOBS CAN IMPACT OUR
PROFITABILITY. While the majority of our jobs 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 jobs. Therefore, the absence of larger jobs, which
can result from a number of factors, including market conditions, can have a
negative impact on our operating results.
QUALIFICATION REQUIREMENTS AND TERMINATION PROVISIONS RELATING TO
GOVERNMENT JOBS. We derive revenues from contracts with the United States, its
agencies and other governmental entities. Government contracting is subject to
competitive bidding processes and there can be no assurance that we will be the
successful bidder for future contracts. Fluctuations in government spending and
the amount of government contracts received also could adversely affect our
revenues and profitability. In addition, it is the policy of the United States
that certain small businesses and other concerns have the maximum practicable
opportunity to participate in performing contracts let by any federal agency. To
the extent that we do not meet applicable criteria for government jobs, we could
be limited in our ability to participate directly in contracts being let by the
United States and other governmental entities with similar requirements. Certain
contracts with governmental entities contain provisions permitting the
governmental entities to terminate the contract for convenience prior to
completion of the contract. To the extent that any of our contracts with a
government entity are so terminated, our revenues and profitability could be
adversely impacted.
OUR OPERATIONS CAN BE IMPACTED BY INCLEMENT WEATHER. A large portion of
our service work is performed in the field. Therefore, excessive amounts of
rain, snow or cold, as well as other unusual weather conditions, including
hurricanes and typhoons, can result in work stoppages. Also, working under
inclement weather conditions can reduce our efficiencies, which can have a
negative impact on our profitability.
OUR BUSINESS IS IMPACTED BY CHANGES IN ENERGY PRICES. 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 oil and gas prices and industry perceptions of
future prices. Our experience indicates that our energy customers react to
declining oil and gas prices by reducing their capital and discretionary
maintenance expenditures. This reaction has in the past, and may in the future,
have a negative impact on our business. We are unable to predict future oil and
gas prices. However, we believe that a prolonged period of low energy prices
could have a negative impact on our business. Typically, there is a delay
between the time prices decline and when we start to experience a negative
impact on our results of operations. Conversely, there is also a delay between
the time energy prices increase and when we start to experience a positive
impact on our results of operations.
THE IMPACT OF 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. Moreover, we have operations in the Middle East
region with revenues totaling $11.6 million for fiscal 2003 and net assets of
approximately $6.3 million at March 31, 2003. These operations can be negatively
impacted by changing economic and political conditions. All of our international
operations except Canada are a part of the Company's net assets held for sale.
8
EXISTING, NEW OR CHANGED REGULATORY INITIATIVES CAN IMPACT OUR
BUSINESS. Corrpro and its customers are subject to federal, state and local
environmental and other laws and regulations. These laws and regulations affect
our operations by imposing standards for the protection of health, welfare and
the environment. Such laws and regulations, and applicable interpretations
thereof, could expose us to liability for acts which are or were in compliance
at the time such acts were performed. We cannot predict whether future
legislative or regulatory developments may occur which would have an adverse
effect on Corrpro.
These risks must be considered by any investor or potential investor in the
Company.
ITEM 2. PROPERTIES
As of March 31, 2003, our continuing operations utilized five locations and
are owned by The Company as well as, over forty locations were leased from
unrelated third parties. Certain 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
Edmonton, Alberta......... Canadian Ops. Office, Production and Warehouse Facility Owned
Nisku, Alberta............ Domestic Core Office 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
Ocean City, New Jersey.... Domestic Core Office 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, Domestic Core Office and Warehouse Facility Leased
California..............
Schaumburg, Illinois...... Domestic Core Office and Warehouse Facility Leased
West Chester, Domestic Core Office and Warehouse Facility Leased
Pennsylvania............
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.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, in January 2000, the Michigan Department of
Environmental Quality ("MDEQ") issued an administrative decision which
effectively limited the scope of MDEQ's 1995 approval of certain assessment
methodologies utilized by Corrpro in determining whether certain underground
storage tanks meet Michigan's regulatory requirements for upgrade by means of
cathodic protection. The MDEQ decision also would have required us to conduct
further assessments and provide certain information. The assessment
methodologies at issue have been and remain recognized by the Environmental
Protection Agency ("EPA") and the other states in which we utilized such
methodologies for virtually identical purposes. We
9
believed that MDEQ's decision was in error and on January 24, 2000, filed a
complaint and claim of appeal in the Circuit Court for the County of Ingham,
Michigan seeking declaratory relief and appealing the decision on several
grounds. In its November 14, 2000 ruling, the Ingham Circuit Court reversed
MDEQ's decision that directed we take certain actions and provide certain
information, however, the court also found that MDEQ had not approved the full
use of the assessment methodologies we utilized in Michigan.
We believed that the circuit court's finding that MDEQ had not approved
full use of the methodologies was not supported by the evidence, and was
contradicted by evidence contained in the administrative record. On December 5,
2000, we filed, in the Michigan Court of Appeals, an application for leave to
appeal the circuit court's finding that MDEQ did not approve the full use of the
assessment methodologies we utilized in Michigan. By order dated February 14,
2001, the Michigan Court of Appeals denied our application for leave to appeal
the circuit court's finding. On March 7, 2001, we filed an application for leave
to appeal with the Supreme Court of the State of Michigan. On August 28, 2001,
the Michigan Supreme Court denied our application for leave to appeal.
As a result of these proceedings, the MDEQ's administrative decision
finding that certain of our assessment methodologies were not approved in full
was upheld, but the MDEQ was found not to have jurisdiction to enforce its
decision against us. In July 2002, the MDEQ sent certain underground storage
tank owners and operators who may have relied on our method of assessment a
notice informing them that certain of such owners and operators' tanks were
improperly upgraded, that such owners and operators are to provide to MDEQ upon
request evidence that they have conducted state required tank tightness testing,
and certain of such tanks must be internally inspected. MDEQ also advised that
internally inspected tanks that do not satisfy applicable criteria should be
taken out-of-service and removed from the ground. There can be no assurance that
the MDEQ will not take further action against underground storage tank owners or
operators.
On July 25, 2002, a summons and complaint was issued from the Circuit Court
for the County of Ingham, Michigan. The action was commenced by Blogett Oil
Company, Inc. and other owners and operators of underground storage tanks
systems on behalf of themselves and others similarly situated. The complaint
relates to the MDEQ regulatory proceeding described immediately above and names
both the Company and MDEQ. The plaintiffs seek an unspecified amount of damages
in excess of $25,000 from Corrpro. The plaintiffs also seek injunctive relief
prohibiting the MDEQ from declaring that underground storage tanks upgraded by
the Company do not meet the current requirement for corrosion protection set
forth by law. On November 18, 2002, the court issued an order certifying the
underlying class. The Michigan Court of Appeals denied the Company's application
for leave to appeal the Circuit Court's order certifying the underlying class.
The Company is unable at this time to make a determination as to whether an
adverse outcome is likely and whether an adverse outcome would have a materially
adverse affect on its operations or financial condition.
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 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 nor 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 and the EPA to develop and
implement field investigation procedures to assess the current status of the
affected sites. Based on currently available information, the Company does not
believe that the cost of field investigation procedures for this matter will
have a material effect on the future operations, financial position or cash
flows of the Company.
The Company is 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 names certain former and
10
current officers and directors of the Company as defendants. The complaint was
purportedly filed on behalf of all persons who purchased Corrpro Common Shares
during the period April 1, 2000 through March 20, 2002 and alleges violations of
the federal securities laws resulting in artificially inflated prices of the
Company's Common Shares during the class period. The complaint relates to the
Company's announcement that it had discovered accounting irregularities caused
by apparent internal misconduct in its Australian subsidiary. 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 to
the United States Circuit Court of Appeals for the 6th Circuit from the order of
dismissal. The Company is unable at this time to make a determination as to
whether an adverse outcome is likely and whether an adverse outcome would have a
materially adverse affect on its operations or financial condition.
Company management discovered accounting irregularities at the Australian
subsidiary in early calendar 2002 and upon discovery immediately began an
internal investigation, which has been conducted under the direction of the
Audit Committee of its Board of Directors. The Australian Securities and
Investments Commission has commenced an independent investigation of the
accounting irregularities. Corrpro voluntarily disclosed this matter to the SEC,
which has commenced a formal inquiry. Corrpro is cooperating with both
commissions.
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. Based on current available information, the Company does not believe
that this matter will have a material effect on the future operations, financial
position or cash flows of the Company.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2003.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names of all executive officers of the
Company as of March 31, 2003 and certain other information relating to their
position held with the Company and other business experience.
EXECUTIVE OFFICER AGE RECENT BUSINESS EXPERIENCE
----------------- --- --------------------------
Joseph W. Rog........................ 63 Chairman of the Board of Directors since June 1993 and
Chief Executive Officer since the Company's formation in
1984. President of the Company since June 1995 and from
January 1984 to June 1993.
Michael K. Baach..................... 48 Executive Vice President since April 1993 and Senior
Vice President from 1992 until April 1993. Prior to
that, Mr. Baach was Vice President of Sales and
Marketing since the Company's formation in 1984.
George A. Gehring, Jr. .............. 59 Executive Vice President since April 1993 and Senior
Vice President from 1991 until April 1993. Prior to
that, Mr. Gehring served as President of Ocean City
Research Corporation, a wholly-owned subsidiary of the
Company, since 1987.
David H. Kroon....................... 53 Executive Vice President since April 1993 and Senior
Vice President from the Company's formation in 1984 to
April 1993.
11
EXECUTIVE OFFICER AGE RECENT BUSINESS EXPERIENCE
----------------- --- --------------------------
Barry W. Schadeck.................... 52 Executive Vice President since June 1995 and President
of Corrpro Canada, Inc., a wholly-owned subsidiary of
the Company, since its formation in May 1994. Prior to
that, Mr. Schadeck served as President since April 1993
and Chief Financial Officer since 1979 of Commonwealth
Seager Group, a wholly-owned subsidiary of the Company,
since 1993.
Robert M. Mayer...................... 40 Senior Vice President, Chief Financial Officer and
Treasurer since November 2002. Prior to that, Mr. Mayer
served as the Company's Vice President and Corporate
Controller since August 2000, Assistant Treasurer since
January 2002 and Assistant Corporate Controller from
January 1998 until August 2000. Prior to that, Mr. Mayer
was with Premier Farnell PLC, an industrial distributor
of electronic components, most recently as Director of
Finance. Mr. Mayer had prior experience with Ernst &
Young, where he was an Audit Manager.
John D. Moran........................ 45 General Counsel since December 1996, Secretary since
January 2002, Senior Vice President since July 2000.
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 for Sealy
Corporation, a bedding manufacturer, for 10 years and
served as Secretary. Mr. Moran also has prior experience
with Grant Thornton.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
PRICE RANGE OF COMMON SHARES
Our Common Shares are listed on the American Stock Exchange ("AMEX") under
the symbol "CO." Prior to February 13, 2002, our Common Shares were listed on
the New York Stock Exchange ("NYSE") under the symbol "CO."
The following table sets forth the high and low sale prices for the Common
Shares on the AMEX and NYSE for the fiscal periods indicated.
FISCAL 2003 FISCAL 2002
------------- -------------------
HIGH LOW HIGH LOW
----- ----- ----- -----------
First Quarter...................................... $1.80 $1.08 $3.95 $1.20
Second Quarter..................................... 1.15 0.58 2.90 1.80
Third Quarter...................................... 0.75 0.38 2.80 1.50
Fourth Quarter..................................... 0.80 0.30 3.15 1.01
We are required by the stock exchange to maintain certain listing standards
and meet certain reporting requirements in order to continue trading and to
remain listed on the exchange. The exchange does not use any precise
mathematical formula to determine whether a security warrants continual trading
on the exchange. Each case is considered on the basis of all relevant facts and
circumstances. The exchange has adopted certain guidelines under which it will
normally give consideration to suspending dealings in, or removing, a security
from listing. The exchange will normally consider suspending dealings in, or
removing from the list, securities of a company which does not meet such
guidelines. As of March 31, 2003 we did not have a sufficient amount of
shareholders' equity to meet the guidelines. If we cannot demonstrate that we
will be in compliance within a limited time frame, our Common Shares may not be
allowed to trade in the stock exchange, although we would pursue an alternative
national trading venue.
12
HOLDERS OF RECORD
On June 23, 2003, there were 195 holders of record of our Common Shares.
DIVIDENDS
We have not paid any cash dividends on our Common Shares. 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.
Provisions within our senior secured credit agreement and senior notes facility
limit our ability to pay cash dividends.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of March 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION TABLE
NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE REMAINING AVAILABLE
EXERCISE OF OF OUTSTANDING FOR ISSUANCE UNDER
OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS PLANS(1)
------------- -------------------- ----------------- --------------------
Equity compensation plans approved by
shareholders........................... 1,399,027 $3.1258 233,586
Equity compensation plans not approved by
shareholders(2)........................ -- -- --
--------- ------- -------
Total.................................... 1,399,027 $3.1258 233,586
========= ======= =======
---------------
(1) Includes 46,875 Common Shares available for issuance under the Non-Employee
Directors' Stock Option Plan.
(2) Does 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 such 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. Also, this does
not include the Company's Employee Stock Purchase Plan, which has been
suspended, with authorized shares totaling 375,000 of which 300,068 shares
are still available.
13
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 Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues................................ $104,220 $123,058 $120,489 $119,133 $123,061
Operating income (loss)(1).............. 2,825 3,405 (371) 5,046 15,666
Interest expense........................ 5,907 5,055 4,401 3,444 2,247
-------- -------- -------- -------- --------
Income (loss) before income taxes from
continuing operations................. (3,082) (1,650) (4,772) 1,602 13,419
Income tax provision (benefit)(3)....... (331) 10,669 (934) 943 4,813
-------- -------- -------- -------- --------
Income (loss) from continuing
operations............................ (2,751) (12,319) (3,838) 659 8,606
-------- -------- -------- -------- --------
Net income (loss)(2).................... $(28,825) $(18,217) $ (8,281) $ (2,668) $ 4,251
======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS --
Basic................................. $ (0.33) $ (1.52) $ (0.50) $ 0.09 $ 1.10
Diluted............................... (0.33) (1.52) (0.50) 0.08 1.05
NET INCOME (LOSS) --
Basic................................. $ (3.43) $ (2.24) $ (1.07) $ (0.35) $ 0.54
Diluted............................... (3.43) (2.24) (1.07) (0.34) 0.52
OTHER DATA:
Total assets............................ $ 76,983 $109,963 $137,200 $140,864 $146,050
Working Capital, excluding net assets
held for sale......................... (28,095) (40,939) 28,501 28,639 35,569
Net Assets Held for Sale................ 7,364 35,783 38,439 43,226 47,631
Total debt.............................. 51,241 62,686 68,124 62,150 62,686
Shareholders' equity.................... 1,199 23,857 41,518 54,235 58,056
---------------
(1) Includes charges totaling $2,868 in fiscal 2001 and $2,000 in fiscal 2000.
See Note 1, Summary of Significant Accounting Policies, Notes to
Consolidated Financial Statements 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
for further information.
