UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
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)
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Class B Common Stock, par value $.10 per share
(Title of Class)
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 ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No ---------
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant computed by reference to the last price at
which such stock was sold, as of September 15, 1997, was $9,538,482.
As of September 15, 1997, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,186,726
Class B Common Stock 296,230
Total 1,482,956
Documents Incorporated by Reference: None
Total number of pages of this report: 52
Index to Exhibits located at page: 46
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business.............................................................3
Item 2. Properties...........................................................8
Item 3. Legal Proceedings....................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................10
Item 6. Selected Financial Data.............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................12
Item 8. Financial Statements and Supplementary Data.........................15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......15
PART III
Item 10. Directors and Executive Officers of the Registrant..................34
Item 11. Executive Compensation..............................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management......43
Item 13. Certain Relationships and Related Transactions......................45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....46
CONSOLIDATED
STATEMENTS OF EARNINGS
AND BALANCE SHEETS
Pages 17 through 19
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
As of June 30, 1997 CERBCO, Inc. ("CERBCO", the "Company" or
"Registrant") [NASDAQ:CERB] is a parent holding company with a controlling
interest in Insituform East, Incorporated [NASDAQ:INEI] (excavationless sewer
and pipeline rehabilitation). Prior to June 30, 1997, CERBCO also owned a
controlling interest in Capitol Office Solutions, Inc. (formerly Capitol Copy
Products, Inc.) [copier and facsimile ("fax") equipment sales, service and
supplies].
CERBCO was incorporated on December 23, 1987 in the State of Delaware.
CERBCO was formed for the purpose of implementing a Plan of Reorganization and
Merger (the "Plan"), whereby its then publicly-traded predecessor, CERBERONICS,
Inc. ("CERBERONICS"), became a wholly-owned subsidiary of CERBCO. Under the
Plan, owners of shares of stock previously held in CERBERONICS, by class,
received ownership of an equivalent number of shares of stock, by class, in
CERBCO. The Company thus consisted of CERBCO, a parent holding company, and
three principal subsidiaries, CERBERONICS, Insituform East, Incorporated and
Capitol Office Solutions, Inc. CERBERONICS, which had been providing
engineering, analytical and technical support services to the United States
Government, discontinued operations in 1991.
On June 30, 1997, the Company's two-thirds stake in Capitol Office
Solutions, Inc. ("Capitol") was redeemed by Capitol for approximately $19
million in cash plus two-thirds of an approximate $5 million pre-redemption
dividend, leaving Insituform East, Incorporated as the Company's sole remaining
operating subsidiary.
The principal office and corporate headquarters of the Company are
located in suburban Washington, D.C., collocated with the offices of Insituform
East, Incorporated, at 3421 Pennsy Drive, Landover, Maryland 20785. The
Company's telephone number is (301) 773-1784, its fax number is (301) 322-3041,
and its twenty-four hour public information FaxVault number is (301) 773-4560.
(b) Financial Information About Industry Segments
As of June 30, 1997, substantially all of the Company's revenues,
operating results and identifiable assets are attributable to the rehabilitation
and repair of underground sewers and other pipelines, the Company's only
remaining business segment. See Part IV, Item 14, Exhibit 99, "CERBCO, Inc.
Consolidating Schedules: Statement of Earnings Information for the Year Ended
June 30, 1997; Balance Sheet Information and Consolidating Elimination Entries
as of June 30, 1997" for additional information pertaining to Insituform East,
Inc.
(c) Narrative Description of Business
CERBCO, Inc.
GENERAL
As of June 30, 1997, CERBCO, Inc. ("CERBCO" or the "Company") is a
parent holding company with a controlling interest in one principal subsidiary,
Insituform East, Inc. CERBCO officers participate directly on the management
team of this subsidiary corporation, in varying capacities and officerships,
with a view to overseeing, protecting and developing the long-term value of the
Company's investment in such subsidiary. A business description of CERBCO is
primarily a business description of Insituform East, Incorporated as given
below.
Insituform East, Incorporated
GENERAL
Insituform East, Incorporated ("Insituform East" or the "Company") was
organized under the laws of the State of Delaware on February 26, 1970 under the
name Universal Construction and Supply Company. Its present name was adopted on
August 24, 1978. The Company was engaged in the business of underground conduit
construction from inception until 1974 and construction equipment rental from
1974 to 1978. The Company then phased out these lines of business and entered
into sublicensing agreements for the Insituform process, a patented technology
for reconstructing pipelines with little or no excavation. Since July 1978, the
Company has been primarily engaged in the business of rehabilitating underground
sewers and other pipelines, the Company's only business segment.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio,
three Kentucky counties and West Virginia to its original Insituform process
licensed territory of Maryland, Virginia, the District of Columbia, Delaware and
eastern Pennsylvania.
In December 1985, MIDSOUTH Partners was organized as a Tennessee
General Partnership and became the exclusive licensee for the Insituform process
in Tennessee, the rest of Kentucky and northern Mississippi. The Company was
assigned three representatives to a seven-member Management Committee
established to manage the business activities of the Partnership and allocated a
42.5% interest in Partnership profits and losses.
In September 1987, the Company established a branch facility in
Cincinnati, Ohio, to support operating activities in the western region of its
licensed territory.
In May 1989, the Company acquired an 80% interest in TRY TEK Machine
Works, Inc. ("TRY TEK"). TRY TEK, located in Hanover, Pennsylvania, was founded
in September 1985 to custom design and build special machinery, including
machinery used in the Insituform process. The Company acquired an additional 10%
interest in TRY TEK in February 1993 and the remaining 10% interest in March
1995.
In December 1990, the Company acquired an exclusive license for the
sale and installation of preformed PVC thermoplastic pipe under the NuPipe(R)
process and trademark for a sales region identical to the territories licensed
to the Company for the Insituform process.
In September 1991, the Company added cement mortar lining of potable
water lines to its service capability. A formal plan to discontinue providing
cement mortar lining services, adopted in June 1993, was substantially completed
in June 1994.
A June 12, 1996 arbitration award granted the Company the unilateral
right to appoint a MIDSOUTH Partners Management Committee representative in
place of another partner's representative, in connection with a default of the
Partnership Agreement by that partner. As a result of this award, the Company
gained majority representation on the Management Committee effective June 12,
1996.
For financial reporting purposes for the fiscal years ended June 30,
1997 and 1996, the Company has included its wholly-owned subsidiary corporations
(collectively, "East") and its majority-controlled subsidiary partnership,
MIDSOUTH Partners, in its consolidated financial statements. Prior to the fiscal
year ended June 30, 1996, the Company accounted for its minority investment in
MIDSOUTH Partners using the equity method.
The Company primarily rehabilitates and repairs underground sewers and
other pipelines -- including waste water, storm water and industrial process
pipelines -- using the Insituform process. The Insituform process utilizes a
polyester fiber-felt material, the Insitutube(R) material, coated with
polyethylene and impregnated with a liquid, thermosetting resin. The Insitutube
material is inserted in the pipe through an existing manhole or other access
point. By use of an inversion tube and cold water pressure, the Insitutube
material is forced through the pipeline, turned inside out, and pressed firmly
against the inner wall of the damaged pipeline. When the Insitutube material is
fully extended, the cold water within the tube is recirculated through a boiler
in a truck. The heated water cures the thermosetting resin to form a hard,
jointless, impact and corrosion resistant Insitupipe product within the original
pipe. Lateral or side connections are then reopened by use of the
Insitucutter(R) device, a remote-controlled cutting machine.
The principal office and corporate headquarters of the Company are
located at 3421 Pennsy Drive, Landover, Maryland 20785. The Company's telephone
number is (301) 386-4100, and its fax number is (301) 386-2444.
RELATIONSHIP WITH INSITUFORM TECHNOLOGIES, INC.
On December 9, 1992, Insituform Technologies, Inc. (formerly Insituform
of North America, Inc., or "INA") through its acquisition of Insituform Group,
Ltd., N.V., acquired the worldwide patent rights for the Insituform process. The
Company is a sublicensee of Insituform Technologies, Inc. ("ITI"). The Company
has entered into seven sublicense agreements with ITI which grant the Company
rights to perform the Insituform process in Virginia, Maryland, Delaware, Ohio,
the District of Columbia, Pennsylvania, West Virginia, Tennessee, Kentucky and
northern Mississippi. The Company can perform the Insituform process in other
locations subject to payment of additional royalties.
The sublicense agreements require the Company to pay ITI a royalty of
8% of the revenue, excluding certain deductions, from all contracts using the
Insituform process, with a minimum annual royalty requirement for each licensed
territory. In the event the Company performs the Insituform process outside its
territory, the sublicense agreements require it to pay a royalty of from 8% to
12% of the gross contract price to the independent sublicensee of such other
territory, if any, in addition to all royalties due ITI.
The sublicense agreements extend for the life of the underlying patents
or patent rights, including any improvements or modifications extending such
life. The agreements may be terminated by the Company upon two calendar quarters
written notice to ITI. The agreements may only be canceled by ITI in certain
events. In addition, ITI has the right to approve the quality and specifications
of equipment and materials not purchased directly from ITI.
On May 1, 1987, the Company entered into supply agreements with ITI
whereby the Company has committed to purchase 90% of its Insitutube material
requirements from ITI. The agreements automatically renew annually unless notice
of termination is provided by either party six months prior to the end of a
renewal period. As a result of certain terms not previously fulfilled by ITI,
the Company believes it is no longer required to purchase 90% of its Insitutube
material requirements from ITI under the otherwise continuing agreements. After
providing six months advance notice, East terminated its supply agreement with
ITI effective May 1, 1997. However, East continues to purchase its Insitutube
material requirements from ITI.
The Company has also entered into license agreements with NuPipe, Inc.,
a wholly-owned subsidiary of ITI, for the sale and installation of preformed PVC
thermoplastic pipe under the NuPipe process and trademark. The Company has
committed to pay a royalty equal to 6.75% of gross contract revenue utilizing
the process and to purchase certain installation equipment and installation
materials from ITI.
TRY TEK manufactures Insitucutter devices for sale to ITI and East
under an agreement with ITI, the Insitucutter device patent holder. Unless
otherwise terminated, this agreement will continue until April 6, 1998, the date
of expiration of the Insitucutter device patent.
In 1981, the Company was assigned the rights to an agreement (the "SAW
Agreement") regarding the introduction of potential Insituform process
sublicensees to ITI. In connection with the introduction of current Insituform
process sublicensees to ITI, the Company receives quarterly payments from ITI
equal to 0.5% of contract revenue from Insituform process installations in
East's licensed territory and the states of New York, New Jersey, North
Carolina, South Carolina, Georgia and Alabama.
PATENTS
The Insituform process was developed in the United Kingdom in 1971. The
Company's rights to utilize the patents, trademarks and know-how related to the
Insituform process are derived from its licensor, ITI. There are presently 62
United States patents which cover various aspects of the Insituform process and
related installation techniques. The last patent to expire will remain in effect
until 2015. Two initial method patents relating to the Insituform process (one
of which covers material aspects of the inversion process) expired in 1994, a
primary method patent relating to the Insitutube material saturation process
expires in February 2001 and a patent relating to the Insitutube material will
expire in May 2001.
Although management of the Company believes these patents are important
to the business of the Company, there can be no assurance that the validity of
the patents will not be successfully challenged or that they are sufficient to
afford protection against another company utilizing a process similar to the
Insituform process. It is possible that the Company's business could be
adversely affected upon expiration of the patents, or by increased competition
in the event that one or more of the patents were adjudicated to be invalid or
inadequate in scope to protect the Company's operations. Management of the
Company believes, however, that while the Company has relied on the strength and
validity of these patents, the Company's significant installation experience
with the Insituform process and its degree of market penetration in its licensed
territory should enable the Company to continue to compete effectively in the
pipeline rehabilitation market in the future as older patents expire or become
obsolete.
CUSTOMERS
The Company performs services under contracts with governmental
authorities, private industries and commercial entities. In each of the last
three fiscal years, more than 65% of the Company's revenues have come from state
and local government entities -- cities, counties, state agencies and regional
authorities. During the year ended June 30, 1997, Federal government contracts
(collectively), a municipal government in central Ohio, a county government in
the Washington, D.C. metropolitan area, and a combined city and county
government in Tennessee accounted for 17%, 15%, 13% and 12%, respectively, of
the Company's sales. During the year ended June 30, 1996, Federal government
contracts (collectively), the same county government in the Washington, D.C.
metropolitan area and a regional sanitary authority in southwest Ohio accounted
for 23%, 20% and 10%, respectively, of the Company's sales. During the year
ended June 30, 1995, Federal government contracts (collectively), the same
regional sanitary authority in southwest Ohio and Washington Metropolitan Area
Transit Authority ("WMATA") accounted for 21%, 15% and 10%, respectively, of the
Company's sales.
SUPPLIERS
The Company's materials and equipment are generally available from
several suppliers. However, the Company believes that ITI is presently the sole
source of proprietary Insitutube material and, therefore, the Company is
presently dependent upon ITI for its supply of Insitutube material. During the
last three years the Company has not experienced any difficulty in obtaining
adequate supplies of Insitutube material from ITI and, subject to ITI's right to
approve the quality and specifications of material not purchased from ITI, the
Company has the right to substitute an alternate polyester fiber-felt or other
tube material available in the marketplace.
REVENUE RECOGNITION AND BACKLOG
The Company recognizes revenue using the units of completion method as
pipeline sections are rehabilitated using the Insituform process. An Insituform
process installation is generally performed between manholes or similar access
points within a twenty-four hour period. A rehabilitated pipeline section is
considered completed work and is generally billable to the customer. In most
cases, contracts consisting of individual line sections have a duration of less
than one year.
The total value of all uncompleted and multi-year contract awards from
customers was approximately $24.4 million at June 30, 1997, as compared to $5.1
million at June 30, 1996. The twelve-month backlog at June 30, 1997 was
approximately $16.1 million as compared to $4.9 million at June 30, 1996. The
total value of all uncompleted and multi-year contracts at June 30, 1997 and
1996 includes work not estimated to be released and installed within twelve
months as well as potential work included in term contract awards which may or
may not be fully ordered by contract expiration. Backlog figures at specific
dates are not necessarily indicative of sales and earnings for future periods
due to the irregular timing and receipt of major project awards including large
multi-year menu-priced contracts with estimated but uncertain order quantities
subject additionally to the specifics of individual work releases.
COMPETITION
The general pipeline replacement, rehabilitation and repair business is
highly competitive. The Company faces conceptual and practical competition both
from a number of contractors employing traditional methods of pipeline
replacement and repair and from contractors offering alternative trenchless
products and technologies.
Traditional Methods. The Insituform process conceptually competes with
traditional methods of pipe rehabilitation including full replacement, point
repair and sliplining. The Company believes the Insituform process usually
offers a cost advantage over full replacement as well as the practical advantage
of avoiding excavation. In addition, the Insituform process also offers
qualitatively better rehabilitation than sliplining which may significantly
reduce the diameter of the pipe. Grouting is also undertaken in the United
States. The Company considers grouting a short-term repair technique and not a
long-term pipeline rehabilitation solution competitive with the Insituform
process. As a practical matter, competition for the Company typically begins at
the point an end user has conceptually determined to employ trenchless
technology over traditional rehabilitation methods involving substantial
excavation.
Cured-in-Place Trenchless Technologies. Over the years, the Company has
witnessed a continuing introduction of alternative cured-in-place trenchless
technologies, none of which the Company believes has been able to offer the
quality or technical and other merits inherent in the Insituform process. The
Company believes it remains the dominant provider of cured-in-place trenchless
pipeline rehabilitation in its licensed territory.
