SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 1-12282
CORRPRO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1422570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1090 ENTERPRISE DRIVE, MEDINA, OHIO 44256
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 723-5082
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ -----
As of August 12, 2003, 8,440,847 Common Shares, without par value, were
outstanding.
1
CORRPRO COMPANIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-27
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 28
ITEM 4. Controls and Procedures 29-30
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 31-33
ITEM 6. Exhibits and Reports on Form 8-K 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, March 31,
2003 2003
(Unaudited) (Audited)
------------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,601 $ 5,514
Accounts receivable, net 19,536 15,849
Other receivables, net 1,248 7,192
Inventories 7,728 7,066
Prepaid expenses and other 4,267 3,713
Assets held for sale 14,242 14,600
-------- --------
Total current assets 52,622 53,934
-------- --------
Property, plant and equipment, net 6,678 6,683
Other Assets:
Goodwill 14,216 13,343
Other assets 2,700 3,023
-------- --------
Total other assets 16,916 16,366
-------- --------
$ 76,216 $ 76,983
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 49,253 $ 50,476
Accounts payable 6,684 7,282
Accrued liabilities and other 9,315 9,671
Liabilities held for sale 7,127 7,236
-------- --------
Total current liabilities 72,379 74,665
-------- --------
Long-term debt, net of current portion 742 765
Deferred income taxes 386 354
Commitments and contingencies -- --
Shareholders' Equity:
Serial preferred shares -- --
Common shares 2,276 2,276
Additional paid-in capital 46,560 46,560
Accumulated deficit (44,243) (45,076)
Accumulated other comprehensive loss (920) (1,597)
Common shares in treasury, at cost (964) (964)
-------- --------
Total shareholders' equity 2,709 1,199
-------- --------
$ 76,216 $ 76,983
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three
Months Ended
June 30,
-------------------------
2003 2002
----------- -----------
Revenues $29,675 $ 26,835
Operating cost and expenses:
Cost of sales 19,745 18,270
Selling, general & administrative expenses 7,192 8,030
------- ---------
Operating income 2,738 535
Interest expense 1,255 1,056
------- ---------
Income (loss) from continuing operations
before income taxes, discontinued operations
and cumulative effect of change in accounting
principle 1,483 (521)
Provision for income taxes 253 169
------- ---------
Income (loss) from continuing operations before
discontinued operations and cumulative effect
of change in accounting principle 1,230 (690)
Discontinued operations:
Loss from operations, net (351) (1,758)
Loss on disposal, net of income taxes (46) --
Cumulative effect of change in accounting principle -- (18,238)
------- ---------
Net income (loss) $ 833 $ (20,686)
======= =========
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ 0.15 $ (0.08)
Discontinued operations:
Loss from operations, net (0.04) (0.21)
Loss on disposal, net of income taxes (0.01) --
Cumulative effect of change in
accounting principle -- (2.18)
------- ---------
Net income (loss) $ 0.10 $ (2.47)
======= =========
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ 0.13 $ (0.08)
Discontinued operations:
Loss from operations, net (0.03) (0.21)
Loss on disposal, net of income taxes (0.01) --
Cumulative effect of change in
accounting principle -- (2.18)
------- ---------
Net income (loss) $ 0.09 $ (2.47)
======= =========
Weighted average shares -
Basic 8,408 8,350
Diluted 9,383 8,350
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
June 30,
------------------------
2003 2002
------- -------
Cash flows from operating activities:
Net income (loss) $ 833 $ (20,686)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Loss from discontinued operations 397 1,758
Depreciation and amortization 766 726
401(k) matching contribution in Treasury shares -- 71
Deferred income taxes -- (14)
Cumulative effect of change in accounting principle -- 18,238
Loss on sale of assets -- (9)
Changes in operating assets and liabilities:
Accounts and other receivables 2,537 1,660
Inventories (434) 574
Prepaid expenses and other (920) (774)
Other assets (242) 606
Accounts payable and accrued expenses (842) (595)
--------- ---------
Total adjustments 1,262 22,241
--------- ---------
