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, 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 February 5, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,186,976
Class B Common Stock 295,980
Total 1,482,956
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements..................................................3
Condensed Consolidated Statements of Operations for the
Three Months and the Nine Months Ended March 31, 1999 and
March 31, 1998 (unaudited)............................................3
Condensed Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 (unaudited).........................................4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1999 and March 31, 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................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 2. Changes in Securities and Use of Proceeds............................13
Item 3. Defaults upon Senior Securities......................................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
Item 5. Other Information....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
For the three months ended Mar. 31 For the nine months ended Mar. 31
---------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 4,993,149 $ 4,147,345 $16,939,195 $18,783,253
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 5,325,240 4,510,966 15,406,481 16,254,863
Selling, general and administrative expenses 1,365,512 1,224,374 3,821,849 4,066,863
----------- ----------- ----------- -----------
Total Costs and Expenses 6,690,752 5,735,340 19,228,330 20,321,726
----------- ----------- ----------- -----------
Operating Loss (1,697,603) (1,587,995) (2,289,135) (1,538,473)
Investment Income 192,699 239,023 678,807 791,346
Interest Expense (7,075) (8,048) (30,973) (48,540)
Other Income - net 147,864 127,090 250,505 452,690
----------- ----------- ----------- -----------
Loss Before Non-Owned Interests
and Incomes Taxes (1,364,115) (1,229,930) (1,390,796) (342,977)
Non-Owned Interest in Pretax Loss
of MIDSOUTH Partners 430,060 242,176 512,408 650,272
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests
in Insituform East, Inc. and Income Taxes (934,055) (987,754) (878,388) 307,295
Provision (Credit) for Income Taxes (392,000) (420,000) (358,000) 66,000
----------- ----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests
in Insituform East, Inc. (542,055) (567,754) (520,388) 241,295
Non-Owned Interests in Loss of
Insituform East, Inc. 400,018 459,067 395,184 78,668
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ (142,037) $ (108,687) $ (125,204) $ 319,963
=========== =========== =========== ===========
Net Earnings (Loss) per Share of Common
Stock:
Basic Earnings (Loss) per Share $ (0.10) $ (0.07) $ (0.08) $ 0.21
Diluted Earnings (Loss) per Share $ (0.10) $ (0.07) $ (0.08) $ 0.21
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
-------------------------------------
Mar. 31, 1999 June 30, 1998
---------------- ---------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 17,457,135 $ 20,405,039
Accounts receivable 6,525,616 5,185,047
Inventories 1,460,841 1,381,861
Prepaid and refundable taxes 787,896 948,486
Prepaid expenses and other 394,285 420,931
------------ ------------
Total Current Assets 26,625,773 28,341,364
------------ ------------
Property, Plant and Equipment - at cost less accumulated depreciation of
$14,875,193 at March 31, 1999 and $14,245,135 at June 30, 1998 11,342,041 11,196,448
------------ ------------
Other Assets:
Excess of acquisition cost over value of net assets acquired less accumulated
amortization of $1,231,613 at March 31, 1999 and $1,165,712 at
June 30, 1998 2,254,739 2,320,640
Cash surrender value of SERP life insurance 1,601,893 1,230,255
Deposits and other 98,489 122,479
------------ ------------
Total Other Assets 3,955,121 3,673,374
============ ============
Total Assets $ 41,922,935 $ 43,211,186
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
As of
-------------------------------------
Mar. 31, 1999 June 30, 1998
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Partner's loans to Midsouth Partners $ 200,000 $ 250,000
Accounts payable and accrued liabilities 2,916,106 2,701,678
Income taxes payable 1,061,432 1,350,825
Current portion of capital lease obligations 40,142 34,621
------------ -------------
Total Current Liabilities 4,217,680 4,337,124
------------ -------------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 73,995 104,829
Deferred income taxes 732,000 915,000
Accrued SERP liability 788,197 605,973
------------ -------------
Total Long-term Liabilities 1,594,192 1,625,802
------------ -------------
Total Liabilities 5,811,872 5,962,926
------------ -------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 10,840,588 12,068,262
------------ -------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,186,976 shares 118,697 118,697
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 295,980 shares 29,598 29,598
Additional paid-in capital 7,742,959 7,527,278
Retained earnings 17,379,221 17,504,425
------------ ------------
