Item 1. Business
(a) General Development of Business
CERBCO, Inc. ("CERBCO", the "Company" or "Registrant") [NASDAQ:CERB] is a parent holding company with controlling interests in Insituform East, Incorporated [NASDAQ:INEI] (excavationless sewer and pipeline rehabilitation), and Capitol Copy Products, Inc. [copier and facsimile ("fax") equipment sales, service and supplies].
CERBCO was incorporated on December 23, 1987 in the State of Delaware. CERBCO was formed for the purpose of implementing a Plan of Reorganization and Merger (the "Plan"), whereby its then publicly-traded predecessor, CERBERONICS, Inc. ("CERBERONICS"), became a wholly-owned subsidiary of CERBCO. Under the Plan, owners of shares of stock previously held in CERBERONICS, by class, received ownership of an equivalent number of shares of stock, by class, in the parent holding company, CERBCO. In 1988, CERBERONICS transferred a material portion of its assets to CERBCO including all shares of stock held in Insituform East, Incorporated and Capitol Copy Products, Inc. CERBERONICS, which had been providing engineering, analytical and technical support services to the United States Government, discontinued operations in 1991.
The principal office and corporate headquarters of the Company are located in suburban Washington, D.C., collocated with the offices of the Company's subsidiary, 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
Financial information about the Registrant's industry segments is set forth below in tabular format. Information by industry segment is concomitant with financial information separately attributable to each of the member companies composing the Registrant's consolidated group, i.e., CERBCO, Inc. (the parent holding company), Insituform East, Incorporated and Capitol Copy Products, Inc. For additional information relating to industry segment information, see Part II, Item 8, "Notes to Consolidated Financial Statements - Note 19: Segment Data and Reconciliation"; also Part IV, Item 14, Exhibit 99, "CERBCO, Inc. Consolidating Schedules: Statement of Earnings Information for the Year Ended June 30, 1996; Balance Sheet Information and Consolidating Elimination Entries as of June 30, 1996."
c) Narrative Description of Business
CERBCO, Inc.
GENERAL
CERBCO, Inc. ("CERBCO" or the "Company") is a parent holding company with controlling interests in two principal subsidiaries, each of which is in a separate industry segment. Insituform East, Incorporated, operating pursuant to sublicense agreements, provides a patented process called "Insituform" primarily to municipal, Federal government and industrial customers for the repair and reconstruction of underground sewers and other types of pipelines. The Insituform(R) process creates a hard, jointless, impact and corrosion-resistant Insitupipe(R) product inside deteriorating pipes, with a principal benefit that it can usually be installed without excavation. Capitol Copy Products, Inc. is in the business of selling, servicing and providing supply products for copier and facsimile equipment, operating pursuant to certain dealer agreements, primarily with Canon U.S.A., Inc.
CERBCO officers participate both directly and indirectly on the management teams of its subsidiary corporations, in varying capacities and officerships, with a view to overseeing, protecting and developing the long-term values of the Company's holdings. By operating separate lines of business in the Federal/municipal and commercial sectors, CERBCO is structured to enable effective response to changing markets through the combination of capital flexibility and strategic diversification.
As of June 30, 1996 the Company and its subsidiaries had a total of 288 employees (including four employees in the parent holding company).
OTHER INFORMATION
For other information regarding a collective business description of CERBCO (e.g., material developments, operations, license agreements, backlog, marketing, competition, etc.), see specific detailed information by individual subsidiary company (i.e., industry segment) below.
Insituform East, Incorporated
GENERAL
Insituform East, Incorporated ("Insituform East" or the "Company") was organized under the laws of the State of Delaware on February 26, 1970 under the name Universal Construction and Supply Company. Its present name was adopted on August 24, 1978. The Company was engaged in the business of underground conduit construction from inception until 1974 and construction equipment rental from 1974 to 1978. The Company then phased out these lines of business and entered into sublicensing agreements for the Insituform process, a patented technology for reconstructing pipelines with little or no excavation. Since July 1978, the Company has been primarily engaged in the business of rehabilitating underground sewers and other pipelines, the Company's only business segment.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio, three Kentucky counties and West Virginia to its original Insituform process licensed territory of Maryland, Virginia, the District of Columbia, Delaware and eastern Pennsylvania.
In December 1985, MIDSOUTH Partners was organized as a Tennessee General Partnership and became the exclusive licensee for the Insituform process in Tennessee, the rest of Kentucky and northern Mississippi. The Company was assigned three representatives to a seven-member Management Committee established to manage the business activities of the Partnership and allocated a 42.5% interest in Partnership profits and losses.
In September 1987, the Company established a branch facility in Cincinnati, Ohio, to support operating activities in the western region of its licensed territory.
In May 1989, the Company acquired an 80% interest in TRY TEK Machine Works, Inc. ("TRY TEK"). TRY TEK, located in Hanover, Pennsylvania, was founded in September 1985 to custom design and build special machinery, including machinery used in the Insituform process. The Company acquired an additional 10% interest in TRY TEK in February 1993 and the remaining 10% interest in March 1995.
In December 1990, the Company acquired an exclusive license for the sale and installation of preformed PVC thermoplastic pipe under the NuPipe(R) process and trademark for a sales region identical to the territories licensed to the Company for the Insituform process.
In September 1991, the Company added cement mortar lining of potable water lines to its service capability. A formal plan to discontinue providing cement mortar lining services, adopted in June 1993, was substantially completed in June 1994.
A June 12, 1996 arbitration award granted the Company the unilateral right to appoint a MIDSOUTH Partners Management Committee representative in place of another partner's representative, in connection with a default of the Partnership Agreement by that partner. As a result of this award, the Company gained majority representation on the Management Committee effective June 12, 1996.
For financial reporting purposes for the fiscal year ended June 30, 1996, the Company has included its wholly-owned subsidiary corporations (collectively, "East") and its majority-controlled subsidiary partnership, MIDSOUTH Partners, in its consolidated financial statements. Prior to the fiscal year ended June 30, 1996, the Company accounted for its minority investment in MIDSOUTH Partners using the equity method.
The Company primarily rehabilitates and repairs underground sewers and other pipelines -- including waste water, storm water and industrial process pipelines -- using the Insituform process. The Insituform process utilizes a polyester fiber-felt material, the Insitutube(R) material, coated with polyethylene and impregnated with a liquid, thermosetting resin. The Insitutube material is inserted in the pipe through an existing manhole or other access point. By use of an inversion tube and cold water pressure, the Insitutube material is forced through the pipeline, turned inside out, and pressed firmly against the inner wall of the damaged pipeline. When the Insitutube material is fully extended, the cold water within the tube is recirculated through a boiler in a truck. The heated water cures the thermosetting resin to form a hard, jointless, impact and corrosion resistant Insitupipe product within the original pipe. Lateral or side connections are then reopened by use of the Insitucutter(R) device, a remote-controlled cutting machine.
The principal office and corporate headquarters of the Company are located at 3421 Pennsy Drive, Landover, Maryland 20785. The Company's telephone number is (301) 386-4100, and its fax number is (301) 386-2444.
RELATIONSHIP WITH INSITUFORM TECHNOLOGIES, INC.
On December 9, 1992, Insituform Technologies, Inc. (formerly Insituform of North America, Inc., or "INA") through its acquisition of Insituform Group, Ltd., N.V., acquired the worldwide patent rights for the Insituform process. The Company is a sublicensee of Insituform Technologies, Inc. ("ITI"). The Company has entered into seven sublicense agreements with ITI which grant the Company rights to perform the Insituform process in Virginia, Maryland, Delaware, Ohio, the District of Columbia, Pennsylvania, West Virginia, Tennessee, Kentucky and northern Mississippi. The Company can perform the Insituform process in other locations subject to payment of additional royalties.
The sublicense agreements require the Company to pay ITI a royalty of 8% of the revenue, excluding certain deductions, from all contracts using the Insituform process, with a minimum annual royalty requirement for each licensed territory. In the event the Company performs the Insituform process outside its territory, the sublicense agreements require it to pay a royalty of from 8% to 12% of the gross contract price to the independent sublicensee of such other territory, if any, in addition to all royalties due ITI.
The sublicense agreements extend for the life of the underlying patents or patent rights, including any improvements or modifications extending such life. The agreements may be terminated by the Company upon two calendar quarters written notice to ITI. The agreements may only be canceled by ITI in certain events. In addition, ITI has the right to approve the quality and specifications of equipment and materials not purchased directly from ITI.
On May 1, 1987, the Company entered into supply agreements with ITI whereby the Company has committed to purchase 90% of its Insitutube material requirements from ITI. The agreements automatically renew annually unless notice of termination is provided by either party six months prior to the end of a renewal period. As a result of certain terms not previously fulfilled by ITI, the Company believes it is no longer required to purchase 90% of its Insitutube material requirements from ITI under the otherwise continuing agreements. The continuing agreements currently extend through April 30, 1997.
The Company has also entered into license agreements with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale and installation of preformed PVC thermoplastic pipe under the NuPipe process and trademark. The Company has committed to pay a royalty equal to 6.75% of gross contract revenue utilizing the process and to purchase certain installation equipment and installation materials from ITI.
TRY TEK manufactures Insitucutter devices for sale to ITI and the Company under an agreement with ITI, the Insitucutter device patent holder. Unless otherwise terminated, this agreement will continue until April 6, 1998, the date of expiration of the Insitucutter device patent.
In 1981, the Company was assigned the rights to an agreement (the "SAW Agreement") regarding the introduction of potential Insituform process sublicensees to ITI. In connection with the introduction of current Insituform process sublicensees to ITI, the Company receives quarterly payments from ITI equal to 0.5% of contract revenue from Insituform process installations in East's licensed territory and the states of New York, New Jersey, North Carolina, South Carolina, Georgia and Alabama.
PATENTS
The Insituform process was developed in the United Kingdom in 1971. The Company's rights to utilize the patents, trademarks and know-how related to the Insituform process are derived from its licensor, ITI. There are presently 56 United States patents which cover various aspects of the Insituform process and related installation techniques. The last patent to expire will remain in effect until 2014. Two initial method patents relating to the Insituform process (one of which covers material aspects of the inversion process) expired in 1994, a primary method patent relating to the Insitutube material saturation process expires in February 2001 and a patent relating to the Insitutube material will expire in May 2001.
Although management of the Company believes these patents are important to the business of the Company, there can be no assurance that the validity of the patents will not be successfully challenged or that they are sufficient to afford protection against another company utilizing a process similar to the Insituform process. It is possible that the Company's business could be adversely affected upon expiration of the patents, or by increased competition in the event that one or more of the patents were adjudicated to be invalid or inadequate in scope to protect the Company's operations. Management of the Company believes, however, that while the Company has relied on the strength and validity of these patents, the Company's significant installation experience with the Insituform process and its degree of market penetration in its licensed territory should enable the Company to continue to compete effectively in the pipeline rehabilitation market in the future as older patents expire or become obsolete.
CUSTOMERS
The Company performs services under contracts with governmental authorities, private industries and commercial entities. In each of the last three fiscal years, more than 65% of the Company's customers have been state and local government entities -- cities, counties, state agencies and regional authorities. During the year ended June 30, 1996, Federal government contracts (collectively), a county government in the Washington, D.C. metropolitan area and a regional sanitary authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the Company's sales. During the year ended June 30, 1995, Federal government contracts (collectively), the same regional sanitary authority in southwest Ohio and Washington Metropolitan Area Transit Authority ("WMATA") accounted for 21%, 15% and 10%, respectively, of the Company's sales. During the year ended June 30, 1994, Federal government contracts (collectively) accounted for 15% of the Company's sales.
