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
For the fiscal year ended: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from --------------------- to ------------------------
Commission file number: 0-16749
CERBCO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1448835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3421 Pennsy Drive, Landover, Maryland 20785
(Address of principal executive offices) (Zip Code)
Registrant's telephone and fax numbers, including area code:
301-773-1784 (tel)
301-322-3041 (fax)
301-773-4560 (24-hour public information FaxVault System)
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 17, 1999, was $6,480,654.
As of September 17, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 1,189,476
Class B Common Stock 293,480
Total 1,482,956
Documents Incorporated by Reference: None
Total number of pages of this report: 49
Index to Exhibits located at page: 45
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business...........................................................3
Item 2. Properties.........................................................9
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............................................................9
Item 6. Selected Financial Data...........................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................11
Item 7a.Quantitative and Qualitative Disclosures About Market Risk........15
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................33
Item 11.Executive Compensation............................................34
Item 12.Security Ownership of Certain Beneficial Owners and Management....41
Item 13.Certain Relationships and Related Transactions....................42
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K...43
CONSOLIDATED
STATEMENTS OF OPERATIONS
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, but continues as a Delaware holding
company subsidiary.
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
Substantially all of the Company's revenues and operating results are
attributable to Insituform East, Incorporated. Insituform East, Incorporated
primarily rehabilitates and repairs underground sewers and other pipelines,
which business constitutes the Company's only industry segment. See Part IV,
Item 14, Exhibit 99, "CERBCO, Inc. Consolidating Schedules: Statement of
Operations Information for the Year Ended June 30, 1999; Balance Sheet
Information and Consolidating Elimination Entries as of June 30, 1999" for
additional information pertaining to Insituform East, Inc.
(c) Narrative Description of Business
CERBCO, Inc.
GENERAL
CERBCO is a parent holding company with a controlling interest in one
operating subsidiary, Insituform East, Incorporated, and a wholly-owned interest
in CERBERONICS, Inc., a Delaware holding company. CERBCO officers participate
directly on the management team of these subsidiary corporations, in varying
capacities and officerships, with a view to overseeing, protecting and
developing the long-term value of the Company's investments in such
subsidiaries. A business description of CERBCO is primarily a business
description of its one operating subsidiary, Insituform East, Incorporated, as
given below.
Insituform East, Incorporated
GENERAL
Insituform East, Incorporated ("Insituform East" or for this section,
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(R) process,
a patented technology for reconstructing pipelines with little or no excavation.
Since July 1978, the Company and its subsidiaries have been engaged in the
business of rehabilitating underground sewers and other pipelines, principally
using cured-in-place pipe ("CIPP") processes, with primary revenues generating
from the Company's Insituform process product line.
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 March 1998, the Company closed its Ohio branch office and
completed an orderly plan to transfer the functions, personnel and equipment to
the Company's Landover, Maryland headquarters facility. In March 1999, the
Company reestablished a branch facility in Cincinnati, Ohio.
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.
On June 12, 1996, as the result of a default by a partner under the
Partnership Agreement, the Company was issued an arbitration award granting it
the unilateral right to appoint a Midsouth Partners Management Committee
representative in place of the defaulted partner's representative. Accordingly,
the Company obtained majority representation on the Management Committee
effective June 12, 1996.
In March 1999, Insituform Technologies, Inc. ("ITI") gave notice of a
purported termination of the Midsouth Partners partnership, purportedly
terminated Midsouth Partners' Insituform(R) License Agreement and simultaneously
commenced litigation in the Chancery Court of Delaware to deny Midsouth Partners
any rights to further utilize CIPP rehabilitation processes as previously
practiced under such license. In April 1999, Midsouth Partners responded to the
Delaware Chancery Court litigation and filed a demand for arbitration with the
American Arbitration Association.
The Company subsequently settled its disputes with ITI concerning
Midsouth Partners under the terms of an agreement reached July 20, 1999 (the
"Midsouth Settlement Agreement") and actions before the Delaware Chancery Court
and the American Arbitration Association were dismissed. Under the terms of the
Midsouth Settlement Agreement, a wholly-owned subsidiary of the Company
purchased ITI's interests in the Midsouth Partners partnership at book value and
Midsouth Partners remained entitled to continue the business of the partnership
under its present name. The Insituform(R) License Agreement and its requirement
to pay royalties were relinquished under the settlement, henceforth permitting
direct competition between ITI and Midsouth Partners. The Midsouth Settlement
Agreement expressly provides that Midsouth Partners may utilize processes other
than the Insituform process to perform pipe rehabilitation services, and
Midsouth Partners also obtained a royalty-free non-exclusive right, without
limitation in time and within the partnership's previously licensed territory,
to continued use of the cured-in-place pipe processes, technique and inventions
that it formerly practiced pursuant to its since-terminated Insituform(R)
License Agreement as the same existed on July 20, 1999.
For financial reporting purposes, for the fiscal years ended June 30,
1999, 1998 and 1997, Insituform East 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, Insituform East accounted for its
minority investment in Midsouth Partners using the equity method.
Insituform East and its subsidiaries are engaged in the trenchless
rehabilitation of underground sewers and other pipelines principally using CIPP
rehabilitation processes to produce a shape-conforming "pipe-within-a-pipe."
Since 1978, the Company has performed work in six Mid-Atlantic states and the
District of Columbia using the patented Insituform process under territorially
exclusive sublicense agreements. Utilizing other trenchless CIPP processes, the
Company's wholly-owned subsidiary, Midsouth Partners, operates substantially
without geographic restriction. The Company's CIPP rehabilitation processes
utilize a custom manufactured unwoven polyester fiber-felt tubing with an
elastomeric coating on the exterior surface. The flat, pliable tube is later
impregnated with a liquid thermosetting resin and the resin-saturated material
is inserted in the pipe through an existing manhole or other access point. Using
a temporary inversion duct and cold water pressure, the material is turned
inside out as it is forced through the pipeline. When the inverted and inflated
tube is fully extended, the cold water within it is recirculated through a
heat-exchange unit. The heated water cures the thermosetting resin to form a
new, hard, jointless, impact and corrosion resistant cured-in-place pipe within
the original pipe. Lateral or side connections are then reopened by use of a
remotely controlled cutting device. The Company is certified to ISO 9001 quality
standards for the design and installation of its traditional Insituform process
product line.
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.) through its acquisition of Insituform Group, Ltd., N.V.,
acquired the worldwide patent rights for the Insituform process. Insituform East
is a sublicensee of ITI for use of the Insituform process. The Company has
entered into six sublicense agreements with ITI which grant the Company
exclusive rights to perform the Insituform process in the designated territories
of Virginia, Maryland, Delaware, Ohio, the District of Columbia, Pennsylvania
and West Virginia.
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
exclusive territory, the sublicense agreements require it to pay a royalty of
from 8% to 12% of the gross contract price to the independent Insituform process
sublicensee of such other territory 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.
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
Insituform East's licensed territory and the states of New York, New Jersey,
North Carolina, South Carolina, Georgia and Alabama.
On December 29, 1997, Insituform East entered into a revised supply
agreement with ITI whereby the Company committed to purchase 90% of its
Insitutube requirements from ITI for an initial five year period from January 1,
1998 to December 31, 2002. The agreement will automatically extend for one year
periods unless notice of termination is provided by either party six months
prior to the end of any such annual period.
Under the terms of the Midsouth Settlement Agreement effective July 20,
1999, Midsouth Partners became a wholly-owned subsidiary of the Company and
obtained a royalty-free non-exclusive right, without limitation in time, to
continued use within the partnership's previously licensed territory of the
cured-in-place pipe processes, technique and inventions that it formerly
practiced pursuant to its since-terminated Insituform(R) License Agreement as
the same existed on July 20, 1999. The Insituform(R) License Agreement and its
requirement to pay royalties were relinquished under the settlement, henceforth
permitting direct competition between ITI and Midsouth.
Effective July 20, 1999, Midsouth Partners executed a Felt Tube Supply
Agreement with ITI for the purchase of felt tubes to be used in CIPP
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement, with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
The Company has also entered into a license agreement with NuPipe,
Inc., a previously wholly-owned and now merged subsidiary of ITI, for the sale
and installation of preformed PVC thermoplastic pipe under the NuPipe process
and trademark. The Company's licensed NuPipe territory is identical to the
Company's licensed Insituform territory. 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. In
connection with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe
License Agreement was relinquished effective July 20, 1999.
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 61
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 2016. 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 Insituform 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 Insituform
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 Insituform patents, the Company's
other CIPP process alternatives and its significant CIPP installation experience
coupled with the Company's high degree of market recognition should enable the
Company to continue to compete effectively in the pipeline rehabilitation market
in the future as Insituform 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 58% 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, 1999, a county government in the
Washington, D.C. metropolitan area, federal government contracts (collectively)
and a regional sanitation authority in southwest Ohio accounted for 18%, 12% and
11%, respectively, of the Company's sales. During the year ended June 30, 1998,
the Perry Nuclear Power Plant project, a combined city and county metropolitan
government in Tennessee and the same county government in the Washington, D.C.
metropolitan area accounted for 19%, 12% and 12%, respectively, of the Company's
sales. During the year ended June 30, 1997, federal government contracts
(collectively), a municipal government in central Ohio, the same county
government in the Washington, D.C. metropolitan area, and the same combined city
and county government in Tennessee accounted for 17%, 15%, 13% and 12%,
respectively, of the Company's sales.
SUPPLIERS
The Company's materials and equipment are generally available from
several suppliers. Although the Company believes that ITI is presently the sole
source of proprietary Insitutube(R) material, the Company is aware of other
suppliers of felt tube materials and other materials used in CIPP
rehabilitation. The Company presently relies upon ITI for its supply of
Insitutube(R) material for its Insituform process product line. 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. In connection with the Midsouth
Settlement Agreement effective July 20, 1999, Midsouth Partners is no longer an
Insituform process licensee and therefore no longer subject to ITI approval for
the use of alternate installation materials.
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 Company's total backlog value of all uncompleted and multi-year
contract awards from customers was approximately $31.1 million at June 30, 1999,
as compared to $24.9 million at June 30, 1998. The twelve-month backlog at June
30, 1999 was approximately $13.5 million as compared to $10.7 million at June
30, 1998. The total value of all uncompleted and multi-year contracts at June
30, 1999 and 1998 includes work not estimated to be released and installed
within twelve months as well as potential work included in term contract awards
which may or may not be fully ordered by contract expiration. While potentially
helpful as a possible trend indicator, backlog figures at specific dates are not
necessarily indicative of sales and earnings for future periods due to the
irregular timing and receipt of major project awards including large multi-year
menu-priced contracts with estimated but uncertain order quantities subject
additionally to the specifics of individual work releases.
COMPETITION
The general pipeline replacement, rehabilitation and repair business is
significantly 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 including CIPP technology.
Traditional Methods. CIPP rehabilitation processes conceptually compete
with traditional methods of pipe rehabilitation including full replacement,
point repair and sliplining. The Company believes CIPP processes usually offer a
cost advantage over full replacement as well as the practical advantage of
avoiding excavation. In addition, CIPP processes also offer qualitatively better
rehabilitation than sliplining which may significantly reduce the diameter of
the pipe. Grouting is also undertaken in the United States, but the Company
considers grouting a short-term repair technique and not a long-term pipeline
rehabilitation solution competitive with CIPP processes. 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.