Net cash provided by continuing operating activities 2,095 1,555
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (156) (82)
Proceeds from disposal of property, plant and equipment 79 30
--------- ---------
Net cash used for investing activities (77) (52)
--------- ---------
Cash flows from financing activities:
Net payments under Revolving Credit Facility and
lines of credit (1,923) (49)
--------- ---------
Net cash used for financing activities (1,923) (49)
--------- ---------
Effects on cash of foreign currency exchange rates 140 (6)
--------- ---------
Cash used for discontinued operations (148) (1,153)
--------- ---------
Net increase in cash and cash equivalents 87 295
Cash and cash equivalents at beginning of period 5,514 3,959
--------- ---------
Cash and cash equivalents at end of period $ 5,601 $ 4,254
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 251 $ 127
Interest $ 1,275 $ 1,394
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements include the
accounts of Corrpro Companies, Inc. and subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The information furnished in the accompanying interim consolidated
financial statements has not been audited by independent accountants. In the
opinion of management, the interim consolidated financial statements include all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation of the consolidated financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the three months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2004 or any other period. The interim consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE 2 - INVENTORIES
June 30, March 31,
2003 2003
-------- --------
Inventories consist of the following:
Component parts and raw material $5,304 $5,005
Finished goods 2,424 2,061
-------- --------
$7,728 $7,066
======== ========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
June 30, March 31,
2003 2003
-------- --------
Property, plant and equipment consist of the following:
Land $ 466 $ 443
Buildings and improvements 5,076 4,897
Equipment, furniture and fixtures 15,660 15,312
-------- --------
21,202 20,652
Less: Accumulated depreciation (14,524) (13,969)
-------- --------
$ 6,678 $ 6,683
======== ========
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income for
the period by the
6
weighted average number of common shares outstanding for the period, which was
8,408 and 8,350 for the three months ended June 30, 2003 and 2002, respectively.
Diluted EPS for the period has been determined by dividing net income by the
weighted average number of common shares and potential common shares outstanding
for the period, which was 9,383 and 8,350 for the three months ended June 30,
2003 and 2002, respectively. Stock options and the warrants (see Note 12 -
Revolving Credit Facility and Senior Notes) are the only potential common
shares.
NOTE 5 - STOCK PLANS
The Company granted 0 and 20 to purchase common shares under the 1997
Option Plan and the Non-Employee Director Option Plan during the three months
ended June 30, 2003 and 2002, respectively. In addition, options previously
granted to purchase 15 and 23 common shares at exercise prices ranging from
$1.50 to $12.10 were terminated during the three months ended June 30, 2003 and
2002, respectively.
NOTE 6 - SHAREHOLDERS' EQUITY
During the quarter ended September 30, 2002, the Company issued warrants
to the lenders (see Note 12 - Revolving Credit Facility and Senior Notes) 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.
NOTE 7 - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is reported separately
from retained earnings and additional paid-in-capital in the Consolidated
Balance Sheets. Items considered to be other comprehensive income (loss) include
adjustments made for foreign currency translation (under SFAS No. 52) and
pensions (under SFAS No. 87).
Components of other accumulated comprehensive loss consist of foreign
currency translation adjustment of $(920) and $(1,597) as of June 30, 2003 and
March 31, 2003, respectively.
7
Components of comprehensive income (loss) consist of the following:
Three Months Ended June 30,
2003 2002
---- ----
Net income (loss) $ 833 $ (20,686)
Other Comprehensive income (loss):
Write-off of translation adjustment
related to Australian operations -- 1,590
Translation adjustment 677 1,858
------ ---------
Total comprehensive income (loss) $1,510 $ (17,238)
====== =========
NOTE 8 - 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."
