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, 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 February 6, 1998, 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 and the Six Months Ended December 31, 1997
and December 31, 1996 (unaudited)...................................3
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997 (unaudited).....................................4-5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1997 and December 31, 1996 (unaudited)...........6
Notes to Condensed Consolidated Financial Statements (unaudited).7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................10-12
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..................................14
<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
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $5,487,623 $ 6,637,618 $14,635,908 $11,958,388
---------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 5,373,820 4,923,149 11,743,897 9,633,836
Selling, general and administrative 1,303,361 1,639,288 2,842,489 2,986,994
expenses ---------- ----------- ----------- -----------
Total Costs and Expenses 6,677,181 6,562,437 14,586,386 12,620,830
---------- ----------- ----------- -----------
Operating Profit (Loss) (1,189,558) 75,181 49,522 (662,442)
Investment Income 306,670 113,586 552,323 193,143
Interest Expense (8,026) (8,118) (40,492) (14,411)
Other Income - net 207,696 7,224 325,600 34,161
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned
Interests and Incomes Taxes (683,218) 187,873 886,953 (449,549)
Non-Owned Interest in Pretax (Earnings)
Loss of MIDSOUTH Partners 250,950 (91,939) 408,096 (76,596)
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned
Interests in Insituform East, Inc.
and Income Taxes (432,268) 95,934 1,295,049 (526,145)
Provision (Credit) for Income Taxes (169,000) 44,000 486,000 (147,000)
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned
Interests in Insituform East, Inc. (263,268) 51,934 809,049 (379,145)
Non-Owned Interests in (Earnings) Loss of
Insituform East, Inc. 298,910 (141,541) (380,399) 58,319
---------- ----------- ----------- -----------
Earnings (Loss) from Continuing Operations 35,642 (89,607) 428,650 (320,826)
Discontinued Operations:
Earnings from discontinued operations of
copier machine products and services segment 0 570,083 0 1,070,715
---------- ----------- ----------- -----------
NET EARNINGS $ 35,642 $ 480,476 $ 428,650 $ 749,889
========== =========== =========== ===========
Basic Earnings per Share of Common Stock:
Earnings (loss) from continuing
operations $ .02 $ (.06) $ .29 $ (.22)
Earnings from discontinued operations .00 .39 .00 .73
---------- ----------- ----------- -----------
Basic Earnings per Share $ .02 $ .33 $ .29 $ .51
========== =========== =========== ===========
Diluted Earnings per Share of Common
Stock:
Earnings (loss) from continuing $ .02 $ (.06) $ .29 $ (.22)
operations
Earnings from discontinued operations .00 .39 .00 .73
---------- ----------- ----------- -----------
Diluted Earnings per Share $ .02 $ .33 $ .29 $ .51
========== =========== =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Dec. 31, 1997 June 30, 1997
------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $18,969,596 $27,081,412
Accounts receivable 6,718,407 6,691,313
Inventories 1,439,301 1,538,017
Prepaid and refundable taxes 839,890 813,872
Prepaid expenses and other 411,937 251,572
----------- -----------
Total Current Assets 28,379,131 36,376,186
----------- -----------
Property, Plant and Equipment - at cost
less accumulated depreciation of $14,179,189 at
December 31, 1997 and $13,296,041 at June 30, 1997 11,730,854 11,758,572
----------- -----------
Other Assets:
Excess of acquisition cost over value of net assets
acquired less accumulated amortization of $1,121,778
at December 31, 1997 and $1,077,844 at June 30, 1997 2,364,574 2,408,508
Cash surrender value of life insurance 973,323 779,041
Deposits and other 107,489 148,837
----------- -----------
Total Other Assets 3,445,386 3,336,386
----------- -----------
Total Assets $43,555,371 $51,471,144
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Dec. 31, 1997 June 30, 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $ 2,427,460 $ 6,006,361
Income taxes payable 987,432 5,804,724
Current portion of capital lease obligations 31,425 28,508
----------- -----------
Total Current Liabilities 3,446,317 11,839,593
----------- -----------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 123,001 139,480
Deferred income taxes 1,055,000 1,074,000
Accrued SERP liability 518,479 440,950
----------- -----------
Total Long-term Liabilities 1,696,480 1,654,430
----------- -----------
Total Liabilities 5,142,797 13,494,023
----------- -----------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 13,014,420 13,042,117
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,186,726 shares (at Dec. 31, 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 Dec. 31, 1997) 29,623
Issued and outstanding: 296,355 shares (at June 30, 1997) 29,635