Trenchless Cured-in-Place Technologies. Over the years, the Company has
witnessed a continuing stream of entrants into the CIPP marketplace, few of
which the Company believes are able to offer the quality or technical capability
of the Company. The Company believes it remains the dominant provider of
trenchless cured-in-place pipeline rehabilitation in its Insituform licensed
territory and believes there is significant potential into the future for the
alternative CIPP processes available through its Midsouth Partners subsidiary.
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 CIPP processes over
modified sliplining techniques due to the quality and longevity of the CIPP
product, the proven performance record of the Company's CIPP process
installations over the past twenty-one years, and the broader range of design
alternatives available with CIPP processes. The Company does offer its NuPipe
product to customers in situations where, for budget restraints or other
reasons, such customers or their consulting engineers will accept a modified
sliplining technique technologically inferior to cured-in-place technology.
Other Trenchless Competition. 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 its
significant years of proven performance continues to present a significant CIPP
capability advantage over alternative trenchless products and new entrants.
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 CIPP processes compete favorably in
each of these areas with traditional replacement or repair methods. In
particular, the ability to install CIPP 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 a CIPP product against the wall
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
contractors with limited CIPP installation experience or inferior imitation
products hoping that cheap price alone might permit them to succeed against the
Company's quality and time tested CIPP rehabilitation capability. In that
segment of the market where technical risk and the lowest priced product may be
deemed "good enough," the Company is at a disadvantage and market share
participation strategically undertaken by the Company in such segment, at levels
materially below normal margins, necessarily dilutes the Company's overall
margin performance. Conversely, in the "best value" and quality-based market
segment, the Company's quality CIPP rehabilitation capability continues to
provide a distinct advantage. While both the Federal Government and industry
routinely use best value and quality-weighted contract award criteria in
technical procurements, municipalities and local governments are often
politically reluctant to modernize from simply "low-bid" buying to "best value"
buying. In the face of mounting technical failures from awards based upon lowest
price, municipalities are also expected over time to reevaluate traditional "low
bid" award criteria - in favor of "best value" award criteria -when procuring
trenchless technology for the rehabilitation of older pipelines.
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 group
includes five 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 CIPP processes.
Insituform East relies on its Insituform process licensor, ITI, for major
research and development of its Insituform process product line. On a continuing
basis, however, the Company expends engineering efforts to improve CIPP
installation methods and design techniques for specific customer applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments to the use of
CIPP processes arising from existing or future regulations or requirements,
including those regulating the discharge of materials into the environment.
EMPLOYEES
At June 30, 1999, the Company employed 204 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 5,460 square foot facility in Cincinnati, Ohio to serve customers 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
9: Contingencies" for details concerning (a) a previously disclosed lawsuit
pending in the Superior Court of the District of Columbia, (b) a previously
disclosed lawsuit filed in the U.S. District Court for the Southern District of
Texas, Houston Division, and (c) settlement of litigation and arbitration with
Insituform Technologies, Inc. over Midsouth Partners.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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, 1999 High Low
------------------------------- ---- ---
1st Quarter 9 5/8 7 5/8
2nd Quarter 8 1/4 7 1/8
3rd Quarter 8 1/8 6 3/8
4th Quarter 7 1/8 5 7/8
Fiscal Year Ended June 30, 1998 High Low
------------------------------- ---- ---
1st Quarter 13 1/4 8 7/8
2nd Quarter 14 8 3/4
3rd Quarter 12 3/4 9 1/4
4th Quarter 10 7 3/4
The quotations in the above table represent prices between dealers,
without retail mark-ups, markdowns 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 17, 1999, the approximate number of shareholders of
record of each class of common equity of CERBCO was as follows:
Common Stock 285
Class B Common Stock 119
(c) Dividends
On June 11, 1999, the Company declared a regular cash dividend of ten
cents per share, both on its shares of Common Stock and its shares of Class B
Common Stock, payable July 15, 1999 to its shareholders of record as of the
close of business on June 30, 1999. On June 16, 1998, the Company declared a
regular cash dividend of ten cents per share, both on its shares of Common Stock
and its shares of Class B Common Stock, payable July 15, 1998 to its
shareholders of record as of the close of business on June 30, 1998. 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.
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.
<TABLE>
(in thousands, except per share information and return on equity amounts)
STATEMENT OF OPERATIONS INFORMATION
<CAPTION>
Years ended June 30
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 23,315 $ 23,891 $ 26,542 $ 30,471 $ 21,594
Operating profit (loss) $ (3,605) $ (2,607) $ (1,633) $ 2,551 $ 1,529
Earnings (loss) before non-owned interests
and income taxes $ (2,362) $ (899) $ (1,243) $ 3,121 $ 2,615
Earnings (loss) before non-owned interests
in Insituform East $ (1,632) $ 127 $ (565) $ 1,389 $ 1,247
Earnings (loss) from continuing operations $ (213) $ 359 $ (199) $ 247 $ (202)
Net earnings (loss) $ (213) $ 359 $ 10,169 $ 2,055 $ 1,542
Earnings (loss) per share:
Continuing operations $ (0.14) $ 0.24 $ (0.13) $ 0.17 $ (0.13)
Net earnings (loss) $ (0.14) $ 0.24 $ 6.91 $ 1.40 $ 1.06
Weighted average number of shares 1,483 1,483 1,471 1,465 1,460
Dividends declared per share $ 0.10 $ 0.10 $ 1.55 $ 0.05 $ 0
BALANCE SHEET INFORMATION June 30
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Accounts receivable $ 6,593 $ 5,185 $ 6,691 $ 8,497 $ 6,386
Working capital $ 20,898 $ 24,004 $ 24,537 $ 17,886 $ 12,152
Total assets $ 41,353 $ 43,211 $ 51,471 $ 39,451 $ 32,980
Short-term debt $ 442 $ 285 $ 29 $ 55 $ 53
Long-term debt $ 63 $ 105 $ 139 $ 136 $ 42
Non-owned interests $ 10,262 $ 12,068 $ 13,042 $ 16,509 $ 12,367
Stockholders' equity $ 25,052 $ 25,180 $ 24,935 $ 17,002 $ 15,000
Book value per share $ 16.89 $ 16.98 $ 16.88 $ 11.58 $ 10.26
Average stockholders' equity
[Weighted average equity during year
exclusive of current earnings] $ 25,223 $ 24,878 $ 17,033 $ 15,010 $ 13,452
Return on equity
[Net earnings divided by average
stockholders' equity as defined above] -- 1.4% 59.7% 13.7% 11.5%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported net loss of -$213,274 (-$0.14 per share) on sales
of $23.3 million for the fiscal year ended June 30, 1999. In the previous fiscal
year, the Company reported net earnings of $358,790 ($0.24 per share) on sales
of $23.9 million. In fiscal year 1997, 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). The results in fiscal year 1997 included earnings from the
operations of, and a gain from the redemption of its interest in, Capitol Office
Solutions, the Company's discontinued copy machine products and services
segment.
The Company attributed its unfavorable results for the fiscal year
ended June 30, 1999 to the unfavorable results of Insituform East, the Company's
majority-controlled subsidiary and only remaining operating segment. Insituform
East recognized a consolidated net loss of -$1,115,534 on sales of $23.3
million, contributing a loss of -$389,832 to CERBCO in fiscal year 1999.
Insituform East attributed its unfavorable results in fiscal year 1999 to the
acceptance by Midsouth Partners, its majority-controlled subsidiary partnership,
of additional job completion costs on several incomplete projects, costs
incurred in connection with litigation initiated by Insituform Technologies,
Inc. against Insituform East and Midsouth Partners, and an increase in
discounted sales performed by Insituform East and its wholly-owned subsidiaries
(collectively, "East"). The Company attributed its positive net earnings for the
fiscal year ended June 30, 1998 primarily to the parent company's short-term
investment earnings. Insituform East recognized a consolidated net loss of
- -$331,907 on sales of $23.9 million, contributing a loss of -$108,453 to CERBCO,
in fiscal year 1998. The operations of East produced positive operating results
in fiscal year 1998 due to the favorable impact of the Perry Nuclear project in
the first quarter of the fiscal year, which more than offset the impact of
reduced sales volume during the rest of the year. However, Midsouth Partners
experienced significantly reduced margins throughout the year, producing
contributory losses that more than offset East's modestly favorable results.
Insituform East recognized a consolidated net loss of -$543,646 on sales of
$26.5 million, contributing a loss of -$177,641 to CERBCO, in fiscal year 1997.
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 and the curtailment of further legal costs as a result of the
Midsouth Settlement Agreement effective July 20, 1999, the Company presently
anticipates modest but positive operating results for Insituform East for the
first quarter of fiscal year 2000. A combination of additional sales at normal
margins and increased production levels will be required to sustain positive
operating results for Insituform East for the remaining quarters of the fiscal
year. Income from the Company's non-operating activities presently is
anticipated to approximate the normal levels of its holding company expenses
into the future; accordingly, absent unusual items, the Company's future results
are anticipated substantially to parallel the Company's approximate 35%
participation in the future results of Insituform East.
The principal factor affecting the Company's future performance remains
the volatility of Insituform East's earnings as a function of sales volume at
normal margins. Accordingly, because a substantial portion of Insituform East's
costs are semi-fixed in nature, 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
contractors with limited cured-in-place pipe ("CIPP") installation experience or
inferior imitation products hoping that cheap price alone might permit them to
succeed against Insituform East's quality and time tested CIPP rehabilitation
capability. In that segment of the market where technical risk and the lowest
priced product may be deemed "good enough," the Company is at a disadvantage and
market share participation strategically undertaken by the Company in such
segment, at levels materially below normal margins, necessarily dilutes the
Company's overall margin performance. Conversely, in the "best value" and
quality-based market segment, the Company's quality CIPP rehabilitation
capability continues to provide a distinct advantage. While both the Federal
Government and industry routinely use best value and quality-weighted contract
award criteria in technical procurements, municipalities and local governments
are often politically reluctant to modernize from simply "low-bid" buying to
"best value" buying. In the face of mounting technical failures from awards
based upon lowest price, municipalities are also expected over time to
reevaluate traditional "low bid" award criteria - in favor of "best value" award
criteria -when procuring trenchless technology for the rehabilitation of older
pipelines.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain items of expense and earnings or loss bear to the sales
of CERBCO and the percentage increases or decreases in the dollar amounts of
each item from period to period:
<TABLE>
<CAPTION>
Percentage Relationship to Revenues Period to Period Changes
Years ended June 30 Years ended June 30
1999 1998
1999 1998 1997 vs 1998 vs 1997
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% (2.4%) (10.0%)
----- ----- -----
Costs and Expenses:
Cost of sales 92.7 88.7 84.5 2.0 (5.5)
Selling, general and administrative expenses 22.7 22.2 21.7 (0.1) (7.7)
------ ------ ------
Total Costs and Expenses 115.4 110.9 106.2 1.6 (5.9)
----- ----- -----
Operating Loss (15.4) (10.9) (6.2) (38.3) (59.7)
Investment Income 3.7 4.3 1.0 (16.1) 300.1
Interest Expense (0.1) (0.3) (0.1) (30.5) 51.7
Other Income - net 1.7 3.1 0.6 (43.4) 329.0
------- ------- -------
Loss Before Non-Owned Interests
and Income Taxes (10.1) (3.8) (4.7) (162.8) 27.7
Non-Owned Interest in Midsouth Partners (3.1) (4.3) 0.7 28.8 (622.8)
------- ------- -------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (7.0) 0.5 (5.4) (1,381.6) N/A
Credit for Income Taxes (3.0) (0.0) (3.3) (8,562.5) 99.1
------- -------- -------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (4.0) 0.5 (2.1) (7,938.1) N/A
Non-Owned Interests in Insituform East 3.1 1.0 1.3 (224.8) 38.9
------- ------- -------
Earnings (Loss) from Continuing Operations (0.9) 1.5 (0.8) (1,594.4) N/A
Discontinued Operations 0.0 0.0 39.1 0.0 (100.0)
------- ------- ------
Net Earnings (Loss) (0.9%) 1.5% 38.3% (1,594.4) (96.5)
======== ======= ======
</TABLE>
1999 vs. 1998
Consolidated sales decreased $0.6 million (-2%) in fiscal year 1999
primarily as a result of significant revenues from the Perry Nuclear project
recognized during the first quarter of fiscal year 1998. East's sales decreased
3% in fiscal year 1999; Midsouth Partners' sales decreased 1%.
