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, 2000
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 5, 2000, was $4,688,133.
As of September 5, 2000, 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: 189
Index to Exhibits located at page: 45
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business............................................................3
Item 2. Properties..........................................................8
Item 3. Legal Proceedings...................................................8
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..........................................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........14
Item 8. Financial Statements and Supplementary Data........................14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................14
PART III
Item 10. Directors and Executive Officers of the Registrant.................33
Item 11. Executive Compensation.............................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management.....42
Item 13. Certain Relationships and Related Transactions.....................43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...44
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND BALANCE SHEETS
Pages 16 through 18
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
CERBCO, Inc. ("CERBCO", the "Company" or "Registrant") [NASDAQ:CERB] is
a parent holding company with a controlling interest, through its wholly-owned
subsidiary, CERBERONICS, Inc. ("CERBERONICS"), in Insituform East, Incorporated
[NASDAQ:INEI] (excavationless sewer and pipeline rehabilitation).
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,
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.
Capitol Office Solutions, Inc., formerly known as Capitol Copy
Products, Inc. ("Capitol"), is in the business of selling, servicing and
providing supply products for copier and facsimile equipment in the greater
Baltimore and Washington, DC metropolitan areas. On June 30, 1997, the Company's
two-thirds majority interest in 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, 2000; Balance Sheet
Information and Consolidating Elimination Entries as of June 30, 2000" for
additional financial information pertaining to Insituform East, Incorporated.
(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(R) 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 process that it formerly practiced pursuant to its
since-terminated Insituform(R) License Agreement as the same existed on July 20,
1999.
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 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 that 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. The Company currently receives quarterly payments from ITI
equal to 0.5% of contract revenue from Insituform process installations in
Insituform East's licensed territory. The Company received quarterly payments
from ITI equal to 0.5% of contract revenues form Insituform process
installations in the states of New York, New Jersey, North Carolina, South
Carolina, Georgia and Alabama in connection with the introduction of former
Insituform process licensees to ITI.
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
process 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(R)
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 are derived from its licensor, ITI.
There are presently 76 United States patents that cover various aspects of the
Insituform process. 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 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 sales have come from state
and local government entities -- cities, counties, state agencies and regional
authorities. During the year ended June 30, 2000, a county government in the
Washington, D.C. metropolitan area, Federal government contracts (collectively),
a municipal government in Tennessee and a regional sanitary authority in
southwest Ohio accounted for 17%, 14%, 10% and 10%, respectively, of the
Company's sales. During the year ended June 30, 1999, the same county government
in the Washington, D.C. metropolitan area, Federal government contracts
(collectively) and the same 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.
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 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.
Midsouth Partners does purchase felt tube materials from suppliers other than
ITI.
REVENUE RECOGNITION AND BACKLOG
The Company recognizes revenue using the units of completion method as
pipeline sections are rehabilitated using CIPP processes. Installations are
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 was approximately $27.1 million at June 30, 2000 as compared to
$31.1 million at June 30, 1999. The twelve-month backlog at June 30, 2000 was
approximately $15.2 million as compared to $13.5 million at June 30, 1999. The
total backlog value of all uncompleted and multi-year contracts at June 30, 2000
and 1999 includes work not estimated to be released and installed within twelve
months, as well as potential work included in terms contract awards which may or
may not be fully ordered by contract expiration. While potentially helpful as a
possible trend indicator, "total" and "twelve-month" backlog figures at specific
dates are not necessarily indicative of sales and earnings for future periods
due to the irregular timing and receipt of major project awards including large,
multi-year, menu-priced contracts with estimated but uncertain order quantities
further subject to the specifics of individual work releases. On a week-to-week
and month-to-month basis, the availability of often volatile "immediately
workable" backlog most directly affects productivity, with such availability
subject to unpredictable changes such as weather, customer-initiated delays and
found variances in site conditions.
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
Midsouth Partners using the alternative CIPP processes available.
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-two years, and the broader range of design
alternatives available with a CIPP process. 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 newer 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.
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 three 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
provides promotional materials to current and prospective users of CIPP
processes.
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, 2000, the Company employed 155 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 the southeastern United States.
Item 3. Legal Proceedings
See Part II, Item 8, "Notes to Consolidated Financial Statements - Note
8. Contingencies" for details concerning (a) settlement of a previously
disclosed lawsuit brought in the Superior Court of the District of Columbia, and
(b) a previously disclosed lawsuit pending in the United States District Court
for the Middle District of Tennessee against Insituform East and 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") SmallCapSM
Market System. 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, 2000 High Low
------------------------------- ---- ---
1st Quarter $6.750 $5.500
2nd Quarter $6.125 $5.063
3rd Quarter $6.063 $4.500
4th Quarter $5.438 $4.188
Fiscal Year Ended June 30, 1999 High Low
------------------------------- ---- ---
1st Quarter $9.625 $7.625
2nd Quarter $8.250 $7.125
3rd Quarter $8.125 $6.375
4th Quarter $7.125 $5.875
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 5, 2000, the approximate number of shareholders of
record of each class of common equity of CERBCO was as follows:
Common Stock 272
Class B Common Stock 119
(c) Dividends
On June 9, 2000, 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 17, 2000 to its shareholders of record as of the
close of business on June 30, 2000. 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.
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 on or about 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.
(in thousands, except per share information and return on equity amounts)
<TABLE>
STATEMENT OF OPERATIONS INFORMATION
<CAPTION>
Years ended June 30
------------ ------------ ------------ ------------ -------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $22,422 $23,315 $23,891 $26,542 $30,471
Operating profit (loss) $(3,708) $(3,605) $(2,607) $(1,633) $ 2,551
Earnings (loss) before non-owned interests and
income taxes $(2,035) $(2,362) $ (899) $(1,243) $ 3,121
Earnings (loss) before non-owned interests in
Insituform East $(2,015) $(1,632) $ 127 $ (565) $ 1,389
Earnings (loss) from continuing operations $ (343) $ (213) $ 359 $ (199) $ 247
Net earnings (loss) $ (343) $ (213) $ 359 $10,169 $ 2,055
Earnings (loss) per share:
Continuing operations $ (0.23) $ (0.14) $ 0.24 $ (0.13) $ 0.17
Net earnings (loss) $ (0.23) $ (0.14) $ 0.24 $ 6.91 $ 1.40
Weighted average number of shares 1,483 1,483 1,483 1,471 1,465
Dividends declared per share $ 0.10 $ 0.10 $ 0.10 $ 1.55 $ 0.05
BALANCE SHEET INFORMATION
Years ended June 30
------------ ------------ ------------ ------------ -------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Accounts receivable $ 6,295 $ 6,593 $ 5,185 $ 6,691 $ 8,497
Working capital $15,868 $20,898 $24,004 $24,537 $17,886
Total assets $36,737 $41,353 $43,211 $51,471 $39,451
Short-term debt $ 30 $ 442 $ 285 $ 29 $ 55
Long-term debt $ 43 $ 63 $ 105 $ 139 $ 136
Non-owned interests $ 7,004 $10,262 $12,068 $13,042 $16,509
Stockholders' equity $24,327 $24,818 $25,180 $24,935 $17,002
Book value per share $ 16.40 $ 16.89 $ 16.98 $ 16.88 $ 11.58
Average stockholders' equity
[Weighted average equity during year
exclusive of current earnings] $24,744 $25,105 $24,878 $17,033 $15,010
Return on equity
[Net earnings divided by average
stock-holders' equity as defined above] -- -- 1.4% 59.7% 13.7%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$343,197 (-$0.23 per
share) on sales of $22.4 million for the fiscal year ended June 30, 2000. In
fiscal year 1999, the Company reported a consolidated net loss of -$213,274
(-$0.14 per share) on sales of $23.3 million. In fiscal year 1998, the Company
reported consolidated net earnings of $358,790 ($0.24 per share) on sales of
$23.9 million.
