UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission file number: 0-16749
CERBCO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1448835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3421 Pennsy Drive, Landover, Maryland 20785
(Address of principal executive offices) (Zip Code)
Registrant's telephone and fax numbers, including area code:
301-773-1784 (tel)
301-322-3041 (fax)
301-773-4560 (24-hour public information FaxVault System)
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 November 1, 1996, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,157,226
Class B Common Stock 310,730
Total 1,467,956
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
<CAPTION>
For the three months ended Sept. 30
1996 1995
Sales
<S> <C> <C>
Sales of products $7,786,551 $10,797,471
Sales of services and supplies 2,897,902 2,482,213
----------- ------------
TOTAL SALES 10,684,453 13,279,684
----------- ------------
Costs and Expenses:
Cost of products sold 6,654,307 7,458,528
Cost of services and supplies 1,405,323 1,240,666
Selling, general and administrative expenses 2,243,025 2,357,211
----------- -----------
Total Costs and Expenses 10,302,655 11,056,405
----------- -----------
Operating Profit 381,798 2,223,279
Investment Income 130,750 72,642
Interest Expense (8,099) (8,529)
Other Income - net 9,077 62,982
----------- ------------
Earnings Before Incomes Taxes and Non-Owned Interests 513,526 2,350,374
Provision for Income Taxes 209,000 835,000
----------- -----------
Earnings Before Non-Owned Interests 304,526 1,515,374
Non-Owned Interests in Earnings of Consolidated Subsidiaries 35,113 924,557
----------- -----------
NET EARNINGS $ 269,413 $ 590,817
=========== ===========
Net Earnings per Share of Common Stock $0.18 $0.40
===== =====
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Sept. 30, 1996 June 30, 1996
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $10,511,317 $ 10,234,224
Accounts receivable 8,515,723 8,497,050
Inventories 3,041,829 3,336,052
Prepaid and refundable taxes 304,096 135,242
Deferred income taxes 133,000 133,000
Prepaid expenses and other 547,019 359,631
----------- -----------
Total Current Assets 23,052,984 22,695,199
----------- -----------
Property, Plant and Equipment - at cost
Less accumulated depreciation of $12,804,991 at
September 30, 1996 and $12,394,724 at June 30, 1996 11,240,735 11,291,818
----------- -----------
Other Assets:
Excess of acquisition cost over value of net assets acquired
- net of accumulated amortization of $1,655,054 at September 30, 1996
and $1,615,227 at June 30, 1996 4,688,835 4,728,662
Cash surrender value of life insurance 498,974 498,974
Deferred income taxes 41,000 41,000
Deposits and other 187,659 195,082
----------- -----------
Total Other Assets 5,416,468 5,463,718
----------- -----------
Total Assets $39,710,187 $39,450,735
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Sept. 30, 1996 June 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $3,564,353 $3,629,255
Income taxes payable 640,082 623,618
Deferred revenue 499,713 500,643
Current portion of long-term debt 0 5,104
Current portion of capital lease obligations 42,245 50,176
----------- -----------
Total Current Liabilities 4,746,393 4,808,796
----------- -----------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 126,877 135,844
Deferred income taxes 837,000 818,000
Other long-term liabilities 270,188 176,955
----------- ------------
Total Long-term Liabilities 1,234,065 1,130,799
----------- ------------
Total Liabilities 5,980,458 5,939,595
----------- ------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 16,432,715 16,509,371
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,157,226 shares (at Sept. 30, 1996) 115,722
Issued and outstanding: 1,157,101 shares (at June 30, 1996) 115,710
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 310,730 shares (at Sept. 30, 1996) 31,073
Issued and outstanding: 310,855 shares (at June 30, 1996) 31,085
Additional paid-in capital 7,457,903 7,432,071
Retained earnings 9,692,316 9,422,903
----------- -----------
Total Stockholders' Equity 17,297,014 17,001,769
----------- -----------
Total Liabilities and Stockholders' Equity $39,710,187 $39,450,735
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
For the three months ended Sept. 30
1996 1995
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 269,413 $ 590,817
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 506,435 476,763
Amounts attributable to non-owned interests 35,113 924,557
Deferred income taxes 19,000 (74,000)
(Increase) decrease in other assets 2,423 (14,701)
Increase in long-term liabilities 93,233 18,093
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (18,673) (2,058,830)
(Increase) decrease in inventories 294,223 (208,383)
(Increase) decrease in prepaid expenses and other current assets (356,242) (184,627)
Increase (decrease) in accounts payable and accrued expenses 112,742 (96,163)
