<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-14439
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ERC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0382879
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2906 Holmes Road, Houston, Texas 77051
(Address of principal executive offices) (Zip Code)
(713) 733-9301
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 1995
----- ------------------------------
Common stock, $0.01 par value 13,863,656 shares
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ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
FINANCIAL INFORMATION:
Condensed Balance Sheets -
June 30, 1995 (unaudited) and December 31, 1994.................. 2
Condensed Statements of Income
(Unaudited) - Three and Six Months Ended June 30, 1995 and 1994.. 3
Condensed Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 1995 and 1994............ 4
Notes to Condensed Financial Statements........................... 5
Management's Discussion and Analysis.............................. 7
PART II
OTHER INFORMATION.................................................. 10
Signature Page.................................................... 11
</TABLE>
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PART I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 312
Trade accounts receivable, net of allowance for
doubtful accounts of $593 and $512, respectively 5,962 5,664
Inventory 8,080 6,936
Prepaid expenses and other current assets 185 57
Deferred tax asset 448 434
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Total current assets 14,675 13,403
Property, plant and equipment, net 3,069 3,102
Other assets 494 701
Excess cost over net assets acquired, net 1,805 1,913
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$20,043 $19,119
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt due within one year $ 478 $ 533
Line of credit 2,825 --
Accounts payable 2,502 3,607
Other accrued liabilities 1,571 1,326
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Total current liabilities 7,376 5,466
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Long-term debt 1,938 2,841
Deferred taxes 129 129
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2,067 2,970
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Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, par value $1; authorized and
unissued--10,000,000 shares -- --
Common stock, par value $.01; authorized--
30,000,000 shares; issued and outstanding--
13,863,656 shares 139 139
Additional paid-in capital 5,232 5,232
Retained earnings from January 10, 1989 5,229 5,312
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Total shareholders' equity 10,600 10,683
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$20,043 $19,119
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</TABLE>
See notes to financial statements.
2
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ERC INDUSTRIES, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended: Six Months Ended:
June 30, June 30,
-------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 8,523 $ 7,602 $16,443 $15,069
Cost of goods sold 6,525 5,825 12,541 11,471
------- ------- ------- -------
Gross profit 1,998 1,777 3,902 3,598
Selling, general and administrative
expenses 1,975 1,820 3,830 3,617
------- ------- ------- -------
Operating income (loss) 23 (43) 72 (19)
------- ------- ------- -------
Other (income) expense:
Interest expense 107 94 197 142
Other, net (8) -- (28) (36)
------- ------- ------- -------
99 94 169 106
------- ------- ------- -------
Loss before provision (benefit) for
income taxes (76) (137) (97) (125)
Provision (benefit) for income taxes (7) -- (14) 11
------- ------- ------- -------
Net loss $ (69) $ (137) $ (83) $ (136)
======= ======= ======= =======
Net loss per share $ none $ (.01) $ (.01) $ (.01)
======= ======= ======= =======
Weighted average number of shares
outstanding 13,864 13,864 13,864 13,864
======= ======= ======= =======
</TABLE>
See notes to financial statements.
3
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ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended:
June 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (83) $ (136)
Adjustments to reconcile net (loss) income to
net cash used in by operating activities:
Depreciation and amortization 535 483
Bad debt expense 83 76
Deferred tax benefit (14) (377)
(Gain) on sale of property, plant and equipment (4) (9)
Non-cash charge for income taxes -- 377
(Decrease) increase in other assets 162 10
Net effect of changes in operating accounts (2,513) (3,461)
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Net cash used in operating activities (1,834) (3,037)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (340) (530)
Proceeds from sale of property, plant and
equipment 13 11
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Net cash used in investing activities (327) (519)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 2,075 2,800
Principal payments on long-term debt and
capital lease obligations (226) (244)
Payments pursuant to reorganization plan:
Payments made on plan obligations -- (23)
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Net cash provided by financing activities 1,849 2,533
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Net decrease in cash and cash equivalents (312) (1,023)
Cash and cash equivalents, beginning of period 312 1,336
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Cash and cash equivalents, end of period $ 0 $ 313
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</TABLE>
See notes to financial statements.
