<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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
------ ------
As of August 2, 1999, 7,647,889 Common Shares, without par value, were
outstanding.
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX
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Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Shareholders' Equity 6
Notes to the Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 16
2
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -------
CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,363 $ 3,957
Accounts receivable, net 45,530 47,232
Inventories 28,267 27,518
Prepaid expenses and other 8,466 7,270
--------- ---------
Total current assets 87,626 85,977
--------- ---------
Property and Equipment, net 15,816 14,421
Other Assets:
Goodwill 42,203 37,423
Other assets 10,200 9,774
--------- ---------
Total other assets 52,403 47,197
--------- ---------
$ 155,845 $ 147,595
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 2,478 $ 2,235
Accounts payable 15,028 13,951
Accrued liabilities and other 8,104 10,747
--------- ---------
Total current liabilities 25,610 26,933
--------- ---------
Long-Term Debt, net of current portion 40,428 30,864
Senior Notes 30,000 30,000
Deferred Income Taxes 1,523 1,545
Commitments and Contingencies -- --
Minority Interest 182 197
Shareholders' Equity:
Serial preferred shares -- --
Common shares 2,256 2,255
Additional paid-in capital 50,972 50,945
Accumulated earnings 14,324 12,915
--------- ---------
67,552 66,115
Accumulated other comprehensive income (loss) (1,748) (1,413)
Common shares in treasury, at cost (7,702) (6,646)
--------- ---------
Total shareholders' equity 58,102 58,056
--------- ---------
$ 155,845 $ 147,595
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
--------------------------
1999 1998
------- -------
<S> <C> <C>
Revenues $43,151 $44,728
Cost of sales 29,129 31,007
------- -------
Gross profit 14,022 13,721
Selling, general & administrative expenses 10,373 9,653
------- -------
Operating income 3,649 4,068
Interest expense 1,300 880
------- -------
Income before income taxes 2,349 3,188
Provision for income taxes 940 1,274
------- -------
Net income $ 1,409 $ 1,914
======= =======
Earnings per share -
Basic $ 0.18 $ 0.24
Diluted $ 0.18 $ 0.23
Weighted average shares -
Basic 7,706 7,942
Diluted 8,007 8,369
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
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CORRPRO COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,409 $ 1,914
Adjustments to reconcile net income to net cash
provided by (used for) continuing operations:
Depreciation and amortization 1,405 1,032
Deferred income taxes (74) 13
Gain (loss) on sale of assets (33) 7
Minority interest (11) (3)
Changes in assets and liabilities:
Accounts receivable 2,927 (4,814)
Inventories (640) (992)
Contracts in progress, net (1,442) (851)
Prepaid expenses and other 138 92
Other assets (462) (1,590)
Accounts payable and accrued expenses (3,181) (3,189)
-------- --------
Total adjustments (1,373) (10,295)
-------- --------
Net cash provided by (used for) continuing operations 36 (8,381)
Net cash provided by discontinued operations -- 376
-------- --------
Net cash provided by (used for) operating activities 36 (8,005)
-------- --------
Cash flows from investing activities:
Additions to and disposals of property, plant and equipment (716) (799)
Acquisition, net of cash acquired (5,060) (273)
-------- --------
Net cash used for investing activities (5,776) (1,072)
-------- --------
Cash flows from financing activities:
Long-term debt, net 8,520 5,050
Short-term borrowings, net 262 (196)
Net proceeds from issuance of Common Shares 17 15
Repurchase of Common Shares (1,056) (272)
-------- --------
Net cash provided by financing activities 7,743 4,597
-------- --------
Effect of changes in foreign currency exchange rates (597) 21
Net increase (decrease) in cash 1,406 (4,459)
Cash and cash equivalents at beginning of period 3,957 8,687
-------- --------
Cash and cash equivalents at end of period $ 5,363 $ 4,228
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 597 $ 711
Interest $ 1,121 $ 460
</TABLE>
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 SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Common Other Common
Serial Shares Additional Compre- Shares
Preferred ($0.26 Paid-In- Accumulated hensive in
Shares Stated Value) Capital Earnings Income (Loss) Treasury* Total
------ ------------- ------- -------- ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 $ -- $ 2,255 $ 50,945 $ 12,915 $ (1,413) $ (6,646) $ 58,056
Comprehensive Income (Loss):
Net income -- -- -- 1,409 -- -- 1,409
Cumulative translation
adjustment -- -- -- -- (335) -- (335)
Total Comprehensive Income --------
(Loss) -- -- -- -- -- -- 1,074
Exercise of 5 stock options -- 1 27 -- -- -- 28
Repurchase of 105
Common Shares -- -- -- -- -- (1,056) (1,056)
------- -------- -------- -------- -------- -------- --------
June 30, 1999 $ -- $ 2,256 $ 50,972 $ 14,324 $ (1,748) $ (7,702) $ 58,102
======= ======== ======== ======== ======== ======== ========
</TABLE>
* Shares held in treasury totaled 696 at March 31, 1999 and 801 at June 30,
1999.