Assets and liabilities held for sale as of June 30, 2003 and March 31,
2003 consisted of:
June 30, March 31,
2003 2003
---- ----
Cash $ 1,084 $ 2,819
Accounts receivable 7,732 6,203
Inventory 2,517 2,348
Prepaid expenses 1,809 2,135
Property, plant and equipment, net 58 58
Goodwill and other assets 1,042 1,037
------- -------
Assets held for sale $14,242 $14,600
======= =======
Current liabilities $ 7,132 $ 7,310
Deferred taxes & minority interest (5) (74)
------- -------
Liabilities held for sale $ 7,127 $ 7,236
======= =======
The Company allocated interest to discontinued operations of $412 and
$630 for the three months ended June 30, 2003 and 2002, respectively, based on
estimated proceeds from the discontinued operations disposition that will be
used to pay down the Revolving Credit Facility and Senior Notes (see Note 12 -
Revolving Credit Facility and Senior Notes). The interest rate used to calculate
the interest expense allocated was the weighted average interest rate of the
Revolving Credit Facility and Senior Notes.
8
Potential 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. Listed below are the statements of operations for
discontinued operations for the three months ended June 30, 2003 and 2002.
For the Three
Months Ended
June 30,
2003 2002
---- ----
Revenues $6,844 $ 9,095
Operating cost and expenses:
Cost of sales 4,923 5,964
Selling, general & administrative expenses 1,676 2,467
Currency translation adjustment 83 1,590
Loss on disposal 46 --
------ -------
Operating income (loss) 116 (926)
Interest expense 412 630
------ -------
Loss from discontinued operations
before income taxes (296) (1,556)
Provision for income taxes 101 202
------ -------
Loss from discontinued operations $ (397) $(1,758)
====== =======
During the first quarter of fiscal 2004, the Company sold its Asia Pacific
operations for a net loss of $46 after taking into account an impairment charge
on net assets which was recorded during the fourth quarter of fiscal 2003
totaling $1,575. During fiscal 2003, the Company disposed of four non-strategic
business units. First, in March 2003, the Company sold its Bass Trigon Software
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.
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This Interpretation addresses the consolidation
by business enterprises of various interest entities as defined in the
Interpretation. The Company does not expect the adoption of this Interpretation
to have a material impact on its results of operations or financial position.
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This statement amends SFAS No. 133 for
decisions made (1) as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS No. 133, (2) in connection with other
FASB projects dealing with financial instruments and (3) in connection with
implementation issues raised in relation to the application of the definition of
a derivative. This statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003, with certain exceptions. The Company does not expect the adoption of SFAS
No. 149 to have a material impact on
9
its results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments and Characteristics of both Liabilities and Equity" which
requires freestanding financial instruments such as mandatorily redeemable
shares, forward purchase contracts, written put options to be reported as
liabilities by their issuers as well as related new disclosure requirements. The
provisions of SFAS No. 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The application of
this Statement is not expected to have an effect on the Company's consolidated
financial statements.
NOTE 10 - PRODUCT 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 June 30, 2003, accrued warranty costs were not material to the
consolidated balance sheet.
NOTE 11 - 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."
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:
Domestic Core Operations. The Domestic Core Operations segment consists
of the Company's operations in the United States, 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
10
as anodes, primarily to the United States market.
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.