Modified Sliplining Techniques. Several modified sliplining techniques
have been introduced in the trenchless marketplace to include the use of "fold
and formed" thermoplastic pipe. The NuPipe product offered by the Company is a
folded thermoplastic product installed using modified sliplining techniques. The
Company believes that the majority of customers will select the cured-in-place
Insituform process over modified sliplining techniques due to the quality and
longevity of the Insitupipe product, the proven performance record of the
Company's Insituform process installations over the past nineteen years, and the
broader range of design alternatives available with the Insituform process. The
Company does offer its NuPipe product to customers in situations where, for
budget restraints or other reasons, customers or consulting engineers will
accept a technologically inferior modified sliplining technique in place of a
cured-in-place technology.
Other Trenchless Technologies. The Company is aware of a number of
other trenchless technologies both under development and from time to time
introduced into the marketplace with mixed results. The Company believes that
the successful, in the ground, over twenty year proven performance of the
Insituform process presents a significant advantage over alternative trenchless
products.
The principal areas of competition in general pipeline replacement,
rehabilitation and repair include the quality of the work performed, the ability
to provide a long-term solution to the pipeline problems rather than a
short-term repair, the amount of disruption to traffic and commercial activity,
and the price. The Company believes that the Insituform process competes
favorably in each of these areas with traditional replacement or repair methods.
In particular, the ability to install Insitupipe products with little or no
excavation at prices typically at or below traditional open trench replacement
methods is of substantial competitive advantage. Further, and despite a small
reduction in pipe diameter resulting from the installation of the Insitupipe
product against the walls of the original pipe, the smooth finished interior
reduces friction and generally increases flow capacity.
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 the Company from time to time to preserve
competitive presence, typically at levels materially below normal margins,
necessarily dilutes the overall margin performance of the Company. However, a
majority of the Company's customers already use or are implementing improved
procurement specifications and contract award evaluation criteria emphasizing
technical value instead of simply low price. In a "best value" and quality based
market, Insituform remains at a distinct advantage. As customers and consulting
engineers increasingly rely on quality based purchasing criteria to help ensure
long term solutions to their infrastructure needs, they help clearly
differentiate proven products such as Insituform from cheaply priced trenchless
substitutes with technical, performance and installation risks not equally
tested by time or independent third parties.
SALES AND MARKETING
The Company's sales and marketing effort is directed by its Vice
President of Sales and Marketing. The Company's sales and marketing team
includes seven sales representatives, assigned to serve the Company's municipal,
Federal government and industrial market customers. Sales and marketing
personnel are full-time employees compensated through a combination of salary
and bonus. The Company also participates in seminars and trade shows, and
produces and distributes technical video presentations, brochures and
newsletters for current and prospective users of the Insituform process.
RESEARCH AND DEVELOPMENT
The Company is confident of its present capability to provide pipeline
rehabilitation services to its customers primarily using the Insituform process
and relies on its licensor, ITI, for major research and development projects. On
a continuing basis, however, the Company expends engineering efforts to improve
installation methods and design techniques for specific customer applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments to the use of
the Insituform process arising from existing or future regulations or
requirements, including those regulating the discharge of materials into the
environment.
EMPLOYEES
At June 30, 1997, the Company employed 184 full-time persons.
Item 2. Properties
Insituform East owns four buildings totaling 76,700 square feet
situated on a 15.45 acre site in the Ardwick Industrial Park, Prince George's
County, Maryland. This facility houses the maintenance, operations, marketing,
administration and executive offices of the Company.
Insituform East also leases a 13,000 square foot branch facility in the
Cincinnati, Ohio, metropolitan area to service operations in the western region
of its licensed territory.
TRY TEK owns 13,885 square feet of land in Hanover, Pennsylvania, with
6,139 square feet of manufacturing, administration and storage facilities housed
in three buildings.
MIDSOUTH Partners leases a 15,000 square foot facility in Knoxville,
Tennessee to serve customers in Tennessee, Kentucky and northern Mississippi.
Item 3. Legal Proceedings
See Part II, Item 8, "Notes to Consolidated Financial Statements - Note
12: Contingencies" for details concerning (a) a previously disclosed lawsuit in
the Court of Chancery of the State of Delaware currently on appeal to the
Delaware Supreme Court, (b) a previously disclosed lawsuit pending in the
Superior Court of the District of Columbia, and (c) a previously disclosed
lawsuit filed in the U.S. District Court for the Southern District of Texas,
Houston Division.
Item 4. Submission of Matters to a Vote of Security Holders
On June 27, 1997, a special meeting of stockholders was held to allow
stockholders to vote for or against the sale by the Company of its two-thirds
stake in Capitol Office Solutions, Inc. ("Capitol"), held by the Company's
wholly-owned subsidiary, CERBERONICS, Inc. pursuant to the terms of an
Investment, Redemption and Stock Purchase Agreement. The Agreement contemplated
a sales price of $19 million and two-thirds of an approximately $5 million
pre-sale distribution of excess cash from Capitol. The transaction was
conditioned upon the affirmative vote of a majority of the votes cast by
stockholders other than the Company's controlling stockholders, Messrs. Robert
W. Erikson and George Wm. Erikson. Based on the vote for the transaction by the
non-controlling stockholders, the controlling stockholders voted for the
transaction. The number of votes cast for and against the proposal, as well as
abstentions and broker non-votes, were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
Shares Votes Shares Votes Shares Votes Shares
Non-Controlling Stockholders
<S> <C> <C> <C> <C> <C> <C> <C>
Common 510,211 510,211 297,538 297,538 14,367 14,367 198,454
Class B Common 22,397 223,970 7,447 74,470 250 2,500 3,911
-------- ------- ------- ------- ------ ------ -------
Total 532,608 734,181 304,985 372,008 14,617 16,867 202,365
------- ------- ------- ------- ------ ------ -------
Controlling Stockholders
Common 115,056 115,056 0 0 0 0 0
Class B Common 245,318 2,453,180 0 0 0 0 0
------- --------- - - - - -
Total 360,374 2,568,236 0 0 0 0 0
------- --------- - - - - -
GRAND TOTAL 892,982 3,302,417 304,985 372,008 14,617 16,867 202,365
======= ========= ======= ======= ====== ====== =======
</TABLE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
(i) Common Stock
CERBCO's Common Stock is traded in the over-the-counter market and is
included in the National Association of Securities Dealers ("NASD") National
Market System ("NMS"). Quotations for such shares are reported in the National
Association of Securities Dealers Automated Quotations ("NASDAQ") System under
the trading symbol CERB. Holders of Common Stock have one vote per share on all
matters on which stockholders are entitled to vote together.
The following table shows the range of bid quotations for the period
indicated as reported by NASDAQ:
Common Stock
Fiscal Year Ended June 30, 1997 High Low
------------------------------- ---- ---
1st Quarter 7 3/8 5 3/8
2nd Quarter 7 1/4 5 1/4
3rd Quarter 9 3/4 6 1/8
4th Quarter 12 71/4
Fiscal Year Ended June 30, 1996 High Low
------------------------------- ---- ---
1st Quarter 8 1/4 4 7/8
2nd Quarter 7 5/8 6
3rd Quarter 7 1/2 5 7/8
4th Quarter 8 1/8 6
The quotations in the above table represent prices between dealers,
without retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
(ii) Class B Common Stock
There is no public trading market for shares of CERBCO's Class B Common
Stock. Holders of shares of Class B Common Stock have ten votes per share on all
matters with the exception of the election of directors and any other matter
requiring the vote of stockholders separately as a class. Holders of Class B
Common Stock are entitled to elect the remaining directors after election of not
less than 25% of the directors by the holders of Common Stock, voting separately
as a class. Shares of Class B Common Stock are convertible at any time to shares
of Common Stock on a share-for-share basis.
(b) Holders
As of September 15, 1997, the approximate number of shareholders of
record of each class of common equity of CERBCO was as follows:
Common Stock 319
Class B Common Stock 130
(c) Dividends
On June 17, 1997, the Company declared a regular cash dividend of five
cents per share, both on its shares of Common Stock and its shares of Class B
Common Stock, payable July 15, 1997 to its shareholders of record as of the
close of business on June 30, 1997. On June 27, 1997, the Company declared a
special dividend of one-dollar and fifty cents per share, both on its Common
Stock and its Class B Common Stock, payable July 30, 1997 to shareholders of
record as of the close of business on July 15, 1997. On June 18, 1996, the
Company declared a regular cash dividend of five cents per share, both on its
shares of Common Stock and its shares of Class B Common Stock, payable July 15,
1996 to its shareholders of record as of the close of business on June 30, 1996.
No dividends were declared in 1995.
The declaration of any future dividends will be determined by the Board
of Directors based upon conditions then existing, including the Company's
operating results, financial condition, capital requirements and other factors.
While there can be no assurances as to the declaration of any future dividends,
it is presently contemplated that dividends will be declared annually with a
record date of June 30th and a payment date of July 15th.
Item 6. Selected Financial Data
The selected financial data set forth below should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere in this report. Statement of earnings information for
fiscal years prior to 1997 has been restated to account for inclusion of Capitol
Office Solutions as discontinued operations.
<TABLE>
(in thousands, except per share information and return on equity amounts)
STATEMENT OF EARNINGS INFORMATION
<CAPTION>
Years ended June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales .................................... $ 26,542 $ 30,471 $ 21,594 $ 14,804 $ 13,105
Operating profit (loss) .................. $ (1,633) $ 2,551 $ 1,529 $ (771) $ (2,611)
Earnings (loss) before non-owned interests
and income taxes ....................... $ (1,243) $ 3,121 $ 2,615 $ (180) $ (2,007)
Earnings (loss) before non-owned interest
in Insituform East ..................... $ (565) $ 1,389 $ 1,247 $ (301) $ (1,223)
Earnings (loss) from continuing operations $ (199) $ 247 $ (202) $ (403) $ (639)
Net earnings (loss) ...................... $ 10,169 $ 2,055 $ 1,542 $ 1,319 $ (290)
Net earnings (loss) per share:
Continuing operations .................. $ (0.13) $ 0.17 $ (0.13) $ (0.28) $ (0.44)
Net earnings (loss) .................... $ 6.91 $ 1.40 $ 1.06 $ 0.90 $ (0.20)
Weighted average number of shares ........ 1,471 1,465 1,460 1,457 1,457
Dividends declared per share ............. $ 1.55 $ 0.05 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accounts receivable $ 6,691 $ 8,497 $ 6,386 $ 6,675 $ 3,641
Working capital $ 24,537 $ 17,886 $ 12,152 $ 9,480 $ 7,313
Total assets $ 51,471 $ 39,451 $ 32,980 $ 29,507 $ 27,559
Short-term debt $ 29 $ 55 $ 53 $ 611 $ 962
Long-term debt $ 139 $ 136 $ 42 $ 96 $ 458
Non-owned interests $ 13,042 $ 16,509 $ 12,367 $ 10,318 $ 9,809
Stockholders' equity $ 24,935 $ 17,002 $ 15,000 $ 13,445 $ 12,127
Book value per share $ 16.88 $ 11.58 $ 10.26 $ 9.23 $ 8.32
Average stockholders' equity
[Weighted average equity during year
exclusive of current earnings (loss)] $ 17,033 $ 15,010 $ 13,452 $ 12,127 $ 12,454
Return on equity
[Current earnings (loss) divided by average
stockholders' equity as defined above] 59.7% 13.7% 11.5% 10.9% (2.3)%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated loss from continuing operations of
- -$199,396 (-$0.13 per share) on sales of $26.5 million, but extraordinarily
positive overall net earnings of $10,169,310 ($6.91 per share), a 59.7% return
on equity, for its fiscal year ended June 30, 1997. Overall net earnings include
earnings from the operations of, and a gain from the redemption of its interest
in, the Company's now discontinued copy machine products and services segment.
In the previous fiscal year, the Company recognized consolidated earnings from
continuing operations of $247,219 ($0.17 per share) on sales of $30.5 million,
and net earnings of $2,055,291 ($1.40 per share), a 13.7% return on equity,
including earnings from the operations of the discontinued copy machine products
and services segment.
The Company's significant net earnings for the fiscal year ended June
30, 1997 were attributable to the stockholder approved redemption, closed June
30, 1997, of its interest in Capitol Office Solutions. In addition to earnings
from discontinued operations of $2,166,894 attributable to Capitol Office
Solutions, the Company recognized a gain on disposal of the discontinued segment
of $8,201,812, net of income taxes of $6,230,000. Insituform East, the Company's
pipeline rehabilitation segment, recognized a net loss of -$543,646,
contributing a loss of -$177,641 to CERBCO, on sales of $26.5 million in fiscal
year 1997, as compared to net earnings of $1,678,557, contributing earnings of
$537,138 to CERBCO, on sales of $30.5 million in fiscal year 1996. Insituform
East's current annual loss was attributable to an unfavorable balance of
negative factors coalescing in fiscal year 1997 including a 13% decrease in
period sales, delays in the start-up and execution of several significant
projects and dilution to normal overall margin levels caused by increases in
subcontracted services, in modified sliplining installations and in certain
discounted work undertaken for strategic reasons.
The Company's results were also affected by unallocated net general
corporate expenses in the amount of $551,755 (up $261,836 from the previous
year), including $171,484 (down $15,471 from the previous year), related to the
demands made of, and litigation being continued against, the Company by two
associated, minority stockholders in connection with the unconsummated private
sale of a controlling interest in the Company abandoned in September 1990. From
inception in 1990 through the year ended June 30, 1997, legal fees and expenses
resulting from this litigation totaled approximately $2.3 million. For
additional information concerning this matter, see Part II, Item 8, "Notes to
Consolidated Financial Statements - Note 12. Contingencies."
With respect to forward-looking information, 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 believes that increases in workable
backlog should result in favorable operating results through the opening two
quarters of fiscal year 1998.
The principal factor affecting the Company's future performance remains
the volatility of Insituform East's earnings as a function of sales volume at
normal margins. Accordingly, because a substantial portion of Insituform East's
costs are semi-fixed in nature, earnings can, at times, be severely reduced or
eliminated during periods of depressed sales at normal margins or material
increases in discounted sales, even where total revenues may experience an
apparent buoyancy or growth from the addition of discounted sales undertaken
from time to time for strategic reasons. Conversely, at normal margins,
increases in period sales typically leverage positive earnings significantly.
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. However,
a majority of Insituform East's customers already use or are implementing
improved procurement specifications and contract award evaluation criteria
emphasizing technical value instead of simply low price. In a "best value" and
quality based market, Insituform remains at a distinct advantage. As customers
and consulting engineers increasingly rely on quality based purchasing criteria
to help ensure long term solutions to their infrastructure needs, they help
clearly differentiate proven products such as Insituform from cheaply priced
trenchless substitutes with technical, performance and installation risks not
equally tested by time or independent third parties.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain items of expense and earnings bear to the sales of
CERBCO and the percentage increases in the dollar amounts of each item from
period to period.