Total Stockholders' Equity 25,270,475 25,179,998
============ ============
Total Liabilities and Stockholders' Equity $ 41,922,935 $ 43,211,186
============ ============
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
-------------------------------------
1999 1998
-------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings (loss) $ (125,204) $ 319,963
Adjustments to reconcile net earnings
to net cash used in operations:
Depreciation and amortization 1,606,265 1,675,135
Amounts attributable to non-owned interests (907,592) (728,940)
Deferred income taxes (183,000) (65,000)
Decrease in other assets 17,990 18,348
Increase in accrued SERP liability 182,224 121,276
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,390,569) 990,083
(Increase) decrease in inventories (78,980) 114,666
(Increase) decrease in prepaid expenses and other current assets 237,236 (572,241)
Increase (decrease) in accounts payable and accrued expenses 362,724 (1,263,244)
Decrease in income taxes payable (289,393) (4,807,292)
----------- -------------
Net Cash Used in Operating Activities (568,299) (4,197,246)
----------- -------------
Cash Flows from Investing Activities:
Capital expenditures, net (1,679,957) (1,110,513)
Increase in investment in Insituform East (104,401) 0
Increase in cash surrender value of life insurance (371,638) (352,421)
----------- -------------
Net Cash Used in Investing Activities (2,155,996) (1,462,934)
----------- -------------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit 0 1,800,000
Principal payments on revolving lines of credit and
capital lease obligations (25,313) (1,820,853)
Proceeds from loans to Midsouth Partners from non-owned interests 200,000 0
Repayment of loans to Midsouth Partners from non-owned interests (250,000) 0
Dividends paid (148,296) (2,474,276)
Proceeds from exercise of stock options 0 34,500
----------- -------------
Net Cash Used in Financing Activities (223,609) (2,460,629)
----------- -------------
Net Decrease in Cash and Cash Equivalents (2,947,904) (8,120,809)
Cash and Cash Equivalents at Beginning of Period 20,405,039 27,081,412
=========== =============
Cash and Cash Equivalents at End of Period $17,457,135 $ 18,960,603
=========== =============
Supplemental disclosure of cash flow information:
Interest paid $ 42,232 $ 65,317
Income taxes paid (refunded), net $ (46,197) $ 5,352,211
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," the "Company" or
"Registrant"), 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 March 31, 1999, the
Condensed Consolidated Statements of Operations for the three months and nine
months ended March 31, 1999 and 1998, and the Condensed Consolidated Statements
of Cash Flows for the nine months ended March 31, 1999 and 1998 have been
prepared by the Company without audit. The Condensed Consolidated Balance Sheet
as of June 30, 1998 (unaudited) has been derived from the Company's June 30,
1998 audited financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at March 31, 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, 1998. Operating results for interim periods
are not necessarily indicative of operating results for an entire fiscal year.
2. Earnings (Loss) Per Share
Basic earnings (loss) per share data are computed based upon the
weighted average number of common shares outstanding during each period. Diluted
earnings per share are computed based upon the weighted average number of common
shares outstanding during the period including common stock equivalents from
dilutive stock options, if any. The weighted average number of common shares
outstanding used in computing diluted earnings per share for the three months
and nine months ended March 31, 1999 and 1998 include no net shares associated
with unexercised dilutive stock options. The following numbers of shares have
been used in the earnings (loss) per share computations:
<TABLE>
<CAPTION>
For the three months ended Mar. 31 For the nine months ended Mar. 31
---------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 1,482,956 1,482,956 1,482,956 1,482,759
========= ========= ========= =========
Diluted 1,482,956 1,482,956 1,482,956 1,482,759
========= ========= ========= =========
</TABLE>
3. Accounts Receivable
<TABLE>
<CAPTION>
Accounts receivable consist of:
Mar. 31, 1999 June 30, 1998
<S> <C> <C>
Due from customers $6,442,514 $5,134,644
Miscellaneous 83,102 50,403
---------- ----------
6,525,616 5,185,047
Less: Allowance for doubtful accounts 0 0
---------- ----------
$6,525,616 $5,185,047
========== ==========
</TABLE>
4. Equity in Insituform East
At March 31, 1999, CERBCO beneficially held 1,218,000 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 30.0% of the Common Stock, 99.5%
of the Class B Common Stock, 34.8% of the total equity and 59.4% 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 and nine months
ended March 31, 1999. If all the options outstanding at March 31, 1999 were
exercised, the resulting percentages of CERBCO's equity ownership and total
voting power would be 31.0% and 55.3%, 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 and nine months ended March 31, 1999.
5. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of:
Mar. 31, 1999 June 30, 1998
<S> <C> <C>
Accounts payable $1,351,094 $1,154,576
Accrued compensation and related expenses 1,565,012 1,398,806
Dividends payable 0 148,296
---------- ----------
$2,916,106 $2,701,678
========== ==========
</TABLE>
6. Contingencies
As previously reported by the Company, in March 1990, the controlling
stockholders of the Company, Messrs. George Wm. Erikson and Robert W. Erikson
(together, the "Eriksons"), executed a letter of intent and subsequently
executed four amendments thereto (collectively referred to herein as the "Letter
of Intent") with Insituform Technologies, Inc. ("ITI") to effect a sale of their
controlling interest in the Company to ITI for $6,000,000 (the "Proposed
Transaction"). The Proposed Transaction, if consummated, would have had the
effect of making ITI the controlling stockholder of the Company, and,
indirectly, of each of the Company's three direct subsidiaries at the time,
Insituform East, Capitol, and CERBERONICS. In September 1990, the Eriksons
informed the Company that the Letter of Intent had expired without consummation
of any transaction, that it would not be further extended, that negotiations had
ceased, and that the Eriksons had no further intention at the time of pursuing
the proposed sale of their controlling interest in the Company to ITI.
Also as previously reported by the Company, two stockholders commenced
a derivative lawsuit in the Delaware Court of Chancery against the Eriksons in
August, 1990, making certain claims with respect to the Proposed Transaction
(the "Delaware Action"). The Delaware Action finally was concluded on December
3, 1997, when the Delaware Supreme Court issued its order affirming the findings
of the Court of Chancery with respect to (a) the trial court's assessment of
certain damages against the Eriksons on remand from a previous appeal and (b)
the renewed petition of plaintiffs' attorneys for an award of attorneys' fees
and expenses. Those findings by the Court of Chancery had been made on remand
from the same Delaware Supreme Court after a 1996 ruling in which the Supreme
Court affirmed the Court of Chancery's holding that CERBCO had not suffered any
transactional damages with respect to the Proposed Transaction.
As previously reported by the Company, in January 1993, a lawsuit
against the partners in the law firm of Rogers & Wells and the Company, arising
out of the subject matter of the Delaware litigation, was filed in the Superior
Court of the District of Columbia (the "D.C. Complaint"). Plaintiffs were the
same two stockholders who were plaintiffs in the Delaware Action, and a former
director of the Company, and alleged that Rogers & Wells breached its duty of
loyalty and care to the Company by representing allegedly conflicting interests
of the Eriksons in the Proposed Transaction with ITI. Plaintiffs also claimed
that Rogers & Wells committed malpractice by allegedly making misrepresentations
to the Company's Board and allegedly failing to properly inform the Company's
Board. Plaintiffs claimed that the conduct of Rogers & Wells caused the Company
to lose an opportunity to sell its control of Insituform East to ITI, caused the
Company to incur substantial expense, and unjustly enriched Rogers & Wells. The
D.C. Complaint sought to recover from Rogers & Wells (i) damages in an amount
equal to all fees paid to Rogers & Wells, (ii) damages in an amount not less
than $6,000,000 for the loss of the opportunity for the Company to sell its
control of Insituform East to ITI, and (iii) punitive damages. Although the D.C.