Consolidated operating results decreased $1.0 million (-38%) from an
operating loss of -$2.6 million in 1998 to an operating loss of -$3.6 million in
1999. Insituform East's gross profit margin decreased from 11% to 7% due
primarily to Midsouth Partners' acceptance of additional job completion costs on
several incomplete projects and an increase in discounted sales performed by
East. Insituform East's selling, general and administrative expenses decreased
$0.1 million in fiscal year 1999, primarily as a result of reduced costs to
support decreased production activities more than offsetting additional legal
and arbitration costs associated with the future of Midsouth Partners. The
parent company's unallocated general corporate expenses increased $0.1 million,
primarily as a result of increased fees for legal counsel in connection with
preparation of proxy materials for the annual stockholders' meeting.
1998 vs. 1997
Consolidated sales decreased $2.7 million (-10%) in fiscal year 1998
primarily as a result of reduced workable backlog levels experienced during the
last three quarters of the fiscal year. East's sales decreased 9% in fiscal year
1998; Midsouth Partners' sales decreased 12%.
Consolidated operating results decreased $1.0 million (-60%) from an
operating loss of -$1.6 million in 1997 to an operating loss of -$2.6 million in
1998. Insituform East's gross profit margin decreased from 16% to 11% due
primarily to reduced margins on work performed by Midsouth Partners more than
offsetting improved margins recognized by East. Improved East margins in 1998
were due in part to completion of the Perry Nuclear Project and a mix of work
that included a reduced volume of discounted work and work subcontracted to
others. Reduced margins for Midsouth Partners were due primarily to both
discounted sales and performance inefficiencies. Insituform East's selling,
general and administrative expenses decreased $0.4 million (-9%) in fiscal year
1998, primarily as a result of reduced legal expenses and lower costs to support
reduced production activities. Additional legal costs were incurred during
fiscal year 1997 in connection with the Inliner U.S.A./CAT Contracting antitrust
lawsuit. The parent company's unallocated general corporate expenses were down
slightly from the previous year, as decreased legal expenses were largely offset
by increased salary expense.
Investment income increased $0.8 million (300%) as a result of interest
earned on short-term investment of cash realized from the sale of the Company's
interest in Capitol Office Solutions on June 30, 1997. Other income increased
$0.6 million (329%) primarily as a result of the payment of damages to CERBCO in
connection with the Delaware Action.
Earnings from discontinued operations in fiscal year 1997 resulted from
the then operations of Capitol Office Solutions.
Liquidity and Capital Resources
Liquidity may be defined as the Company's ability to mobilize cash.
Cash and cash equivalents decreased $3.3 million in fiscal year 1999 due
primarily to capital expenditures and an increase in accounts receivable. Cash
and cash equivalents decreased $6.7 million in fiscal year 1998 due primarily to
payment of income taxes on the gain resulting from the sale of Capitol Office
Solutions and cash dividends to stockholders. Cash and cash equivalents
increased $16.8 million in fiscal year 1997 due primarily to the sale of the
Company's investment in Capitol Office Solutions.
The Company's operating activities used approximately $0.3 million and
$2.7 million in cash in fiscal years 1999 and 1998, respectively, and provided
approximately $4.6 million in cash during fiscal year 1997.
Net cash used in investing activities was approximately $3.0 million
and $1.7 million in fiscal years 1999 and 1998, 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 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
which more than offset capital expenditures by Insituform East in that year.
Net cash used in financing activities was $33 thousand, $2.3 million
and $0.3 million in fiscal years 1999, 1998 and 1997, respectively. During
fiscal year 1999, CERBCO paid regular cash dividends declared for fiscal year
1998. During fiscal year 1998, CERBCO and Insituform East each paid regular cash
dividends declared for fiscal year 1997 and CERBCO paid special cash dividends
declared in connection with the sale of Capitol Office Solutions on June 30,
1997. During fiscal year 1997, CERBCO and Insituform East paid regular cash
dividends declared for fiscal year 1996.
Although the Company experienced a $3.3 million decrease in cash during
fiscal year 1999, its liquidity remained strong with working capital of
approximately $20.9 million and a current ratio of 5.2 to 1 at June 30, 1999.
The Company anticipates that expanding production capabilities will require
additional capital expenditures. CERBCO believes that Insituform East's cash
flow from future operations, existing working capital and borrowing potential
against unencumbered assets will be sufficient to finance the cash requirements
of future capital expenditures. The parent holding company, CERBCO, has cash and
temporary investments in excess of $16 million which, pending longer term
investment, it believes are more than adequate to meet its own cash flow
requirements and the temporary requirements of Insituform East in the
foreseeable future.
As previously disclosed, the Company may purchase additional shares of
Common Stock of Insituform East. The Company expects that any such purchases
would be made in open market transactions, at the then-prevailing market price,
and executed through brokers. Any such purchases will require use of the
Company's working capital.
Year 2000 Issues
The inability of present computerized systems to process dates
correctly beyond December 31, 1999 and the potential impact on businesses and
governments in the future are generally referred to as "Year 2000" issues.
The Company has implemented plans to address Year 2000 issues. Primary
areas of focus include the Company's information technology systems, the
Company's non-information technology systems, the Year 2000 readiness of the
Company's vendors and suppliers and the Year 2000 readiness of the Company's
major customers. Because the Company's primary products and services neither
include nor rely upon computerized components, the Company believes that there
are no additional contingencies associated with actual or implied warranties
related to its products and services resulting from Year 2000 issues.
With respect to the Company's information technology systems, the
Company's primary accounting and information process system is Year 2000 ready
and will recognize years 2000 through 2029 in the proper century. The Company's
preliminary assessment of supporting information systems is that these systems
either are Year 2000 ready, can be modified to become Year 2000 ready, or would
not have a significant impact on either the primary accounting and information
system or the Company's operating activities should non-compliant systems not be
properly modified. Vendor-supplied modifications for supporting information
systems were implemented and tested prior to June 30, 1999, and are believed to
be Year 2000 ready.
With respect to the Company's non-information technology systems, the
Company is dependent on information from vendors and suppliers in assessing and
evaluating these systems. As potential Year 2000 issues were identified during
the preliminary assessment stage, implementation plans were developed and
executed. The Company initiated and completed corrective action for its office
telephone system and headquarters facility security system, two systems that
were identified as not being Year 2000 ready.
With respect to the Company's suppliers and customers, the Company has
initiated preliminary correspondence with selected critical suppliers and
customers. Responses received to date indicate that responding suppliers and
customers either are currently Year 2000 ready or expect to be Year 2000 ready
by December 31, 1999. The Company will continue to seek to obtain responses from
suppliers and customers who have not as yet responded to inquiries and is
monitoring Year 2000 readiness from respondents not as yet Year 2000 ready.
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $50,000. This estimate is based on presently available
information and may require future reassessment. Specifically, this estimate
would change if, after receipt of information from key suppliers or customers, a
modified contingency plan required development and implementation. The Company
has incurred $25,000 in implementation costs through June 30, 1999.
There can be no assurances that the Company's Year 2000 Plan will be
successful. The Company is dependent on vendors to identify and correct Year
2000 issues related to the Company's utilities and equipment using computerized
components. In addition, if key vendors fail to provide materials critical to
the Company's operations, or with sufficient electrical power or other
utilities, or if transportation of the Company's personnel and equipment is
seriously impeded, then any such failure or impedance could have a material
adverse effect on the operational performance and financial condition of the
Company.
In addition, if major municipal, industrial or federal government
customers are seriously affected, directly or indirectly, by Year 200 issues
such that pipeline rehabilitation programs are delayed or abandoned, this too
could have a material adverse effect on the operational performance and
financial condition of the Company.