SUPPLIERS
The Company's materials and equipment are generally available from several suppliers. However, the Company believes that ITI is presently the sole source of proprietary Insitutube material and, therefore, the Company is presently dependent upon ITI for its supply of Insitutube material. During the last three years the Company has not experienced any difficulty in obtaining adequate supplies of Insitutube material from ITI and, subject to ITI's right to approve the quality and specifications of material not purchased from ITI, the Company has the right to substitute an alternate polyester fiber-felt or other tube material available in the marketplace. The Company presently maintains an annually renewed supply agreement with ITI for Insitutube material (see "Relationship With Insituform Technologies, Inc." above).
REVENUE RECOGNITION AND BACKLOG
The Company recognizes revenue using the units of completion method as pipeline sections are rehabilitated using the Insituform process. An Insituform process installation is generally performed between manholes or similar access points within a twenty-four hour period. A rehabilitated pipeline section is considered completed work and is generally billable to the customer. In most cases, contracts consisting of individual line sections have a duration of less than one year.
The total value of all uncompleted and multi-year contract awards from customers was approximately $5.1 million at June 30, 1996, as compared to $11.9 million at June 30, 1995. The twelve-month backlog at June 30, 1996 was approximately $4.9 million as compared to $11.5 million at June 30, 1995. June 30, 1996 backlog figures include approximately $1.8 million from MIDSOUTH Partners. MIDSOUTH Partners' backlog of approximately $4.1 million at June 30, 1995 is not included in consolidated backlog figures at June 30, 1995. The total value of all uncompleted and multi-year contracts at June 30, 1996 and 1995 includes work not estimated to be released and installed within twelve months as well as potential work included in term contract awards which may or may not be fully ordered by contract expiration. Backlog figures at specific dates are not necessarily indicative of sales and earnings for future periods due to the irregular timing and receipt of larger annual term contract renewals and other large project awards.
COMPETITION
The general pipeline replacement, rehabilitation and repair business is highly competitive. The Company faces conceptual and practical competition both from a number of contractors employing traditional methods of pipeline replacement and repair and from contractors offering alternative trenchless products and technologies.
Traditional Methods. The Insituform process conceptually competes with traditional methods of pipe rehabilitation including full replacement, point repair and sliplining. The Company believes the Insituform process usually offers a cost advantage over full replacement as well as the practical advantage of avoiding excavation. In addition, the Insituform process also offers qualitatively better rehabilitation than sliplining which may significantly reduce the diameter of the pipe. Grouting is also undertaken in the United States. The Company considers grouting a short-term repair technique and not a long-term pipeline rehabilitation solution competitive with the Insituform process. As a practical matter, competition for the Company typically begins at the point an end user has conceptually determined to employ trenchless technology over traditional rehabilitation methods involving substantial excavation.
Cured-in-Place Trenchless Technologies. Over the years, the Company has witnessed a continuing introduction of alternative cured-in-place trenchless technologies, none of which the Company believes has been able to offer the quality or technical and other merits inherent in the Insituform process. The Company believes it remains the dominant provider of cured-in-place trenchless pipeline rehabilitation in its licensed territory.
Modified Sliplining Techniques. Several modified sliplining techniques have been introduced in the trenchless marketplace to include the use of "fold and formed" thermoplastic pipe. The NuPipe product offered by the Company is a folded thermoplastic product installed using modified sliplining techniques. The Company believes that the majority of customers will select the cured-in-place Insituform process over modified sliplining techniques due to the quality and longevity of the Insitupipe product, the proven performance record of the Company's Insituform process installations over the past seventeen years, and the broader range of design alternatives available with the Insituform process. The Company does offer its NuPipe product to customers in situations where, for budget restraints or other reasons, customers or consulting engineers consider a modified sliplining technique to be an acceptable rehabilitation alternative.
Other Trenchless Technologies. The Company is aware of a number of other trenchless technologies both under development and from time to time introduced into the marketplace with mixed results. The Company believes that the successful, in the ground, over twenty year proven performance of the Insituform process presents a significant advantage over alternative trenchless products.
The principal areas of competition in general pipeline replacement, rehabilitation and repair include the quality of the work performed, the ability to provide a long-term solution to the pipeline problems rather than a short-term repair, the amount of disruption to traffic and commercial activity, and the price. The Company believes that the Insituform process competes favorably in each of these areas with traditional replacement or repair methods. In particular, the ability to install Insitupipe products with little or no excavation at prices typically at or below traditional open trench replacement methods is of substantial competitive advantage. Further, and despite a small reduction in pipe diameter resulting from the installation of the Insitupipe product against the walls of the original pipe, the smooth finished interior reduces friction and generally increases flow capacity.
The Company believes the trenchless pipeline reconstruction marketplace is continuing to expand, thereby enticing, however, the entry of ever more imitations and substitute products hoping that cheap price alone may permit them to succeed in a market otherwise dominated by Insituform. In those limited markets where the cheapest priced product may be deemed technically "good enough," Insituform is at a disadvantage. Strategic participation undertaken by the Company in this market share segment to preserve competitive presence, usually at levels materially below normal margins, necessarily dilutes the overall margin performance of the Company. However, a majority of the Company's customers already use or are implementing improved procurement specifications and contract award evaluation criteria emphasizing technical value instead of simply low price. In a value and quality based market, Insituform remains at a distinct advantage. As customers and consulting engineers increasingly rely on quality based purchasing criteria to help ensure long term solutions to their infrastructure needs, they help clearly differentiate proven products such as Insituform from cheaply priced trenchless substitutes with technical, performance and installation risks not equally tested by time or independent third parties.
SALES AND MARKETING
East's sales and marketing effort is directed by its Vice President of Sales and Marketing. East's sales and marketing team includes five sales engineers, three primarily serving municipal customers and two primarily serving industrial market customers. MIDSOUTH Partners' sales and marketing activities are directed by the Partnership Management Committee through the Partnership's General Manager. MIDSOUTH Partners' sales and marketing team includes one sales manager and one regional sales representative. Sales and marketing personnel are full-time employees compensated through a combination of salary and bonus. The Company also participates in seminars and trade shows, and produces and distributes technical video presentations, brochures and newsletters for current and prospective users of the Insituform process.
RESEARCH AND DEVELOPMENT
The Company is confident of its present capability to provide pipeline rehabilitation services to its customers primarily using the Insituform process and relies on its licensor, ITI, for major research and development projects. On a continuing basis, however, the Company expends engineering efforts to improve installation methods and design techniques for specific customer applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments to the use of the Insituform process arising from existing or future regulations or requirements, including those regulating the discharge of materials into the environment.
EMPLOYEES
At June 30, 1996, the Company employed 189 full-time persons, including 46 employees of MIDSOUTH Partners. None of the Company's employees are represented or covered by collective bargaining agreements.
PROPERTIES
The Company 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.
The Company also leases a 13,000 square foot branch facility in the Cincinnati, Ohio, metropolitan area to service operations in the western region of its licensed territory.
TRY TEK owns 13,885 square feet of land in Hanover, Pennsylvania, with 6,139 square feet of manufacturing, administration and storage facilities housed in three buildings.
MIDSOUTH Partners leases a 15,000 square foot facility in Knoxville, Tennessee to serve its customers in Tennessee, Kentucky and northern Mississippi.
LEGAL PROCEEDINGS
There is no material legal proceeding to which the Company is a party or any such legal proceeding contemplated of which the Company is aware.
Capitol Copy Products, Inc.
GENERAL
Capitol Copy Products, Inc. ("Capitol Copy" or the "Company") is in the business of selling, servicing and providing supply products for copier and facsimile ("fax") equipment. Capitol Copy was originally organized under the laws of the District of Columbia on May 4, 1976. The Company became a Delaware corporation on January 27, 1988. The Company's principal business territory comprises the greater metropolitan Washington, D.C. and Baltimore areas, the latter having been authorized by Canon, U.S.A., Inc., effective July 1, 1995.
The Company's primary business products are the Canon line of copiers and fax machines, which the Company is authorized to sell and service under written dealer agreements with the equipment manufacturer (see "Dealer Agreements" below). A material portion of the Company's business is involved in servicing this equipment.
The principal office, corporate headquarters and central distribution facility of the Company are located at 12000 Old Baltimore Pike, Beltsville, Maryland 20705. The Company's telephone number is (301) 937-5030, and its fax number is (301) 937-6031.
DEALER AGREEMENTS
Capitol Copy presently maintains copier and fax dealer agreements with its principal equipment vendor, Canon U.S.A., Inc. ("Canon"). The agreements formally permit Capitol Copy to represent the Company as an "authorized" dealer of each of the manufacturer's copier and fax products, and allows the Company to benefit from advertising, access to product, training, and various other support from the equipment manufacturer.
The Canon agreements authorize a primary sales and service area responsibility ("territory") for the Company to be comprised of the District of Columbia; the Virginia counties of Arlington and Fairfax; the Virginia cities of Alexandria and Fairfax; the Maryland counties of Anne Arundel, Baltimore, Carroll, Harford, Howard, Montgomery and Prince George's; and the Maryland city of Baltimore.
The Canon agreements remain in effect until terminated by either party upon specified notice, or by failure to adhere to agreement provisions. The Company believes that its requirements under the Canon agreements have been and are being met, and that it maintains an excellent relationship with this principal vendor. While the Company's relationship with its customers may enable substitution of an alternate vendor line in the event of any unforeseen termination of the Canon agreements, the Company presently believes that any such termination could have a material adverse impact upon the Company.
CUSTOMERS
The Company provides service and supply products to approximately 8,000 customers in the Washington, D.C. and Baltimore metropolitan area. More than 95% of its active customers are utilizing Canon products.
The majority of the Company's customers operate one to three copier or fax units, with fewer than fifty active accounts operating ten or more machines. No single customer accounts for more than 5% of the Company's annual sales revenue.
PROPERTIES
At June 30, 1996, Capitol Copy occupied three commercial sites in Maryland and Virginia. The Company leases all of its facilities which at year-end aggregated to approximately 21,000 square feet of office, showroom and warehouse space.
The Company believes that the space it occupies for its operations is adequate for its current and near-term requirements. As additions or reductions in space become required, the Company anticipates no material problems in securing in due course appropriate adjustments in occupied space.
COMPETITION
Capitol Copy has several regional competitors in each of the Company's product lines. However, in the Company's principal product line, copiers and fax machines manufactured by Canon, the Company believes it presently is the largest full line dealer in the Washington, D.C. area.
It is possible that the Company's equipment vendors may authorize additional full line dealers in the Company's territory, or that the Company's vendors may themselves enter or expand their product distribution directly. The Company is not aware of any plans by Canon to market directly in the Company's territory (to other than government customers, or major, national accounts, which market segments they have traditionally reserved), or to authorize additional dealers. Based upon overall performance by existing dealers, the Company believes that the historical disinclination of Canon to authorize additional area dealers remains unchanged at present. The Company knows of no adverse developments regarding its dealer agreement with its principal vendor, Canon.
The principal competitive factors affecting the Company are product recognition, the ability to deliver an efficient service and repair capability, and price. As the Company's line of copiers is principally manufactured by an overseas vendor, there exists the risk of currency fluctuations or trade embargoes affecting the pricing or delivery of the Company's products.
SALES AND MARKETING
The Company markets its products directly through its own selling organization consisting of twenty-two sales representatives, four sales managers and the Company President. The sales representatives are organized by geographic area. The sales representatives are full-time employees and are compensated through a combination of salary, commissions and bonuses for sales in excess of quotas.
