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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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
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As of August 10, 2001 8,056,163 Common Shares, without par value, were
outstanding.
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CORRPRO COMPANIES, INC.
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings 19
ITEM 6. Exhibits and Reports on Form 8-K 20
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
June 30, March 31,
2001 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,279 $ 3,900
Accounts receivable, net 47,106 43,222
Inventories 20,499 22,298
Prepaid expenses and other 6,837 4,734
Deferred income taxes 2,697 2,688
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Total current assets 80,418 76,842
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Property, plant and equipment, net 12,632 13,245
Other Assets:
Goodwill 37,250 37,139
Other assets 11,077 10,908
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Total other assets 48,327 48,047
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$ 141,377 $ 138,134
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 5,881 $ 3,155
Accounts payable 15,206 14,007
Accrued liabilities and other 8,651 10,423
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Total current liabilities 29,738 27,585
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Long-term debt, net of current portion 65,126 65,134
Commitments and contingencies -- --
Minority interest 90 92
Shareholders' Equity:
Serial preferred shares -- --
Common shares 2,276 2,276
Additional paid-in capital 49,047 49,979
Accumulated earnings 5,766 5,541
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57,089 57,796
Accumulated other comprehensive loss (5,789) (6,449)
Common shares in treasury, at cost (4,877) (6,024)
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Total shareholders' equity 46,423 45,323
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$ 141,377 $ 138,134
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended
June 30,
------------------
2001 2000
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Revenues $44,377 $40,760
Cost of sales 30,967 27,045
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Gross profit 13,410 13,715
Selling, general & administrative expenses 11,202 11,660
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Operating income 2,208 2,055
Interest expense 1,820 1,456
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Income before income taxes 388 599
Provision for income taxes 163 239
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Net income $ 225 $ 360
======= =======
Earnings per share:
Basic $ 0.03 $ 0.05
Diluted $ 0.03 $ 0.05
Weighted average shares:
Basic 7,960 7,687
Diluted 7,978 7,748
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
June 30,
-------------------
2001 2000
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Cash flows from operating activities:
Net income $ 225 $ 360
Adjustments to reconcile net income to net cash
used for operations:
Depreciation and amortization 1,354 1,372
401K matching contribution in Treasury shares 215 --
Deferred income taxes (9) 52
(Gain) loss on sale of assets 8 (44)
Minority interest (1) 50
Changes in assets and liabilities:
Accounts receivable (3,609) (2,410)
Inventories 1,965 16
Prepaid expenses and other (2,156) (2,185)
Other assets (572) (427)
Accounts payable and accrued expenses (369) 77
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Total adjustments (3,174) (3,499)
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Net cash used for operating activities (2,949) (3,139)
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Cash flows from investing activities:
Additions to property, plant and equipment (317) (875)
Proceeds from disposal of property, plant and equipment 377 348
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Net cash provided by (used for) investing activities 60 (527)
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Cash flows from financing activities:
Net borrowings under revolving credit facility and
lines of credit 2,419 3,916
Net payments under other long-term debt (138) (130)
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Net cash provided by financing activities 2,281 3,786
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Effect of changes in foreign currency exchange rates (13) (37)
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Net increase (decrease) in cash and cash equivalents (621) 83
Cash and cash equivalents at beginning of period 3,900 1,965
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Cash and cash equivalents at end of period $ 3,279 $ 2,048
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 364 $ 580
Interest $ 1,602 $ 1,216
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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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. Certain fiscal 2001 amounts have been reclassified to conform
with the fiscal 2002 presentation.