<TABLE>
Results of Operations
<CAPTION>
Percentage Relationship to Revenues Period to Period Changes
Years ended June 30 Years ended June 30
1997 1996
1997 1996 1995 vs 1996 vs 1995
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% (12.9%) 41.1%
----- ----- -----
Costs and Expenses:
Cost of sales 84.5 73.1 69.5 0.6 48.4
Selling, general and administrative expenses 21.7 18.5 23.4 2.1 11.6
----- ----- -----
Total Costs and Expenses 106.2 91.6 92.9 0.9 39.2
----- ----- -----
Operating Profit (Loss) (6.2) 8.4 7.1 (164.0) 66.8
Investment Income 1.0 1.0 0.9 (11.1) 45.3
Equity in Earnings of MIDSOUTH Partners 0.0 0.0 3.4 0.0 (100.0)
Interest Expense (0.1) (0.2) 0.0 137.3 NA
Other Income - net 0.6 1.0 0.7 (42.5) 102.3
----- ----- -----
Earnings (Loss) Before Non-Owned Interests
and Income Taxes (4.7) 10.2 12.1 (139.8) 19.4
Non-Owned Interest in MIDSOUTH Partners 0.7 2.2 0.0 (70.2) NA
----- ----- -----
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (5.4) 8.0 12.1 (158.4) (5.8)
Income Taxes (3.3) 3.5 6.3 (181.4) (21.5)
----- ----- -----
Earnings (Loss) Before Non-Owned Interests in
Insituform East (2.1) 4.5 5.8 (140.7) 11.3
Non-Owned Interests in Insituform East (1.3) 3.7 6.7 (132.1) (21.2)
----- ----- -----
Earnings (Loss) from Continuing Operations (0.8) 0.8 (0.9) (180.7) NA
Discontinued Operations 39.1 5.9 8.0 473.5 3.7
---- ----- -----
Net Earnings 38.3% 6.7% 7.1% 394.8 33.3
===== ===== =====
</TABLE>
1997 vs 1996
Consolidated sales decreased $3.9 million (-12.9%) primarily as a
result of periods of reduced workable backlog levels experienced by Insituform
East during fiscal year 1997 and third quarter fiscal year 1997 delays in the
start-up and execution of several significant projects. The Company experienced
a 25% decrease in comparable year Insituform installation revenues which was
offset to some extent by increased NuPipe installation revenues and increased
services subcontracted to others.
Consolidated operating results decreased $4.2 million (-164.0%) from an
operating profit of $2.6 million in 1996 to an operating loss of -$1.6 million
in 1997. Insituform East's operating results decreased $4.0 million. Insituform
East's gross profit margin decreased from 26.9% to 15.5% primarily as a result
of both sales mix and absorption of semi-fixed operating costs over reduced
sales levels. Fiscal year 1997 sales mix included increases in low margin
subcontracted services, modified sliplining installations and certain discounted
work undertaken for strategic reasons. Insituform East's selling, general and
administrative expenses decreased $0.1 million (-2.1%) in fiscal year 1997, a
much smaller decrease than the decrease in sales. The parent company's operating
loss increased $0.2 million (46.7%) primarily due to a one-time increase in the
accrued supplemental executive retirement plan liability.
Earnings from discontinued operations increased $0.4 million (19.8%)
due to an increase in Capitol Office Solutions' sales (16.5%) and operating
profit (10.8%). Discontinued operations in fiscal year 1997 also included a gain
due to the sale of the Company's interests in Capitol Office Solutions of $8.2
million, net of income taxes of $6.2 million.
1996 vs 1995
Consolidated sales increased $8.9 million (41.1%), primarily due to the
inclusion of MIDSOUTH Partners' sales in Insituform East's consolidated sales
total. Comparable period East sales increased 4%, primarily as a result of
expanded production capacity and high levels of workable backlog during the
first six months of fiscal year 1996.
Consolidated operating profit increased $1.0 million (66.8%) in 1996 as
compared to 1995 as Insituform East's operating profit increased and the parent
company's operating loss decreased. Insituform East's operating profit increased
22.2% as a result of including MIDSOUTH Partners' operating profit in 1996.
Insituform East's gross profit margin decreased from 30.5% to 26.9% primarily as
a result of increased semi-fixed operating costs associated with expanded East
production capacity in 1996 and reduced margins on MIDSOUTH Partners' Insituform
contracts. Insituform East's selling, general and administrative costs increased
25.8% primarily as a result of including MIDSOUTH Partners' selling, general and
administrative costs in 1996. The parent company's operating loss decreased $0.5
million (48.9%) primarily due to a decrease in corporate legal expenses.
Earnings from discontinued operations increased $0.2 million (13.5%)
due to an increase in Capitol Office Solutions' sales (15.2%) and operating
profit (10.1%). Discontinued operations in fiscal year 1995 included a gain due
to receipt by the Company of final payments on five Federal government contracts
completed by CERBERONICS on or before June 30, 1991.
Liquidity and Capital Resources
Liquidity may be defined as the Company's ability to mobilize cash.
Cash and cash equivalents increased $16.8 million, $5.0 million and $3.0 million
in fiscal years 1997, 1996 and 1995, respectively. The increase in 1997 was due
primarily to the sale of the Company's investment in Capitol Office Solutions.
The increase in 1996 was due primarily to cash generated from operations and the
sale of temporary investments by the parent holding company. The increase in
1995 was due primarily to cash generated from operations.
The Company's operating activities provided approximately $4.6 million,
$6.2 million and $4.9 million in cash during fiscal years 1997, 1996 and 1995,
respectively.
Net cash provided by investing activities was approximately $12.6
million in fiscal year 1997, due primarily to the proceeds of the Company's sale
of Capitol Office Solutions. Net cash used in investing activities was
approximately $0.7 million and $1.1 million in fiscal years 1996 and 1995,
respectively. The primary use of such funds was for capital expenditures by
Insituform East in each of the fiscal years to upgrade, expand and improve
production capabilities, and purchases of vehicles and production equipment to
replace aging units..
Net cash used in financing activities was $0.3 million, $0.4 million
and $0.7 million in fiscal years 1997, 1996 and 1995, respectively. During
fiscal years 1997, 1996 and 1995, Insituform East paid cash dividends declared
for fiscal years 1996, 1995 and 1994, respectively. During fiscal year 1996,
Capitol Office Solutions paid cash dividends declared at mid-year. During fiscal
year 1995, Capitol Office Solutions paid down its line of credit.
CERBCO believes that its principal operating subsidiary, Insituform
East has cash reserves, an existing $3,000,000 undrawn bank line of credit and
borrowing potential against unencumbered assets sufficient to meet its cash flow
requirements for operating funds and capital expenditures in the future. The
parent holding company, CERBCO, does not have a separate bank line of credit,
but has cash and temporary investments in excess of $18.0 million, principally
from the redemption of its interests in Capitol Office Solutions, which, pending
longer term investment, are believed to be more than adequate to meet its own
cash flow requirements, or the temporary requirements of Insituform East, in the
foreseeable future, including continuing legal fees and expenses of the parent
in connection with the stockholder litigation now on appeal to the Delaware
Supreme Court.
Item 8. Financial Statements and Supplementary Data
See financial statements and supplementary financial information
provided following Item 9 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CERBCO, Inc.
We have audited the accompanying consolidated balance sheets of CERBCO, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CERBCO, Inc. and subsidiaries as of
June 30, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Washington, D.C.
September 22, 1997
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales $26,541,542 $30,470,867 $21,594,313
----------- ----------- -----------
Costs and Expenses:
Cost of sales 22,422,831 22,288,437 15,016,598
Selling, general and administrative expenses 5,751,328 5,631,827 5,048,244
----------- ----------- -----------
Total Costs and Expenses 28,174,159 27,920,264 20,064,842
----------- ----------- -----------
Operating Profit (Loss) (1,632,617) 2,550,603 1,529,471
Investment Income 258,947 291,173 200,421
Equity in Earnings of MIDSOUTH Partners 0 0 738,798
Interest Expense (39,871) (16,799) 0
Other Income - net 170,469 296,483 146,571
----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests
and Income Taxes (1,243,072) 3,121,460 2,615,261
Non-Owned Interest in Pretax Earnings of MIDSOUTH
Partners 196,329 658,822 0
----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. and Income Taxes (1,439,401) 2,462,638 2,615,261
Provision (Credit) for Income Taxes (874,000) 1,074,000 1,368,000
----------- ----------- -----------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. (565,401) 1,388,638 1,247,261
Non-Owned Interests in Earnings (Loss) of
Insituform East, Inc. (366,005) 1,141,419 1,449,131
----------- ----------- -----------
Earnings (Loss) from Continuing Operations (199,396) 247,219 (201,870)
----------- ----------- -----------
Discontinued Operations:
Earnings from discontinued operations of copier
machine products and services segment 2,166,894 1,808,072 1,592,909
Gain on disposal of copier machine products and
services segment - net of income taxes of
$6,230,000 8,201,812 0 0
Gain on disposal of defense services segment 0 0 151,349
----------- ----------- -----------
Total Discontinued Operations 10,368,706 1,808,072 1,744,258
----------- ----------- -----------
NET EARNINGS $10,169,310 $ 2,055,291 $ 1,542,388
=========== =========== ===========
Net Earnings per Share of Common Stock:
Earnings (loss) from continuing operations $ (0.13) $ (0.13) $ 0.17
Earnings from discontinued operations 1.47 1.23 1.09
Gain on disposal 5.57 0.00 0.10
----------- ----------- -----------
Net Earnings per Share $ 6.91 $ 1.40 $ 1.06
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
1997 1996
------------ ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 27,081,412 $ 10,234,224
Accounts receivable 6,691,313 8,497,050
Inventories 1,538,017 3,336,052
Prepaid and refundable taxes 813,872 135,242
Deferred income taxes 0 133,000
Prepaid expenses and other 251,572 359,631
------------ ------------
Total Current Assets 36,376,186 22,695,199
------------ ------------
Property, Plant and Equipment:
Land and improvements 2,018,587 2,018,587
Buildings and improvements 5,904,448 6,127,007
Vehicles and production equipment 11,406,621 9,867,451
Vehicles under capital leases 0 136,178
Small tools, radios and machine shop equipment 4,658,431 4,119,870
Office furniture and equipment 1,066,526 1,417,449
------------ ------------
25,054,613 23,686,542
Less accumulated depreciation and amortization (13,296,041) (12,394,724)
------------ ------------
Total Property, Plant and Equipment 11,758,572 11,291,818
------------ ------------
Other Assets:
Excess of acquisition cost over value of net assets
acquired - net of accumulated amortization of
$1,077,844 in 1997 and $1,615,227 in 1996 2,408,508 4,728,662
Cash surrender value of life insurance 779,041 498,974
Deferred income taxes 0 41,000
Deposits and other 148,837 195,082
------------ ------------
Total Other Assets 3,336,386 5,463,718
------------ ------------
Total Assets $ 51,471,144 $ 39,450,735
============ ============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
------------
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $ 6,006,361 $ 3,629,255
Income taxes payable 5,804,724 623,618
Deferred revenue 0 500,643
Current portion of long-term debt 0 5,104
Current portion of capital lease obligations 28,508 50,176
------------ ------------
Total Current Liabilities 11,839,593 4,808,796
------------ ------------
Long-Term Liabilities:
Long-term debt (less current portion shown above) 0 0
Capital lease obligations (less current portion shown above) 139,480 135,844
Deferred income taxes 1,074,000 818,000
Accrued SERP liability 440,950 176,955
------------ ------------
Total Long-Term Liabilities 1,654,430 1,130,799
------------ ------------
Total Liabilities 13,494,023 5,939,595
------------ ------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 13,042,117 16,509,371
------------ ------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,180,601 shares
(at June 30, 1997) 118,060
Issued and outstanding: 1,157,101 shares
(at June 30, 1996) 115,710
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 296,355 shares
(at June 30, 1997) 29,635
Issued and outstanding: 310,855 shares
(at June 30, 1996) 31,085
Additional paid-in capital 7,493,378 7,432,071
Retained earnings 17,293,931 9,422,903
------------ ------------
Total Stockholders' Equity 24,935,004 17,001,769
------------ ------------
Total Liabilities and Stockholders' Equity $ 51,471,144 $ 39,450,735
============ ============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 and 1995
<CAPTION>
Common Stock Class B Common Stock Additional Total Stock-
----------------------------------------------------- Paid-in Retained holders'
Shares Amounts Shares Amounts Capital Earnings Equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 1994 1,146,489 $114,649 310,967 $31,096 $7,401,012 $ 5,898,622 $13,445,379
Net earnings 0 0 0 0 0 1,542,388 1,542,388
Issuance of stock pursuant to
exercise of stock options 4,500 450 0 0 11,925 0 12,375
Change in ownership interest
in subsidiary 0 0 0 0 117 0 117
--------- ------- ------- ---------- ---------- ---------- ----------
BALANCE - JUNE 30, 1995 1,150,989 115,099 310,967 31,096 7,413,054 7,441,010 15,000,259
Net earnings 0 0 0 0 0 2,055,291 2,055,291
Issuance of stock pursuant to
exercise of stock options 6,000 600 0 0 18,900 0 19,500
Conversion of Class B stock
into Common stock 112 11 (112) (11) 0 0 0
Dividends declared 0 0 0 0 0 (73,398) (73,398)
Change in ownership interest
in subsidiary 0 0 0 0 117 0 117
--------- ------- ------- --------- --------- ---------- ----------
BALANCE - JUNE 30, 1996 1,157,101 115,710 310,855 31,085 7,432,071 9,422,903 17,001,769
Net earnings 0 0 0 0 0 10,169,310 10,169,310
Issuance of stock pursuant to
exercise of stock options 9,000 900 0 0 35,475 0 36,375
Conversion of Class B stock
into Common stock 14,500 1,450 (14,500) (1,450) 0 0 0
Dividends declared 0 0 0 0 0 (2,298,282) (2,298,282)
Change in ownership interest
in subsidiary 0 0 0 0 25,832 0 25,832
--------- -------- ------- ------- ---------- ----------- -----------
BALANCE - JUNE 30, 1997 1,180,601 $118,060 296,355 $29,635 $7,493,378 $17,293,931 $24,935,004
========= ======== ======= ======= ========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended June 30
--------------------------------------------
1997 1996 1995
------------- ------------- --------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Earnings from continuing operations $ (199,396) $ 247,219 $ (201,870)
Earnings from discontinued operations 10,368,706 1,808,072 1,744,258
------------ ------------ ------------
Net earnings 10,169,310 2,055,291 1,542,388
Adjustments to reconcile net earnings to net cash
provided by operations:
Depreciation and amortization 2,142,711 1,949,292 1,364,171
Gain on sale of Capitol Office Solutions included
in earnings from discontinued operations (8,201,812) 0 0
Equity in earnings of unconsolidated affiliate 0 0 (738,798)
Amounts attributable to non-owned interests 913,771 2,704,277 2,245,586
Deferred income taxes 256,000 (102,000) 50,000
(Increase) decrease in other assets (447) (24,321) 56,441
Increase in long-term liabilities 263,995 77,283 67,932
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (218,805) 165,729 289,043
(Increase) decrease in inventories (55,063) (42,324) (762,694)
(Increase) decrease in other current assets (640,025) 59 430,273
Increase (decrease) in accounts payable and
accrued expenses 1,127,014 (861,126) (78,792)
Increase (decrease) in income taxes payable (1,198,658) 221,140 411,322
Increase (decrease) in deferred revenue 4,202 20,785 (15,747)
------------ ------------ ------------
Net Cash Provided by Operating Activities 4,562,193 6,164,085 4,861,125
------------ ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (2,629,247) (2,111,648) (1,627,540)
Disposal of equipment - net 28,529 28,387 40,133
Proceeds from sale of Capitol Office Solutions - net 15,652,845 0 0
Increase in investment in Insituform East (85,938) 0 0
Acquisition of non-owned interest in TRY TEK 0 0 (18,816)
Cash distribution from MIDSOUTH Partners to non-owned
interests (101,200) (368,000) 0
Cash balance of majority-controlled Partnership prior to
consolidation 0 241,094 0
Cash distribution from MIDSOUTH Partners 0 0 123,250
Redemption of temporary investments - net 0 1,760,950 531,086
Increase in cash surrender value of insurance (280,067) (244,914) (180,857)
Increase in other assets 0 (13,000) 0
------------ ------------ ------------
Net Cash Provided by (Used in) Investing Activities 12,584,922 (707,131) (1,132,744)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit and long-term
borrowings 800,000 0 2,150,000
Principal payments on revolving lines of credit, capital
lease obligations and long-term borrowings (835,260) (108,738) (2,760,795)
Dividends paid (301,042) (331,041) (148,036)
Proceeds from exercise of stock options 36,375 19,500 12,375
------------ ------------ ------------
Net Cash Used in Financing Activities (299,927) (420,279) (746,456)
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 16,847,188 5,036,675 2,981,925
Cash and Cash Equivalents at Beginning of Year 10,234,224 5,197,549 2,215,624
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 27,081,412 $ 10,234,224 $ 5,197,549
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 39,871 $ 27,529 $ 28,290
============ ============ ============
Income taxes paid $ 313,854 $ 3,076,269 $ 2,173,715
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Additions to capital leases $ 58,543 $ 133,088 $ 0
============ ============ ============
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. Summary of Significant Accounting Policies
Basis of Presentation
Prior to June 30, 1997, the consolidated financial statements included
the accounts of the parent holding company, CERBCO, Inc. ("CERBCO"); its
majority-owned subsidiary, Capitol Office Solutions, Inc. ("Capitol") (formerly
Capitol Copy Products, Inc.); and its majority-controlled subsidiary, Insituform
East, Incorporated ("Insituform East"). Effective June 30, 1997, CERBCO no
longer has an interest in Capitol, and previously reported statements of
earnings have been restated to reflect the operating results of Capitol as
discontinued operations (see Note 6: Discontinued Operations). Previously
reported balance sheets have not been restated.