Increase (decrease) in income taxes payable 16,464 413,484
Increase (decrease) in deferred revenue (930) (28,018)
----------- ----------
Net Cash Provided by (Used in) Operating Activities 973,201 (241,008)
----------- ----------
Cash Flows from Investing Activities:
Capital expenditures (410,524) (300,637)
Increase in investment in subsidiary (85,938) 0
Cash balance of majority controlled partnership prior to consolidation 0 241,094
Redemption (purchase) of temporary investments - net 0 779,033
----------- -----------
Net Cash Provided by (Used in) Investing Activities (496,462) 719,490
----------- -----------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations and long-term borrowings (22,002) (26,482)
Dividends paid (177,644) (177,643)
----------- -----------
Net Cash Used in Financing Activities (199,646) (204,125)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 277,093 274,357
Cash and Cash Equivalents at Beginning of Period 10,234,224 5,197,549
----------- -----------
Cash and Cash Equivalents at End of Period $10,511,317 $ 5,471,906
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 8,099 $ 8,529
=========== ===========
Income taxes paid $ 902,390 $ 514,277
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Capitol equipment acquired under capital lease obligations $ 0 $ 72,708
=========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Financial Information
The Condensed Consolidated Balance Sheet as of September 30, 1996, the
Condensed Consolidated Statements of Earnings for the three months ended
September 30, 1996 and 1995, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1996 and 1995 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1996 (unaudited) has been derived from the Company's June 30, 1996
audited financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September 30,
1996 and for all periods presented have been made.
The condensed consolidated financial statements include the accounts of
CERBCO, Inc. ("CERBCO"); its majority-owned subsidiary, Capitol Office
Solutions, Inc. ("Capitol Office Solutions" or "Capitol"), formerly known as
Capitol Copy Products, Inc. ("Capitol Copy"); and its majority-controlled
subsidiary, Insituform East, Incorporated ("Insituform East"). All significant
intercompany accounts and transactions have been eliminated. The Condensed
Consolidated Statement of Earnings and the Condensed Consolidated Statement of
Cash Flows for the three months ended September 30, 1995 have been restated to
include consolidation of the financial activities of MIDSOUTH Partners beginning
July 1, 1995.
These statements have been prepared in accordance with the instructions
to Form 10-Q and therefore do not necessarily include all information and
footnotes necessary to a presentation of the financial position, the results of
operations and the cash flows, in conformity with generally accepted accounting
principles. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the audited financial
statements and notes thereto included in the CERBCO annual report on Form 10-K
for the fiscal year ended June 30, 1996. Operating results for interim periods
are not necessarily indicative of operating results for an entire fiscal year.
2. Earnings Per Share
Earnings per share data have been computed based upon the weighted
average number of common shares outstanding and common share equivalents
outstanding during each period. The following numbers of shares have been used
in the computations:
For the three months ended Sept. 30
1996 1995
1,467,956 1,461,956
========= =========
3. Accounts Receivable
<TABLE>
Accounts receivable consist of:
<CAPTION>
Sept. 30, 1996 June 30, 1996
<S> <C> <C>
Due from municipal and commercial customers $8,223,192 $8,113,075
Miscellaneous 322,531 426,831
---------- ----------
8,545,723 8,539,906
Less: Allowance for doubtful accounts (30,000) (42,856)
---------- ----------
$8,515,723 $8,497,050
========== ==========
</TABLE>
4. Inventories
<TABLE>
Inventories consist of:
<CAPTION>
Sept. 30, 1996 June 30, 1996
<S> <C> <C>
Pipeline rehabilitation materials $1,478,119 $1,159,532
Copier and facsimile equipment 988,416 1,662,375
Copier and facsimile supplies 203,846 182,475
Copier and facsimile parts 371,448 331,670
---------- ----------
$3,041,829 $3,336,052
========== ==========
</TABLE>
5. Equity in Insituform East
At September 30, 1996, CERBCO beneficially held 1,127,500 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 27.8% of the Common Stock, 99.5%
of the Class B Common Stock, 32.7% of the total equity and 58.1% of the total
voting power of all outstanding classes of Insituform East common stock. Holders
of Class B Common Stock, voting separately as a class, have the right to elect
the remaining members of the Board of Directors after election of not less than
25% of such members by holders of shares of Common Stock, voting separately as a
class.