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 ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2002 or any other period. The interim consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - INVENTORIES
June 30, March 31,
2001 2001
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Inventories consist of the following:
Component parts and raw material $ 9,224 $ 9,450
Work in process 767 2,140
Finished goods 11,744 11,717
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21,735 23,307
Inventory reserve (1,236) (1,009)
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$ 20,499 $ 22,298
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NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
June 30, March 31,
2001 2001
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Property, plant and equipment consists of the following:
Land $ 602 $ 593
Buildings and improvements 6,738 6,615
Equipment, furniture and fixtures 19,206 19,667
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26,546 26,875
Less: Accumulated depreciation (13,914) (13,630)
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$ 12,632 $ 13,245
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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 7,960 and 7,687 for the three months ending June 30, 2001 and
2000, 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 7,978 and 7,748 for the three
months ending June 30, 2001 and 2000, respectively. Stock options are the only
potential common shares included in the Company's diluted EPS calculations.
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. During the three months ended June 30, 2001, the Company granted options
to purchase 648 common shares at an exercise price of $2.55 per share in
exchange for options previously surrendered under the surrender program.
In addition to the granting of options in exchange for the previously
surrendered options referred to above, the Company granted options to purchase
18 common shares at exercise prices ranging from $1.30 to $1.52 per share under
the 1997 Option Plan during the three months ended June 30, 2001.
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, the Company matches a portion of employees'
contributions. Effective October 1, 2000, the Company began matching employee
contributions with treasury shares. For the first quarter of fiscal year 2002,
the Company issued 116 treasury shares for the Company's matching contribution.
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NOTE 7 - COMPREHENSIVE INCOME
Comprehensive income (loss), which includes net income and other
comprehensive income (loss), amounted to $885 and ($667) for the quarters ended
June 30, 2001 and June 30, 2000, respectively. Other comprehensive income is
comprised of other revenues, expenses, gains and losses that are excluded from
net income but included as a component of total shareholders' equity. Other
comprehensive income (loss) for the quarters ended June 30, 2001 and June 30,
2000 was $660 and ($1,027), respectively, which is comprised of the effects of
foreign currency translation adjustments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
The accumulated balance of foreign currency translation adjustments, excluded
from net income, is presented in the Consolidated Balance Sheets as "Accumulated
other comprehensive loss."
NOTE 8 - BUSINESS SEGMENTS
In fiscal 2001, as a result of the Company's restructuring its internal
operations, the Company reconfigured its business segments by combining its
operations in Europe, Asia and Australia with that of the Middle East to form
the International Operations segment. Previously, its operations in Europe, Asia
and Australia were included in its Other Operations segment. Prior period
business segment information has been reconfigured to conform with the current
period presentation. 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.
International Operations. The International Operations segment consists of the
Company's operations in Europe, the Middle East, Australia and Asia, which
provide corrosion control products and services to customers in the petroleum,
utility, industrial, marine and offshore markets, as well as to governmental
entities in connection with their infrastructure assets. In addition to
corrosion control products and services, the Company's operation in Australia
also provides coatings and pipeline integrity services to its customer base,
which includes oil and gas, water treatment, mining and marine markets.
Other Operations. The Other Operations segment includes the Company's corrosion
monitoring equipment business, which assembles and sells products including
probes, instruments, access fittings and remote monitoring units to customers in
the oil and gas and chemical industries. In addition, this segment also includes
the Company's risk assessment and analysis software business, which sells or
licenses products to customers primarily in the oil and gas industry.