All significant intercompany balances and transactions have been
eliminated in consolidation..
Business Operations
As of June 30, 1997, CERBCO is a parent holding company with a
controlling interest in one principal subsidiary. Insituform East, operating
pursuant to sublicense agreements with Insituform Technologies, Inc. ("ITI"),
provides a patented process called "Insituform" primarily to municipalities and
state agencies for the repair and reconstruction of sewers and other types of
pipelines. The Insituform(R) process creates a hard, jointless, impact and
corrosion resistant Insitupipe(R) product inside deteriorating pipes, with a
principal benefit that it can usually be installed without excavation. Prior to
June 30, 1997, CERBCO had a second principal subsidiary, Capitol, which was in
the business of selling, servicing and providing supply products for copier and
facsimile equipment, operating pursuant to certain dealer agreements, primarily
with Canon, U.S.A., Inc.
As a result of the disposal of its interest in Capitol, CERBCO has
eliminated the reporting of business segment information.
Revenue Recognition
The Company recognizes revenue under contracts to rehabilitate pipeline
sections using the units of completion method. A rehabilitated pipeline section
is considered completed work and is generally billable to the customer.
Cash and Cash Equivalents
Cash and cash equivalents are composed of unrestricted checking
accounts and short-term investments in repurchase agreements, money market
funds, certificates of deposit and U.S. Treasury instruments. Cash equivalents
are stated at cost plus accrued interest which approximates market. For purposes
of the consolidated statements of cash flows, the Company considers only highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost for
pipeline rehabilitation materials is determined by the first-in, first-out
method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation has been
provided in the financial statements using the straight-line or declining
balance methods at rates which are based upon reasonable estimates of the
properties' useful lives. These lives range from three to ten years for
vehicles, equipment and furniture, and twenty to forty years for buildings.
Leasehold improvements are amortized using the straight-line method over the
life of the lease.
Betterments or improvements which increase the estimated useful life of
an asset are capitalized. Repairs and maintenance are charged directly to
expense as incurred. The Company incurred repair and maintenance costs of
approximately $984,000, $1,022,000 and $789,000 in fiscal years 1997, 1996 and
1995, respectively.
Goodwill
The excess of cost over the fair value of the Insituform East net
tangible assets ("goodwill") acquired in 1985 is amortized using the
straight-line method over forty years. The Company annually reviews its goodwill
recoverability by assessing the historical profitability of Insituform East and
expectations as to its future nondiscounted cash flows and operating income, the
continued use of its name; the continued use of its license agreements and the
status of various patents which govern the Insituform process. Based upon its
most recent analysis, the Company believes that no impairment of goodwill exists
at June 30, 1997.
Income Taxes
The Company provides for federal and state income taxes at the
statutory rates in effect on taxable income. Deferred income taxes result from
recognizing certain items of income and expense in consolidated financial
statements in different years from those in income tax returns. These temporary
differences relate principally to use of accelerated depreciation methods for
tax purposes; timing of the payment of compensated absences; and timing of the
recognition of income from the Company's investment in MIDSOUTH Partners (see
Note 5: Investment in MIDSOUTH Partners).
Insituform East files separate federal and state tax returns, and its
provision is combined with CERBCO's consolidated provision.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
2. Accounts Receivable
Accounts receivable consist of:
1997 1996
----------- -----------
Due from municipal and commercial customers $ 6,479,230 $ 8,113,075
Miscellaneous 212,083 426,831
----------- -----------
6,691,313 8,539,906
Less: Allowance for doubtful accounts 0 (42,856)
----------- -----------
$ 6,691,313 $ 8,497,050
=========== ===========
3. Inventories
Inventories consist of:
1997 1996
---------- ----------
Pipeline rehabilitation materials $1,538,017 $1,159,532
Copier and facsimile equipment 0 1,662,375
Copier and facsimile supplies 0 182,475
Copier and facsimile parts 0 331,670
---------- ----------
$1,538,017 $3,336,052
========== ==========
4. Equity in Insituform East
At June 30, 1997, CERBCO beneficially held 1,127,500 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 27.8% of the Common Stock, 99.5%
of the Class B Common Stock, 32.7% of the total equity and 58.1% of the total
voting power of all outstanding classes of Insituform East stock. At June 30,
1996, CERBCO beneficially held 1,100,000 shares of Insituform East Common Stock
and 296,141 shares of convertible Insituform East Class B Common Stock
representing approximately 27.1% of the Common Stock, 99.5% of the Class B
Common Stock, 32.0% of the total equity and 57.7% of the total voting power of
all outstanding classes of Insituform East 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 the
directors 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 1997, 1996 or 1995. If all the
options and warrants outstanding at June 30, 1997 were exercised, the resulting
percentages of CERBCO's equity ownership and total voting power would be 29.7%
and 54.7%, respectively.
From time to time, Insituform East purchases shares of stock for
treasury. Changes in capital structure resulting from such stock purchases
increase CERBCO's equity ownership. No shares were purchased in 1997, 1996 or
1995.
5. Investment in MIDSOUTH Partners
CERBCO's consolidated financial statements as of June 30, 1997 and 1996
and for each of the years then ended 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 is the exclusive licensee for the Insituform process and
NuPipe process in Tennessee, Kentucky (excluding Boone, Kenton and Campbell
counties) and northern Mississippi. The Partnership's general partners at June
30, 1997 are Insitu, Inc., a wholly-owned subsidiary of Insituform East;
E-Midsouth, Inc., an affiliate of Insituform Technologies, Inc. ("ITI"); and
Insituform Southwest, Inc., also an affiliate of ITI.
Management and conduct of the business of MIDSOUTH Partners is vested
in a Management Committee. The seven-member Partnership Management Committee
consisted of four Insitu, Inc. representatives, two E-Midsouth, Inc.
representatives and one Insituform Southwest, Inc. representative at June 30,
1997. Insituform East did not have majority representation on the Partnership
Management Committee prior to a June 12, 1996 arbitration award, which, in
connection with a default of the Partnership Agreement by E-Midsouth, Inc.,
granted Insitu, Inc. the unilateral right to appoint an additional Management
Committee member in place of an E-Midsouth, Inc.
representative.
Partnership profits and losses are allocated to the partners as follows:
Insitu, Inc. 42.5%
E-Midsouth, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
The following is condensed financial information of MIDSOUTH Partners
at June 30, 1997, 1996 and 1995, and for each of the three years in the period
ended June 30, 1997:
1997 1996 1995
---------- ---------- ----------
Cash $ 817,144 $ 678,176 $ 241,094
Accounts receivable 2,143,197 2,193,636 2,249,690
Inventories 514,502 445,210 431,738
Property, plant and equipment, net 1,435,193 1,298,593 1,319,303
Other assets 153,492 129,359 185,097
---------- ---------- ----------
Total Assets $5,063,528 $4,744,974 $4,426,922
========== ========== ==========
Current liabilities $ 707,593 $ 581,228 $ 859,489
Long-term obligations under capital lease 139,480 112,732 22,196
---------- ---------- ----------
Total Liabilities $ 847,073 $ 693,960 $ 881,685
========== ========== ==========
Revenues $7,210,604 $8,395,698 $8,894,746
========== ========== ==========
Gross Profit $1,158,926 $2,074,144 $2,739,390
========== ========== ==========
Partnership Earnings $ 341,441 $1,145,777 $1,738,347
========== ========== ==========
6. Discontinued Operations
Prior to June 30, 1997, CERBCO beneficially held 800 shares, and
Capitol's president held 400 shares, of Capitol Class B Stock, representing 66
2/3% and 33 1/3%, respectively, of the one outstanding class of Capitol stock.
On June 30, 1997, Capitol redeemed the 800 shares of Class B stock held
by the Company for $19 million plus a pre-redemption dividend of two-thirds of
the cash held by Capitol in excess of $800,000 equaling $3,789,593. The
redemption price ultimately is subject to formula adjustment based upon June 30,
1997 audited financial statements. This transaction was approved by the
Company's stockholders at a meeting held on June 27, 1997. CERBCO's share of
Capitol's operating results for the fiscal year ended June 30, 1997 are shown
separately in the accompanying consolidated statement of earnings as earnings
from discontinued operations. The consolidated statements of earnings for the
fiscal years ended June 30, 1996 and 1995 have been restated to also show
separately CERBCO's shares of Capitol's operating results. Capitol's sales
revenues of $23,552,754, $20,209,196 and $17,548,471 for the fiscal years ended
June 30, 1997, 1996 and 1995, respectively, are not included in sales in the
accompanying consolidated statements of earnings.
On March 31, 1991, the Company adopted a formal plan to discontinue the
operations of its defense contract services segment conducted through its
wholly-owned subsidiary, CERBERONICS, Inc. ("CERBERONICS"). The segment did not
operate subsequent to June 30, 1991. During fiscal year 1995, the Company
obtained final payment from the Federal government on five contracts completed
by CERBERONICS on or before June 30, 1991. These payments resulted in a gain
from discontinued operations of $151,349 for the fiscal year ended June 30,
1995. There are no material open items remaining that pertain to other former
contracts of CERBERONICS.
7. Supplemental Executive Retirement Plan
The Company has an unfunded supplemental pension plan for its three
executive officers, effected January 1, 1994. The expense for this plan was
$263,995, $77,784 and $67,932 for the fiscal years ended June 30, 1997, 1996 and
1995, respectively.
The Company has established a trust to facilitate the payment of
benefits under the plan. Funds in the trust are invested in variable life
insurance policies and are included in the Company's balance sheet as cash
surrender value of life insurance in the amounts of $779,040 and $498,974 at
June 30, 1997 and 1996, respectively. This trust is subject to the claims of the
Company's creditors in the event of bankruptcy or insolvency.
8. Loans Payable
Insituform East maintains a $3,000,000 bank line of credit which is
currently available to it through December 31, 1998. Interest on borrowings
against this line of credit is payable monthly at the bank's prime rate. The
line is unsecured; however, Insituform East must comply quarterly with financial
liquidity, net worth, tangible net worth and debt to equity leverage covenants.
At June 30, 1997, the amount available as undrawn on this line was $3,000,000.
Insituform East also has an agreement in place with the parent company, CERBCO,
whereby it may borrow up to $1,000,000 for operating purposes from CERBCO at
interest rates not less than it would pay to its respective bank. At June 30,
1997, Insituform East had no amounts outstanding under this agreement.
9. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
1997 1996
---------- ----------
Accounts payable $1,655,097 $1,075,893
Accrued compensation and related expenses 1,876,988 2,302,320
Dividends payable 2,474,276 251,042
---------- ----------
$6,006,361 $3,629,255
========== ==========
10. Long-Term Debt
Long-term debt consists of:
1996
----
Installment note payable due in full in September 1996,
with equal monthly payments of $1,734
including interest at 11.5% $ 5,104
Less: Current portion (5,104)
-------
$ 0
=======
11. Commitments
The Company utilizes certain equipment and facilities under operating
leases providing for payment of fixed rents and the pass-through of certain
landlord expenses. Rental expense was approximately $500,000, $361,000 and
$377,000 for the years ended June 30, 1997, 1996 and 1995, respectively. In
addition, the Company obtains certain mobile production equipment under
long-term capital leases. The net book value of equipment under capital leases
was approximately $150,000 and $137,000 as of June 30, 1997 and 1996,
respectively. Minimum future rental commitments under long-term capital and
operating leases in effect at June 30, 1997, are as follows:
Years Ending Capital Operating
June 30 Leases Leases
1998 $ 61,080 $ 81,292
1999 61,080 41,669
2000 61,080 3,472
2001 39,000 0
2002 34,125 0
2003 and thereafter 6,500 0
--------- ---------
Total Minimum Payments 262,865 $ 126,433
=========
Less: Interest (94,877)
---------
Present Value of Minimum Payments $ 167,988
=========
The Company's pipeline rehabilitation using the Insituform process is
performed under seven sublicense agreements with ITI. These sublicenses grant
the Company rights to perform the Insituform process in the states of Maryland,
Virginia, Delaware, the District of Columbia, Pennsylvania, Ohio, West Virginia,
Kentucky, Tennessee and northern Mississippi. The agreements are for the life of
the patents or the patent rights unless sooner terminated by a specified action
of either party. The agreements obligate the Company to pay ITI a royalty equal
to 8% of the gross contract price of all contracts performed utilizing the
process, less certain fees. The total royalty expense was approximately
$1,428,000, $1,847,000 and $1,354,000 for the years ended June 30, 1997, 1996
and 1995, respectively.
The Company has also entered into license agreements for identical
territories with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R)
process and trademark. The Company has committed to pay royalty equal to 6.75%
of gross contract revenues utilizing the NuPipe process and to purchase certain
installation equipment and installation materials from NuPipe, Inc.
The Company has operated under supply agreements with ITI committing
the Company to purchase 90% of its Insitutube(R) material requirements from ITI.
These agreements are renewable annually unless notice of termination is provided
by either party six months prior to the end of the current renewal period. The
MIDSOUTH Partners supply agreement presently extends through April 30, 1998.
After providing six months advance notice, East terminated its supply agreement
with ITI effective May 1, 1997. However, during the three years ended June 30,
1997, the Company purchased substantially all of its Insitutube from ITI.
12. 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.
In August 1990, a complaint against the Company and the Eriksons was
filed in the Delaware Court of Chancery (the "Delaware Complaint") by two
stockholders of the Company, on their own behalf and derivatively on behalf of
the Company, which sought (i) damages against the individual defendants for
alleged breach of fiduciary duties in an amount not less than $6,000,000,
together with interest thereon from March 12, 1990; (ii) to permanently enjoin
the Eriksons from completing any transaction with ITI similar in substance to
the Proposed Transaction; (iii) a declaration of the invalidity of the 1982
authorization for and issuance of the Company's Class B Common Stock, and,
therefore, of the entitlement of holders of Class B Common Stock to elect any
members of the Company's Board; (iv) a declaration of the invalidity of the 1990
election of the Company's directors and the issuance of new proxy materials that
fully and fairly disclose all facts which plaintiffs claim are material to the
election of such directors; (v) an award to the plaintiffs of their costs of
bringing the action, including reasonable attorneys' fees; and (vi) an award to
plaintiffs of such further relief as the Court of Chancery deemed appropriate.
