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, 1999
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 9, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,189,476
Class B Common Stock 293,480
Total 1,482,956
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, 1999 and
September 30, 1998 (unaudited)........................................3
Condensed Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999 (unaudited).........................................4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1999 and
September 30, 1998 (unaudited)........................................6
Notes to Condensed Consolidated Financial Statements (unaudited)......7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................14
Item 2. Changes in Securities and Use of Proceeds............................14
Item 3. Defaults upon Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
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
1999 1998
<S> <C> <C>
Sales $ 7,314,454 $ 6,047,942
------------ ------------
Costs and Expenses:
Cost of sales 6,119,386 5,050,451
Selling, general and administrative expenses 1,262,726 1,206,539
------------ ------------
Total Costs and Expenses 7,382,112 6,256,990
------------ ------------
Operating Loss (67,658) (209,048)
Investment Income 178,412 250,862
Interest Expense (7,450) (12,705)
Other Income - net 20,194 33,638
------------ ------------
Earnings Before Non-Owned Interests and Incomes Taxes 123,498 62,747
Non-Owned Interest in Pretax Loss of Midsouth Partners 19,889 61,623
------------ ------------
Earnings Before Non-Owned Interests in Insituform East, Inc.
and Income Taxes 143,387 124,370
Provision for Income Taxes 60,000 54,000
------------- ------------
Earnings Before Non-Owned Interests in Insituform East, Inc. 83,387 70,370
Non-Owned Interests in Earnings of Insituform East, Inc. (37,886) (35,633)
------------ ------------
NET EARNINGS $ 45,501 $ 34,737
============ ============
Net Earnings per Share of Common Stock:
Basic Earnings per Share $ 0.03 $ 0.02
============ =============
Diluted Earnings per Share $ 0.03 $ 0.02
============ =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
-------------------------------------
Sept. 30, 1999 June 30, 1999
---------------- ---------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $14,606,824 $17,050,119
Accounts receivable 7,870,943 6,592,913
Inventories 1,149,239 1,273,402
Prepaid and refundable taxes 87,677 550,453
Prepaid expenses and other 280,547 339,928
----------- -----------
Total Current Assets 23,995,230 25,806,815
----------- -----------
Property, Plant and Equipment - at cost less accumulated depreciation of
$15,993,670 at September 30, 1999 and $15,432,983 at June 30, 1999 11,626,542 11,511,536
----------- -----------
Other Assets:
Excess of acquisition cost over value of net assets acquired less accumulated
amortization of $1,272,687 at September 30, 1999 and $1,253,580 at
June 30, 1999 1,948,956 1,998,822
Cash surrender value of SERP life insurance 1,806,369 1,730,964
Deposits and other 88,934 70,489
----------- -----------
Total Other Assets 3,844,259 3,800,275
=========== ===========
Total Assets $39,466,031 $41,118,626
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
-------------------------------------
Sept. 30, 1999 June 30, 1999
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Loans to Midsouth Partners from non-owned interests $ 0 $ 400,000
Accounts payable and accrued liabilities 2,998,139 2,958,136
Income taxes payable 1,075,432 1,508,353
Current portion of capital lease obligations 38,696 42,167
------------- ------------
Total Current Liabilities 4,112,267 4,908,656
------------- ------------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 56,356 62,662
Deferred income taxes 255,000 219,000
Accrued SERP liability 906,893 847,560
------------- ------------
Total Long-term Liabilities 1,218,249 1,129,222
------------- ------------
Total Liabilities 5,330,516 6,037,878
------------- ------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 9,271,585 10,262,319
------------- ------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,189,476 shares 118,947 118,947
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 293,480 shares 29,348 29,348
Additional paid-in capital 7,527,278 7,527,278
Retained earnings 17,188,357 17,142,856
------------- ------------
Total Stockholders' Equity 24,863,930 24,818,429
============= ============
Total Liabilities and Stockholders' Equity $39,466,031 $41,118,626
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
For the three months ended Sept. 30
-----------------------------------
1999 1998
----------------- ----------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 45,501 $ 34,737
Adjustments to reconcile net earnings
to net cash used in operations:
Depreciation and amortization 600,145 510,204