(3) 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 for further information.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Business -- Factors Influencing
Future Results and Accuracy of Forward Looking Information."
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies, including the assumptions and
judgments underlying them, are more fully described in "Note 1 -- Summary of
Significant Accounting Policies" to the accompanying consolidated financial
statements of this Form 10-K. Some of the Company's accounting policies require
the application of significant judgment by management in the preparation of the
Company's financial statements. In applying these policies, the Company's
management uses its best judgment to determine the underlying assumptions that
are used in calculating the estimates that affect the reported values on its
financial statements. Management bases its estimates and assumptions on
historical experience and other factors that the Company considers relevant.
Corrpro's critical accounting policies include the following:
REVENUE RECOGNITION
The Company records income from construction and engineering contracts
under the percentage-of-completion method. Under this method, revenues are
recognized in proportion to the ratio of costs incurred to currently estimated
total contract costs. Estimated earnings and costs on contracts are subject to
revision throughout the terms of the contracts, and any required adjustments are
recorded in the periods in which revisions are made. The Company recognizes
revenue from product sales upon shipment and transfer of ownership.
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 in
a particular industry or 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
The Company periodically evaluates 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, the Company uses an estimate of the related
asset's net undiscounted cash flows from
15
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 2003, the Company recorded an impairment charge relating to
its Asia Pacific operations totaling $1.6 million based on current market value
of these operations and additionally recorded impairment charges totaling $0.9
million based on market value analysis for its European and Middle East
operations. The Asia Pacific, European and Middle East operations are all
reported as discontinued operations.
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 require periodic tests for impairment of these assets. Upon the Company's
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. The
adoption of SFAS 142 reduced amortization expense approximately $1.7 million for
the year ended March 31, 2003 as compared to the year ended March 31, 2002. The
Company has completed its impairment testing under SFAS 142 and recorded an
impairment loss, as of April 1, 2002, totaling $18.2 million of which $11.8
million related to discontinued operations and $6.4 million 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 resulted in no additional impairment as
of March 31, 2003.
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
recorded a valuation allowance for its net domestic deferred tax assets
carryforwards of $10.5 million in the fourth quarter of fiscal 2002. The Company
maintained a valuation allowance at March 31, 2003 and intends to maintain a
full valuation allowance for its net 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,
the Company expects to have no reported tax provision, net of valuation
allowance adjustments. 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 5 of Notes to Consolidated Financial Statements
of the Company for additional information regarding income taxes.
RESULTS OF OPERATIONS
In July 2002, the Company's Board of Directors approved a formal business
restructuring plan. The multi-year plan includes a series of initiatives to
improve operating income and reduce debt. The Company intends to sell non-core
business units and use the proceeds to reduce debt. The Company has engaged
outside professionals to assist in the disposition of the 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 have been eliminated and the
non-core domestic and international units are reported as discontinued
operations. Prior-year financial statements have been reclassified to reflect
these non-core units as discontinued operations, which are also referred to as
"assets and liabilities held for sale."
16
YEAR ENDED MARCH 31, 2003 COMPARED TO YEAR ENDED MARCH 31, 2002
REVENUES
Revenues for fiscal 2003 totaled $104.2 million, compared with $123.1
million for fiscal 2002, a decrease of 15.3%.
Of the $85.0 million in revenues generated by our Domestic Core Operations,
$42.7 million was for corrosion control products and services for fiscal 2003, a
decrease from 2002 of 7.8%. The decrease was caused by our decision to close our
offices in New Mexico and South America and by lower federal government
contracts for coating services.
Revenues relating to our Canadian Operations segment totaled $19.3 million,
compared to $21.3 million in fiscal 2002, a decrease of 9.4%. The decrease is
due primarily to lower material and rectifier sales and the closure of our
office in Taiwan. The Canadian Operations continue to experience weakness in the
energy segment of its business.
GROSS PROFIT
On a consolidated basis, gross profit margin (defined as revenues less cost
of sales items) for fiscal 2003 totaled $32.6 million (31.3 % of revenues)
compared to $35.7 million (29.0% of revenues) for fiscal 2002, a decrease in
gross profit dollars of $3.1 million or 8.7%. The higher gross profit as a
percent to revenue (a 2.3% increase) can be attributed to our cost containment
program under which we attempted to better match our workforce to our job
activity level.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses for fiscal 2003
totaled $29.8 million (28.6% of revenues), compared with $32.3 million (26.3% of
revenues) for fiscal 2002, a decrease of 7.7%. The fiscal 2003 amount of $29.8
million includes severance and consultant expenses totaling $3.4 million. The
improvement in S,G&A was brought about by our concerted effort to eliminate
non-value added costs throughout the Company. Savings were achieved through head
count reductions at all levels, office closures, reduced travel and
entertainment and other administrative costs.
OPERATING INCOME (LOSS)
Operating income for fiscal 2003 totaled $2.8 million, compared to $3.4
million for fiscal 2002, a decrease of $0.6 million. However, despite a
reduction in revenue of $18.9 million from fiscal 2002, our efforts to
restructure the Company and reduce our operating costs and expenses kept
operating income as a percent to revenue even with fiscal 2002.
INTEREST EXPENSE
Interest expense for fiscal 2003 totaled $5.9 million, compared to $5.1
million for fiscal 2002. The increase was related primarily to a provision for
yield maintenance of $1.0 million in our Senior Notes. See Note 3, Long-Term
Debt, Notes to Consolidated Financial Statements.
INCOME TAX PROVISION
We recorded an income tax benefit of $0.3 million for fiscal 2003, compared
to an income tax provision of $10.7 million in fiscal 2002. Our effective rate
is based on the statutory rates in effect in the countries in which we operate.
See Note 5, Income Taxes, Notes to Consolidated Financial Statements included in
Item 8 for a reconciliation of our effective tax rates. Within the fiscal 2002
tax provision is an increase in valuation allowance for our domestic deferred
tax asset of $10.5 million.
17
LOSS FROM CONTINUING OPERATIONS
As a result of the foregoing, loss from continuing operations in fiscal
2003 totaled $2.8 million, compared with a loss from continuing operations of
$12.3 million in fiscal 2002, a decrease of $9.5 million. The decrease is
primarily attributable to the valuation allowance for our deferred tax assets
taken in fiscal 2002 and lower operating costs and expenses.
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income taxes totaled $9.9 million
for fiscal 2003, compared with a loss from discontinued operations, net of
income taxes, of $5.9 million for fiscal 2002. This incremental loss is mainly
attributable to currency translation adjustments, pension liability and
impairment charges.
In fiscal 2003 four non-strategic business units were sold for a gain, net
of taxes of $2.1 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During fiscal 2003, the Company, with the assistance of independent
valuation experts, completed its initial assessment test and concluded that
certain of its goodwill was impaired. Effective April 1, 2002, the Company has
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
The net loss for fiscal 2003 totaled $28.8 million, compared with a net
loss of $18.2 million in fiscal 2002. The net loss increase reflects the impact
of the change in accounting principle and increased losses from discontinued
operations due to currency translation adjustments. Diluted loss per share
increased to a loss of $3.43 in fiscal 2003 compared with a loss of $2.24 in
fiscal 2002.
YEAR ENDED MARCH 31, 2002 COMPARED TO YEAR ENDED MARCH 31, 2001
REVENUES
Revenues for fiscal 2002 totaled $123.1 million, compared with $120.5
million for fiscal 2001, an increase of 2.2%. Fiscal 2002 revenues relating to
our Domestic Core Operations segment totaled $101.8 million, compared to $96.2
million in fiscal 2001, an increase of 5.8%. Revenues continued to increase for
our coatings services business, which was partially offset by declines in our
core cathodic protection business as a result of the sluggish energy-related
markets. Revenues from government contract awards totaled approximately $10.0
million during fiscal 2002.
Revenues relating to our Canadian Operations segment totaled $21.3 million,
compared to $24.3 million in fiscal 2002, a decrease of 12.3%. This decrease was
primarily due to lower levels of construction and material revenues.
GROSS PROFIT
On a consolidated basis, gross profit (defined as revenues less cost of
sales items) for fiscal 2002 totaled $35.7 million (29.0% of revenues) compared
to $35.2 million (29.2% of revenues) for fiscal 2001, an increase in gross
profit dollars of $0.5 million or 1.4%. Included in fiscal 2002 was $1.0 million
of expenses for the cessation of certain Mexican foundry operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses for fiscal 2002
totaled $32.3 million (26.3% of revenues), compared with $35.5 million (29.5% of
revenues) for fiscal 2001, a decrease of 9.0%. In fiscal 2001 S,G&A expenses
included $1.9 million for the disposition of a small non-core business unit, the
consolidation
18
of district offices, severance pay and other costs associated with the Company's
cost reduction programs and expenses accrued in connection with state regulatory
proceedings and anti-trust litigation involving the Company. See "Item
3 -- Legal Proceedings" for a discussion of the ongoing regulatory and
litigation matters.
OPERATING INCOME (LOSS)
Operating income for fiscal 2002 totaled $3.4 million, compared to an
operating loss of $0.4 million during fiscal 2001, an increase of $3.8 million.
The increase is the result of a number of cost reduction programs we implemented
in the latter part of fiscal 2001 and our continuing efforts to reduce our S,G&A
expenses.
INTEREST EXPENSE
Interest expense for fiscal 2002 totaled $5.1 million compared to $4.4
million in fiscal 2001. The decrease in debt year-over-year was offset by
increased interest rates in the latter fiscal year.
INCOME TAX PROVISION
We recorded an income tax provision of $10.7 million for fiscal 2002,
compared to an income tax benefit of $0.9 million for fiscal 2001. Within the
fiscal 2002 tax provision is an increase in valuation allowance for our domestic
deferred tax asset of $10.5 million. Our effective rate is based on the
statutory rates in effect in the countries in which we operate. See Note 5,
Income Taxes, Notes to Consolidated Financial Statements included in Item 8 for
a reconciliation of our effective tax rates.
LOSS FROM CONTINUING OPERATIONS
As a result of the foregoing, loss from continuing operations in fiscal
2002 totaled $12.3 million, compared with a loss from continuing operations of
$3.8 million in fiscal 2001, a decrease of $8.5 million. The decrease is
primarily attributable to the valuation allowance for our deferred tax assets
taken in fiscal 2002 which was partially offset by our reduction in S,G&A
expense.
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income taxes totaled $5.9 million
for fiscal 2002, compared with a loss from discontinued operations of $4.4
million for fiscal 2001. The fiscal 2002 loss included a loss on investment in
our Australian subsidiary of $2.5 million.
NET LOSS
As a result of the foregoing, net loss for fiscal 2002 totaled $18.2
million, compared with a net loss of $8.3 million in fiscal 2001, an increase of
$9.9 million. The increase is primarily attributable to the valuation allowance
for our deferred tax assets taken in fiscal 2002 which was partially offset by
our reduction in S, G&A. Diluted loss per share increased to a loss of $2.24 in
fiscal 2002 compared with a loss of $1.07 in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had working capital deficit of $28.1 million,
compared to a deficit of $40.9 million at March 31, 2002, an improvement of
$12.8 million. This improvement in working capital is due to a $6.2 million note
receivable related to the disposition of a non-strategic business unit and our
reduction in debt.
During fiscal 2003, cash provided by operating activities totaled $0.2
million, compared to $9.4 million in fiscal 2002. Cash provided by investing
activities totaled $0.2 million during fiscal 2003, which included $0.3 million
for capital expenditures that were offset by $0.5 million of proceeds from the
disposal of capital assets; while cash used by investing activities totaled $0.1
million during fiscal 2002, which included
19
$0.6 million for capital expenditures partially offset by $0.5 million of
proceeds from the disposal of capital assets. Cash used by financing activities
totaled $11.5 million, substantially all of which was used to pay down debt
during fiscal 2003 compared to $5.3 million that was also used to pay down debt
during fiscal 2002.
In March 1999, the Company entered into an $80 million revolving credit
facility that expires on July 31, 2003 (the "Revolving Credit Facility").
Initial borrowings were used to repay existing domestic bank indebtedness.
Through a series of subsequent amendments, including an amendment executed by
the Company on September 23, 2002 ("September 2002 Amendment") the size of the
Revolving Credit Facility was reduced to $37.5 million. In addition, the
September 2002 Amendment provides that any cash proceeds from the disposition of
targeted Company assets will be used to reduce the Revolving Credit Facility and
the Senior Notes in a ratio of 56% and 44%, respectively. Any net asset
disposition payments to reduce the Revolving Credit Facility will result in a
proportionate reduction in the lender's commitments in the Revolving Credit
Facility. Borrowings under the Revolving Credit Facility are further limited to
borrowing base amounts as defined. The September 2002 Amendment provides for
interest on borrowings at prime plus 5.00%. In addition, the September 2002
Amendment requires the Company to pay a facility fee of 1.00% on the commitment
amount. The Company executed another amendment on November 1, 2002 (the "Seventh
Amendment") which contained additional provisions for the improvement period and
also reset the net worth covenant. The Company also executed an amendment on
February 10, 2003 (the "Eighth Amendment") to modify certain terms and
conditions under which facility letters of credit may be issued.
In connection with the September 2002 Amendment, the Revolving Credit
Facility lender group received a warrant ("Revolving Credit Facility Warrant")
to purchase 467,000 of the Company's Common Shares at a purchase price of $0.01
per share exercisable at any time after July 31, 2003 until September 23, 2012.
The Revolving Credit Facility Warrant can be reduced up to 50% if the Company
partially pays the Revolving Credit Facility principal amount prior to July 31,
2003 or by up to 10% if targeted asset dispositions are completed and the
proceeds are used to paydown the debt levels but this is highly unlikely to be
fully utilized by July 31, 2003. Borrowings under the Revolving Credit Facility
are secured by the Company's domestic accounts receivable, inventories, certain
intangibles, machinery and equipment and owned real estate as well as certain
assets in Canada. The Company also has pledged slightly less than two-thirds of
the capital stock of two of its foreign subsidiaries. The Revolving Credit
Facility, as amended, requires the Company to maintain certain financial ratios
and places limitations on the Company's ability to pay cash dividends, incur
additional indebtedness and make investments, including acquisitions. The
Company was not in compliance with its net worth covenant and its operating
income before depreciation and amortization financial covenant of the Revolving
Credit Facility as of March 31, 2003 and there can be no assurance that the
Company will receive a waiver for these violations. At March 31, 2003, the
Company had $22.2 million outstanding under the Revolving Credit Facility. Total
availability under the Revolving Credit Facility at March 31, 2003 was
approximately $1.6 million, after giving consideration to the borrowing base
limitations under, the Revolving Credit Facility but this availability can be
revoked at any time due to the debt covenant violations.
Due to the fact that the Company's Revolving Credit Facility expires on
July 31, 2003, it will be necessary for the Company to amend this Revolving
Credit Facility to extend the expiration date. If the Company is unable to
negotiate an amendment to the Revolving Credit Facility, it will be necessary
for the Company to refinance or repay this debt. The Company cannot assure that
it will be able to accomplish such a transaction on terms acceptable to the
Company or at all. Failure to do so would have a material adverse effect on the
Company's liquidity and financial condition and could result in the Company's
inability to operate as a going concern. If the Company is unable to operate as
a going concern, it may file, or may have no alternative but to file, bankruptcy
or insolvency proceedings or pursue a sale or sales of assets to satisfy
creditors.