In addition, the Complaint asserted a claim against the individual defendants
alleging that the Company had forgone a corporate opportunity by the continued
failure to pursue a transaction with ITI.
All but one of the plaintiffs' claims subsequently were dismissed. The
claim remaining in the litigation was plaintiffs' allegation that the Proposed
Transaction was an opportunity belonging to the Company and that the Eriksons
breached their duty to the Company by precluding the Company from taking
advantage of that opportunity so that the Eriksons might have a chance to do so.
Trial in this matter was held beginning February 21, 1995.
Following a trial, Chancellor Allen issued an opinion on August 9,
1995, in which he ruled in favor of the Eriksons. The court determined that,
while the Eriksons failed in certain limited respects to meet the standards of
loyalty required of them under Delaware corporate law, that "deviation from
proper corporate practice" neither caused injury to CERBCO nor resulted in any
substantial gain to the Eriksons. The Court also found that the Eriksons met
their burden of showing that their conduct was "wholly fair to the corporation."
The Court denied in toto the plaintiffs' request for legal fees and expenses
totaling $1,513,499. The Court concluded that the litigation conferred no
substantial benefit on CERBCO, so that it would be inappropriate to require
CERBCO and its stockholders to share the costs that plaintiffs incurred.
The plaintiffs appealed to the Delaware Supreme Court. On April 10,
1996, the Supreme Court ruled that "[t]he Eriksons were entitled to profit from
their control premium and to that end compete with CERBCO but only after
informing CERBCO of the opportunity" for a transaction with ITI. Although the
Eriksons were deemed to have breached their duty of loyalty, the Supreme Court
affirmed the finding of the Court of Chancery that there was no viable
transaction that could take place between CERBCO and ITI, given the Eriksons'
ability to veto such a transaction as controlling shareholders of CERBCO.
Therefore, no damages could be awarded for the loss of a transaction that had a
"zero probability of occurring due to the lawful exercise of statutory rights."
The Supreme Court did rule, however, that the Eriksons were liable to CERBCO for
$75,000 they received from ITI for extending the Letter of Intent (the
"Extension Fee"), and had to reimburse the expenses, if any, that CERBCO
"incurred to accommodate the Eriksons' pursuit of their own interests" prior to
the abandonment of the proposed transaction with ITI. The Supreme Court
concluded that the Chancery Court's opinion was therefore "affirmed in part and
reversed in part, and this matter is remanded to the Court of Chancery for
further determination of damages. Once those damages are fixed, the [Chancery]
court should proceed to examine anew any petition for counsel fees on behalf of
the plaintiffs." The Eriksons filed motions for reargument and for rehearing en
banc, which the Supreme Court denied.
The plaintiffs filed a motion for post-remand relief in the Court of
Chancery, seeking (i) a "disgorgement of benefits" allegedly received by the
Eriksons in the aggregate amount of $451,000; (ii) "damages attributable to the
Eriksons' breach of fiduciary duty" in an aggregate amount of almost $1.4
million; and (iii) certain injunctive relief against the Eriksons with respect
to "any further negotiations with ITI respecting ITI's interest in obtaining
control of [Insituform East]."
On September 13, 1996, the Court of Chancery issued its decision on
remand. The Court ruled that the Eriksons were obligated to pay CERBCO the
principal amount of $188,200, plus interest, representing legal fees paid to the
law firm of Morgan, Lewis & Bockius as counsel for the special committee of the
CERBCO Board of Directors that was appointed in 1990 in connection with the
Proposed Transaction. The Court of Chancery also ruled that the Eriksons were
obligated to pay CERBCO interest on the $75,000 Extension Fee the Supreme Court
had ordered the Eriksons to pay to CERBCO. All of the plaintiffs' other claims
were rejected, except that the Court ruled it was premature to determine
plaintiffs' claim that the Eriksons were obligated to reimburse CERBCO for
advances to them of the defense costs of the litigation. On October 2, 1996, the
plaintiffs filed a petition seeking attorneys' fees and expenses totaling
$1,663,266. On February 6, 1997, the Court of Chancery entered a final order and
judgment (revised on February 14, 1997) encompassing the above rulings and
awarding the plaintiffs attorneys' fees of $143,364.23 to be paid by CERBCO and
court costs of $9,359.20 to be paid by the Eriksons. The plaintiffs, the
Eriksons, and CERBCO have each appealed those rulings to the Delaware Supreme
Court where the appeals were briefed and, subsequently, oral arguments were
presented on September 9, 1997. The Delaware Supreme Court currently has the
appeals under consideration.
As previously reported by the Company, in January 1993, a separate
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"). The
plaintiffs are the same two stockholders, and a former director of the Company,
and have 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. The plaintiffs also claim that Rogers & Wells
committed malpractice by allegedly making misrepresentations to the Company's
Board and allegedly failing to properly inform the Company's Board. The
plaintiffs claim 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 seeks 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.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay in 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 to the Delaware Supreme Court and, subsequently, the stay
was continued at least until such time as the Delaware Court of Chancery ruled
upon the plaintiffs' pending motion for post-remand relief. As of this date, the
District of Columbia action remains stayed.
As previously reported by the Company, on October 23, 1996, Inliner
U.S.A. and CAT Contracting, Inc. (collectively, "plaintiffs") filed an antitrust
suit against Insituform Technologies, Inc. ("ITI") and Insituform East
(collectively, "defendants") in United States District Court for the Southern
District of Texas, Houston Division, alleging violations by ITI (including all
of its subsidiary licensees) and Insituform East of Sections 1 and 2 of the
Sherman Act, Section 43(a) of the Lanham Act, Section 15(a) and (b) of the Texas
Business and Commercial Code, tortious interference with contracts and business
disparagement. Plaintiffs are seeking from 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 the suit. Insituform East filed two motions to dismiss the action
which were pending at June 30, 1997. On August 25, 1997, the Court denied one of
the motions to dismiss, granted in part and denied in part the second motion to
dismiss and ordered plaintiffs to file an amended complaint. As a result, the
plaintiffs have until September 29, 1997 to amend certain claims or face
dismissal outright. 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.
Management believes ultimate resolution of these matters will not have
a material effect on the financial statements of CERBCO. Accordingly, no
provision for these contingencies has been reflected therein. CERBCO is also
involved in other contingencies, none of which could, in the opinion of
management, materially affect the Company's financial position or results of
operations.
13. Common Stock
The Company has two classes of Common Stock, which are designated as
Common Stock and Class B Common Stock. Each share of Class B Common Stock can be
converted into one share of Common Stock at any time. In 1997, 14,500 shares of
Class B Common Stock were converted to Common Stock. In 1996, 112 shares of
Class B Common Stock were converted to Common Stock. In 1995, no shares of Class
B Common Stock were converted to Common Stock
Each share of Common Stock is entitled to one vote and each share of
Class B Common Stock is entitled to ten votes, except with respect to the
election of directors and any other matter requiring the vote of shareholders
separately as a class. The holders of Common Stock, voting as a separate class,
are entitled to elect that number of directors which constitutes twenty-five
percent (25%) of the authorized number of members of the Board of Directors and,
if such 25% is not a whole number, then the holders of Common Stock are entitled
to elect the nearest higher whole number of directors that is at least 25% of
such membership. The holders of Class B Common Stock, also voting as a separate
class, are entitled to elect the remaining directors. In addition, the holders
of Common Stock have certain dividend preferences.
14. Income Taxes
The provision for taxes is composed of the following (in thousands):
1997 1996 1995
------- ------- -------
Current:
Federal $ 5,177 $ 1,082 $ 1,135
State (77) 159 167
------- ------- -------
Total current 5,100 1,241 1,302
------- ------- -------
Deferred:
Federal 223 (146) 58
State 33 (21) 8
------- ------- -------
Total deferred 256 (167) 66
------- ------- -------
Total provision for taxes $ 5,356 $ 1,074 $ 1,368
======= ======= =======
The provision for income taxes is different from that computed using
the statutory Federal income tax rate of 34% for the following reasons (in
thousands, except percentages):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
Amounts % Amounts % Amounts %
<S> <C> <C> <C> <C> <C> <C>
Taxes computed at statutory rate $ 5,154 34.0 $ 1,061 34.0 $ 890 34.0
Increase (decrease) in taxes resulting from:
State and local income taxes, net of Federal
income tax benefit (expense) (59) (0.6) 103 3.3 146 5.6
Non-taxable income 0 0.0 0 0.0 (1) 0.0
Nondeductible items 17 22 0.7 13 0.5
Effect of NOL 0 0.0 112 3.6 299 11.4
Federal taxes on partnership income
attributable to non-owned interests 0 0.0 (224) (7.2) 0 0.0
Other 244 1.5 0 0.0 21 0.8
------- ---- ------- ---- ------- ----
Total provision for taxes $ 5,356 34.9% $ 1,074 34.4 $ 1,368 52.3
======= ==== ======= ==== ======= ====
</TABLE>
The components of the deferred tax provisions are as follows (in
thousands):
1997 1996 1995
----- ----- -----
Depreciation $ 80 $ 52 $ 16
MIDSOUTH Partners operations (10) (76) 126
Deferred compensation (12) 8 33
Deferred revenue 201 (155) (107)
Other (3) 4 (2)
----- ----- -----
Total deferred taxes $ 256 $(167) $ 66
===== ===== =====
Deferred Income Taxes, provided for the tax effect of cumulative
temporary differences between income tax and financial reporting purposes,
consists of the following (in thousands):
1997 1996
------- -------
Depreciation $ 1,101 $ 1,021
MIDSOUTH Partners operations 75 85
Deferred compensation (27) (15)
Deferred revenue (61) (262)
NOL carryforwards 0 (240)
Valuation allowance 0 240
Other (14) (11)
------- -------
$ 1,074 $ 818
======= =======
15. Earnings Per Share
Earnings per share data have been computed based upon the weighted
average number of common shares outstanding and common share equivalents during
each period. The following numbers of shares have been used in the computations:
1997 1996 1995
--------- --------- ---------
1,471,178 1,465,169 1,459,848
========= ========= =========
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS No. 128") was issued in February 1997 by the Financial Accounting
Standards Board. SFAS No. 128 is effective for periods ending after December 15,
1997 and early adoption is not permitted. SFAS No. 128 will require the Company
to compute and present basic and diluted earnings per share. Had the Company
computed net earnings per share in accordance with SFAS No. 128, both basic and
diluted earnings per share would have been the same as earnings per share
presented on the Company's statements of earnings.
16. Retirement Benefit Plans
Employees of Insituform East and MIDSOUTH Partners who meet certain
minimum eligibility requirements and who are not covered by a collective
bargaining agreement participate in separate profit-sharing plans. No employees
were covered by collective bargaining agreements as of June 30, 1997.
Contributions to the plan are determined annually by the respective companies.
Contributions to Insituform East's plan were $212,409, $198,844 and $183,489 in
fiscal years 1997, 1996 and 1995, respectively. The contribution to MIDSOUTH
Partners' plan was $51,373 and $64,878 in fiscal years 1997 and 1996,
respectively.
17. Stock Option Plans
CERBCO granted options under the Directors' Stock Option Plan on 3,000
shares of CERBCO's Common Stock on December 15, 1995 and 6,000 shares of
CERBCO's Common Stock on December 16, 1994, at the option prices of $6.375 and
$5.125, respectively, per share, exercisable within three years of the date of
the grant. The following is a summary of transactions:
Shares under Option
1997 1996 1995
------ ------ ------
Outstanding, beginning of year 15,000 18,000 18,000
Granted during the year 0 3,000 6,000
Exercised during the year (9,000) (6,000) (4,500)
Expired/canceled during the year 0 0 (1,500)
------- ------- -------
Outstanding, end of year 6,000 15,000 18,000
======= ======= =======
At June 30, 1997, no further grants were anticipated.
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") during the year ended June 30, 1997. As allowed under
provisions of SFAS 123, the company will continue to measure compensation cost
for employee stock-based compensation plans using the intrinsic value based
method of accounting prescribed by the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. As such, the Company is required
to make pro forma disclosures of net earnings (loss) and net earnings (loss) per
share as if the fair value-based method of accounting had been applied.
Summary information for stock options granted during the year ended
June 30, 1996 is as follows:
Year ended June 30, 1996
Date of grant 12/15/95
Option shares granted 3,000
Per share exercise price $6.38
Fair value per option share $4.63
The fair value of options granted during the year ended June 30, 1996
was estimated on the date of the grants using the binomial option-pricing model
using the following assumptions:
Year ended June 30, 1996
Risk-free interest rate 5.30%
Expected option term 3 years
Expected stock price volatility 207%
Expected dividend yield 13%
If compensation costs for the Company's stock option grants had been
determined using the fair value-based method of accounting per SFAS 123, the
Company's pro forma net earnings and pro forma net earnings per share for the
year ended June 30, 1996 would be as follows:
Year ended June 30, 1996
As reported Pro forma
Earnings from Continuing Operations $ 247,219 $ 238,046
Earnings from Discontinued Operations 1,808,072 1,808,072
----------- -----------
Net Earnings $2,055,291 $2,046,118
========== ==========
Earnings per Share from Continuing Operations $0.17 $0.16
Earnings per Share from Discontinued Operations 1.23 1.23
------ ------
Net Earnings per Share $1.40 $1.39
===== =====
18. Unaudited Quarterly Financial Data
The following table provides summarized quarterly results of operations
for fiscal years 1997 and 1996 (in thousands, except per share information):
<TABLE>
<CAPTION>
Three Months Ended
1997 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Sales $5,321 $6,638 $6,272 $8,311
Gross profit 610 1,714 458 1,337
Earnings (loss) from continuing operations (231) (90) (540) 662
Net earnings 269 480 93 9,327
Net earnings per share:
Continuing operations (0.16) (0.06) (0.37) 0.46
Net earnings 0.18 0.33 0.06 6.34
Three Months Ended
1996 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
Sales $8,470 $8,370 $6,898 $6,732
Gross profit 2,625 2,556 1,555 1,447
Earnings (loss) from continuing operations 144 54 (19) 67
Net earnings 591 532 383 549
Net earnings (loss) per share:
Continuing operations 0.10 0.04 (0.01) 0.04
Net earnings 0.40 0.37 0.26 0.37
</TABLE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of CERBCO Directors
Name Age Director Since Other Positions with Registrant
Robert W. Erikson 52 December 1974(1) President & Treasurer
George Wm. Erikson 55 November 1975(1) Chairman & General Counsel
Webb C. Hayes, IV 49 April 1991 None
Paul C. Kincheloe, Jr. 56 April 1991 None
(1) Date of initial election as a director of the Company's then publicly-traded
predecessor company, CERBERONICS. Elected as a CERBCO director in February 1988,
under a Plan of Reorganization and Merger whereby CERBERONICS became a
wholly-owned subsidiary of CERBCO.
Directors of CERBCO are elected at the Annual Meeting of Stockholders
except that vacancies and newly created directorships may be filled by the
directors then in office. Each director holds office until his successor is
elected and qualified or until his earlier resignation or removal.
