UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from --------------------to---------------------------
Commission file number: 0-16749
CERBCO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1448835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3421 Pennsy Drive, Landover, Maryland 20785
(Address of principal executive offices) (Zip Code)
Registrant's telephone and fax numbers, including area code:
301-773-1784 (tel)
301-322-3041 (fax)
301-773-4560 (24-hour public information FaxVault System)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of November 2, 1998, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,186,976
Class B Common Stock 295,980
---------
Total 1,482,956
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements...................................................3
Condensed Consolidated Statements of Earnings for the Three Months
Ended September 30, 1998 and September 30, 1997 (unaudited)............3
Condensed Consolidated Balance Sheets as of September 30, 1998
and June 30, 1998 (unaudited)..........................................4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and September 30, 1997 (unaudited)............6
Notes to Condensed Consolidated Financial Statements (unaudited).......7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................13
Item 2. Changes in Securities and Use of Proceeds.............................13
Item 3. Defaults upon Senior Securities.......................................13
Item 4. Submission of Matters to a Vote of Security Holders...................13
Item 5. Other Information.....................................................13
Item 6. Exhibits and Reports on Form 8-K......................................13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
<CAPTION>
For the three months ended Sept. 30
1998 1997
<S> <C> <C>
Sales $6,047,942 $9,148,285
---------------- ---------------
Costs and Expenses:
Cost of sales 5,050,451 6,370,077
Selling, general and administrative expenses 1,206,539 1,539,128
----------------
---------------
Total Costs and Expenses 6,256,990 7,909,205
---------------- ---------------
Operating Profit (Loss) (209,048) 1,239,080
Investment Income 250,862 245,653
Interest Expense (12,705) (32,466)
Other Income - net 33,638 117,904
---------------- ---------------
Earnings Before Non-Owned Interests and Incomes Taxes 62,747 1,570,171
Non-Owned Interest in Pretax Loss of Midsouth Partners (61,623) (157,146)
---------------- ---------------
Earnings Before Non-Owned Interests in Insituform East, Inc.
and Income Taxes 124,370 1,727,317
Provision for Income Taxes 54,000 655,000
---------------- ---------------
Earnings Before Non-Owned Interests in Insituform East, Inc. 70,370 1,072,317
Non-Owned Interests in Earnings of Insituform East, Inc. 35,633 679,309
---------------- ---------------
NET EARNINGS $ 34,737 $ 393,008
================ ===============
Net Earnings per Share of Common Stock:
Basic Earnings per Share $ 0.02 $ 0.27
================ ===============
Diluted Earnings per Share $ 0.02 $ 0.27
================ ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
-------------------------------------
Sept. 30, 1998 June 30, 1998
---------------- ---------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 19,632,410 $ 20,405,039
Accounts receivable 6,182,492 5,185,047
Inventories 1,372,576 1,381,861
Prepaid and refundable taxes 970,928 948,486
Prepaid expenses and other 354,993 420,931
---------------- ---------------
Total Current Assets 28,513,399 28,341,364
---------------- ---------------
Property, Plant and Equipment - at cost less accumulated depreciation of
$14,697,279 at September 30, 1998 and $14,245,135 at June 30, 1998 11,108,247 11,196,448
---------------- ---------------
Other Assets:
Excess of acquisition cost over value of net assets acquired less accumulated
amortization of $1,187,679 at September 30, 1998 and $1,165,712 at
June 30, 1998 2,298,673 2,320,640
Cash surrender value of SERP life insurance 1,310,554 1,230,255
Deposits and other 102,489 122,479
----------------
---------------
Total Other Assets 3,711,716 3,673,374
---------------- ---------------
Total Assets $ 43,333,362 $ 43,211,186
================ ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
--------------------------------------
Sept. 30, 1998 June 30, 1998
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Partner's loans to Midsouth Partners $ 250,000 $ 250,000
Accounts payable and accrued liabilities 2,588,796 2,701,678
Income taxes payable 1,410,825 1,350,825
Current portion of capital lease obligations 36,390 34,621
-----------------
-----------------
Total Current Liabilities 4,286,011 4,337,124
----------------- -----------------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 95,052 104,829
Deferred income taxes 1,019,000 915,000
Accrued SERP liability 676,291 605,973
-----------------
-----------------
Total Long-term Liabilities 1,790,343 1,625,802
-----------------
-----------------
Total Liabilities 6,076,354 5,962,926
----------------- -----------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 12,042,273 12,068,262