Additional paid-in capital 7,527,278 7,493,378
Retained earnings 17,722,581 17,293,931
----------- -----------
Total Stockholders' Equity 25,398,154 24,935,004
----------- -----------
Total Liabilities and Stockholders' Equity $43,555,371 $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 six months ended Dec. 31
1997 1996
Cash Flows from Operating Activities:
<S> <C> <C>
Earnings (loss) from continuing operations $ 428,650 $ (320,826)
Earnings from discontinued operations 0 1,070,715
----------- -----------
Net earnings 428,650 749,889
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 1,128,599 1,021,972
Amounts attributable to non-owned interests (27,697) 553,635
Deferred income taxes (19,000) 214,000
Decrease in other assets 18,348 2,515
Increase in long-term liabilities 77,529 186,465
Changes in operating assets and liabilities:
Increase in accounts receivable (27,094) (500,414)
(Increase) decrease in inventories 98,716 (201,777)
Increase in prepaid expenses and other current assets (186,383) (526,805)
Increase (decrease) in accounts payable and accrued expenses (1,104,625) 1,595,231
Decrease in income taxes payable (4,817,292) (425,062)
Increase in deferred revenue 0 26,163
----------- -----------
Net Cash Provided by (Used in) Operating Activities (4,430,249) 2,695,812
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures, net (1,033,947) (1,632,504)
Increase in cash surrender value of life insurance (194,282) (85,938)
Increase in investment in subsidiary 0 (205,626)
----------- -----------
Net Cash Used in Investing Activities (1,228,229) (1,924,068)
----------- -----------
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 (1,813,562) (35,170)
Dividends paid (2,474,276) (177,644)
Proceeds from exercise of stock options 34,500 21,000
----------- -----------
Net Cash Used in Financing Activities (2,453,338) (191,814)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (8,111,816) 579,930
Cash and Cash Equivalents at Beginning of Period 27,081,412 10,234,224
----------- -----------
Cash and Cash Equivalents at End of Period $18,969,596 $10,814,154
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 54,719 $ 17,627
Income taxes paid $ 5,386,602 $ 1,383,916
Supplemental schedule of non-cash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 0 $ 58,543
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, 1997, the
Condensed Consolidated Statements of Earnings for the three months ended
December 31, 1997 and 1996, and the Condensed Consolidated Statements of Cash
Flows for the six months ended December 31, 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 December 31, 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 and six months ended December 31, 1996 have 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
Basic earnings (loss) per share data have been computed based upon the
weighted average number of common shares outstanding during each period. Diluted
earnings (loss) per share have been computed based upon the weighted average
number of common shares outstanding during the period including common stock
equivalents from dilutive stock options. The following numbers of shares have
been used in the computations:
<TABLE>
<CAPTION>
For the three months ended Dec. 31 For the six months ended Dec. 31
---------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 1,482,956 1,468,934 1,482,663 1,468,445
========= ========= ========= =========
Diluted 1,482,956 1,468,934 1,480,051 1,468,445
========= ========= ========= =========
</TABLE>
3. Accounts Receivable
<TABLE>
Accounts receivable consist of:
<CAPTION>
Dec. 31, 1997 June 30, 1997
<S> <C> <C>
Due from customers $6,211,208 $6,479,230
Miscellaneous 507,199 212,083
---------- ----------
6,718,407 6,691,313
Less: Allowance for doubtful accounts 0 0
---------- ----------
$6,718,407 $6,691,313
========== ==========
</TABLE>
<PAGE>
4. Equity in Insituform East
At December 31, 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 December
31, 1997. If all the options outstanding at December 31, 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 December 31, 1997.
5. Discontinued Operations
Prior to June 30, 1997, CERBCO beneficially held 800 shares, and
Capitol Office Solution'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. 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 three months and
six months ended December 31, 1996 are shown separately in the accompanying
condensed consolidated statements of earnings as earnings from discontinued
operations. Capitol's sales revenues of $6,137,669 and $11,501,352 for the three
months and six months ended December 31, 1996 are not included in sales in the
accompanying condensed consolidated statements of earnings.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
Dec. 31, 1997 June 30, 1997
Accounts payable $ 974,885 $1,655,097
Accrued compensation and related expenses 1,452,575 1,876,988
Dividends payable 0 2,474,276
---------- ----------
$2,427,460 $6,006,361
========== ==========
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.
