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: March 31, 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 May 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 Operations for the Three
Months and the Nine Months Ended March 31, 1998 and
March 31, 1997 (unaudited)............................................3
Condensed Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 (unaudited).......................................4-5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1998 and March 31, 1997 (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.....................................13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
For the three months ended Mar. 31 For the nine months ended Mar. 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $4,147,345 $6,271,529 $18,783,253 $18,229,917
---------- ---------- ----------- -----------
Costs and Expenses:
Cost of sales 4,510,966 5,813,443 16,254,863 15,447,279
Selling, general and administrative expenses 1,224,374 1,665,356 4,066,863 4,652,350
---------- ----------- ----------- -----------
Total Costs and Expenses 5,735,340 7,478,799 20,321,726 20,099,629
---------- ----------- ----------- -----------
Operating Profit (Loss) (1,587,995) (1,207,270) (1,538,473) (1,869,712)
Investment Income 239,023 51,579 791,346 244,722
Interest Expense (8,048) (9,389) (48,540) (23,800)
Other Income - net 127,090 4,207 452,690 38,368
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests and
Income Taxes (1,229,930) (1,160,873) (342,977) (1,610,422)
Non-Owned Interest in Pretax (Earnings) Loss of
MIDSOUTH Partners 242,176 (36,479) 650,272 (113,075)
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. and Income Taxes (987,754) (1,197,352) 307,295 (1,723,497)
Provision (Credit) for Income Taxes (420,000) (321,000) 66,000 (468,000)
---------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. (567,754) (876,352) 241,295 (1,255,497)
Non-Owned Interests in Loss of
Insituform East, Inc. 459,067 336,743 78,668 395,062
---------- ----------- ----------- -----------
Earnings (Loss) from Continuing Operations (108,687) (539,609) 319,963 (860,435)
Discontinued Operations:
Earnings from discontinued operations of copier
machine products and services segment 0 632,885 0 1,703,601
---------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ (108,687) $ 93,276 $ 319,963 $ 843,166
========== =========== =========== ===========
Basic Earnings (Loss) per Share of Common Stock:
Earnings (loss) from continuing operations $ (.07) $ (.37) $ .21 $ (.59)
Earnings from discontinued operations 0 .43 0 1.16
---------- ----------- ----------- ----------
Basic Earnings (Loss) per Share $ (.07) $ .06 $ .21 $ .57
========== =========== =========== ==========
Diluted Earnings (Loss) per Share of Common Stock:
Earnings (loss) from continuing operations $ (.07) $ (.37) $ .21 $ (.59)
Earnings from discontinued operations 0 .43 0 1.16
---------- ----------- ----------- ----------
Diluted Earnings (Loss) per Share $ (.07) $ .06 $ .21 $ .57
========== =========== =========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Mar. 31, 1998 June 30, 1997
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $18,960,603 $27,081,412
Accounts receivable 5,701,230 6,691,313
Inventories 1,423,351 1,538,017
Prepaid and refundable taxes 1,227,791 813,872
Prepaid expenses and other 409,894 251,572
----------- -----------
Total Current Assets 27,722,869 36,376,186
----------- -----------
Property, Plant and Equipment - at cost
less accumulated depreciation of $14,167,409 at
March 31, 1998 and $13,296,041 at June 30, 1997 11,284,851 11,758,572
----------- -----------
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net of accumulated amortization
of $1,143,745 at March 31, 1998 and $1,077,844 at
June 30, 1997 2,342,607 2,408,508
Cash surrender value of life insurance 1,131,462 779,041
Deposits and other 105,489 148,837
----------- -----------
Total Other Assets 3,579,558 3,336,386
----------- -----------
Total Assets $42,587,278 $51,471,144
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
Mar. 31, 1998 June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $ 2,268,841 $ 6,006,361
Income taxes payable 997,432 5,804,724
Current portion of capital lease obligations 32,997 28,508
----------- -----------
Total Current Liabilities 3,299,270 11,839,593
----------- -----------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 114,138 139,480
Deferred income taxes 1,009,000 1,074,000
Accrued SERP liability 562,226 440,950
----------- -----------
Total Long-term Liabilities 1,685,364 1,654,430
----------- -----------
Total Liabilities 4,984,634 13,494,023
----------- -----------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 12,313,177 13,042,117
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,186,726 shares (at Mar. 31, 1998) 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 Mar. 31, 1998) 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 17,613,894 17,293,931
----------- -----------
Total Stockholders' Equity 25,289,467 24,935,004
----------- -----------
Total Liabilities and Stockholders' Equity $42,587,278 $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 nine months ended Mar. 31
1998 1997
Cash Flows from Operating Activities:
<S> <C> <C>
Earnings (loss) from continuing operations $ 319,963 $ (860,435)
Earnings from discontinued operations 0 1,703,601
----------- -----------
Net earnings 319,963 843,166
Adjustments to reconcile net earnings