The Company attributed its unfavorable results for the fiscal year
ended June 30, 2000, to the unfavorable results of Insituform East, the
Company's majority-controlled subsidiary and only operating segment. Insituform
East recognized a consolidated net loss of -$2,761,306 on sales of $22.4
million, which contributed a loss of -$1,083,131 to CERBCO in fiscal year 2000.
Insituform East attributed its unfavorable results in fiscal year 2000 primarily
to a significant decrease in immediately workable backlog from October 1999
through May 2000.
The Company attributed its unfavorable results for the fiscal year
ended June 30, 1999 also to the unfavorable results of Insituform East.
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 short-term investment earnings of CERBCO,
the parent company, which increased $0.8 million (300%) as a result of the
investment of cash realized from the sale of the Company's interest in Capitol
Office Solutions on June 30, 1997, and which was more than enough to offset the
unfavorable results of Insituform East. 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. While the operations of East
produced results that were modestly positive in fiscal year 1998 due to the
favorable impact of the Perry Nuclear project in the first quarter of the fiscal
year, these results were more than offset by contributory losses from Midsouth
Partners, which experienced significantly reduced margins throughout the year.
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 immediately workable
backlog of customer orders, the Company currently anticipates modest but
positive operating results for Insituform East for the first quarter of fiscal
year 2001. A combination of a favorable mix of work and a consistently high
volume of immediately workable backlog 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 39%
participation in the future results of Insituform East.
As previously reported, Insituform East's Insituform process licensor
and former partner in the Midsouth Partners partnership, Insituform
Technologies, Inc. ("ITI") initiated a second calendar 1999 lawsuit against
Insituform East and Midsouth Partners on December 3, 1999, following the July
20, 1999 settlement (the Midsouth Settlement Agreement) of earlier litigation
filed March 11, 1999. The newest litigation appears again targeted by ITI to
usurp for itself certain rights belonging to Insituform East or to Midsouth
Partners, including Insituform East's legitimate competitive rights as a
licensee and the competitive rights of Midsouth Partners acquired pursuant to
the Midsouth Settlement Agreement. While the ultimate outcome of any litigation
including ITI's most recent December litigation cannot be predetermined, pending
resolution Insituform East and Midsouth Partners intend to continue to exercise
their respective rights under license agreements and the Midsouth Settlement
Agreement as exercised prior to the instigation of such litigation. Trial of the
December litigation is currently scheduled for July 31, 2001.
Insituform East's total backlog value of all uncompleted and multi-year
contract awards was approximately $27.1 million at June 30, 2000, as compared to
$31.1 million at June 30, 1999. The twelve-month backlog at June 30, 2000 was
approximately $15.2 million as compared to $13.5 million at June 30, 1999. The
total backlog value of all uncompleted and multi-year contracts at June 30, 2000
and 1999 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, "total" and "twelve month" backlog figures at specific
dates are not necessarily indicative of sales and earnings for future periods
due to the irregular timing and receipt of major project awards including large,
multi-year, menu-priced contracts with estimated but uncertain order quantities
further subject to the specifics of individual work releases. On a week-to-week
and month-to-month basis, the availability of often volatile "immediately
workable" backlog most directly affects productivity, with such availability
subject to unpredictable changes such as weather, customer-initiated delays and
found variances in site conditions.
In addition to immediately workable backlog, a primary 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
either depressed sales at normal margins or material increases in discounted
sales, even where total revenues may experience an apparent buoyancy or growth
from the addition of discounted sales undertaken from time to time for strategic
reasons. Conversely, at normal margins, increases in period sales typically
leverage positive earnings significantly.
In response to continuing unfavorable operating margins in fiscal year
2000, Insituform East embarked on an aggressive cost reduction program to return
Insituform East to positive operating results in fiscal year 2001. As noted
earlier, Insituform East currently anticipates modest but positive operating
results for the first quarter of fiscal year 2001 ending September 30, 2000.
Insituform East intends going forward to provide a range of customer service and
quality in response to market demand, including being the efficient low-cost
provider where product price is the predominantly controlling procurement
factor.
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
--------------------------------------------- -------------------
2000 1999
<S> <C> <C> <C> <C> <C>
2000 1999 1998 vs 1999 vs 1998
---- ---- ---- ------- -------
Sales 100.0% 100.0% 100.0% (3.8%) (2.4%)
----- ----- -----
Costs and Expenses:
Cost of sales 95.0 92.7 88.7 (1.4) 2.0
Selling, general and administrative expenses 21.5 22.7 22.2 (9.2) (0.1)
------ ------ ------
Total Costs and Expenses 116.5 115.4 110.9 (2.9) 1.6
----- ----- -----
Operating Loss (16.5) (15.4) (10.9) (2.9) (38.3)
Investment Income 3.1 3.7 4.3 (20.0) (16.1)
Interest Expense (0.1) (0.1) (0.3) (48.9) (30.5)
Other Income - net 4.4 1.7 3.1 141.0 (43.4)
------- ------- -------
Loss Before Non-Owned Interests
and Income Taxes (9.1) (10.1) (3.8) 13.9 (162.8)
Non-Owned Interest in Midsouth Partners 0.1 3.1 4.3 97.3 28.8
------- ------- -------
Earnings (Loss) Before Non-Owned Interests in
Insituform East and Income Taxes (9.0) (7.0) 0.5 (23.5) (1,381.6)
Credit for Income Taxes (0.0) (3.0) (0.0) (100.9) 8,562.5
------- ------- --------
Earnings (Loss) Before Non-Owned Interests in
Insituform East (9.0) (4.0) 0.5 (115.3) (7,938.1)
Non-Owned Interests in Insituform East 7.5 3.1 1.0 (131.2) (224.8)
------- ------- -------
Net Earnings (Loss) (1.5%) (0.9%) 1.5% (60.9) (1,594.4)
======== ======== =======
</TABLE>
2000 vs. 1999
Consolidated sales decreased $0.9 million (-4%) in fiscal year 2000,
primarily as a result of significant decreases in Insituform East's immediately
workable backlog from October 1999 through May 2000.
Consolidated operating results decreased $0.1 million (-3%) from an
operating loss of -$3.6 million in fiscal year 1999 to an operating loss of
-$3.7 million in fiscal year 2000. Insituform East's gross profit margin
decreased from 7% to 5% due primarily to increased indirect costs incurred
during fiscal year 2000 to support increased productive capacity, to include
support costs associated with the Company's Ohio branch office reestablished in
March 1999. Insituform East's selling, general and administrative expenses
decreased $0.4 million in fiscal year 2000, primarily as a result of cost
reduction measures implemented during fiscal year 2000, plus the impact of
additional legal costs associated with the future of Midsouth Partners incurred
during fiscal year 1999. The parent company's unallocated general corporate
expenses decreased $0.1 million, primarily as a result of increased legal fees
in connection with preparation of proxy materials for the annual stockholder's
meeting incurred in fiscal year 1999.
Other income increased $0.6 million, primarily as the result of the
payments to the parent company in settlement of the legal proceedings in the
Superior Court of the District of Columbia in fiscal year 2000.
Insituform East's operating results for fiscal year 2000, and thus the
consolidated operating results of the Company, were significantly affected by
the recognition of all but $19,889 of the negative operating results of Midsouth
Partners for the fiscal year and a valuation allowance recorded by Insituform
East against its tax provision calculated at statutory rates. The Company's
-$2,362,440 Loss Before Non-Owned Interests and Income Taxes for fiscal year
1999 was reduced by the $730,464 allocation of Midsouth Partners' pretax loss to
non-owned interests and a $713,000 credit for income taxes recorded by
Insituform East. A credit for income taxes of $219,000, recorded by Insituform
East for fiscal year 2000, is 7% of its pretax loss of -$2,980,306, as the
credit calculated using applicable enacted federal and state tax rates of 39% of
Insituform East's pretax loss was reduced by a $943,000 valuation allowance
recorded against the deferred tax asset during the year.
1999 vs. 1998
Consolidated sales decreased $0.6 million (-2%) in fiscal year 1999,
primarily as a result of significant revenues from Insituform East's Perry
Nuclear project recognized during the first quarter of fiscal year 1998.