From time to time, Insituform East issues additional shares of stock as
a result of stock dividends and exercised stock options. Changes in capital
structure resulting from such additional stock issues decrease CERBCO's equity
ownership. No additional shares were issued during the three months ended
September 30, 1996. If all the options outstanding at September 30, 1996 were
exercised, the resulting percentages of CERBCO's equity ownership and total
voting power would be 30.0% and 55.1%, respectively.
From time to time, Insituform East purchases shares of its common stock
for treasury. Changes in capital structure resulting from such stock purchases
increase CERBCO's equity ownership. Insituform East did not purchase any shares
during the three months ended September 30, 1996.
6. Equity in Capitol Office Solutions
At September 30, 1996, CERBCO beneficially held 800 shares, and Capitol
Office Solutions's president held 400 shares, of Capitol Office Solutions Class
B Stock, representing 66 2/3% and 33 1/3%, respectively, of the one outstanding
class of Capitol Office Solutions stock.
7. Accounts Payable and Accrued Liabilities
<TABLE>
Accounts payable and accrued liabilities consist of:
<CAPTION>
Sept. 30, 1996 June 30, 1996
<S> <C> <C>
Accounts payable $1,480,873 $1,075,893
Accrued compensation and related expenses 2,083,480 2,302,320
Dividends payable 0 251,042
---------- ----------
$3,564,353 $3,629,255
========== ==========
</TABLE>
8. Contingencies
As previously reported by the Company, in March 1990, the controlling
stockholders of the Company, Messrs. George Wm. Erikson and Robert W. Erikson
(together, the "Eriksons"), executed a letter of intent and subsequently
executed four amendments thereto (collectively referred to herein as the "Letter
of Intent") with Insituform Technologies, Inc. ("ITI") to effect a sale of their
controlling interest in the Company to ITI for $6,000,000 (the "Proposed
Transaction"). The Proposed Transaction, if consummated, would have had the
effect of making ITI the controlling stockholder of the Company, and,
indirectly, of each of the Company's three direct subsidiaries at the time,
Insituform East, Capitol Copy, and CERBERONICS. In September 1990, the Eriksons
informed the Company that the Letter of Intent had expired without consummation
of any transaction, that it would not be further extended, that negotiations had
ceased, and that the Eriksons had no further intention at the time of pursuing
the proposed sale of their controlling interest in the Company to ITI.
In August 1990, a complaint against the Company and the Eriksons was
filed in the Delaware Court of Chancery (the "Delaware Complaint") by two
stockholders of the Company, on their own behalf and derivatively on behalf of
the Company, which sought (i) damages against the individual defendants for
alleged breach of fiduciary duties in an amount not less than $6,000,000,
together with interest thereon from March 12, 1990; (ii) to permanently enjoin
the Eriksons from completing any transaction with ITI similar in substance to
the Proposed Transaction; (iii) a declaration of the invalidity of the 1982
authorization for and issuance of the Company's Class B Common Stock, and,
therefore, of the entitlement of holders of Class B Common Stock to elect any
members of the Company's Board; (iv) a declaration of the invalidity of the 1990
election of the Company's directors and the issuance of new proxy materials that
fully and fairly disclose all facts which plaintiffs claim are material to the
election of such directors; (v) an award to the plaintiffs of their costs of
bringing the action, including reasonable attorneys' fees; and (vi) an award to
plaintiffs of such further relief as the Court of Chancery deemed appropriate.
In addition, the Complaint asserted a claim against the individual defendants
alleging that the Company had forgone a corporate opportunity by the continued
failure to pursue a transaction with ITI.
All but one of the plaintiffs' claims subsequently were dismissed. The
claim remaining in the litigation was plaintiffs' allegation that the Proposed
Transaction was an opportunity belonging to the Company and that the Eriksons
breached their duty to the Company by precluding the Company from taking
advantage of that opportunity so that the Eriksons might have a chance to do so.
Trial in this matter was held beginning February 21, 1995.
Following post-trial briefing and argument, Chancellor Allen issued an
opinion on August 9, 1995, in which he ruled in favor of the Eriksons. The court
determined that, while the Eriksons failed in certain limited respects to meet
the standards of loyalty required of them under Delaware corporate law, that
"deviation from proper corporate practice" neither caused injury to CERBCO nor
resulted in any substantial gain to the Eriksons. The Court also found that the
Eriksons met their burden of showing that their conduct was "wholly fair to the
corporation."
On August 25, 1995, the Court of Chancery issued its Memorandum and
Order on Final Judgment and a corresponding Final Order and Judgment, which
latter document formally entered judgment in favor of the Eriksons and denied in
toto the plaintiffs' request for legal fees and expenses totaling $1,513,499.