Also as previously reported by the Company, two stockholders commenced
a derivative lawsuit in the Delaware Court of Chancery against the Eriksons in
August, 1990, making certain claims with respect to the Proposed Transaction
(the "Delaware Action"). The Delaware Action was finally concluded on December
3, 1997, when the Delaware Supreme Court issued its order affirming the findings
of the Court of Chancery with respect to (a) the trial court's assessment of
certain damages against the Eriksons on remand from a previous appeal and (b)
the renewed petition of plaintiffs' attorneys for an award of attorneys' fees
and expenses. Those findings by the Court of Chancery had been made on remand
from the same Delaware Supreme Court after a 1996 ruling in which the Supreme
Court affirmed the Court of Chancery's holding that CERBCO had not suffered any
transactional damages with respect to the Proposed Transaction.
As previously reported by the Company, in January 1993, a 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"). Plaintiffs were the
same two stockholders who were plaintiffs in the Delaware litigation, and a
former director of the Company, and 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. Plaintiffs also
claimed that Rogers & Wells committed malpractice by allegedly making
misrepresentations to the Company's Board and allegedly failing to properly
inform the Company's Board. Plaintiffs claimed 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 sought 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. Although the D.C. Complaint stated that it was filed on
behalf of the Company, management does not believe that Rogers & Wells should be
sued on any of the claims set forth therein.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay of 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 of the outcome of the Delaware litigation to the Delaware
Supreme Court and, subsequently, the stay was continued at least until such time
as the Delaware Court of Chancery ruled upon plaintiffs' pending motion for
post-remand relief. After the Delaware Supreme Court's most recent ruling on
December 3, 1997, finally affirming the Delaware Court of Chancery with respect
to such post-remand relief and a renewed petition for counsel fees and expenses,
the stay of the District of Columbia action was lifted, and plaintiffs filed an
amended D.C. Complaint. In the amended D.C. Complaint, plaintiffs assert
essentially the same conflicts of interest charges against Rogers & Wells but
shift their focus from the value of the alleged lost opportunity to the
litigation expenses incurred by the Company in the Delaware Action. Plaintiffs
now seek to recover from Rogers & Wells (i) damages in an amount equal to all
fees paid to Rogers & Wells, (ii) damages for more than $2 million in attorneys'
fees and expenses incurred by CERBCO in the Delaware Action and other
unspecified compensatory damages, and (iii) punitive damages. The Company's
response to the amended D.C. Complaint is due on or before March 27, 1998.
As previously reported by the Company, on October 23, 1996, Inliner
U.S.A. and CAT Contracting, Inc. filed an antitrust suit against Insituform
Technologies, Inc. ("ITI") and Insituform East 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 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
during the fiscal year ended June 30, 1997. In an extensive memorandum and order
of August 25, 1997, the Court granted a partial dismissal of plaintiffs' claims
and ordered plaintiffs to replead remaining potential claims. Plaintiffs filed a
motion for leave to file a Second Amended Complaint on September 29, 1997.
Defendants each filed responses to plaintiffs' motion. On January 30, 1998, the
Court by order denied plaintiffs' motion to file a second amended complaint
because the proposed amended complaint failed to comply in a number of material
respects with the Court's August 25, 1997 order. Plaintiffs have twenty days
from receipt of the Court's January 30, 1998 order to file a third amended
complaint or face dismissal of the case outright for failure to prosecute its
alleged claims. If plaintiffs file a third amended complaint, defendants have
been granted leave to submit additional 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 and
will not have a material adverse effect on the financial condition or the
results of operations of Insituform East.
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 earnings from continuing operations
and net earnings of $35,642 ($.02 per share) on sales of $5.5 million for the
second quarter of fiscal year 1998. For the first six months of fiscal year
1998, the Company reported consolidated earnings from continuing operations and
net earnings of $428,650 ($.29 per share) on sales of $14.6 million. For the
second quarter and first six months of fiscal year 1997, the Company recognized
consolidated losses from continuing operations of -$89,607 (-$.06 per share) on
sales of $6.6 million and -$320,826 (-$.22 per share) on sales of $12.0 million,
respectively. Consolidated net earnings for the second quarter and first six
months of the fiscal year 1997 were $480,476 ($.33 per share) and $749,889 ($.51
per share), respectively, including earnings from the operations of the
Company's discontinued copy machine products and services segment.
