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, 1997
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 3, 1997, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,186,726
Class B Common Stock 296,230
Total 1,482,956
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements...................................................3
Condensed Consolidated Statements of Earnings for the
Three Months Ended September 30, 1997 and September 30,
1996 (unaudited).......................................................3
Condensed Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997 (unaudited)........................................4-5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1997 and September 30,
1996 (unaudited).......................................................6
Notes to Condensed Consolidated Financial Statements
(unaudited).........................................................7-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................11-12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................13
Item 2. Changes in Securities.................................................13
Item 3. Defaults upon Senior Securities.......................................13
Item 4. Submission of Matters to a Vote of Security Holders...................13
Item 5. Other Information.....................................................13
Item 6. Exhibits and Reports on Form 8-K......................................13
<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
1997 1996
<S> <C> <C>
Sales $9,148,285 $5,320,770
---------- ----------
Costs and Expenses:
Cost of sales 6,370,077 4,710,687
Selling, general and administrative expenses 1,539,128 1,347,706
---------- ----------
Total Costs and Expenses 7,909,205 6,058,393
---------- ----------
Operating Profit (Loss) 1,239,080 (737,623)
Investment Income 245,653 79,557
Interest Expense (32,466) (6,293)
Other Income - net 117,904 26,937
---------- ----------
Earnings (Loss) Before Non-Owned Interests and
Incomes Taxes 1,570,171 (637,422)
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 157,146 15,343
---------- ----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. and Income Taxes 1,727,317 (622,079)
Provision (Credit) for Income Taxes 655,000 (191,000)
---------- ----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. 1,072,317 (431,079)
Non-Owned Interests in (Earnings) Loss of
Insituform East, Inc. (679,309) 199,860
---------- ----------
Earnings (Loss) from Continuing Operations 393,008 (231,219)
Discontinued Operations:
Earnings from discontinued operations of copier
machine products and services segment 0 500,632
----------- -----------
NET EARNINGS $ 393,008 $ 269,413
=========== ===========
Net Earnings per Share of Common Stock:
Earnings (loss) from continuing operations $ 0.27 $ (0.16)
Earnings from discontinued operations 0 0.34
----------- -----------
Net Earnings per Share $ 0.27 $ 0.18
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Sept. 30, 1997 June 30, 1997
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $19,313,102 $27,081,412
Accounts receivable 10,137,924 6,691,313
Inventories 1,778,248 1,538,017
Prepaid and refundable taxes 567,715 813,872
Prepaid expenses and other 425,326 251,572
----------- -----------
Total Current Assets 32,222,315 36,376,186
----------- -----------
Property, Plant and Equipment - at cost
less accumulated depreciation of $13,708,274 at
September 30, 1997 and $13,296,041 at June 30, 1997 11,734,692 11,758,572
----------- -----------
Other Assets:
Excess of acquisition cost over value of net assets
acquired less accumulated amortization of $1,099,811
at September 30, 1997 and $1,077,844 at June 30, 1997 2,386,541 2,408,508
Cash surrender value of life insurance 856,284 779,041
Deposits and other 125,489 148,837
------------ ------------
Total Other Assets 3,368,314 3,336,386
------------ ------------
Total Assets $ 47,325,321 $ 51,471,144
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Sept. 30, 1997 June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Notes payable to bank $ 600,000 $ 0
Accounts payable and accrued liabilities 4,788,856 6,006,361
Income taxes payable 1,333,337 5,804,724
Current portion of capital lease obligations 29,930 28,508
------------- ------------
Total Current Liabilities 6,752,123 11,839,593
------------- ------------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 131,442 139,480
Deferred income taxes 1,039,000 1,074,000
Accrued SERP liability 479,714 440,950
------------ ------------
Total Long-term Liabilities 1,650,156 1,654,430
------------ ------------
Total Liabilities 8,402,279 13,494,023
------------ ------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 13,564,280 13,042,117
------------ ------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,186,726 shares (at Sept. 30, 1997) 118,672
Issued and outstanding: 1,180,601 shares (at June 30, 1997) 118,060
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 296,230 shares (at Sept. 30, 1997) 29,623