----------------- -----------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,186,976 shares 118,697 118,697
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 295,980 shares 29,598 29,598
Additional paid-in capital 7,527,278 7,527,278
Retained earnings 17,539,162 17,504,425
----------------- -----------------
Total Stockholders' Equity 25,214,735 25,179,998
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 43,333,362 $ 43,211,186
================= =================
See notes to condensed consolidated fiancial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
For the three months ended Sept. 30
---------------- ---- ----------------
1998 1997
---------------- ----------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 34,737 $ 393,008
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 510,204 531,807
Amounts attributable to non-owned interests (25,990) 522,163
Deferred income taxes 104,000 (35,000)
Decrease in other assets 17,990 18,348
Increase in accrued SERP liability 70,318 38,764
Changes in operating assets and liabilities:
Increase in accounts receivable (997,445) (3,446,611)
Decrease (increase) in inventories 9,285 (240,231)
Decrease in prepaid expenses and other current assets 43,496 72,403
Increase in accounts payable and accrued expenses 35,414 1,256,771
Increase (decrease) in income taxes payable 60,000 (4,471,387)
---------------- ----------------
Net Cash Used in Operating Activities (137,991) (5,359,965)
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures, net (398,035) (480,960)
Increase in cash surrender value of SERP life insurance (80,299) (77,243)
---------------- ----------------
Net Cash Used in Investing Activities (478,334) (558,203)
---------------- ----------------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit 0 1,800,000
Principal payments on revolving lines of credit and
capital lease obligations (8,008) (1,206,616)
Dividends paid (148,296) (2,474,276)
Proceeds from exercise of stock options 0 30,750
---------------- ----------------
Net Cash Used in Financing Activities (156,304) (1,850,142)
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (772,629) (7,768,310)
Cash and Cash Equivalents at Beginning of Period 20,405,039 27,081,412
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 19,632,410 $ 19,313,102
================ ================
Supplemental disclosure of cash flow information:
Interest paid $ 12,705 $ 32,466
================ ================
Income taxes paid (refunded) $ (87,598) $ 4,953,522
================ ================
See notes to condensed conslidated financial statements.
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Financial Information
The Condensed Consolidated Balance Sheet as of September 30, 1998, the
Condensed Consolidated Statements of Earnings for the three months ended
September 30, 1998 and 1997, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1998 and 1997 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1998 (unaudited) has been derived from the Company's June 30, 1998
audited financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September 30,
1998 and for all periods presented have been made.
The condensed consolidated financial statements include the accounts of
the parent holding company, CERBCO, Inc. ("CERBCO"); and its majority-controlled
subsidiary, Insituform East, Incorporated ("Insituform East"). 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, 1998. Operating results for interim periods
are not necessarily indicative of operating results for an entire fiscal year.
2. Earnings Per Share
Basic earnings per share data are computed based upon the weighted
average number of common shares outstanding during each period. Diluted earnings
per share are computed based upon the weighted average number of common shares
outstanding during the period including common stock equivalents from dilutive
stock options, if any. The weighted average number of common shares outstanding
used in computing diluted earnings per share for the three months ended
September 30, 1998 and 1997 include no net shares associated with unexercised
dilutive stock options. The following numbers of shares have been used in the
earnings per share computations:
For the three months ended Sept. 30
1998 1997
Basic 1,482,956 1,482,369
========= =========
Diluted 1,482,956 1,482,369
========= =========
3. Accounts Receivable
Accounts receivable consist of:
Sept. 30, 1998 June 30, 1998
Due from customers $6,102,137 $5,134,644
Miscellaneous 80,355 50,403
---------- ----------
6,182,492 5,185,047
Less: Allowance for doubtful accounts 0 0
---------- ----------
$6,182,492 $5,185,047
========== ==========
4. Equity in Insituform East
At September 30, 1998, CERBCO beneficially held 1,127,500 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 27.8% of the Common Stock, 99.5%
of the Class B Common Stock, 32.7% of the total equity and 58.1% of the total
voting power of all outstanding classes of Insituform East common stock. Holders
of Class B Common Stock, voting separately as a class, have the right to elect
the remaining members of the Board of Directors after election of not less than
25% of such members by holders of shares of Common Stock, voting separately as a
class.
