SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 1-12282
CORRPRO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1422570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1090 ENTERPRISE DRIVE, MEDINA, OHIO 44256
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 723-5082
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
As of February 11, 2003, 8,408,276 Common Shares, without par value, were
outstanding.
1
CORRPRO COMPANIES, INC.
INDEX
Page
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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 6-20
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-35
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 36
ITEM 4. Controls and Procedures 36-38
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 39-40
ITEM 4. Submission of Matters to Vote of Security
Holders 41
ITEM 6. Exhibits and Reports on Form 8-K 42
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31, March 31,
2002 2002
(Unaudited) (Audited)
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,602 $ 3,959
Accounts receivable, net 19,880 22,575
Inventories 6,799 8,469
Prepaid expenses and other 3,007 3,028
Assets held for sale 27,734 40,936
----------- -----------
Total current assets 62,022 78,967
----------- -----------
Property, plant and equipment, net 6,762 8,391
Other Assets:
Goodwill 12,583 18,859
Other assets 3,169 3,403
----------- -----------
Total other assets 15,752 22,262
----------- -----------
$ 84,536 $ 109,620
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 55,092 $ 61,668
Accounts payable 6,054 8,636
Accrued liabilities and other 8,878 8,666
Liabilities held for sale 7,457 5,153
----------- -----------
Total current liabilities 77,481 84,123
----------- -----------
Long-term debt, net of current portion 793 1,018
Deferred income taxes 800 622
Commitments and contingencies -- --
Shareholders' Equity:
Serial preferred shares -- --
Common shares 2,276 2,276
Additional paid-in capital 46,561 46,993
Accumulated deficit (39,845) (16,251)
Accumulated other comprehensive loss (2,566) (7,002)
Common shares in treasury, at cost (964) (2,159)
----------- -----------
Total shareholders' equity 5,462 23,857
----------- -----------
$ 84,536 $ 109,620
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
3
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
As As
Restated Restated
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $ 27,766 $ 33,465 $ 82,887 $ 97,565
Operating cost and expenses:
Cost of sales 18,786 23,971 55,915 68,412
Selling, general & administrative expenses 7,022 7,469 22,793 22,858
---------- ---------- ---------- ----------
Operating income 1,958 2,025 4,179 6,295
Interest expense 1,325 1,323 3,692 3,793
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes, discontinued operations
and cumulative effect of change in accounting
principle 633 702 487 2,502
Provision for income taxes 441 490 1,206 1,383
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
discontinued operations and cumulative effect
of change in accounting principle 192 212 (719) 1,119
Discontinued operations:
Income (loss) from operations, net 257 (134) (4,637) (1,173)
Cumulative effect of change in accounting principle -- -- (18,238) --
---------- ---------- ---------- ----------
Net income (loss) $ 449 $ 78 $ (23,594) $ (54)
========== ========== ========== ==========
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ 0.02 $ 0.03 $ (0.09) $ 0.14
Discontinued operations:
Income (loss) from operations, net 0.03 (0.02) (0.55) (0.15)
Cumulative effect of change in
accounting principle -- -- (2.17) --
---------- ---------- ---------- ----------
Net income (loss) $ 0.05 $ 0.01 $ (2.81) $ (0.01)
========== ========== ========== ==========
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ 0.02 $ 0.03 $ (0.09) $ 0.14
Discontinued operations:
Income (loss) from operations, net 0.03 (0.02) (0.55) (0.15)
Cumulative effect of change in
accounting principle -- -- (2.17) --
---------- ---------- ---------- ----------
Net income (loss) $ 0.05 $ 0.01 $ (2.81) $ (0.01)
========== ========== ========== ==========
Weighted average shares -
Basic 8,408 8,179 8,387 8,071
Diluted 9,324 8,199 8,387 8,094
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
December 31,
As
Restated
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net Loss $ (23,594) $ (54)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Loss from discontinued operations 4,637 1,173
Depreciation and amortization 2,160 3,046
401(k) matching contribution in Treasury shares 136 704
Deferred income taxes 167 --
Cumulative effect of change in accounting principle 18,238 --
Loss on sale of assets -- (75)
Changes in operating assets and liabilities:
Accounts receivable 2,934 5,316
Inventories 1,770 2,949
Prepaid expenses and other 29 (351)
Other assets (395) (847)
Accounts payable and accrued expenses (2,292) (2,925)
---------- ----------
Total adjustments 27,384 8,990
---------- ----------
Net cash provided by continuing operating activities 3,790 8,936
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (242) (428)
Proceeds from disposal of property, plant and equipment 492 287
---------- ----------
Net cash provided by (used for) investing activities 250 (141)
---------- ----------
Cash flows from financing activities:
Net payments under Revolving Credit Facility and
lines of credit (6,249) (5,358)
Net proceeds from employee stock purchase plan -- 40
---------- ----------
Net cash used for financing activities (6,249) (5,318)
---------- ----------
Effects on cash of foreign currency exchange rates 17 3
---------- ----------
Cash provided by (used for) discontinued operations 2,835 (3,216)
---------- ----------
Net increase in cash and cash equivalents 643 264
Cash and cash equivalents at beginning of period 3,959 3,203
---------- ----------
Cash and cash equivalents at end of period $ 4,602 $ 3,467
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 554 $ 1,186
Interest $ 4,877 $ 5,061
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. However,
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 or for the nine months ended December
31, 2002 are not necessarily indicative of the results that may be expected for
the fiscal year ending March 31, 2003 or any other period. The interim
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 2002.
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
December 31, March 31,
2002 2002
------------ ------------
Inventories consist of the following:
Component parts and raw material $ 5,047 $ 5,624
Finished goods 3,026 3,786
------------ ------------
8,073 9,410
Inventory reserve (1,274) (941)
------------ ------------
$ 6,799 $ 8,469
============ ============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
December 31, March 31,
2002 2002
------------ ------------
Property, plant and equipment consist of the following:
Land $ 426 $ 592
Buildings and improvements 4,768 6,158
Equipment, furniture and fixtures 15,186 15,030
------------ ------------
20,380 21,780
Less: Accumulated depreciation (13,618) (13,389)
------------ ------------
$ 6,762 $ 8,391
============ ============
6
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income for
the period by the weighted average number of common shares outstanding for the
period, which was 8,408 and 8,179 for the three months ended December 31, 2002
and 2001, respectively, and 8,387 and 8,071 for the nine months ended December
31, 2002 and 2001, 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 9,324 and 8,199
for the three months ended December 31, 2002 and 2001, respectively, and 8,387
and 8,094 for the nine months ended December 31, 2002 and 2001, respectively.
Stock options and the warrants (see Note 11 - Revolving Credit Facility and
Senior Notes) are the only potential common shares. The effect of the 336
incremental shares for the nine months ended December 31, 2002 have been
excluded from dilutive weighted average shares as the net loss for these periods
would cause the incremental shares to be anti-dilutive. Potential common shares
are computed using the treasury stock method.
NOTE 5 - STOCK PLANS
In fiscal 2001, the Company adopted a plan whereby holders of stock
options covered under the 1997 Long-Term Incentive Plan of Corrpro Companies,
Inc. (the "1997 Option Plan") could surrender options previously granted with
the understanding that a like number of options would be granted no sooner than
six months after surrender at the fair market value of the common shares at that
time. This program was completed in June 2001.
The Company granted options to purchase 63 common shares at exercise
prices ranging from $0.41 to $2.55 per share under the 1997 Option Plan and the
Non-Employee Director Option Plan during the nine months ended December 31,
2002. In addition, options previously granted to purchase 99 common shares at
exercise prices ranging from $1.52 to $12.10 were terminated during the nine
months ended December 31, 2002.