to net cash provided by (used in) operations:
Depreciation and amortization 1,675,135 1,538,220
Amounts attributable to non-owned interests (728,940) 569,813
Deferred income taxes (65,000) 225,000
Decrease in other assets 18,348 61
Increase in long-term liabilities 121,276 225,230
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 990,083 (197,400)
(Increase) decrease in inventories 114,666 (356,356)
Increase in prepaid expenses and other current assets (572,241) (898,128)
Increase (decrease) in accounts payable and accrued expenses (1,263,244) 1,416,591
Decrease in income taxes payable (4,807,292) (488,658)
Increase in deferred revenue 0 25,707
----------- -----------
Net Cash Provided by (Used in) Operating Activities (4,197,246) 2,903,246
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures, net (1,110,513) (2,190,313)
Increase in cash surrender value of life insurance (352,421) (182,234)
Increase in investment in subsidiary 0 (85,938)
Cash distribution from MIDSOUTH Partners to non-owned interests 0 (101,200)
----------- -----------
Net Cash Used in Investing Activities (1,462,934) (2,559,685)
----------- -----------
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 (1,820,853) (48,839)
Dividends paid (2,474,276) (227,644)
Proceeds from exercise of stock options 34,500 21,000
----------- -----------
Net Cash Used in Financing Activities (2,460,629) (255,483)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (8,120,809) 88,078
Cash and Cash Equivalents at Beginning of Period 27,081,412 10,234,224
----------- -----------
Cash and Cash Equivalents at End of Period $18,960,603 $10,322,302
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 65,317 $ 23,800
Income taxes paid $ 5,352,211 $ 404,642
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 March 31, 1998, the
Condensed Consolidated Statements of Operations for the three months and nine
months ended March 31, 1998 and 1997, and the Condensed Consolidated Statements
of Cash Flows for the nine months ended March 31, 1998 and 1997 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 March 31, 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"). Prior to June 30,
1997, the statements also include the accounts of CERBCO's majority-owned
subsidiary, Capitol Office Solutions, Inc. ("Capitol Office Solutions" or
"Capitol"). Effective June 30, 1997, CERBCO no longer has an interest in
Capitol, and the Condensed Consolidated Statement of Earnings for the three
months and nine months ended March 31, 1997 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 Mar. 31 For the nine months ended Mar. 31
---------------------------------- ---------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 1,482,956 1,473,956 1,482,759 1,470,255
========= ========= ========= =========
Diluted 1,482,956 1,473,956 1,482,759 1,470,255
========= ========= ========= =========
</TABLE>
3. Accounts Receivable
Accounts receivable consist of:
Mar. 31, 1998 June 30, 1997
Due from customers $5,368,843 $6,479,230
Miscellaneous 332,387 212,083
---------- ----------
5,701,230 6,691,313
Less: Allowance for doubtful accounts 0 0
---------- ----------
$5,701,230 $6,691,313
========== ==========
4. Equity in Insituform East
At March 31, 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 March 31,
1998. If all the options outstanding at March 31, 1998 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 March 31, 1998.
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
nine months ended March 31, 1997 are shown separately in the accompanying
condensed consolidated statements of operations as earnings from discontinued
operations. Capitol's sales revenues of $5,939,913 and $17,441,265 for the three
months and nine months ended March 31, 1997 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:
Mar. 31, 1998 June 30, 1997
Accounts payable $1,074,759 $1,655,097
Accrued compensation and related expenses 1,194,082 1,876,988
Dividends payable 0 2,474,276
---------- ----------
$2,268,841 $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 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 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. 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 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 were granted 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. On February 24, 1998, plaintiffs filed a motion for leave to
file a Third Amended Complaint. Insituform East filed an opposition to
plaintiff's motion asserting that the proposed Third Amended Complaint failed to
comply with the Court's August 25, 1997 and January 30, 1998 orders. 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, 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 a consolidated loss of -$108,687 (-$.07 per share)
on sales of $4.1 million for the third quarter of fiscal year 1998. For the
first nine months of fiscal year 1998, the Company reported consolidated
earnings of $319,963 ($.21 per share) on sales of $18.8 million. For the third
quarter and first nine months of fiscal year 1997, the Company recognized
consolidated losses from continuing operations of -$539,609 (-$.37 per share) on
sales of $6.3 million and -$860,435 (-$.59 per share) on sales of $18.2 million,
respectively. Consolidated net earnings for the third quarter and first nine
months of the fiscal year 1997 were $93,276 ($.06 per share) and $843,166 ($.57
per share), respectively, including earnings from the operations of the
Company's discontinued copy machine products and services segment.