Consolidated operating results decreased $1.0 million (-38%) from an
operating loss of -$2.6 million in fiscal year 1998 to an operating loss of
-$3.6 million in fiscal year 1999. Insituform East's gross profit margin
decreased from 11% to 7% due primarily to acceptance of additional job
completion costs on several incomplete projects and an increase in discounted
sales. 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.
Other income decreased $0.3 million, primarily as a result of the
payment of damages to CERBCO in connection with the Delaware Action in 1998.
Liquidity and Capital Resources
Liquidity may be defined as the Company's ability to mobilize cash.
Cash and cash equivalents decreased $14.7 million in fiscal year 2000 due
primarily to capital expenditures and the purchase of $12.0 million in
marketable securities. 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.
The Company's operating activities provided approximately $1.0 million
in cash in fiscal year 2000 and used approximately $0.3 million and $2.7 million
in cash in fiscal years 1999 and 1998, respectively.
Net cash used in investing activities was approximately $15.1 million,
$3.0 million and $1.7 million in fiscal years 2000, 1999 and 1998, respectively.
The primary use of such funds in fiscal year 2000 was the investment of the
Company's excess cash in marketable securities and Insituform East's purchase of
the remaining non-owned interests in Midsouth Partners. In addition, cash was
used for capital expenditures by Insituform East in each of the fiscal years to
upgrade, expand and improve production capabilities, and purchases of vehicles
and production equipment to replace aging units.
Net cash used in financing activities was $0.6 million, $33 thousand
and $2.3 million in fiscal years 2000, 1999 and 1998, respectively. The primary
use of such funds in fiscal year 2000 was to repay loans from former partners to
Midsouth Partners. During fiscal years 2000 and 1999, CERBCO paid regular cash
dividends declared for fiscal years 1999 and 1998, respectively. 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.
The Company's liquidity remained strong with working capital of
approximately $15.9 million and a current ratio of 4.7 to 1 at June 30, 2000.
The Company anticipates that Insituform East's increased production levels in
the future will require additional capital expenditures. The parent company,
CERBCO, has cash and temporary investments in excess of $13 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 in the future. 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.
Forward-Looking Information
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements that are
based on certain assumptions and describe future plans, strategies, and
expectations of the Company are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could have a
material adverse affect on the operations and future prospects of the Company
include, but are not limited to, the availability of immediately workable
backlog, mix of work, weather, changes in interest rates and general economic
conditions, and legislative/regulatory changes. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
McLean, Virginia
September 22, 2000
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended June 30
2000 1999 1998
---------------- ----------------- ----------------
<S> <C> <C> <C>
Sales $22,421,875 $23,315,198 $23,891,215
---------------- ----------------- ----------------
Costs and Expenses:
Cost of sales 21,314,391 21,617,623 21,190,803
Selling, general and administrative expenses 4,815,439 5,302,679 5,307,431
---------------- ----------------- ----------------
Total Costs and Expenses 26,129,830 26,920,302 26,498,234
---------------- ----------------- ----------------
Operating Loss (3,707,955) (3,605,104) (2,607,019)
Investment Income 696,015 870,552 1,037,186
Interest Expense (21,473) (42,043) (60,489)
Other Income - net 998,152 414,155 731,256
---------------- ----------------- ----------------
Loss Before Non-Owned Interests and Income Taxes (2,035,261) (2,362,440) (899,066)
Non-Owned Interest in Pretax Loss of Midsouth Partners 19,889 730,464 1,026,402
---------------- ----------------- ----------------
Earnings (Loss) Before Non-Owned Interests in Insituform
East, Inc. and Income Taxes (2,015,372) (1,631,976) 127,336
Provision (Credit) for Income Taxes 6,000 (693,000) (8,000)
---------------- ----------------- ----------------
Earnings (Loss) Before Non-Owned Interests in Insituform
East, Inc. (2,021,372) (938,976) 135,336
Non-Owned Interests in Loss of Insituform East, Inc. 1,678,175 725,702 223,454
---------------- ----------------- ----------------
NET EARNINGS (LOSS) $ (343,197) $ (213,274) $ 358,790
================ ================= ================
Net Earnings (Loss) per Share of Common Stock:
Basic Earnings (Loss) per Share $ (0.23) $ (0.14) $ 0.24
================ ================= ================
Diluted Earnings (Loss) per Share $ (0.23) $ (0.14) $ 0.24
================ ================= ================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
----------------------------------------------
2000 1999
----------------- -----------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 2,344,077 $ 17,050,119
Marketable securities 9,844,593 0
Accounts receivable 6,294,655 6,592,913
Inventories 1,421,104 1,273,402
Prepaid and refundable taxes 22,895 550,453
Prepaid expenses and other 204,381 339,928
-----------------
-----------------
Total Current Assets 20,131,705 25,806,815
----------------- -----------------
Property, Plant and Equipment:
Land and improvements 2,018,587 2,018,587
Buildings and improvements 6,203,270 5,880,498
Vehicles and production equipment 13,330,849 13,303,716
Small tools, radios and machine shop equipment 4,637,721 4,466,896
Office furniture and equipment 1,366,049 1,274,822
----------------- -----------------
27,556,476 26,944,519
Less accumulated depreciation and amortization (17,247,839) (15,432,983)
-----------------
-----------------
Total Property, Plant and Equipment 10,308,637 11,511,536
----------------- -----------------
Other Assets:
Excess of acquisition cost over value of net
assets acquired - net of accumulated amortization
of $1,323,521 in 2000 and $1,253,580 in 1999 1,618,629 1,998,822
Deferred income taxes - net of valuation allowance
of $943,000 in 2000 and $0 in 1999 0 0
Cash surrender value of SERP life insurance 2,387,287 1,730,964
Marketable securities 2,231,052 0
Deposits and other 60,056 70,489
----------------- -----------------
Total Other Assets 6,297,024 3,800,275
----------------- -----------------
Total Assets $36,737,366 $ 41,118,626
================= =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
-------------
----------------- -----------------
2000 1999
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Partner's loans to Midsouth Partners $ 0 $ 400,000
Accounts payable and accrued liabilities 2,961,927 2,958,136
Income taxes payable 1,271,708 1,508,353
Current portion of capital lease obligations 30,177 42,167
----------------- -----------------
Total Current Liabilities 4,263,812 4,908,656
----------------- -----------------
Long-Term Liabilities:
Accrued SERP liability 1,099,720 847,560
Capital lease obligations (less current portion shown above) 42,584 62,662
Deferred income taxes 0 219,000
----------------- -----------------
-----------------
Total Long-Term Liabilities 1,142,304 1,129,222
----------------- -----------------
Total Liabilities 5,406,116 6,037,878
----------------- -----------------
Commitments and Contingencies
Non-Owned Interests in Consolidated Subsidiaries 7,004,314 10,262,319
----------------- -----------------
Stockholders' Equity:
Common stock, $.10 par value
Authorized: 3,500,000 shares
Issued and outstanding: 1,189,476 shares 118,947 118,947
Class B Common stock (convertible), $.10 par value
Authorized: 700,000 shares
Issued and outstanding: 293,480 shares 29,348 29,348
Additional paid-in capital 7,527,278 7,527,278
Retained earnings 16,651,363 17,142,856
----------------- -----------------
Total Stockholders' Equity 24,326,936 24,818,429
----------------- -----------------
Total Liabilities and Stockholders' Equity $36,737,366 $ 41,118,626
================= =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 and 1998
<CAPTION>
Additional Total Stock-
Common Stock Class B Common Stock Paid-in Retained holders'
---------------------------------------------------
Shares Amounts Shares Amounts Capital Earnings Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 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
Net loss 0 0 0 0 0 (343,197) (343,197)
Dividends declared 0 0 0 0 0 (148,296) (148,296)
---------------------------------------------------------------------------------------------
=============================================================================================
BALANCE - JUNE 30, 2000 1,189,476 $118,947 293,480 $29,348 $7,527,278 $16,651,363 $24,326,936
=============================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERBCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended June 30
2000 1999 1998
--------------- --------------- ---------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $ (343,197) $ (213,274) $ 358,790
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 2,383,800 2,211,811 2,209,231
Amounts attributable to non-owned interests (1,698,064) (1,456,166) (1,249,856)
Deferred income taxes (219,000) (696,000) (159,000)
(Increase) decrease in other assets 0 17,990 358
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 298,258 (1,407,866) 1,591,684
(Increase) decrease in inventories (147,702) 108,459 156,156