NOTE 6 - SHAREHOLDERS' EQUITY
The Company maintains the Corrpro Companies, Inc. 401(k) Savings Plan
for all eligible employees in the United States under Section 401(k) of the
Internal Revenue Code. The Company may, at its discretion, make contributions to
the plan. In addition, in the past the Company had matched a portion of
employees' contributions. Effective October 1, 2000, the Company began matching
employee contributions with treasury shares. The Company issued 121 treasury
shares for the Company's matching contributions for January and February 2002.
The Company still must issue shares with a value of $163 for the April 5, 2002
contribution. Effective April 6, 2002, the Company suspended the Company match.
During the quarter ended September 30, 2002, the Company issued
warrants to the lenders (see Note 11 - 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.
7
NOTE 7 - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is reported separately
from retained earnings and additional paid-in-capital in the Consolidated
Balance Sheets. Items considered to be other comprehensive income (loss) include
adjustments made for foreign currency translation (under SFAS No. 52) and
pensions (under SFAS No. 87).
Components of other accumulated comprehensive income (loss) consist of
the following:
December 31, March 31,
2002 2002
------------ ------------
Translation adjustment $ (2,566) $ (6,504)
Pensions -- (498)
------------ ------------
Ending Balance $ (2,566) $ (7,002)
============ ============
Components of comprehensive income (loss) consist of the following:
Nine Months Ended December 31,
2002 2001
------------ ------------
Net loss $ (23,594) $ (54)
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustment 637 560
Write-off translation adjustment related
to discontinued operations 3,301 --
Write-off pensions related to discontinued
operations 498 --
------------ ------------
Total comprehensive income (loss) $ (19,158) $ 506
============ ============
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 will be 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."
8
Assets and liabilities held for sale as of December 31, 2002 and March
31, 2002 consisted of:
December 31, March 31,
2002 2002
----------- ----------
Cash $ 3,048 $ 1,796
Accounts Receivable 11,451 15,291
Inventory 5,812 6,097
Prepaid Expenses 1,061 365
Property, plant and equipment, net 1,675 1,851
Goodwill and Other Assets 4,687 15,536
---------- ----------
Assets held for sale $ 27,734 $ 40,936
========== ==========
Current Liabilities $ 7,483 $ 5,151
Deferred Taxes & Minority Interest (26) 2
---------- ----------
Liabilities held for sale $ 7,457 $ 5,153
========== ==========
The Company allocated interest to discontinued operations of $633 and
$499 for the three months ended December 31, 2002 and 2001, respectively, and
the Company allocated interest to discontinued operations of $1,898 and $1,795,
for the nine month periods ended December 31, 2002 and 2001, 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 11 -
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.
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 three and nine month statements
of operations for the discontinued operations for the periods ended December 31,
2002 and 2001.
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
As As
Restated Restated
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 10,791 $ 13,535 $ 30,664 $ 36,223
Operating cost and expenses:
Cost of sales 7,064 9,355 20,137 24,894
Selling, general & administrative expenses 2,652 3,425 9,684 10,172
Currency translation adjustment 2 -- 3,301 --
------------ ------------ ------------ ------------
Operating income (loss) 1,073 755 (2,458) 1,157
Interest expense 633 499 1,898 1,795
------------ ------------ ------------ ------------
Income (loss) from discontinued operations
before income taxes 440 256 (4,356) (638)
Provision for income taxes 183 390 281 535
------------ ------------ ------------ ------------
Income (loss) from discontinued operations $ 257 $ (134) $ (4,637) $ (1,173)
============ ============ ============ ============
9
NOTE 9 - BUSINESS SEGMENTS
Beginning in the three months ended September 30, 2002, the Company
reorganized its business segments into two principal operating segments:
Domestic Core Operations and Canadian Operations. The International and the
Other Operations segments were designated as non-core and reported in
discontinued operations (see Note 8 - Assets Held for Sale). The segment
information for the prior-year has been restated to conform to the current
operating structure. The Company's business segments and a description of the
products and services they provide are described below:
Domestic Core Operations. The Domestic Core Operations segment consists of the
Company's operations in the United States and Central and South America, which
provide products and services including corrosion control, coatings, pipeline
integrity, risk assessment and inspection services. This segment provides
corrosion control products and services to a wide-range of customers in a number
of industries, including: energy, utilities, water and wastewater treatment,
chemical and petrochemical, pipelines, defense and municipalities. In addition,
this segment provides coatings services to customers in the defense,
entertainment, aerospace, transportation, petrochemical, pipeline and electric
power industries. 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. 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 is
presented below:
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
AS RESTATED AS RESTATED
------------ ------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue:
Domestic Core Operations $ 21,913 $ 26,996 $ 67,474 $ 80,306
Canadian Operations 5,853 6,469 15,413 17,259
------------ ------------ ------------ ------------
$ 27,766 $ 33,465 $ 82,887 $ 97,565
============ ============ ============ ============
Operating Income:
Domestic Core Operations $ 3,692 $ 3,845 $ 11,391 $ 12,876
Canadian Operations 1,285 1,040 3,528 3,004
Corporate Related Costs and Other (3,019) (2,860) (10,740) (9,585)
------------ ------------ ------------ ------------
$ 1,958 $ 2,025 $ 4,179 $ 6,295
============ ============ ============ ============
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the remaining useful life of the related
asset. Upon settlement of the liability, the entity either settles the
obligation for the amount
10
recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Management is evaluating the effect of this
statement on the Company's results of operations and financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies the EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit
and disposal activities that are initiated after December 31, 2002. For periods
beginning before January 1, 2003, it is the Company's policy to recognize
restructuring costs in accordance with EITF Issue No. 94-3.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
was issued. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the effects on reported net income
of an entity's method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for the Company in its second fiscal quarter of 2003. The
Company does not intend to effect a voluntary change in accounting to the fair
value method, and, accordingly, does not anticipate the adoption of SFAS No. 148
to have a significant impact on the Company's future results of operations or
financial position.
NOTE 11 - PRODUCT WARRANTIES
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 December 31, 2002, accrued warranty costs were not material to the condensed
consolidated balance sheet.
NOTE 12 - REVOLVING CREDIT FACILITY AND SENIOR NOTES
In March 1999, the Company entered into an $80 million revolving credit
facility that expires on July 31, 2003 (the "Revolving Credit Facility").
Initial borrowings were used to repay existing domestic bank indebtedness.
Through a series of subsequent amendments, including an amendment executed by
the Company on September 23, 2002 ("September 2002 Amendment") the size of the
Revolving Credit Facility was reduced to $37.5 million. In addition, the
September 2002 Amendment provides that any cash proceeds from the disposition of
targeted Company assets will be used to reduce the Revolving Credit Facility and
the Senior Notes in a ratio of 56% and 44%, respectively. Any net asset
disposition payments to reduce the Revolving Credit Facility will result in a
proportionate reduction in the lender's commitments in the Revolving Credit
Facility. Borrowings under the Revolving Credit Facility are further limited to
borrowing base amounts as defined. The September 2002 Amendment provides for
interest on borrowings at prime plus 5.00%. In addition, the September 2002
Amendment requires the Company to pay a facility fee of 1.00% on the commitment
amount. Moreover, a subsequent amendment executed by the Company on November 1,
2002 (the "Seventh Amendment") contained additional provisions for the
improvement period and also reset the net worth covenant.