The Company attributed its approximately break-even fiscal year 1998
second quarter results to a consolidated net loss realized by Insituform, East,
Inc., the Company's majority-controlled and only remaining operating segment.
Insituform East and MIDSOUTH Partners, its majority-controlled subsidiary, are
principally engaged in the trenchless rehabilitation of underground sewers and
other pipelines using the patented Insituform(R) process. Insituform East and
its wholly-owned subsidiaries (collectively, "East") directly experienced
decreased sales at normal margins, while MIDSOUTH Partners saw significantly
reduced margins on work it performed during the quarter. Favorable results for
the first six months of fiscal year 1998 are primarily due to significant period
sales recognized in connection with the $4.7 million Perry Nuclear Power Plant
project, substantially completed during the first quarter of the fiscal year.
During the second quarter of fiscal year 1998, the parent company
incurred continuing legal expenses related to the Delaware and District of
Columbia lawsuits filed against CERBCO and others by two minority stockholders
in connection with the proposed private sale of a controlling interest in the
Company that was abandoned in September 1990. The first-filed of the two
lawsuits (the "Delaware Action") was finally concluded during the quarter just
ended, when the Delaware Supreme Court affirmed the Court of Chancery's
rejection of all but $143,364 of the plaintiffs' petition for an award against
CERBCO of approximately $1.6 million in attorneys' fees and expenses. After the
final disposition of the Delaware Action, the plaintiffs filed an amended
complaint in their District of Columbia lawsuit (the "D.C. Complaint"), and the
attendant legal expenses are expected to continue. From inception of the
litigations in 1990 through the quarter ended December 31, 1997, CERBCO's legal
fees and expenses relating to both lawsuits total approximately $2.3 million.
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.
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, absent unusual items 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 first quarter of fiscal year 1998 was representative of the
significant leveraging effect to positive earnings of increases in Insituform
East's period sales at normal margins while, conversely, Insituform East's
second quarter loss is representative of the result of depressed sales volume
despite normal margin levels. With respect to forward-looking information, and
while there can be no assurances regarding Insituform East's future operating
performance, the Company currently believes that present overall decreases in
total marketplace orders in East's territory, and in both immediately workable
and in twelve-month backlog share captured by East, are likely to produce
negative results for Insituform East in the third quarter of fiscal 1998. This
trend could continue through the remainder of the fiscal year, and perhaps
longer, although analysis of longer term data indicates that the fiscal year
1998 to date large decline in total East marketplace orders is a factor that
tends to average out over running three-year periods. Indeed, total marketplace
orders in fiscal year 1997 were abnormally high. In addition, while Insituform
East remains unable to predict the likelihood or timing of further favorable,
non-core, specialized work such as the large Perry Nuclear project, building
upon both Insituform East's success and its preeminent capability in this area
will continue as a strong focus in future business development.
Insituform East's total backlog value of all uncompleted and multi-year
contract awards was approximately $25.1 million at December 31, 1997 as compared
to $23.0 million at December 31, 1996. The twelve-month backlog at December 31,
1997 was approximately $10.8 million as compared to $21.8 million at December
31, 1996. The total backlog value of all uncompleted and multi-year contracts at
December 31, 1997 and 1996 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.
While potentially helpful as a possible trend indicator, backlog figures at
specific dates are not necessarily indicative of sales and earnings for future
periods due to the irregular timing and receipt of major project awards
including large, multi-year, menu-priced contracts with estimated but uncertain
order quantities further subject to the specifics of individual work releases.
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 lowest 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, typically at levels materially below normal margins, will necessarily
dilute the overall margin performance of Insituform East. Conversely, in "best
value" and quality based markets, 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
Second Quarter ended 12/31/97 Compared with Second Quarter ended 12/31/96
Consolidated sales decreased $1.1 million (-17%) from $6.6 million for
the quarter ended December 31, 1996 to $5.5 million for the quarter ended
December 31, 1997, due primarily to lower workable backlog levels experienced
during the second quarter of fiscal year 1998. Comparable period sales for East
decreased 22%, while comparable period sales for MIDSOUTH Partners decreased 3%.