(Increase) decrease in other current assets 663,105 479,036 (303,973)
Increase (decrease) in accounts payable and accrued 3,791 256,458 (978,703)
expenses
Increase (decrease) in income taxes payable (236,645) 157,528 (4,453,899)
--------------- --------------- ---------------
Net Cash Provided by (Used in) Operating Activities 704,346 (542,024) (2,829,212)
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Capital expenditures (1,156,897) (2,433,828) (1,704,188)
Disposal of equipment - net 87,086 28,797 170,950
Purchase of marketable securities (12,075,645) 0 0
Increase in investment in Insituform East (300,981) (115,827) 0
Cash contributions to Midsouth Partners by non-owned interests 0 0 276,000
Purchase of remaining interests in Midsouth Partners (948,707) 0 0
Increase in cash surrender value of SERP life insurance (656,323) (500,709) (451,214)
Increase in SERP liability 252,160 241,587 165,023
Increase in other assets (20,000) 0 0
--------------- --------------- ---------------
Net Cash Used in Investing Activities (14,819,307) (2,779,980) (1,543,429)
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Proceeds from revolving lines of credit and long-term borrowings 0 0 1,800,000
Principal payments on revolving lines of credit, capital lease
obligations and long-term borrowings (42,785) (34,621) (1,828,538)
Loans to Midsouth Partners from non-owned interests 0 400,000 250,000
Repayment of loans to Midsouth Partners from non-owned interests (400,000) (250,000) 0
Dividends paid (148,296) (148,295) (2,559,694)
Proceeds from exercise of stock options 0 0 34,500
--------------- --------------- ---------------
Net Cash Used in Financing Activities (591,081) (32,916) (2,303,732)
--------------- --------------- ---------------
Net Decrease in Cash and Cash Equivalents (14,706,042) (3,354,920) (6,676,373)
Cash and Cash Equivalents at Beginning of Year 17,050,119 20,405,039 27,081,412
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 2,344,077 $ 17,050,119 $ 20,405,039
=============== =============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 21,473 $ 85,013 $ 60,489
Income taxes paid (refunded) $ (65,913) $ (552,561) $ 4,739,513
Supplemental disclosure of non-cash investing and financing activities:
Additions to capital leases $ 10,717 $ 0 $ 0
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CERBCO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the
parent holding company, CERBCO, Inc. ("CERBCO") and its majority-controlled
subsidiary, Insituform East, Incorporated ("Insituform East"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Business Operations
CERBCO is a parent holding company with a controlling interest in one
principal operating subsidiary. Insituform East and its subsidiaries are engaged
in the trenchless rehabilitation of underground sewers and other pipelines 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 7: 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.
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. 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. Cash equivalents are stated at cost plus accrued interest
which approximates market.
Marketable Securities
Marketable securities include all investments with a maturity greater
than three months and are accounted for under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company determines the appropriate classification of the
securities at the time of purchase. All of the Company's marketable securities
are debt securities and the Company has the positive intent and ability to hold
these securities to maturity. Held-to-maturity securities are stated at cost,
adjusted for amortization of premiums and discounts to maturity.
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 CIPP rehabilitation processes.
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.
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, 2000.
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; net operating loss carryforwards; 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 5: 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value. The Company has determined that the adoption of SFAS No. 133 will
not have a significant effect on its financial statement presentation or
disclosures, or on its results of operations and financial position. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25, which clarifies the
application of APB Opinion No. 25, Accounting for Stock Issued to Employees
("Opinion No. 25") for certain issues. The Interpretation clarifies (a) the
definition of "employee" for purposes of applying Opinion 25; (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Interpretation was effective
July 1, 2000, but certain conclusions cover specific events occurring after
December 15, 1998 or January 12, 2000, for which the effects are recognized on a
prospective basis from July 1, 2000. The adoption of this Interpretation had no
impact on the Company's financial position or results of operations.
2. Marketable Securities
At June 30, 2000, the Company held investments in marketable debt
securities which were classified as held-to-maturity. Securities with a maturity
date within one year are classified as Marketable Securities as a part of
Current Assets. Securities with a maturity date beyond one year are included
under Other Assets. All securities are stated at amortized cost.
Marketable securities consist of:
2000
----------------
Current:
U.S. Government and Agencies $ 5,844,593
Corporate 4,000,000
----------------
9,844,593
Non-current:
U.S. Government and agencies 2,231,052
----------------
Total marketable securities $12,075,645
================
3. Accounts Receivable
<TABLE>
Accounts receivable consist of:
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
Due from municipal and commercial customers $5,400,317 $6,514,843
Miscellaneous 894,338 78,070
---------------- -----------------
6,294,655 6,592,913
Less: Allowance for doubtful accounts 0 0
---------------- -----------------
$6,294,655 $6,592,913
================ =================
</TABLE>
4. Equity in Insituform East
At June 30, 2000, CERBCO beneficially held 1,412,850 shares of
Insituform East Common Stock and 296,141 shares of convertible Insituform East
Class B Common Stock representing approximately 34.8% of the Common Stock, 99.5%
of the Class B Common Stock, 39.2% of the total equity and 62.2% of the total
voting power of all outstanding classes of Insituform East stock. 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, 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 years ended June 30, 2000 and 1999, CERBCO acquired 186,450
shares and 98,900 shares of Insituform East Common Stock for $300,981 and
$115,827, respectively. The differences between the cost of the stock and the
net book value thereof, $310,252 in 2000 and $233,950 in 1999 have 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 2000, 1999 or 1998. If all the
options and warrants outstanding at June 30, 2000 were exercised, the resulting
percentages of CERBCO's equity ownership and total voting power would be 35.6%
and 58.4%, 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 2000, 1999, or
1998.
5. Investment in Midsouth Partners
CERBCO's consolidated financial statements as of June 30, 2000, 1999
and 1998 and for each of the years then ended include the accounts of Midsouth
Partners, Insituform East's majority-controlled subsidiary partnership from June
12, 1996 to July 20, 1999, and wholly-owned subsidiary since July 20, 1999.
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 to July 20, 1999, were Insitu, Inc., a
wholly-owned subsidiary of Insituform East; Insituform Technologies, Inc.
("ITI"); and Insituform Southwest, Inc., an affiliate of ITI.
Partnership profits and losses were allocated through 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 settled its disputes with ITI concerning Midsouth
Partners under the terms of an agreement reached July 20, 1999 (the "Midsouth
Settlement Agreement") and actions before the Delaware Chancery Court and the
American Arbitration Association were dismissed. Under the terms of the Midsouth
Settlement Agreement, a wholly-owned subsidiary of Insituform East purchased
ITI's interests in the Midsouth Partners partnership at book value and Midsouth
Partners remained entitled to continue the business of the partnership under its
present name. The Insituform(R) License Agreement and its requirement to pay
royalties were relinquished under the settlement, henceforth permitting direct
competition between ITI and Midsouth Partners. The Midsouth Settlement Agreement
expressly provides that Midsouth Partners may utilize processes other than the
Insituform process to perform pipe rehabilitation services, and Midsouth
Partners also obtained a royalty-free non-exclusive right, without limitation in
time and within the partnership's previously licensed territory, to continued
use of the cured-in-place pipe processes, technique and inventions that it
formerly practiced pursuant to its since-terminated Insituform(R) License
Agreement as the same existed on July 20, 1999.
Effective July 20, 1999, Insituform East, through its wholly-owned
subsidiary, Midsouth, LLC, acquired the remaining 57.5% interests in Midsouth
Partners previously held by ITI and Insituform Southwest, Inc. for $948,707, the
book value of their respective partnership accounts on July 20, 1999. The
acquisition was accounted for as a purchase. Partnership pretax earnings and
losses attributable to these interests, previously allocated to non-owned
interests in consolidation, have been allocated to the Company subsequent to
July 20, 1999.