Complaint stated that it was filed on behalf of the Company, management does not
believe that Rogers & Wells should be sued on any of the claims set forth
therein.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay of the proceedings was granted until after the Delaware
trial. Plaintiffs agreed to a stay of the D.C. 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. A further decision from the
D.C. Superior Court is expected later this year.
As previously reported, on June 30, 1998, Inliner U.S.A. and CAT
Contracting, Inc. filed an antitrust suit against ITI, Insituform Gulf South,
Inc. and Insituform East in United States District Court for the Southern
District of Texas, Houston Division, alleging violations by ITI (including all
of its subsidiary licensees), Insituform Gulf South, Inc., and Insituform East
of Sections 1 and 2 of the Sherman Act, Section 2 of the Clayton Act, as amended
by the Robinson-Patman Act, Section 43(a) of the Lanham Act, business
disparagement, tortious interference with contracts and prospective business
relationships, and unfair competition. Plaintiffs are seeking from the
defendants an unspecified amount of compensatory damages, treble damages and
attorneys' fees, as well as punitive damages of $50 million. Plaintiffs'
allegations were consistent with the allegations contained in the third amended
complaint of earlier litigation initiated October 23, 1996 and dismissed without
prejudice on June 18, 1998.
Insituform East believes it has strong defenses to, and is vigorously
contesting, this suit. On August 17,1998, Insituform East filed its answer
denying plaintiffs' claims and a motion to dismiss this action. The court has
not yet taken action with respect to this motion. Although the ultimate outcome
and consequences of the suit cannot be ascertained at this time and the results
of legal proceedings cannot be predicted with certainty, it is the opinion of
the management of Insituform East that the suit is meritless and will not have a
material adverse effect on the financial condition or the results of operations
of Insituform East.
Management believes ultimate resolution of these matters will not have
a material effect on the financial statements of CERBCO. Accordingly, no
provision for these contingencies has been reflected therein. The Company is
also involved in other contingencies arising out of the ordinary course of
business, none of which could, in the opinion of management, materially affect
the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$142,037 (-$0.10 per
share) on sales of $5.0 million, and a consolidated net loss of -$125,204
(-$0.08 per share) on sales of $16.9 million for the three months and nine
months ended March 31, 1999, respectively. The Company recognized a consolidated
net loss of -$108,687 (-$0.07 per share) on sales of $4.1 million and
consolidated net earnings of $319,963 ($0.21 per share) on sales of $18.8
million for the three months and nine months ended March 31, 1998, respectively.
The Company attributed its negative results during the three months and
nine months ended March 31, 1999 to the negative results during the same periods
of Insituform East, Inc. ("Insituform East"), the Company's majority-controlled
and only operating segment. For the three months ended March 31, 1999,
Insituform East recognized a consolidated net loss of -$613,082 on sales of $5.0
million, contributing a loss of -$213,064 to CERBCO. For the nine months ended
March 31, 1999, Insituform East recognized a consolidated net loss of -$605,674
on sales of $16.9 million, contributing a loss of -$210,490 to CERBCO.
Insituform East attributed its negative results for the three months and nine
months ended March 31, 1999 to its acceptance of additional job completion costs
on several incomplete projects, costs incurred in connection with litigation
initiated by Insituform Technologies, Inc. ("ITI") against Insituform East and
its majority-controlled subsidiary, Midsouth Partners, and an increase in
discounted sales performed during the periods. CERBCO's favorable results for
the nine months ended March 31, 1998 were primarily due to investment income
earned on the short-term investment of cash realized from the sale of its
interest in Capitol Office Solutions on June 30, 1997, and its receipt of a
one-time payment of damages in connection with the Delaware Action in December
1997.