The Company established a contingency plan, effective June 30, 1999,
based primarily on potential actions that would be required if key vendors or
customers are unable to address and resolve Year 2000 issues that would directly
or indirectly impact the Company's ability to conduct normal business operations
in the year 2000 and beyond. Specifically, the Company has identified potential
alternate vendors for critical installation materials, tube and resin, in case
primary tube and resin suppliers fail to provide materials critical to the
Company's operations. In addition, the Company intends to rely on the geographic
separation of its operations facilities and reallocate resources as necessary
should vendors fail to supply sufficient electrical power or other utilities to
an operations facility, or if transportation of the Company's personnel and
equipment is seriously impeded in a particular geographic area.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
McLean, Virginia
September 23, 1999
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended June 30
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Sales $ 23,315,198 $ 23,891,215 $ 26,541,542
---------------- ----------------- ----------------
Costs and Expenses:
Cost of sales 21,617,623 21,190,803 22,422,831
Selling, general and administrative expenses 5,302,679 5,307,431 5,751,328
---------------- ----------------- ----------------
Total Costs and Expenses 26,920,302 26,498,234 28,174,159
---------------- ----------------- ----------------
Operating Loss (3,605,104) (2,607,019) (1,632,617)
Investment Income 870,552 1,037,186 258,947
Interest Expense (42,043) (60,489) (39,871)
Other Income - net 414,155 731,256 170,469
---------------- ----------------- ----------------
Loss Before Non-Owned Interests and Income Taxes (2,362,440) (899,066) (1,243,072)
Non-Owned Interest in Pretax Earnings (Loss) of
Midsouth Partners (730,464) (1,026,402) 196,329
---------------- ----------------- ----------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. and Income Taxes (1,631,976) 127,336 (1,439,401)
Credit for Income Taxes (693,000) (8,000) (874,000)
---------------- ----------------- ----------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East, Inc. (938,976) 135,336 (565,401)
Non-Owned Interests in Loss of Insituform East, Inc. (725,702) (223,454) (366,005)
---------------- ----------------- ----------------
Earnings (Loss) from Continuing Operations (213,274) 358,790 (199,396)
Discontinued Operations:
Earnings from discontinued operations of copier
machine products and services segment 0 0 2,166,894
Gain on disposal of copier machine products and
services segment - net of income taxes of 0 0 8,201,812
$6,230,000
---------------- ----------------- ----------------
Total Discontinued Operations 0 0 10,368,706
================ ================= ================
NET EARNINGS (LOSS) $ (213,274) $ 358,790 $ 10,169,310
================ ================= ================
Basic Earnings (Loss) per Share of Common Stock:
Earnings (loss) from continuing operations $ (0.14) $ 0.24 $ (0.13)
Earnings from discontinued operations 0.00 0.00 1.47
Gain on disposal 0.00 0.00 5.57
================ ================= ================
Basic Earnings (Loss) per Share $ (0.14) $ 0.24 $ 6.91
================ ================= ================
Diluted Earnings (Loss) per Share of Common Stock:
Earnings (loss) from continuing operations $ (0.14) $ 0.24 $ (0.13)
Earnings from discontinued operations 0.00 0.00 1.47
Gain on disposal 0.00 0.00 5.57
================ ================= ================
Diluted Earnings (Loss) per Share $ $ $
(0.14) 0.24 6.91
================ ================= ================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
----------------------------------------------
1999 1998
----------------- -----------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 17,050,119 $ 20,405,039
Accounts receivable 6,592,913 5,185,047
Inventories 1,273,402 1,381,861
Prepaid and refundable taxes 550,453 948,486
Prepaid expenses and other 339,928 420,931
-----------------
-----------------
Total Current Assets 25,806,815 28,341,364
----------------- -----------------
Property, Plant and Equipment:
Land and improvements 2,018,587 2,018,587
Buildings and improvements 5,880,498 5,845,185
Vehicles and production equipment 13,303,716 11,853,458
Small tools, radios and machine shop equipment 4,466,896 4,545,414
Office furniture and equipment 1,274,822 1,178,939
----------------- -----------------
26,944,519 25,441,583
Less accumulated depreciation and amortization (15,432,983) (14,245,135)
-----------------
-----------------
Total Property, Plant and Equipment 11,511,536 11,196,448
----------------- -----------------
Other Assets:
Excess of acquisition cost over value of net assets
acquired - net of accumulated amortization of
$1,253,580 in 1999 and $1,165,712 in 1998 1,998,822 2,320,640
Cash surrender value of SERP life insurance 1,730,964 1,230,255
Deposits and other 70,489 122,479
----------------- -----------------
Total Other Assets 3,800,275 3,673,374
----------------- -----------------
Total Assets $ 41,118,626 $ 43,211,186
================= =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
-----------------------------------------------
1999 1998
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Loans to Midsouth Partners from non-owned interests $ 400,000 $ 250,000
Accounts payable and accrued liabilities 2,958,136 2,701,678
Income taxes payable 1,508,353 1,350,825
Current portion of capital lease obligations 42,167 34,621
----------------- -----------------
Total Current Liabilities 4,908,656 4,337,124
----------------- -----------------
Long-Term Liabilities:
Capital lease obligations (less current portion shown above) 62,662 104,829
Deferred income taxes 219,000 915,000
Accrued SERP liability 847,560 605,973
-----------------
-----------------
Total Long-Term Liabilities 1,129,222 1,625,802
----------------- -----------------
Total Liabilities 6,037,878 5,962,926
----------------- -----------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 10,262,319 12,068,262
----------------- -----------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,189,476 shares (at June 30, 118,947
1999)
Issued and outstanding: 1,186,976 shares (at June 30, 118,697
1998)
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 293,480 shares (at June 30, 1999) 29,348
Issued and outstanding: 295,980 shares (at June 30, 1998) 29,598
Additional paid-in capital 7,527,278 7,527,278
Retained earnings 17,142,856 17,504,425
----------------- -----------------
Total Stockholders' Equity 24,818,429 25,179,998
================= =================
Total Liabilities and Stockholders' Equity $ 41,118,626 $ 43,211,186
================= =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 and 1997
<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>
BALANCE - JULY 1, 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
Change in ownership interest
in subsidiary 0 0 0 0 25,832 0 25,832
Dividends declared 0 0 0 0 0 (2,298,282) (2,298,282)
---------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1997 1,180,601 118,060 296,355 29,635 7,493,378 17,293,931 24,935,004
Net earnings 0 0 0 0 0 358,790 358,790
Issuance of stock pursuant to
exercise of stock options 6,000 600 0 0 33,900 0 34,500
Conversion of Class B stock
into Common stock 375 37 (375) (37) 0 0 0
Dividends declared 0 0 0 0 0 (148,296) (148,296)
---------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1998 1,186,976 118,697 295,980 29,598 7,527,278 17,504,425 25,179,998
Net loss 0 0 0 0 0 (213,274) (213,274)
Conversion of Class B stock
into Common Stock 2,500 250 (2,500) (250) 0 0 0
Dividends declared 0 0 0 0 0 (148,295) (148,295)
---------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 1999 1,189,476 $118,947 293,480 $29,348 $7,527,278 $17,142,856 $24,818,429
=============================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended June 30
1999 1998 1997
--------------- --------------- ---------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Earnings (loss) from continuing operations $ (213,274) $ 358,790 $ (199,396)
Earnings from discontinued operations 0 0 10,368,706
--------------- --------------- ---------------
Net earnings (loss) (213,274) 358,790 10,169,310
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operations:
Depreciation and amortization 2,211,811 2,209,231 2,142,711
Gain on sale of Capitol Office Solutions included in earnings
from discontinued operations 0 0 (8,201,812)
Amounts attributable to non-owned interests (1,456,166) (1,249,856) 913,771
Deferred income taxes (696,000) (159,000) 256,000
(Increase) decrease in other assets 17,990 358 (447)
Increase in SERP liability 241,587 165,023 263,995
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,407,866) 1,591,684 (218,805)
(Increase) decrease in inventories 108,459 156,156 (55,063)
(Increase) decrease in other current assets 479,036 (303,973) (640,025)
Increase (decrease) in accounts payable and accrued 256,458 (978,703) 1,127,014
expenses
Increase (decrease) in income taxes payable 157,528 (4,453,899) (1,198,658)
Increase in deferred revenue 0 0 4,202
--------------- --------------- ---------------
Net Cash Provided by (Used in) Operating Activities (300,437) (2,664,189) 4,562,193
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Capital expenditures (2,433,828) (1,704,188) (2,629,247)
Disposal of equipment - net 28,797 170,950 28,529
Proceeds from sale of Capitol Office Solutions - net 0 0 15,652,845
Increase in investment in Insituform East (115,827) 0 (85,938)
Cash contributions to Midsouth Partners by non-owned interests 0 276,000 0
Cash distribution from Midsouth Partners to non-owned interests 0 0 (101,200)
Increase in cash surrender value of life insurance (500,709) (451,214) (280,067)
--------------- --------------- ---------------
Net Cash Provided by (Used in) Investing Activities (3,021,567) (1,708,452) 12,584,922
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit and long-term borrowings 0 1,800,000 800,000
Principal payments on revolving lines of credit, capital lease
obligations and long-term borrowings (34,621) (1,828,538) (835,260)
Loans to Midsouth Partners from non-owned interests 400,000 250,000 0
Repayment of loans to Midsouth Partners from non-owned interests (250,000) 0 0
Dividends paid (148,295) (2,559,694) (301,042)
Proceeds from exercise of stock options 0 34,500 36,375
--------------- --------------- ---------------
Net Cash Used in Financing Activities (32,916) (2,303,732) (299,927)
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,354,920) (6,676,373) 16,847,188
Cash and Cash Equivalents at Beginning of Year 20,405,039 27,081,412 10,234,224
=============== =============== ===============
Cash and Cash Equivalents at End of Year $ 17,050,119 $ 20,405,039 $ 27,081,412
=============== =============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 85,013 $ 60,489 $ 39,871
Income taxes paid (refunded) $ (552,561) $ 4,739,513 $ 313,854
Supplemental disclosure of non-cash investing and financing activities:
Additions to capital leases $ 0 $ 0 $ 58,543
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
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, which is 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. (see Note 5: Discontinued Operations). All significant intercompany
balances and transactions have been eliminated in consolidation.
Business Operations
CERBCO is a parent holding company with a controlling interest in one
principal subsidiary. Insituform East and its subsidiaries are engaged in the
trenchless rehabilitation of underground sewers and other pipeline using
cured-in-place pipe ("CIPP") rehabilitation processes to produce a
shape-conforming "pipe-within-a-pipe." Since 1978, Insituform East has performed
work in six Mid-Atlantic states and the District of Columbia using the patented
Insituform(R) process under territorially exclusive sublicense agreements as
explained in Note 8: Commitments. Utilizing other trenchless CIPP processes,
Insituform East's wholly-owned subsidiary, Midsouth Partners, operates from and
after July 20, 1999 substantially without geographic restriction.
As a result of the disposal of its interest in Capitol, CERBCO
considers itself one operating segment.
Revenue Recognition
The Company recognizes revenue under contracts to rehabilitate pipeline
sections using the units of completion method. Installation of CIPP products 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.
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 (determined by the
first-in, first-out method) or market. Substantially all inventories consist of
raw materials utilized in the Insituform process.
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 $1,028,000, $742,000 and $984,000 in fiscal years 1999, 1998 and
1997, 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, 1999.
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
income tax purposes; timing of the payment of compensated absences; and timing
of the recognition of the results of operations of the Company's investment in
Midsouth Partners (see Note 4: Investment in Midsouth Partners).
Insituform East files separate federal and state tax returns, and its
provision is combined with CERBCO's consolidated provision for financial
reporting purposes.
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:
1999 1998
---- ----
Due from municipal and commercial customers $6,514,843 $5,134,644
Miscellaneous 78,070 50,403
---------- ----------
6,592,913 5,185,047
Less: Allowance for doubtful accounts 0 0
---------- ----------
$6,592,913 $5,185,047
========== ==========
3. Equity in Insituform East
At June 30, 1999, CERBCO beneficially held 1,226,400 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 30.2% of the Common Stock, 99.5%
of the Class B Common Stock, 34.9% of the total equity and 59.5% of the total
voting power of all outstanding classes of Insituform East stock. At June 30,
1998 and 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. Holders of Class B Common
Stock, voting separately as a class, have the right to elect the remaining
members of the Insituform East 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.
During the year ended June 30, 1999, CERBCO acquired 98,900 shares of
Insituform East Common Stock for $115,827. The difference between the cost of
the stock and the net book value thereof, $233,950, has been credited to excess
of acquisition cost over value of net assets acquired.
From time to time, Insituform East issues additional shares of stock as
a result of stock dividends and exercised stock options. Changes in capital
structure resulting from such additional stock issues decrease CERBCO's equity
ownership. No additional shares were issued in 1999, 1998 or 1997. If all the
options and warrants outstanding at June 30, 1999 were exercised, the resulting
percentages of CERBCO's equity ownership and total voting power would be 31.2%
and 55.4%, 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 1999, 1998, or
1997.
4. Investment in Midsouth Partners
CERBCO's consolidated financial statements as of June 30, 1999, 1998
and 1997 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 was the exclusive licensee for the Insituform
process and NuPipe process in Tennessee, Kentucky (excluding Boone, Kenton and
Campbell counties) and northern Mississippi from December 2, 1985 through July
20, 1999. The Partnership's general partners at June 30, 1999 were Insitu, Inc.,
a wholly-owned subsidiary of Insituform East; Insituform Technologies, Inc.
("ITI"); and Insituform Southwest, Inc., an affiliate of ITI.
Management and conduct of the business of Midsouth Partners is vested
in a Management Committee. At June 30, 1999, the seven-member Partnership
Management Committee consisted of four Insitu, Inc. representatives, one ITI
representative, and one Insituform Southwest, Inc. representative. The seventh
Committee representative remained disputed at June 30, 1999. 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 ITI's predecessor in interest, E-Midsouth, Inc.,
granted Insitu, Inc. the unilateral right to appoint an additional Management
Committee member in place of one E-Midsouth, Inc. representative.