From time to time, Insituform East issues additional shares of stock as
a result of stock dividends and exercised stock options. Changes in capital
structure resulting from such additional stock issues decrease CERBCO's equity
ownership. No additional shares were issued in the three months ended September
30, 1998. If all the options outstanding at September 30, 1998 were exercised,
the resulting percentages of CERBCO's equity ownership and total voting power
would be 29.4% and 54.4%, respectively.
From time to time, Insituform East purchases shares of its common stock
for treasury. Changes in capital structure resulting from such stock purchases
increase CERBCO's equity ownership. Insituform East did not purchase any shares
during the three months ended September 30, 1998.
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
Sept. 30, 1998 June 30, 1998
Accounts payable $1,118,788 $1,154,576
Accrued compensation and related expenses 1,470,008 1,398,806
Dividends payable 0 148,296
---------- ----------
$2,588,796 $2,701,678
========== ==========
6. 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 finally was 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 Action, 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 Action 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. On March 27, 1998,
the Company filed its answer to the amended D.C. Complaint, in which it denied
all liability and asserted certain affirmative defenses. On the same day, it
filed its motion for summary judgment, together with a supporting memorandum of
law, on the grounds of collateral estoppel and res judicata. Rogers & Wells
likewise answered the amended D.C. Complaint, denying liability, and filed a
motion for summary judgment on collateral estoppel grounds. On Thursday, May 7,
1998, the Company filed its reply memorandum of points and authorities in
support of its motion for summary judgment. A decision from the D.C. Court is
expected later this year.
As previously reported, on June 30, 1998, Inliner U.S.A. and CAT
Contracting, Inc. filed an antitrust suit against ITI, Insituform Gulf South,
Inc. 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), Insituform Gulf South, Inc., and Insituform East
of Sections 1 and 2 of the Sherman Act, Section 2 of the Clayton Act, as amended
by the Robinson-Patman Act, Section 43(a) of the Lanham Act, business
disparagement, tortious interference with contracts and prospective business
relationships, and unfair competition. Plaintiffs are seeking from the
defendants an unspecified amount of compensatory damages, treble damages and
attorneys' fees, as well as punitive damages of $50 million. Plaintiffs'
allegations were consistent with the allegations contained in the third amended
complaint of earlier litigation initiated October 23, 1996 and dismissed without
prejudice on June 18, 1998.
Insituform East believes it has strong defenses to, and is vigorously
contesting, this suit. On August 17,1998, Insituform East filed its answer
denying plaintiffs claims and a motion to dismiss this action. The court has not
yet taken action with respect to this motion. 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. The Company is
also involved in other contingencies arising out of the ordinary course of
business, none of which could, in the opinion of management, materially affect
the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported consolidated net earnings of $34,737 ($.02 per
share) on sales of $6.0 million for the first quarter of fiscal year 1999. For
the first quarter of the previous fiscal year, the Company recognized
consolidated net earnings of $393,008 ($.27 per share) on sales of $9.1 million.
The Company attributed its modestly favorable first quarter results in
fiscal year 1999 to the positive results of Insituform East, Inc. ("Insituform
East") and the parent company's short-term investment earnings, in equal
measure. Insituform East, the Company's majority-controlled subsidiary and only
operating segment, recognized consolidated net earnings of $52,928 on sales of
$6.0 million, contributing earnings of $17,295 to CERBCO. The parent company
contributed earnings of $17,442. The Company's much more favorable first quarter
sales and earnings in fiscal year 1998 were primarily a result of a significant
contribution to both sales and earnings from the $4.7 million project performed
by Insituform East at the Perry Nuclear Power Plant in Perry, Ohio.
With respect to forward-looking information, and while there can be no
assurances regarding the Company's future operating performance, based on the
volume and mix of Insituform East's present and expected workable backlog of
customer orders, the Company presently anticipates that a combination of
additional normal margin sales and increased production levels by Insituform
East will be required to sustain positive operating results through the
remainder of fiscal year 1999. 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 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, its earnings can, at times, be severely reduced
or eliminated during periods of 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 Insituform East's period sales typically leverage positive earnings
significantly.