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 1999 amounts have been reclassified to conform
with the fiscal 2000 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, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2000 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, 1999.
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 amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - ACQUISITIONS
Acquisition of CSI Coating Systems
- ----------------------------------
Effective April 1, 1999, the Company acquired certain assets and
assumed certain liabilities of CSI Coatings Systems ("CSI"). The purchase price
was $5,060 in cash plus the assumption of $893 of long-term debt.
CSI provides specialty coatings application services such as custom
shop coating as well as field coating work on a variety of structures such as
tanks, pipelines and vessels in Canada.
The acquisition of CSI has been accounted for using the purchase method
of accounting. Accordingly, the purchase price has been allocated to the net
assets acquired based upon preliminary estimates of their fair market value at
the date of acquisition. The excess of the purchase price over the estimated
fair value of net assets acquired totaled $4,838 at June 30, 1999 and is being
amortized over 40 years on a straight-line basis. The allocation was based on
preliminary estimates and is subject to revision at a later date.
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<TABLE>
<CAPTION>
NOTE 3 - INVENTORY
June 30, March 31,
1999 1999
---- ----
Inventories consist of the following:
<S> <C> <C>
Component parts and raw material $11,283 $13,264
Work in process 2,204 2,891
Finished goods 14,780 11,363
------- -------
$28,267 $27,518
======= =======
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
---- ----
Property, plant and equipment consists of the following:
<S> <C> <C>
Land $ 591 $ 539
Buildings and improvements 6,956 5,792
Equipment, furniture and fixtures 19,994 18,147
------- -------
27,541 24,478
Less: Accumulated depreciation (11,725) (10,057)
------- -------
$15,816 $14,421
======= =======
</TABLE>
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income for
the period by the weighted average number of shares of common shares outstanding
for the period which was 7,706 and 7,942, for the three months ending June 30,
1999 and 1998, respectively. Diluted EPS for the period has been determined by
dividing net income by the weighted average number of shares of common shares
and potential common shares outstanding for the period which was 8,007 and
8,369, respectively, for the three months ending June 30, 1999 and 1998. 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 6 - STOCK PLANS
The Company granted options to purchase 10 Common Shares at an exercise
price of $9.94 per share under the 1997 Long-Term Incentive Plan of Corrpro
Companies, Inc. (the "1997 Option Plan") during the three months ended June 30,
1999. During such period, 2 previously granted options terminated in accordance
with the provisions of its option plans. There were 5 options exercised at
exercise prices ranging from $1.86 to $6.49 per share during the three-month
period ended June 30, 1999.
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NOTE 7 - SHAREHOLDERS' EQUITY
In November 1996, the Board of Directors authorized a program to
repurchase up to 750 shares of the Company's outstanding common shares. In April
1999, the Board of Directors authorized the repurchase of up to an additional
750 outstanding common shares. The Company repurchased approximately 105 and 22
shares, at a total cost of $1,056 and $272 during the three months ended June
30, 1999 and 1998, respectively.
In June 1999, the Company adopted an Employee Stock Purchase Plan under
which employees have a systematic long-term investment opportunity to own
Company stock. Shareholder approval for such adoption was obtained on July 22,
1999 and the plan will become effective January 1, 2000. In total 375 Corrpro
common shares are available for purchase under the plan.