In January 1998, the Company issued, through a private placement, $30
million of Senior Notes due 2008 (the "Senior Notes"). The Senior Notes, as
amended, bear interest at 11.35% until July 31, 2003 and 11.85% on and after
July 31, 2003. In addition, the agreement relating to the Senior Notes, as
amended, provides for an additional fee of 1.00% per annum on the outstanding
principal amount of the Senior Notes. In connection with the September 2002
Amendment, the Senior Notes lender received a warrant ("Senior Notes Warrant")
to purchase 467,000 of the Company's Common Shares at a purchase price of $0.01
per share exercisable at any time after July 31, 2003 until September 23, 2012.
The Senior Notes Warrant can be
20
reduced up to 50% to the extent the Company partially pays the Revolving Credit
Facility principal and the Senior Notes principal prior to July 31, 2003 or by
up to 10% if targeted asset dispositions are completed and the proceeds are used
to paydown the debt levels but this is highly unlikely to be fully utilized by
July 31, 2003. The Senior Notes, as amended, require a principal payment of $7.6
million by July 31, 2003 and monthly principal payments of $0.4 million
commencing on August 15, 2003 ("Notes Principal Repayments") and are secured
equally and ratably with debt under the Revolving Credit Facility. In addition,
the Senior Notes provide that any cash proceeds from the disposition of targeted
Company assets will be used to reduce the Revolving Credit Facility and the
Senior Notes in a ratio of 56% and 44%, respectively. Any such additional
payments used to reduce the Senior Notes will result in an equal reduction in
the Notes Principal Repayments. The Company cannot assure that it will be able
to make Notes Principal Repayments when due. Failure to do so would result in a
default under the Senior Notes, in which case, the Senior Notes lender could
pursue its remedies for default, including acceleration of principal, which
would have a material adverse effect on the Company's liquidity and financial
condition and could result in the Company's inability to operate as a going
concern. If the Company is unable to operate as a going concern, it may file, or
may have no alternative but to file, bankruptcy or insolvency proceedings or
pursue a sale or sales of assets to satisfy creditors.
Within the Prudential Senior Notes Agreement is a yield maintenance amount
provision which ensures that the lender is paid the entire interest amount of
the note. The make-whole provision states that the Notes shall be 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 Note. Any partial prepayment of the Notes which meets certain criteria
shall be applied against the principal amount of the Notes scheduled to become
due in the inverse order of maturity thereof. Fiscal 2003 results include an
interest charge of approximately $1.0 million relating to the yield maintenance
amount provisions of our Senior Notes agreement. The yield maintenance amount
provisions apply to certain optional prepayments of principle under the Senior
Notes. The Company does not agree with and is disputing the Note holder's
interpretation that certain payments from the proceeds of sales of certain
non-core and international business assets made during and after fiscal 2003 are
subject to the yield maintenance amount provisions. Further information about
the yield maintenance amount provisions is included in Note 3, Long-Term Debt,
Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
During fiscal 2003, four non-strategic business units were sold. These
dispositions included Rohrback Cosasco Systems, Bass Trigon Software and two
smaller international offices. The proceeds from these dispositions were used to
pay down debt. 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 Form 10-K.
The Company is required to maintain certain financial ratios under the
Senior Notes. The Company was not in compliance with the financial covenants
under the Senior Notes as of March 31, 2003 and there can be no assurance that
the Company will receive a waiver for these violations.
The Company is negotiating agreements with its lenders to amend the current
Revolving Credit Facility and Senior Note agreements and to address existing
violations. In addition to other terms and conditions, we expect to incur
interest rates on borrowings under the Revolving Credit Facility at a higher
applicable margin than under its existing provisions. We also intend to seek
during fiscal 2004 other financing to retire the Senior Notes and Revolving
Credit Facility. There can be no assurance however that we will be able to amend
the existing agreements or obtain other financing.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining
21
useful life of the related asset. Upon settlement of the liability, the entity
either settles the obligation for the amount recorded or incurs a gain or loss.
Statement No. 143 is effective for fiscal years beginning after June 15, 2002
(i.e. our fiscal year 2004). The adoption of SFAS No. 143 is not expected to
have a material effect on the Company's results of operations or financial
position.
In June 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit and
disposal activities that are initiated after December 31, 2002.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123" was issued. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the effects on reported net income
of an entity's method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for the Company in its second fiscal quarter of 2003. The
Company does not intend to effect a voluntary change in accounting to the fair
value method, and accordingly, does not anticipate the adoption of SFAS No. 148
to have a significant impact on the Company's future results of operations or
financial position. The Company has adopted the disclosure provisions of SFAS
No. 148 as of March 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," and in May 2003 SFAS No. 150 was
issued, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." We have not yet determined the impact, if any, on
our financial statements of SFAS No. 149 and SFAS No. 150, which are effective
in our fiscal year 2004.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others." Interpretation 45 expands on the
accounting guidance of Statements No. 5 "Accounting for Contingencies," No. 57
"Related Party Disclosures," and No. 107 "Disclosures about Fair Value of
Financial Instruments" and incorporates without change the provisions of
Interpretation No. 34 "Disclosure in Indirect Guarantees of Indebtedness of
Others, an Interpretation of FASB Statement No. 5" which is being superceded.
Interpretation 45 elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time an entity issues a guarantee, the entity must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of Interpretation 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of an entity's
year-end. The disclosure requirements of Interpretation 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. Accordingly, the Company adopted the disclosure requirements of
Interpretation 45 for the year ended March 31, 2003 and the interpretation in
its entirety as of January 1, 2003. The adoption of Interpretation 45 did not
have a material impact on the Company's results of operations or financial
position.
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.
22
INTEREST RATE RISK
Our primary interest rate risk exposure results from our Revolving Credit
Facility, Senior 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, 2003 rates, and assuming no changes in debt from the March 31, 2003
levels, the additional annual interest expense would be approximately $1.0
million.
FOREIGN OPERATIONS AND FOREIGN CURRENCY EXCHANGE RISK
Our foreign subsidiaries generally conduct business in local currencies.
During fiscal 2003, the Company recorded a favorable foreign currency
translation adjustment of $1.6 million in 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. Our foreign operations are also subject to other customary
risks of operating in a global environment, such as unstable political
situations, the affect 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. We have international
operations excluding those in Canada that are reported as net assets held for
sale in the consolidated balance sheets and these assets can be effected by
foreign currency exchange risk that could effect the selling price of these
assets. Also during fiscal 2003, discontinued operations recorded charges to
selling, general and administrative expenses totaling $3.7 million related to
currency translation.
23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Corrpro Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Corrpro
Companies, Inc. and subsidiaries (Company) as of March 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 2003.
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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
3 to the consolidated financial statements, at March 31, 2003, the Company has
suffered recurring losses from operations and was not in compliance with certain
financial covenants contained in its banking agreements. These matters raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to these matters is also described in note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
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 20, 2003
24
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(IN THOUSANDS)
2003 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,514 $ 3,959
Accounts receivable, less allowance for doubtful accounts
of $531 and $1,779 at March 31, 2003 and 2002,
respectively............................................ 16,809 22,575
Note receivable........................................... 6,232 --
Inventories............................................... 7,066 8,469
Prepaid expenses and other................................ 3,713 3,371
Assets held for sale...................................... 14,600 40,936
-------- --------
Total current assets.................................... 53,934 79,310
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 443 592
Buildings and improvements................................ 4,897 6,158
Equipment, furniture and fixtures......................... 15,312 15,030
-------- --------
20,652 21,780
Less accumulated depreciation............................. (13,969) (13,389)
-------- --------
Property, plant and equipment, net........................ 6,683 8,391
-------- --------
OTHER ASSETS:
Goodwill, net............................................. 13,343 18,859
Deferred income taxes..................................... -- --
Other assets.............................................. 3,023 3,403
-------- --------
Total other assets...................................... 16,366 22,262
-------- --------
$ 76,983 $109,963
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................................... $ 61 $ --
Current portion of long-term debt......................... 50,415 61,668
Accounts payable.......................................... 7,282 8,636
Accrued liabilities and other............................. 9,671 9,009
Liabilities held for sale................................. 7,236 5,153
-------- --------
Total current liabilities............................... 74,665 84,466
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 765 1,018
DEFERRED INCOME TAXES....................................... 354 622
COMMITMENTS AND CONTINGENCIES............................... -- --
SHAREHOLDERS' EQUITY:
Serial Preferred Shares, voting, no par value; 1,000
shares authorized and unissued.......................... -- --
Common Shares, voting, no par value, at stated value;
40,000 shares authorized; 8,538 shares issued in 2003
and 2002; 8,439 and 8,288 shares outstanding in 2003 and
2002.................................................... 2,276 2,276
Additional paid-in capital................................ 46,560 46,993
Accumulated earnings (deficit)............................ (45,076) (16,251)
Accumulated other comprehensive loss...................... (1,597) (7,002)
Common Shares in treasury, at cost; 99 and 250 shares held
in 2003 and 2002........................................ (964) (2,159)
-------- --------
Total shareholders' equity.............................. 1,199 23,857
-------- --------
$ 76,983 $109,963
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
25
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001
-------- -------- --------
Revenues.................................................... $104,220 $123,058 $120,489
Operating costs and expenses:
Cost of sales............................................. 71,607 87,326 85,325
Selling, general and administrative expenses.............. 29,788 32,327 35,535
-------- -------- --------
Operating income (loss)..................................... 2,825 3,405 (371)
Interest expense............................................ 5,907 5,055 4,401
-------- -------- --------
Loss from continuing operations before income taxes......... (3,082) (1,650) (4,772)
Provision (benefit) for income taxes........................ (331) 10,669 (934)
-------- -------- --------
Loss from continuing operations............................. (2,751) (12,319) (3,838)
Discontinued operations:
Loss from operations, net of income taxes................. (9,931) (5,898) (4,443)
Gain on disposals, net of income taxes.................... 2,095 -- --
-------- -------- --------
Loss before Cumulative effect of change in accounting
principle................................................. (10,587) (18,217) (8,281)
Cumulative effect of change in accounting principle......... (18,238) -- --
-------- -------- --------
Net Loss.................................................... $(28,825) $(18,217) $ (8,281)
======== ======== ========
Loss per share -- Basic:
Loss from continuing operations........................... $ (0.33) $ (1.52) $ (0.50)
Discontinued operations:
Loss from operations, net of income taxes................. (1.18) (0.72) (0.57)
Gain on disposal, net of income taxes..................... 0.25 -- --
-------- -------- --------
Loss before Cumulative effect of change in accounting
principle................................................. (1.26) (2.24) (1.07)
Cumulative effect of change in accounting principle......... (2.17) -- --
-------- -------- --------
Net Loss.................................................... $ (3.43) $ (2.24) $ (1.07)
======== ======== ========
Weighted average shares outstanding -- Basic................ 8,387 8,119 7,736
======== ======== ========
Loss per share -- Diluted:
Loss from continuing operations........................... $ (0.33) $ (1.52) $ (0.50)
Discontinued operations:
Loss from operations, net of income taxes................. (1.18) (0.72) (0.57)
Gain on disposal, net of income taxes..................... 0.25 -- --
-------- -------- --------
Loss before Cumulative effect of change in accounting
principle................................................. (1.26) (2.24) (1.07)
Cumulative effect of change in accounting principle......... (2.17) -- --
-------- -------- --------
Net Loss.................................................... $ (3.43) $ (2.24) $ (1.07)
======== ======== ========
Weighted average shares outstanding -- Diluted.............. 8,387 8,119 7,736
======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
26
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
ACCUMULATED
OTHER COMMON
SERIAL ADDITIONAL COMPREHENSIVE SHARES
PREFERRED COMMON PAID-IN ACCUMULATED INCOME IN
SHARES SHARES CAPITAL EARNINGS (LOSS) TREASURY TOTAL
--------- ------ ---------- ----------- ------------- -------- -------
March 31, 2000............ $-- $2,276 $51,486 $ 10,247 $(1,699) $(8,075) $54,235
Comprehensive Loss:
Net loss.............. -- -- -- (8,281) -- -- (8,281)
Minimum pension
liability, net of
tax of $142......... -- -- -- -- (366) -- (366)
Cumulative translation
adjustment.......... -- -- -- -- (4,614) -- (4,614)
-------
Total Comprehensive
Loss.................. -- -- -- -- -- -- (13,261)
Exercise of 2 stock
options............... -- -- 4 -- -- -- 4
Issuance of 208 Treasury
Shares................ -- -- (1,511) -- -- 2,051 540
-- ------ ------- -------- ------- ------- -------
March 31, 2001............ -- 2,276 49,979 1,966 (6,679) (6,024) 41,518
Comprehensive Loss:
Net loss.............. -- -- -- (18,217) -- -- (18,217)
Minimum pension
liability, net of
tax of $74.......... -- -- -- -- (132) -- (132)
Cumulative translation
adjustment.......... -- -- -- -- (191) -- (191)
-------
Total Comprehensive
Loss.................. -- -- -- -- -- -- (18,540)
Issuance of 391 Treasury
Shares................ -- -- (2,986) -- -- 3,865 879
-- ------ ------- -------- ------- ------- -------
March 31, 2002............ -- 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................ -- -- (1,059) -- -- 1,195 136
-- ------ ------- -------- ------- ------- -------
March 31, 2003............ $-- $2,276 $46,560 $(45,076) $(1,597) $ (964) $ 1,199
== ====== ======= ======== ======= ======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
27
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
-------- -------- -------
Cash flows from operating activities:
Net loss.................................................. $(28,825) $(18,217) $(8,281)
Adjustments to reconcile net loss to net cash provided
(used) by continuing operations:
Loss on discontinued operations........................ 7,836 5,898 4,443
Depreciation and amortization.......................... 3,027 4,142 4,201
401K matching contributions in Treasury shares......... 136 841 360
Deferred income taxes.................................. (344) 6,737 (2,576)
Loss on sale of assets................................. (11) (87) (82)
Cumulative effect of change in accounting principle.... 18,238 -- --
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts and notes receivable............................. 176 4,898 (3,417)
Inventories............................................... 1,752 4,323 625
Prepaid expenses and other................................ (314) 2,821 2,153
Other assets.............................................. (698) (1,174) 1,228
Accounts payable and accrued expenses..................... (744) (832) 699
-------- -------- -------
Total adjustments................................. 29,054 27,567 7,634
-------- -------- -------
Net cash provided (used) by continuing
operations...................................... 229 9,350 (647)
-------- -------- -------
Cash flows from investing activities:
Additions to property, plant and equipment................ (351) (588) (1,882)
Proceeds from disposal of property, plant and equipment... 507 495 1,510
-------- -------- -------
Net cash provided (used) by investing
activities...................................... 156 (93) (372)
-------- -------- -------
Cash flows from financing activities:
Net payment under revolving credit facility and lines of
credit................................................. (11,534) (5,362) 6,588
Net proceeds from issuance of Common Shares............... -- 40 183
-------- -------- -------
Net cash provided (used) by financing
activities...................................... (11,534) (5,322) 6,771
-------- -------- -------
Effect of changes in foreign currency exchange rates on
cash...................................................... 154 (5) (11)
-------- -------- -------
Cash provided by (used for) discontinued operations......... 12,550 (3,174) (3,022)
-------- -------- -------
Net increase in cash........................................ 1,555 756 2,719
Cash and cash equivalents at beginning of year.............. 3,959 3,203 484
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 5,514 $ 3,959 $ 3,203
======== ======== =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
28
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(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 2002 and 2001 amounts have been reclassified to conform with the
fiscal 2003 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 includes a series of initiatives to
improve operating income and reduce debt. The Company intends to sell non-core
business units and use the proceeds to reduce debt. The Company has engaged
outside professionals to assist in the disposition of the 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 have been eliminated and the
non-core domestic and international units are reported as discontinued
operations. Prior-year financial statements have been reclassified to reflect
these non-core units as discontinued operations, which are 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 in
a particular industry or with an individual customer. The Company performs
ongoing credit evaluations of its customers' financial condition.