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 the combination of a
regular component of sales at normal margins and increased production capacity
for anticipated net increases in discounted sales will be required through the
remainder of fiscal year 1999 and beyond to absorb both normal and expected
operating costs and the additional anticipated costs associated with continuing
litigation and arbitration with ITI over the future of Midsouth Partners. Income
from the Company's non-operating activities presently is anticipated to continue
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 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
imitations and substitute products hoping that cheap price alone may permit them
to succeed in a market otherwise dominated by Insituform. In those limited
markets where the lowest priced product may be deemed technically "good enough,"
Insituform is at a disadvantage. Market share participation in this segment
strategically undertaken by Insituform East from time to time to preserve
competitive presence, typically at levels materially below normal margins,
necessarily dilutes the overall margin performance of Insituform East.
Conversely, in "best value" and quality-based markets, Insituform remains at a
distinct advantage. While both the Federal Government and industry routinely use
best value and quality-weighted contract award criteria in more sophisticated
procurements, municipalities and other local governments are often politically
reluctant to modernize from simply "low bid" to "best value" evaluations when
buying sophisticated processes and technologies. In the face of mounting
technical failures from awards based upon lowest price, local governments also
are expected over time to reevaluate simple low bid award criteria - in favor of
"best value" award criteria - when procuring trenchless technology for the
rehabilitation of older pipelines.
Results of Operations
Third Quarter ended 3/31/99 Compared with Third Quarter ended 3/31/98
Consolidated sales increased approximately $0.8 million (20%) from $4.1
million for the quarter ended March 31, 1998 to $5.0 million for the quarter
ended March 31, 1999. Comparable period sales increased primarily as a result of
increases in available work.
Consolidated operating losses increased from -$1.6 million in the
quarter ended March 31, 1998 to -$1.7 million in the quarter ended March 31,
1999, primarily due to an increase in Insituform East's operating loss from
- -$1.4 million to -$1.5 million in the same comparable periods. Consolidated cost
of sales increased 18% in the third quarter of fiscal year 1999 as compared to
the third quarter of fiscal year 1998. As a result, gross profit (loss) as a
percentage of sales improved from (9%) to (7%) for the same two comparable
periods. The improvement in gross profit (loss) as a percentage of sales is due
primarily to absorption of semi-fixed costs over higher sales volume during the
third quarter of fiscal year 1999. Insituform East's selling, general and
administrative expenses increased $0.1 million (12%) for the current period, due
primarily to costs incurred in connection with litigation initiated by ITI
against Insituform East. The parent Company's unallocated general corporate
expenses remained approximately the same in the comparable periods.
Nine Months Ended 3/31/99 Compared With Nine Months Ended 3/31/98
Consolidated sales decreased approximately $1.8 million (-10%) from
$18.8 million for the nine months ended March 31, 1998 to $16.9 million for the
nine months ended March 31, 1999. Comparable period sales decreased primarily as
a result of significant revenues from the Perry Nuclear project recognized
during the first quarter of fiscal year 1998.
Consolidated operating losses increased from -$1.5 million in the nine
months ended March 31, 1998 to -$2.3 million in the nine months ended March 31,
1999, primarily due to an increase in Insituform East's operating loss from
- -$1.0 million to -$1.7 million in the same comparable periods. Consolidated cost
of sales decreased 5% in the nine months ended March 31, 1999 as compared to the
nine months ended March 31, 1998. As a result, gross profit as a percentage of
sales decreased from 13% to 9% for the same two comparable periods. The decrease
in gross profit as a percentage of sales is due primarily to absorption of
semi-fixed costs over lower sales volume during the nine months ended March 31,
1999. Insituform East's selling, general and administrative expenses decreased
$0.2 million (-7%) for the current nine months, primarily as a result of reduced
costs to support decreased production activities more than offsetting additional
legal expenses incurred during the third quarter of fiscal year 1999. The parent
company's unallocated general corporate expenses remained approximately the same
in the comparable nine-month periods.
Other income decreased $0.2 million (-45%) primarily as a result of a
one-time payment of damages to CERBCO in connection with the Delaware Action in
the quarter ended December 31, 1997.
Financial Condition
During the nine months ended March 31, 1999, the Company's operating
activities used approximately $0.6 million in cash. This result is due primarily
to the unfavorable impact of the Company's net operating loss to include the
non-owned interests in the losses of the Company's consolidated subsidiaries and
a $1.4 million increase in accounts receivable more than offsetting the
favorable impact of a $0.3 million increase in payables and accruals and $1.6
million in depreciation and amortization expenses included in operating results
that did not require the outlay of cash.