Partnership profits and losses were allocated through June 30, 1999 and
until July 20, 1999 to the partners as follows:
Insitu, Inc. 42.5%
Insituform Technologies, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
Insituform East and ITI had each unconditionally committed to advance
funds to Midsouth Partners, up to a maximum of $500,000 each, with interest
payable at Chase Manhattan Bank's Prime Lending Rate. These commitments which
initially extended through December 31, 1999, were cancelled effective July 20,
1999.
In March 1999, ITI gave notice of a purported termination of the
Midsouth Partners partnership, purportedly terminated Midsouth Partners'
Insituform(R) License Agreement and simultaneously commenced litigation in the
Chancery Court of Delaware to deny Midsouth Partners any rights to further
utilize cured-in-place pipe ("CIPP") rehabilitation processes as previously
practiced under such license. In April 1999, Midsouth Partners responded to the
Delaware Chancery Court litigation and filed a demand for arbitration with the
American Arbitration Association.
Insituform East subsequently settled its disputes with ITI concerning
Midsouth Partners under the terms of an agreement reached July 20, 1999 (the
"Midsouth Settlement Agreement") and actions before the Delaware Chancery Court
and the American Arbitration Association were dismissed. Under the terms of the
Midsouth Settlement Agreement, a wholly-owned subsidiary of Insituform East
purchased ITI's interests in the Midsouth Partners partnership at book value and
Midsouth Partners remained entitled to continue the business of the partnership
under its present name. The Insituform(R) License Agreement and its requirement
to pay royalties were relinquished under the settlement, henceforth permitting
direct competition between ITI and Midsouth Partners. The Midsouth Settlement
Agreement expressly provides that Midsouth Partners may utilize processes other
than the Insituform process to perform pipe rehabilitation services, and
Midsouth Partners also obtained a royalty-free non-exclusive right, without
limitation in time and within the partnership's previously licensed territory,
to continued use of the cured-in-place pipe processes, technique and inventions
that it formerly practiced pursuant to its since-terminated Insituform(R)
License Agreement as the same existed on July 20, 1999.
5. 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 was subject to formula adjustment based upon June 30, 1997
audited financial statements. It was ultimately determined that there was no
adjustment to the redemption price. CERBCO's share of Capitol's operating
results for the fiscal year ended June 30, 1997 is shown separately in the
accompanying consolidated statement of earnings as earnings from discontinued
operations. Capitol's sales revenues of $23,552,754 for the fiscal year ended
June 30, 1997 is not included in sales in the accompanying consolidated
statements of earnings.
6. Loans Payable
Insituform East maintains a $3,000,000 intercompany line of credit
facility with CERBCO. Loans under this facility are unsecured, due on demand,
with interest payable monthly at the commercial bank prime lending rate. The
facility, which is available for an indefinite period, was increased to
$4,500,000 on August 12, 1999 in connection with Insituform East's acquisition
of the remaining partnership interests in Midsouth Partners. At June 30, 1999,
Insituform East had $1.8 million outstanding under this agreement.
Insituform East maintained a $3,000,000 revolving line of credit
facility with a commercial bank through February 28, 1999. Due to a change in
loan terms sought by the bank, Insituform East let this facility lapse on its
expiration date.
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
1999 1998
---- ----
Accounts payable $1,448,725 $1,154,576
Accrued compensation and related expenses 1,361,115 1,398,806
Dividends payable 148,296 148,296
---------- ----------
$2,958,136 $2,701,678
========== ==========
8. 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 $163,000, $452,000 and
$499,000 for the years ended June 30, 1999, 1998 and 1997, respectively. In
addition, the Company obtains certain mobile production equipment under
long-term capital leases. The net book value of equipment under capital lease at
June 30, 1999 is approximately $68,000. Minimum future rental commitments under
long-term capital and operating leases in effect at June 30, 1999, are as
follows:
Years Ending Capital Operating
June 30 Leases Leases
2000 $61,080 $ 64,710
2001 39,000 64,710
2002 34,125 64,710
2003 6,500 26,514
2004 0 15,361
2005 and thereafter 0 0
------- ---------
Total Minimum Payments 140,705 $236,005
========
Less: Interest 35,876
-------
Present Value of Minimum Payments 104,829
Less: Current Portion 42,167
--------
Long-term Capital Lease Obligations $62,662
=======
Insituform East's CIPP rehabilitation using the Insituform process is
performed under six sublicense agreements with ITI. These sublicenses grant
Insituform East the right to perform the Insituform process in Maryland,
Virginia, Delaware, the District of Columbia, Pennsylvania, Ohio, West Virginia,
and three counties of Kentucky. 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 specify that a royalty equal to 8% of the gross contract
price of all contracts performed utilizing the process, less certain fees, be
paid to ITI. The total royalty expense was approximately $1,245,000, $1,410,000
and $1,428,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Midsouth Partners entered into a sublicense agreement with ITI which
granted Midsouth Partners the right to perform the Insituform process in
Tennessee, most of Kentucky and northern Mississippi under terms similar to
Insituform East's sublicense agreements discussed above. In connection with the
Midsouth Settlement Agreement, Midsouth Partners' Insituform(R) License
Agreement and its requirement to pay royalties were relinquished effective July
20, 1999.
Insituform East 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. Insituform East 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.
Midsouth Partners entered into a license agreement with NuPipe, Inc.
for the sale and installation of pre-formed thermoplastic pipe under the NuPipe
process and trademark in Tennessee, most of Kentucky and northern Mississippi
under terms similar to Insituform East's license agreement discussed above. In
connection with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe
License Agreement and its requirement to pay royalties were relinquished
effective July 20, 1999.
On December 29, 1997, Insituform East entered into a supply agreement
with ITI whereby Insituform East committed to purchase 90% of its Insitutube
requirements from ITI for an initial five year period from January 1, 1998 to
December 31, 2002. The agreement will automatically extend for one year periods
unless notice of termination is provided by either party six months prior to the
end of any such annual period.
Effective July 20, 1999, Midsouth Partners executed a Felt Tube Supply
Agreement with ITI for the purchase of felt tubes to be used in CIPP
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement, with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
9. Contingencies
As previously reported by the Company, in March 1990, the controlling
stockholders of the Company, Messrs. George Wm. Erikson and Robert W. Erikson
(together, the "Eriksons"), executed a letter of intent and subsequently
executed four amendments thereto (collectively referred to herein as the "Letter
of Intent") with Insituform Technologies, Inc. ("ITI") to effect a sale of their
controlling interest in the Company to ITI for $6,000,000 (the "Proposed
Transaction"). The Proposed Transaction, if consummated, would have had the
effect of making ITI the controlling stockholder of the Company, and,
indirectly, of each of the Company's three direct subsidiaries at the time,
Insituform East, Capitol, and CERBERONICS. In September 1990, the Eriksons
informed the Company that the Letter of Intent had expired without consummation
of any transaction, that it would not be further extended, that negotiations had
ceased, and that the Eriksons had no further intention at the time of pursuing
the proposed sale of their controlling interest in the Company to ITI.
Also as previously reported by the Company, two stockholders commenced
a derivative lawsuit in the Delaware Court of Chancery against the Eriksons in
August, 1990, making certain claims with respect to the Proposed Transaction
(the "Delaware Action"). The Delaware Action finally was concluded on December
3, 1997, when the Delaware Supreme Court issued its order affirming the findings
of the Court of Chancery with respect to (a) the trial court's assessment of
certain damages against the Eriksons on remand from a previous appeal and (b)
the renewed petition of plaintiffs' attorneys for an award of attorneys' fees
and expenses. Those findings by the Court of Chancery had been made on remand
from the same Delaware Supreme Court after a 1996 ruling in which the Supreme
Court affirmed the Court of Chancery's holding that CERBCO had not suffered any
transactional damages with respect to the Proposed Transaction.
As previously reported by the Company, in January 1993, a lawsuit
against the partners in the law firm of Rogers & Wells and the Company, arising
out of the subject matter of the Delaware litigation, was filed in the Superior
Court of the District of Columbia (the "D.C. Complaint"). Plaintiffs were the
same two stockholders who were plaintiffs in the Delaware Action, and a former
director of the Company, and alleged that Rogers & Wells breached its duty of
loyalty and care to the Company by representing allegedly conflicting interests
of the Eriksons in the Proposed Transaction with ITI. Plaintiffs also claimed
that Rogers & Wells committed malpractice by allegedly making misrepresentations
to the Company's Board and allegedly failing to properly inform the Company's
Board. Plaintiffs claimed that the conduct of Rogers & Wells caused the Company
to lose an opportunity to sell its control of Insituform East to ITI, caused the
Company to incur substantial expense, and unjustly enriched Rogers & Wells. The
D.C. Complaint sought to recover from Rogers & Wells (i) damages in an amount
equal to all fees paid to Rogers & Wells, (ii) damages in an amount not less
than $6,000,000 for the loss of the opportunity for the Company to sell its
control of Insituform East to ITI, and (iii) punitive damages. Although the D.C.
Complaint stated that it was filed on behalf of the Company, management does not
believe that Rogers & Wells should be sued on any of the claims set forth
therein.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay of the proceedings was granted until after the Delaware
trial. Plaintiffs agreed to a stay in the Superior Court action pending the
outcome of the appeal of the outcome of the Delaware Action to the Delaware
Supreme Court and, subsequently, the stay was continued at least until such time
as the Delaware Court of Chancery ruled upon plaintiffs' pending motion for
post-remand relief. After the Delaware Supreme Court's most recent ruling on
December 3, 1997, finally affirming the Delaware Court of Chancery with respect
to such post-remand relief and a renewed petition for counsel fees and expenses,
the stay of the District of Columbia action was lifted, and plaintiffs filed an
amended D.C. Complaint. In the amended D.C. Complaint, plaintiffs assert
essentially the same conflicts of interest charges against Rogers & Wells but
shift their focus from the value of the alleged lost opportunity to the
litigation expenses incurred by the Company in the Delaware Action. Plaintiffs
now seek to recover from Rogers & Wells (i) damages in an amount equal to all
fees paid to Rogers & Wells, (ii) damages for more than $2 million in attorneys'
fees and expenses incurred by CERBCO in the Delaware Action and other
unspecified compensatory damages, and (iii) punitive damages. On March 27, 1998,
the Company filed its answer to the amended D.C. Complaint, in which it denied
all liability and asserted certain affirmative defenses. On the same day, it
filed its motion for summary judgment, together with a supporting memorandum of
law, on the grounds of collateral estoppel and res judicata. Rogers & Wells
likewise answered the amended D.C. Complaint, denying liability, and filed a
motion for summary judgment on collateral estoppel grounds. On February 18,
1999, the D.C Superior Court entered an Order denying the Company's motion on
the ground of res judicata, but granting the defendants' summary judgment motion
on the issue of punitive damages only. On April 9, 1999, the Court conducted a
hearing limited to the issues of causation, damages, and collateral estoppel
with respect to the defendants' pending motions. On May 20, 1999, the Court
denied the Company's motion for summary judgment on the ground of collateral
estoppel. The matter has now been referred to mediation in the District of
Columbia, which mediation is currently scheduled to occur on September 30, 1999.