Issued and outstanding: 296,355 shares (at June 30, 1997) 29,635
Additional paid-in capital 7,523,528 7,493,378
Retained earnings 17,686,939 17,293,931
------------ ------------
Total Stockholders' Equity 25,358,762 24,935,004
------------ ------------
Total Liabilities and Stockholders' Equity $ 47,325,321 $ 51,471,144
============ ============
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
1997 1996
Cash Flows from Operating Activities:
<S> <C> <C>
Earnings (loss) from continuing operations $ 393,008 $ (231,219)
Earnings from discontinued operations 0 500,632
----------- -----------
Net earnings 393,008 269,413
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 531,807 506,435
Amounts attributable to non-owned interests 522,163 35,113
Deferred income taxes (35,000) 19,000)
Decrease in other assets 18,348 2,423
Increase in long-term liabilities 38,764 93,233
Changes in operating assets and liabilities:
Increase in accounts receivable (3,446,611) (18,673)
(Increase) decrease in inventories (240,231) 294,223
(Increase) decrease in prepaid expenses and other current assets 72,403 (356,242)
Increase (decrease) in accounts payable and accrued expenses 1,256,771 112,742
Increase (decrease) in income taxes payable (4,471,387) 16,464
Increase (decrease) in deferred revenue 0 (930)
----------- -----------
Net Cash Provided by (Used in) Operating Activities (5,359,965) 973,201
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures, net (480,960) (410,524)
Increase in investment in subsidiary 0 (85,938)
Increase in cash surrender value of insurance (77,243) 0
----------- ------------
Net Cash Used in Investing Activities (558,203) (496,462)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit 1,800,000 0
Principal payments on revolving lines of credit and
capital lease obligations (1,206,616) (22,002)
Dividends paid (2,474,276) (177,644)
Proceeds from exercise of stock options 30,750 0
----------- -----------
Net Cash Used in Financing Activities (1,850,142) (199,646)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (7,768,310) 277,093
Cash and Cash Equivalents at Beginning of Period 27,081,412 10,234,224
----------- -----------
Cash and Cash Equivalents at End of Period $19,313,102 $10,511,317
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 32,466 $ 8,099
=========== =============
Income taxes paid $ 4,953,522 $ 902,390
=========== =============
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, 1997, the
Condensed Consolidated Statements of Earnings for the three months ended
September 30, 1997 and 1996, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1997 and 1996 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1997 (unaudited) has been derived from the Company's June 30, 1997
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,
1997 and for all periods presented have been made.
Prior to June 30, 1997, the condensed consolidated financial statements
include the accounts of the parent holding company, CERBCO, Inc. ("CERBCO"); its
majority-owned subsidiary, Capitol Office Solutions, Inc. ("Capitol Office
Solutions" or "Capitol"), and its majority-controlled subsidiary, Insituform
East, Incorporated ("Insituform East"). Effective June 30, 1997, CERBCO no
longer has an interest in Capitol, and the Condensed Consolidated Statement of
Earnings for the three months ended September 30, 1996 has been restated to
reflect the operating results of Capitol as discontinued operations (see Note 5:
Discontinued Operations). All significant intercompany accounts and transactions
have been eliminated.
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, 1997. 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
1997 1996
1,482,369 1,467,956
========= =========
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS No. 128") was issued in February 1997 by Financial Accounting Standards
Board. SFAS No. 128 is effective for periods ending after December 15, 1997 and
early adoption is not permitted. SFAS No. 128 will require the Company to
compute and present basic and diluted earnings per share. Had the Company
computed earnings per share in accordance with SFAS No. 128, both basic and
diluted earnings per share would have been the same as earnings per share
presented on the Company's condensed consolidated statements of earnings.
3. Accounts Receivable
<TABLE>
<CAPTION>
Accounts receivable consist of:
Sept. 30, 1997 June 30, 1997
<S> <C> <C>
Due from customers $ 9,740,670 $6,479,230
Miscellaneous 397,254 212,083
----------- ----------
10,137,924 6,691,313
Less: Allowance for doubtful accounts 0 0
----------- ----------
$10,137,924 $6,691,313
=========== ==========
</TABLE>
4. Equity in Insituform East
At September 30, 1997, 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 in the three months ended September
30, 1997. If all the options outstanding at September 30, 1997 were exercised,
the resulting percentages of CERBCO's equity ownership and total voting power
would be 29.7% and 54.7%, 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, 1997.
