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: December 31, 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 January 31, 1997, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,163,226
Class B Common Stock 310,730
Total 1,473,956
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
<CAPTION>
For the three months For the six months
ended Dec. 31 ended Dec. 31
1996 1995 1996 1995
Sales
<S> <C> <C> <C> <C>
Sales of products $9,664,486 $10,958,942 $17,451,037 $21,756,413
Sales of services and supplies 3,110,801 2,758,998 6,008,703 5,241,211
---------- ----------- ----------- -----------
TOTAL SALES 12,775,287 13,717,940 23,459,740 26,997,624
---------- ----------- ----------- -----------
Costs and Expenses:
Cost of products sold 7,243,003 7,662,807 13,897,310 15,121,335
Cost of services and supplies 1,477,210 1,368,056 2,882,533 2,608,722
Selling, general and administrative expenses 2,687,599 2,378,927 4,930,624 4,736,138
---------- ----------- ----------- -----------
Total Costs and Expenses 11,407,812 11,409,790 21,710,467 22,466,195
---------- ----------- ----------- -----------
Operating Profit 1,367,475 2,308,150 1,749,273 4,531,429
Investment Income 170,687 57,838 301,437 130,480
Interest Expense (9,528) (6,778) (17,627) (15,307)
Other Income - net (10,636) 4,178 (1,559) 67,160
---------- ----------- ----------- -----------
Earnings Before Incomes Taxes and Non-Owned
Interests 1,517,998 2,363,388 2,031,524 4,713,762
Provision for Income Taxes 519,000 907,000 728,000 1,742,000
---------- ----------- ----------- -----------
Earnings Before Non-Owned Interests 998,998 1,456,388 1,303,524 2,971,762
Non-Owned Interests in Earnings of Consolidated
Subsidiaries 518,522 924,211 553,635 1,848,768
---------- ----------- ----------- -----------
NET EARNINGS $ 480,476 $ 532,177 $ 749,889 $ 1,122,994
========== =========== =========== ===========
Net Earnings per Share of Common Stock $ .33 $ .37 $ .51 $ .77
========== =========== =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Dec. 31, 1996 June 30, 1996
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $10,814,154 $10,234,224
Accounts receivable 8,997,464 8,497,050
Inventories 3,537,829 3,336,052
Prepaid and refundable taxes 485,622 135,242
Deferred income taxes 133,000 133,000
Prepaid expenses and other 536,056 359,631
----------- -----------
Total Current Assets 24,504,125 22,695,199
----------- -----------
Property, Plant and Equipment - at cost
Less accumulated depreciation of $13,274,339 at
December 31, 1996 and $12,394,724 at June 30, 1996 12,050,548 11,291,818
----------- -----------
Other Assets:
Excess of acquisition cost over value of net assets acquired
- net of accumulated amortization of $1,694,881 at December
31, 1996 and $1,615,227 at June 30, 1996 4,649,008 4,728,662
Cash surrender value of life insurance 704,600 498,974
Deferred income taxes 41,000 41,000
Deposits and other 182,567 195,082
----------- -----------
Total Other Assets 5,577,175 5,463,718
----------- ------------
Total Assets $42,131,848 $39,450,735
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Dec. 31, 1996 June 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $5,046,842 $3,629,255
Income taxes payable 198,556 623,618
Deferred revenue 526,806 500,643
Current portion of long-term debt 0 5,104
Current portion of capital lease obligations 44,273 50,176
----------- -----------
Total Current Liabilities 5,816,477 4,808,796
----------- -----------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 170,224 135,844
Deferred income taxes 1,032,000 818,000
Accrued SERP liability 363,420 176,955
----------- -----------
Total Long-term Liabilities 1,565,644 1,130,799
----------- -----------
Total Liabilities 7,382,121 5,939,595
----------- -----------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 16,951,237 16,509,371
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,163,226 shares (at Dec. 31, 1996) 116,322
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 Dec. 31, 1996) 31,073
Issued and outstanding: 310,855 shares (at June 30, 1996) 31,085
Additional paid-in capital 7,478,303 7,432,071
Retained earnings 10,172,792 9,422,903
----------- -----------
Total Stockholders' Equity 17,798,490 17,001,769
----------- -----------
Total Liabilities and Stockholders' Equity $42,131,848 $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 six months ended Dec. 31
1996 1995
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 749,889 $1,122,994
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 1,021,972 962,572
Amounts provided by non-owned interests 553,635 1,848,768
Deferred income taxes 214,000 (85,000)