As previously reported by the Company, on June 30, 1998, Inliner U.S.A.
and CAT Contracting, Inc. filed an antitrust suit against ITI, Insituform East,
Inc. and Insituform Gulf South, Inc. in United States District Court for the
Southern District of Texas, Houston Division, alleging violations by ITI
(including all of its subsidiary licensees), Insituform Gulf South, Inc., and
Insituform East of Sections 1 and 2 of the Sherman Act, Section 2 of the Clayton
Act, as amended by the Robinson-Patman Act, Section 43(a) of the Lanham Act,
business disparagement, tortious interference with contracts and prospective
business relationships, and unfair competition. Plaintiffs are seeking from the
defendants an unspecified amount of compensatory damages, treble damages and
attorneys' fees, as well as punitive damages of $50 million.
The Company believes Insituform East has strong defenses to, and is
vigorously contesting, this suit. On August 17,1998, Insituform East filed its
answer denying plaintiffs claims and a motion to dismiss this action. The court
has not yet taken action with respect to this motion. Plaintiff's counsel has
recently moved to withdraw from the case. Although the ultimate outcome and
consequences of the suit cannot be ascertained at this time and the results of
legal proceedings cannot be predicted with certainty, it is the opinion of the
management of Insituform East that the suit is meritless and will not have a
material adverse effect on the financial condition or the results of operations
of Insituform East.
Management believes ultimate resolution of the matters discussed above
will not have a material effect on the financial statements of CERBCO.
Accordingly, no provision for these contingencies has been reflected therein.
The Company is also involved in other contingencies, none of which could, in the
opinion of management, materially affect the Company's financial position or
results of operations.
As previously reported, on March 11, 1999, ITI filed a declaratory
action (the "Declaratory Judgment Action") in the Chancery Court of Delaware
against Insitu, Inc. ("Insitu"), a wholly-owned subsidiary of Insituform East,
and Insituform East's majority-controlled subsidiary partnership, Midsouth
Partners ("Midsouth"), seeking confirmation of ITI's ability to terminate
Midsouth's sub-license agreement (the "Midsouth Sub-License Agreement") for the
use of the Insituform process in the territory covering Tennessee and portions
of Mississippi and Kentucky (the "Midsouth Territory"). ITI also gave notice of
termination of the Midsouth Partnership effective upon the later of (i) 120 days
from the date of the notice or (ii) entry of the order requested by ITI in the
Delaware Chancery Court.
On April 1, 1999, Midsouth and Insitu answered the Declaratory Judgment
Action and counterclaimed for breaches of fiduciary and contract obligations by
ITI and for an injunction and a stay of the Declaratory Judgment Action pending
the outcome of the arbitration. At the same time, Insitu filed against ITI and
Insituform Southwest, Inc. a demand for arbitration with the American
Arbitration Association. Insitu's arbitration complaint alleged that ITI's
purported termination and dissolution of Midsouth was in violation of
partnership and fiduciary obligations owed to Insitu under applicable law and
that such action was undertaken to usurp for ITI the opportunities of Midsouth
in the Midsouth Territory.
On May 7, 1999, the Delaware Chancery Court issued a Preliminary
Injunction Decree enjoining ITI from exploiting the Insituform process in the
Midsouth Territory and ordering the arbitration commenced by Insitu to proceed.
On July 19, 1999, the American Arbitration Associated notified the parties of
its decision to set hearings in late July and agreement to go forward on the
merits of Insitu's complaint.
On July 20, 1999, ITI entered into settlement with Insituform East and
related parties concerning Midsouth Partners (the "Midsouth Settlement
Agreement"). Under terms of the Midsouth Settlement Agreement, all remaining
disputes before the Delaware Chancery Court and the American Arbitration
Association were dismissed (see Note 4: Investment in Midsouth Partners).
10. 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 1999, 1998 and 1997,
2,500 shares, 375 shares and 14,500 shares, respectively, 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.
11. Income Taxes
The provision (credit) for taxes is composed of the following (in
thousands):
1999 1998 1997
---- ---- ----
Current:
Federal $5 $ 158 $5,177
State (2) (7) (77)
----- ----- ------
Total current 3 151 5,100
----- ----- ------
Deferred:
Federal (607) (139) 223
State (89) (20) 33
----- ----- ------
Total deferred (696) (159) 256
----- ----- ------
Total provision (credit) for taxes $(693) $ (8) $5,356
===== ===== ======
The provision (credit) 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>
1999 1998 1997
---- ---- ----
Amounts % Amounts % Amounts %
<S> <C> <C> <C> <C> <C> <C>
Taxes computed at statutory rate $(552) (34) $44 34 $5,154 34
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal
income tax benefit (expense) (112) (7) (45) (35) (59) (1)
Non-taxable income (80) (4) (54) (42) 0 0
Nondeductible items 51 3 47 37 17 0
Other 0 0 0 0 244 2
----- --- ---- --- ------ --
Total provision for taxes $(693) (42) $(8) (6) $5,356 35
===== === ==== === ====== ==
</TABLE>
The components of the deferred tax expense (benefit) resulting from net
temporary differences are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Depreciation $ (44) $ 14 $ 80
Net operating loss carry forward (729) 0 0
Midsouth Partners operations 36 (188) (10)
Deferred compensation (4) 10 (12)
Deferred revenue 51 12 201
Other (6) (7) (3)
----- ----- ----
Total deferred taxes $(696) $(159) $256
===== ===== ====
</TABLE>
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):
1999 1998
---- ----
Depreciation $1,071 $1,115
Net operating loss carry forward (729) 0
Midsouth Partners operations (77) (113)
Deferred compensation (19) (51)
Deferred revenue 0 (15)
Other (27) (21)
------ -----
$ 219 $ 915
====== =====
12. Earnings (Loss) Per Share
Basic earnings (loss) per share data have been computed based upon the
weighted average number of common shares outstanding during each period. Diluted
earnings (loss) per share have been computed based upon the weighted average
number of common shares outstanding during the period including common stock
equivalents from dilutive stock options. The following numbers of shares have
been used in the earnings (loss) per share computations:
1999 1998 1997
---- ---- ----
Basic 1,482,956 1,482,808 1,471,178
========= ========= =========
Diluted 1,482,956 1,482,808 1,471,178
========= ========= =========
13. Retirement Benefit Plans
Employees of East, including employees of the parent company, CERBCO,
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, 1999. Contributions to the plans are determined
annually by the respective companies. During the years ended June 30, 1999, 1998
and 1997, the Company recognized profit sharing expense of approximately
$243,000, $48,000 and $276,000, respectively.
14. Supplemental Executive Retirement Plans
CERBCO has an unfunded supplemental pension plan for its three
executive officers, effected January 1, 1994. The expense for this plan was
$185,965, $165,023 and $263,995 for the fiscal years ended June 30, 1999, 1998,
and 1997, respectively. CERBCO 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. This trust is subject to the claims of
CERBCO's creditors in the event of bankruptcy or insolvency.
On January 1, 1998, Insituform East established a similar unfunded
supplemental pension plan for its three executive officers who are not otherwise
participants in the CERBCO plan. The expense for this plan was $59,673 and
$17,715 for the fiscal years ended June 30, 1999 and 1998, respectively.
On July 1, 1998, Insituform East established a trust to facilitate the
payment of benefits under the plan. Funds in the trust are invested in variable
life insurance policies on the lives of two of the three plan-covered officers.
One of the three officers did not qualify for such insurance and, therefore, any
premature death of this officer prior to retirement would result in an
accelerated recognition by Insituform East of his unaccrued plan benefits.
Assets of the trust are subject to the claims of Insituform East's creditors in
the event of bankruptcy or insolvency.
15. Stock Option Plans
During fiscal year 1987, CERBCO adopted the 1986 Directors' Stock
Option Plan. Under the terms of this plan, up to 75,000 shares of Common Stock
were reserved for the Company's Directors. All options granted under this plan
have been exercised or expired as of June 30, 1998. No further grants under this
plan are anticipated. The following is a summary of transactions for the 1986
Directors' Stock Option Plan:
Shares Under Option
1998 1997
Outstanding, beginning of year 6,000 15,000
Granted during the year 0 0
Exercised during the year (6,000) (9,000)
Expired/canceled during the year 0 0
--------- -------
Outstanding, end of year 0 6,000
========= =======
During fiscal year 1998, CERBCO adopted the 1997 Directors' Stock
Option Plan. Under the terms of this plan, up to 125,000 shares of Common Stock
have been reserved for the Company's Directors. All grants of options are made
at the market price on the date of the grant. CERBCO granted options on 20,000
shares (options on 5,000 shares to each of four directors) of CERBCO's Common
Stock on December 18, 1998 and December 19, 1997, at the option prices of $7.656
per share and $9.40625 per share, respectively, exercisable within five years of
the date of the grants. The following is a summary of transactions for the 1997
Directors' Stock Option Plan:
Shares Under Option
1999 1998
Outstanding, beginning of year 20,000 0
Granted during the year 20,000 20,000
Exercised during the year 0 0
Expired/canceled during the year 0 0
------ ------
Outstanding, end of year 40,000 20,000
====== ======
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 No. 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. Under SFAS No. 123, 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 years ended
June 30, 1999 and 1998 is as follows:
Years ended June 30
-------------------
1999 1998
---- ----
Date of grant 12/18/98 12/19/97
Option shares granted 20,000 20,000
Per share exercise price $7.66 $9.41
Fair value per option share $3.26 $4.65
The fair value of options granted during the years ended June 30, 1999
and 1998 was estimated on the date of the grants using the binomial
option-pricing model using the following assumptions:
Years ended June 30
-------------------
1999 1998
---- ----
Risk-free interest rate 4.58% 4.69%
Expected option term 5 years 5 years
Expected stock price volatility 46% 55%
Expected dividend yield 1% 1%
If compensation costs for the Company's stock option grants had been
determined using the fair value-based method of accounting per SFAS No. 123, the
Company's pro forma net earnings (loss) and pro forma basic and diluted net
earnings (loss) per share for the years ended June 30, 1999 and 1998 would be as
follows:
Years ended June 30
----------------------------
1999 1998
---- ----
Net Earnings (Loss):
As reported $(213,274) $358,790
Pro forma $(256,284) $297,384
Basic Net Earnings (Loss) Per Share:
As reported $(0.14) $0.24
Pro forma $(0.17) $0.20
Diluted Net Earnings (Loss) Per Share:
As reported $(0.14) $0.24
Pro forma $(0.17) $0.20
16. Unaudited Quarterly Financial Data
The following table provides summarized quarterly results of operations
for fiscal years 1999 and 1998 (in thousands, except per share information):
<TABLE>
<CAPTION>
Three Months Ended
1999 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Sales $6,048 $5,898 $4,993 $6,376
Gross profit (loss) 997 867 (332) 164
Earnings (loss) from continuing operations 35 (11) (142) (95)
Net earnings (loss) 35 (11) (142) (95)
Net earnings (loss) per share: 0.02 (0.01) (0.10) (0.05)
1998 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
Sales $9,148 $5,488 $4,147 $5,108
Gross profit (loss) 2,778 114 (364) 172
Earnings (loss) from continuing operations 393 36 (109) 39
Net earnings (loss) 393 36 (109) 39
Net earnings (loss) per share 0.27 0.02 (0.07) 0.02
</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 54 December 1974 1/ President
George Wm. Erikson 57 November 1975 1/ Chairman & General Counsel
Webb C. Hayes, IV 51 April 1991 None
Paul C. Kincheloe, Jr. 58 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
Name Age Position(s) Held Since
Robert W. Erikson 54 President February 1988
George Wm. Erikson 57 Chairman & General Counsel February 1988
Robert F. Hartman 52 Vice President, Secretary & Treasurer February 1988 1/
1/ Elected as Secretary in June 1991 and as Treasurer in December 1997.