5. Discontinued Operations
Prior to June 30, 1997, CERBCO beneficially held 800 shares, and
Capitol's president held 400 shares, of Capitol Class B Stock, representing 66
2/3% and 33 1/3%, respectively, of the one outstanding class of Capitol stock.
On June 30, 1997, Capitol redeemed the 800 shares of Class B stock held
by the Company for $19 million plus a pre-redemption dividend of two-thirds of
the cash held by Capitol in excess of $800,000 equaling $3,789,593. The
redemption price ultimately is subject to formula adjustment based upon June 30,
1997 audited financial statements. This transaction was approved by the
Company's stockholders at a meeting held on June 27, 1997. CERBCO's share of
Capitol's operating results for the quarter ended September 30, 1996 are shown
separately in the accompanying condensed consolidated statement of earnings for
the quarter ended September 30, 1996 as earnings from discontinued operations.
Capitol's sales revenues of $5,363,683 for the quarter ended September 30, 1996
are not included in sales in the accompanying condensed consolidated statement
of earnings.
6. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of:
Sept. 30, 1997 June 30, 1997
<S> <C> <C>
Accounts payable $2,479,106 $1,655,097
Accrued compensation and related expenses 2,309,750 1,876,988
Dividends payable 0 2,474,276
---------- ----------
$4,788,856 $6,006,361
========== ==========
</TABLE>
7. 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, 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 a trial, 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."
The Court 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 appealed to the Delaware Supreme Court. On April 10,
1996, the Supreme 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 the Supreme Court denied.
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]."
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. On October 2, 1996, the
plaintiffs filed a petition seeking attorneys' fees and expenses totaling
$1,663,266. On February 6, 1997, the Court of Chancery entered a final order and
judgment (revised on February 14, 1997) encompassing the above rulings and
awarding the plaintiffs attorneys' fees of $143,364.23 to be paid by CERBCO and
court costs of $9,359.20 to be paid by the Eriksons. The plaintiffs, the
Eriksons, and CERBCO have each appealed those rulings to the Delaware Supreme
Court where the appeals were briefed and, subsequently, oral arguments were
presented on September 9, 1997. The Delaware Supreme Court currently has the
appeals under consideration.
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. Plaintiffs agreed to a stay in the Superior Court action pending the
outcome of the appeal to the Delaware Supreme Court and, subsequently, the stay
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.
As previously reported by the Company, 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(a) and (b) of the Texas
Business and Commercial 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 $50 million.
Insituform East believes it has strong defenses to and is vigorously
contesting the suit. Insituform East filed two motions to dismiss the action
which were pending at June 30, 1997. On August 25, 1997, the Court denied one of
the motions to dismiss, granted in part and denied in part the second motion to
dismiss and ordered plaintiffs to file an amended complaint. The Plaintiffs
filed a motion for leave to file a Second Amended Complaint on September 29,
1997. The Defendants each filed responses to the Plaintiffs' motion. Should the
Court grant Plaintiffs' motion for leave to file the Second Amended Complaint,
the Defendants will have 45 days from that date to file motions to dismiss.
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, it is the opinion of the management of Insituform East that the suit
is meritless.
Management believes ultimate resolution of these matters will not have
a material effect on the financial statements of CERBCO. Accordingly, no
provision for these contingencies has been reflected therein. CERBCO is also
involved in other contingencies, none of which could, in the opinion of
management, materially affect the Company's financial position or results of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported consolidated net earnings of $393,008 ($.27 per
share) on sales of $9.1 million for the first quarter of fiscal year 1998. For
the first quarter of the previous fiscal year, the Company recognized a
consolidated loss from continuing operation of -$231,219 (-$.16 per share) on
sales of $5.3 million, and net earnings of $269,413 ($.18 per share) including
earnings from the operations of its discontinued copy machine products and
services segment.
The Company attributed its favorable first quarter results to a 72%
increase in comparable period sales by Insituform, East, Inc., the Company's
majority-controlled subsidiary. Insituform East, the Company's only remaining
operating segment, is principally engaged in the trenchless rehabilitation of
underground sewers and other pipelines using the patented Insituform(R) process.
The material increase in period sales was largely the result of revenues
recognized from the installation phase of a nearly year long $4.7 million
project performed for the owners of the Perry Nuclear Power Plant in Perry, Ohio
and installed between mid-September and early October, 1997.