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Financial information relating to the Company's operations by segment is
presented below:
For the Three Months Ended
June 30,
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2001 2000
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Revenue:
Domestic Core Operations $ 27,497 $ 23,481
Canadian Operations 5,453 5,391
International Operations 9,034 8,702
Other Operations 2,393 3,186
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$ 44,377 $ 40,760
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Operating Profit:
Domestic Core Operations $ 4,776 $ 3,719
Canadian Operations 726 802
International Operations 186 175
Other Operations (15) 279
Corporate Related Costs and Other (3,465) (2,920)
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$ 2,208 $ 2,055
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NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2001, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. As
amended, SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, measure those
instruments at fair value and recognize changes in the fair value of derivatives
in earnings in the period of change unless the derivative qualifies as an
effective hedge that offsets certain exposures. The Company had no derivatives
as of June 30, 2001, and therefore, no resulting transition adjustments.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. The Company is required to adopt the
provisions of SFAS No. 141 immediately, and SFAS No. 142 effective April 1,
2002.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of approximately $36.0 million, which will be subject to
the transition provisions of SFAS No. 141 and 142. Amortization expense related
to goodwill was approximately $1.7 million and $0.4 million for the year ended
March 31, 2001 and the three months ended June 30, 2001, respectively. Because
of the extensive effort needed to comply with adopting the new rules, it is not
practical to reasonably estimate the impact of adopting these statements on the
Company's financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
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NOTE 10 -- LONG TERM DEBT
The Company currently has a Revolving Credit Facility, as amended in August
2001, in the amount of $45.0 million, subject to a borrowing base formula which
limits the amount the Company can borrow under the facility to the lesser of
$40.0 million or borrowing base amounts as defined. This Revolving Credit
Facility expires on July 31, 2002. In addition to the Revolving Credit Facility,
the Company has various smaller lines of credit with foreign banks that totaled
approximately $5.5 million as of June 30, 2001. Total availability under the
Revolving Credit Facility and foreign credit facilities at June 30, 2001 was
approximately $6.3 million after giving consideration to the borrowing base
limitations under the Revolving Credit Facility. At June 30, 2001, the Company
was in compliance with all debt covenants as amended.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- OF OPERATIONS
GENERAL
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Corrpro provides corrosion control related services, systems, equipment
and materials to the infrastructure, environmental and energy markets. Our
products and services include (i) corrosion control engineering services,
systems and equipment ("corrosion control"), (ii) coatings services ("coatings")
and (iii) pipeline integrity and risk assessment services.
CORROSION CONTROL. Corrpro's specialty in the corrosion control market is
cathodic protection. We offer a comprehensive range of services in this area,
which include the design, manufacture, installation, maintenance and monitoring
of cathodic protection systems. Cathodic protection is an electrochemical
process that prevents corrosion for new structures and stops the corrosion
process for existing structures. It can provide a cost-effective alternative to
the replacement of corroding structures. In order to understand how cathodic
protection works, it is helpful to first understand the corrosion process.
Steel, the most common metal protected by cathodic protection, is produced from
iron ore. To produce steel, the iron ore is subjected to a refining process that
adds energy. Once the steel is put back into the environment, it begins to
revert back to its original state (i.e., iron ore) by releasing the added energy
back into the surrounding environment. This process of dispersing energy is
called corrosion. Cathodic protection electrodes, called anodes, are placed
near, and connected to, the structure to be protected (i.e., the cathode).
Anodes are typically made from cast iron, graphite, aluminum, zinc or magnesium.
A cathodic protection system works by passing an electrical current from the
anode to the cathode. This process maintains the energy level on the cathode,
thus stopping it from corroding. Instead, the anode corrodes, sacrificing itself
to maintain the integrity of the structure. In order for the electrical current
to pass from the anode to the cathode, they both must be in a common
environment. Therefore, cathodic protection can only be used to protect
structures that are buried in soil, submerged in water or encased in concrete.
Structures commonly protected against corrosion by the cathodic protection
process include oil and gas pipelines, offshore platforms, above and underground
storage tanks, ships, electric power plants, bridges, parking garages, transit
systems and water and wastewater treatment equipment.
In addition to cathodic protection, our corrosion control services
include corrosion engineering, material selection, inspection services, advanced
corrosion research and testing and corrosion monitoring (including remote
monitoring). Remote monitoring is a technology we acquired in September 1999. In
order for cathodic protection to be most effective, the system must run
continuously. To ensure that this is happening, the cathodic protection systems
need to be monitored on a regular basis. Remote monitoring allows customers to
reduce the cost of monitoring and maintaining their cathodic protection systems
by eliminating the need to have personnel travel to various sites in order to
collect data from the cathodic protection system. Equally significant is the
continuous flow (and more frequent updates) of data that remote monitoring can
provide. This information allows problems to be identified immediately rather
than waiting for the on-site inspection interval. We also sell a variety of
materials and equipment, including anodes, rectifiers and corrosion monitoring
probes, used in cathodic protection and corrosion monitoring systems.