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses,
gains, and losses that are excluded from net income but included as a component
of total shareholders' equity. Comprehensive income (loss) for the quarters
ended June 30, 1999 and June 30, 1998 was ($335) and ($1,257), respectively,
which is comprised of the effect of foreign currency translation adjustments in
accordance with 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 and Statements of Shareholders'
Equity as "Accumulated other comprehensive income (loss)".
NOTE 9 - BUSINESS SEGMENTS
In fiscal 1999, the Company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information", which changes the way the
Company reports information about its operating segments. The information for
all prior periods has been restated to conform with SFAS 131. The Company's
operating segments and a description of the products and services they provide
are described below:
Domestic Core Operations. The Domestic Core Operations consist of the
U.S. offices offering services which include contract research in various areas
of corrosion control, cathodic protection engineering services and general
corrosion engineering services associated with failure analysis, metallurgical
problems and material selection. The engineering services are provided to
private sector customers in the aerospace, defense, marine, chemicals, petroleum
and utilities industries and to governmental entities in connection with water
treatment and delivery systems, marine vessels, transit systems, weapons and
infrastructure assets. This sector also sells material and equipment in
conjunction with its services, and often sells these products to other
engineering and construction firms in connection with corrosion control
projects. Products sold include various cathodic protection anodes, rectifier
units and instrumentation, computer hardware and software for monitoring
corrosion, and accessory products.
9
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Canadian Operations. This segment resulted from the combination of
previously acquired Commonwealth Seager Group ("CSG") and UCC Corporation
("UCC") during fiscal 1995. Corrpro's Canadian Operations offer a combination of
expertise in engineering, construction and product supply in cathodic
protection. In addition, this operating unit provides material and equipment to
customers in the oil and gas industry with its primary focus on the needs of
pipeline operators. The Canadian Operations also specialize in pipeline
integrity issues, and designs internal inspection programs that are used to
detect corrosion and pipe weld flaws, clean pipelines, and confirm pipeline
orientation. The Canadian Operations also include the results of CSI, which was
acquired effective April 1, 1999.
European Operations. This segment provides corrosion engineering
services and equipment supply primarily to the marine, offshore and industrial
markets. In the marine market, this segment manufactures and supplies cathodic
protection systems for hulls and ballast tanks on new ships and those which are
in need of repair. In the offshore market, it provides cathodic protection
equipment for new and existing subsea pipelines, offshore drilling rigs and
production platforms. Having a manufacturing and distribution center in Europe
enables it to serve many of Europe's major offshore oil production areas. In the
industrial market, it offers corrosion engineering, cathodic protection
equipment and installation services.
Other Operations. This segment consists of all other businesses
including those in the Middle East, Asia and Australia as well as the corrosion
monitoring equipment business. The businesses in the Middle East, Asia and
Australia provide corrosion engineering services and equipment supply to the
marine, offshore and industrial markets. The corrosion monitoring equipment
business provides corrosion engineering services and equipment supply for
monitoring internal corrosion on gas and liquid pipelines, storage vessels, well
casings and refining and process equipment.
The Company's operations by segment are presented below:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenue:
Domestic Core Operations $24,761 $25,464
Canadian Operations 5,430 3,220
European Operations 3,950 6,188
Other Operations 9,010 9,856
------- -------
$43,151 $44,728
======= =======
Operating Profit:
Domestic Core Operations $ 4,532 $ 4,800
Canadian Operations 887 698
European Operations 274 473
Other Operations 173 69
Corporate Related Costs and Other (2,217) (1,972)
------- -------
$ 3,649 $ 4,068
======= =======
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain statements that constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors which might affect such forward-looking
statements include the Company's mix of products and services, timing of jobs,
the availability and value of larger jobs, the impact of weather on the
Company's operations, the Company's ability to successfully integrate acquired
businesses in a timely manner, the actual impact of the passing of the
underground storage tank upgrade deadline on the Company's business, the impact
of low energy prices on the Company's business and the impact of the Year 2000.