(Increase) decrease in other assets 2,515 (182,232)
Increase in SERP liability 186,465 36,186
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (500,414) (2,841,590)
(Increase) decrease in inventories (201,777) (37,828)
(Increase) decrease in other current assets (526,805) (52,809)
Increase (decrease) in accounts payable and accrued expenses 1,170,169 (278,928)
Increase (decrease) in deferred revenue 26,163 24,791
----------- ----------
Net Cash Provided by Operating Activities 2,695,812 516,924
----------- ----------
Cash Flows from Investing Activities:
Capital expenditures, net (1,632,504) (840,317)
Increase in cash surrender value of life insurance (205,626) 0
Increase in investment in subsidiary (85,938) 0
Cash balance of majority controlled partnership prior to consolidation 0 241,094
Redemption of temporary investments - net 0 286,650
----------- ----------
Net Cash Used in Investing Activities (1,924,068) (312,573)
----------- ----------
Cash Flows from Financing Activities:
Principal payments on revolving lines of credit, capital lease
obligations and long-term borrowings (35,170) (55,747)
Proceeds from exercise of stock options 21,000 19,499
Dividends paid (177,644) (177,643)
----------- ----------
Net Cash Used in Financing Activities (191,814) (213,891)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 579,930 (9,540)
Cash and Cash Equivalents at Beginning of Period 10,234,224 5,197,549
----------- ----------
Cash and Cash Equivalents at End of Period $10,814,154 $5,188,009
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 17,627 $ 15,307
Income taxes paid $ 1,383,916 $2,002,377
Supplemental schedule of non-cash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 58,543 $ 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 December 31, 1996, the
Condensed Consolidated Statements of Earnings for the three months and six
months ended December 31, 1996 and 1995, and the Condensed Consolidated
Statements of Cash Flows for the six months ended December 31, 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 December 31, 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 Statements of Earnings for the three months and six months ended
December 31, 1995 and the Condensed Consolidated Statement of Cash Flows for the
six months ended December 31, 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 Dec. 31 For the six months ended Dec. 31
---------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
1,468,934 1,462,869 1,468,445 1,462,413
========= ========= ========= =========
3. Accounts Receivable
Accounts receivable consist of:
Dec. 31, 1996 June 30, 1996
Due from municipal and commercial customers $8,647,197 $8,113,075
Miscellaneous 380,267 426,831
---------- ----------
9,027,464 8,539,906
Less: Allowance for doubtful accounts (30,000) (42,856)
---------- ----------
$8,997,464 $8,497,050
========== ==========
4. Inventories
Inventories consist of:
Dec. 31, 1996 June 30, 1996
Pipeline rehabilitation materials $1,394,520 $1,159,532
Copier and facsimile equipment 1,556,072 1,662,375
Copier and facsimile supplies 237,749 182,475
Copier and facsimile parts 349,488 331,670
---------- ----------
$3,537,829 $3,336,052
========== ==========
5. Equity in Insituform East
At December 31, 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 six months ended December
31, 1996. If all the options outstanding at December 31, 1996 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 six months ended December 31, 1996.
6. Equity in Capitol Office Solutions
At September 30, 1996, CERBCO beneficially held 800 shares, and
Capitol'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
Accounts payable and accrued liabilities consist of:
Dec. 31, 1996 June 30, 1996
Accounts payable $2,296,980 $1,075,893
Accrued compensation and related expenses 2,749,862 2,302,320
Dividends payable 0 251,042
---------- ----------
$5,046,842 $3,629,255
========== ==========
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, 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 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 Eriksons have advised the Company they are likely to
appeal. Absent any appeal, the judgment becomes final in thirty days.
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 15.05 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 believes it has strong defenses
to, and will vigorously contest, the suit. Insituform East has filed two motions
to dismiss the action which are currently pending. 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.
Management believes ultimate resolution of these matters will not have
a material effect on the consolidated financial statements of CERBCO.