Accounts receivable are presented net of allowances for doubtful accounts
of $531 and $1,779 at March 31, 2003 and 2002, respectively. Bad debt expense
totaled $452, $532 and $813 in fiscal 2003, 2002 and 2001, respectively. Trade
receivables written off, net of recoveries of prior years write-offs, totaled
$1,700, $873 and $393 in fiscal 2003, 2002 and 2001, 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, 2003 and 2002:
2003 2002
------ ------
Component parts and raw materials........................... $5,005 $5,624
Finished goods.............................................. 2,061 2,845
------ ------
$7,066 $8,469
====== ======
29
Disposals of obsolete inventory, net of proceeds, totaled $149, $183 and
$1,728 in fiscal 2003, 2002 and 2001, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major renewals and
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 $1,937, $2,429 and $2,593 in fiscal 2003, 2002
and 2001, respectively.
GOODWILL, PATENTS AND OTHER INTANGIBLES
In June 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 and establishes criteria to be used in determining whether
acquired intangible assets are to be separated from goodwill.
In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), were issued by the
Financial Accounting Standards Board. SFAS 142 changes the accounting for
goodwill and indefinite life intangibles from an amortization approach to a
non-amortization approach, and require periodic tests for impairment of these
assets. Upon the Company's 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. The Company has completed its initial impairment testing
as of April 1, 2002 under SFAS 142 and recorded an impairment loss totaling
$18,238 of which $11,832 related to discontinued operations and $6,406 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, 2003.
The following table reflects the reconciliation of reported net loss and
net loss per share to the amounts adjusted for the exclusion of goodwill
amortization:
2002 2001
-------- --------
NET LOSS:
Reported Net Loss........................................... $(18,217) $ (8,281)
Add back Goodwill Amortization.............................. 1,723 1,668
-------- --------
Adjusted Net Loss........................................... $(16,494) $ (6,613)
======== ========
Income (loss) per share -- Basic & Diluted:
As reported............................................... $ (2.24) $ (1.07)
Adjusted Net Loss......................................... $ (2.03) $ (0.85)
Goodwill balances as of March 31, 2003 totaled $13,343 compared to $18,859
at March 31, 2002. During fiscal 2003, the Company recorded an impairment on its
goodwill of $11,832 for discontinued operations and $6,406 for its continuing
operations which was offset by Canadian foreign currency translation
adjustments.
30
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 $1,083 and $1,279 at March 31, 2003 and 2002, respectively, are
amortized on the straight-line method over their estimated useful lives ranging
from 4 to 20 years. Amortization expense for such assets totaled $217, $227 and
$381 in fiscal 2003, 2002 and 2001, respectively. Amortization expense is
anticipated to be approximately $217 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. Under this method, revenues are
recognized in proportion to the ratio of costs incurred to currently estimated
total contract costs. Estimated earnings and costs on contracts are subject to
revision throughout the terms of the contracts and any required adjustments are
recorded in the periods in which revisions are made. Accounts receivable
includes $1,218 and $1,059 at March 31, 2003 and 2002, respectively, of amounts
billed but not paid by customers under retainage provisions of contracts.
Prepaid expenses and other includes $1,987 and $2,286 at March 31, 2003 and
2002, respectively, of amounts related to costs and estimated earnings in excess
of billings on uncompleted contracts. Accrued liabilities and other includes
$477 and $343 at March 31, 2003 and 2002, 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 2003 and
2002 and amounted to approximately $700 in fiscal 2001.
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.
At March 31, 2003, 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
recorded a valuation allowance for its net domestic deferred tax assets and net
operating loss carryforwards of $10,472 in the fourth quarter of fiscal
31
2002. The Company intends to maintain a full valuation allowance for its net
deferred tax assets until sufficient positive evidence exists to support the
reversal of the remaining reserve. Until such time, except for 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 5 of Notes to Consolidated Financial Statements
of the Company for additional information regarding income taxes.
EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is computed by dividing net income (loss)
for the period by the weighted average number of Common Shares outstanding for
the period. Diluted EPS is computed by dividing net income (loss) by the
weighted average number of Common Shares and potential shares outstanding for
the period. Stock options and warrants are the only potential Common Shares and
are considered in the Company's diluted EPS calculation. Potential Common Shares
are computed using the treasury stock method. The effect of the 45 and 28
incremental shares stock options in fiscal 2003 and 2002, respectively, have
been excluded from dilutive weighted average shares, as the net loss for the
year would cause the incremental shares to be antidilutive. Moreover, the effect
of the 477 weighted average incremental shares from the issuance of stock
warrants in fiscal 2003, respectively, have been excluded from dilutive weighted
average shares, as the net loss for the year would cause the incremental shares
to be antidilutive.
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,
2003 2002
--------- ---------
Translation adjustment...................................... $(1,597) $(6,504)
Pensions.................................................... -- (498)
------- -------
Ending Balance.............................................. $(1,597) $(7,002)
======= =======
Components of comprehensive income (loss) consist of the following:
TWELVE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Net loss.................................................... $(28,825) $(18,217)
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustment...................................... 1,606 (191)
Pensions.................................................... -- (132)
Write-off translation adjustment related to discontinued
operations................................................ 3,301 --
Write-off pensions related to discontinued operations....... 498 --
-------- --------
Total comprehensive loss.................................... $(23,420) $(18,540)
======== ========
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
32
rates for the period. Resulting translation adjustments are recorded as a
component of shareholders' equity in other comprehensive income (loss). The
Company's foreign assets held for sale are effected by currency fluctuations.
For discontinued operations, the effects of foreign currency translations have
been reflected in the statement of operations.
FINANCIAL STATEMENT ESTIMATES
The preparation of 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
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" in that it requires additional
disclosures about our stock-based compensation plans. SFAS No. 148 is effective
for periods beginning after December 15, 2002. We account for our stock-based
compensation plans using the intrinsic value method of recognition and
measurement principles under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. We adopted the disclosure-only
provisions of SFAS No. 123. Assuming that we had accounted for our stock-based
compensation programs using the fair value method promulgated by SFAS No. 123,
proforma loss and loss per share would have been as follows (for the fiscal
years ended):
2003 2002 2001
------- -------- -------
Loss from continuing operations:
As reported.......................................... $(2,751) $(12,319) $(3,838)
Pro forma............................................ (3,007) (12,498) (4,245)
Loss from continuing operations per share -- Basic:
As reported.......................................... $ (0.33) $ (1.52) $ (0.50)
Pro forma............................................ (0.36) (1.54) (0.55)
Loss from continuing operations per share -- Diluted:
As reported.......................................... $ (0.33) $ (1.52) $ (0.50)
Pro forma............................................ (0.36) (1.54) (0.55)
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. The weighted-average fair
value price at the date of grant for options granted during fiscal 2003, 2002
and 2001 was $0.32, $3.70 and $3.75 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 6.5%, expected
volatility of 142.0% for 2003, 113.5% for 2002 and 46.5% for 2001, an expected
life of 10 years and no expected dividends.
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 includes a series of initiatives to
improve operating income and reduce debt. The Company intends to sell non-core
business units and use the proceeds to reduce debt. The Company has engaged
outside professionals to assist in the disposition of the 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
for the quarter ended September 30, 2002, the Other Operations and the
International Operations reporting segments have been eliminated and the
non-core domestic and international units are reported as discontinued
operations. Prior-year financial statements have been reclassified to reflect
these non-core units as discontinued operations, which are also referred to as
"assets and liabilities held for sale."
33
Assets and liabilities held for sale consisted of the following at March
31,
2003 2002
------- -------
Cash........................................................ $ 2,819 $ 1,796
Accounts Receivable......................................... 6,203 15,291
Inventory................................................... 2,348 6,097
Prepaid Expenses............................................ 2,135 365
Property, plant and equipment, net.......................... 58 1,851
Goodwill and Other Assets................................... 1,037 15,536
------- -------
Assets held for sale........................................ $14,600 $40,936
======= =======
Current Liabilities......................................... $ 7,310 $ 5,151
Deferred Taxes & Minority Interest.......................... (74) 2
------- -------
Liabilities held for sale................................... $ 7,236 $ 5,153
======= =======
Operating gains or losses may be 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, 2003, 2002 and 2001 are shown below.
FOR THE TWELVE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002 2001
------- ------- -------
Revenues................................................ $40,309 $49,133 $43,448
Operating cost and expenses:
Cost of sales........................................... 26,817 34,708 31,409
Selling, general & administrative expenses.............. 20,919 17,435 13,625
------- ------- -------
Operating loss.......................................... (7,427) (3,010) (1,586)
Gain on disposal........................................ (2,095) -- --
Interest expense........................................ 2,455 2,298 2,354
------- ------- -------
Loss from discontinued operations before income taxes... (7,787) (5,308) (3,940)
Provision for income taxes.............................. 49 590 503
------- ------- -------
Loss from discontinued operations....................... $(7,836) $(5,898) $(4,443)
======= ======= =======
The Company allocated interest to discontinued operations of $2,455, $2,298
and $2,354 for fiscal 2003, 2002 and 2001, respectively, based on estimated
proceeds from the discontinued operations dispositions that will be 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.
During fiscal 2003, the Company disposed of four non-strategic business
units. First, in March 2003, the Company sold its Bass Trigon Software division
for $3,150 and recognized a gain of $194. Also, in March 2003, the Company
recorded a note receivable for $6,232, of which the Company has collected $5,932
on April 2, 2003, for its Rohrback Cosasco Systems division and recognized a
gain of $1,809. The Company also disposed of two smaller international offices
with 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 impairment charges totaling $900
based on market value analysis for its European operations and its Middle East
operations. Also during fiscal 2003, discontinued operations recorded charges to
selling, general and administrative expenses totaling $3,661 related to currency
translation.
34
3. LONG-TERM DEBT:
Long-term debt at March 31, 2003 and 2002 consisted of the following:
2003 2002
------- -------
Senior Notes, due 2008...................................... $26,824 $28,286
Revolving Credit Facility................................... 22,192 32,045
Other....................................................... 2,225 2,355
------- -------
51,241 62,686
Less: current portion....................................... 50,476 61,668
------- -------
$ 765 $ 1,018
======= =======
In March 1999, the Company entered into an $80 million revolving credit
facility that expires on July 31, 2003 (the "Revolving Credit Facility").
Initial borrowings were used to repay existing domestic bank indebtedness.
Through a series of subsequent amendments, including an amendment executed by
the Company on September 23, 2002 ("September 2002 Amendment"), the size of the
Revolving Credit Facility was reduced to $37.5 million. In addition, the
September 2002 Amendment provides that any cash proceeds from the disposition of
targeted Company assets will be used to reduce the Revolving Credit Facility and
the Senior Notes in a ratio of 56% and 44%, respectively. Any net asset
disposition payments to reduce the Revolving Credit Facility will result in a
proportionate reduction in the lender's commitments in the Revolving Credit
Facility. Borrowings under the Revolving Credit Facility are further limited to
borrowing base amounts as defined. The September 2002 Amendment provides for
interest on borrowings at prime plus 5.00%. In addition, the September 2002
Amendment requires the Company to pay a facility fee of 1.00% on the commitment
amount. The Company executed another amendment on November 1, 2002 (the "Seventh
Amendment") which contained additional provisions for the improvement period and
also reset the net worth covenant. The Company also executed an amendment on
February 10, 2003 (the "Eighth Amendment") to modify certain terms and
conditions under which facility letters of credit may be issued.
In connection with the September 2002 Amendment, the Revolving Credit
Facility lender group received a warrant ("Revolving Credit Facility Warrant")
to purchase 467 of the Company's Common Shares at a purchase price of $0.01 per
share exercisable at any time after July 31, 2003 until September 23, 2012. The
Revolving Credit Facility Warrant can be reduced up to 50% if the Company
partially pays the Revolving Credit Facility principal amount prior to July 31,
2003 or by up to 10% if targeted asset dispositions are completed and the
proceeds are used to paydown the debt levels but this is highly unlikely to be
fully utilized by July 31, 2003. Borrowings under the Revolving Credit Facility
are secured by the Company's domestic accounts receivable, inventories, certain
intangibles, machinery and equipment and owned real estate as well as certain
assets in Canada. The Company also has pledged slightly less than two-thirds of
the capital stock of two of its foreign subsidiaries. The Revolving Credit
Facility, as amended, requires the Company to maintain certain financial ratios
and places limitations on the Company's ability to pay cash dividends, incur
additional indebtedness and make investments, including acquisitions. The
Company was not in compliance with its net worth covenant and its operating
income before depreciation and amortization financial covenant of the Revolving
Credit Facility as of March 31, 2003 and there can be no assurance that the
Company will receive a waiver for these violations. At March 31, 2003, the
Company had $22,192 outstanding under the Revolving Credit Facility. Total
availability under the Revolving Credit Facility at March 31, 2003 was
approximately $1,552, after giving consideration to the borrowing base
limitations, under the Revolving Credit Facility but this availability can be
revoked at any time due to the debt covenant violations.
Due to the fact that the Company's Revolving Credit Facility expires on
July 31, 2003, it will be necessary for the Company to amend this Revolving
Credit Facility to extend the expiration date. If the Company is unable to
negotiate an amendment to the Revolving Credit Facility, it will be necessary
for the Company to refinance or repay this debt. The Company cannot assure that
it will be able to accomplish such a transaction on terms acceptable to the
Company or at all. Failure to do so would have a material adverse effect on the
Company's liquidity and financial condition and could result in the Company's
inability to operate as a
35
going concern. If the Company is unable to operate as a going concern, it may
file, or may have no alternative but to file, bankruptcy or insolvency
proceedings or pursue a sale or sales of assets to satisfy creditors.
The weighted average interest rate on borrowings under the Revolving Credit
Facility was 9.5%, 9.2% and 9.6% during fiscal 2003, 2002 and 2001,
respectively.