The sales organization is supported by presentation materials, customer literature and media advertising in both radio and print. In addition, the Company's product lines are advertised on a national basis by the equipment manufacturers.
LEGAL PROCEEDINGS
There is no material legal proceeding to which the Company is a party or any such legal proceeding contemplated of which the Company is aware.
EMPLOYEES
At June 30, 1996, the Company employed 99 full-time persons. None of the Company's employees are represented or covered by collective bargaining agreements.
Item 2.
Item 2. Properties
See the "Properties" sections of Part I, Item 1(c), "Narrative Description of Business" for details concerning the properties of each subsidiary company comprising, in the aggregate, the properties of the Registrant.
Item 3.
Item 3. Legal Proceedings
See Part II, Item 8, "Notes to Consolidated Financial Statements - Note 13: Contingencies" for details concerning (a) a previously disclosed lawsuit in the Court of Chancery of the State of Delaware currently on remand from the Delaware Supreme Court, and (b) a previously disclosed lawsuit pending in the Superior Court of the District of Columbia.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
(i) Common Stock
CERBCO's Common Stock is traded in the over-the-counter market and is included in the National Association of Securities Dealers ("NASD") National Market System ("NMS"). Quotations for such shares are reported in the National Association of Securities Dealers Automated Quotations ("NASDAQ") System under the trading symbol CERB. Holders of Common Stock have one vote per share on all matters on which stockholders are entitled to vote together. The following table shows the range of bid quotations for the period indicated as reported by NASDAQ:
The quotations in the above table represent prices between dealers, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions.
(ii) Class B Common Stock
There is no public trading market for shares of CERBCO's Class B Common Stock. Holders of shares of Class B Common Stock have ten votes per share on all matters with the exception of the election of directors and any other matter requiring the vote of stockholders separately as a class. Holders of Class B Common Stock are entitled to elect the remaining directors after election of not less than 25% of the directors by the holders of Common Stock, voting separately as a class. Shares of Class B Common Stock are convertible at any time to shares of Common Stock on a share-for-share basis.
(b) Holders
As of September 17, 1996, the approximate number of holders of each class of common equity of CERBCO was as follows:
Common Stock 331 Class B Common Stock 135
(c) Dividends
On June 18, 1996, the Company declared cash dividends of five cents per share on its shares of Common Stock and five cents per share on its shares of Class B Common Stock to its shareholders of record at the close of business on June 30, 1996, payable July 15, 1996. No dividends were declared in 1995 or 1994.
Item 6.
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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
The Company recognized consolidated earnings from continuing operations and net earnings of $2,055,291 ($1.40 per share) on sales of $50.7 million, a 13.7% return on equity, for its fiscal year ended June 30, 1996. The Company recognized consolidated earnings from continuing operations of $1,391,039 ($.96 per share) and consolidated net earnings, including a gain on disposal of discontinued operations, of $1,542,388 ($1.06 per share) on sales of $39.1 million, an 11.5% return on equity, for its fiscal year ended June 30, 1995.
The Company's financial reporting for the fiscal year ended June 30, 1996 includes on a consolidated basis, for the first time, the accounts of Insituform East's partnership interest in MIDSOUTH Partners. Insituform East's investment in MIDSOUTH Partners, and therefore the Company's, was accounted for using the equity method in prior years. The fiscal year 1996 change in consolidated reporting arises from a change in control of MIDSOUTH Partners (also trading as Insituform MIDSOUTH), whereby Insituform East obtained majority representation on the partnership Management Committee as a result of a June 12, 1996 arbitration award. The change in control does not affect Insituform East's unaltered 42.5% equity share in partnership earnings and, therefore, financial consolidation of Insituform East's now majority-controlled subsidiary partnership has no effect on the previous, current or future shares of contribution by MIDSOUTH Partners to the overall net earnings of Insituform East or the Company.
The Company attributed its increased results to the record results of Capitol Copy, its copy machine products and services segment, and to a significant decrease in unallocated net general corporate expenses. Capitol Copy recognized sales of $20.2 million in fiscal year 1996, as compared to $17.5 million in fiscal year 1995, as it continued to sell more high volume, higher priced units and expanded its service and supply customer base. Capitol Copy contributed $1,808,072 (up $215,163) in net earnings to CERBCO. Insituform East, the Company's pipeline rehabilitation segment, recognized sales of $30.5 million in fiscal year 1996, as compared to $21.6 million in fiscal year 1995; however, such increase is principally attributable to initiation, in fiscal year 1996, of the inclusion of MIDSOUTH Partners sales in consolidated sales totals. Insituform East contributed $537,138 (down $141,297) in net earnings to CERBCO, and attributed the decrease in its fiscal year earnings to a combination of adverse sales volume during the last six months of fiscal year 1996 resulting from harsh winter weather conditions and lower backlog levels, reduced margins on contracts performed by MIDSOUTH Partners and increased semi-fixed operating costs associated with expanded production capabilities.
Subsidiary contributions were offset by unallocated net general corporate expenses in the amount of ($289,919), (down $590,386), including $186,955 (down $350,661), related to the demands made of, and litigation being continued against, the Company by two associated, minority stockholders in connection with the unconsummated private sale of a controlling interest in the Company abandoned in September 1990. From inception in 1990 through the year ended June 30, 1996, legal fees and expenses resulting from this litigation totaled approximately $2.1 million. In August 1995, a Final Order and Judgment was rendered by the Delaware Court of Chancery in favor of the defendants and denied in toto the plaintiffs' request for legal fees and expenses totaling $1,513,499. This opinion was appealed to the Delaware Supreme Court by the plaintiffs. The Supreme Court issued its decision in April 1996, concluding that the Chancery Court's opinion was "affirmed in part and reversed in part, and this matter is remanded to the Court of Chancery for further determination of damages. Once those damages are fixed, the [Chancery] court should proceed to examine anew any petition for counsel fees on behalf of the plaintiffs." The plaintiffs filed a motion for post-remand relief in May 1996 and, after briefings and oral argument, the Chancery Court issued its decision on September 13, 1996. The order and judgment embodying this ruling have not yet been entered. For additional information concerning this matter, see Part I, Item 3, "Legal Proceedings."
For financial information relating to CERBCO's two operating segments, see Part I, Item 1(b), "Financial Information about Industry Segments."
After experiencing two favorable quarters in fiscal year 1996, Insituform East saw less favorable results in the second half of the year for the reasons stated above. While there can be no assurances regarding future operating performance, based on the volume and mix of its present and expected backlog of customer orders, Insituform East anticipates these less favorable results to extend or expand through the first quarter of fiscal year 1997. However, Insituform East presently believes that anticipated increases in immediately workable backlog should result in favorable results over the remaining three quarters of fiscal year 1997.
The Company believes the trenchless pipeline reconstruction marketplace is continuing to expand, thereby enticing, however, the entry of ever more imitations and substitute products hoping that cheap price alone may permit them to succeed in a market otherwise dominated by Insituform. In those limited markets where the cheapest priced product may be deemed technically "good enough," Insituform is at a disadvantage. Strategic participation undertaken by the Company in this market share segment to preserve competitive presence, usually at levels materially below normal margins, necessarily dilutes the overall margin performance of the Company. However, a majority of the Company's customers already use or are implementing improved procurement specifications and contract award evaluation criteria emphasizing technical value instead of simply low price. In a value and quality based market, Insituform remains at a distinct advantage. As customers and consulting engineers increasingly rely on quality based purchasing criteria to help ensure long term solutions to their infrastructure needs, they help clearly differentiate proven products such as Insituform from cheaply priced trenchless substitutes with technical, performance and installation risks not equally tested by time or independent third parties.
The principal factor affecting Insituform East's future performance remains the volatility of earnings as a function of sales volume at normal margins. Accordingly, because a substantial portion of Insituform East's costs are semi-fixed in nature, earnings can, at times, be severely reduced or eliminated during periods of depressed sales at normal margins or material increases in discounted sales, even where total revenues 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.
Capitol Copy has increased sales in each of the last six years, growing from sales of $9.5 million in fiscal year 1991 to $20.2 million in fiscal year 1996, in a sales and service territory consisting of the cities and counties in the Washington, D.C. metropolitan area, and since July 1995, the contiguous Baltimore metropolitan area. Earnings have increased from approximately $0.3 million to $2.7 million in this same six-year period. Again, while there can be no assurances, the Company presently expects continued favorable results from this operating segment throughout fiscal year 1997.
Results of Operations
The following table sets forth, for the periods indicated, the relative percentages that certain items of expense and earnings bear to the sales of CERBCO and the percentage increases in the dollar amounts of each item from period to period.
1996 vs 1995
Consolidated sales increased $11.5 million (29.5%) in 1996 as compared to 1995, as sales increased in both of the Company's operating segments. Insituform East's sales increased $8.9 million (41.1%), primarily due to the inclusion of MIDSOUTH Partners' sales in its consolidated sales total. Comparable period East sales increased 4%, primarily as a result of expanded production capacity and high levels of workable backlog during the first six months of fiscal year 1996. Capitol Copy's sales increased $2.7 million (15.2%) in 1996, with its equipment sales increasing 14.3% and its copier service and supply revenues increasing 15.8%. The increases in both areas reflect a continuing expansion in Capitol Copy's customer base, and expansion into the Baltimore area with sales of approximately $0.8 million for 1996.
Operating profit increased $1.4 million (25.6%) in 1996 as compared to 1995 as operating profit increased in both of the Company's operating segments, and the parent company's operating loss decreased. Insituform East's operating profit increased 22.2% as a result of including MIDSOUTH Partners' operating profit in 1996. Insituform East's gross profit margin decreased from 30.5% to 26.9% primarily as a result of increased semi-fixed operating costs associated with expanded East production capacity in 1996 and reduced margins on MIDSOUTH Partners' Insituform contracts. Insituform East's selling, general and administrative costs increased 25.8% primarily as a result of including MIDSOUTH Partners' selling, general and administrative costs in 1996. Capitol Copy's operating profit increased 10.1%, a smaller increase than sales, as overall gross profit margin decreased from 41.4% to 40.4% and selling, general and administrative costs increased 15.3%. Capitol Copy's selling, general and administrative costs increased primarily due to the additional selling expenses associated with opening its Baltimore office.
1995 vs 1994
Consolidated sales increased $9.3 million (31.2%) in 1995 as compared to 1994 as sales increased in both of the Company's operating segments. Insituform East's sales increased $6.8 million (45.9%), primarily due to available work and expanded production capacity associated with the addition of another installation crew during the second quarter of fiscal year 1995. Insituform East achieved sales volume increases at normal margins in all three of its market sectors -- municipal, Federal government and industrial. Sales in these three areas were 65%, 21% and 14%, respectively, of Insituform East's fiscal year 1995 sales. Capitol Copy's sales increased $2.5 million (16.7%) in 1995. While equipment sales increased 8.5%, reflecting some increase in the sales of high volume machines which typically sell at higher prices, copier service and supply revenues increased 24.7% primarily due to an increase, net of cancellations, in service contracts resulting from an expanding customer base.
Operating profit increased $3.3 million (149.9%) in 1995 as compared to 1994 due primarily to Insituform East achieving an operating profit of $2.5 million in 1995 after an operating loss of -$0.2 million in 1994. Insituform East's gross profit margin increased from 22.5% to 30.5% as its semi-fixed operating costs were absorbed over increased sales in 1995. Insituform East's selling, general and administrative costs increased 15.7%, a smaller percentage increase than sales, primarily as a result of costs associated with increased production activities. Capitol Copy's operating profit increased $1.1 million (35.0%) to $4.1 million, as overall gross profit increased from 39.2% to 41.4% and general and administrative costs increased 11.3%, a smaller percentage increase than sales. The parent company's operating loss increased $0.4 million primarily due to an increase in corporate legal expenses.