The Court concluded that the litigation conferred no substantial benefit on
CERBCO, so that it would be inappropriate to require CERBCO and its stockholders
to share the costs that plaintiffs incurred.
The plaintiffs filed a Notice of Appeal with the Delaware Supreme Court
on August 30, 1995. Briefing was completed on December 6, 1995. Oral argument
was held on January 18, 1996. On April 10, 1996, the Delaware Supreme Court
issued its decision. The Court ruled that "[t]he Eriksons were entitled to
profit from their control premium and to that end compete with CERBCO but only
after informing CERBCO of the opportunity" for a transaction with ITI. Although
the Eriksons were deemed to have breached their duty of loyalty, the Supreme
Court affirmed the finding of the Court of Chancery that there was no viable
transaction that could take place between CERBCO and ITI, given the Eriksons'
ability to veto such a transaction as controlling shareholders of CERBCO.
Therefore, no damages could be awarded for the loss of a transaction that had a
"zero probability of occurring due to the lawful exercise of statutory rights."
The Supreme Court did rule, however, that the Eriksons were liable to CERBCO for
$75,000 they received from ITI for extending the Letter of Intent (the
"Extension Fee"), and had to reimburse the expenses, if any, that CERBCO
"incurred to accommodate the Eriksons' pursuit of their own interests" prior to
the abandonment of the proposed transaction with ITI. The Supreme Court
concluded that the Chancery Court's opinion was therefore "affirmed in part and
reversed in part, and this matter is remanded to the Court of Chancery for
further determination of damages. Once those damages are fixed, the [Chancery]
court should proceed to examine anew any petition for counsel fees on behalf of
the plaintiffs." The Eriksons filed motions for reargument and for rehearing en
banc, which motions the Supreme Court denied, and on May 15, 1996, the case was
remanded to the Court of Chancery.
On May 20, 1996, the plaintiffs filed a motion for post-remand relief
in the Court of Chancery, seeking (i) a "disgorgement of benefits" allegedly
received by the Eriksons in the aggregate amount of $451,000; (ii) "damages
attributable to the Eriksons' breach of fiduciary duty" in an aggregate amount
of almost $1.4 million; and (iii) certain injunctive relief against the Eriksons
with respect to "any further negotiations with ITI respecting ITI's interest in
obtaining control of [Insituform East]." The Eriksons and the plaintiffs filed
briefs in connection with the plaintiffs' motion. Oral argument on the motion
was presented to the Court of Chancery on July 15, 1996.
On September 13, 1996, the Court of Chancery issued its decision on
remand. The Court ruled that the Eriksons were obligated to pay CERBCO the
principal amount of $188,200, plus interest, representing legal fees paid to the
law firm of Morgan, Lewis & Bockius as counsel for the special committee of the
CERBCO Board of Directors that was appointed in 1990 in connection with the
Proposed Transaction. The Court of Chancery also ruled that the Eriksons were
obligated to pay CERBCO interest on the $75,000 Extension Fee the Supreme Court
had ordered the Eriksons to pay to CERBCO. All of the plaintiffs' other claims
were rejected, except that the Court ruled it was premature to determine
plaintiffs' claim that the Eriksons were obligated to reimburse CERBCO for
advances to them of the defense costs of the litigation. The order and judgment
embodying the Court's rulings have not yet been entered and, accordingly, the
time for filing any appeals from the Court of Chancery's decision on remand has
not yet commenced. The Eriksons have advised the Company they are likely to
appeal the judgment. On October 2, 1996, the plaintiffs filed a petition seeking
legal fees and expenses totaling $1,663,266. Both CERBCO and the Eriksons filed
objections, and the Court of Chancery is expected to rule on the petition
shortly.
As previously reported by the Company, in January 1993, a separate
lawsuit against the partners in the law firm of Rogers & Wells and the Company,
arising out of the subject matter of the Delaware litigation, was filed in the
Superior Court of the District of Columbia (the "D.C. Complaint"). The
plaintiffs are the same two stockholders, and a former director of the Company,
and have alleged that Rogers & Wells breached its duty of loyalty and care to
the Company by representing allegedly conflicting interests of the Eriksons in
the Proposed Transaction with ITI. The plaintiffs also claim that Rogers & Wells
committed malpractice by allegedly making misrepresentations to the Company's
Board and allegedly failing to properly inform the Company's Board. The
plaintiffs claim that the conduct of Rogers & Wells caused the Company to lose
an opportunity to sell its control of Insituform East to ITI, caused the Company
to incur substantial expense, and unjustly enriched Rogers & Wells. The D.C.