The Company attributed its fiscal year 1998 third quarter loss to the
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") experienced decreased sales at normal
margins during the third quarter, while MIDSOUTH Partners experienced
significantly reduced margins on normal levels of work it performed during the
quarter. CERBCO's favorable results for the first nine months of fiscal year
1998 are primarily due to investment income 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.
During the third quarter of fiscal year 1998, the parent company
incurred continuing legal expenses related to the two 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 second quarter of fiscal year 1998, when the
Delaware Supreme Court affirmed the Court of Chancery's rejection of all but
$143,364 of 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, 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 March 31, 1998, 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 its costs are
semi-fixed in nature, Insituform East's 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 Insituform East's period sales typically leverage positive
earnings significantly.
Insituform East's losses in the second and third quarters of fiscal
year 1998 were representative of the result of depressed sales volume despite
normal margin levels. 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 primarily due to the
significant impact of revenues recognized during the quarter in connection with
the installation phase of the year-long $4.7 million Perry Nuclear Power Plant
project.
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 are likely to produce negative results for Insituform East in
the fourth quarter of fiscal year 1998. Although this trend could continue into
fiscal year 1999, analysis of longer term data indicates that the fiscal year
1998 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. Thus, while selective cost saving actions have
been taken during this period of reduced sales, Insituform East does not intend
to undertake at this time drastic cost reduction measures that would ultimately
reduce future productive capacity, erode operations support capabilities or
impair its ability to execute the complex requirements of non-core, specialized
work such as the large Perry Nuclear project. In addition, while Insituform East
remains unable to predict the likelihood or timing of further such favorable,
specialized work, building upon both Insituform East's success and its
preeminent capability in this area will continue as a strong focus in future
business development. 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.
Insituform East's total backlog value of all uncompleted and multi-year
contract awards was approximately $26.2 million at March 31, 1998 as compared to
$19.3 million at March 31, 1997. The twelve-month backlog at March 31, 1998 was
approximately $11.5 million as compared to $17.9 million at March 31, 1997. The
total backlog value of all uncompleted and multi-year contracts at March 31,
1998 and 1997 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
Third Quarter ended 3/31/98 Compared with Third Quarter ended 3/31/97
Consolidated sales decreased $2.1 million (-34%) from $6.3 million for
the quarter ended March 31, 1997 to $4.2 million for the quarter ended March 31,
1998, due primarily to lower workable backlog levels experienced during the
third quarter of fiscal year 1998. Comparable period sales for East decreased
46%, while comparable period sales for MIDSOUTH Partners decreased 2%.
Consolidated operating results decreased from an operating loss of
- -$1.2 million in the quarter ended March 31, 1997 to an operating loss of -$1.6
million in the quarter ended March 31, 1998. Consolidated cost of sales
decreased 22% and as a result, gross profit (loss) as a percentage of sales
decreased from a gross profit of 7% for the third quarter of fiscal year 1997 to
a gross profit (loss) of (9%) for the third quarter of fiscal year 1998. This
decrease in gross profit as a percentage of sales is due primarily to absorption
of semi-fixed costs over significantly reduced sales during the third quarter of
fiscal year 1998. Insituform East's selling, general and administrative expenses
decreased $0.3 million (-21%), primarily as a result of decreased costs to
support decreased production activities. The parent company's unallocated
general corporate expenses also decreased $0.2 million (-47%) in the quarter
ended March 31, 1998, as CERBCO incurred legal and consulting fees in the
quarter ended March 31, 1997 in connection with the ultimate sale of its
interest in Capitol Office Solutions.
Investment income increased $0.2 million (363%) in the third 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
third quarter of fiscal year 1997 resulted from the then operations of Capitol
Office Solutions.
Nine Months Ended 3/31/98 Compared With Nine Months Ended 3/31/97
Consolidated sales increased $0.6 million (3%) from $18.2 million for
the first nine months of fiscal year 1997 to $18.8 million for the first nine
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 which offset lower sales resulting from lower workable backlog levels
experienced during the second and third quarters of fiscal year 1998. Comparable
period sales for East increased 6%, while comparable period sales for MIDSOUTH
Partners decreased 3%.