Consolidated operating results decreased from an operating profit of
$0.1 million in the quarter ended December 31, 1996 to an operating loss of
- -$1.2 million in the quarter ended December 31, 1997, due to a 9% increase in
cost of sales resulting in a decrease in gross profit as a percentage of sales
from 26% for the second quarter of fiscal year 1997 to 2% for the second quarter
of fiscal year 1998. This decrease in gross profit as a percentage of sales is
due primarily to reduced margins on work performed by MIDSOUTH Partners and, to
a lesser extent, East's absorption of semi-fixed costs over reduced sales during
the second quarter of fiscal year 1998. Reduced margins on work performed by
MIDSOUTH Partners were due primarily to discounted sales and performance
inefficiencies. Insituform East's selling, general and administrative expenses
decreased $0.2 million (-15%), primarily as a result of decreased costs to
support decreased production activities and decreased legal expenses. Additional
legal costs were incurred during the second quarter of fiscal year 1997 in
connection with the Inliner U.S.A./CAT Contracting antitrust lawsuit. The parent
company's unallocated general corporate expenses also decreased $0.1 million in
the quarter ended December 31, 1997.
Investment income increased $0.2 million (170%) in the second quarter
of fiscal year 1998, primarily as a result of interest earned on the short-term
investment of cash realized from the sale of the Company's interest in Capitol
Office Solutions on June 30, 1997. Earnings from discontinued operations in the
second quarter of fiscal year 1997 resulted from the then operations of Capitol
Office Solutions.
Six Months Ended 12/31/97 Compared With Six Months Ended 12/31/96
Consolidated sales increased $2.7 million (22%) from $11.0 million for
the first six months of fiscal year 1997 to $14.6 million for the first six
months of fiscal year 1998, due primarily to the $4.7 million Perry Nuclear
Power Plant project, substantially completed during the first quarter of fiscal
year 1998. Comparable period sales for East increased 33%, while comparable
period sales for MIDSOUTH Partners decreased 7%.
Consolidated operating results increased from an operating loss of
- -$0.6 million in the six months ended December 31, 1996 to an operating profit
of $49,522 in the six months ended December 31, 1997. Cost of sales increased
22%, and gross profit as a percentage of sales increased from 19% to 20% as a
result. This modest increase in gross profit as a percentage of sales is due
primarily to absorption of fixed costs over increased sales, which more than
offset reduced margins on work performed by MIDSOUTH Partners during the first
six months of fiscal year 1998. Insituform East's selling, general and
administrative expenses decreased $69,301 (-3%), primarily as a result of lower
costs to support reduced production activities during the quarter ended December
31, 1997. The parent company's unallocated general corporate expenses also
decreased $0.1 million in the six months ended December 31, 1997.
Investment income increased $0.4 million (186%) in the first six months
of fiscal year 1998, primarily as a result of interest earned on the short-term
investment of cash realized from the Capitol Office Solutions sale. Earnings
from discontinued operations in the first six months of fiscal year 1997
resulted from the then operations of Capitol Office Solutions.
Financial Condition
During the six months ended December 31, 1997, the Company used $4.4
million in cash in operating activities, due primarily to net earnings of $0.4
million plus $1.1 million in depreciation and amortization expenses included in
operating results that did not require the outlay of cash offset by a $1.1
million decrease in accounts payable and accrued expenses and a $4.8 million
decrease in income taxes payable.
During the six months ended December 31, 1997, the Company expended
$1.0 million for equipment purchases and other capital improvements. 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 an $8.1 million decrease in cash
during the first six months of fiscal year 1998, its liquidity remained strong
with working capital of almost $25 million and a current ratio of 8.2 at
December 31, 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 moved to the District of
Columbia.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 3, 1997, the Delaware Supreme Court issued an Order in the
derivative litigation brought by two stockholders of the Company against CERBCO
and its controlling stockholders, George Wm. Erikson and Robert W. Erikson
(together, "the Eriksons"), affirming a Delaware Court of Chancery judgment
which largely denied plaintiffs' further claims for damages and the petition of
plaintiffs' attorneys for $1,529,867 in attorneys' fees and $133,398 in costs
and damages. The Supreme Court affirmed the award of only $143,364 to
plaintiffs' attorneys to be paid by CERBCO and court costs of $9,359 to be paid
by the Eriksons, thus concluding this lengthy Delaware litigation commenced in
August 1990.