In January 1998, the Company issued, through a private placement, $30
million of Senior Notes due 2008 (the "Senior Notes"). The Senior Notes, as
amended, bear interest at 11.35% until July 31, 2003 and 11.85% on and after
July 31, 2003. In addition, the agreement relating to the Senior Notes, as
amended, provides for an additional fee of 1.00% per annum on the outstanding
principal amount of the Senior Notes. In connection with the September 2002
Amendment, the Senior Notes lender received a warrant ("Senior Notes Warrant")
to purchase 467 of the Company's Common Shares at a purchase price of $0.01 per
share exercisable at any time after July 31, 2003 until September 23, 2012. The
Senior Notes Warrant can be reduced up to 50% to the extent the Company
partially pays the Revolving Credit Facility principal and the Senior Notes
principal prior to July 31, 2003 or by up to 10% if targeted asset dispositions
are completed and the proceeds are used to paydown the debt levels but this is
highly unlikely to be fully utilized by July 31, 2003. The Senior Notes, as
amended, require a principal payment of $7,561 by July 31, 2003 and monthly
principal payments of $384 commencing on August 15, 2003 ("Notes Principal
Repayments") and are secured equally and ratably with debt under the Revolving
Credit Facility. In addition, the Senior Notes provide that any cash proceeds
from the disposition of targeted Company assets will be used to reduce the
Revolving Credit Facility and the Senior Notes in a ratio of 56% and 44%,
respectively. Any such additional payments used to reduce the Senior Notes will
result in an equal reduction in the Notes Principal Repayments. The Company
cannot assure that it will be able to make Notes Principal Repayments when due.
Failure to do so would result in a default under the Senior Notes, in which
case, the Senior Notes lender could pursue its remedies for default, including
acceleration of principal, which would have a material adverse effect on the
Company's liquidity and financial condition and could result in the Company's
inability to operate as a going concern. If the Company is unable to operate as
a going concern, it may file, or may have no alternative but to file, bankruptcy
or insolvency proceedings or pursue a sale or sales of assets to satisfy
creditors.
Within the Prudential Senior Notes Agreement is a yield maintenance amount
provision which ensures that the lender is paid the entire interest amount of
the note. The make-whole provision states that the Notes shall be 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 Note. Any partial prepayment of the Notes which meets certain criteria
shall be applied against the principal amount of the Notes scheduled to become
due in the inverse order of maturity thereof. Fiscal 2003 results include an
interest charge of approximately $1,045 relating to the yield maintenance amount
provisions of our Senior Notes agreement. The yield maintenance amount
provisions apply to certain optional prepayments of principle under the Senior
Notes. The Company does not agree with and is disputing the Note holder's
interpretation that certain payments from the proceeds of sales of certain
non-core and international business assets made during and after fiscal 2003 are
subject to the yield maintenance amount provisions.
The Company is required to maintain certain financial ratios under the
Senior Notes. The Company was not in compliance with the financial covenants
under the Senior Notes as of March 31, 2003 and there can be no assurance that
the Company will receive a waiver for these violations.
The Company intends to seek, prior to July 31, 2003, other financing to
retire the Senior Notes and the Revolving Credit Facility or will seek to get an
extension. There can be no assurance, however, that the Company will be able to
obtain other financing or if obtained, what the terms and conditions would be.
The weighted average interest rate on borrowings under the Senior Notes was
11.35%, 9.1% and 9.1% during fiscal 2003, 2002 and 2001, respectively.
Other long-term debt bears interest at various rates, which was 6.2% at
March 31, 2003 and March 31, 2002. The obligations mature at various intervals
between 2003 and 2007.
36
The Company's long-term debt excluding the Revolving Credit Facility and
the Senior Notes, matures as follows: $340 in 2005, $340 in 2006 and $85 in
2007.
The Company also maintains available lines of credit from various foreign
banks which are secured by the assets of certain foreign subsidiaries.
Short-term borrowings amounted to $61 and $0 at March 31, 2003 and 2002,
respectively, under these lines of credit. The interest rate on such borrowings
at March 31, 2003 was 5.0%.
Cash paid for interest totaled $6,090, $6,633 and $5,687 for fiscal year
2003, 2002 and 2001, respectively. Fiscal 2003 cash paid for interest included
facility commitments fees of $336.
In July 2002, with the assistance of strategic financial advisors, the
Company developed a formal business restructuring plan. The multi-year plan
includes a series of initiatives to improve operating income and reduce debt
through restructuring, consolidation and divestiture of non-core businesses.
Operating gains or losses may be experienced with the disposition of assets at
the time of disposal during the implementation of the restructuring plan.
Operating income improvements combined with debt reductions are expected to
result. Implementation efforts are currently underway. As appropriate, the
Company will report future quarterly and annual results separately for
continuing operations and for discontinued operations.
The Company has retained an investment banking firm to assist in its
efforts to recapitalize its balance sheet and refinance its currently
outstanding Senior Notes and Revolving Credit Facility. The refinancing process
is ongoing and the Company is currently having discussions with various parties
in order to effect a refinancing transaction. There can be no assurance,
however, that the Company will be able to obtain other financing or as to the
terms and conditions under which such financing may be available.
The Company is currently in default of certain financial ratios required to
be maintained under it Senior Note and Revolving Credit Facility agreements. In
addition, the Revolving Credit Facility is scheduled to expire on July 31, 2003
and the Company is required to make a $7.6 million principal payment on the
Senior Notes by July 31, 2003. The Company is also, at the current time, not
able to provide any assurances regarding its ability to make the $7.6 million
Senior Note principal payment that is due on July 31, 2003. Further information
about our Long-Term Debt is included in Note 3, Long-Term Debt, Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.
The Company has had preliminary discussions with its lenders regarding an
amendment to the Revolving Credit Facility which would, among other things,
extend the maturity date of the Revolving Credit Facility beyond July 31, 2003.
The Company intends to continue its efforts to obtain such an amendment,
however, there can be no assurances that the Company will be able to negotiate
such an amendment at all or under terms and conditions acceptable to it.
Until such time when the Company is able to refinance the Senior Notes and
Revolving Credit Facility it will attempt to negotiate arrangement with its
lenders to, among other things, waive the covenant violations under the Senior
Notes and Revolving Credit Facility agreement, extend the maturity of the
Revolving Credit Facility beyond July 31, 2003 and defer the principal payments
due under the Senior Notes. If the Company is not able to negotiate mutually
acceptable arrangements with its existing lenders, events could occur that would
have a material adverse effect on the Company's liquidity and financial
condition and could result in its inability to operate as a going concern. If
the Company is unable to operate as a going concern, it may file, or have no
alternative but to file, bankruptcy or insolvency proceedings or pursue a sale
or sales of assets to satisfy creditors.
4. LEASES:
The Company leases certain office and warehouse space and equipment under
operating leases which expire at various dates through 2012. Future minimum
rental payments under long-term lease agreements are as follows: $2,291 in 2004,
$1,703 in 2005, $1,139 in 2006, $629 in 2007, $375 in 2008 and $575 after 2009
with a cumulative total of $6,712. In addition, the Company rents other
properties on a month-to-month basis.
Total rental expense was $4,685, $3,819 and $3,393 for fiscal 2003, 2002
and 2001, respectively.
37
5. INCOME TAXES:
Components of income (loss) from continuing operations before income taxes
as follows:
2003 2002 2001
------- ------- -------
United States........................................... $(4,633) $(3,294) $(7,542)
Foreign................................................. 1,551 1,644 2,770
------- ------- -------
$(3,082) $(1,650) $(4,772)
======= ======= =======
Components of the provision for income taxes for continuing operations by
jurisdiction follow:
2003 2002 2001
----- ------- -------
Current
Federal................................................. $ -- $ -- $ 333
State and local......................................... 120 -- 11
Foreign................................................. 79 1,132 1,225
----- ------- -------
199 1,132 1,569
Deferred
Federal................................................. -- 9,351 (2,502)
State and local...................................... -- (56) (508)
Foreign.............................................. (530) 242 507
----- ------- -------
(530) 9,537 (2,503)
----- ------- -------
$(331) $10,669 $ (934)
===== ======= =======
Differences between the statutory United States federal income tax rate
(34%) and the effective income tax rate for continuing operations are as
follows:
2003 2002 2001
------- ------- -------
Federal income tax provision (benefit) at statutory
rate.................................................. $(1,048) $ (561) $(1,622)
State income taxes, net................................. 78 (36) (323)
Foreign tax rate differential........................... 146 725 698
Meals and entertainment................................. 169 178 195
Valuation allowance..................................... 364 10,472 --
Other................................................... (40) (109) 118
------- ------- -------
Effective income tax.................................... $ (331) $10,669 $ (934)
======= ======= =======
38
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities were comprised of the following at March 31, 2003 and
2002:
2003 2002
-------- --------
DEFERRED TAX ASSETS
Bad debts................................................. $ 208 $ 550
Other accruals............................................ 860 1,118
Uniform cost capitalization............................... 9 27
Accrued expenses.......................................... 473 648
Pension and other benefit accruals........................ 428 654
Minimum tax credit........................................ 557 557
Federal net operating loss carryforward................... 7,060 6,665
State net operating loss carryforwards.................... 772 772
Other..................................................... 835 468
-------- --------
Total deferred tax assets......................... 11,202 11,459
DEFERRED TAX LIABILITIES
Property, plant and equipment............................. (353) (680)
Other..................................................... (367) (929)
-------- --------
Total deferred tax liabilities.................... (720) (1,609)
-------- --------
Valuation allowance....................................... (10,836) (10,472)
-------- --------
Total net deferred taxes.................................. $ (354) $ (622)
======== ========
In fiscal 2002, the Company recorded a $10,472 charge to establish a
valuation allowance for its net deferred tax assets. The valuation allowance was
calculated in accordance with the provisions of SFAS 109. The Company intends to
maintain a full valuation allowance on its net deferred tax assets until
sufficient positive evidence exists to support reversal of the remaining
reserve. Until such time, except for foreign and state tax provisions, the
Company expects to have no reported tax provision, net of changes in the
valuation allowance.
No income tax provisions for United States income tax on approximately
$7,722 of undistributed losses of foreign subsidiaries at March 31, 2003 has
been made. Determination of the amount of the unrecognized deferred tax
liabilities for temporary differences related to investments in foreign
subsidiaries is not practicable.
The Company had state net operating loss carryforwards of approximately
$14,622 at March 31, 2003. At March 31, 2003, the Company had federal net
operating loss carryforwards of $20,550, which expire through 2022. The Company
also has federal credit carryforwards of $557 at March 31, 2003 relating to
non-expiring alternative minimum tax credits.
Cash paid for income taxes totaled $371, $1,897 and $2,471 for fiscal 2003,
2002 and 2001, respectively.
6. EMPLOYEE BENEFIT PLANS:
One of the Company's discontinued 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.
39
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:
2003 2002
------- ------
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 3,816 $3,651
Service cost........................................... -- --
Interest cost.......................................... 249 218
Assumption change...................................... 771 --
Effects of currency translation........................ 398 6
Benefits paid.......................................... (66) (59)
------- ------
Benefit obligation at end of year......................... $ 5,168 $3,816
Change in plan assets
Fair value of plan assets at beginning of year............ $ 3,034 $2,933
Employer contributions................................. 193 137
Benefits paid.......................................... (66) (59)
Effects of currency translation........................ 319 6
Investment return...................................... (449) 17
------- ------
Fair value of plan assets at end of year.................. $ 3,031 $3,034
Funded status............................................... $(2,137) $ (782)
Amounts recognized in Consolidated Balance Sheets
Accrued benefit liability (recorded in Discontinued
Operations)............................................ $(2,137) $ (782)
2003 2002 2001
----- ----- -----
Net periodic pension benefit cost
Service cost.............................................. $ -- $ -- $ --
Interest cost............................................. 247 218 211
Expected return on assets................................. (274) (239) (256)
Net amortization and deferral............................. 38 17 --
----- ----- -----
Net periodic pension cost................................... $ 11 $ (4) $ (45)
Weighted-average assumptions as of March 31
Discount rate............................................. 5.0% 6.0% 6.5%
Long-term rate of return on plan assets................... 8.0% 8.0% 8.5%
Rate of increase in compensation level.................... N/A N/A N/A
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. For fiscal year 2003 and 2002, the Company issued 121 and 375 treasury
shares for the Company's matching portion. Total matching contributions in cash
and treasury shares totaled $199, $977 and $973 in fiscal 2003, 2002 and 2001,
respectively. Effective April 6, 2002, the Company suspended the Company match.
The Company has entered into an agreement with one of its 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 is providing for this deferred compensation benefit
over the term of the agreement.
40
7. 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 Rights will expire in July 2007.
WARRANTS
During the quarter ended September 30, 2002, the Company issued warrants to
the lenders (see Note 3 -- Long-Term Debt) under its Revolving Credit Facility
and Senior Notes. The warrant issued to the Revolving Credit Facility lender
permits the lender to purchase 467 shares at a purchase price of $0.01 per
share, and the warrant issued to the Senior Notes lender permits the lender to
purchase 467 shares at a purchase price of $0.01 per share. 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. The $313 discount per facility will be fully amortized by the Revolving
Credit Facility termination date of July 2003, and by the Senior Notes
termination date of January 15, 2008. Warrants have been amortized over the life
of the debt and current amortization expense for fiscal 2003 totaled $217 and is
included in the interest expense in the accompanying consolidated statement of
operations.
8. 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 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 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.
41
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.
In fiscal 2001, the Company adopted a plan whereby holders of stock options
covered under the 1997 Option Plan could surrender options previously granted
with the understanding that a like number of options would be granted no sooner
than six months after surrender. Accordingly, options for 654 shares with
exercise prices ranging from $5.25 to $14.96 were surrendered during December
2000. Subsequently, in June 2001, the Company reissued options for 648 shares
with a price of $2.55, the market price.
Shares for issuance under equity compensation plans does 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 such non-employee directors hold such stock appreciation
rights.
Stock option activity for the Company during fiscal 2003, 2002 and 2001 was
as follows:
NUMBER OF SHARES 2003 2002 2001
---------------- ------ ------ ------
Options outstanding, beginning of year................. 1,303 757 1,107
Granted................................................ 270 676 425
Exercised.............................................. -- -- (2)
Expired, canceled or surrendered....................... (174) (130) (773)
------ ------ ------
Outstanding, end of year............................... 1,399 1,303 757
------ ------ ------
Exercisable, end of year............................... 270 305 444
Available for grant, end of year....................... 248 1,014 891
Price range of options:
Granted.............................................. $ 0.32 to $ 1.30 to $ 3.69 to
$ 1.15 $ 3.05 $ 4.00
Exercised............................................ N/A N/A $ 1.86
Options outstanding, end of year..................... $ 0.32 to $ 1.30 to $ 1.86 to
$13.78 $13.78 $13.78
Of the options shares outstanding at March 31, 2003, 1,218 shares
outstanding were in a price range of $0.32 to $3.75. The remaining 181 options
shares outstanding were at a price range from $4.00 to $13.78.