Amounts attributable to non-owned interests 17,997 (25,990)
Deferred income taxes 36,000 104,000
Decrease in other assets 0 17,990
Increase in accrued SERP liability 59,333 70,318
Changes in operating assets and liabilities:
Increase in accounts receivable (1,278,030) (997,445)
Decrease in inventories 124,163 9,285
Decrease in prepaid expenses 59,381 65,938
(Increase) decrease in prepaid taxes 462,776 (22,442)
Increase in accounts payable and accrued expenses 188,299 35,414
Increase (decrease) in income taxes payable (432,921) 60,000
-------------- --------------
Net Cash Used in Operating Activities (117,356) (137,991)
-------------- --------------
Cash Flows from Investing Activities:
Capital expenditures, net (694,489) (398,035)
Purchase of remaining interests in Midsouth Partners (948,707) 0
Increase in investment in Insituform East (29,265) 0
Increase in other assets (20,000) 0
Increase in cash surrender value of SERP life insurance (75,405) (80,299)
-------------- --------------
Net Cash Used in Investing Activities (1,767,866) (478,334)
-------------- --------------
Cash Flows from Financing Activities:
Repayment of loans to Midsouth Partners from non-owned interests (400,000) 0
Principal payments under capital lease obligations (9,777) (8,008)
Dividends paid (148,296) (148,296)
-------------- --------------
Net Cash Used in Financing Activities (558,073) (156,304)
-------------- --------------
Net Decrease in Cash and Cash Equivalents (2,443,295) (772,629)
Cash and Cash Equivalents at Beginning of Period 17,050,119 20,405,039
============== ==============
Cash and Cash Equivalents at End of Period $ 14,606,824 $ 19,632,410
============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 58,221 $ 12,705
============== ==============
Income taxes refunded $ (5,855) $ (87,598)
============== ==============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Financial Information
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.
The Condensed Consolidated Balance Sheet as of September 30, 1999, the
Condensed Consolidated Statements of Earnings for the three months ended
September 30, 1999 and 1998, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1999 and 1998 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1999 (unaudited) has been derived from the Company's June 30, 1999
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,
1999 and for all periods presented have been made.
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, 1999. 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 data 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, 1999 and 1998 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
1999 1998
Basic 1,482,956 1,482,956
========= =========
Diluted 1,482,956 1,482,956
========= =========
3. Accounts Receivable
Accounts receivable consist of:
Sept. 30, 1999 June 30, 1999
Due from customers $7,583,340 $6,514,843
Miscellaneous 287,603 78,070
---------- ----------
7,870,943 6,592,913
Less: Allowance for doubtful accounts 0 0
---------- ----------
$7,870,943 $6,592,913
========== ==========
4. Equity in Insituform East
At September 30, 1999, CERBCO beneficially held 1,244,750 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 30.7% of the Common Stock, 99.5%
of the Class B Common Stock, 35.4% of the total equity and 59.8% 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.
During the quarter ended September 30, 1999, CERBCO acquired 18,350
shares of Insituform East Common Stock for $29,264. The difference between the
cost of the stock and the net book value thereof, $30,759, has been credited to
excess of acquisition cost over value of net assets acquired.
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, 1999. If all the options outstanding at September 30, 1999 were exercised,
the resulting percentages of CERBCO's equity ownership and total voting power
would be 31.6% and 55.6%, 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, 1999.
5. Acquisition of Remaining Interests in Midsouth Partners
CERBCO's consolidated financial statements as of September 30, 1999 and
June 30, 1999, and for the quarters ended September 30, 1999 and 1998, include
the accounts of Midsouth Partners, Insituform East's majority-controlled
subsidiary partnership since June 12, 1996. Midsouth Partners was organized as
Insituform Midsouth, a Tennessee general partnership, in December 1985 with
Insituform East as a general partner. Midsouth Partners was the exclusive
licensee for the Insituform process and NuPipe process in Tennessee, Kentucky
(excluding Boone, Kenton and Campbell counties) and northern Mississippi from
December 2, 1985 through July 20, 1999. The Partnership's general partners
through July 20, 1999 were Insitu, Inc., a wholly-owned subsidiary of Insituform
East; Insituform Technologies, Inc. ("ITI"); and Insituform Southwest, Inc., an
affiliate of ITI.