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 Dec. 31 For the six months ended Dec. 31
---------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Sales to Unaffiliated Customers:
<S> <C> <C> <C> <C>
Pipeline rehabilitation $6,638 $8,370 $11,959 $16,841
Copier equipment products and services 6,138 5,348 11,501 10,157
------- ------- ------- -------
Total Sales $12,776 $13,718 $23,460 $26,998
======= ======= ======= =======
Earnings Before Income Taxes:
Pipeline rehabilitation $377 $1,274 $(215) $2,526
Copier equipment products and services 1,293 1,193 2,412 2,275
Corporate holding company expenses - net (303) (159) (448) (270)
------- ------- ------- -------
Operating Profit 1,367 2,308 1,749 4,531
Other income 200 104 380 241
Other expenses (49) (48) (97) (58)
------- ------- ------- -------
Earnings Before Income Taxes $1,518 $2,364 $2,032 $4,714
====== ====== ====== ======
Net Earnings (Loss) Contribution by Segment:
Pipeline rehabilitation $ 69 $ 213 $ (28) $ 425
Copier equipment products and services 571 479 1,071 925
Corporate holding company (159) (160) (293) (227)
------- ------- ------- -------
Net Earnings $ 481 $ 532 $ 750 $1,123
======= ======= ======= ======
</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 $480,476 ($.33 per
share) for the second quarter of fiscal year 1997, as compared to consolidated
net earnings of $532,177 ($.37 per share) for the second quarter of fiscal year
1996. The Company recognized consolidated net earnings of $749,889 ($.51 per
share) for the first six months of fiscal year 1997, as compared to consolidated
net earnings of $1,122,994 ($.77 per share) for the first six months of fiscal
year 1996. The decrease in comparable period results is attributable to
continued reduced results from Insituform East, the Company's pipeline
rehabilitation segment, which, while positive for the second quarter of the
current fiscal year, were insufficient to fully offset first quarter negative
results. The Condensed Consolidated Statements of Earnings for the three months
and six months ended December 31, 1995 have been restated to reflect comparable
consolidation of Insituform East's now majority-controlled subsidiary, MIDSOUTH
Partners.
Insituform East attributed its below par six month performance to a
significant decrease in comparable period sales, primarily due to a low level of
released and workable orders being made timely available by customers from its
otherwise record level of backlog. Insituform East's total backlog value of all
uncompleted and multi-year contract awards was approximately $23.0 million at
December 31, 1996, a record, as compared to $11.4 million at December 31, 1995.
The twelve-month backlog value at December 31, 1996, also a record, was
approximately $21.8 million as compared to $11.2 million at December 31, 1995.
Consolidated backlog figures include MIDSOUTH Partners' backlog of approximately
$3.4 million and $2.6 million at December 31, 1996 and 1995, respectively. The
total backlog values of all uncompleted and multi-year contracts 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 are not
necessarily indicative of sales and earnings for future periods, and continued
delays experienced in January 1997 by Insituform East on several major projects
will significantly reduce East's third quarter fiscal year 1997 results. While
there can be no assurances regarding future operating performance, anticipated
increases in released and workable orders over the balance of the fiscal year,
however, should permit an improved and more typical three-month performance for
East during the fourth quarter. Overall, East's earnings for the twelve months
ending June 30, 1997 are presently anticipated to be both positive and
significant, but materially reduced as compared to the previous fiscal year.
Capitol Office Solutions, the Company's copier and facsimile equipment
products and services segment, continued to experience increased sales and
earnings in the second 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 presently 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 second quarter and first six months of
fiscal year 1997, CERBCO experienced unallocated general corporate expenses in
the amount of $302,755 and $448,020, respectively, of which $53,779 and $71,838,
respectively, were legal fees and expenses in connection with the derivative
litigation. From inception in 1990 through December 31, 1996, such legal fees
and expenses totaled approximately $2.2 million. 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
Second Quarter ended 12/31/96 Compared with Second Quarter ended 12/31/95
Consolidated sales decreased $0.9 million (-6.9%) in the second quarter
of fiscal year 1997 as compared to the second quarter of fiscal year 1996.
Insituform East's pipeline rehabilitation sales decreased $1.7 million (-20.7%),
due primarily to lower workable backlog levels experienced throughout the
quarter. East's sales decreased $1.2 million (-20.0%); MIDSOUTH Partners' sales
decreased $0.5 million (-22.6%). Sales of copier equipment products and services
by Capitol Office Solutions increased $0.8 million (14.8%), as equipment sales
and service and supply revenues increased 16.9% and 12.8%, respectively. The
increases in both areas reflect a continuing expansion in Capitol's customer
base.