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 pending in the Superior Court of the
District of Columbia, and (b) 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
7. 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
On December 19, 1997, an annual meeting of stockholders was held to
allow stockholders to vote for the uncontested reelection of directors and to
approve the Company's 1997 Board of Directors' Stock Option Plan. The numbers of
votes cast for and against each of the proposals, as well as abstentions and
broker non-votes, were as follows:
Election of Directors
FOR AGAINST
Common:
P.C. Kincheloe 1,000,229 108,144
========== =======
Class B Common:
R.W. Erikson 258,064 7,885
======== =====
G.Wm. Erikson 260,358 5,591
======== =====
W.C. Hayes 260,358 5,591
======== =====
<TABLE>
<CAPTION>
Stock Option Plan BROKER
FOR AGAINST ABSTAIN NON-VOTES
Shares Votes Shares Votes Shares Votes Shares
<S> <C> <C> <C> <C> <C> <C> <C>
Common 411,718 411,718 227,526 227,526 17,316 17,316 451,813
Class B Common 251,779 2,517,790 11,766 117,660 275 2,750 2,129
------- --------- ------- ------- ------ ------ -------
TOTAL 663,497 2,929,508 239,292 345,186 17,591 20,066 453,942
======= ========= ======= ======= ====== ====== =======
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule for the period ended December 31, 1997
99 - CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the three months ended December 31, 1997;
Statement of Earnings Information for the six months ended
December 31, 1997; Balance Sheet Information and Consolidating
Elimination Entries as of December 31, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
<PAGE>
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 13, 1998
CERBCO,Inc.
(Registrant)
/s/ ROBERT W. ERIKSON
Robert W. Erikson
President
/s/ ROBERT F. HARTMAN
Robert F. Hartman
Vice President & Chief Financial 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, 1997;
Statement of Earnings Information for the Six Months Ended
December 31, 1997; Balance Sheet Information; and
Consolidating Elimination Entries as of December 31, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 18,970
<SECURITIES> 0
<RECEIVABLES> 6,718
<ALLOWANCES> 0
<INVENTORY> 1,439
<CURRENT-ASSETS> 28,379
<PP&E> 25,910
<DEPRECIATION> 14,179
<TOTAL-ASSETS> 43,555
<CURRENT-LIABILITIES> 3,446
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 25,250
<TOTAL-LIABILITY-AND-EQUITY> 43,555
<SALES> 14,636
<TOTAL-REVENUES> 14,636
<CGS> 11,744
<TOTAL-COSTS> 11,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 1,295
<INCOME-TAX> 486
<INCOME-CONTINUING> 429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
THREE MONTHS ENDED DECEMBER 31, 1997
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C> <C>
Sales $ 5,487,623 $ 0 $ 0 $ 5,487,623
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 5,373,820 0 0 5,373,820
Selling, general and administrative expenses 1,303,361 0 162,228 1,141,133
----------- ----------- ----------- -----------
Total Costs and Expenses 6,677,181 0 162,228 6,514,953
----------- ----------- ----------- -----------
Operating Profit (Loss) (1,189,558) 0 (162,228) (1,027,330)
Investment Income 306,670 (A) (12,810) 293,202 26,278
Interest Expense (8,026) (A) 12,810 0 (20,836)
Other Income - net 207,696 0 165,744 41,952
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests and
Income Taxes (683,218) 0 296,718 (979,936)
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 250,950 0 0 250,950
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (432,268) 0 296,718 (728,986)
Provision (Credit) for Income Taxes (169,000) 0 116,000 (285,000)
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (263,268) 0 180,718 (443,986)
Non-Owned Interests in Loss of Insituform East 298,910 (B) 298,910 0 0
----------- ----------- ----------- -----------
NET EARNINGS $ 35,642 (C) $ 298,910 $ 180,718 $ (443,986)
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF EARNINGS INFORMATION
SIX MONTHS ENDED DECEMBER 31, 1997
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C> <C>
Sales $14,635,908 $ 0 $ 0 $14,635,908
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 11,743,897 0 0 11,743,897
Selling, general and administrative expenses 2,842,489 0 372,816 2,469,673
----------- ----------- ----------- -----------
Total Costs and Expenses 14,586,386 0 372,816 14,213,570
----------- ----------- ----------- -----------
Operating Profit 49,522 0 (372,816) 422,338