Financial information relating to the Company's operations by segment
are presented below:
FOR THE THREE MONTHS ENDED
JUNE 30,
2003 2002
---- ----
Revenue:
Domestic Core Operations $23,978 $22,455
Canadian Operations 5,697 4,380
------- -------
$29,675 $26,835
======= =======
Operating Income:
Domestic Core Operations $ 4,421 $ 3,323
Canadian Operations 974 743
Corporate Related Costs and Other (2,657) (3,531)
------- -------
$ 2,738 $ 535
======= =======
NOTE 12 - REVOLVING CREDIT FACILITY AND SENIOR NOTES
In March 1999, the Company entered into an $80 million revolving credit
facility that expires on October 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 August 8, 2003 and effective as of July 31, 2003, ("August 2003
Amendment") the size of the Revolving Credit Facility was reduced to $27.5
million. Also, the August 2003 Amendment requires the Company to meet certain
milestones related to its efforts to refinance this debt. In addition, 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 Revolving Credit
Facility provides for interest on borrowings at prime plus 5.00% and requires
the Company to pay a facility fee of 1.00% on the commitment amount. Also, in
connection with the Sixth Amendment to the Revolving Credit Facility, the 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 with cash proceeds received from the disposition of targeted Company
assets. This resulted in the Warrant being reduced by 82 common shares at 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
11
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. At June 30, 2003, the Company had $22,682 outstanding under the
Revolving Credit Facility. Total availability under the Revolving Credit
Facility at June 30, 2003 was approximately $1,116, after giving consideration
to the borrowing base limitations, under the Revolving Credit Facility.
Due to the fact that the Company's Revolving Credit Facility expires on
October 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.
At June 30, 2003, the Company was in violation of several financial
covenants for which it obtained waivers through July 31, 2003. The Company was
in compliance with the financial covenants under the Revolving Credit Facility,
as amended by the August 2003 Amendment.
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 October 31, 2003. In addition, the
agreement relating to the Senior Notes, as amended, provides for any overdue
amount to bear an interest rate of the greater of 13.35% or 2.00% over the rate
of interest publicly announced by The Bank of New York from time to time in New
York City as its Prime Rate on the outstanding principal payments and overdue
amounts. Also, the Senior Notes Agreement as amended, requires the Company to
meet certain milestones related to its efforts to refinance this debt.
Furthermore, in connection with prior amendments in September 2002, 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
with cash proceeds received from the disposition of targeted Company assets.
This resulted in the warrant being reduced by 82 common shares at July 31, 2003.
The Company is required to maintain certain financial ratios under the Senior
Notes. As of June 30, 2003, the Company was in violation of several of these
financial covenants for which it obtained waivers through July 31, 2003. The
Company is currently in compliance with the financial covenants under the
amended agreement relating to the Senior Notes, executed on August 8, 2003 and
effective July 31, 2003.
The Senior Notes, as amended, require a principal payment of $8,712 by
October 31, 2003 and monthly principal payments of $384 commencing on November
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
12
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 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 meet 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 principal under the Senior
Notes.
The Company is still seeking 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.
Until such time when the Company is able to refinance the Senior Notes
and Revolving Credit Facility it will attempt to negotiate arrangements with its
lenders to, among other things, extend the maturity of the Revolving Credit
Facility beyond October 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.
NOTE 13 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
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 was
13
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.
Amortizable intangibles at June 30, 2003 amounted to a net book value of
$1,026. These intangibles are primarily related to patents and trademarks with
useful lives ranging from 3 to 15 years. Amortization expense for each of the
next five years is expected to be $242.
NOTE 14 - SUBSEQUENT EVENT
During the second quarter of fiscal 2004, the Company's Board of
Directors approved a resolution to keep the European Operations and remove them
from discontinued operations. Effective in the second quarter of fiscal 2004,
the Company will report future quarterly and annual results of the European
Operations in its continuing operations. Prior-year financial statements will be
reclassified to reflect the European Operations as continuing operations.
Assets and liabilities for European Operations as of June 30, 2003 and
March 31, 2003 consisted of:
JUNE 30, MARCH 31,
2003 2003
---- ----
Cash $ 504 $ 1,524
Accounts receivable 3,360 2,368
Inventory 1,298 1,168
Prepaid expenses 143 140
Property, plant and equipment, net 307 299
Goodwill and other assets 836 836
------- -------
Assets $ 6,448 6,335
======= =======
Current liabilities $ 5,465 $ 5,312
Deferred taxes & minority interest (5) (5)
------- -------
Liabilities $ 5,460 $ 5,307
======= =======
Operating results for the Company's European operations are presented
below:
FOR THE THREE
MONTHS ENDED
JUNE 30,
2003 2002
---- ----
Revenues $3,376 $2,852
Operating cost and expenses:
Cost of sales 2,299 1,882
Selling, general & administrative expenses 737 712
Currency translation adjustment (264) --
------ ------
Operating income 604 258
Interest expense 2 (3)
------ ------
Earnings before income taxes 602 261
Provision for income taxes 101 125
------ ------
Earnings from operations $ 501 $ 136
====== ======
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 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.