In connection with the September 2002 Amendment, the Revolving Credit
Facility lender group received a warrant ("Revolving Credit Facility Warrant")
to purchase 467 of the Company's common shares at a purchase price of $0.01 per
share exercisable at any time after July 31, 2003 until September 23, 2012. The
Revolving Credit Facility Warrant can be reduced up to 50% if the Company
partially pays the Revolving Credit Facility principal amount prior to July 31,
2003. If the entire Revolving Credit Facility principal balance is paid prior to
February 23, 2003, the Revolving Credit Facility Warrant will be terminated and
cease to be in force and effect. 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 has also pledged
11
slightly less than two-thirds of the capital stock of two of its foreign
subsidiaries. The Revolving Credit Facility, as amended, requires the Company to
maintain certain financial ratios and places limitations on the Company's
ability to pay cash dividends, incur additional indebtedness and make
investments, including acquisitions. The Company was in compliance with the
financial covenants of the Revolving Credit Facility as of December 31, 2002,
but there can be no assurance that the Company will meet these financial ratios
in the future. At December 31, 2002, the Company had $25.8 million outstanding
under the Revolving Credit Facility. Total availability under the Revolving
Credit Facility at December 31, 2002 was approximately $5.4 million 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
July 31, 2003, it will be necessary for the Company to amend this Revolving
Credit Facility to extend the expiration date. If the Company is unable to
negotiate an amendment to the Revolving Credit Facility, it will be necessary
for the Company to refinance or repay this debt. The Company cannot assure that
it will be able to accomplish such a transaction on terms acceptable to the
Company. Failure to do so would have a material adverse effect on the Company's
liquidity and financial condition and could result in the Company's inability to
operate as a going concern. If the Company is unable to operate as a going
concern, it may file, or may have no alternative but to file, bankruptcy or
insolvency proceedings or pursue a sale or sales of assets to satisfy creditors.
In January 1998, the Company issued, through private placement, $30
million of Senior Notes due 2008 (the "Senior Notes"). The Senior Notes, as
amended, bear interest at 11.35% until July 31, 2003 and 11.85% on and after
July 31, 2003. In addition, the agreement relating to the Senior Notes, as
amended, provides for an additional fee of 1.00% per annum on the outstanding
principal amount of the Senior Notes. In connection with the September 2002
Amendment, the Senior Notes lender received a warrant ("Senior Notes Warrant")
to purchase 467 of the Company's common shares at a purchase price of $0.01 per
share exercisable at any time after July 31, 2003 until September 23, 2012. The
Senior Notes Warrant can be reduced up to 50% to the extent the Company
partially pays the Revolving Credit Facility principal and the Senior Notes
principal prior to July 31, 2003. To the extent the entire Revolving Credit
Facility and Senior Notes principal balance is paid prior to February 23, 2003,
the Senior Notes Warrant will be terminated and cease to be in force and effect.
The Senior Notes, as amended, require a principal payment of $7,561 by July 31,
2003 and monthly principal payments of $384 commencing on August 15, 2003
("Notes Principal Repayments") and are secured equally and ratably with debt
under the Revolving Credit Facility. In addition, the Senior Notes provided 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 Note Principal Repayments
when due. Failure to do so would result in 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.
The Company is required to maintain certain financial ratios under the
Senior Notes. The Company was in compliance with the financial covenants under
the Senior Notes as of December 31, 2002, but there can be no assurance that the
Company will meet these financial ratios in the future.
12
The Company intends to seek, prior to July 31, 2003, other financing to
retire the Senior Notes and the Revolving Credit Facility. 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.
NOTE 13 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective April 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer being amortized but are subject to impairment
tests in accordance with SFAS No. 142. Excluding such amortization, operating
expenses would have decreased by $422 and $1,303 for the three months and nine
months ended December 31, 2001.
During the quarter ended September 30, 2002, the Company, with the
assistance of independent valuation experts, completed its initial assessment
test as of April 2002 and concluded that certain of its goodwill was impaired.
Effective April 1, 2002, the Company has recognized a transitional impairment
charge of $18,238 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.
Effective April 1, 2002, impairment of goodwill amounted to $18,238.
The impairment of goodwill consisted of goodwill impairments of $3,180 from
Domestic Operations, $3,226 from Canadian Operations, $4,803 from Other
Operations in discontinued operations, and $7,029 from International Operations
in discontinued operations. Weakening foreign currency exchange rates and
economic conditions, particularly in the Middle East, have negatively impacted
profits and cash flows in U.S. dollars for the International and Canadian
Operations. Fair values of indefinite lived intangible assets and goodwill were
estimated using a discounted cash flow valuation model, incorporating a discount
rate commensurate with the risks involved for each group of assets.
SFAS No. 142 requires a review at least annually of the carrying value
of indefinite lived assets and goodwill. In addition to the transitional
impairment test completed in the second quarter of fiscal year 2003, another
impairment test will be completed in the fourth quarter of fiscal year 2003 and
at least annually thereafter.
Amortizable intangibles at December 31, 2002 amounted to $1,121 net of
$2,486 of accumulated amortization. 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 $232.
NOTE 14 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On March 20, 2002, the Company announced that it had discovered
accounting irregularities caused by apparent internal misconduct involving its
Australian subsidiary. The accounting irregularities involved the overstatement
of revenues and understatement of expenses by the Australian subsidiary. The
irregularities were discovered by Corrpro management in connection with an
internal review of the subsidiary's working capital management practices and
cash flow problems inconsistent with the subsidiary's reported results. Upon
discovering the irregularities, the Company immediately began an internal
investigation conducted under the direction of the Audit Committee of its Board
of Directors. The Audit Committee subsequently retained special counsel in
connection with the investigation and retained the forensic investigation unit
of the accounting firm Deloitte Touche Tohmatsu.
13
The Company also announced in March 2002 that its Australian subsidiary
was in the process of appointing an administrator and commencing voluntary
administration proceedings, a process under Australian law providing relief from
creditors of Australian companies. Following the appointment, the Company
recorded a charge to earnings in the fiscal fourth quarter ended March 31, 2002
for its loss on investment related to the subsidiary. The Company also stated
that, to the extent that the accounting irregularities materially affect
previously filed financial statements, the Company expected that it would have
to restate its audited financial statements for its fiscal year which ended
March 31, 2001 as well as unaudited financial information for the first nine
months through December 31, 2001 of its fiscal year ended March 31, 2002, as
previously released. Accordingly, the financial statements for the affected
periods have been restated in the Company's Form 10-K/A filed on August 9, 2002.
In addition to the Audit Committee investigation, the Company conducted
a review of the accounting records for fiscal 2001 and the first nine months
through December 31, 2001 of fiscal 2002 and contracted KPMG LLP to audit the
Company's restated consolidated financial statements for fiscal 2001. The
cumulative restatement of the Company's fiscal 2001 consolidated financial
statements decreased consolidated stockholders' equity as of March 31, 2001 by
approximately $3,805 from amounts previously reported and increased the loss by
$3,575. The cumulative restatement of the Company's first nine months of fiscal
2002 consolidated financial statements decreased consolidated stockholders'
equity as of December 31, 2001 by approximately $5,694 from amounts previously
reported and decreased net income by $1,721.