During the first quarter of fiscal year 1998, the parent company
incurred legal expenses in the amount of $37,471 related to the demands made of,
and litigation being continued against, CERBCO by two associated, minority
stockholders in connection with the unconsummated private sale of a controlling
interest in the Company abandoned in September 1990. From inception in 1990
through the quarter ended September 30, 1997, legal fees and expenses resulting
from this litigation totaled approximately $2.4 million. For additional
information concerning this matter, see Part I, Item 1, "Notes to Condensed
Consolidated Financial Statement (unaudited) Note 7. Contingencies."
The focus, planning, preparation and successful completion of the large
Perry project necessarily disturbed Insituform East's normal scheduling,
processing and other functions. As a result, the Company anticipates materially
unbalanced quarterly performance by Insituform East over the first six months of
fiscal year 1998. Thus, with respect to forward-looking information, and while
there can be no assurances regarding Insituform East's future operating
performance, based on the volume and mix of Insituform East's present and
expected workable backlog of customer orders, the Company presently believes
that decreases in Insituform East's immediately workable and total backlog could
produce marginal or negative results for Insituform East for the second quarter
of fiscal year 1998. It is possible this trend could continue for Insituform
East into the second half of the fiscal year as the subsidiary continues to
experience difficulty obtaining sufficient core municipal work at normal
margins. Insituform East presently is unable to predict the likelihood or timing
of specialized work such as the Perry project. Income from the Company's
non-operating activities presently is anticipated to approximate the normal
levels of its holding company expenses into the future; accordingly the
Company's forward-looking results are anticipated substantially to parallel the
Company's approximate 33% participation in the forward results of Insituform
East.
The principal factor affecting the Company's future performance remains
the volatility of Insituform East's earnings as a function of sales volume at
normal margins. Accordingly, because a substantial portion of Insituform East's
costs are semi-fixed in nature, earnings can, at times, be severely reduced or
eliminated during periods of either depressed sales at normal margins or
material increases in discounted sales, even where total revenues may experience
an apparent buoyancy or growth from the addition of discounted sales undertaken
from time to time for strategic reasons. Conversely, at normal margins,
increases in period sales typically leverage positive earnings significantly.
The Company believes the trenchless pipeline reconstruction marketplace
is continuing to expand, thereby enticing, however, the entry of ever more
imitations and substitute products hoping that cheap price alone may permit them
to succeed in a market otherwise dominated by Insituform. In those markets where
the cheapest priced product may be deemed technically "good enough," Insituform
is at a disadvantage. Market share participation in this segment strategically
undertaken by Insituform East from time to time to preserve competitive
presence, at levels materially below normal margins, necessarily dilutes the
overall margin performance of Insituform East. In a "best value" and quality
based market, Insituform remains at a distinct advantage. While both the Federal
Government and industry routinely use best value and quality-weighted contract
award criteria in more sophisticated procurements, municipalities and local
governments have been politically reluctant to modernize from simply "low-bid"
buying to "best value" buying when evaluating sophisticated processes and
technologies. In the face of mounting technical failures from awards based upon
lowest price, municipalities are also expected over time to increasingly shift
from low bid to quality-driven award criteria when procuring trenchless
technology to rehabilitate older pipelines.
Results of Operations
First Quarter ended 9/30/97 Compared with First Quarter ended 9/30/96
Consolidated sales increased $3.8 million (72%) from $5.3 million for
the quarter ended September 30, 1996 to $9.1 million for the quarter ended
September 30, 1997, due primarily to a $4.7 million project performed by
Insituform East at the Perry Nuclear Power Plant in Perry, Ohio. Consolidated
cost of sales increased 35% in the first quarter of fiscal year 1998, and as a
result, gross profit as a percentage of sales increased from 11% of sales for
the first quarter of fiscal year 1997 to 30% of sales for the first quarter of
fiscal year 1998. This increase was due primarily to absorption of semi-fixed
costs over a higher sales volume in the first quarter of fiscal year 1998.