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
15
with aggressive corrosion conditions such as the inside and outside of storage
tanks and pipelines.
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.
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 2004, the Company sold its Asia Pacific operations for a
minimal loss after taking into account an impairment charge on net assets which
was recorded during the fourth quarter of fiscal 2003 totaling $1.6 million.
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 8, Assets and Liabilities Held for Sale, Notes to Consolidated Financial
Statements.
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. The Domestic Core Operations segment consists
of the Company's operations in the United States, 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.
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.
16
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.
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2002
REVENUES
Revenues from continuing operations for the fiscal 2004 first quarter
totaled $29.7 million compared to $26.8 million in the fiscal 2003 first
quarter, an increase of $2.8 million, or 10.6%. Revenues from the discontinued
operations were $6.8 million in the fiscal 2004 first quarter compared to $9.1
million in the prior-year period, a decrease of $2.3 million or 24.7%.
Fiscal 2004 first quarter revenues relating to our Domestic Core
Operations segment totaled $24.0 million compared to $22.5 million in the fiscal
2003 first quarter, an increase of $1.5 million or 6.8%. This revenue increase
relates primarily to a large engineering project that started in late calendar
2002 and is scheduled to continue into fiscal year 2005. Also, contributing to
this increase were improved revenue levels in our coatings services and material
sales businesses compared to the prior-year period.
Our Canadian Operations segment revenues for the first quarter of fiscal
2004 totaled $5.7 million compared to $4.4 million in the prior-year first
quarter, an increase of $1.3 million or 30.1%. This increase is due primarily to
material and rectifier sales and increases in the energy segment of our
business.
GROSS PROFIT
Gross profit margins were 33.5% for the fiscal 2004 first quarter
compared to 31.9% for the fiscal 2003 first quarter. Gross margins benefited in
the current quarter from a number of high margin jobs in both the Domestic Core
Operations as well as our overall continued effort to improve operating
efficiencies and productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $7.2 million (24.2%
of revenues) for the fiscal 2004 first quarter compared to $8.0 million (29.9%
of revenues) in the fiscal 2003 first quarter, a decrease of $0.8 million. The
fiscal 2004 first quarter had $0.4 million related to professional fees
associated with our lender requirements while the fiscal 2003 first quarter had
$0.7 million in professional fees related to lender requirements. Selling,
general and administrative expenses, as a percentage of revenue, continue to
show positive results from our efforts to streamline our operations.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income totaled $2.7 million in the first quarter of fiscal
2004 compared to $0.5 million for the fiscal 2003 first quarter, an increase of
$2.2 million. The increase in operating income in the fiscal 2004 first quarter
resulted from improved revenue levels, improved operating margins and lower
operating expenses.
17
INTEREST EXPENSE
Interest expense totaled $1.3 million in first quarter of fiscal 2004
compared to $1.1 million in the prior-year period. The increase in interest
rates year-over-year were partially offset by reduced debt levels. Additionally,
the increase in interest expense is also attributable to the amount of interest
allocated to discontinued operations which decreased for the same year-earlier
period.