Partnership profits and losses were allocated through July 20, 1999 to
the partners as follows:
Insitu, Inc. 42.5%
Insituform Technologies, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
In March 1999, ITI gave notice of a purported termination of the
Midsouth Partners partnership, purportedly terminated Midsouth Partners'
Insituform(R) License Agreement and simultaneously commenced litigation in the
Chancery Court of Delaware to deny Midsouth Partners any rights to further
utilize cured-in-place pipe ("CIPP") rehabilitation processes as previously
practiced under such license. In April 1999, Midsouth Partners responded to the
Delaware Chancery Court litigation and filed a demand for arbitration with the
American Arbitration Association.
Insituform East settled its disputes with ITI concerning Midsouth
Partners under the terms of an agreement reached July 20, 1999 (the "Midsouth
Settlement Agreement") and actions before the Delaware Chancery Court and the
American Arbitration Association were dismissed. Under the terms of the Midsouth
Settlement Agreement, a wholly-owned subsidiary of Insituform East purchased
ITI's interests in the Midsouth Partners partnership at book value and Midsouth
Partners remained entitled to continue the business of the partnership under its
present name. The Insituform(R) License Agreement and its requirement to pay
royalties were relinquished under the settlement, henceforth permitting direct
competition between ITI and Midsouth Partners. The Midsouth Settlement Agreement
expressly provides that Midsouth Partners may utilize processes other than the
Insituform process to perform pipe rehabilitation services, and Midsouth
Partners also obtained a royalty-free non-exclusive right, without limitation in
time and within the partnership's previously licensed territory, to continued
use of the cured-in-place pipe processes, technique and inventions that it
formerly practiced pursuant to its since-terminated Insituform(R) License
Agreement as the same existed on July 20, 1999.
Effective July 20, 1999, Insituform East, through its wholly-owned
subsidiary, Midsouth, L.L.C., acquired the remaining 57.5% interests in Midsouth
Partners previously held by ITI and Insituform Southwest, Inc. for $948,707, the
book value of their respective partnership accounts on July 20, 1999. The
acquisition was accounted for as a purchase. Partnership pretax earnings and
losses attributable to these interests, previously allocated to non-owned
interests in consolidation, have been allocated to Insituform East subsequent to
July 20, 1999.
Unaudited pro forma results of operations, assuming acquisition of the
remaining interests in Midsouth Partners had occurred as of July 1, 1998, are as
follows:
Three Months Ended September 30,
1999 1998
Sales $7,314,454 $6,047,942
Net Earnings $40,934 $22,443
Net Earnings per Share:
Basic $0.03 $0.02
Diluted $0.03 $0.02
This pro forma information does not purport to be indicative of the
results that actually would have been recognized if the operations had been
combined during the periods presented and is not intended to be a projection of
future results.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
Sept. 30, 1999 June 30, 1999
Accounts payable $1,534,391 $1,448,725
Accrued compensation and related expenses 1,463,748 1,361,115
Dividends payable 0 148,296
---------- ----------
$2,998,139 $2,958,136
========== ==========
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,
including Insituform East. 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 million 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 February 18,
1999, the D.C. Superior Court entered an Order denying the Company's motion on
the ground of res judicata, but granting the defendants' summary judgment motion
on the issue of punitive damages only. On April 9, 1999, the Court conducted a
hearing limited to the issues of causation, damages, and collateral estoppel
with respect to the defendants' pending motions. On May 20, 1999, the Court
denied the Company's motion for summary judgment on the ground of collateral
estoppel. The matter has now been referred to mediation in the District of
Columbia.
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.