complaint seeks to recover from Rogers & Wells (i) damages in an amount equal to
all fees paid to Rogers & Wells, (ii) damages in an amount not less than
$6,000,000 for the loss of the opportunity for the Company to sell its control
of Insituform East to ITI, and (iii) punitive damages.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay in the proceedings was granted until after the Delaware
trial. After the Court of Chancery's August 9, 1995 opinion was rendered, the
parties to the Superior Court action filed status reports. On November 13, 1995,
plaintiffs agreed to a stay in the Superior Court action pending the outcome of
the appeal to the Delaware Supreme Court. In accordance with a status report
filed by the parties with the Superior Court on or about June 28, 1996, the stay
of the District of Columbia action was continued at least until such time as the
Delaware Court of Chancery ruled upon the plaintiffs' pending motion for post-
remand relief. As of this date, the District of Columbia action remains stayed.
Management believes ultimate resolution of these matters will not have
a material effect on the financial statements. Accordingly, no provision for
these contingencies has been reflected therein.
CERBCO is involved in other contingencies, none of which could, in the
opinion of management, materially affect the Company's financial position or
results of operations.
9. Segment Data and Reconciliation
CERBCO's operations are classified into two principal industry
segments: pipeline rehabilitation and copier equipment products and services.
The following is a summary of pertinent industry segment information. General
corporate expenses include items which are of an overall holding company nature
and are not allocated to the segments.
<TABLE>
<CAPTION>
(in thousands) For the three months ended Sept. 30
-----------------------------------
1996 1995
---- ----
Sales to Unaffiliated Customers:
<S> <C> <C>
Pipeline rehabilitation $ 5,321 $ 8,471
Copier equipment products and services 5,363 4,809
------- -------
Total sales $10,684 $13,280
======= =======
Earnings (Loss) before Income Taxes:
Pipeline rehabilitation $ (592) $ 1,252
Copier equipment products and services 1,119 1,082
General corporate expenses (145) (111)
------- -------
Operating Profit 382 2,223
Other income 180 137
Other expenses (48) (10)
------- -------
Earnings before income taxes $ 514 $ 2,350
======= =======
Net Earnings (Loss) Contribution by Segment:
Pipeline rehabilitation $ (97) $ 212
Copier equipment products and services 500 446
Corporate (134) (67)
------- -------
Net earnings $ 269 $ 591
======= =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company realized consolidated net earnings of $269,413 ($.18 per
share) from $10.7 million in sales for the first quarter of fiscal year 1997, as
compared to consolidated net earnings of $590,817 ($.40 per share) from $13.3
million in sales for the first quarter of fiscal year 1996. The decrease in
comparable period results is attributable to a loss contribution from Insituform
East, the Company's pipeline rehabilitation segment. The Condensed Consolidated
Statement of Earnings for the first quarter of fiscal year 1996 has been
restated to reflect comparable consolidation of Insituform East's now
majority-controlled subsidiary, MIDSOUTH Partners.
Insituform East attributed its unfavorable first quarter operating
results to a 37.2% decrease in sales as compared to the first quarter of the
previous fiscal year, materially as a result both of the timing of work releases
and of the low workable backlog levels in its licensed territory. Insituform
East's total backlog value of all uncompleted and multi-year contract awards was
approximately $17.4 million at September 30, 1996 as compared to $12.8 million
at September 30, 1995. The twelve-month backlog at September 30, 1996 was
approximately $13.1 million as compared to $12.5 million at September 30, 1995.
The total backlog value of all uncompleted and multi-year contracts at September
30, 1996 and 1995 includes work not estimated to be released and installed
within twelve months, as well as potential work included in term contract awards
which may or may not be fully ordered by contract expiration. Backlog figures at
specific dates, however, are not necessarily indicative of sales and earnings
for future periods due to the irregular timing and receipt of larger annual term
contract renewals and other large project awards. While there can be no
assurances regarding future operating performance, based on the volume and mix
of its immediately workable backlog, Insituform East presently anticipates
favorable results over the remaining three quarters of fiscal year 1997.
Capitol Office Solutions, the Company's copier and facsimile equipment
products and services segment, continued to experience increased sales and
earnings in the first quarter of fiscal year 1997, primarily as a result of
continued increases in both its copier equipment sales, and service and supply
activities. While again there can be no assurances, sales revenues and earnings
results are anticipated to remain favorable, and the Company believes that the
future prospects of this majority-owned subsidiary remain excellent.