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1998
REVENUES
- --------
Revenues for the fiscal 2000 first quarter totaled $43.2 million, a
3.5% decline from the $44.7 million recorded in the fiscal 1999 first quarter.
The fiscal 2000 first quarter revenues include the results of the following
acquisitions subsequent to the effective dates of the transactions: Corrpro
Australia, effective July 1, 1998; Basco, effective August 1, 1998; D.C.
Corrosion, effective March 1, 1999; CSI Coating Systems ("CSI"), effective April
1, 1999.
The results of these acquisitions, in total, are no longer separable as
they have been integrated into the Company's operations. However, management
estimates that, excluding the impact of acquisitions, revenues were down
approximately 15% between years.
Fiscal 2000 first quarter revenues relating to the Domestic Core
Operations totaled $24.8 million compared to $25.5 million in the fiscal 1999
first quarter, a decrease of $0.7 million or 2.8%. The Domestic Core Operations
have been impacted by a slowdown in the underground storage tank ("UST") market.
The fiscal 1999 first quarter results benefited from a December 1998 regulatory
deadline relating to the UST market. During the fiscal 2000 first quarter,
UST-related revenues totaled approximately $2.0 million compared to
approximately $4.5 million in the prior-year period, a decrease of $2.5 million.
Excluding the impact of the UST market, the Domestic Core Operations grew
approximately 9% between years. This growth related to the Domestic Core
Operations' general engineering business as well as growth in the target areas
of above ground storage tanks, coatings engineering and electric power.
Fiscal 2000 first quarter revenues relating to the Canadian Operations
totaled $5.4 million compared to $3.2 million in the fiscal 1999 first quarter,
an increase of 68.6%. Excluding the impact of the acquisitions of D.C. Corrosion
and CSI, the Canadian Operation's revenues increased approximately 6% over the
prior-year period.
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Fiscal 2000 first quarter revenues relating to the European Operations
totaled $4.0 million compared to $6.2 million in the fiscal 1999 first quarter,
a decrease of 36.2%. Since early in fiscal 1999, this segment's operations have
been negatively impacted by fluctuating oil prices, which have significantly
decreased demand for its lower margin products in the North Sea region. Although
oil prices have increased in recent months, the demand for the segment's
products has not yet recovered.
Fiscal 2000 first quarter revenues relating to the Other Operations
total $9.0 million compare to $9.9 million in the fiscal 1999 first quarter, a
decrease of 8.6%. Current year results include Corrpro Australia, which was
acquired effective July 1, 1998. Excluding the impact of this acquisition, the
segment's revenues were down approximately 35% which relates to a decline in the
market for corrosion monitoring equipment, which has been impacted by low energy
prices, as well as weakness at the Company's Asian market.
As previously disclosed, the Company plans to exit the low margin
product business in both Europe and Asia. The Company is currently negotiating
transactions which, if successfully completed, would allow this objective to be
met.
GROSS PROFIT
- ------------
Gross profit margins for the fiscal 2000 first quarter totaled 32.5%
compared with 30.7% in the fiscal 1999 first quarter. Despite the 3.5% decrease
in revenues, gross profit dollars increased 2.2% between years. The improvement
in gross profit margins reflects the continued success of the Company's strategy
to increase the percentage of revenues generated from the higher-margin
engineering services side of the business. Service related revenues represented
approximately 63% of total revenues during the fiscal 2000 first quarter
compared to 56% in the prior-year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the fiscal
2000 first quarter totaled $10.4 million compared to $9.7 million in the
prior-year period, an increase of 7.5%. Excluding the impact of acquisitions,
management estimates that SG&A decreased approximately 6% as a result of the
Company's efforts to reduce overhead costs.
OPERATING INCOME
- ----------------
Operating income for the fiscal 2000 first quarter totaled $3.6 million
compared to $4.1 million for the fiscal 1999 first quarter, a decrease of 10.3%.
INTEREST EXPENSE
- ----------------
Interest expense totaled $1.3 million for the fiscal 2000 first quarter
compared to $0.9 million for the fiscal 1999 first quarter, an increase of $0.4
million or 47.7%. The increase relates primarily to the Company's use of debt to
finance the acquisitions that were completed over the past year.