Consolidated operating profit decreased $0.9 million (-40.8%) in the
second quarter of fiscal year 1997 as compared to the second quarter of fiscal
year 1996, primarily as a result of a decrease in the operating profit of
Insituform East. Insituform East's cost of sales decreased 15.3%, a smaller
percentage decrease than the decrease in its sales and, as a result, gross
profit as a percentage of sales decreased from 30.5% to 25.8%. This decrease is
due primarily to reduced comparable period margins on installation contracts
performed by MIDSOUTH Partners and, to a lesser extent, absorption of semi-fixed
costs over a lower sales volume for both East and MIDSOUTH Partners. Insituform
East's selling, general and administrative expenses increased $0.1 million
(4.3%) as a result of legal costs associated with the Inliner U.S.A./CAT
Contracting antitrust suit. As a result, Insituform East's operating profit
decreased $0.9 million (-70.4%). Capitol's cost of sales increased 18.1%, a
larger percentage increase than the increase in its sales and, as a result,
gross profit as a percentage of sales decreased from 39.9% to 38.1%. The
decrease in gross profit as a percentage of sales is due to a decrease in the
gross profit margin on equipment sales. Capitol's selling, general and
administrative expenses increased $0.1 million (11.8%), and its operating profit
increased $0.1 million (8.2%). The parent company's operating loss increased
$0.1 million (90.5%), primarily as a result of an increase in the accrued
supplemental executive retirement plan liability.
Six Months ended 12/31/96 Compared with Six Months ended 12/31/95
Consolidated sales decreased $3.5 million (-13.1%) in the first six
months of fiscal year 1997 as compared to the first six months of fiscal year
1996. Insituform East's sales decreased $4.9 million (29.0%), due primarily due
to lower workable backlog levels experienced throughout the first half of fiscal
year 1997. East's sales decreased $3.5 million (-28.6%); MIDSOUTH Partners'
sales decreased $1.4 million (-30.0%). Capitol's sales increased $1.4 million
(13.2%), as equipment sales and service and supply revenues increased 11.7% and
14.6%, respectively. The increases in both areas reflect a continuing expansion
in Capitol's customer base.
Consolidated operating profit decreased $2.8 million (-61.4%) in the
first six months of fiscal year 1997 as compared to the first six months of
fiscal year 1996, primarily as a result of the six month operating loss of
Insituform East. Insituform East's cost of sales decreased 17.4%, a smaller
percentage decrease than the decrease in its sales and, as a result, gross
profit as a percentage of sales decreased from 30.8% to 19.4%. This decrease is
due primarily to absorption of semi-fixed costs over lower sales volume and
reduced comparable period margins on installation contracts performed by
MIDSOUTH Partners. Insituform East's selling, general and administrative
expenses decreased $0.1 million (-4.3%), primarily as a result of lower costs to
support reduced production activities. Capitol's cost of sales increased 17.7%,
a larger percentage increase than the increase in its sales and, as a result,
gross profit as a percentage of sales decreased from 40.2% to 37.9%. The
decrease in gross profit as a percentage of sales is due to a decrease in the
gross profit margin on equipment sales. Capitol's selling, general and
administrative expenses increased $0.1 million (7.3%), and its operating profit
increased $0.1 million (6.0%). The parent company's operating loss increased
$0.2 million (65.9%), primarily as a result of an increase in the accrued
supplemental executive retirement plan liability.
Liquidity and Capital Resources
The Company's operating activities provided $2.7 million in cash during
the first six months of fiscal year 1997. The increase in cash is primarily due
to an increase in Insituform East's accounts payable and accrued expenses during
the first six months of fiscal year 1997, six months' net earnings, plus
depreciation and amortization expenses that do not require the outlay of cash.
Net cash in the amount of $1.9 million was used in investing activities
in the first six months of fiscal year 1997 due to 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 six months of fiscal year 1997. The primary use of such funds was the
payment of dividends by Insituform East.
CERBCO believes that its two principal operating subsidiaries,
Insituform East and Capitol Office Solutions, have existing open bank lines of
credit or borrowing potential against unencumbered assets sufficient to meet the
respective cash flow requirements of each operating 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 $2.6 million, respectively, which are believed to be adequate to
meet their respective cash flow requirements in the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only material pending legal proceedings to which the Company is a
party or any such legal proceedings contemplated of which the Company is aware
are (a) a previously disclosed lawsuit in which judgment was rendered in favor
of the Company but subsequently appealed to the Delaware Supreme Court by
plaintiffs (the "Delaware Complaint"), (b) a previously disclosed lawsuit
pending in the Superior Court of the District of Columbia (the "D.C.