The Company used $2.2 million in cash in investing activities during
the nine months ended March 31, 1999 primarily for equipment purchases and other
capital improvements by Insituform East. The Company also used $0.2 million in
financing activities, primarily due to the payment of dividends by the parent
company, CERBCO. Despite the $2.9 million net decrease in cash during the first
nine months of fiscal year 1999, the Company's liquidity remained strong with
working capital of over $22 million and a current ratio of 6.31 at March 31,
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 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 $16 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.
As previously disclosed, the Company may purchase additional shares of
Common Stock of Insituform East. The Company expects that any such purchases
would be made in open market transactions, at the then-prevailing market price,
and executed through brokers. Any such purchases will require use of the
Company's working capital.
Year 2000 Issues
The inability of present computerized systems to process dates
correctly beyond December 31, 1999 and the potential impact on businesses and
governments in the future are generally referred to as "Year 2000 Issues."
The Company has implemented plans to address Year 2000 issues. Primary
areas of focus include the Company's information technology systems, the
Company's non-information technology systems, the Year 2000 readiness of the
Company's vendors and suppliers and the Year 2000 readiness of the Company's
major customers. Because the Company's primary products and services neither
include nor rely upon computerized components, the Company believes that there
are no additional contingencies associated with actual or implied warranties
related to its products and services resulting from Year 2000 issues.
With respect to the Company's information technology systems, the
Company's primary accounting and information process system is Year 2000
compliant and will recognize years 2000 through 2029 in the proper century. The
Company's preliminary assessment of supporting information systems is that these
systems either are Year 2000 compliant, can be modified to become Year 2000
compliant, or should not have a significant impact on either the primary
accounting and information system or the Company's operating activities should
non-compliant systems not be properly modified.
With respect to the Company's non-information technology systems, the
Company is still in the preliminary assessment stage. The Company is dependent
on information from vendors and suppliers in assessing and evaluating these
systems. As potential Year 2000 issues are identified, implementation plans are
developed and executed. The Company has completed corrective action for its
office telephone system and its headquarters facility security system, two
systems that were identified as not being Year 2000 compliant.
With respect to the Company's suppliers and customers, the Company has
initiated preliminary correspondence with selected critical suppliers and
customers. Responses received to date indicate that responding suppliers and
customers either are currently Year 2000 compliant or expect to be Year 2000
compliant by December 31, 1999. Prior to June 30, 1999, the Company plans to
seek to obtain responses from suppliers and customers who have not as yet
responded to inquiries and develop a plan to monitor and assess Year 2000
readiness from respondents not as yet Year 2000 compliant.
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $200,000. This preliminary estimate is based on
presently available information and will be updated as the Company continues its
assessment and proceeds with implementation. Specifically, this estimate would
change if, after receipt of information from key suppliers or customers, a
formal contingency plan required development and implementation. The Company has
incurred approximately $21,000 in implementation costs through March 31, 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 the Company with
materials critical to its operations, or with sufficient electrical power or
other utilities, or if transportation of the Company's personnel and equipment
is seriously impeded, then any such failure or impedance could have a material
adverse effect on the operational performance and financial condition of the
Company.