Unaudited pro forma results of operations, assuming acquisition of the
remaining interests in Midsouth Partners had occurred as of July 1, 1997, are as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Sales $22,421,875 $23,315,198
Net Earnings (Loss) $ (350,998) $ (392,009)
Net Earnings (Loss) Per Share
Basic $(0.24) $(0.26)
Diluted $(0.24) $(0.26)
</TABLE>
6. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of:
2000 1999
---- ----
<S> <C> <C>
Accounts payable $1,633,378 $1,448,725
Accrued compensation and related expenses 1,180,253 1,361,115
Dividends payable 148,296 148,296
------------ ------------
$2,961,927 $2,958,136
</TABLE>
7. 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 $267,000, $163,000 and
$452,000 for the years ended June 30, 2000, 1999 and 1998, 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, 2000 is approximately $38,000. Minimum future rental commitments under
long-term capital and operating leases in effect at June 30, 2000, are as
follows:
<TABLE>
<CAPTION>
Years Ending June 30 Capital Leases Operating Leases
--------------------
----------------- -------------------
<S> <C> <C> <C>
2001 $43,844 $72,036
2002 38,968 72,036
2003 10,134 31,524
2004 0 18,561
2005 0 0
2006 and thereafter 0 0
------------ --------------
Total Minimum Payments 92,946 $194,157
========
Less: Interest 20,185
--------
Present Value of Minimum Payments 72,761
Less: Current Portion 30,177
--------
Long-term Capital Lease Obligations $42,584
=======
</TABLE>
Insituform East has entered into six sublicense agreements with ITI
which 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 agreements obligate Insituform East to pay minimum annual royalties
during the terms of the agreements unless waived upon approval of Insituform
East's marketing and sales plans for licensed processes by ITI. Payments of such
minimum annual royalties for Insituform East for the years ended June 30, 1999
and 1998 have been waived by ITI. Payments of minimum annual royalties for
Midsouth Partners for the years ended December 31, 1998 and 1997 were also
waived by ITI. During the year ended June 30, 2000, Insituform East incurred
$1,215,929 in royalty expense, including $220,806 in minimum annual royalties
not waived by ITI. During the years ended June 30, 1999 and 1998, Insituform
East incurred royalty expense of $1,244,954 and $1,409,696, respectively.
Insituform East has not received a waiver of minimum annual royalties for the
year ending June 30, 2001.
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 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.
8. Contingencies
Stockholder Suit - Superior Court of the District of Columbia
As previously reported by the Company, in March 1990, the controlling
stockholders of the Company, Messrs. George Wm. Erikson and Robert W. Erikson
(together, the "Eriksons"), executed a letter of intent and subsequently
executed four amendments thereto (collectively referred to herein as the "Letter
of Intent") with Insituform Technologies, Inc. ("ITI") to effect a sale of their
controlling interest in the Company to ITI for $6,000,000 (the "Proposed
Transaction"). The Proposed Transaction, if consummated, would have had the
effect of making ITI the controlling stockholder of the Company, and,
indirectly, of each of the Company's three direct subsidiaries at the time,
including Insituform East. In September 1990, the Eriksons informed the Company
that the Letter of Intent had expired without consummation of any transaction,
that it would not be further extended, that negotiations had ceased, and that
the Eriksons had no further intention at the time of pursuing the proposed sale
of their controlling interest in the Company to ITI.
Also as previously reported by the Company, two stockholders commenced
a derivative lawsuit in the Delaware Court of Chancery against the Eriksons in
August, 1990, making certain claims with respect to the Proposed Transaction
(the "Delaware Action"). The Delaware Action finally was concluded on December
3, 1997, when the Delaware Supreme Court issued its order affirming the findings
of the Court of Chancery with respect to (a) the trial court's assessment of
certain damages against the Eriksons on remand from a previous appeal and (b)
the renewed petition of plaintiffs' attorneys for an award of attorneys' fees
and expenses. Those findings by the Court of Chancery had been made on remand
from the same Delaware Supreme Court after a 1996 ruling in which the Supreme
Court affirmed the Court of Chancery's holding that CERBCO had not suffered any
transactional damages with respect to the Proposed Transaction.
Also as previously reported by the Company, in January 1993, a lawsuit
against the partners in the law firm of Rogers & Wells and the Company, arising
out of the subject matter of the Delaware litigation, was filed in the Superior
Court of the District of Columbia (the "D.C. Complaint"). Plaintiffs were the
same two stockholders who were plaintiffs in the Delaware Action, and a former
director of the Company, and alleged that Rogers & Wells breached its duty of
loyalty and care to the Company by representing allegedly conflicting interests
of the Eriksons in the Proposed Transaction with ITI. Plaintiffs also claimed
that Rogers & Wells committed malpractice by allegedly making misrepresentations
to the Company's Board and allegedly failing to properly inform the Company's
Board. Plaintiffs claimed that the conduct of Rogers & Wells caused the Company
to lose an opportunity to sell its control of Insituform East to ITI, caused the
Company to incur substantial expense, and unjustly enriched Rogers & Wells. The
D.C. Complaint sought to recover from Rogers & Wells (i) damages in an amount
equal to all fees paid to Rogers & Wells, (ii) damages in an amount not less
than $6 million for the loss of the opportunity for the Company to sell its
control of Insituform East to ITI, and (iii) punitive damages. Although the D.C.
Complaint stated that it was filed on behalf of the Company, management did not
believe that Rogers & Wells should be sued on any of the claims set forth
therein.
Motions to dismiss this case by the Company and Rogers & Wells were
denied, but a stay of the proceedings was granted until after the Delaware
trial. Plaintiffs agreed to a stay of the D.C. Superior Court action pending the
outcome of the appeal of the trial court's ruling in 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 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 asserted
essentially the same conflicts of interest charges against Rogers & Wells but
shifted their focus from the value of the alleged lost opportunity to the
litigation expenses incurred by the Company in the Delaware Action. Plaintiffs
sought 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 was then referred to mediation in the District of Columbia.
During the mediation proceeding, the parties to the D.C. lawsuit
entered into settlement negotiations. On or about April 10, 2000, the parties
signed a stipulation of settlement of that lawsuit (the "Stipulation"). The
tentative settlement described in the Stipulation provided for a payment by
Rogers & Wells to the Company of $700,000 and for an exchange of mutual
releases, including releases of the Company and its directors by plaintiffs. The
Stipulation further provided for plaintiffs' counsel to petition the D.C.
Superior Court for an award of $233,333 in attorneys' fees (one-third of the
proposed settlement proceeds) and approximately $32,000 in expenses. On April
17, 2000, the Company sent a notice of pendency of the D.C. lawsuit and of the
proposed settlement to the Company's stockholders. In a hearing on May 31, 2000,
the D.C. Superior Court determined that (i) the proposed settlement described in
the Stipulation was fair, reasonable, adequate and in the best interest of the
Company and its stockholders, and (ii) the requested attorneys' fees and
expenses were awarded to plaintiffs. The Company has received the settlement
payment from Rogers & Wells and out of that payment has paid the attorneys' fees
and expenses awarded by the Court to plaintiffs' counsel. The D.C. legal
proceedings are now complete.