Following are the primary categories of restatement adjustments to the
Company's previously reported financial results as of and for the three and nine
months ended December 31, 2001. These restated financial statements reflect the
impact of the accounting irregularities related to the Australian subsidiary and
the reclassification related to certain operations being classified as
discontinued operations (see Note 8 - Assets Held for Sale):
14
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
As of December 31, 2001
------------------------------------------------------------------
As
Previously Restatement Discontinued
Reported Adjustments Adjustments Reported
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,908 $ 38 $ (1,479) $ 3,467
Accounts receivable, net 39,445 (959) (16,141) 22,345
Inventories 19,956 (1,490) (8,544) 9,922
Prepaid expenses and other 6,830 (847) (1,966) 4,017
Deferred income taxes 2,662 (136) -- 2,526
Assets held for sale -- -- 49,807 49,807
------------ ------------ ------------ ------------
Total current assets 73,801 (3,394) 21,677 92,084
------------ ------------ ------------ ------------
Property, plant and equipment 11,241 -- (2,271) 8,970
Other Assets:
Goodwill, net 36,519 102 (17,652) 18,969
Other assets 10,821 811 (1,823) 9,809
------------ ------------ ------------ ------------
Total other assets 47,340 913 (19,475) 28,778
------------ ------------ ------------ ------------
$ 132,382 $ (2,481) $ (69) 129,832
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current
portion of long-term debt $ 8,108 $ -- $ (60) $ 8,048
Accounts payable 11,692 490 (4,569) 7,613
Accrued liabilities and other 9,412 2,723 (4,324) 7,811
Liabilities held for sale -- -- 8,940 8,940
------------ ------------ ------------ ------------
Total current liabilities 29,212 3,213 (13) 32,412
------------ ------------ ------------ ------------
Long-term debt, net of current portion 54,653 -- -- 54,653
Commitments and contingencies -- -- -- --
Minority interest 56 -- (56) --
Shareholders' Equity:
Serial preferred shares -- -- -- --
Common shares 2,276 -- -- 2,276
Additional paid-in capital 47,337 -- -- 47,337
Accumulated earnings 7,208 (5,296) -- 1,912
Accumulated other comprehensive loss (5,721) (398) -- (6,119)
Common shares in treasury (2,639) -- -- (2,639)
------------ ------------ ------------ ------------
Total shareholders' equity 48,461 (5,694) -- 42,767
------------ ------------ ------------ ------------
$ 132,382 $ (2,481) $ (69) $ 129,832
============ ============ ============ ============
15
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended December 31, 2001
-----------------------------------------------------------------
As
Previously Restatement Discontinued
Reported Adjustments Adjustments Reported
------------ ------------ ------------ ------------
Revenues $ 47,081 $ (81) $ (13,535) $ 33,465
Operating cost and expenses:
Cost of sales 33,166 160 (9,355) 23,971
Selling, general & administrative expenses 10,830 64 (3,425) 7,469
------------ ------------ ------------ ------------
Operating income 3,085 (305) (755) 2,025
Interest expense 1,819 3 (499) 1,323
------------ ------------ ------------ ------------
Income(loss) from continuing operations
before income taxes, discontinued
operations and cumulative effect of
change in accounting principle 1,266 (308) (256) 702
Provision for income taxes 721 159 (390) 490
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before discontinued operations and
cumulative effect of change in
accounting principle 545 (467) 134 212
Discontinued operations:
Income (loss) from operations, net -- -- (134) (134)
Cumulative effect of change in accounting
principle -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 545 $ (467) $ -- $ 78
============ ============ ============ ============
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ 0.07 $ (0.06) $ 0.02 $ 0.03
Discontinued operations
Income (loss) from operations, net -- -- (0.02) (0.02)
------------ ------------ ------------ ------------
Net income (loss) $ 0.07 $ (0.06) $ -- $ 0.01
============ ============ ============ ============
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ 0.07 $ (0.06) $ 0.02 $ 0.03
Discontinued operations
Income (loss) from operations, net -- -- (0.02) (0.02)
------------ ------------ ------------ ------------
Net income (loss) $ 0.07 $ (0.06) $ -- $ 0.01
============ ============ ============ ============
Weighted average Shares -
Basic 8,179 8,179 8,179 8,179
Diluted 8,199 8,199 8,199 8,199
16
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended December 31, 2001
-----------------------------------------------------------------
As
Previously Restatement Discontinued
Reported Adjustments Adjustments Reported
------------ ------------ ------------ ------------
Revenues $ 134,689 $ (901) $ (36,223) $ 97,565
Operating cost and expenses:
Cost of sales 93,083 223 (24,894) 68,412
Selling, general & administrative expenses 32,774 256 (10,172) 22,858
------------ ------------ ------------ ------------
Operating income 8,832 (1,380) (1,157) 6,295
Interest expense 5,563 25 (1,795) 3,793
------------ ------------ ------------ ------------
Income(loss) from continuing operations
before income taxes, discontinued
operations and cumulative effect of
change in accounting principle 3,269 (1,405) 638 2,502
Provision for income taxes 1,602 316 (535) 1,383
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before discontinued operations and
cumulative effect of change in
accounting principle 1,667 (1,721) 1,173 1,119
Discontinued operations:
Income (loss) from operations, net -- -- (1,173) (1,173)
Cumulative effect of change in accounting
principle -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 1,667 $ (1,721) $ -- $ (54)
============ ============ ============ ============
Earnings (loss) per share - Basic:
Income (loss) from continuing operations $ 0.21 $ (0.21) $ 0.14 $ 0.14
Discontinued operations
Income (loss) from operations, net -- -- (0.14) (0.15)
------------ ------------ ------------ ------------
Net income (loss) $ 0.21 $ (0.21) $ -- $ (0.01)
============ ============ ============ ============
Earnings (loss) per share - Diluted:
Income (loss) from continuing operations $ 0.21 $ (0.21) $ 0.14 $ 0.14
Discontinued operations
Income (loss) from operations, net -- -- (0.14) (0.15)
------------ ------------ ----------- ------------
Net income (loss) $ 0.21 $ (0.21) $ -- $ (0.01)
============ ============ =========== ============
Weighted average Shares -
Basic 8,071 8,071 8,071 8,071
Diluted 8,094 8,094 8,094 8,094
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended December 31, 2001
------------------------------------------------------------
As
Previously Restatement Discontinued
Reported Adjustments Adjustments Reported
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net Income (Loss) $ 1,667 $ (1,721) -- $ (54)
Adjustments to reconcile net loss to net cash
Provided by (used for) operating activities:
Net Loss from Discontinued Operations -- -- 1,173 1,173
Depreciation and amortization 4,334 -- (1,288) 3,046
401(k) matching contribution in Treasury Shares 704 -- -- 704
Deferred income taxes 25 (26) 1 --
Minority Interest (37) -- 37 --
(Gain) Loss on sale of assets (79) -- 4 (75)
Changes in operating assets and liabilities:
Accounts receivable 3,696 (168) 1,788 5,316
Inventories 2,581 (124) 492 2,949
Prepaid expenses and other (2,664) 187 2,126 (351)
Other assets (960) (5) 118 (847)
Accounts payable and accrued expenses (2,725) 1,900 (2,100) (2,925)
------------ ------------ ------------ ------------
Total adjustments 4,875 1,764 2,351 8,990
------------ ------------ ------------ ------------
Net cash provided by continuing operating activities 6,542 43 2,351 8,936
------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (753) -- 325 (428)
Proceeds from disposal of property, plant and equipment 655 -- (368) 287
------------ ------------ ------------ ------------
Net cash provided by (used for) investing activities (98) -- (43) (141)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net (payments) borrowings under Revolving Credit
Facility and lines of credit (5,510) -- 152 (5,358)
Net proceeds from employee stock purchase plan 40 -- -- 40
------------ ------------ ------------ ------------
Net cash used for financing activities (5,470) -- 152 (5,318)
------------ ------------ ------------ ------------
Effects of cash on foreign currency exchange rates 34 (137) 106 3
Cash provided by (used for) Discontinued Operations -- -- (3,216) (3,216)
Net increase (decrease) in cash and cash equivalents 1,008 (94) (650) 264
Cash and cash equivalents at beginning of period 3,900 132 (829) 3,203
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,908 38 (1,479) $ 3,467
============ ============ ============ ============
18
NOTE 15 - CORRPRO COMPANIES AUSTRALIA
On March 20, 2002, the Company announced that it had discovered
accounting irregularities caused by apparent internal misconduct in its
Australian subsidiary. The accounting irregularities involved the overstatement
of revenues and understatement of expenses by the Australian companies. The
irregularities were discovered by Corrpro management in connection with an
internal review of the subsidiary's working capital management practices and
cash flow problems inconsistent with the subsidiary's reported results. Upon
discovering the irregularities, the Company immediately began an internal
investigation conducted under the direction of the Audit Committee of its Board
of Directors. The Audit Committee subsequently retained special counsel in
connection with the investigation and retained the forensic investigation unit
of the accounting firm Deloitte Touche Tohmatsu.