9. BUSINESS SEGMENTS:
In July 2002, the Company's Board of Directors approved a formal business
restructuring plan. The multi-year plan includes a series of initiatives to
improve operating income and reduce debt. The Company intends to sell non-core
business units and use the proceeds to reduce debt. The Company has engaged
outside professionals to assist in the disposition of the 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 have been eliminated and the
non-core domestic and international units are reported as discontinued
operations. Prior-year financial statements have been reclassified to reflect
these non-core units as discontinued operations, which are also referred to as
"assets and liabilities held for sale."
42
We have organized our operations into two business segments: Domestic Core
Operations and Canadian Operations. Our business segments and a description of
the products and services they provide are described below:
The Company's business segments and a description of the products and
services they provide are described below:
Domestic Core Operations. The Domestic Core Operations segment consists of
the Company's operations in the United States and Central and South America,
which provide products and services including corrosion control, coatings,
pipeline integrity, risk assessment and inspection services. This segment
provides corrosion control products and services to a wide-range of customers in
a number of industries including: energy, utilities, water and wastewater
treatment, chemical and petrochemical, pipelines, defense and municipalities. In
addition, this segment provides coatings services to customers in the
entertainment, aerospace, transportation, petrochemical and electric power
industries, as well as inspection services to customers in the pharmaceutical,
chemical and energy industries. Finally, this segment includes a production
facility in the United States that assembles and distributes cathodic protection
products, such as anodes, primarily to the United States market. The Domestic
Core Operations had goodwill totaling $6,397 as March 31, 2003.
Canadian Operations. The Canadian Operations segment provides corrosion
control, pipeline integrity and inspection services to customers in Canada who
are primarily in the oil and gas industry. These customers include pipeline
operators, petrochemical plants and refineries. The Canadian Operations segment
also includes production facilities that assemble products such as anodes and
rectifiers. The Canadian Operations had goodwill totaling $6,946 at March 31,
2003.
Financial information relating to the Company's operations by segment are
presented below:
2003 2002 2001
-------- -------- --------
Revenue:
Domestic Core Operations.................................. $ 84,966 $101,781 $ 96,161
Canadian Operations....................................... 19,254 21,277 24,328
-------- -------- --------
$104,220 $123,058 $120,489
======== ======== ========
Operating Income (Loss):
Domestic Core Operations.................................. $ 11,061 $ 13,544 $ 12,483
Canadian Operations....................................... 3,634 2,850 4,193
Corporate Related Costs and Other......................... (11,870) (12,989) (17,047)
-------- -------- --------
$ 2,825 $ 3,405 $ (371)
======== ======== ========
Total Assets:
Domestic Core Operations.................................. $ 30,780 $ 45,352
Canadian Operations....................................... 22,669 21,588
Corporate Related Assets and Other........................ 8,934 2,087
Assets held for Sale...................................... 14,600 40,936
-------- --------
$ 76,983 $109,963
======== ========
Capital Expenditures:
Domestic Core Operations.................................. $ (282) $ (511) $ (1,317)
Canadian Operations....................................... (48) (77) (566)
Corporate Related Capital Expenditures.................... (21) -- --
-------- -------- --------
$ (351) $ (588) $ (1,882)
======== ======== ========
43
2003 2002 2001
-------- -------- --------
Depreciation and Amortization:
Domestic Core Operations.................................. $ 1,925 $ 2,458 $ 2,245
Canadian Operations....................................... 281 677 729
Corporate Related Depreciation and Amortization........... 821 1,007 1,227
-------- -------- --------
$ 3,027 $ 4,142 $ 4,201
======== ======== ========
10. LEGAL MATTERS:
As previously reported, in January 2000, the Michigan Department of
Environmental Quality ("MDEQ") issued an administrative decision which
effectively limited the scope of MDEQ's 1995 approval of certain assessment
methodologies utilized by Corrpro in determining whether certain underground
storage tanks meet Michigan's regulatory requirements for upgrade by means of
cathodic protection. The MDEQ decision also would have required us to conduct
further assessments and provide certain information. The assessment
methodologies at issue have been and remain recognized by the Environmental
Protection Agency ("EPA") and the other states in which we utilized such
methodologies for virtually identical purposes. We believed that MDEQ's decision
was in error and on January 24, 2000, filed a complaint and claim of appeal in
the Circuit Court for the County of Ingham, Michigan seeking declaratory relief
and appealing the decision on several grounds. In its November 14, 2000 ruling,
the Ingham Circuit Court reversed MDEQ's decision that directed we take certain
actions and provide certain information, however, the court also found that MDEQ
had not approved the full use of the assessment methodologies we utilized in
Michigan.
We believed that the circuit court's finding that MDEQ had not approved
full use of the methodologies was not supported by the evidence, and was
contradicted by evidence contained in the administrative record. On December 5,
2000, we filed, in the Michigan Court of Appeals, an application for leave to
appeal the circuit court's finding that MDEQ did not approve the full use of the
assessment methodologies we utilized in Michigan. By order dated February 14,
2001, the Michigan Court of Appeals denied our application for leave to appeal
the circuit court's finding. On March 7, 2001, we filed an application for leave
to appeal with the Supreme Court of the State of Michigan. On August 28, 2001,
the Michigan Supreme Court denied our application for leave to appeal.
As a result of these proceedings, the MDEQ's administrative decision
finding that certain of our assessment methodologies were not approved in full
was upheld, but the MDEQ was found not to have jurisdiction to enforce its
decision against us. In July 2002, the MDEQ sent certain underground storage
tank owners and operators who may have relied on our method of assessment a
notice informing them that certain of such owners and operators' tanks were
improperly upgraded, that such owners and operators are to provide to MDEQ upon
request evidence that they have conducted state required tank tightness testing,
and certain of such tanks must be internally inspected. MDEQ also advised that
internally inspected tanks that do not satisfy applicable criteria should be
taken out-of-service and removed from the ground. There can be no assurance that
the MDEQ will not take further action against underground storage tank owners or
operators.
On July 25, 2002, a summons and complaint was issued from the Circuit Court
for the County of Ingham, Michigan. The action was commenced by Blogett Oil
Company, Inc. and other owners and operators of underground storage tanks
systems on behalf of themselves and others similarly situated. The complaint
relates to the MDEQ regulatory proceeding described immediately above and names
both the Company and MDEQ. The plaintiffs seek an unspecified amount of damages
in excess of $25,000 from Corrpro. The plaintiffs also seek injunctive relief
prohibiting the MDEQ from declaring that underground storage tanks upgraded by
the Company do not meet the current requirement for corrosion protection set
forth by law. On November 18, 2002, the court issued an order certifying the
underlying class. The Michigan Court of Appeals denied the Company's application
for leave to appeal the Circuit Court's order certifying the underlying class.
The Company is unable at this time to make a determination as to whether an
adverse outcome is likely and whether an adverse outcome would have a materially
adverse affect on its operations or financial condition.
44
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 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 nor 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 and the EPA to develop and
implement field investigation procedures to assess the current status of the
affected sites. Based on currently available information, the Company does not
believe that the cost of field investigation procedures for this matter will
have a material effect on the future operations, financial position or cash
flows of the Company.
The Company is 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 names certain former and current officers
and directors of the Company as defendants. The complaint was purportedly filed
on behalf of all persons who purchased Corrpro Common Shares during the period
April 1, 2000 through March 20, 2002 and alleges violations of the federal
securities laws resulting in artificially inflated prices of the Company's
Common Shares during the class period. The complaint relates to the Company's
announcement that it had discovered accounting irregularities caused by apparent
internal misconduct in its Australian subsidiary. 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 to the
United States Circuit Court of Appeals for the 6th Circuit from the order of
dismissal. The Company is unable at this time to make a determination as to
whether an adverse outcome is likely and whether an adverse outcome would have a
materially adverse affect on its operations or financial condition.
Company management discovered accounting irregularities at the Australian
subsidiary in early calendar 2002 and upon discovery immediately began an
internal investigation, which has been conducted under the direction of the
Audit Committee of its Board of Directors. The Australian Securities and
Investments Commission has commenced an independent investigation of the
accounting irregularities. Corrpro voluntarily disclosed this matter to the SEC,
which has commenced a formal inquiry. Corrpro is cooperating with both
commissions.
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 in informal resolution of the
matter. Based on current available information, the Company does not believe
that this matter will have a material effect on the future operations, financial
position or cash flows of the Company.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business.
45
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, 2003 and 2002. The sum of
the quarterly per share figures does not equal annual per share figures due to
rounding.
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------
06/30/02(2) 09/30/02(3) 12/31/02 03/31/03(4)(5) TOTAL
----------- ----------- -------- -------------- --------
Revenues........................... $ 26,835 $28,286 $27,766 $21,333 $104,220
Operating income (loss)............ 535 1,686 1,958 (1,354) 2,825
Net income (loss) from continuing
operations....................... (690) (221) 192 (2,032) (2,751)
Net income (loss).................. (20,686) (3,357) 449 (5,231) (28,825)
Earnings (loss) per share -- Basic:
Income (loss) from continuing
operations.................... $ (0.08) $ (0.03) $ 0.02 $ (0.24) $ (0.33)
Net income (loss)................ (2.48) (0.40) 0.05 (0.60) (3.43)
Weighted average number of
shares -- Basic.................. 8,350 8,403 8,408 8,408 8,387
Earnings (loss) per
share -- Diluted:
Income (loss) from continuing
operations.................... $ (0.08) $ (0.03) $ 0.02 $ (0.24) $ (0.33)
Net income (loss)................ (2.48) (0.40) 0.05 (0.60) (3.43)
Weighted average number of
shares -- Diluted................ 8,350 8,403 9,324 8,408 8,387
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------
06/30/01 09/30/01 12/31/01 03/31/02(1) TOTAL
-------- -------- -------- ----------- --------
Revenues.................................. $33,001 $31,099 $33,465 $ 25,493 $123,058
Operating income (loss)................... 1,973 2,297 2,025 (2,890) 3,405
Net income (loss) from continuing
operations.............................. 534 373 702 (13,928) (12,319)
Net income (loss)......................... 266 134 78 (18,163) (18,217)
Earnings (loss) per share -- Basic:
Income (loss) from continuing
operations........................... $ 0.07 $ 0.05 $ 0.09 $ (1.73) $ (1.52)
Net income (loss)....................... (0.03) 0.02 0.01 (2.20) (2.24)
Weighted average number of shares --
Basic................................... 7,960 8,073 8,179 8,268 8,119
Earnings (loss) per share -- Diluted:
Income (loss) from continuing
operations........................... $ 0.07 $ 0.05 $ 0.09 $ (1.73) $ (1.52)
Net income (loss)....................... (0.03) 0.02 0.01 (2.20) (2.24)
Weighted average number of
shares -- Diluted....................... 7,960 8,104 8,199 8,268 8,119
---------------
(1) Included in the fourth quarter of fiscal 2002 was a tax valuation allowance
of $10,472
(2) Included in the first quarter of fiscal 2003 was goodwill impairment of
$18,238
(3) Included in discontinued operations in the second quarter of fiscal 2003 was
an asset impairment charge of $900
(4) Included in discontinued operations in the fourth quarter of fiscal 2003 was
a gain on sale of discontinued operations of $2,095
(5) Included in discontinued operations in the fourth quarter of fiscal 2003 was
an asset impairment charge of $1,575
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names of all the directors of the Company as
of March 31, 2003 and certain other information relating to their position with
the Company and/or other business experience.
MICHAEL K. BAACH
Mr. Baach has been a director of Corrpro since August 2000 and an Executive
Vice President since April 1993. Mr. Baach was our Vice President of Sales and
Marketing from our formation in 1984 until February 1992 when he was elected
Senior Vice President. Mr. Baach has over twenty five years of experience in the
corrosion control market and has been responsible for Corrpro's marketing and
sales activities, manufacturing and international operations. Mr. Baach attended
Cuyahoga Community College. Age 48.
DAVID H. KROON
Mr. Kroon has been a director of Corrpro since 1984, and an Executive Vice
President since April 1993. Mr. Kroon is currently our Executive Vice President,
Engineering. He served as Senior Vice President of Corrpro from its formation in
1984 until April 1993. Mr. Kroon has over thirty years of engineering and
consulting experience in the corrosion control market, including management of
business, planning, policies and procedures, and professional development. Mr.
Kroon graduated from Yale University with a Bachelor of Science degree in
Chemistry. Age 53.
C. RICHARD LYNHAM
Mr. Lynham has been a director of Corrpro since June 1992. Since 1992, Mr.
Lynham has been the owner and Chief Executive Officer of Harbor Castings, Inc.,
an investment-casting foundry holding company with wholly-owned subsidiaries in
North Canton, Ohio, Piney Flats, Tennessee, and Muskegon, Michigan. From 1984 to
1992, he was Group Vice President, Industrial Ceramics, for Ferro Corporation, a
Fortune 500 manufacturer of specialty industrial products. Mr. Lynham is a
director of Western Reserve Bancorp, Inc. He holds the degrees of Bachelor of
Mechanical Engineering from Cornell University and Master of Business
Administration from Harvard University. Age 61.
HARRY W. MILLIS
Mr. Millis has been a director of Corrpro since February 2002. Mr. Millis
has been Managing Director of SM Berger & Company, Inc., an investor relations
consulting firm, since January 1999. From April 1991 to January 1999, he was
Managing Director for Fundamental Research, Inc., an investment research
corporation. Mr. Millis began his financial career at National City Bank, was a
general partner in the brokerage firm of Prescott, Ball & Turben, where he also
served as Partner in Charge of Institutional Research, and then joined McDonald
& Co. as a general partner in 1979. Age 66.
NEAL R. RESTIVO
Mr. Restivo has been a director since January 2001. Mr. Restivo is
currently Vice President -- Operations and Finance and Chief Financial Officer
of Weatherchem Corporation, a provider of dispensing and packaging products
which he joined in October 2001. From February 2001 until September 2001, Mr.
Restivo was Vice President, Chief Financial Officer, Secretary and Treasurer at
Grand Eagle, Inc., a motor, transformer and power system repair services
company. From October 1995 to January 2001, Mr. Restivo was employed as our
Chief Financial Officer, Secretary and Treasurer. He was also elected Senior
Vice President in October 1995 and became an Executive Vice President of the
Company in March 1998. Mr. Restivo graduated from Miami University, Ohio with
the degree of Bachelor of Science, Accountancy. Age 43.
47
JOSEPH W. ROG
Mr. Rog has been a director and Corrpro's Chief Executive Officer since our
formation in 1984. Mr. Rog became Chairman of the Board in June 1993 and has
been President since June 1995. Mr. Rog was also Corrpro's President between
January 1984 and June 1993. Mr. Rog has over thirty-five years of industry
experience in various technical and management capacities, and particularly in
corrosion analysis and the design and implementation of corrosion control
systems. He graduated from Kent State University with a Bachelor of Science
degree in Geology, and has also completed the Graduate School of Business course
at Stanford University. Age 63.
WARREN F. ROGERS
Dr. Rogers has been a director of Corrpro since July 1996. Dr. Rogers has
been President of Warren Rogers Associates, Inc., a Newport, Rhode Island firm
which provides underground storage tank management and consulting services,
including mathematical and statistical modeling, since 1979. Dr. Rogers also
served as a Vice President of the Center for Naval Analysis in Alexandria,
Virginia from 1982 to 1989. He earned a Ph.D. in statistics from Stanford
University and has an M.S. in Operations Research from the U.S. Naval
Post-Graduate School. Age 73.