The Company believes the trenchless pipeline reconstruction marketplace
is continuing to expand, thereby enticing, however, the entry of ever more
imitations and substitute products hoping that cheap price alone may permit them
to succeed in a market otherwise dominated by Insituform. In those limited
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,
necessarily dilutes 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 are often politically
reluctant to modernize from simply "low bid" to "best value" evaluations when
buying sophisticated processes and technologies. In the face of mounting
technical failures from awards based upon lowest price, municipalities also are
expected over time to reevaluate simple low bid award criteria - in favor of
"best value" award criteria - when procuring trenchless technology for the
rehabilitation of older pipelines.
Results of Operations
First Quarter ended 9/30/98 Compared with First Quarter ended 9/30/97
Consolidated sales decreased $3.1 million (-34%) from $9.1 million for
the quarter ended September 30, 1997 to $6.0 million for the quarter ended
September 30, 1998 as a result of increased production activities resulting from
Insituform East's Perry Nuclear project in the first quarter of fiscal year
1998. Consolidated cost of sales decreased 22% in the first quarter of fiscal
year 1999, a lesser percentage than the decrease in sales. As a result, gross
profit as a percentage of sales decreased from 30% of sales for the first
quarter of fiscal year 1998 to 16% of sales for the first quarter of fiscal year
1999. This decrease reflects primarily the absorption of semi-fixed costs over a
lower sales volume and, to a lesser extent, to some sales at lower margins.
Consolidated operating results decreased from an operating profit of
$1.2 million in the quarter ended September 30, 1997 to an operating loss of
- -$0.2 million in the quarter ended September 30, 1998. The operating profit in
the first quarter of fiscal year 1998 was due primarily to the significant
contribution from Insituform East's nuclear power plant project. In the first
quarter of fiscal year 1999, Insituform East recognized a slight operating loss
due to its lower margins, despite a decrease in selling, general and
administrative expenses of $0.3 million (-22%) resulting from decreased
production activities. The parent company's unallocated general corporate
expenses also decreased slightly.
Financial Condition
During the quarter ended September 30, 1998, the Company used $0.1
million in cash in operating activities, due primarily to a $1.0 million
increase in Accounts Receivable that more than offset net earnings plus
depreciation and amortization expenses not requiring the outlay of cash. The
increase in accounts receivable is due primarily to an increase in Insituform
East's sales from the quarter ended June 30, 1998 to the quarter ended September
30, 1998.
The Company used $0.5 million in cash investing activities during the
quarter ended September 30, 1998, primarily for equipment purchases and other
capital improvements. The Company also used $0.2 million in financing
activities, primarily due to the payment of dividends by the parent company,
CERBCO. Despite the $0.8 million net decrease in cash during the first quarter
of fiscal year 1999, the Company's liquidity remained strong with working
capital of over $24 million and a current ratio of 6.65 at September 30, 1998.
The Company anticipates that Insituform East will continue to expand
production capabilities in the current fiscal year which, along with improving
operational performance, will require additional capital expenditures.
Management believes that Insituform East has cash reserves, bank line of credit
availability or borrowing potential against unencumbered assets sufficient to
meet future cash flow requirements. In addition, the parent holding company has
cash and temporary investments in excess of $18 million which, pending longer
term investment, management believes are more than adequate to meet its own cash
flow requirements and the temporary requirements of Insituform East in the
foreseeable future.
Year 2000 Issues
The inability of present computerized systems to process dates
correctly beyond December 31, 1999 and the potential impact on businesses and
governments in the future are generally referred to as "Year 2000 Issues."
The Company has implemented plans to address Year 2000 issues. Primary
areas of focus include the Company's information technology systems, the
Company's non-information technology systems, the Year 2000 readiness of the
Company's vendors and suppliers and the Year 2000 readiness of the Company's
major customers. Because the Company's primary products and services neither
include nor rely upon computerized components, the Company believes that there
are no additional contingencies associated with actual or implied warranties
related to its products and services resulting from year 2000 issues.
With respect to the Company's information technology systems, the
Company's primary accounting and information process system is Year 2000
compliant and will recognize years 2000 through 2029 in the proper century. The
Company's preliminary assessment of supporting information systems is that these
systems either are Year 2000 compliant, can be modified to become Year 2000
compliant, or should not have a significant impact on either the primary
accounting and information system or the Company's operating activities should
non-compliant systems not be properly modified.