Insituform East's equity in the operating results of MIDSOUTH Partners increased $0.6 million (377.3%) in 1995 as compared to 1994, primarily as a result of a 43.5% increase in MIDSOUTH Partners' comparable period sales from $6.2 million to $8.9 million. The increase in sales was due to consistently high production levels throughout the year and increased sales to Federal government customers. The Partnership's gross profit margin increased from 21.1% in 1994 to 30.7% in 1995 due in part to improved production efficiency, the mix of contracts performed and the absorption of semi- fixed operating costs over increased sales.
The gain on disposal of discontinued operations decreased from $0.7 million in 1994 to $0.1 million in 1995, primarily due to the receipt of a substantial one-time payment in 1994 in connection with the discontinued operations of CERBERONICS resulting from the settlement of a lawsuit with the U.S. Navy (see Part II, Item 8, "Notes to Consolidated Financial Statements -- Note 7: Discontinued Operations").
Liquidity and Capital Resources
Liquidity may be defined as the Company's ability to mobilize cash. Cash and cash equivalents increased $5.0 million in fiscal year 1996. Insituform East's cash and cash equivalents increased $1.4 million, including the $0.7 million provided by consolidating MIDSOUTH Partners. Capitol Copy's cash and cash equivalents increased $2.0 million. At the holding company level, CERBCO's cash and cash equivalents increased $1.6 million, as $1.8 million was provided by the sale of temporary investments. Consolidated cash and cash equivalents increased $3.0 million in fiscal year 1995.
The Company's operating activities provided approximately $5.9 and $4.7 million in cash during fiscal years 1996 and 1995, respectively, primarily due to the earnings of the Company's two operating subsidiaries and non-cash expenses by it and its subsidiaries for depreciation and amortization.
Net cash used in investing activities was approximately $0.4 million and $1.0 million in fiscal years 1996 and 1995, respectively. The primary use of such funds was for capital expenditures by Insituform East in each of the fiscal years to upgrade, expand and improve production capabilities.
Net cash used in financing activities was $0.4 million and $0.7 million in fiscal years 1996 and 1995, respectively. During fiscal year 1996, Capitol Copy paid cash dividends declared at mid-year. During fiscal years 1996 and 1995, Insituform East paid cash dividends declared for fiscal years 1995 and 1994, respectively. During fiscal year 1995, Capitol Copy paid down its line of credit.
CERBCO believes that its two principal operating subsidiaries, Insituform East and Capitol Copy, have cash reserves, existing open bank lines of credit or borrowing potential against unencumbered assets sufficient to meet the respective cash flow requirements for operating funds and capital expenditures of each operating company. Insituform East has available as undrawn the amount of $3.0 million on its individual line of credit. Capitol Copy did not deem it necessary to renew its line of credit which expired January 31, 1995. Its cash reserves were approximately $3.2 million at June 30, 1996 and are expected to grow further in fiscal year 1997. The parent holding company, CERBCO, also does not have a separate bank line of credit, but has cash reserves in excess of $2.8 million which are believed to be adequate to meet its own cash flow requirements, or the temporary requirements of its subsidiaries, in the foreseeable future, including continuing legal fees and expenses of the parent in connection with the stockholder litigation now on remand to the Delaware Chancery Court. The Company cannot, of course, predict the outcome of pending litigation, including further appeals. Any outcome that resulted in an award to plaintiffs of their legal fees and expenses, however, could have a material adverse effect on the future liquidity of the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data
See financial statements and supplementary financial information provided following Item 9
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CERBCO, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Washington, D.C. September 20, 1996
CERBCO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the parent holding company, CERBCO, Inc. ("CERBCO"); its majority-owned subsidiary, Capitol Copy Products, Inc. ("Capitol Copy"); 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 controlling interests in two principal subsidiaries, each of which is in a separate industry segment. Insituform East, operating pursuant to sublicense agreements with Insituform Technologies, Inc. ("ITI"), provides a patented process called "Insituform" primarily to municipalities and state agencies for the repair and reconstruction of sewers and other types of pipelines. The Insituform(R) process creates a hard, jointless, impact and corrosion resistant Insitupipe(R) product inside deteriorating pipes, with a principal benefit that it can usually be installed without excavation. Capitol Copy is in the business of selling, servicing and providing supply products for copier and facsimile equipment, operating pursuant to certain dealer agreements, primarily with Canon, U.S.A., Inc.
Revenue Recognition
The Company recognizes revenue under contracts to rehabilitate pipeline sections using the units of completion method. A rehabilitated pipeline section is considered completed work and is generally billable to the customer.
Sales of copier and facsimile equipment are recorded as revenue on the date the equipment is shipped. Revenue from maintenance contracts is recognized ratably over the terms of the agreements.
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.
Temporary Investments
Temporary investments are composed of U.S. Treasury instruments with maturities of greater than three months. Temporary investments are stated at cost plus accrued interest which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost for pipeline rehabilitation materials is determined by the first-in, first-out method. Cost for copier and facsimile equipment, supplies and parts is determined by the average cost method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation has been provided in the financial statements using the straight-line or declining balance methods at rates which are based upon reasonable estimates of the properties' useful lives. These lives range from three to ten years for vehicles, equipment and furniture, and twenty to forty years for buildings. Leasehold improvements are amortized using the straight-line method over the life of the lease.
Betterments or improvements which increase the estimated useful life of an asset are capitalized. Repairs and maintenance are charged directly to expense as incurred. The Company incurred repair and maintenance costs of approximately $1,055,000, $824,000 and $567,000 in fiscal years 1996, 1995 and 1994, respectively.
Goodwill
The excess of cost over the fair values of the Insituform East and Capitol Copy net tangible assets ("goodwill") acquired in 1985 and 1987, respectively, is amortized using the straight-line method over forty years. The Company annually reviews its goodwill recoverability by assessing the historical profitability of its segments and expectations as to future nondiscounted cash flows and operating income for each segment, as well as: the continued use of the segments' names; the continued use of Insituform East's license agreements and the status of various patents which govern the Insituform process; and the success of Capitol Copy in meeting its commitments under its dealer agreements. Based upon its most recent analysis, the Company believes that no impairment of goodwill exists at June 30, 1996.
Income Taxes
The Company provides for federal and state income taxes at the statutory rates in effect on taxable income. Deferred income taxes result from recognizing certain items of income and expense in consolidated financial statements in different years from those in income tax returns. These temporary differences relate principally to use of accelerated depreciation methods for tax purposes; timing of the payment of compensated absences; timing of the recognition of income from the Company's investment in MIDSOUTH Partners (see Note 6: Investment in MIDSOUTH Partners); and timing of the recognition of income from certain lease transactions and maintenance contracts.
Through September 30, 1992, CERBCO filed consolidated federal and state tax returns, which included the results of Capitol Copy. Beginning October 1, 1992, Capitol Copy filed separate federal and state tax returns. Taxes are reported in the financial statements for this subsidiary as if it filed separate returns for all periods through September 30, 1992. The difference between the total taxes so reported for the subsidiary and the consolidated expense was reported as part of the parent company's tax expense. The parent therefore received the benefit of, or charge for, any difference between the consolidated tax provision and separate return provisions.
Insituform East and Capitol Copy file separate federal and state tax returns, and their provisions are combined with CERBCO's consolidated provision.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), issued by the Financial Accounting Standards Board is effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS No. 123 are also effective for financial statements for fiscal years beginning after December 15, 1995. The new standard encourages entities to adopt a fair value method of accounting for employee stock-based compensation plans. As allowed under the provisions of SFAS No. 123, the Company intends to continue to measure compensation cost for employee stock-based compensation plans using the intrinsic value based method of accounting prescribed by the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As such, the Company would be required to provide pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Thus, adoption during the fiscal year ending June 30, 1997, should have no effect on the Company's financial position or results of operations.
2. Accounts Receivable
3. Inventories
4. Equity in Insituform East
At June 30, 1996 and 1995, CERBCO beneficially held 1,100,000 shares of Insituform East Common Stock and 296,141 shares of convertible Insituform East Class B Common Stock representing approximately 27.1% of the Common Stock, 99.5% of the Class B Common Stock, 32.0% of the total equity and 57.7% of the total voting power of all outstanding classes of Insituform East stock. Holders of Class B Common Stock, voting separately as a class, have the right to elect the remaining members of the Board of Directors after election of not less than 25% of the directors by holders of shares of Common Stock, voting separately as a class.
From time to time, Insituform East issues additional shares of stock as a result of stock dividends and exercised stock options. Changes in capital structure resulting from such additional stock issues decrease CERBCO's equity ownership. No additional shares were issued in 1996, 1995 or 1994. If all the options and warrants outstanding at June 30, 1996 were exercised, the resulting percentages of CERBCO's equity ownership and total voting power would be 29.7% and 55.0%, 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 1996, 1995 or 1994.
5. Equity in Capitol Copy
At June 30, 1996 and 1995, CERBCO beneficially held 800 shares, and Capitol Copy's president held 400 shares, of Capitol Copy Class B Stock, representing 66 2/3% and 33 1/3%, respectively, of the one outstanding class of Capitol Copy stock.
6. Investment in MIDSOUTH Partners
CERBCO's consolidated financial statements as of June 30, 1996 and for the year then ended include the accounts of MIDSOUTH Partners, Insituform East's majority controlled subsidiary partnership since June 12, 1996. MIDSOUTH Partners was organized as Insituform MIDSOUTH, a Tennessee general partnership, in December 1985 with Insituform East as a general partner. MIDSOUTH Partners is the exclusive licensee for the Insituform process and NuPipe process in Tennessee, Kentucky (excluding Boone, Kenton and Campbell counties) and northern Mississippi. The Partnership's general partners at June 30, 1996 are Insitu, Inc., a wholly-owned subsidiary of Insituform East; E-Midsouth, Inc., an affiliate of Insituform Technologies, Inc. ("ITI"); and Insituform California, Inc., also an affiliate of ITI.
Management and conduct of the business of MIDSOUTH Partners is vested in a Management Committee. The seven-member Partnership Management Committee consisted of four Insitu, Inc. representatives, two E-Midsouth, Inc. representatives and one Insituform California, Inc. representative at June 30, 1996. Insituform East did not have majority representation on the Partnership Management Committee prior to a June 12, 1996 arbitration award, which, in connection with a default of the Partnership Agreement by E-Midsouth, Inc., granted Insitu, Inc. the unilateral right to appoint an additional Management Committee member in place of an E-Midsouth, Inc. representative.
Partnership profits and losses are allocated to the partners as follows: Insitu, Inc. 42.5% E-Midsouth, Inc. 42.5% Insituform California, Inc. 15.0%
The following is condensed financial information of MIDSOUTH Partners at June 30, 1996, 1995 and 1994, and for each of the three years in the period ended June 30, 1996:
7. Discontinued Operations
On June 11, 1993, the Company adopted a formal plan to discontinue providing cement mortar lining services conducted through its pipeline rehabilitation segment, Insituform East. This plan included declining to bid on future cement mortar lining contracts, fulfilling existing commitments and selling remaining equipment and materials associated with this service capability. The Company substantially completed two existing contracts in progress and sold substantially all remaining equipment and materials during the year ended June 30, 1994. Sales revenues from cement mortar lining activities for the year ended June 30, 1994 was $1,080,773. This amount is not included in sales in the accompanying Consolidated Statements of Earnings.