Consolidated operating results increased from an operating loss of
- -$1.8 million in the nine months ended March 31, 1997 to an operating loss of
- -$1.5 million in the nine months ended March 31, 1998. Consolidated cost of
sales increased 5%, and gross profit as a percentage of sales decreased from 15%
to 13% as a result. This decrease in gross profit as a percentage of sales is
due primarily to reduced margins on work performed by MIDSOUTH Partners
resulting from both discounted sales and performance inefficiencies. These
reduced margins more than offset improved comparable period margins on East
work. Insituform East's selling, general and administrative expenses decreased
$0.3 million (-9%), primarily as a result of reduced legal expenses and lower
costs to support reduced production activities during the second and third
quarters of fiscal year 1998. Insituform East incurred additional legal expenses
during fiscal year 1997 in connection with the Inliner U.S.A./CAT Contracting
antitrust lawsuit. The parent company's unallocated general corporate expenses
decreased $0.2 million (-30%) in the nine months ended March 31, 1998, as CERBCO
incurred legal and consulting fees in fiscal year 1997 in connection with the
Capitol Office Solutions transaction.
Investment income increased $0.5 million (223%) in the first nine
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 nine months of fiscal year
1997 resulted from the then operations of Capitol Office Solutions.
Financial Condition
During the nine months ended March 31, 1998, the Company used $4.2
million in cash in operating activities, due primarily to net earnings of $0.3
million plus $1.7 million in depreciation and amortization expenses included in
operating results that did not require the outlay of cash offset by a $1.3
million decrease in accounts payable and accrued expenses and a $4.8 million
decrease in income taxes payable.
During the nine months ended March 31, 1998, the Company expended $1.1
million for equipment purchases and other capital improvements. Through
Insituform East, it received and repaid $1.8 million in bank line of credit
advances. 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 nine months of fiscal year 1998, its liquidity remained strong
with working capital of over $24 million and a current ratio of 8.4 at March 31,
1998. CERBCO believes that Insituform East has cash reserves, 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 $18 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only material pending legal proceedings to which the Company is a
party or any such legal proceedings contemplated of which the Company is aware
are (a) a previously disclosed lawsuit 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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule for the period ended March 31, 1998
99 - CERBCO, Inc. Consolidating Schedules: Statement of Operations
Information for the three months ended March 31, 1998; Statement
of Operations Information for the nine months ended March 31,
1998; Balance Sheet Information and Consolidating Elimination
Entries as of March 31, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended March
31, 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: May 14, 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
Operations Information for the Three Months Ended March 31,
1998; Statement of Operations Information for the Nine
Months Ended March 31, 1998; Balance Sheet Information; and
Consolidating Elimination Entries as of March 31, 1998.
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1998
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
--------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $4,147,345 $ 0 $ 0 $4,147,345
----------- ---------- ---------- ----------
Costs and Expenses:
Cost of sales 4,510,966 0 0 4,510,966
Selling, general and administrative expenses 1,224,374 0 198,837 1,025,537
----------- ---------- ---------- ----------
Total Costs and Expenses 5,735,340 0 198,837 5,536,503
----------- ---------- ---------- ----------
Operating Profit (Loss) (1,587,995) 0 (198,837) (1,389,158)
Investment Income 239,023 (A) (2,550) 226,849 14,724
Interest Expense (8,048) (A) 2,550 (64) (10,534)
Other Income (Expense) - net 127,090 0 100,174 26,916
----------- ---------- ---------- -----------
Earnings (Loss) Before Non-Owned Interests
and Income Taxes (1,229,930) 0 128,122 (1,358,052)
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 242,176 0 0 242,176
----------- ---------- ---------- ----------
Earnings (Loss) Before Non-Owned Interests
in Insituform East and Income Taxes (987,754) 0 128,122 (1,115,876)
Provision (Credit) for Income Taxes (420,000) 0 14,000 (434,000)
----------- ---------- ---------- ----------
Earnings (Loss) Before Non-Owned Interests
in Insituform East (567,754) 0 114,122 (681,876)
Non-Owned Interests in Loss of Insituform East 459,067 (B) 459,067 0 0
----------- ---------- ---------- ----------
NET EARNINGS (LOSS) $ (108,687) (C) $ 459,067 $ 114,122 $ (681,876)
=========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED MARCH 31, 1998