COATINGS. Corrpro offers a wide variety of coatings-related services designed to
provide our customers with longer coatings life, reduced corrosion, improved
aesthetics and lower life-cycle costs for their coated structures. Coatings
services include research, testing, evaluation and application of coatings. In
addition, we provide project management services for coatings maintenance
programs, including condition surveys,
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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
assessments, surveys, inspections, analyses, repairs and ongoing maintenance. By
offering a wide range of services, we are able to provide pipeline owners with
one-stop shopping for the preservation of their pipeline systems.
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000
REVENUES
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Revenues for the fiscal 2002 first quarter totaled $44.4 million
compared to $40.8 million in the fiscal 2001 first quarter, an increase of $3.6
million or 8.9%.
Fiscal 2002 first quarter revenues relating to our Domestic Core
Operations segment totaled $27.5 million compared to $23.5 million in the fiscal
2001 first quarter, an increase of $4.0 million or 17.1%. This revenue growth
relates primarily to the increased activity from our coatings services business
and strong demand for cathodic protection services in the U.S.
Our Canadian Operations segment revenues for the first quarter of
fiscal 2002 totaled $5.5 million compared to $5.4 million in the prior year
first quarter, an increase of $0.1 million or 1.2%. Revenues for the Canadian
Operations segment remained relatively flat when compared to the year-earlier
period.
Fiscal 2002 first quarter revenues relating to the International
Operations segment totaled $9.0 million compared to $8.7 million in the fiscal
2001 first quarter, an increase of $0.3 million or 3.8%. The increased revenue
levels relate to the European, Middle East and Asia Pacific regions. These
increases were partially offset by decreased revenue levels in Australia.
Revenues relating to the Other Operations segment totaled $2.4 million
in the fiscal 2002 first quarter compared to $3.2 million in the fiscal 2001
first quarter, a decrease of $0.8 million or 24.9%. The Other Operations segment
experienced revenue growth in its risk assessment and analysis software business
while revenues in its corrosion monitoring equipment business declined from the
year-earlier period.
GROSS PROFIT
------------
Gross profit margins were 30.2% in the first quarter of fiscal 2002
compared with 33.6% in the prior-year first quarter. Gross profit margins,
although up from the quarter ended March 31, 2001, are below the year-earlier
period primarily because of business mix.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Operating expenses totaled $11.2 million in the first quarter of fiscal
2002 compared to $11.7 million in the year-earlier period, a decrease of $0.5
million or 3.9%. The decrease is the result of a number of cost reduction
programs we implemented in the latter part of fiscal 2001 and our continuing
efforts to reduce our selling, general and administrative expenses.
OPERATING INCOME
----------------
Operating income totaled $2.2 million for the first quarter of fiscal
2002 (5.0% of revenues), up 7.4% from $2.1 million for the three months ended
June 30, 2000. This increase is primarily the result of the higher revenue
levels and lower selling, general and administrative expenses, partially offset
by lower gross profit margins.
INTEREST EXPENSE
----------------
Interest expense totaled $1.8 million in the first quarter of fiscal
2002 compared to $1.5 million in the first quarter of fiscal 2001. Interest
expense for the quarter increased over the prior-year period as a result of
higher debt levels and higher effective interest rates.
INCOME TAX PROVISION
--------------------
We recorded a provision for income taxes of $0.2 million for the first
quarters of fiscal 2002 and 2001. Our effective tax rate was 42.0% for the first
quarter of fiscal 2002 and 40.0% for the first quarter of fiscal 2001. Our
effective tax rate is based on the statutory rates in effect in the countries in
which we operate. The increase in our effective tax rate is the result of
changes in the income we generated in the various countries in which we operate.
NET INCOME
----------
Net income totaled $0.2 million in the first quarter of fiscal 2002
compared to $0.4 million in the prior-year period, a decrease of 37.5%. Earnings
per share on a diluted basis totaled $0.03 compared to $0.05 in the prior-year
period.
B. LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had working capital of $50.7 million compared to
$49.3 million at March 31, 2001, an increase of $1.4 million or 2.9%. Consistent
with prior years, working capital increased during our first fiscal quarter as
we moved into the seasonally busiest time of the year. During the first three
months of fiscal 2002, cash used for operating activities totaled $2.9 million
compared to $3.1 million used for operating activities in the year-earlier
period. Cash provided by investing activities totaled $0.1 million during the
first quarter of fiscal 2002. Cash provided by financing activities totaled $2.3
million during the first quarter of fiscal 2002 as a result of additional
borrowings under our Revolving Credit Facility and lines of credit to finance
operating activities.
We currently have a Revolving Credit Facility, as amended in August
2001, in the amount of $45.0 million, subject to a borrowing base formula which
limits the amount we can borrow under the
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facility to the lesser of $40.0 million or borrowing base amounts as defined.
This Revolving Credit Facility expires on July 31, 2002. In addition to the
Revolving Credit Facility, we have various smaller lines of credit with foreign
banks which totaled approximately $5.5 million as of June 30, 2001. Total
availability under the Revolving Credit Facility and foreign credit facilities
at June 30, 2001 was approximately $6.3 million after giving consideration to
the borrowing base limitations under the Revolving Credit Facility. At June 30,
2001, we were in compliance with all debt covenants as amended.
Due to the fact that our Revolving Credit Facility expires on July 31,
2002, it will be necessary for the Company to amend this Revolving Credit
Facility to extend the expiration date. If we are unable to extend the
expiration date, it will be necessary for the Company to refinance or repay this
debt. We cannot be assured that we will be able to accomplish such a
transaction. Failure to do so could have a material adverse effect on our
operations.
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
results expressed or implied by forward-looking statements: our mix of products
and services; our ability to obtain extensions, amendments or waivers under our
debt agreements and the availability and terms of additional or alternative
sources of financing and capital; the timing of jobs; the availability and value
of larger jobs; qualification requirements and termination provisions relating
to government jobs; our ability to satisfy the New York Stock Exchange's
continued listing requirements; the impact of inclement weather on operations;
the impact of energy prices on the Company's and its customers' businesses;
adverse developments in pending litigation or regulatory matters; and the impact
of existing, new or changed regulatory initiatives. 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 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
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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 also
would have a negative impact on our operating results.
OUR ABILITY TO OBTAIN EXTENSIONS, AMENDMENTS OR WAIVERS UNDER OUR DEBT
AGREEMENTS AND AVAILABILITY OF ADDITIONAL SOURCES OF FINANCING AND CAPITAL. On
July 12, 2001, we executed amendments, effective as of June 29, 2001, to our
Revolving Credit Facility and Senior Notes, and on August 10, 2001 we executed
an amendment to our Revolving Credit Facility, which together reset certain
covenants under these agreements and extend the expiration date to July 31,
2002. Failure to satisfy or perform any one or more of the covenants contained
in these debt agreements at any given time in the future will require us to
obtain a waiver, consent or amendment from our lenders, or refinance our credit
facilities. Due to the fact that our current Revolving Credit Facility expires
on July 31, 2002, we will be required to amend this Revolving Credit Facility in
order to extend the expiration date or refinance this debt. We cannot provide
assurance that we will be able to obtain future maturity extensions, waivers,
consents and amendments, or refinance our indebtedness or obtain additional
capital on reasonable terms or at all. If we cannot raise funds on acceptable
terms when needed, we may not be able to meet our obligations as they become
due, which could seriously harm our business and ultimately could impact our
ability to operate as a going concern.