(b) Identification of CERBCO Executive Officers and (Executive Officers of
Each Subsidiary)
Name Age Position(s) Held Since
Robert W. Erikson 52 President & Treasurer February 1988
George Wm. Erikson 55 Chairman & General Counsel February 1988
Robert F. Hartman 50 Vice President, Secretary & Controller February 1988 (1)
(Robert W. Erikson) 52 President (Insituform East) September 1991
(Armen A. Manoogian)54 President (Capitol Office Solutions) October 1987
(1) Elected as Secretary in June 1991.
Each officer holds office until his successor is elected and qualified
or until his earlier resignation or removal. Capitol Office Solutions was not a
subsidiary subsequent to June 30, 1997, and thus Mr. Manoogian is not an
executive officer of CERBCO after such date.
(c) Identification of Certain Significant Employees
Not applicable.
(d) Family Relationships
Mr. Robert Erikson, Director, President and Treasurer, and Mr. George
Erikson, Director, Chairman and General Counsel are brothers.
(e) Business Experience
(1) Mr. Robert Erikson was a Supply Corps officer in the Navy from 1968
through 1972. Mr. Erikson joined CERBERONICS in December 1972. In May 1974, he
was elected Vice President of Finance and Administration and, in December 1974,
he became Executive Vice President, Treasurer and a Director. In October 1977,
he was elected President. In February 1988, he was elected President and
Treasurer of CERBCO. Mr. Erikson currently is a Director, Vice Chairman and
President of Insituform East and serves as a member of the Chief Executive
Officer Committee of Insituform East. He was a Director, Vice Chairman and a
member of the Chief Executive Officer Committee of Capitol Office Solutions from
October 1987 to June 30, 1997. He was a Director of Palmer National Bancorp,
Inc. and The Palmer National Bank from 1983 to 1996, and was a Director of The
Palmer National Bank's successor, The George Mason Bank, N.A., from May 1996 to
June 1997. Mr. Erikson holds a B.A. degree in Engineering and Economics from
Brown University and an M.B.A. degree from The George Washington University.
Mr. George Erikson joined CERBERONICS in July 1976 as Vice
President and General Counsel, and in August 1976, he was elected Secretary. He
served as Executive Vice President until July 1987, at which time he was elected
to the position of Chairman. He became a Director of CERBERONICS in November
1975 and served as Chairman of the Board of Directors from February 1979 to
February 1988. In February 1988, he was elected Chairman and General Counsel of
CERBCO. Mr. Erikson currently is a Director and Chairman of Insituform East and
serves as a member of the Chief Executive Officer Committee of Insituform East.
He was a Director, Chairman and a member of the Chief Executive officer
Committee of Capitol Office Solutions from October 1987 to June 30, 1997. From
December 1972 to July 1976, he was employed as Vice President - Legal by
National Securities & Research Corporation and, prior thereto, he was employed
as an attorney to the Dreyfus Corporation. He is a member of the Bar of the
State of New York, District of Columbia and Commonwealth of Virginia. Mr.
Erikson holds a B.S. degree in Business Administration from Pennsylvania State
University, an LL.B. degree from Fordham University Law School, and an LL.M.
degree from New York University Law School.
Mr. Hartman joined CERBERONICS in August 1979 as Controller
and Manager of the Accounting Department. In November 1981, he was elected
Assistant Vice President and in April 1984, he was elected Vice President &
Treasurer, in which positions he served until his departure from CERBERONICS in
September 1985. From October 1985 to February 1988, Mr. Hartman was Controller
of Dynamac International, Inc. He returned to CERBERONICS and his former
positions in February 1988 and, in addition, was elected Vice President and
Controller of CERBCO. In June 1991, he joined Insituform East as Vice President
of Administration and was elected Secretary of CERBCO, Insituform East and
Capitol Office Solutions. From 1976 to 1977, Mr. Hartman was an accountant for
Coopers & Lybrand, and from 1977 to 1979, he was a partner in the accounting
firm of Hartman and Hartman. Mr. Hartman is a Certified Public Accountant and
holds a B.S. degree from the United States Naval Academy, a B.A. degree from the
University of South Florida and an M.B.A. degree from The George Washington
University.
Mr. Hayes is a Director and Executive Vice President of George
Mason Bankshares, Inc. and was Chairman, President and CEO of The George Mason
Bank, N.A., from May 1996 to June 1997. Previously, he was Chairman of the Board
of Palmer National Bancorp, Inc. and The Palmer National Bank from March 1985 to
May 1996, and President and Chief Executive Officer from March 1983 to May 1996.
Mr. Hayes serves as a Director of Insituform East and was a Director of Capitol
Office Solutions until June 30, 1997. He is also a Director of Citizens
Corporation in Eastman, Georgia, and is a member of the Board of Visitors of the
University of North Carolina. In January 1995, he completed a three year term as
a Director of the Federal Reserve Bank of Richmond. He holds a B.A. degree from
the University of North Carolina and an executive management degree from
Columbia University School of Business.
Mr. Kincheloe holds a B.A. degree from Randolph-Macon College
and a J.D. degree from T.C. Williams School of Law, University of Richmond. He
has been a practicing attorney and businessman in Fairfax County, Virginia,
since 1967. He previously served on the Board of Herndon Federal Savings & Loan
and then First Federal Savings & Loan of Alexandria. He currently serves on the
Board, as Finance Chairman, of Flint Hill School in Oakton, Virginia, and on the
Board of Trustees for Randolph-Macon College. Mr. Kincheloe serves as a Director
of Insituform East and was a Director of Capitol Office Solutions until June 30,
1997.
(2) Directorships. See Part III, Item 10 (e)(1), paragraphs 1, 2, 4 and
5, as to Messrs. Robert Erikson and George Erikson, Hayes and Kincheloe,
respectively.
(f) Involvement in Certain Legal Proceedings
Not applicable.
Item 11. Executive Compensation
CERBCO is a parent holding company with controlling interests in
Insituform East ("IEI") and, until June 30, 1997, Capitol Office Solutions
("COS"). CERBCO officers participate also in the management of these
subsidiaries. The following table sets forth information concerning the
compensation paid to each of the named executive officers of the Company and/or
its subsidiaries for the fiscal years ended June 30, 1997, 1996 and 1995:
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------- ---------------- --------
Name Other Total Restricted
and Annual Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Compensation Awards SARs Payouts Compensation
Position Year ($) ($) ($) (2) ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Erikson 1997 CERBCO $ 11,053 $ 0 $ 0 $ 11,053 $ 0 0 $ 0 $ 0
Director, President IEI 208,649 0 0 208,649 0 15,000 0 11,247 (3)
& Treasurer (1) COS 65,924 23,095 0 89,019 0 0 0 0
--------- --------- ---------- ---------- ------- -------- -------- ----------
$285,626 $ 23,095 $ 0 $308,721 $ 0 0 $ 0 $ 11,247
========= ========= ========== ========== ======= ======== ======== ==========
1996 CERBCO $ 10,677 $ 0 $ 0 $ 10,677 $ 0 0 $ 0 $ 0
IEI 201,555 22,393 0 223,948 0 15,000 0 9,014
COS 62,784 22,812 0 85,596 0 0 0 0
--------- --------- ---------- ---------- ------- -------- -------- ----------
$275,016 $ 45,205 $ 0 $320,221 $ 0 15,000 $ 0 $ 9,014
========= ========= ========== ========== ======= ======== ======== ==========
1995 CERBCO $ 10,412 $ 0 $ 0 $ 10,412 $ 0 1,500 $ 0 $ 0
IEI 196,555 31,457 0 228,012 0 15,000 0 10,118
COS 61,063 28,267 0 89,330 0 0 0 1,549
--------- --------- ---------- ---------- ------- -------- -------- ----------
$268,030 $ 59,724 $ 0 $327,754 $ 0 16,500 $ 0 $ 11,667
========= ========= ========== ========== ======= ======== ======== ==========
George Wm. Erikson 1997 CERBCO $ 11,053 $ 0 $ 0 $ 11,053 $ 0 0 $ 0 $ 0
Director, Chairman IEI 208,649 0 0 208,649 0 15,000 0 11,613 (3)
& General Counsel (1) COS 65,924 23,095 0 89,019 0 0 0 0
--------- --------- ---------- ---------- ------- -------- -------- ----------
$285,626 $ 23,095 $ 0 $308,721 $ 0 0 $ 0 $ 11,613
========= ========= ========== ========== ======= ======== ======== ==========
1996 CERBCO $ 10,677 $ 0 $ 0 $ 10,677 $ 0 0 $ 0 $ 0
IEI 201,555 22,393 0 223,948 0 15,000 0 11,264
COS 62,784 22,812 0 85,596 0 0 0 0
--------- --------- ---------- ---------- ------- -------- -------- ----------
$275,016 $ 45,205 $ 0 $320,221 $ 0 15,000 $ 0 $ 11,264
========= ========= ========== ========== ======= ======== ======== ==========
1995 CERBCO $ 10,412 $ 0 $ 0 $ 10,412 $ 0 1,500 $ 0 $ 0
IEI 196,555 31,457 0 228,012 0 15,000 0 12,033
COS 61,063 28,267 0 89,330 0 0 0 1,549
--------- --------- ---------- ---------- ------- -------- -------- ----------
$268,030 $ 59,724 $ 0 $327,754 $ 0 16,500 $ 0 $ 13,582
========= ========= ========== ========== ======= ======== ======== ==========
Robert F. Hartman 1997 CERBCO $ 11,053 $ 0 $ 0 $ 11,053 $ 0 0 $ 0 $ 0
Vice President, IEI 88,808 0 0 88,808 0 15,000 0 8,010 (3)
Secretary & Controller --------- --------- ---------- ---------- ------- -------- -------- ----------
$ 99,861 $ 0 $ 0 $ 99,861 $ 0 0 $ 0 $ 8,010
========= ========= ========== ========== ======= ======== ======== ==========
1996 CERBCO $ 10,677 $ 0 $ 0 $ 10,677 $ 0 0 $ 0 $ 0
IEI 85,891 9,542 0 95,433 0 0 0 6,666
--------- --------- ---------- ---------- ------- -------- -------- ----------
$ 96,568 $ 9,542 $ 0 $106,110 $ 0 0 $ 0 $ 6,666
========= ========= ========== ========== ======= ======== ======== ==========
1995 CERBCO $ 10,412 $ 0 $ 0 $ 10,412 $ 0 0 $ 0 $ 0
IEI 83,664 13,390 0 97,054 0 0 0 5,754
--------- --------- ---------- ---------- ------- -------- -------- ----------
$ 94,076 $ 13,390 $ 0 $107,466 $ 0 0 $ 0 $ 5,754
========= ========= ========== ========== ======= ======== ======== =========
Armen A. Manoogian 1997 COS $247,444 $ 86,605 $ 9,173 $343,222 $ 0 0 $ 0 $ 7,500 (5)
[Subsidiary ========= ========= ========== ========== ======= ======== ======== =========
President, COS](4) 1996 COS $235,660 $ 85,545 $ 8,736 $329,941 $ 0 0 $ 0 $ 7,500
========= ========= ========== ========== ======= ======== ======== =========
1995 COS $224,955 $105,962 $ 8,400 $339,317 $ 0 0 $ 0 $ 6,129
========= ========= ========== ========== ======= ======== ======== =========
(1) The Company's Corporate Executive Committee, consisting of the Chairman and
the President, exercises the duties and responsibilities of the Chief Executive
Officer of the Company.
(2) None of the named executive officers received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of his total salary and
bonus. The amounts reported represent payment for hours of leave in lieu of time
off.
(3) Insituform East contributions to the IEI Advantage Plan.
(4) Capitol's Chief Executive Officer Committee (the "CEOC"), consisting of the
Chairman, the Vice Chairman and the President, exercised the duties and
responsibilities of the Chief Executive Officer of Capitol. Mr. Armen Manoogian,
age 54, was President and a member of the CEOC of Capitol from October 1987 to
June 30, 1997. Prior to joining Capitol, he served as President of a
publicly-traded East Coast computer retailing organization. Mr. Manoogian served
on the Company's Board of Directors from October 1990 to April 1993.
(5) Capitol contributions to the COS Profit Sharing Plan.
</TABLE>
<PAGE>
COMPENSATION PURSUANT TO PLANS
CERBCO, Inc. Plans
CERBCO Supplemental Executive Retirement Plan
During fiscal year 1994, CERBCO entered into Supplemental Executive
Retirement Agreements with Messrs. Robert Erikson, George Erikson and Robert
Hartman pursuant to a Supplemental Executive Retirement Plan (the "CERBCO
Supplemental Retirement Plan"). The agreements provide for monthly retirement
benefits of 50% of the executive's final aggregate monthly salary from CERBCO
and its subsidiaries as defined in and limited by the executives' agreement, for
Messrs. Robert Erikson and George Erikson. In the case of Mr. Robert Hartman,
the agreement provides for 25% of the executive's final aggregate monthly salary
from CERBCO and its subsidiaries as defined in and limited by the executive's
agreement. Each covered executive's benefit under the Plan is payable in equal
monthly amounts for the remainder of the covered executive's life beginning as
of any date on or after his 62nd birthday (at the covered executive's election)
but not before his termination of service. Payments under the CERBCO
Supplemental Retirement Plan are not subject to any reduction for Social
Security or any other offset amounts but are subject to Social Security and
other applicable tax withholding.
To compute the monthly retirement benefits, the percentage of final
monthly salary is multiplied by a ratio (not to exceed 1) of:
the completed years of employment by CERBCO after 1992
to
the total number of years of employment after 1992 that the executive
would have completed if he had continued in employment to age 65.
If the executive dies prior to retirement, the executive's beneficiary
will receive a pre-retirement death benefit under a split dollar insurance
arrangement. The executive's beneficiary will receive a one-time lump sum
payment in the amount of $1,400,000 (in the case of Messrs. Robert Erikson or
George Erikson) or $700,000 (in the case of Mr. Robert Hartman). If the
executive dies after commencement of the payment of retirement benefits, but
before receiving 180 monthly payments, the executive's beneficiary will continue
to receive payments until the total payments received by the executive and/or
his beneficiary equal 180.
The CERBCO Supplemental Retirement Plan is technically unfunded, except
as described below. CERBCO will pay all benefits from its general revenues and
assets. To facilitate the payment of benefits and provide the executives with a
measure of benefit security without subjecting the CERBCO Supplemental
Retirement Plan to various rules under the Employee Retirement Income Security
Act of 1974, CERBCO has established an irrevocable trust (the "CERBCO, Inc.
Supplemental Executive Retirement Trust Agreement"). This trust is subject to
the claims of CERBCO's creditors in the event of bankruptcy or insolvency. The
trust has purchased life insurance on the lives of the executive officers
covered by the Supplemental Executive Retirement Agreements to provide for
CERBCO's financial obligations under the Plan. Assets in the trust consist of
the cash surrender values of the executive life insurance policies and are
carried on CERBCO's balance sheet as assets. The trust will not terminate until
participants and beneficiaries are no longer entitled to benefits under the
plan. Upon termination, all assets remaining in the trust will be returned to
CERBCO.