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
--------------- ---------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $18,783,253 $ 0 $ 0 $18,783,253
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 16,254,863 0 0 16,254,863
Selling, general and administrative expenses 4,066,863 0 571,653 3,495,210
----------- ----------- ----------- -----------
Total Costs and Expenses 20,321,726 0 571,653 19,750,073
----------- ----------- ----------- -----------
Operating Profit (Loss) (1,538,473) 0 (571,653) (966,820)
Investment Income 791,346 (D) (16,777) 748,667 59,456
Interest Expense (48,540) (D) 16,777 (64) (65,253)
Other Income - net 452,690 0 321,195 131,495
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests and
Income Taxes (342,977) 0 498,145 (841,122)
Non-Owned Interest in Pretax Loss of
MIDSOUTH Partners 650,272 0 0 650,272
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes 307,295 0 498,145 (190,850)
Provision (Credit) for Income Taxes 66,000 0 140,000 (74,000)
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East 241,295 0 358,145 (116,850)
Non-Owned Interests in Loss of Insituform East 78,668 (E) 78,668 0 0
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 319,963 (F) $ 78,668 $ 358,145 $ (116,850)
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
MARCH 31, 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 $18,960,603 $ 0 $18,165,228 $ 795,375
0
Accounts receivable 5,701,230 0 0 5,701,230
Inventories 1,423,351 0 0 1,423,351
Prepaid and refundable taxes 1,227,791 0 0 1,227,791
Prepaid expenses and other 409,894 0 0 409,894
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 27,722,869 0 18,165,228 9,557,641
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (G) (7,483,746) 7,483,746 0
Intercompany receivables and payables 0 0 13,204 (13,204)
Property, Plant and Equipment - net of
accumulated depreciation 11,284,851 0 90,021 11,194,830
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,342,607 (G) 2,342,607 0 0
Cash surrender value of life insurance 1,131,462 0 1,131,462 0
Deposits and other 105,489 0 44,489 61,000
----------- ----------- ----------- -----------
TOTAL ASSETS $42,587,278 $(5,141,139) $26,928,150 $20,800,267
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities 3,266,273 0 1,038,275 2,227,998
Current portion of capital lease obligations 32,997 0 0 32,997
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES
3,299,270 0 1,038,275 2,260,995
Long-Term Liabilities:
Capital lease obligations 114,138 0 0 114,138
Deferred income taxes 1,009,000 0 0 1,009,000
Accrued SERP liability 562,226 0 562,226 0
------------ ----------- ----------- -----------
TOTAL LIABILITIES 4,984,634 0 1,600,501 3,384,133
------------ ----------- ----------- -----------
Non-Owned Interests:
12,313,177 (E)(G) 10,513,987 0 1,799,190
----------- ----------- ----------- -----------
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 17,613,894 (F)(G) (12,656,925) 17,652,076 12,618,743
Treasury stock 0 (G) 1,189,613 0 (1,189,613)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 25,289,467 (15,655,126) 25,327,649 15,616,944
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,587,278 $(5,141,139) $26,928,150 $20,800,267
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
MARCH 31, 1998
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Investment income $2,550
Interest expense $2,550
To eliminate interest expense paid by Insituform East
to CERBCO in the three months ended March 31, 1998.
(B)
Non-owned interests $459,067
Non-owned interests in loss of subsidiary $459,067
To record non-owned interests in loss of Insituform East
for the three months ended March 31, 1998.
(C)
Current quarter earnings adjustments $459,067
Retained Earnings $459,067
To close out impact of eliminating entries on current
quarter's statement of operations.
(D)
Investment income $16,777
Interest expense $16,777
To eliminate interest expense paid by Insituform
East to CERBCO in the nine months ended March 31, 1998.
(E)
Non-owned interests $78,668
Non-owned interests in earnings of subsidiary $78,668
To record non-owned interests in loss of Insituform
East for the nine months ended March 31, 1998.
(F)
Current period earnings adjustments $78,668
Retained Earnings $78,668
To close out impact of eliminating entries on nine
month's statement of operations.
(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 acquired 2,342,607
Treasury stock $1,189,613
Non-owned interests 10,592,655
Investment in subsidiary 7,483,746
To eliminate investments in consolidated subsidiaries.
</TABLE>
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,961
<SECURITIES> 0
<RECEIVABLES> 5,701
<ALLOWANCES> 0
<INVENTORY> 1,423
<CURRENT-ASSETS> 27,723
<PP&E> 25,452
<DEPRECIATION> 14,167
<TOTAL-ASSETS> 42,587
<CURRENT-LIABILITIES> 3,299
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 25,141
<TOTAL-LIABILITY-AND-EQUITY> 42,587
<SALES> 18,783
<TOTAL-REVENUES> 18,783
<CGS> 16,255
<TOTAL-COSTS> 16,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 307
<INCOME-TAX> 66
<INCOME-CONTINUING> 320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