Complaint"), and (c) a previously disclosed lawsuit filed in the U.S. District
Court for the Southern District of Texas, Houston Division [see Part I, Item 1,
"Notes to Condensed Consolidated Financial Statements (unaudited) - Note 9.
Contingencies"].
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 for the six months ended December 31, 1996
99 - CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the three months ended December 31, 1996;
Statement of Earnings Information for the six months ended
December 31, 1996; Balance Sheet Information and Consolidating
Elimination Entries as of December 31, 1996.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
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: February 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)
<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
December 31, 1996; Statement of Earnings Information
for the Six Months Ended December 31, 1996; Balance
Sheet Information; and Consolidating Elimination
Entries as of December 31, 1996.
Note: Exhibit 27, the Financial Data Schedule, is
a requirement by the Securities and Exchange
Commission to be submitted only with the
electronic filing of Form 10-Q. Therefore,
since this schedule contains summary
financial information found elsewhere in
this report, it is not included here.
<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> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 10,814
<SECURITIES> 0
<RECEIVABLES> 9,027
<ALLOWANCES> 30
<INVENTORY> 3,538
<CURRENT-ASSETS> 24,504
<PP&E> 25,325
<DEPRECIATION> 13,274
<TOTAL-ASSETS> 42,132
<CURRENT-LIABILITIES> 5,816
<BONDS> 0
<COMMON> 147
0
0
<OTHER-SE> 17,651
<TOTAL-LIABILITY-AND-EQUITY> 42,132
<SALES> 23,460
<TOTAL-REVENUES> 23,460
<CGS> 16,780
<TOTAL-COSTS> 16,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 2,032
<INCOME-TAX> 728
<INCOME-CONTINUING> 750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
THREE MONTHS ENDED DECEMBER 31, 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 $12,775,287 $0 $0 $6,637,618 $6,137,669
----------- -- -- ---------- ----------
Costs and Expenses:
Cost of sales 8,720,213 0 0 4,923,149 3,797,064
Selling, general and administrative expenses 2,687,599 0 302,755 1,336,533 1,048,311
--------- - ------- --------- ---------
Total Costs and Expenses 11,407,812 0 302,755 6,259,682 4,845,375
---------- - ------- --------- ---------
Operating Profit (Loss) 1,367,475 0 (302,755) 377,936 1,292,294
Investment Income 170,687 0 76,417 37,169 57,101
Interest Expense (9,528) 0 0 (8,118) (1,410)
Other Income (Expense) - net (10,636) 0 (21,967) 29,191 (17,860)
-------- - -------- ------ --------
Earnings (Loss) Before Income Taxes and
Non-Owned Interests 1,517,998 0 (248,305) 436,178 1,330,125
Provision for Income Taxes 519,000 0 (90,000) 134,000 475,000
------- - -------- ------- -------
Earnings (Loss) Before Non-Owned Interests 998,998 0 (158,305) 302,178 855,125
Non-Owned Interests in Earnings of
Consolidated Subsidiaries 518,522 (A) 426,583 0 91,939 0
------- ------- - ------ -
NET EARNINGS (LOSS) $480,476 (B) $(426,583) $(158,305) $210,239 $855,125
======== ========== ========== ======== ========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
SIX MONTHS ENDED DECEMBER 31, 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 $23,459,740 $0 $0 $11,958,388 $11,501,352
----------- -- -- ----------- -----------
Costs and Expenses:
Cost of sales 16,779,843 0 0 9,633,836 7,146,007
Selling, general and administrative expenses 4,930,624 0 448,020 2,538,974 1,943,630
--------- - ------- --------- ---------
Total Costs and Expenses 21,710,467 0 448,020 12,172,810 9,089,637
---------- - ------- ---------- ---------
Operating Profit (Loss) 1,749,273 0 (448,020) (214,422) 2,411,715
Investment Income 301,437 0 109,433 83,710 108,294
Interest Expense (17,627) 0 0 (14,411) (3,216)
Other Income (Expense) - net (1,559) 0 (43,934) 78,095 (35,720)
------- - -------- ------ --------
Earnings (Loss) Before Income Taxes and