The Australian subsidiary appointed an administrator and commenced
voluntary administration proceedings, a process under Australian law providing
relief from creditors of Australian companies. As a result of the appointment,
the Company no longer controlled the Australian subsidiary and the Company
recorded a charge to earnings in the fiscal fourth quarter ended March 31, 2002
for its loss on investment related to the subsidiary.
On April 24, 2002, the creditors of the Australian subsidiary resolved
that the Administrators of the Australian subsidiary should enter into a Deed of
Company Arrangement. The Deed of Company Arrangement became effective May 1,
2002. The arrangement requires the Australian subsidiary to make unsecured
payments to the Administrators for the Administrator's fees, certain employee
benefit programs and unsecured creditors. The Company is not required to fund
any of these unsecured payments. The Company did guarantee payment of the
Australian subsidiary's bank debt, which totaled $1,017 at December 31, 2002.
The arrangement also returns the day-to-day management of the Australian
subsidiary to the director of the subsidiary subject to the oversight of the
Administrator who will retain control of, and be entitled to realize and deal
with, the claims against the Australian subsidiary in accordance with the Deed
of Company Arrangement.
Due to the commencement of the voluntary administration proceedings,
and the resulting loss of control over the Australian subsidiary, the Company
believes that the investment in the subsidiary has been fully impaired. The
assets and liabilities of the subsidiary are not included in the consolidated
balance sheet of the Company as of December 31, 2002, and except for the
existing obligation of $1,017 under the guarantee of the subsidiary's bank debt,
the Company will no longer provide any financial support to the subsidiary.
In connection with the Company's and Audit Committee's investigation,
the Company incurred additional legal and professional fees of approximately
$881 for the nine months ended December 31, 2002 related to this matter. In
addition, as a result of the Company's decision to sell the subsidiary
subsequent to year end, a loss of $1,557 related to the cumulative currency
translation adjustment of the subsidiary was recognized in the first nine months
ended December 31, 2002. The Australian subsidiary is included in discontinued
operations.
On October 1, 2002, the Australian subsidiary sold its business assets
(excluding cash, accounts receivable and certain trademarks) for a purchase
price of $634. The cash proceeds (except amounts held in escrow) from the
business asset sale were remitted to the Administrator of the Australian
subsidiary in accordance with the Deed of Company Arrangement. The remaining
assets (primarily accounts receivable) are also being liquidated and those
proceeds will be remitted to the Administrator. After satisfying the obligations
under the Deed of Company Arrangement, the Administrator will remit
19
back to the Australian subsidiary any excess funds. The excess funds, if any,
will be used by the Australian subsidiary to pay post-petition creditors.
Subsequent to December 31, 2002, the administrator issued a payment to
all unsecured creditors, the Company is an unsecured creditor for intercompany
balances due from the Australian subsidiary. The Company received $593 on
February 7, 2003 from the administrator.
20
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.
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 will be 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.
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.
21
COATINGS. Corrpro offers a wide variety of coatings-related services designed to
provide our customers with longer coatings life, reduced corrosion, improved
aesthetics and lower life-cycle costs for their coated structures. Coatings
services include research, testing, evaluation and application of coatings. In
addition, we provide project management services for coatings maintenance
programs, including condition surveys, failure analysis, selection of site
surface preparation methods and selection and application of coatings. We also
provide specialized coatings application services for structures with aggressive
corrosion conditions such as the inside and outside of storage tanks and
pipelines.
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.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company had determined that its audited financial statements for
the fiscal year ended March 31, 2001 and its unaudited financial statements for
the first nine months through December 31, 2001 of its fiscal year ended March
31, 2002 and for all four quarters of its fiscal year ended March 31, 2001, were
inaccurate and required restatement. These inaccuracies and required
restatements are discussed in Note 13 - Restatement of Consolidated Financial
Statements, Notes to the Consolidated Financial Statements above. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended December 31, 2001 and December
31, 2002 reflects this restatement of the Company's previously reported
financial statements.
AUSTRALIAN SUBSIDIARY
The Company's Australian subsidiary appointed an administrator and
commenced voluntary administration proceedings on March 21, 2002, a process
under Australian law providing relief from creditors of Australian companies.
Following the appointment, the Company no longer controlled the Australian
subsidiary and recorded a charge to earnings of approximately $2.5 million in
the fiscal fourth quarter ended March 31, 2002 for its loss on investment
related to the subsidiary. The results of operations of the subsidiary were
included in the Company's Consolidated Statements of Operations through March
31, 2002. The assets and liabilities of the subsidiary are not included in the
Consolidated Balance Sheet of the Company as of March 31, 2002 or December 31,
2002. The results from the subsidiary have not been included in the Company's
consolidated financial statements for fiscal 2003. Moreover, the Company
incurred additional legal and professional fees of approximately $0.8 million in
the first nine months of fiscal 2003 related to this matter. In addition, as a
result of the Company's decision to sell the subsidiary prior to fiscal 2003, a
loss of $1.5 million related to the cumulative currency translation adjustment
of the subsidiary was recognized in the first nine months of fiscal year 2003.
These costs associated with Australia are included in discontinued operations.
On October 1, 2002, the Australian subsidiary sold its business assets
(excluding cash, accounts receivable and certain trademarks) for a purchase
price of $0.6 million. The cash proceeds (except amounts held in escrow) from
the business asset sale were remitted to the Administrator of the Australian
subsidiary in accordance with the Deed of Company Arrangement. The remaining
assets (primarily accounts receivable) are also being liquidated and those
proceeds will be remitted to the Administrator. After satisfying the obligations
under the Deed of Company Arrangement, the Administrator will remit back to the
Australian subsidiary any excess funds. The excess funds, if any, will be used
by the Australian subsidiary to pay post petition creditors.
22
Subsequent to December 31, 2002, the administrator issued a payment to
all unsecured creditors, the Company is an unsecured creditor for intercompany
balances due from the Australian subsidiary. The Company received $593 on
February 7, 2003 from the administrator.
23
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 2001
REVENUES
Revenues from continuing operations for the fiscal 2003 third quarter
totaled $27.8 million compared to $33.5 million in the fiscal 2002 third
quarter, a decrease of $5.7 million or 17.0%. Revenues from the discontinued
operations were $10.8 million in the fiscal 2003 third quarter compared to $13.5
million in the prior-year period, a decrease of $2.7 million or 20.3%.
Fiscal 2003 third quarter revenues relating to our Domestic Core
Operations segment totaled $21.9 million compared to $27.0 million in the fiscal
2002 third quarter, a decrease of $5.1 million or 18.9%. This revenue decrease
relates primarily to the decreased activity levels in our coatings services
business compared to the year-earlier period. The coatings services business did
not receive as many government contract awards and anticipates lower
year-over-year revenue levels.
Our Canadian Operations segment revenues for the third quarter of
fiscal 2003 totaled $5.9 million compared to $6.5 million in the prior-year
third quarter, a decrease of $0.6 million or 9.5%. The decrease is due primarily
to lower material and rectifier sales. The Canadian Operations continue to
experience weakness in the energy segment of its business.