Dispute with ITI - United States District Court for the Middle District of
Tennessee
As previously reported, on December 3, 1999, Insituform Technologies,
Inc. and its Netherlands affiliate (collectively, "ITI") filed suit in the
United States District Court for the Middle District of Tennessee against
Insituform East and its subsidiary Midsouth Partners. In its Amended Complaint,
which was filed on June 13, 2000, ITI contends that Midsouth Partners has
violated a Settlement Agreement entered into in July 1999 (the "Settlement
Agreement") with respect to certain litigation initiated earlier in 1999 by
allegedly using or failing to timely remove from certain materials and equipment
the Insituform(R) trademark. ITI contends that these alleged breaches of the
Settlement Agreement also constitute violations of the Lanham Act, the Tennessee
Model Trademark Act, and applicable state law for the alleged unauthorized use
of the Insituform trademark. ITI seeks to terminate the Settlement Agreement and
with it Midsouth Partners' rights to continue to exploit the Insituform process
as provided in the Settlement Agreement. ITI seeks declarations (i) that
Midsouth Partners has committed one or more noncurable breaches of the
Settlement Agreement; (ii) that Midsouth Partners has violated the Lanham Act
and the Tennessee Model Trademark Act; (iii) that Midsouth Partners is no longer
entitled to exploit the Insituform process, to use certain tube labeled with the
name "Insituform," and to continue buying tube from ITI as provided in the
Settlement Agreement, and (iv) that the Settlement Agreement is or can be
terminated. ITI also seeks a declaration that the right of Insituform East and
its subsidiaries to perform certain subcontract work for Midsouth Partners
pursuant to the Settlement Agreement is or can be terminated and that the other
provisions of the Settlement Agreement remain in full force and effect. In
addition, ITI seeks unspecified damages.
ITI also contends that the various license agreements between
Insituform East and ITI bar Insituform East from exploiting the Insituform
process, using the Insituform trademark, or practicing any CIPP techniques
outside of Insituform East's territories without payment of the appropriate
cross-over royalty and regular royalty totaling 20% (except as otherwise
provided by the Settlement Agreement) and that these restrictions extend to
Midsouth Partners as well, because Midsouth Partners and Insituform East are
allegedly alter egos of one another. ITI contends that Insituform East is using
Midsouth Partners to practice CIPP rehabilitation processes outside of the
territory provided for in the Settlement Agreement and that the failure to pay a
royalty and cross-over royalty constitutes a breach of Insituform East's
obligations under its license agreements with ITI. ITI seeks a declaration that
Insituform East and Midsouth Partners must pay ITI a royalty and cross-over
royalty totaling 20% (except as otherwise provided by the Settlement Agreement)
for any CIPP work performed in these so-called "Insituform Owner Reserved
Territories." ITI also seeks damages in the form of any and all unpaid royalties
and cross-over royalties that are allegedly owed.
In addition, ITI seeks a declaration that it is no longer obligated to
make payments to Insituform East under its August 4, 1980 agreement with
Insituform East's predecessor-in-interest (the "SAW Agreement"), under which ITI
agreed to pay Insituform East's predecessor-in-interest for recruiting potential
licensees of the Insituform process. ITI contends that its acquisition or merger
of several such licensees has extinguished its obligations under the SAW
Agreement to pay Insituform East, which was assigned the right to receive
payments for such licensees in April 1981.
Trial is currently scheduled for July 31, 2001, and discovery is
underway. Insituform East has counterclaimed for a determination in its favor
that all of its practices are lawful and in accord with existing agreements.
Insituform East seeks unspecified damages from ITI in its counterclaims. The
ultimate outcome and consequences of this suit cannot be ascertained at this
time.
While it is not possible at this time to establish the ultimate amount
of liability, if any, associated with this suit, it is the opinion of the
management of Insituform East that the aggregate amount of any such liability
will not have a material adverse effect on the financial position of Insituform
East. Conversely, in the opinion of management, in the unforeseen event that the
plaintiffs/counter-defendants substantially prevailed on their claims against
Insituform East and its subsidiary Midsouth Partners, including the restriction
or elimination of Midsouth Partners existing rights to expand nationally and to
practice CIPP rehabilitation process methods, such event could have a material
adverse effect on the future financial position of Insituform East.
Summary and Other
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, the aggregate of which will
not, in the opinion of management, materially affect the Company's financial
position or results of operations.
9. 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 fiscal year 2000, no
shares of Class B Common Stock were converted to Common Stock. In 1999 and 1998,
2,500 shares and 375 shares, respectively, were converted.
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.
10. Income Taxes
<TABLE>
The provision (credit) for taxes is composed of the following (in
thousands):
<CAPTION>
2000 1999 1998
---- ---- ----
Current Taxes:
<S> <C> <C> <C>
Federal $ 225 $ 5 $ 158
State 0 (2) (7)
------ ------- --------
Total current tax expense (benefit) 225 3 151
------ ------- --------
Deferred Taxes:
Federal (191) (607) (139)
State (28) (89) (20)
------- ------- --------
Total deferred tax expense (benefit) (219) (696) (159)
------- ------- --------
Total provision (credit) for taxes $ 6 $ (693) $ (8)
======= ======= ========
</TABLE>
<TABLE>
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):
<CAPTION>
2000 1999 1998
---- ---- ----
Amounts % Amounts % Amounts %
------- - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
Taxes computed at statutory rate $(678) (34) $(552) (34) $44 34
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
federal income tax benefit (expense) (171) (8) (112) (7) (45) (35)
Non-taxable income (135) (7) (80) (4) (54) (42)
Nondeductible items 47 2 51 3 47 37
Valuation allowance 943 47 0 0 0 0
----- -- -------- ---- ---- ---
Total provision (credit) for taxes $ 6 0 $(693) (42) $(8) (6)
====== === ===== === ==== ===
</TABLE>
The calculation of Insituform East's credit for income taxes for the
year ended June 30, 2000, using applicable enacted federal and state rates,
resulted in a net deferred tax asset as temporary differences attributable to
operating loss carryforwards exceeded deferred tax liabilities attributable to
other temporary differences, principally the recognition of depreciation
expense. The deferred tax asset of $943,000 at June 30, 2000, has been reduced
by a valuation allowance of $943,000 because, based on the weight of evidence
available, to include Insituform East's pretax operating losses recognized
during the past three fiscal years, it is more likely than not that the deferred
tax asset will not be realized.
<TABLE>
The primary components of temporary differences which give rise to the
Company's net deferred tax asset (liability) at June 30, 2000 and 1999 are
presented below:
<CAPTION>
June 30,
------------------------------------
2000 1999
---- ----
Deferred Tax Assets:
<S> <C> <C>
Net operating loss carryforwards $1,858,000 $ 729,000
Deferred compensation 17,000 19,000
Other 55,000 104,000
Valuation allowance (943,000) 0
----------------- ---------------
Total deferred tax assets 987,000 852,000
Deferred Tax Liability:
Depreciation (987,000) (1,071,000)
----------------- ---------------
Net deferred tax asset (liability) $ 0 $ (219,000)
================= ===============
</TABLE>
11. 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:
2000 1999 1998
---- ---- ----
Basic 1,482,956 1,482,956 1,482,808
========= ========= =========
Diluted 1,482,956 1,482,956 1,482,808
========= ========= =========
12. 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 collective bargaining agreements participate in separate
profit-sharing plans. No employees of either company were covered by collective
bargaining agreements as of June 30, 2000. Contributions to the plans are
determined annually by the respective companies. During the years ended June 30,
2000, 1999 and 1998, the Company recognized profit sharing expense of
approximately $15,000, $243,000 and $48,000, respectively.
13. 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
approximately $209,000, $186,000 and $165,000 for the fiscal years ended June
30, 2000, 1999 and 1998, 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. Assets of the trust are 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 approximately
$49,000, $60,000 and $18,000 for the fiscal years ended June 30, 2000, 1999 and
1998, respectively. On July 1, 1998, Insituform East established a trust to
facilitate the payment of benefits under its plan. Funds in this 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.