CERBCO's current earnings remain impacted by legal fees and expenses
related to the demands made of, and derivative litigation being continued
against, the Company by two associated, minority stockholders in connection with
the unconsummated private sale of a controlling interest in the Company
abandoned in September 1990. In the first quarter of fiscal year 1997, CERBCO
experienced unallocated general corporate expenses in the amount of $145,265 of
which approximately $27,811 were legal fees and expenses in connection with the
derivative litigation. From inception in 1990 through September 30, 1996, such
legal fees and expenses totaled approximately $2.2 million. Any outcome that
results in an award to plaintiffs of their legal fees and expenses could have a
material adverse effect on the future earnings of the Company. For additional
information on the status of this litigation, see Part I, Item 1, "Notes to
Condensed Consolidated Financial Statements (unaudited) - Note 8.
Contingencies."
Results of Operations
First Quarter ended 9/30/96 Compared with First Quarter Ended 9/30/95
Consolidated sales decreased $0.3 million (3.0%) in the first quarter
of fiscal year 1997 as compared to the first quarter of fiscal year 1996.
Insituform East's pipeline rehabilitation sales decreased $3.2 million (37.2%),
due primarily to the timing of then low workable backlog levels experienced
throughout the first quarter of fiscal year 1997. East sales decreased $2.3
million (37.4%); MIDSOUTH Partners sales decreased $0.9 million (36.6%). Sales
of copier equipment products and services by Capitol increased $0.5 million
(11.5%) to $5.4 million, as equipment sales and service and supply revenues
increased 6.0% and 16.7%, respectively. The increases in both areas reflect a
continuing expansion in Capitol's customer base.
Consolidated operating profit decreased $1.8 million (82.8%) in the
first quarter of fiscal year 1997 as compared to the first quarter of fiscal
year 1996, primarily as a result of the operating loss of Insituform East.
Insituform East's cost of sales decreased 19.4%, a smaller percentage decrease
than the decrease in its sales and, as a result, gross profit as a percentage of
sales decreased from 31.0% to 11.5%. The decrease in gross profit as a
percentage of sales is due primarily to absorption of semi-fixed costs over a
lower sales volume and, to a lesser extent, reduced comparable period margins on
installation contracts performed by MIDSOUTH Partners. Insituform East's
selling, general and administrative expenses decreased $0.2 million (12.4%) as a
result of lower costs to support reduced production activities. Capitol's
operating profit increased 3.4%. Capitol's cost of sales increased 17.3%, a
larger percentage increase than the increase in its sales and, as a result,
gross profit as a percentage of sales decreased from 40.7% to 37.6%. This
decrease in gross profit as a percentage of sales is due primarily to a decrease
in the gross profit margin on equipment sales. Capitol's selling, general and
administrative expenses only increased 2.5%, a smaller increase than its
increase in sales, to partially offset its decreased gross profit margin.
Liquidity and Capital Resources
The Company's operating activities provided approximately $1.0 million
in cash during the first three months of fiscal year 1997, primarily as a result
of three month net earnings, plus depreciation and amortization expenses that
did not require the outlay of cash. Cash provided by a decrease in Capitol's
inventories was offset by an increase in Insituform East's inventories and its
prepaid taxes and other prepaid expenses.
Net cash in the amount of $0.5 million was used in investing activities
in the first three months of fiscal year 1997, primarily from capital
expenditures by Insituform East. The parent holding company, CERBCO, expended
$85,938 to purchase 27,500 shares of Insituform East's Common stock in a private
transaction.
Net cash used in financing activities was approximately $0.2 million in
the first three months of fiscal year 1997, primarily due to the payment of
dividends by Insituform East.
The Company's liquidity remained strong, as its cash position increased
$0.3 million during the three months ended September 30, 1996. Working capital
increased $0.4 million, and the Company's current ratio improved from 4.7 to 1.0
to 4.9 to 1.0 during the first three months of fiscal year 1997.
CERBCO believes that its two operating subsidiaries, Insituform East
and Capitol Office Solutions, have existing cash, open bank lines of credit or
borrowing potential against unencumbered assets sufficient to meet the
respective cash flow requirements of each company. Insituform East has available
as undrawn the amount of $3.0 million on its individual line of credit. Capitol
Office Solutions and the parent holding company, CERBCO, do not have separate
bank lines of credit, but have cash reserves in excess of $4.5 million and $2.9
million, respectively, which are believed to be adequate to meet their
respective cash flow requirements in the foreseeable future, including
continuing legal fees and expenses of the parent in connection with the
stockholder litigation discussed above in the Overview and Outlook section of
this item. Other than set out in the aforementioned Note 8, the Company cannot,
of course, predict the outcome of pending litigation remanded to the Court of
Chancery. Any outcome that results in an award to plaintiffs of their legal fees
and expenses, however, could have a material adverse effect on the future
liquidity of the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 1996, Inliner U.S.A. and CAT Contracting, Inc.