Each officer holds office until his successor is elected and qualified
or until his earlier resignation or removal.
(c) Identification of Certain Significant Employees
Not applicable.
(d) Family Relationships
Mr. Robert Erikson, Director and President, 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 Secretary. He was also elected Secretary of CERBCO in June
1991 and Treasurer and Chief Financial Officer in December 1997. 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 Managing Director of Private Client Services at
Friedman, Billings, Ramsey Group, Inc. as of May 1999. He was a Director and
Vice Chairman of United Bank from June 1997 to May 1999. He was a Director and
Executive Vice President of George Mason Bankshares, Inc. and 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. Mr. Hayes holds a B.A. degree from the University of
North Carolina and an executive management degree from Columbia University
School of Business.
Mr. Kincheloe has been a practicing attorney and businessman
in Fairfax County, Virginia, since 1967. Mr. Kincheloe serves as a Director of
Insituform East and was a Director of Capitol Office Solutions until June 30,
1997. He also 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. He previously served on the Board of Herndon Federal Savings & Loan and
then First Federal Savings & Loan of Alexandria. 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.
(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
As of July 1, 1997, CERBCO is a parent holding company with a
controlling interest, through its wholly owned subsidiary, CERBERONICS, in
Insituform East ("IEI"). Prior to June 30, 1997, CERBCO also had a controlling
interest in Capitol Office Solutions, Inc. ("COS"). CERBCO officers also
participate, or participated in the case of COS prior to June 30, 1997, in the
management of one or more of these subsidiaries. The following table sets forth
information concerning the compensation paid to each of the named executive
officers of the Company and its subsidiaries for the fiscal years ended June 30,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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/ ($) ($) (#) ($) ($) 3/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Erikson 1999 CERBCO $11,475 $0 $0 $11,475 $0 5,000 $0 $0
Director & IEI 216,607 0 0 216,607 0 15,000 0 13,076
President 1/ CERBERONICS 90,640 0 0 90,640 0 0 0 0
-------- -- -- -------- -- ------ -- -------
$318,722 $0 $0 $318,722 $0 20,000 $0 $13,076
======== == == ======== == ====== == =======
1998 CERBCO $11,480 $0 $0 $11,480 $0 5,000 $0 $0
IEI 215,030 0 0 215,030 0 15,000 0 2,345
CERBERONICS 90,339 0 0 90,339 0 0 0 0
-------- -- -- -------- -- ------ -- ------
$316,849 $0 $0 $316,849 $0 20,000 $0 $2,345
======== == == ======== == ====== == ======
1997 CERBCO $11,053 $ 0 $0 $11,053 $0 0 $0 $0
IEI 208,649 0 0 208,649 0 15,000 0 11,247
COS 65,924 23,095 0 89,019 0 0 0 0
-------- ------- -- -------- -- ------ -- -------
$285,626 $23,095 $0 $308,721 $0 15,000 $0 $11,247
======== ======= == ======== == ====== == =======
George Wm. Erikson 1999 CERBCO $11,475 $0 $0 $11,475 $0 5,000 $0 $0
Director, Chairman IEI 216,607 0 0 216,607 0 15,000 0 15,476
& General Counsel 1/ CERBERONICS 90,640 0 0 90,640 0 0 0 0
-------- -- -- ------ -- - -- -------
$318,722 $0 $0 $318,722 $0 20,000 $0 $15,476
======== ======= == ======== == ====== == =======
1998 CERBCO $11,480 $0 $0 $11,480 $0 5,000 $0 $0
IEI 215,030 0 0 215,030 0 15,000 0 4,745
CERBERONICS 90,339 0 0 90,339 0 0 0 0
-------- ------- -- -------- -- ------ -- -------
$316,849 $0 $0 $316,849 $0 20,000 $0 $4,745
======== ======= == ======== == ====== == =======
1997 CERBCO $11,053 $ 0 $0 $11,053 $0 0 $0 $0
IEI 208,649 0 0 208,649 0 15,000 0 11,613
COS 65,924 23,095 0 89,019 0 0 0 0
--------- ------- -- -------- -- ------ -- -------
$285,626 $23,095 $0 $308,721 $0 15,000 $0 $11,613
======== ======= == ======== == ====== == =======
Robert F. Hartman 1999 CERBCO $8,475 $0 $0 $8,475 $0 0 $0 $0
Vice President, IEI 92,195 0 0 92,195 0 0 0 7,626
Secretary & CERBERONICS 3,000 0 0 3,000 0 0 0 0
Treasurer -------- ------- -- -------- -- ------ -- -------
$103,670 $0 $0 $103,670 $0 0 $0 $7,626
======== ======= == ======== == ====== == =======
1998 CERBCO $9,207 $0 $0 $9,207 $0 0 $0 $0
IEI 91,524 2,000 0 93,524 0 0 0 2,874
CERBERONICS 2,273 0 0 2,273 0 0 0 0
--------- ------- -- -------- -- ------ -- -------
$103,004 $2,000 $0 $105,004 $0 0 $0 $2,874
======== ======= == ======== == ====== == =======
1997 CERBCO $11,053 $0 0 $11,053 $0 0 $0 $0
IEI 88,808 0 0 88,808 0 0 0 8,010
--------- ------- -- -------- -- ------ -- -------
$99,861 $ 0 $0 $99,861 $0 0 $0 $8,010
======== ======= == ======== == ====== == =======
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.
3/ Insituform East contributions to the IEI Advantage Plan.
</TABLE>
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
SERP"). 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 executive's 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 SERP 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 SERP 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 SERP to various rules under the Employee
Retirement Income Security Act of 1974, CERBCO has established an irrevocable
trust called the CERBCO, Inc. Supplemental Executive Retirement Trust. 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 SERP 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 SERP is equal to
his final base salary as defined in and limited by the executive's agreement.
The maximum covered compensation for Messrs. Robert Erikson and George Erikson
is limited to $20,834 per month ($250,000 annually), increased 2% annually
beginning in 1993. The maximum covered compensation for Mr. Robert Hartman is
limited to $7,500 per month ($90,000 annually), increased 2% annually beginning
in 1993.
The following table sets forth information concerning vested annual
benefits as of June 30, 1999 for the executives listed in the Summary
Compensation Table covered by the CERBCO SERP:
<TABLE>
<CAPTION>
Years of Credited Current Annual Vested Vested
Name Service Under Plan Covered Compensation Percentage Annual Benefit
<S> <C> <C> <C> <C>
Robert W. Erikson 7 $ 281,541 38.89% $ 54,744
George Wm. Erikson 7 $ 281,541 48.67% $ 65,893
Robert F. Hartman 7 $ 101,355 35.00% $ 8,869
</TABLE>
CERBCO 1997 Directors' Stock Option Plan
CERBCO adopted, with stockholder approval at the 1997 Annual Meeting of
Stockholders, the CERBCO, Inc. 1997 Board of Directors' Stock Option Plan (the
"CERBCO 1997 Directors' Plan"). The purpose of this plan is to promote the
growth and general prosperity of CERBCO by permitting the Company, through the
granting of options to purchase shares of its 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 125,000 shares of Common Stock may be made subject to
options under the CERBCO 1997 Directors' Plan. Options shall be granted to all
directors of CERBCO pursuant to the terms of the plan. 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 five years from the date of grant.
The CERBCO Board of Directors administers the CERBCO 1997 Directors'
Plan and has exclusive authority to interpret, construe and implement the
provisions of the 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 1997
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 plan as
it deems necessary to carry out the purposes thereof.
The terms of the CERBCO 1997 Directors' Plan contemplated that each
director of the Company be granted an option to purchase 5,000 shares of the
Company's Common Stock each year for five years, for a total of 25,000 shares of
Common Stock per director, beginning in fiscal year 1997. On December 18, 1998,
options on a total of 20,000 shares of Common Stock were granted to directors of
the Company (options on 5,000 shares to each of four directors) at a per share
price of $7.656. No options available under the plan were exercised by directors
of the Company during fiscal year 1999.
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 1999, 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 1999 1/ as of 6/30/99
<S> <C> <C>
George Wm. Erikson, Chairman $13,076 100%
Robert W. Erikson, President $13,076 100%
Robert F. Hartman, Vice President - Administration & Secretary $ 7,296 100%
Executive Officers of Insituform East as a Group,
(6 persons, including those named above) $61,133 N/A
1/ Total contributions to employees of $276,088 include Insituform East's
contribution of $195,506 and reallocated amounts totaling $80,582 forfeited
by former participants who terminated employment with Insituform East
during fiscal year 1999.
</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. 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. During the fiscal year ended June
30, 1999, Insituform East made the following contributions for the Company's
officers:
<TABLE>
<CAPTION>
Names and Capacities in Which Contributions for Vested Percent
Cash Contributions Were Made Fiscal Year 1999 1/ as of 6/30/99
<S> <C> <C>
George Wm. Erikson, Chairman $2,400 100%
Robert W. Erikson, President $ 0 100%
Robert F. Hartman, Vice President - Administration & Secretary $ 330 100%
Executive Officers of Insituform East as a Group,
(6 persons, including those named above) $7,007 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; that is, 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). 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 11, 1998, 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 $1.1407. No options
available under this plan were exercised by directors of Insituform East during
fiscal year 1999.
OPTION/SAR GRANTS TABLE
The following table sets forth information concerning options granted
to each of the named executive officers during fiscal year 1999 under the CERBCO
1997 Directors' Plan or the IEI 1994 Directors' Plan:
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realized
Value at Assumed
Individual Grants Annual Rates of Stock
Price Appreciation
for Option Term
------------------------------------------------------------ -----------------------
Option/ % of Total Options/SARs Exercise or Expiration
Name SARs Granted to Employees in Base Date 5% ($) 10% ($)
Granted (#) Fiscal Year ($/Share)
- --------------------------- ------------- ------------------------------ ------------- ----------- --------- ---------
Robert W. Erikson
CERBCO 1997
<S> <C> <C> <C> <C> <C> <C>
Directors' Plan 5,000 25% $7.656 12/18/03 $10,576 $23,335
IEI 1994 Directors' Plan 15,000 14% $1.250 12/11/03 $ 5,180 $11,447
George Wm. Erikson
CERBCO 1997
Directors' Plan 5,000 25% $7.656 12/18/03 $10,576 $23,335
IEI 1994 Directors' Plan 15,000 14% $1.250 12/11/03 $ 5,180 $11,447
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
No option or Stock Appreciation Right grants made under the CERBCO 1997
Directors' Plan, or the IEI 1994 Directors' Plan, to any of the named executive
officers were exercised during fiscal year 1999. The following table sets forth
information concerning option or Stock Appreciation Right grants held by each of
the named executive officers under all plans as of June 30, 1999:
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<CAPTION>
Number of Unexercised Value of Unexercised in the
Options/SARs at FY-End(#) Money Options/SARs at
FY-End($)
-------------------------- -------------------------
Shares
Name Acquired on Value Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise (#) ($)
- -------------------------------- ---------------- ---------------- ------------ ------------- ----------- -------------
Robert W. Erikson
CERBCO 1997
<S> <C> <C> <C> <C> <C> <C>
Directors' Plan 0 $0 10,000 0 $ 0 $0
IEI 1994 Directors' Plan 0 $0 75,000 0 $1,640 $0
George Wm. Erikson
CERBCO 1997
Directors' Plan 0 $0 10,000 0 $ 0 $0
IEI 1994 Directors' Plan 0 $0 75,000 0 $1,640 $0
</TABLE>
REPRICING OF OPTIONS/SARs
Neither the Company nor Insituform East have adjusted or amended the
exercise price of stock options or SARs previously awarded to any of the named
executive officers during fiscal year 1999.