Insituform East believes it has strong defenses to, and is vigorously
contesting, this suit. In an October 21, 1999 Order, the Court granted the
Company's motion to compel plaintiffs to respond to its discovery, ordering
plaintiffs to respond within ten days; and the Court denied plaintiff's
counsel's motion to withdraw at this time, ordering plaintiffs to file a status
report concerning their search for new counsel within ten days. On November 1,
1999, plaintiffs responded by indicating that this case will be dismissed with
prejudice by plaintiffs. 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 $45,501 ($.03 per
share) on sales of $7.3 million for the first quarter of fiscal year 2000. For
the first quarter of the previous fiscal year, the Company recognized
consolidated net earnings of $34,737 ($.02 per share) on sales of $6.0 million.
The Company attributed its modestly favorable first quarter results in
fiscal year 2000 to the positive results of Insituform East, Inc. ("Insituform
East") and the parent company's short-term investment earnings, in approximately
equal measure. Insituform East, the Company's majority-controlled subsidiary and
only operating segment, recognized consolidated net earnings of $58,617 on sales
of $7.3 million, contributing earnings of $20,731 to CERBCO. The parent company
contributed earnings of $24,770. These operating results are similar to the
results of the first quarter of the previous fiscal year when Insituform East
recognized consolidated net earnings of $52,928 on sales of $6.0 million,
contributing earnings of $17,295 to CERBCO, and the parent company contributed
earnings of $17,442.
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 sales at normal margins and increased production levels by Insituform
East will be required to sustain positive operating results through the
remainder of fiscal year 2000. 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 or
circumstance, the Company's forward-looking results typically are anticipated to
substantially parallel the Company's approximate 35% 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
contractors with limited cured-in-place ("CIPP") installation experience or
inferior products hoping that cheap price alone might permit them to succeed
against the Company's quality and time tested CIPP rehabilitation capability. In
that segment of the market where technical risk and the lowest priced product
may be deemed "good enough," the Company is at a disadvantage and market share
participation strategically undertaken by the Company in such segment, at levels
materially below normal margins, necessarily dilutes the Company's overall
margin performance. Conversely, in the "best value" and quality-based market
segment, the Company's quality CIPP rehabilitation capability continues to
provide a distinct advantage. While both the Federal Government and industry
routinely use best value and quality-weighted contract award criteria in
technical procurements, municipalities and local governments are often
politically reluctant to modernize from simply "low bid" buying to "best value"
buying. In the face of mounting technical failures from awards based upon lowest
price, municipalities also are expected over time to reevaluate traditional "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 9/30/99 Compared with First Quarter ended 9/30/98
Consolidated sales increased $1.3 million (21%) from $6.0 million for
the quarter ended September 30, 1998 to $7.3 million for the quarter ended
September 30, 1999, as a result of increased sales in Insituform East's licensed
Insituform territory. Consolidated cost of sales also increased 21% in the first
quarter of fiscal year 2000. As a result, gross profit as a percentage of sales
was 16% of sales for each of the comparable periods. Consolidated cost of sales
remained consistent in the comparable periods primarily due to increased
semi-fixed costs incurred in the first quarter of fiscal year 2000 to support
increased installation activities, including support costs associated with
Insituform East's Ohio branch office reestablished in March 1999, and unbudgeted
additions in legal and other expenses during the quarter.
Consolidated operating results improved somewhat from an operating loss
of -$0.2 million in the quarter ended September 30, 1998 to an operating loss of
- -$0.07 million in the quarter ended September 30, 1999, primarily due to
Insituform East's selling, general and administrative costs increasing only
$0.07 million (7%), a lesser percentage increase than its percentage increase in
sales and cost of sales. The parent company's unallocated general corporate
expenses remained approximately the same in the comparable periods.
Financial Condition
During the quarter ended September 30, 1999, the Company used $0.1
million in cash in operating activities, primarily due to a $1.3 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, 1999 to the quarter ended September
30, 1999.
The Company used $1.8 million in cash investing activities during the
quarter ended September 30, 1999, primarily for the purchase of remaining
non-owned interests in Midsouth Partners and equipment purchases and other
capital improvements. The Company also used $0.6 million in financing
activities, primarily due to the repayment of partner loans to Midsouth Partners
by former partners and the payment of dividends by the parent company, CERBCO.