The following tables set forth the annual retirement benefits that
would be received under the CERBCO Supplemental Retirement Plan at various
compensation levels after the specified years of service:
<TABLE>
Pension Plan Table Where Formula Provides 50% of Compensation (1)
<CAPTION>
(Final) Years of Service (Under Plan)
Remuneration 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 58,594 $ 62,500 $ 62,500 $ 62,500 $ 62,500
$ 150,000 $ 70,313 $ 75,000 $ 75,000 $ 75,000 $ 75,000
$ 175,000 $ 82,031 $ 87,500 $ 87,500 $ 87,500 $ 87,500
$ 200,000 $ 93,750 $ 100,000 $ 100,000 $ 100,000 $ 100,000
$ 225,000 $ 105,469 $ 112,500 $ 112,500 $ 112,500 $ 112,500
$ 250,000 $ 117,188 $ 125,000 $ 125,000 $ 125,000 $ 125,000
$ 300,000 $ 140,625 $ 150,000 $ 150,000 $ 150,000 $ 150,000
$ 350,000 $ 154,627 $ 175,000 $ 175,000 $ 175,000 $ 175,000
$ 400,000 $ 154,627 $ 182,101 $ 200,000 $ 200,000 $ 200,000
$ 450,000 $ 154,627 $ 182,101 $ 201,055 $ 221,961 $ 225,000
$ 500,000 $ 154,627 $ 182,101 $ 201,055 $ 221,961 $ 245,085
(1) Assumes at the time the Plan was established (i) the individual is age 50,
(ii) maximum covered compensation is $250,000 and is increased 2% (compounded
annually) each year of service after 1992, and (iii) retirement is effective at
the beginning of the year.
</TABLE>
<TABLE>
Pension Plan Table Where Formula Provides 25% of Compensation (2)
<CAPTION>
(Final) Years of Service (Under Plan)
Remuneration 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 8,929 $ 11,905 $ 12,500 $ 12,500 $ 12,500
$ 75,000 $ 13,393 $ 17,858 $ 18,750 $ 18,750 $ 18,750
$ 100,000 $ 17,858 $ 23,810 $ 25,000 $ 25,000 $ 25,000
$ 200,000 $ 21,206 $ 31,218 $ 36,190 $ 39,957 $ 44,115
$ 300,000 $ 21,206 $ 31,218 $ 36,190 $ 39,957 $ 44,115
$ 400,000 $ 21,206 $ 31,218 $ 36,190 $ 39,957 $ 44,115
$ 500,000 $ 21,206 $ 31,218 $ 36,190 $ 39,957 $ 44,115
(2) Assumes at the time the Plan was established (i) the individual is age 45,
(ii) maximum covered compensation is $90,000 and is increased 2% (compounded
annually) each year of service after 1992, and (iii) retirement is effective at
the beginning of the year.
</TABLE>
Each executive's covered compensation under the CERBCO Supplemental
Retirement Plan is equal to his final base salary. The maximum covered
compensation for Messrs. Robert Erikson and George Erikson is limited to
$250,000 annually ($20,834 per month), increased 2% annually beginning in 1993.
The maximum covered compensation for Mr. Robert Hartman is limited to $90,000
annually ($7,500 per month), increased 2% annually beginning in 1993.
The following table sets forth information concerning vested annual
benefits as of June 30, 1997 for the executives listed in the Summary
Compensation Table covered by the CERBCO Supplemental Retirement Plan:
<TABLE>
<CAPTION>
Years of Credited Current Annual Vested Vested
Name Years of Service Service Under Plan Covered Compensation Percentage Annual Benefit
- ---- ---------------- ------------------ -------------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Erikson 24 5 $ 270 608 27.78% $ 37,584
George Wm. Erikson 21 5 $ 270 608 33.33% $ 45,101
Robert F. Hartman 16 5 $ 97,419 25.00% $ 6,089
</TABLE>
CERBCO 1986 Directors' Stock Option Plan
CERBERONICS adopted, with stockholder approval at the 1986 Annual
Meeting of Stockholders, the CERBERONICS, Inc. 1986 Board of Directors' Stock
Option Plan (now called the "CERBCO Directors' Plan"). This plan automatically
terminated on December 19, 1996, which did not affect options already granted
and still outstanding. The purpose of the CERBCO Directors' Plan was to promote
the growth and general prosperity of CERBCO by permitting the Company, through
the granting of options to purchase shares of CERBCO's Common Stock, to attract
and retain the best available persons as members of CERBCO's Board of Directors
with an additional incentive for such persons to contribute to the success of
the Company. A maximum of 75,000 shares of Common Stock were made subject to
options under the CERBCO Directors' Plan. Options may be granted to directors of
CERBCO or any of its subsidiaries. Each option granted under the CERBCO
Directors' Plan entitles each director to whom such option is granted the right
to purchase shares of CERBCO's Common Stock at a designated option price, any
time and from time to time, within three years from the date of grant.
The CERBCO Board of Directors administers the CERBCO Directors' Plan
and has exclusive authority to interpret, construe and implement the provisions
of the CERBCO Directors' Plan, except as may be delegated in whole or in part by
the Board to a committee of the Board which may consist of three or more members
of the Board. No such delegation of authority has been made. Each determination,
interpretation or other action that may be taken pursuant to the CERBCO
Directors' Plan by the Board is final and binding and conclusive for all
purposes and upon all persons. The Board from time to time may amend the CERBCO
Directors' Plan as it deems necessary to carry out the purposes thereof.
The terms of the CERBCO Directors' Plan contemplated that each director
of the Company be granted an option to purchase 1,500 shares of the Company's
Common Stock each year for five years, for a total of 7,500 shares of Common
Stock per director, beginning in fiscal year 1986. On June 28, 1986, options on
1,500 shares of Common Stock were granted to each of the six CERBERONICS
directors then in office. No additional options were granted until December 19,
1991. On December 19, 1991, the CERBCO Directors' Plan was amended by the CERBCO
Board of Directors to ensure its original purpose by granting options to
purchase 1,500 shares of Common Stock to CERBCO directors in fiscal 1992 and
subsequent years, so that each director serving on the date of grant will
receive options for a total amount of 7,500 shares over a five year period.
Messrs. Robert Erikson and George Erikson, being the only current directors
having received options in 1986, each received options for a total amount of
6,000 shares over a four year period, from 1992 through 1995. Messrs. Hayes and
Kincheloe each received options for a total of 7,500 shares over a five year
period, from 1992 through 1996, and thus each current director has received
options for a total of 7,500 shares. Options on a total of 9,000 shares
available under this plan were exercised by directors of the Company during
fiscal year 1997. Options on a total of 6,000 shares were outstanding at June
30, 1997. These options were exercised on July 10, 1997.
Insituform East, Incorporated Plans
Insituform East Employee Advantage Plan
As executive officers of Insituform East, Messrs. Robert Erikson,
George Erikson and Robert Hartman participate in the Insituform East,
Incorporated Employee Advantage Plan (the "IEI Advantage Plan"). The IEI
Advantage Plan is a noncontributory profit sharing (retirement) plan in which
all employees not covered by a collective bargaining agreement and employed with
Insituform East for at least one year are eligible to participate. No employee
is covered by a collective bargaining agreement. The IEI Advantage Plan is
administered by the Insituform East Board of Directors which determines, at its
discretion, the amount of Insituform East's annual contribution. The Insituform
East Board of Directors can authorize a contribution, on behalf of Insituform
East, of up to 15% of the compensation paid to participating employees during
the year. The plan is integrated with Social Security. Each participating
employee is allocated a portion of Insituform East's contribution based on the
amount of that employee's compensation plus compensation above FICA limits
relative to the total compensation paid to all participating employees plus
total compensation above FICA limits. Amounts allocated under the IEI Advantage
Plan begin to vest after three years of service (at which time 20% of the
contribution paid vests) and are fully vested after seven years of service.
During fiscal year 1997, Insituform East contributed an amount equal to
4.0% of the total compensation paid to all participating employees.
<TABLE>
<CAPTION>
Names and Capacities in Which Contributions for Vested Percent
Cash Contributions Were Made Fiscal Year 1997 (1) as of 6/30/97
- ---------------------------- -------------------- -------------
<S> <C> <C>
George Wm. Erikson, Chairman $11,247 100%
Robert W. Erikson, President $11,247 100%
Robert F. Hartman, Vice
President - Administration & Secretary $ 6,351 80%
Executive Officers of Insituform East as a Group,
(6 persons, including those named above) $57,128 N/A
(1) Total contributions to employees of $276,123 include Insituform East's
contribution of $212,409 and reallocated amounts totaling $63,714 forfeited by
former participants who terminated employment with Insituform East during fiscal
year 1997.
</TABLE>
The IEI Advantage Plan also includes a salary reduction profit sharing
feature under Section 401(k) of the Internal Revenue Code. Each participant may
elect to defer a portion of his compensation by any whole percentage from 2% to
16% subject to certain limitations. During fiscal year 1997, as mandated by the
plan, Insituform East contributed an employer matching contribution equal to 25%
of the participant's deferred compensation up to a maximum of 1.5% of the
participant's total paid compensation for the fiscal year. Participants are 100%
vested at all times in their deferral and employer matching accounts.
<TABLE>
<CAPTION>
Names and Capacities in Which Contributions for Vested Percent
Cash Contributions Were Made Fiscal Year 1997 as of 6/30/97
- ---------------------------- ---------------- -------------
<S> <C> <C>
George Wm. Erikson, Chairman $ 366 100%
Robert W. Erikson, President $ 0 100%
Robert F. Hartman, Vice
President - Administration & Secretary $1,659 100%
Executive Officers of Insituform East as a Group,
(6 persons, including those named above) $6,350 N/A
</TABLE>
Insituform East 1994 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1994 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1994 Board of
Directors' Stock Option Plan (the "IEI 1994 Directors' Plan"). The purpose of
this plan is to promote the growth and general prosperity of Insituform East by
permitting Insituform East, through the granting of options to purchase shares
of its Common Stock, to attract and retain the best available persons as members
of Insituform East's Board of Directors with an additional incentive for such
persons to contribute to the success of Insituform East. The IEI 1994 Directors'
Plan is administered and options are granted by the Insituform East Board of
Directors. As directors of Insituform East, Messrs. Robert Erikson and George
Erikson participate in this plan.
Each grant of options under the IEI 1994 Directors' Plan will entitle
each Insituform East director to whom such options are granted the right to
purchase 15,000 shares of Insituform East's Common Stock at a designated option
price, any time and from time to time, within five years from the date of grant.
Options are granted under the IEI Directors' Plan each year for five years to
each member of the Board of Directors of Insituform East serving as such on the
date of grant, i.e., for each director serving for five years, a total of five
options covering in the aggregate 75,000 shares of Common Stock (subject to
adjustments upon changes in the capital structure of Insituform East) over a
five year period. Under the terms of this plan, up to 525,000 shares of
Insituform East's Common Stock have been reserved for directors of Insituform
East.
On December 13, 1996, options on a total of 105,000 shares of
Insituform East's Common Stock were granted to directors of Insituform East
(options on 15,000 shares to each of seven directors, including Messrs. Robert
Erikson and George Erikson) at a per share option price of $2.625. No options
available under this plan were exercised by directors of Insituform East during
fiscal year 1997.
Insituform East 1989 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1989 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1989 Board of
Directors Stock Option Plan (the "IEI 1989 Directors' Plan"). The purpose of
this plan was the same as the IEI 1994 Directors' Plan. The plan is administered
by the Insituform East Board of Directors. Options were first granted to
directors on December 1, 1989 and each of the four succeeding Board of Directors
meetings following the Annual Meetings of Stockholders in 1990, 1991, 1992 and
1993. Each grant of options under the plan entitles each director to whom such
options were granted the right to purchase 15,000 shares of Insituform East's
Common Stock at a designated option price, any time and from time to time,
within five years from the date of grant. Although no further options are
anticipated to be granted under this plan, options previously granted, and which
have not already been exercised or expired, will remain in effect until exercise
or expiration, whichever comes first. The plan will automatically terminate in
1999, unless terminated sooner by the Board of Directors. No options available
under the plan were exercised by directors of Insituform East during fiscal year
1997. Under the terms of this plan, up to 120,000 shares of Insituform East
Common Stock remain reserved for the directors of Insituform East.
OPTION/SAR GRANTS TABLE
No option or Stock Appreciation Right grants were made to any of the
named executive officers during fiscal year 1997 under the CERBCO Directors'
Plan or the IEI 1989 Directors' Plan. The following table sets forth information
concerning options granted to each of the named executive officers during fiscal
year 1997, under the IEI 1994 Directors' Plan:
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realized Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
-------------------------------------------------------- ---------------------------
% of Total
Options/
Option/ SARs Granted Exercise
SARs to Employees or Base Expiration
Name Granted(#) in Fiscal Year ($/Share) Date 5% ($) 10%($)
- ---- ---------- -------------- --------- ---- ------ ------
Robert W. Erikson
<S> <C> <C> <C> <C> <C> <C>
IEI 1994 Directors' Plan 15,000 14% $2.625 12/13/01 $10,875 $24,045
George Wm. Erikson
IEI 1994 Directors' Plan 15,000 14% $2.625 12/13/01 $10,875 $24,045
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
No option or Stock Appreciation Right grants made under the IEI 1989 or
1994 Directors' Plans to any of the named executive officers were exercised
during fiscal year 1997. During fiscal year 1997, Messrs. Robert Erikson and
George Erikson each exercised options to purchase 3,000 shares of CERBCO Common
Stock granted under the CERBCO Directors' Plan. The following table sets forth
information concerning option or Stock Appreciation Right grants held by each of
the named executive officers under all plans as of June 30, 1997:
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<CAPTION>
Value of
Number of Unexercised Unexercised in the Money
Shares Options/SARs at FY-End(#) Options/SARs at FY-End($)
Acquired on Value
Name Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
Robert W. Erikson
<S> <C> <C> <C> <C> <C> <C>
CERBCO Directors' Plan 3,000 $ 12,563 0 0 $ 0 $0
IEI 1994 Directors' Plan 0 $ 0 45,000 0 $ 0 $0
IEI 1989 Directors' Plan 0 $ 0 30,000 0 $ 938 $0
George Wm. Erikson
CERBCO Directors' Plan 3,000 $ 12,563 0 0 $ 0 $0
IEI 1994 Directors' Plan 0 $ 0 45,000 0 $ 0 $0
IEI 1989 Directors' Plan 0 $ 0 30,000 0 $ 938 $0
</TABLE>
REPRICING OF OPTIONS/SARs
Neither the Company nor its subsidiaries have adjusted or amended the
exercise price of stock options or SARs previously awarded to any of the named
executive officers during fiscal year 1997.
LONG-TERM INCENTIVE PLAN AWARDS
Neither the Company nor its subsidiaries have a long-term incentive
plan.
DEFINED BENEFIT OR ACTUARIAL PLANS
The Company maintains a defined benefit plan called the CERBCO
Supplemental Executive Retirement Plan to provide annual retirement benefits to
covered executives. See "Compensation Pursuant to Plans - CERBCO, Inc. Plans,
Supplemental Executive Retirement Plan" as to the basis upon which benefits
under the Plan are computed.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are no employment contracts between the Company or its
subsidiaries and any named executive officer. There are no arrangements between
the Company or its subsidiaries and any named executive officer, or payments
made to an executive officer, that resulted, or will result, from the
resignation, retirement or other termination of employment with the Company or
its subsidiaries, in an amount that exceeds $100,000.
COMPENSATION OF DIRECTORS
Until December 31, 1996, each non-officer director of the Company was
paid an annual fee of $3,000, and attendance fees of $500 for Board of Directors
meetings where he attended in person and $100 if he participated by telephone.
The annual fee was increased to $5,000, and attendance fees to $1,000 and $200,
respectively, effective as of January 1, 1997. Directors who are also officers
of the Company do not receive separate fees for service as directors, but are
eligible with all other directors to participate in the CERBCO Directors' Stock
Option Plan, as described under the section entitled, "Compensation Pursuant to
Plans." All directors of the Company are reimbursed for Company travel-related
expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation
committee; the Board of Directors as a whole serves in that equivalent capacity.
Messrs. George Erikson and Robert Erikson, both members of the Board of
Directors and executive officers of the Company, holding the offices of Chairman
& General Counsel and President & Treasurer, respectively, participated during
fiscal year 1997 in deliberations of the Board of Directors concerning executive
officer compensation.