INCOME TAX PROVISION
The Company recorded a provision for income taxes of $0.3 million for
the fiscal 2004 first quarter compared to a provision of $0.2 million for the
fiscal 2003 first quarter. Our income tax provision is based on our effective
tax rate. Our effective tax rate is based on the statutory rates in effect in
the countries in which we operate. The Company recorded a provision below the
statutory tax rate of 34% since the Company has utilized the tax benefits of
losses in the Domestic Core Operations it had previously provided for. The
Company intends to maintain a full valuation allowance on its domestic net
deferred tax assets and net operating loss carry-forwards until sufficient
evidence exists to support the reversal of the remaining reserve.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the fiscal 2004 first quarter was
$1.2 million compared to a loss of $0.7 million in the first quarter of fiscal
2003, an increase of $1.9 million. The fiscal 2004 first quarter increase in
operating income is the result of improved revenue levels, improved operating
margins and our overall efforts to streamline operations.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the fiscal 2004 first quarter was
$0.4 million compared to a loss from discontinued operations of $1.8 million in
the prior-year period, an improvement of $1.4 million. Also, during the first
three months of fiscal 2004, the Company sold its Asia Pacific operations for a
$46,000 loss after taking into account a $1.6 million impairment charge on net
assets which was recorded during the fourth quarter of fiscal 2003.
CUMULATIVE EFFECT OF 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
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 was a non-cash charge and did not impact
compliance with the financial covenants contained in our lender agreements. This
impairment testing is also done annually in the fourth quarter and such testing
indicated no additional impairment as of March 31, 2003.
NET INCOME
Net income totaled $0.8 million in the first quarter of fiscal 2004
compared to a net loss of $20.7 million in the prior-year period, an increase in
earnings of $21.5 million. Income per share on a diluted
18
basis totaled $0.09 per share compared to a loss per share of $2.47 in the
year-earlier period.
B. LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had negative working capital of $26.9
million excluding net assets held for sale, compared to negative $28.1 million
at March 31, 2003, excluding net assets held for sale, which was an improvement
of $1.2 million. This improvement is primarily attributable to decreases in
accounts payable and accrued liabilities.
During the first three months of fiscal year 2004, cash provided by
operating activities totaled $2.1 million compared to cash provided by operating
activities of $1.6 million in the year-earlier period. Cash used in investing
activities totaled $0.1 million during the first three months of fiscal 2004,
which included $0.2 million for capital expenditures, offset by, $0.1 million of
proceeds from the disposal of capital assets. This compares to cash used for
investing activities totaling $0.1 million during the first three months of
fiscal 2003, which included $0.1 million used for capital expenditures,
partially offset by proceeds of less than $0.1 million from the disposal of
capital assets. Cash used for financing activities totaled $1.9 million which
was used to pay down debt during the first three months of fiscal 2004 compared
to cash used by financing activities of less than $0.1 million that was used to
pay down debt in the first three months of fiscal 2003.
In March 1999, the Company entered into an $80 million revolving credit
facility that expires on October 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 August 8, 2003 and effective as of July 31, 2003, ("August 2003
Amendment") the size of the Revolving Credit Facility was reduced to $27.5
million. Also, the August 2003 Amendment requires the Company to meet certain
milestones related to its efforts to refinance this debt. In addition, 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 Revolving Credit
Facility provides for interest on borrowings at prime plus 5.00% and requires
the Company to pay a facility fee of 1.00% on the commitment amount. Also, in
connection with the Sixth Amendment to the Revolving Credit Facility, the 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 with cash proceeds received from the disposition of targeted Company
assets. This resulted in the Warrant being reduced by approximately 82,000
common shares at 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. At June 30, 2003, the
Company had $22.7 million outstanding under the Revolving Credit Facility. Total
availability under the Revolving Credit Facility at June 30, 2003 was
approximately $1.1 million, after giving consideration to the borrowing base
limitations, under the Revolving Credit Facility.
19
Due to the fact that the Company's Revolving Credit Facility expires on
October 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.
At June 30, 2003 the Company was in violation of several financial
covenants for which it obtained waivers through July 31, 2003. The Company was
in compliance with the financial covenants under the Revolving Credit Facility,
as amended by the August 2003 Amendment.