Consolidated operating results increased from an operating loss of -$.7
million in the quarter ended September 30, 1996 to an operating profit of $1.2
million in the quarter ended September 30, 1997, due primarily to the
significant contribution to earnings from Insituform East's nuclear power plant
project. Insituform East's selling, general and administrative expenses
increased $.1 million (10%) as a result of increased costs to support increased
production activities. The parent company's unallocated general corporate
expenses also increased $.1 million.
Earnings from discontinued operations in the first quarter of fiscal
year 1997 resulted from the operations of the Company's then majority-owned
subsidiary, Capitol Office Solutions. The Company sold its interests in Capitol
Office Solutions on June 30, 1997.
Financial Condition
During the quarter ended September 30, 1997, the Company used $5.4
million in cash in operating activities, due primarily to a $3.5 million
increase in Insituform East's Accounts Receivable and a $4.5 million net
decrease in Income Taxes Payable. During the first quarter of fiscal year 1998,
Insituform East received $1.8 million in bank line of credit advances, repaying
$1.2 million, and borrowed $.6 million from the parent company to finance
increases in Accounts Receivables resulting from the quarter's increased sales
and, to a lesser extent, collection delays on several completed projects. The
parent company made an estimated income tax deposit of $4.9 million in September
1997.
During the quarter ended September 30, 1997, the Company expended $.5
million for equipment purchases. It also paid $2.5 million in dividends to
stockholders, including a $2.2 million special dividend to CERBCO stockholders
as a result of the Capitol Office Solutions transaction.
Although the Company experienced a $7.8 million decrease in cash during
the first quarter of fiscal year 1998, its liquidity remained strong with
working capital of over $25 million and a current ratio of 4.8 at September 30,
1997. CERBCO believes that Insituform East has cash reserves, remaining bank
line of credit availability or borrowing potential against unencumbered assets
sufficient to meet its immediate cash flow requirements. The parent holding
company, CERBCO, does not have a separate bank line of credit, but has cash and
temporary investments in excess of $17 million which, pending longer term
investment, it believes are more than adequate to meet its own cash flow
requirements, or the temporary requirements of Insituform East in the
foreseeable future, including continuing legal fees and expenses of the parent
in connection with the stockholder litigation now on appeal to the Delaware
Supreme Court.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, "Notes to Condensed Consolidated Financial
Statements (unaudited) - Note 7. Contingencies" for details concerning (a) a
previously disclosed lawsuit in the Court of Chancery of the State of Delaware
currently on appeal to the Delaware Supreme Court, and (b) a previously
disclosed lawsuit pending in the Superior Court of the District of Columbia, and
(c) a previously disclosed lawsuit filed in the U.S. District Court for the
Southern District of Texas, Houston Division.
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, 1997;
Balance Sheet Information; and Consolidating Elimination Entries
as of September 30, 1997.
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the quarter ended September
30, 1997:
The first report, filed on July 3, 1997, reported on the following
items: Item 2. Acquisition or Disposition of Assets and Item 7. Financial
Statements and Exhibits, which concerned the redemption by Capitol Office
Solutions of the entire two-thirds equity interest in Capitol Office Solutions
held by the Company through its wholly-owned subsidiary, CERBERONICS.
The second report, filed on July 10, 1997, reported on the following
item: Item 5. Other Events, which announced through a press release dated June
30, 1997 that the Company was declaring a special cash dividend in connection
with the transaction reported in the first report.
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, 1997
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)
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, 1997;
Balance Sheet Information; and Consolidating Elimination
Entries as of September 30, 1997.