4
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ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to June 30, 1995 and the
three and six month ended June 30, 1995 and 1994, has not been audited but
was prepared in conformity with the accounting principles and policies
described in the Company's annual report (Form 10-K) for the year ended
December 31, 1994. Included are all adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial
information for the three and six months ended June 30, 1995 and 1994. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
(2) FASB No. 109, "Accounting for Income Taxes" requires recording deferred tax
liabilities or assets for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
June 30,
1995
----
(in thousands)
<S> <C>
Deferred tax liabilities:
Tax over book depreciation...... $ 129
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Total deferred tax liabilities.. 129
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Deferred tax assets:
Net operating loss.............. 7,932
Tax over book inventory basis... 1,129
Other........................... 209
Valuation allowance............. (8,822)
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Total deferred tax assets....... 448
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Net deferred tax asset........ $ 319
=======
</TABLE>
At June 30, 1995 the Company had net operating loss carryforwards available to
offset future taxable income in the approximate amount of $23,329,000. These
amounts expire between the years 2001 and 2003. Special limitations exist under
the law which may restrict utilization of the regular tax and alternative
minimum tax net operating loss carryforwards.
5
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(3) The following is a summary of the provision for income taxes for the three
and six months ended June 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
-------- -------- ------ --------
<S> <C> <C> <C> <C>
Current - federal
(due to alternative minimum tax) $ - $ - $ - $ 11
Non-cash charge
in lieu of federal income taxes - - - 377
Deferred benefit (7) - (14) (377)
----- ----- ----- -----
Provision for income taxes $ (7) $ - $ (14) $ 11
===== ===== ===== =====
</TABLE>
The non-cash charges in lieu of income taxes represent the amount of income
taxes the Company would pay absent the net operating loss carryforward which was
generated before the Company effected a quasi-reorganization. Such charges are
offset within shareholders' equity by an increase in additional paid-in capital.
(4) The following is a summary of the net effect of the changes in operating
accounts on cash flows from operating activities for the six months ended
(in thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1995 1994
--------- ---------
<S> <C> <C>
Trade accounts receivable, net $ (381) $ (987)
Inventories (1,144) (2,149)
Prepaid expenses and other current assets (128) 220
Accounts payable (1,105) (694)
Other accrued expenses 245 203
Excess cost over net assets - (54)
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Net effect of changes in operating accounts $(2,513) $(3,461)
======= =======
</TABLE>
The Company made the following cash payments: (i) interest of $181,000 and
$119,000 for the six months ended June 30, 1995 and 1994, respectively, and (ii)
income taxes of $6,800 and $28,000 for the six months ended June 30, 1995 and
1994, respectively.
6
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ERC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, was 677 for the three months ended
June 30, 1995 compared with 734 for the three months ended June 30, 1994, a 7.8%
decrease. For the six months ended June 30, 1995 the rig count decreased by
7.4% to 691 compared with 746 for the comparable period last year. The average
active rig count is a clear indicator of the market in which the Company
operates based on prior years' experience.
In contrast to the change in the rig count, the Company's revenues increased by
$921,000 (12.1%) to $8,523,000 for the three month period ended June 30, 1995,
from $7,602,000 for the three month period ended June 30, 1994. In addition,
the Company's six month revenues increased by $1,374,000 (9.1%) to $16,443,000
for the six months ended June 30, 1995, from $15,069,000 for the six months
ended June 30, 1994. The increase in revenues is principally the result of (i)
certain large customers increasing their levels of activity and (ii) an increase
in the Company's customer base.
Cost of goods sold increased by $700,000 and $1,070,000 for the three and six
month periods ended June 30, 1995 and 1994, respectively. Gross profit margins
remained at 23.4% for the three month period ended June 30, 1995 compared with
the three months ended June 30, 1994. Gross profit margins for the six month
period ended June 30, 1995 changed to 23.7% from 23.9% for the six months ended
June 30, 1994.
Selling, general and administrative (SG&A) expenses increased by $155,000 to
$1,975,000 for the three month period ended June 30, 1995 compared with
$1,820,000 for the three month period ended June 30, 1994. For the six month
period ended June 30, 1995, SG&A increased by $213,000 to $3,830,000 from
$3,617,000 for the six months ended June 30, 1994. SG&A expenses have increased
due to costs associated with additional employment in connection with the Barton
Wood operation, increases in our sales force, and severance costs associated
with administrative terminations.