In addition, if major municipal, industrial or federal government
customers are seriously affected, directly or indirectly, by Year 200 issues
such that pipeline rehabilitation programs are delayed or abandoned, this too
could have a material adverse effect on the operational performance and
financial condition of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one prior to June 30, 1999, based primarily on potential actions that
would be required if key vendors or customers were unable to address and resolve
Year 2000 issues that would directly or indirectly impact the Company's ability
to conduct normal business operations in the Year 2000 and beyond.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, "Notes to Condensed Consolidated Financial
Statements (unaudited) - Note 6. Contingencies" for details concerning (a) a
previously disclosed lawsuit pending in the Superior Court of the District of
Columbia, and (b) a previously disclosed lawsuit filed in the U.S. District
Court for the Southern District of Texas, Houston Division.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule for the period ended March 31, 1999
99 - CERBCO, Inc. Consolidating Schedules: Statement of Operations
Information for the three months ended March 31, 1999;
Statement of Operations Information for the nine months
ended March 31, 1999; Balance Sheet Information and
Consolidating Elimination Entries as of March 31, 1999.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended March
31, 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: May 17, 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)
<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, 1999; Statement of
Operations Information for the Nine Months Ended March 31, 1999;
Balance Sheet Information and Consolidating Elimination Entries as
of March 31, 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,457
<SECURITIES> 0
<RECEIVABLES> 6,526
<ALLOWANCES> 0
<INVENTORY> 1,461
<CURRENT-ASSETS> 26,626
<PP&E> 26,217
<DEPRECIATION> 14,875
<TOTAL-ASSETS> 41,923
<CURRENT-LIABILITIES> 4,218
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 25,122
<TOTAL-LIABILITY-AND-EQUITY> 41,923
<SALES> 16,939
<TOTAL-REVENUES> 16,939
<CGS> 15,406
<TOTAL-COSTS> 15,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (878)
<INCOME-TAX> (358)
<INCOME-CONTINUING> (520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (125)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENTS OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1999
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C>
Sales $ 4,993,149 $ 0 $ 0 $ 4,993,149
------------- ----------- -------------- ---------------
Costs and Expenses:
Cost of sales 5,325,240 0 0 5,325,240
Selling, general and administrative expenses 1,365,512 0 215,048 1,150,464
------------- ----------- -------------- ---------------
Total Costs and Expenses 6,690,752 0 215,048 6,475,704
------------- ----------- -------------- ---------------
Operating Loss (1,697,603) 0 (215,048) (1,482,555)
Investment Income 192,699 (A) (11,259) 192,162 11,796
Interest Expense (7,075) (A) 11,259 0 (18,334)
Other Income (Expense) - net 147,864 0 93,913 53,951
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests and
Income Taxes (1,364,115) 0 71,027 (1,435,142)
Non-Owned Interest in Pretax Loss of
Midsouth Partners 430,060 0 0 430,060
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (934,055) 0 71,027 (1,005,082)
Credit for Income Taxes (392,000) 0 0 (392,000)
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (542,055) 0 71,027 (613,082)
Non-Owned Interests in Loss of Insituform East 400,018 (B) 400,018 0 0
------------- ----------- -------------- ---------------
NET EARNINGS (LOSS) $ (142,037) $ 400,018 $ 71,027 $ (613,082)
============= ========== ============== ===============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENTS OF OPERATIONS INFORMATION
NINE MONTHS ENDED MARCH 31, 1999
(unaudited)
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C>
Sales $ 16,939,195 $ 0 $ 0 $ 16,939,195
------------- ----------- -------------- ---------------
Costs and Expenses:
Cost of sales 15,406,481 0 0 15,406,481
Selling, general and administrative expenses 3,821,849 0 573,903 3,247,946
------------- ----------- -------------- ---------------
Total Costs and Expenses 19,228,330 0 573,903 18,654,427
------------- ----------- -------------- ---------------
Operating Loss (2,289,135) 0 (573,903) (1,715,232)
Investment Income 678,807 (A) (11,259) 639,210 50,856
Interest Expense (30,973) (A) 11,259 0 (42,232)
Other Income (Expense) - net 250,505 0 49,979 200,526