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 generally
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 assurances 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 business 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 CONTINUED LISTING STANDARDS OF THE NEW YORK STOCK
EXCHANGE. Our common shares are currently listed and traded on the New York
Stock Exchange (the "NYSE"). In April 2001, we received a notice from the NYSE
indicating that we did not currently meet its continued listing standards. As
required by the NYSE rules, we have issued a press release disclosing the
non-compliance and submitted a business plan to the NYSE that we believe
demonstrates our meeting or exceeding all of
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the continued listing standards within 18 months of our receiving notice of
non-compliance from the NYSE. The NYSE will either accept the plan or the NYSE
will not accept the plan and we will be subject to possible suspension by the
NYSE and delisting by the SEC. While we believe that we will be in compliance
with all of the NYSE's continued listing criteria under our plan as provided by
the NYSE rules, there can be no assurance that the NYSE will accept our plan
and/or that we will continue to remain in compliance in the future. If our
common shares are delisted from the NYSE, we would pursue an alternative
national trading venue. Nevertheless, delisting could have a material adverse
affect on the price and/or liquidity of our common shares and on our ability to
raise capital in the future from the sale or issuance of our securities.
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.
ADVERSE DEVELOPMENTS IN PENDING LITIGATION OR REGULATORY MATTERS. From time to
time, we are involved in litigation and regulatory proceedings, including those
disclosed in our 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 agenda affecting the
regulatory community. We may need to spend 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 or a decree is entered against
us, it may materially and adversely affect our business, financial condition and
results of operations.
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.
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C. CHANGES IN ACCOUNTING STANDARDS
Effective April 1, 2001, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. As
amended, SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position, measure those
instruments at fair value and recognize changes in the fair value of derivatives
in earnings in the period of change unless the derivative qualifies as an
effective hedge that offsets certain exposures. The Company had no derivatives
as of June 30, 2001, and therefore, no resulting transition adjustments.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. The Company is required to adopt the
provisions of SFAS No. 141 immediately, and SFAS No. 142 effective April 1,
2002.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of approximately $36.0 million, which will be subject to
the transition provisions of SFAS No. 141 and 142. Amortization expense related
to goodwill was approximately $1.7 million and $0.4 million for the year ended
March 31, 2001 and the three months ended June 30, 2001, respectively. Because
of the extensive effort needed to comply with adopting the new rules, it is not
practical to reasonably estimate the impact of adopting these statements on the
Company's financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 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 June 30, 2001 rates, and assuming no changes in debt from the June 30,
2001 levels, the additional annual expense would be approximately $1.4 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 quarter of fiscal
2002, the Company recorded a favorable foreign currency translation adjustment
of $0.7 million related to net assets located outside the United States. This
foreign currency translation adjustment resulted primarily from the
weakening of the United States dollar in relation to the Canadian dollar,
Australian dollar and British pound. 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.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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During the fiscal quarter ended June 30, 2001, there were no material
developments in the legal proceedings reported in our Annual Report on Form
10-K for the fiscal year ended March 31, 2001.
We are subject to other legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability, if any, with respect to any such matters will not materially
affect future operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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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.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORRPRO COMPANIES, INC.
(Registrant)
Date: August 14, 2001 /s/ Joseph W. Rog
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Joseph W. Rog
Chairman of the Board, President
and Chief Executive Officer
/s/ Kurt R. Packer
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Kurt R. Packer
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
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EXHIBIT INDEX
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Exhibit
No. Exhibit
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4.1 Second Amendment to Credit Agreement dated as of June 29, 2001 relating
to the Amended and Restated Credit Agreement dated as of June 9, 2000
among Corrpro Companies, Inc. and the Lenders Party thereto. *
4.2 Amendment dated as of June 29, 2001 by and between The Prudential
Insurance Company of America and the Company relating to the Note
Purchase Agreement dated as of January 21, 1998. *
4.3 Third Amendment to Credit Agreement dated as of August 10, 2001
relating to the Amended and Restated Credit Agreement dated as of June
9, 2000 among Corrpro Companies, Inc. and the Lenders Party thereto.
----------------------------------
* These exhibits were filed as Exhibits 4.5 (Second Amendment to Credit
Agreement) and 4.11 (Amendment to Note Purchase Agreement),
respectively, to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001 and are hereby incorporated herein by
reference.
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