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 October 31, 2003. In addition, the
agreement relating to the Senior Notes, as amended, provides for any overdue
amount to bear an interest rate of the greater of 13.35% or 2.00% over the rate
of interest publicly announced by The Bank of New York from time to time in New
York City as its Prime Rate on the outstanding principal payments and overdue
amounts. Also, the Senior Notes Agreements as amended, requires that the Company
meet certain milestones related to its efforts to refinance this debt.
Furthermore, in connection with prior amendments in September 2002, 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 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 with cash proceeds received from the disposition of targeted Company
assets. This resulted in the warrant being reduced by approximately 82,000
common shares at July 31, 2003. The Company is required to maintain certain
financial ratios under the Senior Notes. As of June 30, 2003, the Company was in
violation of several of these financial covenants for which it obtained waivers
through July 31, 2003. The Company is currently in compliance with the financial
covenants under the amended agreement relating to the Senior Notes, executed on
August 8, 2003 and effective July 31, 2003.
The Senior Notes, as amended, require a principal payment of $8.7
million by October 31, 2003 and monthly principal payments of $0.4 million
commencing on November 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 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
20
prepayment date and the yield maintenance amount, if any, with respect to each
Note. Any partial prepayment of the Notes which meet 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 principal under the Senior
Notes.
The Company is still seeking 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.
Until such time when the Company is able to refinance the Senior Notes
and Revolving Credit Facility it will attempt to negotiate arrangements with its
lenders to, among other things, extend the maturity of the Revolving Credit
Facility beyond October 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.
The following table summarized the Company's contractual obligations at
June 30, 2003:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
(IN THOUSANDS) TOTAL ONE YEAR YEARS YEARS YEARS
----- ---------- ----- ----- -----
Indebtedness:
Senior Notes $ 25,083 $25,083 $ -- $ -- $ --
Revolving Line of Credit 22,651 22,651 -- -- --
Other Debt Obligations 2,261 1,519 742 -- --
Operating Leases 6,712 2,291 3,471 750 200
--------- ------- ------ ------ -----
Total Contractual Cash
Obligations $ 56,707 $51,544 $4,213 $ 750 $ 200
========= ======= ====== ====== =====
21
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, 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 compliance of all its 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 August of fiscal 2004, we amended our Revolving Credit Facility
and Senior Notes because we were not in compliance with the provisions,
including certain financial covenants, of these agreements. As amended, both the
Revolving Credit Facility and the Senior Notes require that the Company meet
certain milestones related to its efforts to refinance this debt. As amended,
the Revolving Credit Facility expires on October 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 October 31, 2003, it will be necessary for
us to
22
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 $8.7 million by October 31, 2003 and monthly principal
payments of $0.4 million commencing on November 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. 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 2004 our Asia Pacific
Operations was sold and in fiscal 2003, we sold four non-strategic business
units. The fiscal 2003 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 our Form 10-K.
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.
23
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 our annual report on Form
10-K 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. 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.
24
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 $3.0 million for first three months of fiscal 2004
and net assets of approximately $7.2 million at June 30, 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. Subsequent to the first quarter of fiscal 2004, the
European Operations will be reported as continuing operations.
25
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.
C. CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
As such, some accounting policies have a significant impact on amounts reported
in these financial statements. A summary of those significant accounting
policies can be found in the Company's fiscal 2003 Annual Report on Form 10-K,
filed on June 30, 2003, in the Note 1 - Summary of Significant Accounting
Policies, Notes to Consolidated Financial Statements, and under the caption
"Significant Accounting Policies" within Management's Discussion and Analysis of
Financial Condition and Results of Operations. In particular, judgment is used
in areas such as revenue recognition for construction and engineering contracts,
determining the allowance for uncollectible accounts and inventory valuation
reserves, asset impairment and deferred tax assets.