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INCOME TAX PROVISION
- --------------------
The Company recorded a provision for income taxes of $0.9 million for
the fiscal 2000 first quarter compared to a provision of $1.3 million for the
fiscal 1999 first quarter. The effective tax rate was 40.0% for both the fiscal
2000 and fiscal 1999 first quarters.
NET INCOME
- ----------
Net income for the fiscal 2000 first quarter totaled $1.4 million
compared to $1.9 million in the prior-year period, a decrease of 26.4%. Earning
per share on a diluted basis totaled $0.18 in the first quarter compared to
$0.23 in the prior-year period, a decrease of 21.7%.
B. LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of $62.0 million
compared to $59.0 million at March 31, 1999, an increase of $3.0 million or
5.0%. The increase is primarily the result of seasonally higher levels of
business activity during the first quarter as compared to the prior fiscal year
fourth quarter. Based on its historical seasonality trends, the Company expects
working capital levels to continue to increase during the fiscal 2000 second
quarter. During the first quarter of fiscal 2000, cash provided by operating
activities was break-even compared to a use of cash of $8.0 million in the prior
year first quarter.
Cash used for investing activities totaled $5.8 million during fiscal
2000 which included $5.1 million related to the acquisition and $0.7 million for
capital expenditures. Cash generated by financing activities totaled $7.7
million during fiscal 2000 which included net borrowings of $8.5 million as well
as $1.1 million of cash used to repurchase common shares.
On March 30, 1999, the Company entered into a new three-year, $80
million unsecured domestic revolving credit facility. The credit facility
consists of an $80 million revolver which expires on April 30, 2002. Initial
borrowings under the credit facility were used to repay existing domestic bank
indebtedness of approximately $30.0 million.
In addition to the domestic bank credit facility, the Company has
various smaller lines of credit with foreign banks which totaled approximately
$5.3 million. Total availability under the domestic and foreign credit
facilities at June 30, 1999 was approximately $45.9 million. The Company used
proceeds from its domestic and foreign credit facilities along with cash on hand
to fund the fiscal 2000 acquisition. The Company was in compliance with all of
its debt covenants at June 30, 1999.
The Company believes that cash generated by operations and amounts
available under its domestic bank credit facility and foreign lines of credit
will be sufficient to finance the Company's working capital requirements and
capital expenditures through the next twelve months.
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C. EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSLATION
The Company does not believe that inflation has had a significant
effect on the Company's results of operations for the periods presented.
The Company has not been significantly affected by currency
fluctuations or foreign exchange restrictions. Management believes that these
risks resulting from the Company's increased foreign sales are manageable.
D. YEAR 2000
The Company has developed plans to address possible exposures related
to the Year 2000 issue. The plans have included assessment of the effect of Year
2000 issues on the services and products the Company provides, the processing
capabilities of the Company's computers and other internal information systems,
non-informational systems which effect the Company's operational capabilities,
and the key sources of supply of products and services to the Company. In
addition, the Company is addressing the status of its significant customers'
Year 2000 compliance.
STATE OF READINESS
- ------------------
The Company has substantially completed its review of products and
services which could experience Year 2000 issues. The Company's business of
providing corrosion control engineering and other services does not inherently
involve software-resident Year 2000 issues for Corrpro's customers. The
substantial majority of company products are not date sensitive. With the
exception of several software components for which upgrades are available,
Corrpro believes that, during their estimated useful lives, unmodified products
containing software should not experience Year 2000 issues when used as
intended.
In January 1999, the Company completed the implementation of a new
software upgrade which is utilized by the majority of its U.S. operations. In
addition to addressing the Year 2000 issue, the new software provides additional
capabilities and functionality. Assessments of the Year 2000 compliance of
software utilized by the Company's other operations has been substantially
completed and upgrades are being implemented, as required.
The Company has substantially completed the assessment of its
non-informational systems for Year 2000 compliance and is in the process of
determining the extent and scope of any remedial actions and impact on its
contingency plans. In addition, the Company has communicated with its key
suppliers, vendors and significant customers and requested information regarding
the status of their own Year 2000 compliance. Based on responses to date, the
Company has not been notified of any circumstances of its suppliers, vendors and
significant customers reasonably likely to have a material adverse impact on the
Company's operations.