Despite the $2.4 million net decrease in cash during the first quarter of fiscal
year 2000, the Company's liquidity remained strong with working capital of over
$19 million and a current ratio of 5.8 at September 30, 1999.
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 $13 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 ready
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 ready, can be modified to become Year 2000 ready, or would
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. Vendor-supplied modifications for supporting information
systems were implemented and tested prior to June 30, 1999 and are believed to
be Year 2000 ready.
With respect to the Company's non-information technology systems, the
Company is dependent on information from vendors and suppliers in assessing and
evaluating these systems. As potential Year 2000 issues were identified during
the preliminary assessment stage, implementation plans were developed and
executed. The Company initiated and completed corrective action for its office
telephone system and headquarters facility security system, the only two systems
that were identified as not being Year 2000 ready.
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 ready or expect to be Year 2000 ready
by December 31, 1999. The Company will continue to seek to obtain responses from
suppliers and customers who have not as yet responded to inquiries and is
monitoring Year 2000 readiness from respondents not as yet Year 2000 ready.
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $50,000. This estimate is based on presently available
information and may require future reassessment. Specifically, this estimate
would change if, after receipt of information from key suppliers or customers, a
modified contingency plan required development and implementation. The Company
has incurred $27,000 in implementation costs through September 30, 1999.
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 materials or sufficient
electrical power or other utilities critical to the Company's operations, 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 2000 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 established a contingency plan, effective June 30, 1999,
based primarily on potential actions that would be required if key vendors or
customers are 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. Specifically, the Company has identified potential
alternate vendors for critical installation materials, tube and resin, in case
primary tube and resin suppliers fail to provide materials critical to the
Company's operations. In addition, the Company intends to rely on the geographic
separation of its operations facilities and reallocate resources as necessary
should vendors fail to supply sufficient electrical power or other utilities to
an operations facility, or if transportation of the Company's personnel and
equipment is seriously impeded in a particular geographic area.
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 7. 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, 1999;
Balance Sheet Information; and Consolidating Elimination Entries
as of September 30, 1999.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
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 12, 1999
CERBCO, Inc.
(Registrant)
/s/ ROBERT W. ERIKSON
Robert W. Erikson
President
/s/ ROBERT F. HARTMAN
Robert F. Hartman
Vice President, Secretary & Treasurer
(Principal Financial and 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, 1999;
Balance Sheet Information; and Consolidating Elimination
Entries as of September 30, 1999.
<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-30-1999
<CASH> 14,607
<SECURITIES> 0
<RECEIVABLES> 7,871
<ALLOWANCES> 0
<INVENTORY> 1,149
<CURRENT-ASSETS> 23,995
<PP&E> 27,620
<DEPRECIATION> 15,994
<TOTAL-ASSETS> 39,466
<CURRENT-LIABILITIES> 4,112
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 24,716
<TOTAL-LIABILITY-AND-EQUITY> 39,466
<SALES> 7,314
<TOTAL-REVENUES> 7,314
<CGS> 6,119
<TOTAL-COSTS> 6,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 143
<INCOME-TAX> 60
<INCOME-CONTINUING> 46
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENTS OF EARNINGS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C>
Sales $7,314,454 $ 0 $ 0 $7,314,454
---------- ----------- ---------- ----------
Costs and Expenses:
Cost of sales 6,119,386 0 0 6,119,386
Selling, general and administrative expenses 1,262,726 0 152,623 1,110,103