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. ("FIN") 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." This Interpretation addresses the
consolidation by business enterprises of various interest entities as defined in
the Interpretation. The provisions of FIN 46 are effective on February 1, 2003
for all variable interest entities created after January 31, 2003, and on July
1, 2003 for all variable interest entities created prior to February 1, 2003.
The Company does not expect the adoption of this Interpretation to have a
material impact on its results of operations or financial position.
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This statement amends SFAS No. 133 for
decisions made (1) as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS No. 133, (2) in connection with other
FASB projects dealing with financial instruments and (3) in connection with
implementation issues raised in relation to the application of the definition of
a derivative. This statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003, with certain exceptions. The Company does not expect the adoption of SFAS
No. 149 to have a material impact on its results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments and Characteristics of both Liabilities and Equity" which
requires freestanding financial instruments such as mandatorily redeemable
shares, forward purchase contracts, written put options to be reported as
liabilities by their issuers as well as related new disclosure requirements. The
provisions of SFAS No.
26
150 are effective for instruments entered into or modified after May 31, 2003
and pre-existing instruments as of the beginning of the first interim period
that commences after June 15, 2003. The application of this Statement is not
expected to have an effect on the Company's consolidated financial statements.
27
ITEM 3. 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 our business.
INTEREST RATE RISK
Our primary interest rate risk exposure results from our variable
interest rate 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 the rates at June 30, 2003 rates, and
assuming no changes in debt from the June 30, 2003 levels, the additional annual
expense would be approximately $1.0 million on a pre-tax basis.
FOREIGN OPERATIONS AND FOREIGN CURRENCY EXCHANGE RISK
Our foreign subsidiaries generally conduct business in local currencies,
creating foreign exchange risk. During the first three months of fiscal 2004,
the Company recorded a favorable foreign currency translation adjustment of $0.7
million 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. We do not enter into
derivatives to hedge foreign currency exchange risk. Our foreign operations are
also subject to other customary risks of operating in a global environment, such
as unstable political situations, the effect of local laws and taxes, tariff
increases and regulations and requirements for export licenses, the potential
imposition of trade or foreign exchange restrictions and transportation delays.
28
ITEM 4. 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 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 2004 on a current
basis.
(b) Evaluation of Disclosure Controls and Procedures.
29
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 of June 30, 2003. Based on that evaluation, the
Senior Officers have concluded that, as of June 30, 2003, 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 changes in internal controls that occurred during the Company's most
recent fiscal quarter that have materially affected, or are reasonably likely to
affect, the Company's internal controls.
30
PART II. OTHER INFORMATION
ITEM 1. 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 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.
By letter dated July 7, 2003, the MDEQ issued a notice to certain owners and
operators of tanks upgraded based on the Company's assessment method that they
31
had until October 7, 2003 to comply with certain actions specified in the MDEQ's
notice. 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 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
32
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.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. See the Exhibit Index at the last page of this Form 10-Q.
B. 8-K filed on April 15, 2003.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORRPRO COMPANIES, INC.
(Registrant)
Date: August 14, 2003 /s/ Joseph W. Rog
------------------------------------
Joseph W. Rog
Chairman of the Board, President
and Chief Executive Officer
/s/ Robert M. Mayer
-------------------------------------
Robert M. Mayer
Senior Vice President, Chief
Financial Officer
35
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
10.1 Ninth Amendment to Credit Agreement dated as of July 31, 2002 relating
to the Amended and Restated Credit Agreement dated as of June 9, 2000
among the Company, CSI Coating Systems, Inc. and the Lenders party
thereto.
10.2 Amendment dated as of July 31, 2002 between the Company and The
Prudential Insurance Company of America relating to the Note Purchase
Agreement dated as of January 21, 1998.
31.1 Rule 13a-14(a) Certification Chief Executive Officer
31.2 Rule 13a-14(a) Certification Chief Financial Officer
32.1 Section 1350 Certification Chief Executive Officer
32.2 Section 1350 Certification Chief Financial Officer
36