The Company generated an operating loss of $76,000 and $97,000 for the three and
six months ended June 30, 1995 as compared with an operating loss of $137,000
and $125,000 for the same period last year. This improvement in operating
profit is due to an increase in sales, partially offset by an increase in
general and administrative expenses.
The provision for income taxes for the three and six months ended June 30, 1995
resulted in a benefit of $7,000 and $14,000, respectively. The provision for
income taxes for the three and six months ended June 30, 1994 was $0 and
$11,000. The $11,000 for the six months ended June 30, 1994 represents a
provision for alternative minimum taxes.
7
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Financial Position
Working Capital decreased by $638,000 to $7,299,000 at June 30, 1995 compared
with $7,937,000 at December 31, 1994. The decrease in working capital was due
to the reclassification of the line of credit facility from a long term
obligation to a short term obligation maturing on February 26, 1996. This was
the effect of a February 27, 1995 amendment which resulted in the bank lowering
its lending rate by one-half of one percent (.50%) from the bank's prime rate.
The line of credit balance at June 30, 1995 was $2,825,000 compared with
$750,000 at December 31, 1995. The increase in the line of credit was primarily
due to increased inventory levels of approximately $1,145,000 and a reduction in
trade payables of $1,105,000.
Pursuant to the Company's long-term debt agreements, approximately $478,000 in
principal payments are due over the next twelve months.
As of June 30, 1995, the Company had $150,000 in letter of credit obligations
outstanding under the credit agreement and $2,825,000 in line of credit
borrowings, leaving a balance of $25,000 available for borrowings. The Company
believes that it is currently in compliance with all covenants under the credit
agreement. The Company is finalizing an agreement with its principal lender
which will provide an additional $1,000,000 line of credit under the same terms
and conditions of its present borrowing facility. The additional line of credit
will be used to finance expansion and growth, as well as operational needs. The
Company believes that amounts available under its current and additional line of
credit facility, combined with cash generated from operations, are adequate to
fund its operations for at least the next twelve months.
The Company currently anticipates incurring for the remainder of 1995, capital
expenditures of as much as $420,000, principally for manufacturing equipment,
facility improvements and additions and vehicle purchases for use in its day-to-
day operations. The Company expects to fund these expenditures from cash
provided by operations, additional capital lease obligations and from the
Company's line of credit facility.
8
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and disputes in the normal
course of its business. Management of the Company believes the
disposition of all such claims, individually or in the aggregate, will
not have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 23, 1995,
the shareholders of the Company re-elected to the Board of Directors,
John Derek Prichard-Jones by a vote of 12,109,913 for and 85,476
against, and Raymond A. Johnson by a vote of 12,115,696 shares for and
79,693 against. George W. Tilley and Allister G. Langlands continue
serving in their capacity as directors. The shareholders also ratified
the appointment of Coopers & Lybrand as the Company's independent
public accountants for the fiscal year ending December 31, 1995 by a
vote of 12,094,809 shares in favor and 61,736 shares abstaining.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27--Financial Data Schedule
9
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SIGNATURES
Pursuant to the requirements 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.
Date: August 11, 1995 ERC INDUSTRIES, INC.
---------------------------------------
(Registrant)
/s/ Wendell R. Brooks
---------------------------------------
Wendell R. Brooks
President
/s/ Carl R. Caldwell
---------------------------------------
Carl R. Caldwell
Controller and Chief Accounting Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,555
<ALLOWANCES> (593)
<INVENTORY> 8,080
<CURRENT-ASSETS> 14,675
<PP&E> 11,664
<DEPRECIATION> (8,595)
<TOTAL-ASSETS> 20,043
<CURRENT-LIABILITIES> 7,376
<BONDS> 0
<COMMON> 139
0
0
<OTHER-SE> 10,461
<TOTAL-LIABILITY-AND-EQUITY> 20,043
<SALES> 16,443
<TOTAL-REVENUES> 16,443
<CGS> 12,541
<TOTAL-COSTS> 3,747
<OTHER-EXPENSES> (28)
<LOSS-PROVISION> 83
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> (97)
<INCOME-TAX> (14)
<INCOME-CONTINUING> (83)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (83)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