Information regarding the executive officers of the Company as of March 31,
2003 is set forth in Part I, Item 4A of this Form 10-K.
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 during fiscal 2003 were timely made except as follows. Certain
stock option grants to Messrs. Lynham, Millis, Restivo, and Rogers, which were
automatically granted under the 1997 Non-Employee Directors' Stock Option Plan,
were not timely reported on Form 4 within the appropriate time period. In
addition, certain stock option grants to Messrs. Baach, Gehring, Kroon, Mayer,
Moran, and Schadeck were not timely reported on Form 4 within the appropriate
time period. Our corporate staff, which coordinates these filings, inadvertently
failed to transmit the applicable Forms 4. All such stock option grants were
reported on Form 5 for the fiscal year ended March 31, 2003.
48
ITEM 11. EXECUTIVE COMPENSATION
BOARD COMPENSATION
RETAINER AND FEES
Corrpro pays non-employee directors an annual retainer of $12,000. Corrpro
also pays non-employee directors $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.
Corrpro also reimburses its directors for reasonable out of pocket expenses
incurred in attending Board and Committee meetings.
In connection with the Audit Committee's investigation of accounting
irregularities discovered at Corrpro's Australian subsidiary, the Board approved
an arrangement to compensate the Audit Committee members for their time and
expenses devoted to the investigation. The Audit Committee members receive their
approved standard meeting fee for meetings convened to address the
investigation. In addition, Corrpro compensates each Audit Committee member at
the rate of $275 per half day and $550 per full day for time (other than time
spent in Committee meetings) devoted to the investigation.
STOCK APPRECIATION RIGHTS
In May 2001, the Board approved the 2001 Non-Employee Directors' Stock
Appreciation Rights Plan. Pursuant to the plan, effective May 17, 2001, a
one-time grant of vested stock appreciation rights was made to non-employee
directors then serving on the Board at an exercise price of $2.10 per share. 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 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 Corrpro Common Shares.
Deferred portions are payable in a lump sum, over a period of five years or over
a period of ten 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 1997 Non-Employee Directors' Stock Option Plan, Corrpro
automatically grants stock options to purchase 2,500 Corrpro Common Shares at
fair market value on the date a director is first elected and, beginning the
next calendar year, on each September 30th on which the individual continues as
a Corrpro director.
49
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF COMPENSATION
The following table summarizes the compensation we paid our CEO and each of
the four other most highly compensated executive officers for fiscal 2003, 2002
and 2001.
LONG TERM
COMPENSATION
AWARDS
NAME AND FISCAL OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(3) COMPENSATION OPTIONS(2) COMPENSATION(1)
------------------ ------ -------- -------- ------------ ------------ ---------------
Joseph W. Rog............ 2003 $285,000 $ 0 0 0 $ 877
Chairman of the Board, 2002 285,000 0 0 206,250 8,418
Chief Executive Officer 2001 285,000 0 0 28,000 8,543
and President
Michael K. Baach......... 2003 180,000 0 0 10,000 554
Executive Vice
President, 2002 180,000 0 0 56,250 6,628
Sales 2001 180,000 0 0 17,000 6,690
George A. Gehring, Jr.... 2003 172,000 0 0 10,000 530
Executive Vice
President, 2002 172,000 17,355 0 131,250 6,881
U.S. Operations 2001 172,000 0 0 17,000 6,865
David H. Kroon........... 2003 170,000 0 0 10,000 523
Executive Vice
President, 2002 170,000 0 0 46,875 6,016
Engineering 2001 170,000 0 0 17,000 6,120
Barry W. Schadeck........ 2003 180,000 0 0 10,000 0
Executive Vice
President, 2002 180,000 0 0 91,250 0
President of 2001 180,000 0 0 17,000 0
Corrpro Canada, Inc.
---------------
(1) Amounts represent Company matching contributions under Corrpro's 401(k)
retirement savings plan.
(2) These options were granted in June 2001 pursuant to the Company's stock
option surrender program in an amount equal to the same number of options
surrendered under the program. The new options are subject to the terms of
the applicable option agreement and the provisions of the Corrpro 1997 Long-
Term Incentive Plan and become exercisable in equal annual increments on the
first, second and third anniversaries of the grant date.
(3) Amounts represent bonus earned pursuant to the Company's Management
Incentive Plan for fiscal 2002.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table lists our grants during fiscal 2003 of stock options to
the officers named in the Summary Compensation Table. The amounts shown as
potential realizable values rely on arbitrarily assumed increases in value
required by the SEC. The ultimate value of the options depends on actual future
share
50
prices. Market conditions and other factors can influence those future share
values, and the amounts shown below are not intended to forecast future
appreciation of Corrpro Common Shares.
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES
SECURITIES TOTAL EXERCISE OF STOCK PRICE
UNDERLYING OPTIONS/SARS OR BASE APPRECIATION FOR
OPTION/SARS GRANTED TO PRICE OPTION TERM
GRANTED EMPLOYEES IN ($/SH) --------------------
NAME (#)(1) FISCAL YEAR (2) EXPIRATION DATE 5% ($) 10% ($)
---- ----------- ------------ -------- ----------------- -------- ---------
(a) (b) (c) (d) (e) (f) (g)
--- ----------- ------------ -------- ----------------- -------- ---------
Joseph W. Rog........... 0 0.0% $N/A N/A $N/A N/A
Michael K. Baach........ 10,000 3.8 0.32 February 26, 2013 2,012 6,000
George A. Gehring, 10,000 3.8 0.32 2,012 6,000
Jr.................... February 26, 2013
David H. Kroon.......... 10,000 3.8 0.32 February 26, 2013 2,012 6,000
Barry W. Schadeck....... 10,000 3.8 0.32 February 26, 2013 2,012 6,000
---------------
(1) The new options are subject to the terms of the applicable options agreement
and the provisions of the Corrpro 1997 Long-Term Incentive Plan and become
exercisable on February 26, 2010, provided the exercise of such options is
subject to acceleration as to one-third of the options granted on the date
the price of the Company's shares close for a consecutive 30 day period at
an average price equal to or greater than $0.50, at which time the one-third
of the options become exercisable, $1.00, at which time two-thirds of the
options become exercisable, and $1.50, at which time all options become
exercisable. The options also may become exercisable upon a change in
control as defined either in the 1997 Long-Term Incentive Plan or the
applicable change in control agreements entered into by Corrpro and the
named executive officers.
(2) Based on the closing price of the common shares of $0.32 on the American
Stock Exchange on February 25, 2003.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR/AND FISCAL YEAR END
OPTION/SAR VALUES
The following table shows for the officers named in the summary
compensation table above information about their exercise of stock options to
purchase common shares during fiscal 2003 and their unexercised stock options to
purchase common shares at March 31, 2003.
SHARES
ACQUIRED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
ON VALUE OPTIONS AT FISCAL YEAR-END MONEY OPTIONS AT FISCAL YEAR-END
NAME EXERCISE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- ------------ -------------------------------- --------------------------------
Joseph W. Rog........ None N/A 182,507 96,743 0 0
Michael K. Baach..... None N/A 56,252 45,748 0 800
George A. Gehring,
Jr................. None N/A 103,104 70,746 0 800
David H. Kroon....... None N/A 50,002 42,623 0 800
Barry W. Schadeck.... None N/A 60,836 57,414 0 800
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
Mr. Rog is employed under an employment agreement having a term through
March 31, 2004. Under this agreement, Mr. Rog serves as Corrpro's Chairman of
the Board, Chief Executive Officer and President. The agreement provides for Mr.
Rog to be nominated as a Corrpro director for so long as such agreement remains
in effect.
51
This employment agreement provides 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 may include bonuses, stock options and incentive
compensation. Mr. Rog's base salary is subject to annual review.
Mr. Rog may not compete with Corrpro during the term of the agreement and
for as long as Mr. Rog receives retirement income payments from Corrpro. Corrpro
may terminate Mr. Rog's employment for good cause (as defined in the agreement),
in which case the Company will pay Mr. Rog his base salary earned through
termination with no further obligation to him except as required by law. Mr. Rog
has 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, payable
monthly, provided that certain conditions are satisfied.
Corrpro may have to pay severance to Mr. Rog if specified events occur.
These events include termination of his employment at a time when Corrpro is in
breach or termination of the agreement by Corrpro without good cause. In such
cases, Corrpro must pay two years of severance at the rate of his base salary in
effect at the time of termination plus a payment equal to one full year's
participation in any short-term incentive bonus plan at the 100% level. Mr. Rog
also would be entitled to continue any medical or other insurance coverage in
effect at the time of termination until age 65.
Mr. Rog is eligible for disability benefits. If he becomes disabled while
employed, his salary and other compensation continues for the first ninety days,
offset by amounts paid under other company-sponsored disability plans. If his
disability cannot be reasonably accommodated, the Board may terminate his
employment. In such case, Mr. Rog's current participation in bonus and incentive
plans will not be adversely affected. Mr. Rog also is covered by other company
welfare benefits.
Corrpro and each of Mr. Baach, Mr. Gehring and Mr. Kroon have signed
employment agreements effective through March 31, 2004 under which each serves
as an Executive Vice President. These agreements provide for the payment of base
salaries, subject to annual adjustment. In general, these agreements provide
severance arrangements similar to those included in the employment agreement
with Mr. Rog described above, except that no retirement income will be paid and
that medical and other insurance coverage shall continue for a period of
twenty-four months rather than to age 65 if the executive is terminated when
specified events occur. 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 following
termination.
We recognize that our executives may be involved from time to time in
evaluating or negotiating offers, proposals, or other transactions that could
result in a change in control of Corrpro and believe that it is in the best
interest of Corrpro and its shareholders for such executives to be in a
position, free from personal financial and employment considerations, to be able
to assess objectively and pursue aggressively our interests and the interests of
our shareholders in making these evaluations and carrying on such negotiations.
Therefore, we have entered into change in control agreements with our named
executive officers. The agreements are intended to provide the executives with
certain benefits and to grant certain protections so that the executives may
more fully focus on enhancing shareholder value and addressing the issues
related to a change in control (as defined in the agreements), and to reward the
executives for the substantial extra effort involved in a change in control.
The change in control agreements provide for severance payment, and other
benefits without duplication of amounts payable under the executive employment
contracts, if certain events occur. Each agreement applies only to the first
change in control to occur.
The type of change in control determines the potential severance benefits.
Upon the occurrence of a hostile change in control, the executive would be
entitled, whether or not employment is terminated, to a lump sum payment equal
to three times current cash compensation, bonus and certain benefits and a
gross-up for certain excise taxes, if they apply. The executive would also be
entitled to three years of continued welfare benefits. In a friendly change in
control, if the executive is terminated, other than for good cause, or resigns
for good reason, in contemplation of or before the second anniversary of the
friendly change in control, the
52
executive is entitled to, in total, a lump sum payment equal to two times
current cash compensation, bonus and certain benefits. The executive would also
be entitled to two years of continued welfare benefits. In the event of a change
in control of any type, all of the executives' outstanding stock options become
exercisable. In addition, Corrpro must set aside sufficient funds, in a trust
which satisfies certain tax requirements, covering potential obligations to Mr.
Rog. The following terms are used in this paragraph, as defined in the change in
control agreements: hostile change in control, welfare benefits, friendly change
in control, good cause, good reason and in contemplation of.
In addition, to provide further incentives to management to maximize
shareholder value on a continuing basis and to address certain other concerns,
executives can earn a transaction bonus upon a change in control in certain
circumstances. In the event of a friendly change in control, the transaction
bonuses are payable 50% upon completion of a change in control and 50% on the
first anniversary thereof, provided the executive is still a Corrpro employee at
that time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2003, Joseph W. Rog served as our Chairman of the Board,
Chief Executive Officer and President and until November 12, 2002 also served on
our Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information regarding beneficial ownership of our
Common Shares as of June 17, 2002, unless otherwise indicated, by each person or
group which is known by us to own beneficially more than 5% of our common
shares, each director and nominee for election as a director, each of the
officers named in the Summary Compensation Table and all directors and executive
officers as a group. All information with respect to beneficial ownership has
been furnished by the respective director, officer or shareholder, as the case
may be. Ownership includes direct and indirect (beneficial) ownership, as
defined by SEC rules. To our knowledge, each person, along with his or her
spouse, has sole voting and investment power over the shares unless otherwise
noted.
53
CERTAIN BENEFICIAL OWNERS
NUMBER OF
NAME SHARES(1) PERCENT
---- --------- -------
Michael K. Baach............................................ 147,366 1.6
George A. Gehring, Jr....................................... 110,754 1.2
David H. Kroon.............................................. 298,399 3.3
C. Richard Lynham........................................... 24,375 *
Harry Millis................................................ 51,100 *
Neal R. Restivo............................................. 115,332 1.3
Joseph W. Rog............................................... 452,386 5.0
Warren F. Rogers............................................ 33,375 *
14 Directors and executive officers as a group.............. 1,358,548 15.0
JB Capital Partners L.P.(2)................................. 617,200 7.3
23 Berkley Lane
Rye Brook, New York 10573
T. Rowe Price Associates, Inc(2)............................ 650,000 7.7
100 East Pratt St.
Baltimore, Maryland 21202
Royce & Associates, Inc.(2)................................. 612,575 7.29
1414 Avenue of the Americas
New York, New York 10019
Delta Partners LLC(2)....................................... 492,168 5.9
One Financial Center, Suite 1600
Boston, Massachusetts 02111
Prudential Financial, Inc.(2)............................... 521,290 5.9
751 Broad St.
Newark, New Jersey 07102
Dimensional Fund Advisors, Inc.(2).......................... 448,300 5.33
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
---------------
* Less than 1%
(1) The number of shares listed includes shares under currently exercisable
stock options and stock options which may become exercisable within 60 days
following June 24, 2003. The number of such exercisable stock options for
those listed above are: Mr. Baach (56,252 shares); Mr. Gehring (103,104
shares); Mr. Kroon (50,002 shares); Mr. Lynham (22,500 shares); Mr. Millis
(1,250 shares); Mr. Restivo (112,500 shares); Mr. Rog (182,507 shares); and
Dr. Rogers (13,125 shares); and all directors and executive officers as a
group (633,660 shares).
(2) Based upon information contained in the following documents as filed with
the SEC:
- Amendment to Schedule 13G jointly filed by Delta Partners LLC, Charles
Jobson and Christopher Argyrople on January 27, 2003. Delta Partners LLC
reported that it had shared voting and dispositive power with respect to
492,168 shares. Charles Jobson reported that he had shared voting and
dispositive power with respect to 492,168 shares. Christopher Argyrople
reported that he had shared voting and dispositive power with respect to
492,168 shares.
- Schedule 13G filed by T. Rowe Price Associates, Inc. on February 14,
2003.
- Amendment to Schedule 13G filed by Royce & Associates LLC on February 4,
2003.