GROSS PROFIT
Gross profit margins were 32.3% for the fiscal 2003 third quarter
compared to 28.4% for the fiscal 2002 third quarter. Gross margins benefited in
the current quarter from a number of high margin jobs in both the Domestic Core
Operations and the Canadian Operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $7.0 million
(25.3% of revenues) for the fiscal 2003 third quarter compared to $7.5 million
(22.3% of revenues) in the fiscal 2002 third quarter, a decrease of $0.5
million. The fiscal 2003 third quarter had $0.6 million related to restructuring
costs while the prior-year quarter had only $0.1 million related to
restructuring costs. The fiscal 2003 third quarter restructuring costs included
$0.4 million in professional fees associated with our lender negotiations, $0.1
million in professional fees related to our loss on investment in our Australian
subsidiary and $0.1 million in severance costs.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income totaled $2.0 million in the third quarter of fiscal
2003 and 2002. The fiscal 2003 third quarter saw decreased revenue levels offset
by improved operating margins .
INTEREST EXPENSE
Interest expense totaled $1.3 million in both the third quarter of
fiscal 2003 and 2002. Interest rates increased in fiscal year 2003 as a result
of amending our credit facilities. However, the increase in the interest rates
in the third quarter of fiscal 2003 was offset by the lower debt levels.
24
INCOME TAX PROVISION
The Company recorded a provision for income taxes of $0.4 million for
the fiscal 2003 third quarter compared to a provision of $0.5 million for the
fiscal 2002 third 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 in excess of
the statutory tax rate of 34% since the Company has not realized the tax
benefits of losses in the Domestic Operations. 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 2003 third quarter was
$0.2 million which remained constant when compared to continuing operations in
the prior-year period.
DISCONTINUED OPERATIONS
Income from discontinued operations for the fiscal 2003 third quarter
was $0.3 million compared to loss from discontinued operations of $0.1 million
in the prior-year period, an increase in of $0.4 million.
NET INCOME
Net income totaled $0.4 million in the third quarter of fiscal 2003
compared to $0.1 million of income in the prior-year period, an increase in
earnings of $0.3 million. Income per share on a diluted basis totaled $0.05 per
share compared to $0.01 of income per share in the year-earlier period.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO
NINE MONTHS ENDED DECEMBER 31, 2001
REVENUES
Revenues from continuing operations for the nine months ended December
31, 2002 totaled $82.9 million compared to prior-year revenues of $97.6 million,
a decrease of $14.7 million or 15.0%. Revenues from the discontinued operations
were $30.7 million for the first nine months of fiscal 2003 compared to $36.2
million in the prior-year period, a decrease of $5.5 million or 15.3%.
For the nine months ended December 31, 2002, revenues relating to the
Domestic Core Operations totaled $67.5 million compared to prior-year results of
$80.3 million, a decrease of $12.8 million or 16.0%. This revenue decrease
relates primarily to the decreased activity levels in our coatings services
business compared to the year-earlier period. The coatings services business did
not receive as many government contract awards and anticipates lower
year-over-year revenue levels.
The Canadian Operations' revenues for the nine months ended December
31, 2002 totaled $15.4 million compared to prior-year results of $17.3 million,
a decrease of $1.9 million or 10.7%. The
25
decrease is primarily due to lower material and rectifier sales. The Canadian
Operations continue to experience weakness in the energy segment of its
business.
GROSS PROFIT
Consolidated gross profit margins were 32.5% for the nine months ended
December 31, 2002 compared to 29.9% for the prior-year period. Gross margins
benefited in the current year from a number of high margin jobs in both the
Domestic Core Operations and the Canadian Operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses totaled $22.8 million
(27.5% of revenues) for the nine months ended December 31, 2002 compared to
$22.9 million (23.4% of revenues) for the prior-year period. Selling, general
and administrative expenses for the nine months ended December 31, 2002 had $3.1
million related to restructuring costs while the prior-year period had only $0.2
million related to restructuring costs. The restructuring costs for the nine
months ended December 31, 2002 included $1.5 million in professional fees
associated with our lender negotiations, $1.1 million in professional fees
related to our loss on investment in our Australian subsidiary and $0.5 million
in severance costs.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income from continuing operations totaled $4.2 million for
the nine months ended December 31, 2002 compared to $6.3 million in the
prior-year period, a decrease in earnings of $2.1 million. This decrease is
primarily related to the restructuring costs incurred and reduced revenues
generated during the fiscal year.
INTEREST EXPENSE
Interest expense totaled $3.7 million for the nine months ended
December 31, 2002 compared to $3.8 million in the prior-year period. Interest
rates increased in fiscal year 2003 as a result of amending our credit
facilities. However, the increase in the interest rates in fiscal 2003 was
offset by the lower debt levels.
INCOME TAX PROVISION
The Company recorded a provision for income taxes of $1.2 million for
the nine months ended December 31, 2002 compared to a provision of $1.4 million
in the prior-year period. 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 in excess of the
statutory tax rate of 34% since the Company has not realized the tax benefits of
losses in the domestic operations. The Company intends to maintain a full
valuation allowance on its domestic net deferred tax assets and net operating
loss carryforwards until sufficient evidence exists to support the reversal of
the remaining reserve.
INCOME (LOSS) FROM CONTINUING OPERATIONS
The loss from continuing operations totaled $0.7 million for the nine
months ended December 31, 2002 compared to $1.1 million of income from
continuing operations in the prior-year period, a decrease in earnings of $1.8
million. This decrease is primarily related to the restructuring costs incurred
during the fiscal year.
26
DISCONTINUED OPERATIONS
Loss from discontinued operations for the first nine months of fiscal
2003 was $4.6 million compared to $1.2 million in the prior-year period, an
increase in loss of $3.4 million. The increased loss is primarily related to the
write-off of accumulated other comprehensive income and professional fees
relating to the discontinuance of these operations which totaled $5.1 million
for the nine months ended December 31, 2002.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
During the nine months ended December 31, 2002, the Company, with the
assistance of independent valuation experts, completed its initial assessment
test and concluded that certain of its goodwill was impaired. Effective April 1,
2002, the Company has recognized a transitional impairment charge of $18.2
million as the cumulative effect of a change in accounting principle to reduce
the carrying values of certain indefinite lived intangible assets and goodwill
to estimated fair values as required by SFAS No. 142. This is a non-cash charge
and does not impact compliance with the financial covenants contained in our
lender agreements.
NET LOSS
Net loss totaled $23.6 million for the nine months ended December 31,
2002 compared to $0.1 million in the prior-year period, a decrease of $23.5
million, which was primarily attributable to non-cash goodwill impairment
charges as a result of a change in accounting principle and the write-off on
non-cash translation adjustments to discontinued operations. Loss per share on a
diluted basis totaled $2.81 per share compared to $0.01 per share in the
prior-year period.
B. LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had negative working capital of $35.7
million excluding net assets held for sale, compared to negative $40.9 million
at March 31, 2002, excluding net assets held for sale, which was an increase of
$5.2 million.
During the first nine months of fiscal year 2003, cash provided by
operating activities totaled $3.8 million compared to cash provided by operating
activities of $8.9 million in the year-earlier period. Cash provided by
investing activities totaled $0.3 million during the first nine months of fiscal
2003, which included $0.2 million for capital expenditures, offset by, $0.5
million of proceeds from the disposal of capital assets compared to cash used
for investing activities totaling $0.1 million during the first nine months of
fiscal 2002, which included $0.4 million used for capital expenditures,
partially offset by $0.3 million of proceeds from the disposal of capital
assets. Cash used for financing activities totaled $6.2 million which was used
to pay down debt during the first nine months of fiscal 2003 compared to cash
used by financing activities of $5.3 million that was used to pay down debt in
the first nine months of fiscal 2002.
In March 1999, the Company entered into an $80 million revolving credit
facility, that expires on July 31, 2003 (the "Revolving Credit Facility").
Initial borrowings were used to repay existing domestic bank indebtedness.