On March 31, 1991, the Company adopted a formal plan to discontinue the operations of its defense contract services segment conducted through its wholly-owned subsidiary, CERBERONICS, Inc. ("CERBERONICS"). The segment did not operate subsequent to June 30, 1991.
On December 14, 1993, the Company obtained payment of $991,520, consisting of a judgment for $871,649 plus interest of $119,871, resulting from settlement of a lawsuit against the U.S. Navy in connection with open proposals under CERBERONICS's former C-9 contract. The payment resulted in a gain from discontinued operations of $730,337 for the fiscal year ended June 30, 1994. During fiscal year 1995, the Company obtained final payment from the Federal government on five contracts completed by CERBERONICS on or before June 30, 1991. These payments resulted in a gain from discontinued operations of $151,349 for the fiscal year ended June 30, 1995. There are no material open items remaining that pertain to other former contracts of CERBERONICS.
8. Supplemental Executive Retirement Plan
The Company has an unfunded supplemental pension plan for its three executive officers, effected January 1, 1994. The expense for this plan was $77,784, $67,932 and $31,740 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
To facilitate the payment of benefits, the Company has established a trust. Funds in the trust are invested in variable life insurance policies and are included in the Company's balance sheet as cash surrender value of life insurance in the amounts of $498,974 and $254,060 at June 30, 1996 and 1995, respectively. This trust is subject to the claims of the Company's creditors in the event of bankruptcy or insolvency.
9. Loans Payable
Insituform East maintains a $3,000,000 bank line of credit which is currently available to it through December 31, 1997. Interest on borrowings against this line of credit is payable monthly at the bank's prime rate. The line is unsecured; however, Insituform East must comply quarterly with financial liquidity, net worth, tangible net worth and debt to equity leverage covenants. At June 30, 1996, the amount available as undrawn on this line was $3,000,000. Capitol Copy had a $1,500,000 bank line of credit which expired January 31, 1995. Capitol Copy did not deem it necessary to renew such line, as both it and Insituform East have agreements in place with the parent company, CERBCO, whereby each may borrow up to $1,000,000 for operating purposes from CERBCO at interest rates not less than the subsidiary would pay to its respective bank. At June 30, 1996, neither subsidiary had amounts outstanding under these agreements.
10. Accounts Payable and Accrued Liabilities
11. Long-Term Debt
12. Commitments
The Company utilizes certain equipment and facilities under operating leases providing for payment of fixed rents and the pass-through of certain landlord expenses. Rental expense was approximately $500,000, $480,000 and $328,000 for the years ended June 30, 1996, 1995 and 1994, respectively. In addition, the Company obtains vehicles and computer and other office equipment under long-term capital leases. The net book value of equipment under capital leases was $166,912 and $61,396 as of June 30, 1996 and 1995, respectively. Minimum future rental commitments under long-term capital and operating leases in effect at June 30, 1996, are as follows:
The Company's pipeline rehabilitation using the Insituform process is performed under seven sublicense agreements with ITI. These sublicenses grant the Company exclusive rights to perform the Insituform process in the states of Maryland, Virginia, Delaware, the District of Columbia, Pennsylvania, Ohio, West Virginia, Kentucky, Tennessee and northern Mississippi. The agreements are for the life of the patents or the patent rights unless sooner terminated by a specified action of either party. The agreements obligate the Company to pay ITI a royalty equal to 8% of the gross contract price of all contracts performed utilizing the process, less certain fees. The total royalty expense was approximately $1,847,000, $1,354,000 and $920,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
The Company has also entered into license agreements for identical territories with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R) process and trademark. The Company has committed to pay royalty equal to 6.75% of gross contract revenues utilizing the NuPipe process and to purchase certain installation equipment and installation materials from NuPipe, Inc.
The Company has supply agreements with ITI committing the Company to purchase 90% of its Insitutube(R) material requirements from ITI. As a result of certain terms not previously fulfilled by ITI, the Company believes it is no longer required to purchase 90% of its Insitutube material requirements from ITI under the otherwise continuing agreements. These agreements, which presently extend through April 30, 1997, are renewable annually unless notice of termination is provided by either party six months prior to the end of the current renewal period. During the three years ended June 30, 1995, the Company purchased substantially all of its Insitutube from ITI.
13. Contingencies
As previously reported by the Company, in March 1990, the controlling stockholders of the Company, Messrs. George Wm. Erikson and Robert W. Erikson (together, the "Eriksons"), executed a letter of intent and subsequently executed four amendments thereto (collectively referred to herein as the "Letter of Intent") with Insituform Technologies, Inc. ("ITI") to effect a sale of their controlling interest in the Company to ITI for $6,000,000 (the "Proposed Transaction"). The Proposed Transaction, if consummated, would have had the effect of making ITI the controlling stockholder of the Company, and, indirectly, of each of the Company's three direct subsidiaries at the time, Insituform East, Capitol Copy, and CERBERONICS. In September 1990, the Eriksons informed the Company that the Letter of Intent had expired without consummation of any transaction, that it would not be further extended, that negotiations had ceased, and that the Eriksons had no further intention at the time of pursuing the proposed sale of their controlling interest in the Company to ITI.
In August 1990, a complaint against the Company and the Eriksons was filed in the Delaware Court of Chancery (the "Delaware Complaint") by two stockholders of the Company, on their own behalf and derivatively on behalf of the Company, which sought (i) damages against the individual defendants for alleged breach of fiduciary duties in an amount not less than $6,000,000, together with interest thereon from March 12, 1990; (ii) to permanently enjoin the Eriksons from completing any transaction with ITI similar in substance to the Proposed Transaction; (iii) a declaration of the invalidity of the 1982 authorization for and issuance of the Company's Class B Common Stock, and, therefore, of the entitlement of holders of Class B Common Stock to elect any members of the Company's Board; (iv) a declaration of the invalidity of the 1990 election of the Company's directors and the issuance of new proxy materials that fully and fairly disclose all facts which plaintiffs claim are material to the election of such directors; (v) an award to the plaintiffs of their costs of bringing the action, including reasonable attorneys' fees; and (vi) an award to plaintiffs of such further relief as the Court of Chancery deemed appropriate. In addition, the Complaint asserted a claim against the individual defendants alleging that the Company had forgone a corporate opportunity by the continued failure to pursue a transaction with ITI.
All but one of the plaintiffs' claims subsequently were dismissed. The claim remaining in the litigation was plaintiffs' allegation that the Proposed Transaction was an opportunity belonging to the Company and that the Eriksons breached their duty to the Company by precluding the Company from taking advantage of that opportunity so that the Eriksons might have a chance to do so. Trial in this matter was held beginning February 21, 1995.
Following post-trial briefing and argument, Chancellor Allen issued an opinion on August 9, 1995, in which he ruled in favor of the Eriksons. The court determined that, while the Eriksons failed in certain limited respects to meet the standards of loyalty required of them under Delaware corporate law, that "deviation from proper corporate practice" neither caused injury to CERBCO nor resulted in any substantial gain to the Eriksons. The Court also found that the Eriksons met their burden of showing that their conduct was "wholly fair to the corporation." With the decision, all of the plaintiffs' claims have been resolved in favor of CERBCO and/or the Eriksons.
On August 25, 1995, the Court of Chancery issued its Memorandum and Order on Final Judgment and a corresponding Final Order and Judgment, which latter document formally entered judgment in favor of the Eriksons and denied in toto the plaintiffs' request for legal fees and expenses totaling $1,513,499. The Court concluded that the litigation conferred no substantial benefit on CERBCO, so that it would be inappropriate to require CERBCO and its stockholders to share the costs that plaintiffs incurred.
The plaintiffs filed a Notice of Appeal with the Delaware Supreme Court on August 30, 1995. Briefing was completed on December 6, 1995. Oral argument was held on January 18, 1996. On April 10, 1996, the Delaware Supreme Court issued its decision. The Court ruled that "[t]he Eriksons were entitled to profit from their control premium and to that end compete with CERBCO but only after informing CERBCO of the opportunity" for a transaction with ITI. Although the Eriksons were deemed to have breached their duty of loyalty, the Supreme Court affirmed the finding of the Court of Chancery that there was no viable transaction that could take place between CERBCO and ITI, given the Eriksons' ability to veto such a transaction as controlling shareholders of CERBCO. Therefore, no damages could be awarded for the loss of a transaction that had a "zero probability of occurring due to the lawful exercise of statutory rights." The Supreme Court did rule, however, that the Eriksons were liable to CERBCO for $75,000 they received from ITI for extending the Letter of Intent (the "Extension Fee"), and had to reimburse the expenses, if any, that CERBCO "incurred to accommodate the Eriksons' pursuit of their own interests" prior to the abandonment of the proposed transaction with ITI. The Supreme Court concluded that the Chancery Court's opinion was therefore "affirmed in part and reversed in part, and this matter is remanded to the Court of Chancery for further determination of damages. Once those damages are fixed, the [Chancery] court should proceed to examine anew any petition for counsel fees on behalf of the plaintiffs." The Eriksons filed motions for reargument and for rehearing en banc, which motions the Supreme Court denied, and on May 15, 1996, the case was remanded to the Court of Chancery.
On May 20, 1996, the plaintiffs filed a motion for post-remand relief in the Court of Chancery, seeking (a) a "disgorgement of benefits" allegedly received by the Eriksons in the aggregate amount of $451,000; (b) "damages attributable to the Eriksons' breach of fiduciary duty" in an aggregate amount of almost $1.4 million; and (c) certain injunctive relief against the Eriksons with respect to "any further negotiations with ITI respecting ITI's interest in obtaining control of [Insituform East]." The Eriksons and the plaintiffs filed briefs in connection with the plaintiffs' motion. Oral argument on the motion was presented to the Court of Chancery on July 15, 1996.
On September 13, 1996, the Court of Chancery issued its decision on remand. The Court ruled that the Eriksons were obligated to pay CERBCO the principal amount of $188,200, plus interest, representing legal fees paid to the law firm of Morgan, Lewis & Bockius as counsel for the special committee of the CERBCO Board of Directors that was appointed in 1990 in connection with the Proposed Transaction. The Court of Chancery also ruled that the Eriksons were obligated to pay CERBCO interest on the $75,000 Extension Fee the Supreme Court had ordered the Eriksons to pay to CERBCO. All of the plaintiffs' other claims were rejected, except that the Court ruled it was premature to determine plaintiffs' claim that the Eriksons were obligated to reimburse CERBCO for advances to them of the defense costs of the litigation. The order and judgment embodying the Court's rulings have not yet been entered and, accordingly, the time for filing any appeals from the Court of Chancery's decision on remand has not yet commenced. The Eriksons have advised the Company they are likely to appeal the judgment. The plaintiffs have not yet submitted a petition in the Court of Chancery for counsel fees as contemplated by the April 10, 1996 Delaware Supreme Court decision.
As previously reported by the Copmpany, in January 1993, a separate lawsuit against the partners in the law firm of Rogers & Wells and the Company, arising out of the subject matter of the Delaware litigation, was filed in the Superior Court of the District of Columbia (the "D.C. Complaint"). The plaintiffs are the same two stockholders, and a former director of the Company, and have alleged that Rogers & Wells breached its duty of loyalty and care to the Company by representing allegedly conflicting interests of the Eriksons in the Proposed Transaction with ITI. The plaintiffs also claim that Rogers & Wells committed malpractice by allegedly making misrepresentations to the Company's Board and allegedly failing to properly inform the Company's Board. The plaintiffs claim that the conduct of Rogers & Wells caused the Company to lose an opportunity to sell its control of Insituform East to ITI, caused the Company to incur substantial expense, and unjustly enriched Rogers & Wells. The D.C. complaint seeks to recover from Rogers & Wells (i) damages in an amount equal to all fees paid to Rogers & Wells, (ii) damages in an amount not less than $6,000,000 for the loss of the opportunity for the Company to sell its control of Insituform East to ITI, and (iii) punitive damages. Although the complaint states that it was filed on behalf of the Company, management does not believe that Rogers & Wells should be sued on any of the claims set forth in the complaint.