- Amendment to Schedule 13G filed by Dimensional Fund Advisors, Inc. on
February 3, 2003.
54
- Schedule 13G filed by Prudential Financial, Inc. on February 7, 2003.
Included in the number of shares stated above are 467,290 Warrants which
are convertible into common stock at a ratio of 1:1.
- Amendment to Schedule 13G was jointly filed by JB Capital Partners, L.P.
and Alan W. Weber on February 14, 2003. JB Capital Partners, L.P.
reported that it had shared voting and dispositive power with respect to
582,200 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 582,200 shares.
Information regarding the Company's equity compensation plans is set forth
in Part II, Item 5 of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. CONTROLS AND PROCEDURES
(A) CONTROLS AND PROCEDURES.
On August 9, 2002, the Company issued restated consolidated financial
statements included in its filings with the Securities and Exchange Commission
(the "SEC") as of and for the fiscal years ended March 31, 2002 and 2001, and
related quarterly periods (the "10-K/A"). The restatement occurred because
certain accounting errors and irregularities in the Company's financial
statements were identified. As discussed in the Company's Annual Report on Form
10-K for the fiscal year 2002 filed with the SEC on August 9, 2002, the Company
has been advised that the SEC is conducting an investigation into the facts and
circumstances giving rise to the restatement, and the Company has been and
intends to continue cooperating with the SEC. The Company cannot predict the
outcome of such an investigation.
Following the commencement of an internal review of its accounting records
and procedures and the investigation initiated by the Company's Audit Committee
of the Board of Directors in connection with the restatement process (the "Audit
Committee Investigation"), the Company initiated a significant restructuring
plan. The multi-year plan includes a series of initiatives to improve operating
income and reduce debt. The Company intends to sell non-core business units and
use the proceeds to reduce debt. These activities, while critical to the
successful restructuring of the Company, complicate the Company's ability to
assess the overall effectiveness of internal controls.
Since the inception of the restatement process and Audit Committee
Investigation, the Company has made a number of significant changes that
strengthened the internal controls over its 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 the Company's
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) temporarily supplementing the Company's
existing staff with additional contractor-based support to collect and analyze
the information necessary to prepare the Company's financial statements, related
disclosures and other information requirements contained in the Company's SEC
periodic reporting until the Company implements changes to the current
organization and staffing, (viii) commencing a comprehensive, team-based process
to further assess and enhance the efficiency and effectiveness of the Company's
financial processes, including support efforts which better integrate current
and evolving financial information system initiatives, and addressing any
remaining weaknesses, and (ix) establishment of an internal audit function.
The Company will continue the process of identifying and implementing
corrective actions where required to improve the effectiveness of its Reporting
and Control Procedures. Significant supplemental resources will continue to be
required to prepare the required financial and other information during this
process, particularly in view of the Company's current stage of restructuring.
The changes made to date as
55
discussed above have enabled the Company to restate its previous filings where
required, as well as subsequently prepare and file the remainder of the required
periodic reports for fiscal 2003 and 2002 on a current basis.
(B) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer (the
"Senior Officers"), with the participation of other members of the Company's
management, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a - 14(c) and 15d -
14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"). Based on that evaluation, and subject to
inherent limitations on the effectiveness of internal controls as described
below, the Senior Officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
(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 the Company's management, do not expect our
disclosure controls or procedures to prevent all possible instances of error and
fraud.
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS ARE INCLUDED IN PART
II, ITEM 8:
Report of Independent Accountants
Consolidated Balance Sheets at March 31, 2003 and 2002
Consolidated Statements of Operations for the years ended March 31, 2003,
2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended March
31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended March 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements
56
(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 Amended and Restated Credit Agreement dated as of June 9,
2000 among Corrpro Companies, Inc., CSI Coating Systems,
Inc. and the Lenders Party thereto. Other long-term debt
agreements of the Company, except for Note Purchase
Agreement, are not filed pursuant to Item 601(b)(4)(iii)(A)
of Regulation S-K. The Company will furnish copies of any
such agreements to the Securities and Exchange Commission
upon its request.(4)
4.3 First Amendment to Credit Agreement dated October 19, 2000
relating to the Amended and Restated Credit Agreement dated
as of June 9, 2000 among Corrpro Companies, Inc., CSI
Coating Systems, Inc. and the Lenders Party thereto.(12)
4.4 Letter Agreement dated October 19, 2000 relating to the
Amended and Restated Credit Agreement dated as of June 9,
2000 among Corrpro Companies, Inc., CSI Coating Systems,
Inc. and the Lenders Party thereto.(12)
4.5 Second Amendment to Credit Agreement dated as of June 29,
2001 relating to the Amended and Restated Credit Agreement
dated as of June 9, 2000 among Corrpro Companies, Inc., CSI
Coating Systems, Inc. and the Lenders Party thereto.(12)
4.6 Third Amendment to Credit Agreement dated as of August 10,
2001 relating to the Amended and Restated Credit Agreement
dated as of June 9, 2000 among Corrpro Companies, Inc., CSI
Coating Systems, Inc. and the Lenders Party thereto.(13)
4.7 Fourth Amendment to Credit Agreement dated as of November
12, 2001 relating to the Amended and Restated Credit
Agreement dated as of June 9, 2000 among Corrpro Companies,
Inc., CSI Coating Systems, Inc. and the Lenders Party
thereto.(14)
4.8 Fifth Amendment to Credit Agreement dated as of February 11,
2002 relating to the Amended and Restated Credit Agreement
dated as of June 9, 2000 among Corrpro Companies, Inc., CSI
Coating Systems, Inc. and the Lenders Party thereto.(15)
4.9 Sixth Amendment to Credit Agreement dated as of September
23, 2002 relating to the Amended and Restated Credit
Agreement dated as of June 9, 2000 among Corrpro Companies
Inc., CSI Coating Systems, Inc. and the Lenders party
thereto.(17)
4.10 Seventh Amendment to Credit Agreement dated as of November
1, 2002 relating to the Amended and Restated Credit
Agreement dated as of June 9, 2000 among Corrpro Companies
Inc., CSI Coating Systems, Inc. and the Lenders party
thereto.(18)
4.11 Eight Amendment to Credit Agreement dated as of February 10,
2003 relating to the amended and restated Credit Agreement
dated as of June 9, 2000 among Corrpro Companies, Inc., CSI
Coatings Systems, Inc. and the Lenders party thereto.
4.12 Note Purchase Agreement dated as of January 21, 1998 by and
among the Company and the Purchaser herein.(5)
4.13 Rights Agreement dated as of July 23, 1997 between the
Company and Fifth Third Bank, successor Rights Agent.(6)
4.14 Amendment dated June 9, 2000 to Note Purchase Agreement
dated January 21, 1998.(4)
4.15 Amendment dated October 18, 2000 to Note Purchase Agreement
dated January 21, 1998.(12)
4.16 Letter Agreement dated October 18, 2000 by and between The
Prudential Insurance Company of America and the Company
relating to the Note Purchase Agreement dated as of January
21, 1998.(12)
4.17 Amendment dated as of June 29, 2001 by and between The
Prudential Insurance Company of America and the Company
relating to the Note Purchase Agreement dated as of January
21, 1998.(12)
4.18 Common Stock Purchase Warrant issued to Bank One, NA dated
as of September 23, 2002.(17)
EXHIBIT
NO. EXHIBIT
--------- -------
4.19 Common Stock Purchase Warrant issued to The Prudential
Insurance Company of America dated as of September 23,
2002.(17)
4.20 Registration Rights Agreement dated as of September 23, 2002
between the Company and Bank One, NA.(17)
4.21 Registration Rights Agreement dated as of September 23, 2002
between the Company and The Prudential Insurance Company of
America.(17)
4.22 Amendment dated as of September 23, 2002 between the Company
and The Prudential Insurance Company of America relating to
the Note Purchase Agreement dated as of January 21,
1998.(17)
*10.1 Corrpro Companies, Inc. 2001 Non-Employees Directors' Stock
Appreciation Rights Plan and form of Award Agreement.(16)
*10.2 1997 Long-Term Incentive Plan of Corrpro Companies, Inc.(7)
*10.3 Amendment to 1997 Long-Term Incentive Plan of Corrpro
Companies, Inc.(8)
*10.4 1997 Non-Employee Directors' Stock Option Plan.(7)
10.5 Corrpro Companies, Inc. Employee Stock Purchase Plan.(9)
*10.6 December 2000 Stock Option Agreement Surrender form.(12)
*10.7 Form of Indemnification Agreement for Officers and Directors
of the Company.(10)
10.8 Consulting Agreement dated April 1, 1997 by and between
Commonwealth Seager Holdings Ltd. and Corrtech Consulting
Group.(11)
*10.9 Employment Agreement effective November 2, 2000 by and
between the Company and Joseph W. Rog.(12)
*10.10 Form of Executive Officer Employment Agreement by and
between the Company and certain executive officers and
schedule thereto.(10)
*10.11 Stock Option Agreement dated as of June 15, 1992 and
November 15, 1992 by and between the Company and C. Richard
Lynham, Michael K. Baach, George A. Gehring, Jr., David H.
Kroon and Joseph W. Rog.(3)
*10.12 Company Incentive Option Plan as amended.(3)
*10.13 Company Deferred Compensation Plan.(12)
*10.14 Consulting Agreement dated January 26, 2001 by and between
the Company and Neal R. Restivo.(12)
*10.15 Form of Change in Control Agreement entered into between the
Company and certain of its executive officers and schedule
thereto.(10)
21.1 Subsidiaries of the Company.(4)
23.1 Consent of KPMG LLP.
99.1 906 Certification CEO
99.2 906 Certification CFO
---------------
* Management contract or compensatory plan or arrangement identified pursuant
to Item 14(a)(3) of this Annual Report on Form 10-K.
(1) A copy of this exhibit filed as Exhibit 3.1 to the Company's report on Form
10-Q for the quarterly period ended December 31, 1998 is incorporated
herein by reference.
(2) A copy of this exhibit filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 33-74814) is incorporated herein by
reference.
(3) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 4.1 (Stock certificate specimen), 10.13, 10.19,
10.20, 10.22 and 10.23 (Stock Option Agreements) and 10.25 (Incentive
Option Plan) to the Company's Registration Statement on Form S-1
(Registration No. 33-64482) and are hereby incorporated by reference.
(4) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 4.3 (Amended and Restated Credit Agreement), 4.6
(Note Purchase Agreement Amendment) and 21.1 (Subsidiaries) to the
Company's report on Form 10-K for the period ended March 31, 2000 and are
hereby incorporated by reference.
(5) A copy of this exhibit filed as Exhibit 4.2 to the Company's report on Form
10-Q for the quarterly period ended December 31, 1997 is incorporated
herein by reference.
(6) A copy of this exhibit filed as Exhibit 1.1 to the Company's Registration
Statement on Form 8-A filed August 7, 1997 is incorporated herein by
reference.
(7) 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 the Company's Registration
Statement on Form S-8 filed October 24, 1997 (SEC File No. 333-38767), and
are hereby incorporated by reference.
(8) A copy of this exhibit filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-8 filed January 19, 2000 (SEC File No. 333-94989) is
incorporated herein by reference.
(9) A copy of this exhibit contained in Corrpro's Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange Commission on June 16,
1999 is incorporated herein by reference.
(10) Copies of the exhibits to which this footnote applies were filed,
respectively, as Exhibits 10.2 (Change in Control Agreement) and 10.3
(Indemnification Agreement) to the Company's report on Form 10-Q for the
quarterly period ended December 31, 2000, and are hereby incorporated by
reference.
(11) A copy of this exhibit filed as Exhibit 10.2 to the Company's report on
Form 10-K for the period ended March 31, 1998 is hereby incorporated by
reference.
(12) Copies of the exhibits filed to which this footnote applies were filed,
respectively, as Exhibits 4.3 (First Amendment to Credit Agreement), 4.4
(Letter Agreement), 4.5 (Second Amendment to Credit Agreement), 4.9
(Amendment to Note Purchase Agreement), 4.10 (Letter Agreement), 10.3
(Employment Agreement), 10.7 (Deferred Compensation Plan) and 10.8
(Consulting Agreement) to the Company's report on Form 10-K for the period
ended March 31, 2001 and are hereby incorporated by reference.
(13) A copy of this exhibit filed as Exhibit 4.3 to the Company's report on Form
10-Q for the quarterly period ended June 30, 2001 and is incorporated
herein by reference.
(14) A copy of this exhibit filed as Exhibit 4.2 to the Company's report on Form
10-Q for the quarterly period ended September 30, 2001 and is incorporated
herein by reference.
(15) A copy of this exhibit filed as Exhibit 4.2 to the Company's report on Form
10-Q for the quarterly period ended December 31, 2001 and is incorporated
herein by reference.
(16) A copy of this exhibit filed as Exhibit 4.9 to the Company's report on Form
10-K for the period ended March 31, 2002 is hereby incorporated by
reference.
(17) 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 the Company's report on Form 10-Q for the quarterly period
ended September 30, 2002 and is incorporated herein by reference.
(18) A copy of this exhibit filed as Exhibit 10.1 to the Company's report on
Form 10-Q for the quarterly period ended December 31, 2002 and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
During the quarter ended March 31, 2002, the Company filed one current
report on Form 8-K. A current report on Form 8-K, dated March 20, 2002,
furnished a press release pursuant to Regulation FD.
(c) EXHIBITS
See "Index to Exhibits" at Item 14(a) above.
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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORRPRO COMPANIES, INC.
By: /s/ JOSEPH W. ROG
------------------------------------
Joseph W. Rog
Chairman of the Board of Directors,
President and Chief Executive
Officer
June 30, 2003
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, 2003 /s/ JOSEPH W. ROG
---------------------------------------------
Joseph W. Rog
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
June 30, 2003 /s/ ROBERT M. MAYER
---------------------------------------------
Robert M. Mayer
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
June 30, 2003 /s/ MICHAEL K. BAACH
---------------------------------------------
Michael K. Baach, Director
June 30, 2003 /s/ DAVID H. KROON
---------------------------------------------
David H. Kroon, Director
June 30, 2003 /s/ C. RICHARD LYNHAM
---------------------------------------------
C. Richard Lynham, Director
June 30, 2003 /s/ HARRY W. MILLIS
---------------------------------------------
Harry W. Millis, Director
June 30, 2003 /s/ NEAL R. RESTIVO
---------------------------------------------
Neal R. Restivo, Director
June 30, 2003 /s/ WARREN F. ROGERS
---------------------------------------------
Warren F. Rogers, Director
CERTIFICATIONS
I, Joseph W. Rog, certify that:
1. I have reviewed this annual report on Form 10-K of CORRPRO COMPANIES,
INC.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ JOSEPH W. ROG
--------------------------------------
Joseph W. Rog
Chairman of the Board, President
and Chief Executive Officer
Dated: June 30, 2003
I, Robert M. Mayer, certify that:
1. I have reviewed this annual report on Form 10-K of CORRPRO COMPANIES,
INC.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ ROBERT M. MAYER
--------------------------------------
Robert M. Mayer
Senior Vice President, Chief Financial
Officer
Dated: June 30, 2003