14. Stock Option Plans
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 10, 1999, December 18, 1998 and December 19, 1997, at the
option prices of $5.375 per share, $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:
<TABLE>
<CAPTION>
Shares Under Option
----------------- ---------------- -----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Outstanding, beginning of year 40,000 20,000 0
Granted during the year 20,000 20,000 20,000
Exercised during the year 0 0 0
Expired/canceled during the year 0 0 0
---------- ---------- ----------
Outstanding, end of year 60,000 40,000 20,000
====== ====== ======
</TABLE>
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, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Years ended June 30
----------------- ------------------ -----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Date of grant 12/10/99 12/18/98 12/19/97
Option shares granted 20,000 20,000 20,000
Per share exercise price $5.38 $7.66 $9.41
Fair value per option share $2.20 $3.26 $4.65
</TABLE>
The fair value of options granted during the years ended June 30, 2000,
1999 and 1998 was estimated on the date of the grants using the binomial
option-pricing model using the following assumptions:
<TABLE>
<CAPTION>
Years ended June 30
----------------- ---------------- -----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.98% 4.58% 4.69%
Expected option term 5 years 5 years 5 years
Expected stock price volatility 44% 46% 55%
Expected dividend yield 2% 1% 1%
</TABLE>
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, 2000, 1999 and 1998 would
be as follows:
<TABLE>
<CAPTION>
Years ended June 30
----------------- ---------------- -----------------
2000 1999 1998
---- ---- ----
Net Earnings (Loss):
<S> <C> <C> <C>
As reported $(343,197) $(213,274) $358,790
Pro forma $(372,247) $(256,284) $297,384
Basic Net Earnings (Loss) Per Share:
As reported $(0.23) $(0.14) $0.24
Pro forma $(0.25) $(0.17) $0.20
Diluted Net Earnings (Loss) Per Share:
As reported $(0.23) $(0.14) $0.24
Pro forma $(0.25) $(0.17) $0.20
</TABLE>
15. Unaudited Quarterly Financial Data
The following table provides summarized quarterly results of operations
for fiscal years 2000 and 1999 (in thousands, except per share information):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
2000 September 30 December 31 March 31 June 30
---- ------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Sales $7,314 $4,672 $4,762 $5,674
Gross profit (loss) 1,195 (203) (536) 651
Net earnings (loss) 45 28 (413) (3)
Net earnings (loss) per share 0.03 0.02 (0.28) 0.00
1999 September 30 December 31 March 31 June 30
---- ------------ ----------- -------- -------
Sales $6,048 $5,898 $4,993 $6,376
Gross profit (loss) 997 867 (332) 164
Net earnings (loss) 35 (11) (142) (95)
Net earnings (loss) per share 0.02 (0.01) (0.10) (0.05)
</TABLE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of CERBCO Directors
<TABLE>
<CAPTION>
Name Age Director Since Other Positions with Registrant
---- --- -------------- -------------------------------
<S> <C> <C> <C>
Robert W. Erikson 55 December 1974 1/ President
George Wm. Erikson 58 November 1975 1/ Chairman & General Counsel
Webb C. Hayes, IV 52 April 1991 None
Paul C. Kincheloe, Jr. 59 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.
</TABLE>
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
<TABLE>
<CAPTION>
Name Age Position(s) Held Since
---- --- ----------- ----------
<S> <C> <C> <C>
Robert W. Erikson 55 President February 1988
George Wm. Erikson 58 Chairman & General Counsel February 1988
Robert F. Hartman 53 Vice President, Secretary & Treasurer February 1988 1/
1/ Elected as Secretary in June 1991 and as Treasurer in December 1997.
</TABLE>
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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and beneficial owners of greater than 10
percent of any class of the Company's equity securities ("Reporting Persons") to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of the Company's equity securities. To the
best of the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during and with respect to the fiscal year
ended June 30, 2000, all Section 16(a) filing requirements applicable to
Reporting Persons were complied with during the fiscal year.
Item 11. Executive Compensation
CERBCO is a parent holding company with a controlling interest, through
its wholly-owned subsidiary, CERBERONICS, in Insituform East ("IEI"). CERBCO
officers participate in the management of each 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, 2000, 1999 and 1998:
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
--------------------------
Annual Compensation Awards Payouts
---------------------------------------------- ------------------ -------
Name Other Total Restricted
and Annual Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Compensation Awards SARs Payouts Compensation
Position Year ($) ($) ($) 2/ ($) ($) (#) ($) ($) 3/
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Erikson 2000 CERBCO $ 11,819 $0 $0 $ 11,819 $0 5,000 $0 $ 0
Director & President 1/ IEI 223,106 0 0 223,106 0 15,000 0 1,140
CERBERONICS 93,359 0 0 93,359 0 0 0 0
-------- -- -- -------- -- ------ -- -------
$328,284 $0 $0 $328,284 $0 20,000 $0 $ 1,140
======== == == ======== == ====== == ======
1999 CERBCO $ 11,475 $0 $0 $ 11,475 $0 5,000 $0 $ 0
IEI 216,607 0 0 216,607 0 15,000 0 13,076
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
======== == == ======== == ====== == ======
George Wm. Erikson 2000 CERBCO $ 11,819 $0 $0 $ 11,819 $0 5,000 $0 $ 0
Director, Chairman IEI 223,106 0 0 223,106 0 15,000 0 3,540
& General Counsel 1/ CERBERONICS 93,359 0 0 93,359 0 0 0 0
-------- -- -- -------- -- ------ -- -------
$328,284 $0 $0 $328,284 $0 20,000 $0 $ 3,540
======== == == ======== == ====== == ======
1999 CERBCO $ 11,475 $0 $0 $ 11,475 $0 5,000 $0 $ 0
IEI 216,607 0 0 216,607 0 15,000 0 15,476
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
======== == == ======== == ====== == ======
Robert F. Hartman 2000 CERBCO $ 8,729 $0 $0 $ 8,729 $0 5,000 $0 $ 0
Vice President, IEI 94,962 0 0 94,962 0 15,000 0 1,004
Secretary & CERBERONICS 3,089 0 0 3,089 0 0 0 0
Treasurer -------- -- -- -------- -- ------ -- -------
$106,780 $0 $0 $106,780 $0 20,000 $0 $ 1,004
======== == == ======== == ====== == ======
1999 CERBCO $ 8,475 $0 $0 $ 8,475 $0 0 $0 $ 0
IEI 92,195 0 0 92,195 0 0 0 7,626
CERBERONICS 3,000 0 0 3,000 0 0 0 0
-------- -- -- -------- -- ------ -- -------
$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
======== ====== == ======== == ====== == ======
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>
Years of Service (Under Plan)
---------------------------------------------------------------------------------------------------------------------
(Final) Remuneration
15 20 25 30 35
-- -- -- -- --
<S> <C> <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>
Years of Service (Under Plan)
---------------------------------------------------------------------------------------------------------------------
(Final) Remuneration
15 20 25 30 35
-- -- -- -- --
<S> <C> <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, 2000 for the executives listed in the Summary
Compensation Table covered by the CERBCO SERP:
<TABLE>
<CAPTION>
Years of Credited Current Annual Covered Vested Vested Annual
Name Service Under Plan Compensation Percentage Benefit
---- ------------------ ------------ ---------- -------
<S> <C> <C> <C> <C>
Robert W. Erikson 8 $287,171 44.44% $63,816
George Wm. Erikson 8 $287,171 53.33% $78,579
Robert F. Hartman 8 $103,382 40.00% $10,338
</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 10, 1999,
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 $5.375. No options available under the plan were exercised by directors
of the Company during fiscal year 2000.
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. No
contribution was authorized for the fiscal year ended June 30, 2000.
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, 2000, 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 2000 1/ as of 6/30/00
---------------------------- ---------------- --------------
<S> <C> <C>
George Wm. Erikson, Chairman $2,400 100%
Robert W. Erikson, President $ 0 100%
Robert F. Hartman, Vice President - Administration & Secretary $ 337 100%
Executive Officers of Insituform East as a Group,
(6 persons, including those named above) $7,199 N/A
1/ Total contributions to employees of $78,810 include Insituform East's
matching contribution of $54,760 and reallocated amounts totaling $24,050
forfeited by former participants who terminated employment with Insituform
East during fiscal year 2000.
</TABLE>
Insituform East 1999 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1999 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1999 Board of
Directors' Stock Option Plan (the "IEI 1999 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 term of the plan is
for ten years, unless terminated sooner by the Board of Directors. The IEI 1999
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 1999 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 10,1999, 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 then seven directors, including Messrs. Robert Erikson
and George Erikson) at a per share option price of $1.328. No options available
under this plan were exercised by directors of Insituform East during fiscal
year 2000.