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
Non-officer directors of the Company are paid an annual fee of $5,000
and an attendance fee of $1,000 for each meeting of the Board of Directors, and
each committee meeting, attended in person. Meetings attended by telephone are
compensated at the rate of $200. 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 1997 Directors' Stock Option Plan,
as described under the section entitled, "Compensation Pursuant to Plans -
CERBCO, Inc. 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, respectively, participated during fiscal year
1999 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. In their capacities as
directors of this subsidiary company, they participated during fiscal year 1999
in deliberations of its Board 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 17, 1999, 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> <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
Emanon Partners, LLP Common Stock 135,500 3/ 11.4%
200 Park Avenue, Suite 3900
New York, NY
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 Form 4 filed on August 10, 1999 with the Securities and
Exchange Commission.
</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 17, 1999, 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/ 10,000 5.8%
Class B Common Stock 131,750 1/ 0 44.8%
George Wm. Erikson Common Stock 59,602 2/ 10,000 5.7%
Class B Common Stock 115,814 2/ 0 39.0%
Webb C. Hayes, IV Common Stock 4,500 10,000 1.2%
Paul C. Kincheloe, Jr. Common Stock 7,500 10,000 1.4%
All Directors and Officers as Common Stock 132,302 40,000 14.0%
a Group (5 persons Class B Common Stock 247,564 0 83.4%
including those named
above) 3/
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/ Mr. George Erikson also is the beneficial owner of 16,500 shares of Common
Stock (less than 1% of such class) of Insituform East, Incorporated, a
subsidiary of the Company. In addition, Messrs. George Erikson and Robert
Erikson each are the beneficial owners of exercisable options on 75,000 shares
of the Common Stock (approximately 1.7% of such class) of Insituform East,
Incorporated, pursuant to the Insituform East 1994 Board of Directors' Stock
Option Plans.
</TABLE>
(c) Changes in Control
There were no changes in control of the Company during the year ended
June 30, 1999.
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
In accordance with the Company's By-laws and pursuant to authorizations
by the Board of Directors, the Company made certain advancements to Mr. George
Erikson, Director, Chairman & General Counsel, and certain advancements to Mr.
Robert Erikson, Director & President (together, "the Eriksons") for their
respective legal fees and expenses which each incurred 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 9. Contingencies").
As of September 17, 1999, pursuant to such Board authorizations, the
Company expensed and advanced in total $600,482 to Mr. George Erikson and
expensed and advanced in total $600,482 to Mr. Robert Erikson.
Pending a final outcome of these legal proceedings, and as contemplated
by the Company's By-laws, the Board of Directors 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. The
legal proceedings in this suit are now completed and, accordingly, the Board of
Directors will consider the entitlement by the Eriksons to indemnification under
the Company's By-laws. 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 Operations for the Years Ended
June 30, 1999, 1998 and 1997 17
Consolidated Balance Sheets as of June 30, 1999 and 1998 18-19
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997 20
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997 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 Operations
Information for the Year Ended June 30, 1999; Balance Sheet
Information and Consolidating Elimination Entries as of
June 30, 1999, and Related Independent Auditors' Report 46-49
(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, 1999.
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 24, 1999.
/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. 24, 1999
President Principal Executive Officer
/s/ GEORGE Wm. ERIKSON
George Wm. Erikson Director, Sept. 24, 1999
Chairman & General Counsel Principal Executive Officer
/s/ ROBERT F. HARTMAN
Robert F. Hartman Principal Financial Officer,
Vice President, Secretary Principal Accounting Officer Sept. 24, 1999
& Treasurer
/s/ WEBB C. HAYES, IV
Webb C. Hayes, IV Director Sept. 24, 1999
/s/ PAUL C. KINCHELOE, JR.
Paul C. Kincheloe, Jr. Director Sept. 24, 1999
<PAGE>
Exhibits to CERBCO, Inc. Form 10-K
Exhibit 27. CERBCO, Inc. Financial Data Schedule
Exhibit 99. CERBCO, Inc. Consolidating Schedules: Statement of Operations
Information for the Year Ended June 30, 1999; Balance Sheet
Information and Consolidating Elimination Entries as of June
30, 1999, and Related Independent Auditors' Report.
Note: Exhibit 27, the Financial Data Schedule, is a
requirement by the Securities and Exchange Commission
to be submitted only with the electronic filing of
Form 10-K. Therefore, since this schedule contains
summary financial information found elsewhere in this
report, it is not included here.
<PAGE>
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, 1999 and 1998, and for each of the three years in
the period ended June 30, 1999, and have issued our report thereon dated
September 23, 1999; 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 30,1999
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
McLean, Virginia
September 23, 1999
<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-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,050
<SECURITIES> 0
<RECEIVABLES> 6,593
<ALLOWANCES> 0
<INVENTORY> 1,273
<CURRENT-ASSETS> 25,807
<PP&E> 26,945
<DEPRECIATION> 15,433
<TOTAL-ASSETS> 41,119
<CURRENT-LIABILITIES> 4,909
<BONDS> 0
<COMMON> 148
0
0
<OTHER-SE> 24,904
<TOTAL-LIABILITY-AND-EQUITY> 41,119
<SALES> 23,315
<TOTAL-REVENUES> 23,315
<CGS> 21,618
<TOTAL-COSTS> 21,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> (1,632)
<INCOME-TAX> (693)
<INCOME-CONTINUING> (213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (213)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED JUNE 30, 1999
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
<S> <C> <C> <C> <C>
Sales $ 23,315,198 $ 0 $ 0 $ 23,315,198
------------------ --------------- ----------------- -----------------
Costs and Expenses:
Cost of sales 21,617,623 0 0 21,617,623
Selling, general and administrative expenses 5,302,679 0 804,045 4,498,634
------------------ --------------- ----------------- -----------------
Total Costs and Expenses 26,920,302 0 804,045 26,116,257
------------------ --------------- ----------------- -----------------
Operating Loss (3,605,104) 0 (804,045) (2,801,059)
Investment Income 870,552 (A) (42,970) 847,772 65,750
Interest Expense (42,043) (A) 42,970 0 (85,013)
Other Income - net 414,155 0 152,831 261,324
------------------ --------------- ----------------- -----------------
Earnings (Loss) Before Non-Owned Interests
and Income Taxes (2,362,440) 0 196,558 (2,558,998)
Non-Owned Interest in Pretax Loss of
Midsouth Partners 730,464 0 0 730,464
------------------ --------------- ----------------- -----------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (1,631,976) 0 196,558 (1,828,534)
Provision (Credit) for Income Taxes (693,000) 0 20,000 (713,000)
------------------ --------------- ----------------- -----------------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (938,976) 0 176,558 (1,115,534)
Non-Owned Interests in Loss of Insituform East 725,702 (B) 725,702 0 0
------------------ --------------- ----------------- -----------------
NET EARNINGS (LOSS) $ (213,274) $ 725,702 $ 176,558 $ (1,115,534)
================== =============== ================= =================
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
JUNE 30, 1999
<CAPTION>
CERBCO, Inc. CERBCO, Inc. Insituform East,
Consolidated Eliminations Unconsolidated Incorporated
ASSETS
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $17,050,119 $ 0 $16,256,932 $ 793,187
Accounts receivable 6,592,913 0 4,478 6,588,435
Inventories 1,273,402 0 0 1,273,402
Prepaid and refundable taxes 550,453 0 456,921 93,532
Prepaid expenses and other 339,928 0 36,176 303,752
-------------- -------------- -------------- --------------
TOTAL CURRENT ASSETS 25,806,815 0 16,754,507 9,052,308
Investment in and Advances to Subsidiary:
Investment in subsidiaries 0 (C) (7,381,284) 7,381,284 0
Intercompany receivables and payables 0 0 1,811,855 (1,811,855)
Property, Plant and Equipment - net of
accumulated depreciation 11,511,536 0 86,906 11,424,630
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net 1,998,822 (C) 1,998,822 0 0
Cash surrender value of life insurance 1,730,964 0 1,657,179 73,785
Deposits and other 70,489 0 44,489 26,000
============== ============== ============== ==============
TOTAL ASSETS $41,118,626 $ (5,382,462) $27,736,220 $18,764,868
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Partners' loans to Midsouth Partners $ 400,000 $ $ 0 $ 400,000
0
Accounts payable and accrued liabilities 2,958,136 0 242,393 2,715,743
Income taxes payable 1,508,353 0 1,493,629 14,724
Current portion of capital lease obligations 42,167 0 0 42,167
--------------
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 4,908,656 0 1,736,022 3,172,634
-------------- -------------- -------------- --------------
Long-Term Liabilities:
Capital lease obligations 62,662 0 0 62,662
Deferred income taxes 219,000 0 0 219,000
Accrued SERP liability 847,560 0 791,937 55,623
-------------- -------------- -------------- --------------
TOTAL LONG-TERM LIABILITIES 1,129,222 0 791,937 337,285
-------------- -------------- -------------- --------------
TOTAL LIABILITIES 6,037,878 0 2,527,959 3,509,919
-------------- -------------- -------------- --------------
Non-Owned Interests: 10,262,319 (B)(C) 9,293,723 0 968,596
-------------- -------------- -------------- --------------
Stockholders' Equity:
Common stock 118,947 (C) (175,486) 118,947 175,486
Class B stock 29,348 (C) (11,904) 29,348 11,904
Additional paid-in capital 7,527,278 (C) (4,000,424) 7,527,278 4,000,424
Retained earnings 17,142,856 (C)(D) (11,677,984) 17,532,688 11,288,152
Treasury stock 0 (C) 1,189,613 0 (1,189,613)
-------------- -------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY 24,818,429 (14,676,185) 25,208,261 14,286,353
-------------- -------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,118,626 $ (5,382,462) $ 27,736,220 $18,764,868
============== ============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATING ELIMINATION ENTRIES
JUNE 30, 1999
<CAPTION>
(A)
<S> <C> <C>
Investment income $42,970
Interest expense $42,970
To eliminate interest expense paid by Insituform
East to CERBCO in 1999.
(B)
Non-owned interests $725,702
Non-owned interests in loss of subsidiary $725,702
To record non-owned interests in loss of Insituform
East in 1999.
(C)
Common stock $175,486
Class B stock 11,904
Additional paid-in capital 4,000,424
Retained earnings 12,403,686
Excess of acquisition cost over value of net assets acquired 1,998,822
Treasury stock $1,189,613
Non-owned interests 10,019,425
Investment in subsidiary 7,381,284
To eliminate investment in Insituform East at June 30, 1999.
(D)
Current year earnings adjustments $725,702
Retained earnings $725,702
To close out impact of eliminating entries on statement of
operations for 1999.
</TABLE>