Through a series of subsequent amendments, including an amendment executed by
the Company on September 23, 2002 ("September 2002 Amendment"), the
27
size of the Revolving Credit Facility was reduced to $37.5 million. In addition,
the September 2002 Amendment provided that any cash proceeds from the
disposition of targeted Company assets will be used to reduce the Revolving
Credit Facility and the Senior Notes in a ratio of 56% and 44%, respectively.
Any net asset disposition proceeds that reduce the Revolving Credit Facility
will result in a proportionate reduction in the lender's commitments under the
Revolving Credit Facility. Borrowings under the Revolving Credit Facility are
further limited to borrowing base amounts as defined. The September 2002
Amendment provides for interest on borrowings at prime plus 5.00%. In addition,
the September 2002 Amendment requires the Company to pay a facility fee of 1.00%
on the commitment amount. Moreover, a subsequent amendment executed by the
Company on November 1, 2002 (the "Seventh Amendment") contained additional
provisions for the improvement period and also reset the net worth covenant.
In connection with the September 2002 Amendment, the Revolving Credit
Facility lender group received a warrant ("Revolving Credit Facility Warrant")
to purchase 467,126 shares 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. If the entire Revolving Credit Facility principal balance is paid
prior to February 23, 2003, the Revolving Credit Facility Warrant will be
terminated and cease to be in force and effect. 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 has also pledged slightly less
than two-thirds of the capital stock of two of its foreign subsidiaries. The
Revolving Credit Facility, as amended, requires the Company to maintain certain
financial ratios and places limitations on the Company's ability to pay cash
dividends, incur additional indebtedness and make investments, including
acquisitions. The Company was in compliance with the financial covenants of the
Revolving Credit Facility as of December 31, 2002, but there can be no assurance
that the Company will meet these financial ratios in the future. At December 31,
2002, the Company had $25.8 million outstanding under the Revolving Credit
Facility. Total availability under the Revolving Credit Facility at December 31,
2002 was approximately $5.4 million 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
July 31, 2003, it will be necessary for the Company to amend this Revolving
Credit Facility to extend the expiration date. If the Company is unable to
negotiate an amendment to the Revolving Credit Facility, it will be necessary
for the Company to refinance or repay this debt. The Company cannot assure that
it will be able to accomplish such a transaction on terms acceptable to the
Company. Failure to do so would have a material adverse effect on the Company's
liquidity and financial condition and could result in the Company's inability to
operate as a going concern. If the Company is unable to operate as a going
concern, it may file, or may have no alternative but to file, bankruptcy or
insolvency proceedings or pursue a sale or sales of assets to satisfy creditors.
In January 1998, the Company issued, through private placement, $30
million of Senior Notes due 2008 (the "Senior Notes"). The Senior Notes, as
amended, bear interest at 11.35% until July 31, 2003 and 11.85% on and after
July 31, 2003. In addition, the agreement relating to the Senior Notes, as
amended, provides for an additional fee of 1.00% per annum on the outstanding
principal amount of the Senior Notes. In connection with the September 2002
Amendment, the Senior Notes lender received a warrant ("Senior Notes Warrant")
to purchase 467,126 of the
28
Company's common shares at a purchase price of $0.01 per share 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. If the entire
Revolving Credit Facility and Senior Notes principal balance is repaid prior to
February 23, 2003, the Senior Notes Warrant will be terminated and cease to be
in force and effect. The Senior Notes, as amended, requires a principal payment
of $7.6 million on July 31, 2003 and monthly principal payments of $0.4 million
commencing on August 15, 2003 ("Notes Principal Repayments") and are secured
equally and ratably with debt under the Revolving Credit Facility. In addition,
the amended 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 a reduction in the Notes
Principal Repayments. The Company cannot assure that it will be able to make its
Notes Principal Repayments when due. Failure to do so would result in 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
of assets to satisfy creditors.
The Company is required to maintain certain financial ratios under the
Senior Notes. The Company was in compliance with the financial covenants under
the amended agreement relating to the Senior Notes as of December 31, 2002 but
there can be no assurance that the Company will meet these financial ratios in
the future..
Prior to July 31, 2003, the Company also intends to seek other
financing to pay down the Senior Notes and Revolving Credit Facility. There can
be no assurance, however, that the Company will be able to obtain other
financing, or as to the terms or conditions on which such financing may be
obtained, if at all.
As a result of uncertainty related to the Company's ability to amend or
refinance its debt, and the timing thereof, certain vendors may no longer do
business with the Company on favorable credit terms, and the Company could
experience cash flow problems or the inability to obtain materials and services
when required. In addition, vendors may require cash in advance or deposits. All
of these developments could materially increase the Company's operating expenses
and further reduce its liquidity.
The Company has incurred substantial costs in fiscal 2002, and will
continue to incur substantial costs in fiscal 2003, in connection with the
engagement of financial advisors and consultants, the investigation of
accounting matters and the preparation and review of its financial statements
and other reports. The Company also anticipates that it will continue to incur
significant legal and other expenses in connection with the ongoing litigation
and investigations described in Part II, Item 1 - Legal Proceedings.
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. To assist in
these efforts, the Company has engaged the firm of Carl Marks Consulting Group
LLC. A managing director
29
of Carl Marks has joined the Company in the role of Chief Restructuring Officer
to manage the plan's implementation. The Company will report future quarterly
and annual results separately for continuing operations and for discontinued
operations. Potential operating gains or losses may be experienced with the
disposition of assets at the time of disposal during the implementation of the
restructuring plan. Operating income improvements combined with debt reduction
are expected to result over the long-term.
30
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, particularly in light of the going concern qualification contained in
our auditors' opinion contained in our most recently audited financial
statements) 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 any 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; 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 earlier 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.
During fiscal 2003, we amended our Revolving Credit Facility and Senior Notes in
September 2002 because we were not in compliance with the provisions, including
certain financial covenants, of these agreements as a result of matters related
to the accounting irregularities at our Australian subsidiary. As amended, the
Revolving Credit Facility expires on July 31, 2003, and it will be necessary for
us to amend this Revolving Credit Facility to extend the expiration date. If we
are unable to negotiate a further amendment to the Revolving Credit Facility, it
will be necessary for us to refinance or repay this debt. We cannot assure that
we will be able to accomplish such a transaction on terms acceptable to us.
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
31
going concern. If we are unable to operate as a going concern, we may file, or
may have no alternative but to file, bankruptcy or insolvency proceedings or
pursue a sale or sales of assets to satisfy creditors. In addition, the Senior
Notes, as amended, require a principal payment of $7.6 million by July 31, 2003
and monthly principal payments of $0.4 million commencing on August 15, 2003. We
cannot assure that we will be able to make these payments when due, which will
result in our being in default under the Senior Notes and in that event the
Senior Notes lender may pursue its remedies against us for such a default,
including acceleration of principal, which would have a material adverse effect
on our liquidity and financial condition and could result in our inability to
operate as a going concern. If we are unable to operate as a going concern, we
may file, or may have no alternative but to file, bankruptcy or insolvency
proceedings or pursue a sale or sales of assets to satisfy creditors. We intend
to seek other financing during fiscal 2003 to pay down the Senior Notes and the
Revolving Credit Facility. There can be no assurance, however, that we will be
able to obtain other financing or as to the terms and conditions under which
such financing may be available.
THE EFFECTIVENESS OF OUR BUSINESS RESTRUCTURING PLAN. In July 2002, our Board of
Directors approved a formal business restructuring plan. The multi-year plan
includes a series of initiatives to improve operating income and reduce debt. We
intend to sell non-core business units and use the proceeds to reduce debt. To
assist, we have engaged the firm of Carl Marks Consulting Group LLC and a
managing director of Carl Marks has joined us in the role of Chief Restructuring
Officer to manage the plan's implementation. While we expect that operating
income improvements combined with debt reduction will result from the business
restructuring plan in the long term, it is uncertain at this time to what extent
such operating income improvements and debt reduction will be achieved as a
result of the business restructuring plan and the terms and/or timing thereof.