With respect to the Company's non-information technology systems, the
Company is still in the preliminary assessment stage. The Company is dependent
on information from vendors and suppliers in assessing and evaluating these
systems. As potential Year 2000 issues are identified, implementation plans are
developed and executed. The Company has completed corrective action for its
office telephone system and initiated corrective action for its headquarters
facility security system, two systems that were identified as not being Year
2000 compliant.
With respect to the Company's suppliers and customers, the Company has
initiated preliminary correspondence with selected critical suppliers and
customers. Responses received to date indicate that responding suppliers and
customers either are currently Year 2000 compliant or expect to be Year 2000
compliant by December 31, 1999. Prior to December 31, 1998, the Company plans to
seek to obtain responses from suppliers and customers who have not as yet
responded to inquiries and develop a plan to monitor and assess Year 2000
readiness from respondents not as yet Year 2000 compliant.
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $200,000. This preliminary estimate is based on
presently available information and will be updated as the Company continues its
assessment and proceeds with implementation. Specifically, this estimate would
change if, after receipt of information from key suppliers or customers, a
formal contingency plan required development and implementation. The Company has
incurred approximately $12,000 in implementation costs through September 30,
1998.
There can be no assurances that the Company's Year 2000 Plan will be
successful. The Company is dependent on vendors to identify and correct Year
2000 issues related to the Company's utilities and equipment using computerized
components. In addition, if key vendors fail to provide the Company with
materials critical to its operations, or with sufficient electrical power or
other utilities, or if transportation of the Company's personnel and equipment
is seriously impeded, then any such failure or impedance could have a material
adverse effect on the operational performance and financial condition of the
Company.
In addition, if major municipal, industrial or federal government
customers are seriously affected, directly or indirectly, by Year 200 issues
such that pipeline rehabilitation programs are delayed or abandoned, this too
could have a material adverse effect on the operational performance and
financial condition of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one prior to June 30, 1999, based primarily on potential actions that
would be required if key vendors or customers were unable to address and resolve
Year 2000 issues that would directly or indirectly impact the Company's ability
to conduct normal business operations in the Year 2000 and beyond.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, "Notes to Condensed Consolidated Financial
Statements (unaudited) - Note 6. Contingencies" for details concerning (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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
99 - CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the three months ended September 30, 1998;
Balance Sheet Information; and Consolidating Elimination Entries
as of September 30, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998
CERBCO, Inc.
(Registrant)
/s/ROBERT W. ERIKSON
Robert W. Erikson
President
/s/ROBERT F. HARTMAN
Robert F. Hartman
Vice President, Secretary & Treasurer
(Principal Financial Officer and Chief Accounting Officer)
Exhibits to CERBCO, Inc. Form 10-Q
Exhibit 27. CERBCO, Inc. Financial Data Schedule
Exhibit 99. CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the Three Months Ended September 30, 1998;
Balance Sheet Information; and Consolidating Elimination
Entries as of September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000826821
<NAME> CERBCO, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 19,632
<SECURITIES> 0
<RECEIVABLES> 6,182
<ALLOWANCES> 0
<INVENTORY> 1,373
<CURRENT-ASSETS> 28,513
<PP&E> 25,806
<DEPRECIATION> 14,697
<TOTAL-ASSETS> 43,333
<CURRENT-LIABILITIES> 4,286
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 25,066
<TOTAL-LIABILITY-AND-EQUITY> 43,333
<SALES> 6,048
<TOTAL-REVENUES> 6,048
<CGS> 5,050
<TOTAL-COSTS> 5,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 124
<INCOME-TAX> 54
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENTS OF EARNINGS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1998
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
----------------- --------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Sales $6,047,942 $0 $0 $6,047,942
----------------- --------------- ----------------- --------------------