<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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 19,313
<SECURITIES> 0
<RECEIVABLES> 10,138
<ALLOWANCES> 0
<INVENTORY> 1,778
<CURRENT-ASSETS> 32,222
<PP&E> 25,443
<DEPRECIATION> 13,708
<TOTAL-ASSETS> 47,325
<CURRENT-LIABILITIES> 6,752
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 25,210
<TOTAL-LIABILITY-AND-EQUITY> 47,325
<SALES> 9,148
<TOTAL-REVENUES> 9,148
<CGS> 6,370
<TOTAL-COSTS> 6,370
<OTHER-EXPENSES> 1,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 1,727
<INCOME-TAX> 655
<INCOME-CONTINUING> 393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1997
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C> <C>
Sales $9,148,285 $0 $0 $9,148,285
---------- ------- -------- ----------
Costs and Expenses:
Cost of sales 6,370,077 0 0 6,370,077
Selling, general and administrative expenses 1,539,128 0 210,588 1,328,540
---------- ------- -------- ----------
Total Costs and Expenses 7,909,205 0 210,588 7,698,617
---------- ------- -------- ----------
Operating Profit 1,239,080 0 (210,588) 1,449,668
Investment Income 245,653 (A) (1,417) 228,616 18,454
Interest Expense (32,466) (A) 1,417 0 (33,883)
Other Income - net 117,904 0 55,277 62,627
---------- ------- ------- ---------
Earnings Before Non-Owned Interests and
Income Taxes 1,570,171 0 73,305 1,496,866
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 157,146 0 0 157,146
---------- ------- ------- ---------
Earnings Before Non-Owned Interests in
Insituform East and Income Taxes 1,727,317 0 73,305 1,654,012
Provision for Income Taxes 655,000 0 10,000 645,000
---------- ------- ------- ---------
Earnings Before Non-Owned Interests in 1,072,317 0 63,305 1,009,012
Insituform East
Non-Owned Interests in Earnings of
Insituform East (679,309) (B) (679,309) 0 0
---------- -------- ------- ----------
NET EARNINGS $393,008 (D) $679,309 $63,305 $1,009,012
========== ======== ======= ==========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
SEPTEMBER 30, 1997
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $19,313,102 $0 $17,365,549 $1,947,553
Accounts receivable 10,137,924 0 7,111 10,130,813
Inventories 1,778,248 0 0 1,778,248
Prepaid and refundable taxes 567,715 0 0 567,715
Prepaid expenses and other 425,326 0 0 425,326
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 32,222,315 0 17,372,660 14,849,655
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (C) (7,527,680) 7,527,680 0
Intercompany receivables and payables 0 0 581,675 (581,675)
Property, Plant and Equipment - net of
accumulated depreciation 11,734,692 0 94,749 11,639,943
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,386,541 (C) 2,386,541 0 0
Cash surrender value of life insurance 856,284 0 856,284 0
Deposits and other 125,489 0 44,489 81,000
----------- ----------- ----------- -----------
TOTAL ASSETS $47,325,321 $(5,141,139) $26,477,537 $25,988,923
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $600,000 $0 $0 $600,000
Accounts payable and accrued liabilities 6,122,193 0 968,764 5,153,429
Current portion of capital lease obligations 29,930 0 0 29,930
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 6,752,123 0 968,764 5,783,359
Long-Term Liabilities:
Capital lease obligations 131,442 0 0 131,442
Deferred income taxes 1,039,000 0 0 1,039,000
Accrued SERP liability 479,714 0 479,714 0
----------- ----------- ----------- -----------
TOTAL LIABILITIES 8,402,279 0 1,448,478 6,953,801
----------- ----------- ----------- -----------
Non-Owned Interests: 13,564,280 (B)(C 11,271,964 0 2,292,316
----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock 118,672 (C) (175,486) 118,672 175,486
Class B stock 29,623 (C) (11,904) 29,623 11,904
Additional paid-in capital 7,523,528 (C) (4,000,424) 7,523,528 4,000,424
Retained earnings 17,686,939 (C)(D) (13,414,902) 17,357,236 13,744,605
Treasury stock 0 (C) 1,189,613 0 (1,189,613)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 25,358,762 (16,413,103) 25,029,059 16,742,806
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,325,321 $(5,141,139) $26,477,537 $25,988,923
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
DECEMBER 31, 1996
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Investment income $1,417
Interest expense $1,417
To eliminate interest expense paid by Insituform East
to CERBCO in the three months ended September 30, 1997.
(B)
Non-owned interests in earnings of subsidiaries 679,309
Non-owned interests $679,309
To record non-owned interests in earnings of subsidiaries for
the three months ended September 30, 1997.
(C)
Common stock $175,486
Class B stock 11,904
Additional paid-in capital 4,000,424
Retained earnings 12,735,593
Excess of acquisition cost over value of net assets acquired 2,386,541
Treasury stock $1,189,613
Non-owned interests 10,592,655
Investment in subsidiary 7,527,680
To eliminate investments in consolidated subsidiaries.
(D)
Retained Earnings $679,309
Current year earnings adjustments $679,309
To close out impact of current quarter's statement of earnings.
</TABLE>