Motions to dismiss this case by the Company and Rogers & Wells were denied, but a stay in the proceedings was granted until after the Delaware trial. After the Court of Chancery's August 9, 1995 opinion was rendered, the parties to the Superior Court action filed status reports. On November 13, 1995, plaintiffs agreed to a stay in the Superior Court action pending the outcome of the appeal to the Delaware Supreme Court. In accordance with a status report filed by the parties with the Superior Court on or about June 28, 1996, the stay of the District of Columbia action was continued at least until such time as the Delaware Court of Chancery ruled upon the plaintiffs' pending motion for post-remand relief.
Management believes ultimate resolution of these matters will not have a material effect on the financial statements. Accordingly, no provision for these contingencies has been reflected therein.
CERBCO is involved in other contingencies, none of which could, in the opinion of management, materially affect the Company's financial position or results of operations.
14. 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 1996, 112 shares of Class B Common Stock were converted to Common Stock. In 1995, no shares of Class B Common Stock were converted to Common Stock. In 1994, 56 shares of Class B Common Stock were converted to Common Stock.
Each share of Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes, except with respect to the election of directors and any other matter requiring the vote of shareholders separately as a class. The holders of Common Stock, voting as a separate class, are entitled to elect that number of directors which constitutes twenty-five percent (25%) of the authorized number of members of the Board of Directors and, if such 25% is not a whole number, then the holders of Common Stock are entitled to elect the nearest higher whole number of directors that is at least 25% of such membership. The holders of Class B Common Stock, also voting as a separate class, are entitled to elect the remaining directors. In addition, the holders of Common Stock have certain dividend preferences.
15. Income Taxes
The Company has tax basis net operating losses of approximately $900,000 that may be carried forward to offset future income tax liabilities. These carryforwards will expire in fiscal years 2005 through 2011.
16. Earnings Per Share
Earnings per share data have been computed based upon the weighted average number of common shares outstanding and common share equivalents during each period. The following numbers of shares have been used in the computations:
1996 1995 1994 ---- ---- ----
1,465,169 1,459,848 1,457,456 ========= ========= =========
17. Retirement Benefit Plans
Employees of Insituform East and MIDSOUTH Partners who meet certain minimum eligibility requirements and who are not covered by a collective bargaining agreement participate in separate profit-sharing plans. No employees were covered by collective bargaining agreements as of June 30, 1996. Contributions to the plan are determined annually by the respective companies. Contributions to Insituform East's plan were $198,844, $183,489 and $84,775 in fiscal years 1996, 1995 and 1994, respectively. The contribution to MIDSOUTH Partners' plan was $64,878 in fiscal year 1996.
Employees of Capitol Copy who meet certain minimum eligibility requirements also participate in a profit-sharing plan. Contributions are determined annually by Capitol Copy's Board of Directors. No contributions were made in fiscal year 1996. Contributions to the plan were $55,052 and $48,864 in fiscal years 1995 and 1994, respectively.
18. Stock Option Plans
CERBCO granted options under the Directors' Stock Option Plan on 3,000 shares of CERBCO's Common Stock on December 15, 1995 and 6,000 shares of CERBCO's Common Stock on December 16, 1994 and December 17, 1993, at the option prices of $6.375, $5.125 and $3.50, respectively, per share, exercisable within three years of the date of the grant. The following is a summary of transactions:
At June 30, 1996, there were no remaining shares reserved for future grants under the Directors' Stock Option Plan.
On June 6, 1987, CERBCO granted under the 1986 Employee Stock Option Plan options on 51,483 shares of Common Stock to its officers, and the officers and managers of CERBERONICS, at an option price of $7.00 per share exercisable within ten years of the date of the grant. There were no additional grants or exercise of options available under this plan in fiscal year 1996. This plan automatically terminated on June 28, 1996.
19. Segment Data and Reconciliation
CERBCO's operations are classified into two principal industry segments: pipeline rehabilitation and copier equipment products and services. The following is a summary of pertinent industry segment information. General corporate assets are principally intercompany receivables and investments that are owned by the holding company. General corporate expenses include items which are of an overall holding company nature and are not allocated to the segments.
During the year ended June 30, 1996, the Federal government (collectively), a county government in the Washington, D.C. metropolitan area and a regional sanitary authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the Company's pipeline rehabilitation sales. During the year ended June 30, 1995, the Federal government (collectively), the same regional sanitary authority in southwest Ohio and Washington Metropolitan Area Transit Authority ("WMATA") accounted for 21%, 15% and 10%, respectively, of these sales. During the year ended June 30, 1994, the Federal government (collectively) accounted for 15% of these sales. No single customer accounted for 10% or more of the Company's copier machine products and service sales during the last three fiscal years.
20. Unaudited Quarterly Financial Data
The following table provides summarized quarterly results of operations for fiscal years 1996 and 1995 (in thousands, except per share information):
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of CERBCO Directors
Directors of CERBCO are elected at the Annual Meeting of Stockholders except that vacancies and newly created directorships may be filled by the directors then in office. Each director holds office until his successor is elected and qualified or until his earlier resignation or removal.
(b) Identification of CERBCO Executive Officers and (Principal Officer of Each Subsidiary)
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, President and Treasurer, and Mr. George Erikson, Director, Chairman and General Counsel are brothers.
(e) Business Experience
(1) Mr. Robert Erikson was a Supply Corps officer in the Navy from 1968 through 1972. Mr. Erikson joined CERBERONICS in December 1972. In May 1974, he was elected Vice President of Finance and Administration and, in December 1974, he became Executive Vice President, Treasurer and a Director. In October 1977, he was elected President. In February 1988, he was elected President and Treasurer of CERBCO. Mr. Erikson currently is a Director and Vice Chairman of Capitol Copy, a Director, Vice Chairman and President of Insituform East and serves as a member of the Chief Executive Officer Committee of Capitol Copy and Insituform East. He was a Director of Palmer National Bancorp, Inc. and The Palmer National Bank from 1983 to 1996, and is a Director of The Palmer National Bank's successor, The George Mason Bank, N.A., since May 1996. 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 Capitol Copy and a Director and Chairman of Insituform East and serves as a member of the Chief Executive Officer Committee of Capitol Copy and Insituform East. From December 1972 to July 1976, he was employed as Vice President - Legal by National Securities & Research Corporation and, prior thereto, he was employed as an attorney to the Dreyfus Corporation. He is a member of the Bar of the State of New York, District of Columbia and Commonwealth of Virginia. Mr. Erikson holds a B.S. degree in Business Administration from Pennsylvania State University, an LL.B. degree from Fordham University Law School, and an LL.M. degree from New York University Law School.
Mr. Hartman joined CERBERONICS in August 1979 as Controller and Manager of the Accounting Department. In November 1981, he was elected Assistant Vice President and in April 1984, he was elected Vice President & Treasurer, in which positions he served until his departure from CERBERONICS in September 1985. From October 1985 to February 1988, Mr. Hartman was Controller of Dynamac International, Inc. He returned to CERBERONICS and his former positions in February 1988 and, in addition, was elected Vice President and Controller of CERBCO. In June 1991, he joined Insituform East as Vice President of Administration and was elected Secretary of CERBCO, Insituform East and Capitol Copy. 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. Manoogian holds a B.S. degree in Business Administration from Pennsylvania State University and an M.B.A. from Pace University. In October 1987, he was elected a Director and President of Capitol Copy and serves as a member of the Chief Executive Officer Committee. Immediately prior to joining Capitol Copy, Mr. Manoogian served as President and Chief Operating Officer of a publicly-traded East Coast computer retailing organization. His previous business experience includes 17 years with the Xerox Corporation, starting as a sales representative in 1966, progressing through numerous field and headquarters marketing assignments, and culminating in his final position as Region General Manager for the Mid-Atlantic Operations Group based in Washington, D.C.
Mr. Hayes is a Director and Executive Vice President of George Mason Bankshares, Inc. and Chairman, President and CEO of The George Mason Bank, N.A., since May 1996. 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 Capitol Copy. He is also a Director of Citizens Corporation in Eastman, Georgia, and is a member of the Board of Visitors of the University of North Carolina. In January 1995, he completed a three year term as a Director of the Federal Reserve Bank of Richmond. He holds a B.A. degree from the University of North Carolina and an executive management degree from Columbia University School of Business.
Mr. Kincheloe holds a B.A. degree from Randolph-Macon College and a J.D. degree from T.C. Williams School of Law, University of Richmond. He has been a practicing attorney and businessman in Fairfax County, Virginia, since 1967. He previously served on the Board of Herndon Federal Savings & Loan and then First Federal Savings & Loan of Alexandria. He currently serves on the Board, as Finance Chairman, of Flint Hill School in Oakton, Virginia, and on the Board of Trustees for Randolph-Macon College. Mr. Kincheloe serves as a Director of Insituform East and Capitol Copy.
(2) Directorships. See Part III, Item 10 (e)(1), paragraphs 1, 2, 5 and 6, as to Messrs. Robert Erikson and George Erikson, Hayes and Kincheloe, respectively.
(f) Involvement in Certain Legal Proceedings
Not applicable.
Item 11.
Item 11.Executive Compensation
CERBCO is a parent holding company with controlling interests in two principal subsidiaries, Insituform East ("IEI") and Capitol Copy Products ("CCP"). CERBCO officers participate also in the management of these subsidiaries. The following table sets forth information concerning the compensation paid to each of the named executive officers of the Company and/or its subsidiaries for the fiscal years ended June 30, 1996, 1995 and 1994:
COMPENSATION PURSUANT TO PLANS
CERBCO, Inc. Plans
CERBCO Supplemental Executive Retirement Plan
During fiscal year 1994, CERBCO entered into Supplemental Executive Retirement Agreements with Messrs. Robert Erikson, George Erikson and Robert Hartman pursuant to a Supplemental Executive Retirement Plan (the "CERBCO Supplemental Retirement Plan"). The agreements provide for monthly retirement benefits of 50% of the executive's final aggregate monthly salary from CERBCO and its subsidiaries as defined in and limited by the executives' agreement, for Messrs. Robert Erikson and George Erikson. In the case of Mr. Robert Hartman, the agreement provides for 25% of the executive's final aggregate monthly salary from CERBCO and its subsidiaries as defined in and limited by the executive's agreement. Each covered executive's benefit under the Plan is payable in equal monthly amounts for the remainder of the covered executive's life beginning as of any date on or after his 62nd birthday (at the covered executive's election) but not before his termination of service. Payments under the CERBCO Supplemental Retirement Plan are not subject to any reduction for Social Security or any other offset amounts but are subject to Social Security and other applicable tax withholding.
To compute the monthly retirement benefits, the percentage of final monthly salary is multiplied by a ratio (not to exceed 1) of:
the completed years of employment by CERBCO after 1992 to the total number of years of employment after 1992 that the executive would have completed if he had continued in employment to age 65.