---------- ----------- ---------- ----------
Total Costs and Expenses 7,382,112 0 152,623 7,229,489
---------- ----------- ---------- ----------
Operating Profit (Loss) (67,658) 0 (152,623) 84,965
Investment Income 178,412 (A) (50,771) 219,500 9,683
Interest Expense (7,450) (A) 50,771 0 (58,221)
Other Income (expense) - net 20,194 0 (19,107) 39,301
---------- ----------- ---------- ----------
Earnings Before Non-Owned Interests and
Income Taxes 123,498 0 47,770 75,728
Non-Owned Interest in Pretax Loss of
Midsouth Partners 19,889 0 0 19,889
---------- ----------- ---------- ----------
Earnings Before Non-Owned Interests in
Insituform East and Income Taxes 143,387 0 47,770 95,617
Provision for Income Taxes 60,000 0 23,000 37,000
---------- ----------- ---------- ----------
Earnings Before Non-Owned Interests in
Insituform East 83,387 0 24,770 58,617
Non-Owned Interests in Earnings of Insituform East (37,886) (B) (37,886) 0 0
---------- ----------- ---------- ----------
NET EARNINGS $ 45,501 $ (37,886) $ 24,770 $ 58,617
========== =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
SEPTEMBER 30, 1999
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
ASSETS
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $14,606,824 $ 0 $13,797,749 $ 809,075
Accounts receivable 7,870,943 0 2,760 7,868,183
Inventories 1,149,239 0 0 1,149,239
Prepaid and refundable taxes 87,677 0 0 87,677
Prepaid expenses and other 280,547 0 12,096 268,451
----------- ----------- ----------- ----------
TOTAL CURRENT ASSETS 23,995,230 0 13,812,605 10,182,625
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (C) (7,001,610) 7,001,610 0
Intercompany receivables and payables 0 0 4,213,038 (4,213,038)
Property, Plant and Equipment - net of
accumulated depreciation 11,626,542 0 84,431 11,542,111
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 1,948,956 (C) 1,948,956 0 0
Cash surrender value of SERP life insurance 1,806,369 0 1,657,179 149,190
Deposits and other 88,934 0 44,489 44,445
----------- ----------- ----------- ----------
TOTAL ASSETS $39,466,031 $(5,052,654) $26,813,352 $17,705,333
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 2,998,139 $ 0 $ 69,272 $ 2,928,867
Income taxes payable 1,075,432 0 1,059,708 15,724
Current portion of capital lease obligations 38,696 0 0 38,696
----------- ----------- ----------- ----------
TOTAL CURRENT LIABILITIES 4,112,267 0 1,128,980 2,983,287
----------- ----------- ----------- ----------
Long-Term Liabilities:
Capital lease obligations 56,356 0 0 56,356
Deferred income taxes 255,000 0 0 255,000
Accrued SERP liability 906,893 0 841,173 65,720
----------- ----------- ----------- ----------
TOTAL LONG-TERM LIABILITIES 1,218,249 0 841,173 377,076
----------- ----------- ----------- ----------
TOTAL LIABILITIES 5,330,516 0 1,970,153 3,360,363
----------- ----------- ----------- ----------
Non-Owned Interests 9,271,585 (B)(C) 9,271,585 0 0
----------- ----------- ----------- ----------
Stockholders' Equity:
Common stock 118,947 (C) (175,486) 118,947 175,486
Class B Common stock 29,348 (C) (11,904) 29,348 11,904
Additional paid-in capital 7,527,278 (C) (4,000,424) 7,527,278 4,000,424
Retained earnings 17,188,357 (C)(D) (11,326,038) 17,167,626 11,346,769
Treasury stock 0 (C) 1,189,613 0 (1,189,613)
----------- ----------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY 24,863,930 (14,324,239) 24,843,199 14,344,970
----------- ----------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,466,031 $(5,052,654) $26,813,352 $17,705,333
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
SEPTEMBER 30, 1999
(unaudited)
<CAPTION>
(A)
<S> <C>
Investment income $ 50,771
Interest expense $ 50,771
To eliminate interest expense paid by Insituform East to CERBCO in the
three months ended September 30, 1999.
(B)
Non-owned interests in earnings of subsidiaries $ 37,886
Non-owned interests $ 37,886
To record non-owned interests in earnings of subsidiaries
for the three months ended September 30, 1999.
(C)
Common stock $ 175,486
Class B stock $ 11,904
Additional paid-in capital $ 4,000,424
Retained earnings $11,288,152
Excess of acquisition cost over value of net assets acquired $ 1,948,956
Treasury stock $1,189,613
Non-owned interests $9,233,699
Investment in subsidiary $7,001,610
To eliminate investments in consolidated subsidiaries.
(D)
Retained Earnings $ 37,886
Current year earnings adjustments $ 37,886
To close out impact of current quarter's statement of earnings.
</TABLE>