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests and
Income Taxes (1,390,796) 0 115,286 (1,506,082)
Non-Owned Interest in Pretax Loss of
Midsouth Partners 512,408 0 0 512,408
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (878,388) 0 115,286 (993,674)
Provision (Credit) for Income Taxes (358,000) 0 30,000 (388,000)
------------- ----------- -------------- ---------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (520,388) 0 85,286 (605,674)
Non-Owned Interests in Loss of Insituform East 395,184 (D) 395,184 0 0
------------- ----------- -------------- ---------------
NET EARNINGS (LOSS) $ (125,204) $ 395,184 $ 85,286 $ (605,674)
============= ========== ============== ===============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
MARCH 31, 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 $ 17,457,135 $ 0 $ 16,801,612 $ 655,523
Accounts receivable 6,525,616 0 0 6,525,616
Inventories 1,460,841 0 0 1,460,841
Prepaid and refundable taxes 787,896 0 0 787,896
Prepaid expenses and other 394,285 0 50,000 344,285
------------- ----------- -------------- ---------------
TOTAL CURRENT ASSETS 26,625,773 0 16,851,612 9,774,161
Investment in and Advances to Subsidiary:
Investment in subsidiary 0 (F) (7,607,506) 7,607,506 0
Intercompany receivables and payables 0 0 1,208,521 (1,208,521)
Property, Plant and Equipment - net of
accumulated depreciation 11,342,041 0 89,381 11,252,660
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,254,739 (F) 2,254,739 0 0
Cash surrender value of SERP life insurance 1,601,893 0 1,532,360 69,533
Deposits and other 98,489 0 44,489 54,000
============== =========== ============== ===============
TOTAL ASSETS $ 41,922,935 $ (5,352,767) $ 27,333,869 $ 19,941,833
============== ============ ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
Current Liabilities:
Partner's loans to Midsouth Partners $ 200,000 0 0 200,000
Accounts payable and accrued liabilities 2,916,106 0 63,495 2,852,611
Income taxes payable 1,061,432 0 1,046,708 14,724
Current portion of capital lease obligations 40,142 0 0 40,142
------------- ----------- -------------- ---------------
TOTAL CURRENT LIABILITIES 4,217,680 0 1,110,203 3,107,477
Long-Term Liabilities:
Capital lease obligations 73,995 0 0 73,995
Deferred income taxes 732,000 0 0 732,000
Accrued SERP liability 788,197 0 742,701 45,496
------------- ----------- -------------- ---------------
TOTAL LIABILITIES 5,811,872 0 1,852,904 3,958,968
------------- ----------- -------------- ---------------
Non-Owned Interests: 10,840,588 (D)(F) 9,653,936 0 1,186,652
------------- ----------- -------------- ---------------
Stockholders' Equity:
Common stock 118,697 (F) (175,486) 118,697 175,486
Class B stock 29,598 (F) (11,904) 29,598 11,904
Additional paid-in capital 7,742,959 (F) (4,000,424) 7,742,959 4,000,424
Retained earnings 17,379,221 (E)(F)(12,008,502) 17,589,711 11,798,012
Treasury stock 0 (F) 1,189,613 0 (1,189,613)
------------- ----------- -------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 25,270,475 (15,006,703) 25,480,965 14,796,213
------------- ----------- -------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,922,935 $(5,352,767) $ 27,333,869 $ 19,941,833
============= =========== ============== ===============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
MARCH 31, 1999
(unaudited)
<CAPTION>
(A)
<S> <C> <C>
Investment income $11,259
Interest expense $11,259
To eliminate interest expense paid by Insituform East to CERBCO
in the three months and nine months ended March 31, 1999.
(B)
Non-owned interests $400,018
Non-owned interests in loss of subsidiary $400,018
To record non-owned interests in loss of Insituform East for the
three months ended March 31, 1999.
(C)
Current quarter earnings adjustments $400,108
Retained earnings $400,018
To close out impact of eliminating entries on current quarter's
statement of operations.
(D)
Non-owned interests $395,184
Non-owned interests in loss of subsidiary $395,184
To record non-owned interests in loss of Insituform East for the
nine months ended March 31, 1999.
(E)
Current quarter earnings adjustments $395,184
Retained Earnings $395,184
To close out impact of eliminating entries on six month's
statement of operations.
(F)
Common stock $175,486
Class B stock 11,904
Additional paid-in capital 4,000,424
Retained earnings 12,403,686
Excess of acquisition cost over value of net assets acquired 2,254,739
Treasury stock $1,189,613
Non-owned interests 10,049,120
Investment in subsidiary 7,607,506
To eliminate investments in consolidated subsidiaries.
</TABLE>