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 the same as the IEI 1999 Directors' Plan. The term of the plan is for
ten years, unless terminated sooner by the Board of Directors. Options were
first granted to directors on December 9, 1994 and each of the four succeeding
Board of Directors meetings following the Annual Meetings of Stockholders in
1995, 1996, 1997 and 1998. Each grant of options under the plan entitles each
director to whom such options were granted the right to purchase 15,000 shares
of Insituform East's Common Stock at a designated option price, any time and
from time to time, within five years from the date of grant. Although no further
options are anticipated to be granted under this plan, options previously
granted, and which have not already been exercised or expired, will remain in
effect until exercise or expiration, whichever comes first. No options available
under the plan were exercised by directors of Insituform East during fiscal year
2000. Under the terms of this plan, up to 360,000 shares of Insituform East
Common Stock remain reserved for the directors of Insituform East. As directors
of Insituform East, Messrs. Robert Erikson and George Erikson participate in
this plan.
OPTION/SAR GRANTS TABLE
The following table sets forth information concerning options or Stock
Appreciation Rights granted to each of the named executive officers during
fiscal year 2000 under the CERBCO 1997 Directors' Plan and the IEI 1999
Directors' Plan:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
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% $5.375 12/10/04 $7,425 $16,405
IEI 1999 Directors' Plan 15,000 14% $1.328 12/10/04 $5,505 $12,165
George Wm. Erikson
CERBCO 1997
Directors' Plan 5,000 25% $5.375 12/10/04 $7,425 $16,405
IEI 1999 Directors' Plan 15,000 14% $1.328 12/10/04 $5,505 $12,165
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
No option or Stock Appreciation Right grants made under the CERBCO 1997
Directors' Plan or the IEI 1999 and 1994 Directors' Plans to any of the named
executive officers were exercised during fiscal year 2000. The following table
sets forth information concerning option or Stock Appreciation Right grants held
by each of the named executive officers under all plans as of June 30, 2000:
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
--------------------------------------------------------------------------------
<CAPTION>
Number of Unexercised Value of Unexercised in the
Options/SARs at FY-End(#) Money Options/SARs at FY-End($)
------------------------- -------------------------------
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 15,000 0 $ 0 $0
IEI 1994 Directors' Plan 0 $0 60,000 0 $4,460 $0
IEI 1999 Directors' Plan 0 $0 15,000 0 $1,648 $0
George Wm. Erikson
CERBCO 1997
Directors' Plan 0 $0 15,000 0 $ 0 $0
IEI 1994 Directors' Plan 0 $0 60,000 0 $4,460 $0
IEI 1999 Directors' Plan 0 $0 15,000 0 $1,648 $0
</TABLE>
REPRICING OF OPTIONS/SARs
Neither the Company nor its subsidiaries adjusted or amended the
exercise price of stock options or SARs previously awarded to any of the named
executive officers during fiscal year 2000.
LONG-TERM INCENTIVE PLAN AWARDS
Neither the Company nor its subsidiaries have any long-term incentive
plans.
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,
CERBCO 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
2000 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 2000
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 June 30, 2000, 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/ 44.9%
Landover, MD 20785
George Wm. Erikson Common Stock 59,602 2/ 5.0%
3421 Pennsy Drive Class B Common Stock 115,814 2/ 39.5%
Landover, MD 20785
Schaenen Capital Management, LLC Common Stock 165,000 3/ 13.9%
200 Park Avenue, Suite 3900
New York, NY 10166
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 February 14, 2000 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 June 30, 2000, 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>
Robert W. Erikson Common Stock 60,700 1/ 15,000 6.1%
Class B Common Stock 131,750 1/ 0 44.9%
George Wm. Erikson Common Stock 59,602 2/ 15,000 6.0%
Class B Common Stock 115,814 2/ 0 39.5%
Webb C. Hayes, IV Common Stock 4,500 15,000 1.6%
Paul C. Kincheloe, Jr. Common Stock 7,500 15,000 1.8%
All Directors and Officers as Common Stock 132,302 60,000 15.4%
a Group (5 persons Class B Common Stock 247,564 0 84.4%
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 1999 and 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, 2000.
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 and President (together the "Eriksons") for their
respective legal fees and expenses which each incurred for personal legal
representation in connection with a stockholder lawsuit filed in August 1990
challenging a proposed but unconsummated transaction between each of the
Eriksons and Insituform Technologies, Inc. The Company expensed and advanced in
total $600,482 to Mr. George Erikson and $600,482 to Mr. Robert Erikson. Such
advances were made subject to an agreement with the Company executed by each of
the Eriksons and delivered to the Board of Directors that should it be
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 were not entitled to indemnification for such legal fees and
expenses under Section 145 of Delaware Corporation Law, such advances would be
reimbursed by Mr. George Erikson and/or Mr. Robert Erikson to the Company.
Pending a final outcome of these legal proceedings, and as contemplated
by the Company's By-laws, the Board of Directors had deferred consideration and
ultimate determination of entitlement of Mr. George Erikson and/or Mr. Robert
Erikson to indemnification by the Company for their legal fees and expenses.
These legal proceedings are now complete. On June 30, 2000, the Board of
Directors, having completed its consideration of the Erikson's request for
indemnification under Section 145 of Delaware Corporation Law, determined that
Mr. George Erikson and Mr. Robert Erikson were each entitled to indemnification
for 96% of the total amounts of legal fees and expenses for which they had
requested indemnification and for which they had received certain advances. In
accordance with their agreements with the Company, Mr. George Erikson and Mr.
Robert Erikson have each repaid to the Company all amounts in excess of the
amounts advanced to them.
(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 15
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998 16
Consolidated Balance Sheets as of June 30, 2000 and 1999 17-18
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998 19
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998 20
Notes to Consolidated Financial Statements 21-32
(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
Exhibit
Number * Pages
-----
3.1 CERBCO, Inc. Certificate of Incorporation 47-55
3.2 CERBCO, Inc. By-Laws 56-67
10.1 Insituform Process Sub-License Agreement -
Maryland, Virginia, D.C. Territory 68-78
10.2 Insituform Process Sub-License Agreement -
Delaware, Eastern Pennsylvania Territory 79-93
10.3 Insituform Process Sub-License Agreement -
Western Pennsylvania Territory 94-112
10.4 Insituform Process Sub-License Agreement -
Northern Ohio Territory 113-131
10.5 Insituform Process Sub-License Agreement -
Southern Ohio Territory 132-150
10.6 Insituform Process Sub-License Agreement -
West Virginia Territory 151-168
10.7 Insituform Tube Supply Agreement 169-178
10.8 SAW Agreement 179-180
10.9 Supplemental Retirement Agreement 181-185
10.10 1997 Board of Directors Stock Option Plan
(Incorporated by reference to CERBCO, Inc.
Proxy Statement filed in connection with
the Company's Annual Meeting of Stockholders
on December 19, 1997)
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and is not
included here.
99 CERBCO, Inc. Consolidating Schedules: 186-189
Statement of Operations Information for the
Year Ended June 30, 2000; Balance Sheet
Information and Consolidating Elimination
Entries as of June 30, 2000, and Related
Independent Auditors' Report.
* The Exhibit Number used refers to the appropriate subsection in paragraph (b)
of Item 601 of Regulation S-K.
(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, 2000.
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 25, 2000.
/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
------------------------------------- Sept. 25, 2000
Robert W. Erikson Director,
President Principal Executive Officer
/s/ GEORGE Wm. ERIKSON
------------------------------------- Sept. 25, 2000
George Wm. Erikson Director,
Chairman & General Counsel Principal Executive Officer
/s/ ROBERT F. HARTMAN
------------------------------------- Sept. 25, 2000
Robert F. Hartman Principal Financial Officer,
Vice President, Secretary Principal Accounting Officer
& Treasurer
/s/ WEBB C. HAYES, IV
------------------------------------- Sept. 25, 2000
Webb C. Hayes, IV Director
/s/ PAUL C. KINCHELOE, JR.
------------------------------------- Sept. 25, 2000
Paul C. Kincheloe, Jr. Director