If the executive dies prior to retirement, the executive's beneficiary will receive a pre-retirement death benefit of a percentage (50% in the case of Messrs. Robert Erikson and George Erikson; 25% in the case of Mr. Robert Hartman) of the executive's final monthly salary for 180 months. If the executive dies after commencement of the payment of benefits, but before receiving 180 monthly payments, the executive's beneficiary will receive payments until the total payments received by the executive and/or his beneficiary equal 180.
The CERBCO Supplemental Retirement Plan is technically unfunded, except as described below. CERBCO will pay all benefits from its general revenues and assets. To facilitate the payment of benefits and provide the executives with a measure of benefit security without subjecting the CERBCO Supplemental Retirement Plan to various rules under the Employee Retirement Income Security Act of 1974, CERBCO has established an irrevocable trust (the "CERBCO, Inc. Supplemental Executive Retirement Trust Agreement"). This trust is subject to the claims of CERBCO's creditors in the event of bankruptcy or insolvency. The trust has purchased life insurance on the lives of the executive officers covered by the Supplemental Executive Retirement Agreements to provide for CERBCO's financial obligations under the Plan. Assets in the trust consist of the cash surrender values of the executive life insurance policies and are carried on CERBCO's balance sheet as assets. The trust will not terminate until participants and beneficiaries are no longer entitled to benefits under the plan. Upon termination, all assets remaining in the trust will be returned to CERBCO. For additional information on the CERBCO Supplemental Retirement Plan, see "Defined Benefit or Actuarial Plans."
The following tables set forth the annual retirement benefits that would be received under the CERBCO Supplemental Retirement Plan at various compensation levels after the specified years of service:
Each executive's covered compensation under the CERBCO Supplemental Retirement Plan is equal to his final base salary. The maximum covered compensation for Messrs. Robert Erikson and George Erikson is limited to $250,000 annually ($20,834 per month), increased 2% annually beginning in 1993. The maximum covered compensation for Mr. Robert Hartman is limited to $90,000 annually ($7,500 per month), increased 2% annually beginning in 1993.
The following table sets forth information concerning vested annual benefits as of June 30, 1996 for the executives listed in the Summary Compensation Table covered by the CERBCO Supplemental Retirement Plan:
CERBCO 1988 Plan of Reorganization and Merger
Pursuant to the Plan of Reorganization and Merger, approved by CERBERONICS stockholder vote on February 26, 1988, CERBCO became a successor to the CERBERONICS, Inc. 1986 Employee Stock Option Plan and the 1986 Board of Directors' Stock Option Plan (now collectively the "CERBCO Plans") described below. The CERBCO Plans are now deemed to relate to stock options to purchase shares of CERBCO Common Stock. Each CERBERONICS stock option previously outstanding was converted into an option to purchase, upon the same terms, shares of CERBCO Common Stock in the same numbers as were provided by the option with respect to Class A Common Stock of CERBERONICS. The CERBCO Plans do not relate to shares of CERBCO Class B Common Stock. In all other respects, the terms of the CERBCO Plans and the options outstanding, or which may become outstanding, remain unchanged.
CERBCO 1986 Employee Stock Option Plan
CERBERONICS adopted, with stockholder approval at the 1986 Annual Meeting of Stockholders, the CERBERONICS, Inc. 1986 Employee Stock Option Plan (now called the "CERBCO Employee Plan"). The purpose of the CERBCO Employee Plan is to promote the growth and general prosperity of the Company by permitting key management employees to purchase shares, through the grant and exercise of options, of CERBCO's Common Stock. Under the terms of the CERBCO Employee Plan, which is administered by the Stock Option Committee appointed by and comprised of members of the Board of Directors, both incentive and nonstatutory stock options may be granted to eligible employees. Under the CERBCO Employee Plan, 75,000 shares of Common Stock were reserved for issuance upon the exercise of stock options granted.
The Stock Option Committee, in its sole discretion, has full power and authority to designate eligible employees to whom an incentive stock option or a nonstatutory stock option shall be granted, determine the number of shares to be made available under any option granted, determine the periods in which a participant may exercise his option (provided, however, no incentive stock option may be exercised more than ten years after the date of its grant), determine the option price and determine the date on which the option shall expire. The grant of a stock option under the CERBCO Employee Plan is contingent on the participant's continued services on behalf of CERBCO for a period of not less than 24 months from the date of grant of the option.
During fiscal year 1995, no options were granted to executive officers of CERBCO. This plan automatically terminated on June 28, 1996. All options granted under this plan in past years have expired.
CERBCO 1986 Directors' Stock Option Plan
CERBERONICS adopted, with stockholder approval at the 1986 Annual Meeting of Stockholders, the CERBERONICS, Inc. 1986 Board of Directors' Stock Option Plan (now called the "CERBCO Directors' Plan"). The purpose of the CERBCO Directors' Plan is to promote the growth and general prosperity of CERBCO by permitting the Company, through the granting of options to purchase shares of CERBCO's Common Stock, to attract and retain the best available persons as members of CERBCO's Board of Directors with an additional incentive for such persons to contribute to the success of the Company. A maximum of 75,000 shares of Common Stock may be made subject to options under the CERBCO Directors' Plan. Options may be granted to directors of CERBCO or any of its subsidiaries. Each option granted under the CERBCO Directors' Plan entitles each director to whom such option is granted the right to purchase shares of CERBCO's Common Stock at a designated option price, any time and from time to time, within three years from the date of grant.
The CERBCO Board of Directors administers the CERBCO Directors' Plan and has exclusive authority to interpret, construe and implement the provisions of the CERBCO Directors' Plan, except as may be delegated in whole or in part by the Board to a committee of the Board which may consist of three or more members of the Board. No such delegation of authority has been made. Each determination, interpretation or other action that may be taken pursuant to the CERBCO Directors' Plan by the Board is final and binding and conclusive for all purposes and upon all persons. The Board from time to time may amend the CERBCO Directors' Plan as it deems necessary to carry out the purposes thereof.
The terms of the CERBCO Directors' Plan contemplated that each director of the Company be granted an option to purchase 1,500 shares of the Company's Common Stock each year for five years, for a total of 7,500 shares of Common Stock per director, beginning in fiscal year 1986. On June 28, 1986, options on 1,500 shares of Common Stock were granted to each of the six CERBERONICS directors then in office. No additional options were granted until December 19, 1991. On December 19, 1991, the CERBCO Directors' Plan was amended by the CERBCO Board of Directors to ensure its original purpose by granting options to purchase 1,500 shares of Common Stock to CERBCO directors in fiscal 1992 and subsequent years, so that each director serving on the date of grant will receive options for a total amount of 7,500 shares over a five year period. Messrs. Robert Erikson and George Erikson, being the only current directors having received options in 1986, each received options for a total amount of 6,000 shares over a four year period, from 1992 through 1995.
On December 15, 1995, options on a total of 1,500 shares of Common Stock each were granted to Messrs. Kincheloe and Hayes at a per share option price of $6.375. With this grant, each current director has received options for a total of 7,500 shares. No further grants are anticipated under this plan. Options on a total of 6,000 shares available under this plan were exercised by directors of the Company during fiscal year 1996.
Insituform East, Incorporated Plans
Insituform East Employee Advantage Plan
As executive officers of Insituform East, Messrs. Robert Erikson, George Erikson and Robert Hartman participate in the Insituform East, Incorporated Employee Advantage Plan (the "IEI Advantage Plan"). The IEI Advantage Plan is a noncontributory profit sharing (retirement) plan in which all employees not covered by a collective bargaining agreement and employed with Insituform East for at least one year are eligible to participate. No employee is covered by a collective bargaining agreement. The IEI Advantage Plan is administered by the Insituform East Board of Directors which determines, at its discretion, the amount of Insituform East's annual contribution. The Insituform East Board of Directors can authorize a contribution, on behalf of Insituform East, of up to 15% of the compensation paid to participating employees during the year. The plan is integrated with Social Security. Each participating employee is allocated a portion of Insituform East's contribution based on the amount of that employee's compensation plus compensation above FICA limits relative to the total compensation paid to all participating employees plus total compensation above FICA limits. Amounts allocated under the IEI Advantage Plan begin to vest after three years of service (at which time 20% of the contribution paid vests) and are fully vested after seven years of service.
During fiscal year 1996, Insituform East contributed an amount equal to 4.0% of the total compensation paid to all participating employees.
The IEI Advantage Plan also includes a salary reduction profit sharing feature under Section 401(k) of the Internal Revenue Code. Each participant may elect to defer a portion of his compensation by any whole percentage from 2% to 16% subject to certain limitations. During fiscal year 1996, 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.
Insituform East 1985 Employee Stock Option Plan
Insituform East adopted, with stockholder approval at the 1985 Annual Meeting of Stockholders, the Insituform East, Incorporated 1985 Employee Stock Option Plan (the "IEI Employee Plan"). The purpose of the plan was to advance the growth and development of Insituform East by affording an opportunity to employees of Insituform East to purchase shares of Insituform East's Common Stock and to provide incentives for them to put forth maximum efforts for the success of Insituform East's business. Any employee of Insituform East who was employed on a full-time basis was eligible for participation. The IEI Employee Plan was administered by Insituform East's Stock Option Committee.
During fiscal year 1996, no options were granted to executive officers of Insituform East. All options granted under this plan in past years expired prior to fiscal year 1996. This plan automatically terminated on February 17, 1996.
Insituform East 1994 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1994 Annual Meeting of Stockholders, the Insituform East, Incorporated 1994 Board of Directors' Stock Option Plan (the "IEI 1994 Directors' Plan"). The purpose of this plan is to promote the growth and general prosperity of Insituform East by permitting Insituform East, through the granting of options to purchase shares of its Common Stock, to attract and retain the best available persons as members of Insituform East's Board of Directors with an additional incentive for such persons to contribute to the success of Insituform East. The IEI 1994 Directors' Plan is administered and options are granted by the Insituform East Board of Directors. As directors of Insituform East, Messrs. Robert Erikson and George Erikson participate in this plan.
Each grant of options under the IEI 1994 Directors' Plan will entitle each Insituform East director to whom such options are granted the right to purchase 15,000 shares of Insituform East's Common Stock at a designated option price, any time and from time to time, within five years from the date of grant. Options are granted under the IEI Directors' Plan each year for five years to each member of the Board of Directors of Insituform East serving as such on the date of grant, i.e., for each director serving for five years, a total of five options covering in the aggregate 75,000 shares of Common Stock (subject to adjustments upon changes in the capital structure of Insituform East) over a five year period. Under the terms of this plan, up to 525,000 shares of Insituform East's Common Stock have been reserved for directors of Insituform East.
On December 8, 1995, options on a total of 105,000 shares of Insituform East's Common Stock were granted to directors of Insituform East (options on 15,000 shares to each of seven directors, including Messrs. Robert Erikson and George Erikson) at a per share option price of $4.2188. No options available under this plan were exercised by directors of Insituform East during fiscal year 1996.
Insituform East 1989 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1989 Annual Meeting of Stockholders, the Insituform East, Incorporated 1989 Board of Directors Stock Option Plan (the "IEI 1989 Directors' Plan"). The purpose of this plan was the same as the IEI 1994 Directors' Plan. The plan is administered by the Insituform East Board of Directors. Options were first granted to directors on December 1, 1989 and each of the four succeeding Board of Directors meetings following the Annual Meetings of Stockholders in 1990, 1991, 1992 and 1993. Each grant of options under the plan entitles each director to whom such options were granted the right to purchase 15,000 shares of Insituform East's Common Stock at a designated option price, any time and from time to time, within five years from the date of grant. Although no further optionsare anticipated to be granted under this plan, options previously granted, and which have not already been exercised or expired, will remain in effect until exercise or expiration, whichever comes first. The plan will automatically terminate in 1999, unless terminated sooner by the Board of Directors. No options available under the plan were exercised by directors of Insituform East during fiscal year 1996. Under the terms of this plan, up to 180,000 shares of Insituform East Common Stock remain reserved for the directors of Insituform East.