Costs and Expenses:
Cost of sales 5,050,451 0 0 5,050,451
Selling, general and administrative 1,206,539 0 166,713 1,039,826
expenses
----------------- --------------- ----------------- --------------------
Total Costs and Expenses 6,256,990 0 166,713 6,090,277
----------------- --------------- ----------------- --------------------
Operating Loss (209,048) 0 (166,713) (42,335)
Investment Income 250,862 0 226,122 24,740
Interest Expense (12,705) 0 0 (12,705)
Other Income - net 33,638 0 (21,967) 55,605
----------------- --------------- ----------------- --------------------
Earnings Before Non-Owned Interests and
Income Taxes 62,747 0 37,442 25,305
Non-Owned Interest in Pretax Loss of
Midsouth Partners (61,623) 0 0 (61,623)
----------------- --------------- ----------------- --------------------
Earnings Before Non-Owned Interests in
Insituform East and Income Taxes 124,370 0 37,442 86,928
Provision for Income Taxes 54,000 0 20,000 34,000
----------------- --------------- ----------------- --------------------
Earnings Before Non-Owned Interests in
Insituform East 70,370 0 17,442 52,928
Non-Owned Interests in Earnings of 35,633 (A) 35,633 0 0
Insituform East
----------------- --------------- ----------------- --------------------
NET EARNINGS $34,737 $(35,633) $17,442 $52,928
================= =============== ================= ====================
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
SEPTEMBER 30, 1998
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
---------------- ---------------- ----------------- -----------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $19,632,410 $0 $18,250,869 $1,381,541
Accounts receivable 6,182,492 0 0 6,182,492
Inventories 1,372,576 0 0 1,372,576
Prepaid and refundable taxes 970,928 0 306,921 664,007
Prepaid expenses and other 354,993 0 13,491 341,502
---------------- ---------------- ----------------- -----------------
TOTAL CURRENT ASSETS 28,513,399 0 18,571,281 9,942,118
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (B) (7,331,357) 7,331,357 0
Intercompany receivables and payables 0 0 3,820 (3,820)
Property, Plant and Equipment - net of
accumulated depreciation 11,108,247 0 85,492 11,022,755
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,298,673 (B) 2,298,673 0 0
Cash surrender value of SERP life insurance 1,310,554 0 1,230,255 80,299
Deposits and other 102,489 0 44,489 58,000
---------------- ---------------- ----------------- -----------------
TOTAL ASSETS $43,333,362 $(5,032,684) $27,266,694 $21,099,352
================ ================ ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Partner loans to Midsouth Partners $250,000 $0 $0 $250,000
Accounts payable and accrued liabilities 3,999,621 0 1,419,535 2,580,086
Current portion of capital lease obligations 36,390 0 0 36,390
---------------- ---------------- ----------------- -----------------
TOTAL CURRENT LIABILITIES 4,286,011 0 1,419,535 2,866,476
Long-Term Liabilities:
Capital lease obligations 95,052 0 0 95,052
Deferred income taxes 1,019,000 0 0 1,019,000
Accrued SERP liability 676,291 0 649,719 26,572
---------------- ---------------- ----------------- -----------------
TOTAL LIABILITIES 6,076,354 0 2,069,254 4,007,100
---------------- ---------------- ----------------- -----------------
Non-Owned Interests: 12,042,273 (A)(B) 10,404,836 0 1,637,437
---------------- ---------------- ----------------- -----------------
Stockholders' Equity:
Common stock 118,697 (B) (175,486) 118,697 175,486
Class B stock 29,598 (B) (11,904) 29,598 11,904
Additional paid-in capital 7,527,278 (B) (4,000,424) 7,527,278 4,000,424
Retained earnings 17,539,162 (B)(C) (12,439,319) 17,521,867 12,456,614
Treasury stock 0 (B) 1,189,613 0 (1,189,613)
---------------- ---------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 25,214,735 (15,437,520) 25,197,440 15,454,815
---------------- ---------------- ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,333,362 $(5,032,684) $27,266,694 $21,099,352
================ ================ ================= =================
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
SEPTEMBER 30, 1998
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Non-owned interests in earnings of subsidiaries $35,633
Non-owned interests $35,633
To record non-owned interests in earnings of subsidiaries
for the three months ended September 30, 1998.
(B)
Common stock $ 175,486
Class B stock 11,904
Additional paid-in capital 4,000,424
Retained earnings 12,403,686
Excess of acquisition cost over value of net assets acquired 2,298,673
Treasury stock $ 1,189,613
Non-owned interests 10,369,203
Investment in subsidiary 7,331,357
To eliminate investments in consolidated subsidiaries.
(C)
Retained Earnings $35,633
Current year earnings adjustments $35,633
To close out impact of current quarter's statement of earnings.
</TABLE>