Investment Income 552,323 (D) (14,227) 521,818 44,732
Interest Expense (40,492) (D) 14,227 0 (54,719)
Other Income - net 325,600 0 221,021 104,579
----------- ----------- ----------- -----------
Earnings Before Non-Owned Interests and
Income Taxes 886,953 0 370,023 516,930
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 408,096 0 0 408,096
----------- ----------- ----------- -----------
Earnings Before Non-Owned Interests in
Insituform East and Income Taxes 1,295,049 0 370,023 925,026
Provision for Income Taxes 486,000 0 126,000 360,000
----------- ----------- ----------- -----------
Earnings Before Non-Owned Interests in
Insituform East 809,049 0 244,023 565,026
Non-Owned Interests in Earnings of Insituform East (380,399) (E) (380,399) 0 0
----------- ----------- ----------- -----------
NET EARNINGS $ 428,650 (F) $ (380,399) $ 244,023 $ 565,026
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
DECEMBER 31, 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 $18,969,596 $ 0 $17,740,017 $1,229,579
Accounts receivable 6,718,407 0 566 6,717,841
Inventories 1,439,301 0 0 1,439,301
Prepaid and refundable taxes 839,890 0 0 839,890
Prepaid expenses and other 411,937 0 0 411,937
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 28,379,131 0 17,740,583 10,638,548
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (G) (7,505,713) 7,505,713 0
Intercompany receivables and payables 0 0 402,464 (402,464)
Property, Plant and Equipment - net of
accumulated depreciation 11,730,854 0 92,385 11,638,469
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,364,574 2,364,574 0 0
Cash surrender value of life insurance 973,323 0 973,323 0
Deposits and other 107,489 0 44,489 63,000
----------- ----------- ----------- -----------
TOTAL ASSETS $43,555,371 $ (5,141,139) $26,758,957 $21,937,553
=========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 0 $ 0 $ 0 $ 0
Accounts payable and accrued liabilities 3,414,892 0 1,026,951 2,387,941
Current portion of capital lease obligations 31,425 0 0 31,425
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 3,446,317 0 1,026,951 2,419,366
Long-Term Liabilities:
Capital lease obligations 123,001 0 0 123,001
Deferred income taxes 1,055,000 0 0 1,055,000
Accrued SERP liability 518,479 0 518,479 0
----------- ----------- ----------- -----------
TOTAL LIABILITIES 5,142,797 0 1,545,430 3,597,367
----------- ----------- ----------- -----------
Non-Owned Interests: 13,014,420 (E)(G) 10,973,054 0 2,041,366
----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock 118,672 (G) (175,486) 118,672 175,486
Class B stock 29,623 (G) (11,904) 29,623 11,904
Additional paid-in capital 7,527,278 (G) (4,000,424) 7,527,278 4,000,424
Retained earnings 17,722,581 (F)(G) (13,115,992) 17,537,954 13,300,619
Treasury stock 0 (G) 1,189,613 0 (1,189,613)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 25,398,154 (16,114,193) 25,213,527 16,298,820
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,555,371 $(5,141,139) $26,758,957 $21,937,553
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
<CAPTION>
CONSOLIDATING ELIMINATION ENTRIES
DECEMBER 31, 1997
(unaudited)
(A)
<S> <C> <C>
Investment income $ 12,810
Interest expense $ 12,810
To eliminate interest expense paid by Insituform East
to CERBCO in the three months ended December 31, 1997.
(B)
Non-owned interests $ 298,910
Non-owned interests in loss of subsidiary $ 298,910
To record non-owned interests in loss of Insituform East
for the three months ended December 31, 1997.
(C)
Current quarter earnings adjustments $ 298,910
Retained Earnings $ 298,910
To close out impact of eliminating entries on current
quarter's statement of earnings.
(D)
Investment income $ 14,227
Interest expense $ 14,227
To eliminate interest expense paid by Insituform East
to CERBCO in the six months ended December 31, 1997.
(E)
Non-owned interests in earnings of subsidiary $ 380,399
Non-owned interests $ 380,399
To record non-owned interests in earnings of Insituform
East for the six months ended December 31, 1997.
(F)
Retained Earnings $ 380,399
Current quarter earnings adjustments $ 380,399
To close out impact of eliminating entries on six
month's statement of earnings.
(G)
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 2,364,574
acquired
Treasury stock $ 1,189,613
Non-owned interests 10,592,655
Investment in subsidiary 7,505,713
To eliminate investments in consolidated subsidiaries.
</TABLE>