Capitol Copy Products, Inc. Plans
Capitol Copy 401(k) Profit Sharing Plan
As executive officers of Capitol Copy, Messrs. Robert Erikson, George Erikson and Armen Manoogian participate in the Capitol Copy Products, Inc. 401(k) Profit Sharing Plan (the "CCP Profit Sharing Plan"). All employees not covered by a collective bargaining agreement and employed with Capitol Copy for at least one year are eligible to participate in this salary reduction profit sharing plan. No employee is covered by a collective bargaining agreement. Each participant may elect to defer a portion of his compensation and receive an employer matching contribution as determined by the Board of Directors, at its discretion. In addition to, or in place of, the matching contribution, employees may receive a non-elective contribution at the discretion of the Board of Directors. Each participating employee is allocated a portion of the contribution based on the amount of that employee's compensation relative to the total compensation paid to all participating employees. The combined contribution by the participant and Capitol Copy may not exceed the lesser of $30,000 or 25% of the participant's compensation paid during the year. All amounts allocated under the CCP Profit Sharing Plan begin to vest after two years of service (at which time 20% of the contribution paid vests) and are fully vested after six years of service.
During fiscal year 1996, Capitol Copy contributed an employer matching contribution equal to 100% of the participant's deferred compensation up to a maximum of 5% of the participant's total paid compensation for the year. The Company made no additional non-elective contributions.
Capitol Copy 1987 Incentive Stock Option Plan
Capitol Copy adopted, with stockholder approval on October 1, 1987, the Capitol Copy Products, Inc. 1987 Incentive Stock Option Plan (the "CCP Incentive Plan"). The purpose of this plan is to advance the interests of Capitol Copy by providing key employees with additional incentive for them to promote the success of Capitol Copy, to increase their proprietary interest in Capitol Copy and to remain in its employ. The term "key employee" means those employees (including officers and directors who are also employees, but not including Messrs. George Erikson and Robert Erikson) who, in the judgment of the Capitol Copy Board of Directors, are important to the future of Capitol Copy. The CCP Incentive Plan is administered and options are granted by the Capitol Copy Board of Directors.
Each grant of options under the CCP Incentive Plan will entitle the Capitol Copy key employee to whom such options are granted the right to purchase a designated number of shares of Class B Stock at a designated price for a designated option period. No part of any grant of options may be exercised until the optionee has remained in the employ of Capitol Copy for a period of time as specified by the Board of Directors in the option agreement.
No options were granted under this plan to executive officers of Capitol Copy during fiscal year 1996. All options granted under this plan in past years were exercised prior to fiscal year 1996.
OPTION/SAR GRANTS
No option or Stock Appreciation Right grants were made to any of the named executive officers during fiscal year 1996 under the CERBCO Employee Plan, the CERBCO Directors' Plan, the IEI Employee Plan, the IEI 1989 Directors' Plan or the CCP Incentive Plan. The following table sets forth information concerning options granted to each of the named executive officers during fiscal year 1996, under the IEI 1994 Directors' Plan:
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
No option or Stock Appreciation Right grants made under the CERBCO Employee Plan, or the IEI 1989 or 1994 Directors' Plans to any of the named executive officers were exercised during fiscal year 1996. During fiscal year 1996, Messrs. Robert Erikson and George Erikson each exercised options to purchase 1,500 shares of CERBCO Common Stock granted under the CERBCO Directors' Plan. The following table sets forth information concerning option or Stock Appreciation Right grants held by each of the named executive officers under all plans as of June 30, 1996:
REPRICING OF OPTIONS/SARs
Neither the Company nor its subsidiaries have adjusted or amended the exercise price of stock options or SARs previously awarded to any of the named executive officers during fiscal year 1996.
LONG-TERM INCENTIVE PLAN AWARDS
Neither the Company nor its subsidiaries have a long-term incentive plan.
DEFINED BENEFIT OR ACTUARIAL PLANS
The Company maintains a defined benefit plan called the CERBCO Supplemental Executive Retirement Plan to provide annual retirement benefits to covered executives. See "Compensation Pursuant to Plans - CERBCO, Inc. Plans, Supplemental Executive Retirement Plan" as to the basis upon which benefits under the Plan are computed.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
There are no employment contracts between the Company or its subsidiaries and any named executive officer. There are no arrangements between the Company or its subsidiaries and any named executive officer, or payments made to an executive officer, that resulted, or will result, from the resignation, retirement or other termination of employment with the Company or its subsidiaries, in an amount that exceeds $100,000.
COMPENSATION OF DIRECTORS
Each non-officer director of the Company is paid an annual fee of $3,000 and an attendance fee of $500 for Board of Directors meetings where he attends in person. The attendance fee is $100 if he participates by telephone. Directors who are also officers of the Company do not receive separate fees for service as directors, but are eligible with all other directors to participate in the CERBCO Directors' Stock Option Plan, as described under the section entitled, "Compensation Pursuant to Plans." All directors of the Company are reimbursed for Company travel-related expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation committee; the Board of Directors as a whole serves in that equivalent capacity. Messrs. George Erikson and Robert Erikson, both members of the Board of Directors and executive officers of the Company, holding the offices of Chairman & General Counsel and President & Treasurer, respectively, participate in, and during fiscal 1996 participated in, deliberations of the Board of Directors concerning executive officer compensation.
Messrs. George Erikson and Robert Erikson are both members of the Board of Directors and executive officers of Insituform East and Capitol Copy. In their capacities as directors of these subsidiary companies, they participate in, and during fiscal 1996 participated in, deliberations of the respective subsidiaries' Boards of Directors concerning executive officer compensation.
Mr. Robert Erikson served during fiscal 1996 as a member of the Compensation Committee of the Board of Directors of Palmer National Bancorp, Inc. and The Palmer National Bank. Mr. Webb C. Hayes, IV, a director of the Company and a director of Insituform East and Capitol Copy who participates in, and during fiscal 1996 participated in, deliberations of the CERBCO Board of Directors and the Boards of Directors of its subsidiaries concerning executive officer compensation for CERBCO and its subsidiaries, respectively, was Chairman of the Board and an executive officer of Palmer National Bancorp, Inc. and The Palmer National Bank. Palmer National Bancorp, Inc., parent of The Palmer National Bank, was acquired by George Mason Bankshares, Inc., in May 1996. The Palmer National Bank was subsequently renamed The George Mason Bank, N.A. Since May 1996, Mr. Erikson no longer participates in compensation matters affecting Mr. Hayes.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table reflects, as of September 17, 1996, 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:
(b) Security Ownership of Management
The following information is furnished with respect to all directors of CERBCO who were the beneficial owners of any shares of CERBCO's Common Stock and Class B Common Stock as of September 17, 1996, and with respect to all directors and officers of CERBCO as a group:
The following information is furnished with respect to all directors of Insituform East who were the beneficial owners of any shares of Insituform East's Common Stock and Class B Common Stock as of September 3, 1996, and with respect to all directors and officers of Insituform East as a group:
The following information is furnished with respect to all directors of Capitol Copy who were the beneficial owners of any shares of Capitol Copy's Class B Stock as of September 17, 1996, and with respect to all directors and officers of Capitol Copy as a group:
(c) Changes in Control
There were no changes in control of the Company during the year ended June 30, 1996. However, in March 1990 George Wm. Erikson and Robert W. Erikson, the controlling stockholders of the Company, executed a letter of intent and subsequently executed four amendments thereto (collectively referred to herein as the "Letter of Intent") with Insituform Technologies, Inc. ("ITI") (formerly Insituform of North American, Inc. or "INA") to effect a sale of their controlling interest in the Company to ITI for $6,000,000 (the "Proposed Transaction"). The Proposed Transaction, had it been consummated, would have had the effect of making ITI the controlling stockholder of the Company and, indirectly, of each of the Company's three direct subsidiaries at the time, Insituform East, Capitol Copy and CERBERONICS. On September 19, 1990, however, the Company issued a press release announcing that the Eriksons had informed the Company that the Letter of Intent had expired without consummation of any transaction, that it would not be further extended, that negotiations had ceased and that the Eriksons had no further intention at the time of pursuing the proposed sale of their controlling interest in the Company to ITI.
A lawsuit challenging the proposed, but unconsummated transaction brought by two of the Company's stockholders is described in Part I, Item 3, "Legal Proceedings."
Item 13.
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
See Item 13.(c) below.
(b) Certain Business Relationships
Not applicable.
(c) Indebtedness of Management
Pursuant to authorizations by the Board of Directors on the dates indicated below, the Company has made certain advancements to Mr. George Erikson, Director, Chairman & General Counsel, and certain advancements to Mr. Robert Erikson, Director, President & Treasurer (together the "Eriksons") for their respective legal fees and expenses which each has incurred, and may incur in the future, for personal legal representation in connection with the stockholder lawsuit filed in August 1990 challenging a proposed but unconsummated transaction between each of the Eriksons and Insituform Technologies, Inc. (see Part I, Item 3, "Legal Proceedings").
As of September 27, 1996, pursuant to such Board authorizations, the Company has advanced and expensed in total $515,213 to Mr. George Erikson and has advanced and expensed in total $515,213 to Mr. Robert Erikson.
While a decision has been rendered in favor of the Eriksons in the above-referenced lawsuit, that decision was appealed to the Delaware Supreme Court and subsequently remanded to the Chancery Court for ultimate disposition. Pending a final outcome thereof, the Board of Directors has deferred consideration or ultimate determination of entitlement of Mr. George Erikson and/or Mr. Robert Erikson to indemnification by the Company for such legal fees and expenses. If it is ultimately determined by the Board of Directors or otherwise in accordance with Section 145 of Delaware Corporation Law that Mr. George Erikson and/or Mr. Robert Erikson are not entitled to indemnification for any such legal fees and expenses under Section 145 of Delaware Corporation Law, such advances shall be reimbursed by Mr. George Erikson and/or Mr. Robert Erikson to the Company pursuant to an agreement with the Company executed by each of the Eriksons and delivered to the Board of Directors.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
(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, 1996.
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 27, 1996.
/s/ ROBERT W. ERIKSON Robert W. Erikson President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature & Title Capacity Date
/s/ ROBERT W. ERIKSON Robert W. Erikson Director, Sept. 27, 1996 President Principal Executive Officer, Principal Financial Officer
/s/ GEORGE Wm. ERIKSON George Wm. Erikson Director, Sept. 27, 1996 Chairman & General Counsel Principal Executive Officer
/s/ ROBERT F. HARTMAN Robert F. Hartman Principal Accounting Officer Sept. 27, 1996 Vice President, Secretary & Controller
/s/ WEBB C. HAYES, IV Webb C. Hayes, IV Director Sept. 27, 1996
/s/ PAUL C. KINCHELOE, JR. Paul C. Kincheloe, Jr. Director Sept. 27, 1996
Exhibits to CERBCO, Inc. Form 10-K
Exhibit 27. CERBCO, Inc. Financial Data Schedule
Exhibit 99. CERBCO, Inc. Consolidating Schedules: Statement of Earnings Information for the Year Ended June 30, 1996; Balance Sheet Information and Consolidating Elimination Entries as of June 30, 1996, and Related Independent Auditors' Report.