Messrs. George Erikson and Robert Erikson are both members of the Board
of Directors and executive officers of Insituform East and, until June 30, 1997,
Capitol Office Solutions. In their capacities as directors of these subsidiary
companies, they participated during fiscal year 1997 in deliberations of the
respective subsidiaries' Boards of Directors concerning executive officer
compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table reflects, as of September 15, 1997, the only
persons known to the Company to be the beneficial owners of more than five
percent of any class of CERBCO's voting securities:
<TABLE>
<CAPTION>
Name & Address of Amount and Nature of
Beneficial Owner Title of Class Beneficial Ownership Percent of Class
<S> <C> <C> <C>
Robert W. Erikson Common Stock 60,700 (1) 5.1%
3421 Pennsy Drive Class B Common Stock 131,750 (1) 44.5%
Landover, MD
George Wm. Erikson Common Stock 59,602 (2) 5.0%
3421 Pennsy Drive Class B Common Stock 115,814 (2) 39.1%
Landover, MD
Koonce Securities, Inc. Common Stock 230,588 (3) 19.4%
6550 Rock Spring Dr
Bethesda, MD
(1) Record and beneficial ownership, sole voting and sole investment power.
(2) Record and beneficial ownership. Includes 2,246 shares of each class of
stock owned jointly with Mr. Erikson's spouse, as to which there is shared
voting and investment power. (3) Beneficial ownership, sole voting and sole
investment power as publicly disclosed in current Schedule 13G Beneficial
Ownership Report, reporting securities acquired by such financial institution in
the ordinary course of its business.
</TABLE>
(b) Security Ownership of Management
The following information is furnished with respect to all directors of
CERBCO who were the beneficial owners of any shares of CERBCO's Common Stock and
Class B Common Stock as of September 15, 1997, and with respect to all directors
and officers of CERBCO as a group:
<TABLE>
<CAPTION>
Amount & Nature of Beneficial Ownership
Name of Beneficial Owner Title of Class Owned Outright Exercisable Options Percent of Class
- ------------------------ -------------- -------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert W. Erikson Common Stock 60,700 (1) 0 5.1%
Class B Common Stock 131,750 (1) 0 44.5%
George Wm. Erikson Common Stock 59,602 (2) 0 5.0%
Class B Common Stock 115,814 (2) 0 39.1%
Webb C. Hayes, IV Common Stock 4,500 0 0.4%
Paul C. Kincheloe, Jr. Common Stock 7,500 0 0.6%
All Directors and Officers as a
Group (5 persons including Common Stock 132,302 0 11.1%
those named above) Class B Common Stock 247,564 0 83.6%
(1) Record and beneficial ownership, sole voting and sole investment power.
(2) Record and beneficial ownership. Includes 2,246 shares of each class of
stock owned jointly with Mr. Erikson's spouse, as to which there is shared
voting and investment power.
</TABLE>
The following information is furnished with respect to all directors of
Insituform East who were the beneficial owners of any shares of Insituform
East's Common Stock and Class B Common Stock as of September 2, 1997, and with
respect to all directors and officers of Insituform East as a group:
<TABLE>
<CAPTION>
Amount & Nature of Beneficial Ownership
Name of Beneficial Owner Title of Class Owned Outright Exercisable Options Percent of Class
- ------------------------ -------------- -------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Thomas J. Schaefer Common Stock 0 75,000 1.8%
George Wm. Erikson Common Stock 16,500 75,000 2.2%
Robert W. Erikson Common Stock 0 75,000 1.8%
Jack Massar Common Stock 0 75,000 1.8%
Webb C. Hayes, IV Common Stock 0 45,000 1.1%
Paul C. Kincheloe, Jr. Common Stock 0 45,000 1.1%
Calvin G. Franklin Common Stock 0 45,000 1.1%
All Directors and
Officers as a Group Common Stock 17,000 435,000 10.1%
(11 persons including Class B Common Stock 0 0 0.0%
those named above)
</TABLE>
(c) Changes in Control
There were no changes in control of the Company during the year ended
June 30, 1997. However, in March 1990 George Wm. Erikson and Robert W. Erikson,
the controlling stockholders of the Company, 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") (formerly
Insituform of North American, Inc. or INA) to effect a sale of their controlling
interest in the Company to ITI for $6,000,000 (the "Proposed Transaction"). The
Proposed Transaction, had it been 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
Office Solutions and CERBERONICS. On September 19, 1990, however, the Company
issued a press release announcing that the Eriksons had 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.
A lawsuit challenging the proposed, but unconsummated transaction
brought by two of the Company's stockholders is described in Part II, Item 8,
"Notes to Consolidated Financial Statements - Note 12:
Contingencies."
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
See Item 13.(c) below.
(b) Certain Business Relationships
Not applicable.
(c) Indebtedness of Management
Pursuant to authorizations by the Board of Directors, the Company has
made certain advancements to Mr. George Erikson, Director, Chairman & General
Counsel, and certain advancements to Mr. Robert Erikson, Director, President &
Treasurer (together the "Eriksons") for their respective legal fees and expenses
which each has incurred, and may incur in the future, for personal legal
representation in connection with the stockholder lawsuit filed in August 1990
challenging a proposed but unconsummated transaction between each of the
Eriksons and Insituform Technologies, Inc. (see Part II, Item 8, "Notes to
Consolidated financial Statements - Note 12.
Contingencies").
As of September 16, 1997, pursuant to such Board authorizations, the
Company has advanced and expensed in total $592,854 to Mr. George Erikson and
has advanced and expensed in total $592,854 to Mr. Robert Erikson.
Pending a final outcome of these legal proceedings, the Board of
Directors has deferred consideration or ultimate determination of entitlement of
Mr. George Erikson and/or Mr. Robert Erikson to indemnification by the Company
for such legal fees and expenses. If it is ultimately determined by the Board of
Directors or otherwise in accordance with Section 145 of Delaware Corporation
Law that Mr. George Erikson and/or Mr. Robert Erikson are not entitled to
indemnification for any such legal fees and expenses under Section 145 of
Delaware Corporation Law, such advances shall be reimbursed by Mr. George
Erikson and/or Mr. Robert Erikson to the Company pursuant to an agreement with
the Company executed by each of the Eriksons and delivered to the Board of
Directors.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of CERBCO, Inc. and subsidiaries
are included in PART II, Item 8:
Pages
Independent Auditors' Report 16
Consolidated Statements of Earnings for the Years Ended June 30, 1997,
1996 and 1995 17
Consolidated Balance Sheets as of June 30, 1997 and 1996 18-19
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997,
1996 and 1995 21
Notes to Consolidated Financial Statements 22-32
(2) Financial Statement Schedules
Schedules have been omitted for the reason that they are not required,
or are not applicable, or that the required information is given in the
financial statements and notes thereto.
(3) Exhibits
27. Financial Data Schedule
Pages
99. CERBCO, Inc. Consolidating Schedules: Statement of Earning
Information for the Year Ended June 30, 1997; Balance Sheet
Information and Consolidating Elimination Entries as of
June 30, 1997, and Related Independent Auditors' Report 48-51
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30, 1997. However, subsequent to fiscal year end, the Company
filed two reports:
The first report, filed on July 3, 1997, reported on the following
items: Item 2. Acquisition or Disposition of Assets and Item 7. Financial
Statements and Exhibits, which concerned the redemption by Capitol Office
Solutions of the entire two-thirds equity interest in Capitol Office Solutions
held by the Company through its wholly-owned subsidiary, CERBERONICS.
The second report, filed on July 10, 1997, reported on the following
item: Item 5. Other Events, which announced through a press release dated June
30, 1997 that the Company was declaring a special cash dividend in connection
with the transaction reported in the first report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Landover, Maryland, on
September 26, 1997.
/s/ ROBERT W.ERIKSON
Robert W. Erikson
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature & Title Capacity Date
/s/ ROBERT W. ERIKSON
Robert W. Erikson Director, Sept. 26, 1997
President & Treasurer Principal Executive Officer,
Principal Financial Officer
/s/ GEORGE Wm. ERIKSON
George Wm. Erikson Director, Sept. 26, 1997
Chairman & General Counsel Principal Executive Officer
/s/ ROBERT F. HARTMAN
Robert F. Hartman Principal Accounting Officer Sept. 26, 1997
Vice President, Secretary
& Controller
/s/ WEBB C. HAYES, IV
Webb C. Hayes, IV Director Sept. 26, 1997
/s/ PAUL C. KINCHELOE, JR.
Paul C. Kincheloe, Jr. Director Sept. 26, 1997
Exhibits to CERBCO, Inc. Form 10-K
Exhibit 27. CERBCO, Inc. Financial Data Schedule
Exhibit 99. CERBCO, Inc. Consolidating Schedules: Statement of Earnings
Information for the Year Ended June 30, 1997; Balance Sheet
Information and Consolidating Elimination Entries as of June
30, 1997, and Related Independent Auditors' Report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROMSEC FORM 10-K
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> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 27,081
<SECURITIES> 0
<RECEIVABLES> 6,691
<ALLOWANCES> 0
<INVENTORY> 1,538
<CURRENT-ASSETS> 36,376
<PP&E> 25,055
<DEPRECIATION> 13,296
<TOTAL-ASSETS> 51,471
<CURRENT-LIABILITIES> 11,840
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 24,787
<TOTAL-LIABILITY-AND-EQUITY> 51,471
<SALES> 26,542
<TOTAL-REVENUES> 26,542
<CGS> 22,423
<TOTAL-COSTS> 22,423
<OTHER-EXPENSES> 5,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (1,439)
<INCOME-TAX> (874)
<INCOME-CONTINUING> (199)
<DISCONTINUED> 10,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,169
<EPS-PRIMARY> 6.91
<EPS-DILUTED> 6.91
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CERBCO, Inc.
We have audited the consolidated financial statements of CERBCO, Inc. and
subsidiaries as of June 30, 1997 and 1996, and for each of the three years in
the period ended June 30, 1997, and have issued our report thereon dated
September 22, 1997; such financial statements and report are included in this
Annual Report on Form 10-K. Our audits were conducted for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The consolidating schedules as of, and for the year ended June 30,1997
are presented for the purpose of additional analysis of the basic consolidated
financial statements rather than to present the financial position and results
of operations of the individual companies, and are not a required part of the
basic consolidated financial statements. These schedules are the
responsibility of the Company's management. Such schedules have been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Washington, D.C.
September 22, 1997
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENTS OF EARNINGS INFORMATION
YEAR ENDED JUNE 30, 1997
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
------------ ------------ -------------- ----------------
<S> <C> <C><C> <C> <C>
Sales $ 26,541,542 $ 0 $ 0 $ 26,541,542
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 22,422,831 0 0 22,422,831
Selling, general and administrative expenses 5,751,328 0 720,881 5,030,447
------------ ------------ ------------ ------------
Total Costs and Expenses 28,174,159 0 720,881 27,453,278
------------ ------------ ------------ ------------
Operating Loss (1,632,617) 0 (720,881) (911,736)
Investment Income 258,947 0 126,304 132,643
Interest Expense (39,871) 0 0 (39,871)
Other Income - net 170,469 0 42,822 127,647
------------ ------------ ------------ ------------
Loss Before Non-Owned Interests and
Income Taxes (1,243,072) 0 (551,755) (691,317)
Non-Owned Interest in Pretax Earnings of
MIDSOUTH Partners 196,329 0 0 196,329
------------ ------------ ------------ ------------
Loss Before Non-Owned Interests in
Insituform East and Income Taxes (1,439,401) 0 (551,755) (887,646)
Credit for Income Taxes (874,000) 0 (530,000) (344,000)
------------ ------------ ------------ ------------
Loss Before Non-Owned Interests in
Insituform East (565,401) 0 (21,755) (543,646)
Non-Owned Interests in Loss of Insituform East (366,005) (B) (366,005) 0 0
------------ ------------ ------------ ------------
Loss from Continuing Operations (199,396) (366,005) (21,755) (543,646)
Discontinued Operations:
Earnings from discontinued operations 2,166,894 0 2,166,894 0
Gain on disposal - net 8,201,812 0 8,201,812 0
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 10,169,310 (D)$ (366,005) $ 10,346,951 $ (543,646)
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
JUNE 30, 1997
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
------------ ------------ -------------- ----------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $27,081,412 $ 0 $ 25,009,560 $ 2,071,852
Accounts receivable 6,691,313 (A) (85,418) 94,604 6,682,127
Inventories 1,538,017 0 0 1,538,017
Prepaid and refundable taxes 813,872 0 48,292 765,580
Prepaid expenses and other 251,572 0 0 251,572
----------- ------------ ------------ ------------
TOTAL CURRENT ASSETS 36,376,186 (85,418) 25,152,456 11,309,148
Investment in and Advances to Subsidiaries:
Investment in subsidiaries 0 (C) (7,727,288) 7,727,288 0
Intercompany receivables and payables 0 0 5,226 (5,226)
Property, Plant and Equipment - net of
accumulated depreciation 11,758,572 0 88,511 11,670,061
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 2,408,508 (C) 2,408,508 0 0
Cash surrender value of life insurance 779,041 0 779,041 0
Deposits and other 148,837 0 62,837 86,000
------------ ------------ ------------ ------------
TOTAL ASSETS $51,471,144 $ (5,404,198) $33,815,359 $ 23,059,983
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $11,811,085 (A) $ (85,418) $ 8,261,764 $ 3,634,739
Current portion of capital lease obligations 28,508 0 0 28,508
------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 11,839,593 (85,418) 8,261,764 3,663,247
Long-Term Liabilities:
Capital lease obligations 139,480 0 0 139,480
Deferred income taxes 1,074,000 0 0 1,074,000
Accrued SERP liability 440,950 0 440,950 0
------------ ------------ ------------ ------------
TOTAL LIABILITIES 13,494,023 (85,418) 8,702,714 4,876,727
------------ ------------ ------------ ------------
Non-Owned Interests: 13,042,117 (B)(C) 10,592,655 0 2,449,462
------------ ------------ ------------ ------------
Stockholders' Equity:
Common stock 118,060 (C) (175,486) 118,060 175,486
Class B stock 29,635 (C) (11,904) 29,635 11,904
Additional paid-in capital 7,493,378 (C) (4,000,424) 7,493,378 4,000,424
Retained earnings 17,293,931 (C)(D)(12,913,234) 17,471,572 12,735,593
Treasury stock 0 (C) 1,189,613 0 (1,189,613)
------------ -------------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,935,004 (15,911,435) 25,112,645 15,733,794
------------ -------------- ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,471,144 $ (5,404,198) $ 33,815,359 $ 23,059,983
============ =============== ============ ============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
JUNE 30, 1997
<CAPTION>
(A)
<S> <C> <C>
Accounts payable and accrued liabilities $85,418
Accounts receivable $85,418
Toeliminate dividend receivable from Insituform East to CERBCO at June 30,
1997.
(B)
Non-owned interests $366,005
Non-owned interests in loss of subsidiary $366,005
To record non-owned interests in loss of subsidiary in 1997.
(C)
Common stock $175,486
Class B stock 11,904
Additional paid-in capital 4,000,424
Retained earnings 13,279,239
Excess of acquisition cost over value of net assets acquired 2,408,508
Treasury stock $1,189,613
Non-owned interests 10,958,660
Investment in subsidiary 7,727,288
To eliminate investments in consolidated subsidiary at June 30, 1997.
(D)
Current year earnings adjustments $366,005
Retained earnings $366,005
To close out impact of eliminating entries on statement of earnings for 1997.
</TABLE>
