The trademark for a local defense contractor is Cerberus, the three-headed, dragon-tailed dog that guarded the gates of hell in Greek mythology.
But the founders of Cerberonics Inc., who display one of the world's largest and most fear-provoking bronzes of the mythical beast in their lobby, probably never anticipated that most of their profits would come from underground.
After losing two major Navy aircraft support contracts in December 1984 that accounted for two-thirds of its business, Cerberonics, of Bailey's Crossroads, veered off in a different direction: It invested in the Landover firm Insituform East Inc., which repairs sewers and pipelines.
Although Cerberonics officials refused to comment because they said they were reconsidering business strategy and were unprepared to discuss it, it appears that in their case, the grass has grown greener over the septic system. Cerberonics' initial investment of $5.2 million on March 15 to purchase one-third of Insituform stock is now worth about $13.9 million, stock analysts say.
Cerberonics, in a pattern similar to that followed by many area defense contractors, won lucrative contracts from the Pentagon in the late 1960s and expanded rapidly. Its key defense services have been systems testing, logistics and, through its wholly-owned subsidiary, Systems Research Corp., research analyses.
But the company lost out to Surveyor Inc., a divison of E-Systems Inc. of Dallas, in bidding to continue its contracts to manage spare parts for the C-9 aircraft and to provide support services for the TC-4C aircraft. Together, the contracts accounted for 68.4 percent of the company's total contract revenue of $35.4 million for the year ended June 30, 1985 -- and their loss forced Cerberonics to scale down operations drastically.
No one at Cerberonics would confirm whether it intends to rebuild the defense business or continue to diversify into other areas. Robert E. Long, a Cerberonics board member and senior vice president of Potomac Asset Management Inc., would only say that the firm "has a lot of bids out right now, some of them very exciting."
Analysts, however, view diversification as a wise move.
Eliot Benson, vice president and research director of Ferris & Co., called Cerberonics' stock purchase "an extremely prudent decision, one that might prove to be the best decision that Cerberonics has made."
Robert Buchman, security analyst with Baker Watts & Co., agreed. "Insituform was a good investment. I only wish that I had been so smart."
Whether Cerberonics was smart or just in the right place at the right time, its earnings on the Insituform investment accounted for $157,000 of the $174,000 in profits that the defense contractor reported for its first fiscal quarter, which ended Sept. 30. But even buoyed by profits from Insituform, Cerberonics' earnings have suffered from the loss of the contracts. Its profits in the latest quarter, ended Dec. 31, were $154,173 -- down from $499,265 in the same period of 1984.
In sharp contrast, Insituform reported a jump in net earnings to $457,833 in the quarter ended Dec. 31 from $300,401 in the same period of 1984.
"Talk about the American dream," mused Insituform's president and chief executive officer, Arthur G. Lang III, at the company's offices at Ardmore Industrial Park in Landover, where his neighbors include such local giants as Dart Drug Corp. and Hechinger Co.
While Cerberonics' president, Robert W. Erikson, declined to comment on his company's future or its purchase of Insituform stock, Lang jumped at the opportunity to promote his enterprise.
He told the story of how he started out on top of a garage in 1978 with only two employes. "Now there are 120, and we're about to expand operations to further west," said the former college football star. "Hey, I'm the kind of a guy who finished college on Friday and was at work on Monday."
But Lang didn't have to reach far to succeed. He found exactly what he needed right under his feet: a crumbling sewer system. "You can see the road decaying, but you can't see the pipes. I can. We're dealing with a major catastrophe," he said.
Insituform East licensed the patented Insituform process -- a method developed by the British to create new pipes within the damaged original without costly excavation -- for the mid-Atlantic region. Lang immediately landed a major contract from the Washington Suburban Sanitary Commission, which operates 4,000 miles of sewer lines in several Maryland counties. Insituform never fell into the red.
The sewer company, which serves the District, Maryland, Virginia, Delaware, Pennsylvania and northern Ohio, continued to drum up about 90 percent of its work from government contracts. As a result, Lang decided the firm needed a board member who was "from our neighborhood, who understood government contracts." He began sniffing around Cerberonics in June 1984, and decided on George Erikson, Cerberonics' executive vice president and Robert's brother.