(collectively, "plaintiffs") filed an antitrust suit against Insituform
Technologies, Inc. ("ITI") and Insituform East (collectively, "defendants") in
United States District Court for the Southern District of Texas, Houston
Division, alleging violations by ITI (including all of its subsidiary licensees)
and Insituform East of Sections 1 and 2 of the Sherman Act, Section 43(a) of the
Lanham Act, Section 15.05 of the Texas Business and Commerce Code, tortious
interference with contracts and business disparagement. Plaintiffs are seeking
from the defendants an unspecified amount of compensatory damages, treble
damages and attorneys' fees, as well as punitive damages of at least $50
million. Insituform East, which has not yet filed its answer to the complaint,
believes it has strong defenses to, and will vigorously contest, the suit.
Although the ultimate outcome and consequences of the suit cannot be ascertained
at this time and the results of legal proceedings cannot be predicted with
certainty, the management of Insituform East has indicated that it believes the
suit is meritless and will not have a material adverse effect on its financial
condition or the results of operations.
See Part I, Item 1, "Notes to Condensed Consolidated Financial
Statements (unaudited) - Note 8. Contingencies" for details concerning (a) a
previously disclosed lawsuit in the Court of Chancery of the State of Delaware
currently on remand from the Delaware Supreme Court, and (b) a previously
disclosed lawsuit pending in the Superior Court of the District of Columbia.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
99 - CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the three months ended September 30, 1996;
Balance Sheet Information; and Consolidating Elimination Entries
as of September 30, 1996.
(b) Reports on Form 8-K:
None.
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.
Date: November 14, 1996
CERBCO, Inc.
(Registrant)
/s/ ROBERT W. ERIKSON
Robert W. Erikson
President
(Principal Financial Officer)
/s/ ROBERT F. HARTMAN
Robert F. Hartman
Vice President & Controller
(Principal Accounting Officer)
<PAGE>
Exhibits to CERBCO, Inc. Form 10-Q
Exhibit 27. CERBCO, Inc. Financial Data Schedule
Exhibit 99. CERBCO, Inc. Consolidating Schedules: Statement
of Earnings Information for the Three Months Ended
September 30, 1996; Balance Sheet Information; and
Consolidating Elimination Entries as of
September 30, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000826821
<NAME> CERBCO, INC.
<MULTIPLIER> 1,000
<CAPTION>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 10,511
<SECURITIES> 0
<RECEIVABLES> 8,546
<ALLOWANCES> 30
<INVENTORY> 3,042
<CURRENT-ASSETS> 23,053
<PP&E> 24,046
<DEPRECIATION> 12,805
<TOTAL-ASSETS> 39,710
<CURRENT-LIABILITIES> 4,746
<BONDS> 0
<COMMON> 147
0
0
<OTHER-SE> 17,150
<TOTAL-LIABILITY-AND-EQUITY> 39,710
<SALES> 10,684
<TOTAL-REVENUES> 10,684
<CGS> 8,060
<TOTAL-COSTS> 8,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 514
<INCOME-TAX> 209
<INCOME-CONTINUING> 269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 269
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
EXHIBIT 99
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East, Capitol Office
Consolidated Eliminations Unconsolidated Incorporated Solutions, Inc.
<S> <C> <C> <C> <C> <C> <C>
Sales $10,684,453 $0 $0 $5,320,770 $5,363,683
----------- --------- ------- ---------- ----------
Costs and Expenses:
Cost of sales 8,059,630 0 0 4,710,687 3,348,943
Selling, general and
administrative expenses 2,243,025 0 145,265 1,202,441 895,319
---------- --------- ------- --------- ---------
Total Costs and Expenses 10,302,655 0 145,265 5,913,128 4,244,262
---------- --------- ------- --------- ---------
Operating Profit (Loss) 381,798 0 (145,265) (592,358) 1,119,421
Investment Income 130,750 0 33,016 46,541 51,193
Interest Expense (8,099) 0 0 (6,293) (1,806)
Other Income (Expense) - net 9,077 0 (21,967) 48,904 (17,860)
----- --------- ------- ------ -------
Earnings (Loss) Before Income
Taxes and Non-Owned Interests 513,526 0 (134,216) (503,206) 1,150,948
Provision for Income Taxes 209,000 0 0 (191,000) 400,000
------- -------- --------- -------- -------
Earnings (Loss) Before Non-Owned
Interests 304,526 0 (134,216) (312,206) 750,948
Non-Owned Interests in Earnings of
Consolidated Subsidiaries 35,113 (A) 50,456 0 (15,343) 0
-------- -------- --------- --------- --------
NET EARNINGS $269,413 $(50,456) $(134,216) $(296,863) $750,948
======== ======== ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
SEPTEMBER 30, 1996
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East, Capitol Office
Consolidated Eliminations Unconsolidated Incorporated Solutions, Inc.