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<PAGE> 15
COSTS
- -----
The cost of implementing the new software upgrade for the Company's
U.S. operations, including the cost of Year 2000 compliance which is not
separately determinable, totaled approximately $1.5 million which was incurred
in fiscal 1999. Such costs have not had a material adverse impact on the
Company's financial position, results of operations or cash flows. The majority
of these costs were incurred under capital projects that will result in
additional capabilities and functionality while also addressing the Year 2000
issues. The Company may incur other future Year 2000 costs which are not
expected to be material.
RISKS
- -----
If needed modifications or conversion of information and
non-information systems are not made on a timely basis, including third party
systems, or contingency plans not successfully implemented, the Company could
experience loss of revenue from customers whose operations are disrupted,
unavailability of materials, supplies, and services from its vendors whose
operations are disrupted, and difficulty in supplying its own products and
services on a timely basis. On a consolidated basis, no one customer accounts
for greater than 10% of the Company's revenue, and no one vendor supplies more
than 10% of the Company's purchases. On a regional or local basis, however, the
disruption of customer and vendor operations could more significantly adversely
affect such regional or local operations. In addition, if multiple customers or
vendors experienced disruption in their operations, the effect on the Company's
consolidated results could be materially impacted. The Company cannot quantify
how significant the impact of such disruption could be.
CONTINGENCY PLANS
- -----------------
To mitigate the impact of potential Year 2000 issues, the Company is in
the process of enhancing its disaster recovery plans and developing contingency
plans to address key business functions, including relations with third parties.
The Company expects to address possible unremediated internal Year 2000 issues
and further develop its contingency plans in the event of disruption of its
supplier or customer relations. These plans are expected to include identifying
alternate suppliers and vendors, developing alternative communication plans and
using manual back-up.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although in the Company's opinion the following claim is without merit
and will have no material effect on the Company, disclosure is being made in
order to comply with applicable requirements of the Securities and Exchange
Commission. The Company is a defendant in a complaint filed on November 12,
1998, as subsequently amended, in United States District Court, Northern
District of Ohio, Eastern Division. The lawsuit arises out of the adoption by
the Environmental Protection Agency ("EPA") and the American Society for Testing
and Materials ("ASTM") of regulations permitting non-invasive methods for
inspecting and testing underground storage tanks. Prior to the adoption of such
regulations, underground storage tanks were inspected by visual manned
inspections. After convening a task force to study the issue, the EPA and ASTM
recognized several other methods of tank assessment, including statistical and
analytical methods used by the Company and other corrosion control service
providers. The plaintiffs in the lawsuit, Armor Shield, Inc. and Doublewall
Retrofit Systems, Inc., have claimed that the methods used by the Company are
not as protective of human health and the environment as internal manned tank
inspection, that ASTM procedures were manipulated and that EPA approval was
obtained fraudulently. The plaintiffs, which provide internal manned inspection
and lining services and equipment, have claimed violations of federal and state
anti-trust laws, unreasonable restraint of trade, false advertising and unfair
competition, which allegedly caused injury to their businesses and property in
excess of $30 million. They are seeking damages and injunctive relief. The
complaint also names, among others, an executive officer of the Company and a
director of the Company. The Company believes that the claims are without merit
and has filed a motion to dismiss the anti-trust claims for failure to state a
claim and on the basis that there has been no injury to competition. The Company
denies any allegations of wrongdoing and is preparing to vigorously defend the
claims.
The Company is subject to other legal proceedings and claims which
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, the financial position or cash flows of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. No exhibits required
B. There were no reports on Form 8-K filed during the quarter
16
<PAGE> 17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORRPRO COMPANIES, INC.
(Registrant)
Date: August 12, 1999 /s/ Joseph W. Rog
--------------------------------
Joseph W. Rog
Chairman of the Board, President
and Chief Executive Officer
/s/ Neal R. Restivo
--------------------------------
Neal R. Restivo
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
17
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