Non-Owned Interests 2,031,524 0 (382,521) (67,028) 2,481,073
Provision for Income Taxes 728,000 0 (90,000) (57,000) 875,000
------- - -------- -------- -------
Earnings (Loss) Before Non-Owned Interests 1,303,524 0 (292,521) (10,028) 1,606,073
Non-Owned Interests in Earnings of
Consolidated Subsidiaries 553,635 (C) 477,039 0 76,596 0
------- ------- - ------ -
NET EARNINGS (LOSS) $749,889 (D) $(477,039) $(292,521) $(86,624) $1,606,073
======== ========== ========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
DECEMBER 31, 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 $10,814,154 $0 $2,649,475 $3,708,682 $4,455,997
Accounts receivable 8,997,464 0 198 6,128,143 2,869,123
Inventories 3,537,829 0 0 1,394,520 2,143,309
Prepaid and refundable taxes 485,622 0 48,292 437,330 0
Deferred income taxes 133,000 0 0 0 133,000
Prepaid expenses and other 536,056 0 0 405,237 130,819
------- - - ------- -------
TOTAL CURRENT ASSETS 24,504,125 0 2,697,965 12,073,912 9,732,248
Investment in and Advances to Subsidiaries:
Investment in subsidiaries 0 (13,673,870) 13,673,870 0 0
Intercompany receivables and payables 0 0 5,671 6,155 (11,826)
Property, Plant and Equipment - net of
accumulated depreciation 12,050,548 0 91,805 11,778,197 180,546
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 4,649,008 2,452,442 0 0 2,196,566
Cash surrender value of life insurance 704,600 0 704,600 0 0
Deferred income taxes 41,000 0 0 0 41,000
Deposits and other 182,567 0 62,836 96,000 23,731
------- - ------ ------ ------
TOTAL ASSETS $42,131,848 $(11,221,428) $17,236,747 $23,954,264 $12,162,265
=========== ============= =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $5,245,398 $0 $117,247 $3,854,408 $1,273,743
Deferred revenue 526,806 0 0 0 526,806
Current portion of capital lease obligations 44,273 0 0 30,273 14,000
------ - - ------ ------
TOTAL CURRENT LIABILITIES 5,816,477 0 117,247 3,884,681 1,814,549
Long-Term Liabilities:
Capital lease obligations 170,224 0 0 154,426 15,798
Deferred income taxes 1,032,000 0 0 1,032,000 0
Accrued SERP liability 363,420 0 363,420 0 0
------- - ------- - -
TOTAL LIABILITIES 7,382,121 0 480,667 5,071,107 1,830,347
--------- - ------- --------- ---------
Non-Owned Interests: 16,951,237 (C)(E) 14,520,308 0 2,430,929 0
---------- ---------- - --------- -
Stockholders' Equity:
Common stock 116,322 (E) (175,486) 116,322 175,486 0
Class B stock 31,073 (E) (12,024) 31,073 11,904 120
Additional paid-in capital 7,478,303 (E) (4,750,304) 7,478,303 4,000,424 749,880
Retained earnings 10,172,792 (D)(E) (21,993,535) 9,130,382 13,454,027 9,581,918
Treasury stock 0 (E) 1,189,613 0 (1,189,613) 0
- --------- - ----------- -
TOTAL STOCKHOLDERS' EQUITY 17,798,490 (25,741,736) 16,756,080 16,452,228 10,331,918
---------- ------------ ---------- ---------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $42,131,848 $(11,221,428) $17,236,747 $23,954,264 $12,162,265
=========== ============= =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
DECEMBER 31, 1996
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Non-owned interests in earnings of subsidiaries $426,583
Non-owned interests $426,583
To record non-owned interests in earnings of subsidiaries
for the three months ended December 31, 1996.
(B)
Retained earnings $426,583
Current quarter earnings adjustments $426,583
To close out impact of eliminating entries on current quarter's
statement of earnings.
(C)
Non-owned interests in earnings of subsidiaries $477,039
Non-owned interests $477,039
To record non-owned interests in earnings of subsidiaries for the
six months ended December 31, 1996.
(D)
Retained earnings $477,039
Current quarter earnings adjustments $477,039
To close out impact of eliminating entries on six month's
statement of earnings.
(E)
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 2,452,442
Treasury stock $1,189,613
Non-owned interests 14,043,269
Investment in subsidiaries 13,673,870
To eliminate investments in consolidated subsidiaries.
</TABLE>