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $10,511,317 $0 $2,858,340 $3,172,601 $4,480,376
Accounts receivable 8,515,723 0 105 6,026,898 2,488,720
Inventories 3,041,829 0 0 1,478,119 1,563,710
Prepaid and refundable taxes 304,096 0 48,292 255,804 0
Deferred income taxes 133,000 0 0 0 133,000
Prepaid expenses and other 547,019 0 0 437,292 109,727
---------- ---------- ---------- ---------- ---------
TOTAL CURRENT ASSETS 23,052,984 0 2,906,737 11,370,714 8,775,533
Investment in and Advances to
Subsidiaries:
Investment in subsidiaries 0 (B) (13,695,837) 13,695,837 0 0
Intercompany receivables and
payables 0 0 4,800 5,795 (10,595)
Property, Plant and Equipment - net
of accumulated depreciation 11,240,735 0 93,452 10,949,484 197,799
Other Assets:
Excess of acquisition cost over
value of net assets acquired -
net 4,688,835 (B) 2,474,409 0 0 2,214,426
Cash surrender value of life
insurance 498,974 0 498,974 0 0
Deferred income taxes 41,000 0 0 0 41,000
Deposits and other 187,659 0 62,837 101,000 23,822
------- ------------ ----------- ----------- -----------
TOTAL ASSETS $39,710,187 $(11,221,428) $17,262,637 $22,426,993 $11,241,985
=========== ============ =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $4,204,435 $0 $99,064 $2,872,821 $1,232,550
Deferred revenue 499,713 0 0 0 499,713
Current portion of capital lease
obligations 42,245 0 0 28,854 13,391
--------- --------- -------- ---------- ----------
TOTAL CURRENT LIABILITIES 4,746,393 0 99,064 2,901,675 1,745,654
Long-Term Liabilities:
Capital lease obligations 126,877 0 0 107,339 19,538
Deferred income taxes 837,000 0 0 837,000 0
Accrued SERP liability 270,188 0 270,188 0 0
--------- --------- ------- ---------- ----------
TOTAL LIABILITIES 5,980,458 0 369,252 3,846,014 1,765,192
--------- --------- ------- --------- ---------
Non-Owned Interests: 16,432,715 (A)(B) 14,093,725 0 2,338,990 0
---------- ---------- --------- --------- ---------
Stockholders' Equity:
Common stock 115,722 (B) (175,486) 115,722 175,486 0
Class B stock 31,073 (B) (12,024) 31,073 11,904 120
Additional paid-in capital 7,457,903 (B) (4,750,304) 7,457,903 4,000,424 749,880
Retained earnings 9,692,316 (B)(C)(21,566,952) 9,288,687 13,243,788 8,726,793
Treasury stock 0 (B) 1,189,613 0 (1,189,613) 0
----------- ----------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 17,297,014 (25,315,153) 16,893,385 16,241,989 9,476,793
----------- ------------ ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $39,710,187 $(11,221,428) $17,262,637 $22,426,993 $11,241,985
=========== ============ =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
SEPTEMBER 30, 1996
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Non-owned interests in earnings of subsidiaries $50,456
Non-owned interests $50,456
To record non-owned interests in earnings of subsidiaries
for the three months ended September 30, 1996.
(B)
Common stock $175,486
Class B stock 12,024
Additional paid-in capital 4,750,304
Retained earnings 21,516,496
Excess of acquisition cost over value of net assets acquired 2,474,409
Treasury stock $1,189,613
Non-owned interests 14,043,269
Investment in subsidiaries 13,695,837
To eliminate investments in consolidated subsidiaries.
(C)
Retained earnings $50,456
Current year earnings adjustments $50,456
To close out impact of current quarter's statement of earnings.
</TABLE>