For George Erikson, the board position meant being one of the first to know in February 1985 that Stanley B. Ledford, former chairman of Insituform's board of directors, was going to sell his one-third share of the firm. The Eriksons bought it.
Cerberonics became Insituform's largest stockholder, and three directors of Cerberonics now serve on the current six-member board of Insituform: Robert and George Erikson and Robert E. Long, who sits on the boards of both companies.
Before the Eriksons joined Insituform's board, Long said, Insituform's management team was "thin on the top. Put on Rob and George and it adds a lot. The company's five-year plan is going to be much broader than it has been in the past," he said.
Asked whether the Eriksons will step into an even stronger role at Insituform, Arthur Lang responded with an adamant "no."
Just as "the Miami Dolphins wouldn't take Joe Theismann because they have Dan Marino, we don't want Joe Theismann. We have a good quarterback here," Lang said of himself. He added: "Those guys aren't laborers."
But Lang acknowledges that the Eriksons have been very valuable. "It doesn't matter if you're selling widgets or balloons, [government contracts] is still the same system," he said. "What happened to Cerberonics, heck, it could have happened to us. More than 50 percent of our business used to be with Washington Suburban Sanitary Commission," Lang said.
But according to Richard Hocevar, director of maintenance and operations at WSSC, Insituform's services will be required for at least another 50 years. The commission oversees roughly 600 miles of pipes that predate 1950 and are in need of repair, he estimated, adding, "At 10 miles a year I just don't see an end to it."
Furthermore, Insituform's base of active clients has expanded beyond WSSC to include relationships with the city of Baltimore, Prince William and Fairfax counties, Giant Food Inc. and Langley Air Force Base. Through a new partnership with other Insituform regional firms, the company also has obtained a contract from the Department of Defense to work on the pipeline system under the Oak Ridge National Laboratory in Tennessee.
Ferris & Co.'s Benson views Insituform's stock as "attractive" but "overpriced." On the other hand, he suggests that buying Cerberonics' stock "is one way to get Insituform at a discount, to get representation in its assets for nothing."
Benson voiced the major problem that stock analysts say they face in trying to predict anything to do with Cerberonics: "I can't talk with the Cerberonics people," he said.
"The Eriksons are secretive, they're very close-mouthed. I can't find much out about their defense business," said Buckman at Baker, Watts. But he also believes that Cerberonics "could be a very attractive investment; it holds that possibility." It came as a major surprise to stock analysts a year ago when Cerberonics lost its two principal contracts. Edward Comeau of Laidlow, Adams and Peck, based in New York, said Cerberonics is a difficult company to follow. "I never had any trouble with the company, except to predict its future. And if you can't predict the future of it, how can you follow it?"
As an example, Comeau said that he tried to get a handle on how negotiations were going on the C-9 contract. "I was told that everything was allright, but then they lost the whole contract on Jan. 1. I had no indication that this was coming."
Joseph Campbell, a defense analyst with Paine Webber, said that larger defense companies often lose large contracts. "It's painful, but not catastrophic," he said. But for small firms such as Cerberonics ,"it makes a big difference. It's hard to grow back." He believes that investing in another company might be the only way for it to achieve future growth.
Neither Benson nor Buckman believes that the relationship between Cerberonics and Insituform will develop further. "On a management level, Cerberonics has enough common sense to realize that this is not their game. As an owner, yes, I think Cerberonics would have a desire to push its share up to 51 percent, but it would be expensive. Considering that the firm is also building up its own business, it would be a mistake at this time," said Buckman.
There are advantages to remaining separate, said Benson, such as easier options for selling stock and the potential impact that Cerberonics' troubles could have on Insituform.
Lang is satisfied with the Eriksons' involvement being limited to six board meetings a year. "Insituform has as much connection with Cerberonics as it has with its other investors," he said.
Cerberonics doesn't talk.