We cannot assure that the business restructuring plan will be successful in
enhancing our ability to pursue financing alternatives acceptable to us.
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. In addition to
significant expenditures we may have to make to defend ourselves in these
actions and the related significant financial penalties that might be imposed on
us if the plaintiffs prevail in these actions, 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.
ADVERSE DEVELOPMENTS IN PENDING LITIGATION OR REGULATORY MATTERS. From time to
time, we are involved in litigation and regulatory proceedings, including those
disclosed in "Legal Proceedings" of this quarterly report and in our other
periodic reports filed with the Securities and Exchange Commission. There are
always significant uncertainties involved in litigation and regulatory
proceedings. As to current matters in litigation, we believe that our positions
and defenses are meritorious. However, the litigation process involves
unpredictability 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
32
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.
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 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 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. If we fail to meet the required
listing standards and reporting requirements and cannot within a limited time
frame thereafter demonstrate compliance, our common shares may not be allowed to
trade on the stock exchange, although we would pursue an alternative national
trading venue. If this occurs, it may make it more difficult for us to raise
33
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. There can be no
assurances that trading will not be suspended again and if so, that trading
would be permitted to resume.
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 $8.6 million for the nine months ended December
31, 2002 and net assets of approximately $7.7 million at December 31, 2002 that
can be negatively impacted by changing economic and political conditions.
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.
34
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 2002 Annual Report on Form 10-K/A,
filed on August 9, 2002, 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 June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon settlement
of the liability, the entity either settles the obligation for the amount
recorded or incurs a gain or loss. Statement No. 143 is effective for fiscal
years beginning after June 15, 2002. Management is evaluating the effect of this
statement on the Company's results of operations and financial position.
In June 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit and
disposal activities that are initiated after December 31, 2002. For periods
beginning before January 1, 2003, it is the Company's policy to recognize
restructuring costs in accordance with EITF Issue No. 94-3.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
was issued. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the effects on reported net income
of an entity's method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for the Company in its second fiscal quarter of 2003. The
Company does not intend to effect a voluntary change in accounting to the fair
value method, and, accordingly, does not anticipate the adoption of SFAS No. 148
to have a significant impact on the Company's future results of operations or
financial position.
35
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 December 31, 2002 rates, and assuming no
changes in debt from the December 31, 2002 levels, the additional annual expense
would be approximately $1.1 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 nine months of
fiscal 2003, the Company recorded a favorable foreign currency translation
adjustment of $0.6 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. In addition, as a result of the Company's decision to
sell the Australian subsidiary subsequent to year-end, a loss of $1.5 million
related to the cumulative currency translation adjustment of the subsidiary was
recognized in the first nine months of fiscal year 2003. In July 2002 the Board
of Directors approved a plan to sell non-core business units and the
International Operations to reduce debt (see Note 8 - Assets Held for Sale).
When the International Operations were classified as discontinued operations,
the Company expensed the cumulative currency translation balance for those
discontinued operations. For the nine months ended December 31, 2002, the
Company recorded a loss of $3.3 million for cumulative currency translation. The
expense is reported in the Loss from Discontinued Operations.
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.
36
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. 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 team.
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 2003 and 2002 on a
current basis.
(b) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer (the
"Senior Officers"), with the participation of other members of the Company's
management, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a - 14(c) and 15d -
14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"). Based on that evaluation, and subject to
inherent limitations on the effectiveness of internal controls as described
below, the Senior Officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
37
(c) Inherent Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, a control system is subject to implementation based
on the cost effectiveness of such controls. Further, because of the inherent
limitations in all control systems, including faulty judgments in decision
making or breakdowns resulting from simple errors or mistakes, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. Additionally, controls can be circumvented by
individual acts, collusion or by management override of the controls in place.
Over time, controls may become inadequate because of changes in conditions, or
deterioration of the degree of compliance with the policies or procedures.
Because of the inherent limitation of control systems, misstatements due to
error or fraud may occur and not be detected. Given such inherent limitations,
the Senior Officers and other members of the Company's management, do not expect
our disclosure controls or procedures to prevent all possible instances of error
and fraud.
38
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. On December 9, 2002, the Company filed application
39
for leave to appeal the court's order certifying the underlying class. The
Company is unable at this time to make a determination as to whether an adverse
outcome is likely and whether an adverse outcome would have a materially adverse
affect on its operations or financial condition.
During fiscal 2001, the Company discovered that a former employee used
an incorrect assessment standard in connection with the evaluation of whether
certain underground storage tanks located at as many as 67 sites were eligible
for upgrade using cathodic protection. Such evaluations were done using one of
the approved assessment methodologies. The tanks at these sites, which are
located in five states, were subsequently upgraded using cathodic protection
which arrests corrosion. These tanks are also subject to ongoing leak detection
requirements. Based on the Company's review of available information and
governmental records, the Company believes that there have not been any releases
from the affected tanks as a result of the actions of the former employee. The
Company has contacted, and in October and November 2000 met with, officials from
the EPA and officials from the corresponding environmental protection agencies
of the five states involved to discuss this matter. It is the Company's
understanding that none of the states nor the EPA intend to take any enforcement
action as a result of the use of the inaccurate standard by the former employee.
The Company is currently working with the states and the EPA to develop and
implement field investigation procedures to assess the current status of the
affected sites. Based on currently available information, the Company does not
believe that the cost of field investigation procedures for this matter will
have a material effect on the future operations, financial position or cash
flows of the Company.
The Company is a defendant in a purported class action suit filed on
June 24, 2002, in the United States District Court, Northern District of Ohio,
Eastern Division. The complaint also names certain former and current officers
and a director 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. 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.
The Company is subject to other legal proceedings and claims which
arise in the ordinary course of business.
40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company convened its Annual Meeting of Shareholders as scheduled on
September 19, 2002 and reviewed the performance of its business over the past
fiscal year, but adjourned the formal portions of the meeting to reconvene on
October 11, 2002. Adjournment of the annual meeting was necessary because the
Company had not yet attained a quorum for purposes of shareholder voting.
A vote was taken by the Company's shareholders at the reconvened Annual
Meeting of Shareholders held on October 11, 2002 for the election of three
directors of the Company for terms expiring in two years. The aggregate number
of votes cast for or withheld for each nominee were as follows:
Director Nominees For Withheld
-------------------- --------- ---------
Michael K. Baach 7,415,860 197,439
Harry Millis 7,425,967 187,332
Dr. Warren F. Rogers 7,418,155 195,144
For a description of the bases used in tabulating the above-referenced
votes, see the Company's definitive proxy materials used in connection with the
solicitation of proxies for the Annual Meeting of Shareholders held on September
19, 2002 and October 11, 2002.
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. See the Exhibit Index at the last page of this Form 10-Q.
B. There were no reports on Form 8-K filed during the quarter.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORRPRO COMPANIES, INC.
(Registrant)
Date: February 14, 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
43
CERTIFICATIONS
I, Joseph W. Rog, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CORRPRO COMPANIES,
INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 14, 2003
/s/ Joseph W. Rog
-------------------------------------
Joseph W. Rog
Chairman of the Board, President and
Chief Executive Officer
44
I, Robert M. Mayer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CORRPRO COMPANIES,
INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 14, 2003
/s/ Robert M. Mayer
----------------------------------------------
Robert M. Mayer
Senior Vice President, Chief Financial Officer
45
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
10.1 Seventh Amendment to Credit Agreement dated as of November
1, 2002 relating to the Amended and Restated Credit
Agreement dated as of June 9, 2000 among the Company, CSI
Coating Systems, Inc. and the Lenders party thereto.
46