<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 September 30, 1996
[ ] 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
-------
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)
15835 Park Ten Place, Suite 115, Houston, Texas 77084
- ----------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(281) 398-8901
--------------
(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 September 30, 1996
----- ---------------------------------
Common stock, $0.01 par value 21,248,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
FINANCIAL INFORMATION:
Condensed Balance Sheets -
September 30, 1996 (Unaudited) and December 31, 1995.. 2
Condensed Statements of Income
(Unaudited) - Three and Nine Months Ended
September 30, 1996 and September 30, 1995............. 3
Condensed Statements of Cash Flows
(Unaudited) - Nine Months Ended
September 30, 1996 and September 30, 1995........ 4
Notes to Condensed Financial Statements.................. 5
Management's Discussion and Analysis..................... 7
PART II
OTHER INFORMATION.......................................... 9
Signature Page........................................... 10
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Trade accounts receivable, net of allowance for
doubtful accounts of $612 and $492, respectively $ 9,794 $ 6,671
Inventory 13,477 8,599
Prepaid expenses and other current assets 216 60
Deferred tax asset 781 499
------- -------
Total current assets 24,268 15,829
Property, plant and equipment, net 4,784 2,860
Other assets 650 493
Excess costs over net assets acquired, net 1,726 1,697
------- -------
$31,428 $20,879
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks $ 1,393 $ 2,425
Long-term debt and capital leases due within one year 293 390
Accounts payable 7,403 4,182
Other accrued liabilities 3,301 2,182
------- -------
Total current liabilities 12,390 9,179
------- -------
Long-term debt 2,105 1,787
Shareholders' equity:
Preferred stock, par value $1; authorized and
unissued--10,000,000 shares -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 21,248,272 and 13,863,656 issued and
outstanding as of September 30, 1996 and
December 31, 1995, respectively 212 139
Additional paid-in capital 11,613 5,237
Retained earnings from January 10, 1989 5,108 4,537
------- -------
Total shareholders' equity 16,933 9,913
------- -------
$31,428 $20,879
======= =======
</TABLE>
See notes to financial statements.
2
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended: Nine Months Ended:
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $13,304 $ 9,271 $34,949 $25,714
Cost of goods sold 10,244 7,423 26,924 19,964
------- ------- ------- -------
Gross profit 3,060 1,848 8,025 5,750
Selling, general and administrative expenses 2,397 1,992 6,906 5,832
------- ------- ------- -------
Operating income 663 (144) 1,119 (82)
------- ------- ------- -------
Other (income) expense:
Interest expense 19 117 211 314
Other, net (20) 4 (34) (34)
------- ------- ------- -------
(1) 121 177 280
------- ------- ------- -------
Income (loss) before provision (benefit) for income taxes 664 (265) 942 (362)
Provision (benefit) for income taxes 272 (79) 370 (93)
------- ------- ------- -------
Net income (loss) $ 392 $ (186) $ 572 $ (269)
======= ======= ======= =======
Net income (loss) per share $ 0.02 $ (0.01) $ 0.03 $ (0.02)
======= ======= ======= =======
Weighted average number of shares outstanding 21,248 13,864 16,990 13,864
======= ======= ======= =======
</TABLE>
See Notes to financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended:
September 30,
------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 572 $ (269)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 728 778
Bad debt expense 51 130
Deferred tax benefit (282) (93)
Non-cash charge for income taxes 614 --
Gain on sale of property, plant and equipment -- (5)
(Increase) decrease in other assets (416) 163
Net effect of changes in operating accounts (3,316) (2,347)
------- -------
Net cash used in operating activities (2,049) (1,643)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (1,580) --
Purchases of property, plant and equipment (524) (411)
Proceeds from sale of property, plant and equipment -- 14
------- -------
Net cash used in investing activities (2,104) (397)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net (1,925) 2,075
Borrowings (repayments) on long-term debt and capital lease obligations 221 (347)
Net proceeds from issue of common stock 5,857 --
------- -------
Net cash provided by financing activities 4,153 1,728
------- -------
Net increse in cash and cash equivalents -- (312)
Cash and cash equivalents, beginning of period -- 312
------- -------
Cash and cash equivalents, end of period $ -- $ --
======= =======
</TABLE>
See notes to financial statements.
4
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to September 30, 1996 and
the three and nine months ended September 30, 1996 and 1995, 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, 1995. Included are all adjustments which, in the
opinion of management, are necessary for a fair presentation of the
financial information for the three and nine months ended September 30,
1996 and 1995. The results of interim periods are not necessarily
indicative of results to be expected for the year.
(2) On September 27, 1996, the Company acquired 100% of the issued and
outstanding capital shares of Seaboard Lloyd Limited (Seaboard), a private
company incorporated in Scotland under the Companies Acts of the United
Kingdom in a privately negotiated transaction.
The business of Seaboard is the manufacture of oilfield equipment. Seaboard
operates from a facility located in Cumbernauld, Scotland. The Company
plans to continue to operate Seaboard in substantially the same manner as
it was operated prior to the acquisition.
The Company paid a purchase price of $1,580,000 cash for the issued share
capital of Seaboard. The source of the funds for the purchase was
approximately $1,080,000 in cash on hand and $500,000 borrowed under the
Company's existing credit facility. The purchase price was allocated (based
on preliminary estimates and assumptions) as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts Receivable $ 931,000
Inventory 1,088,000
Fixed Asset 1,605,000
Goodwill 317,000
Accounts Payable (545,000)
Accrued Expenses (923,000)
Bank Debt (893,000)
----------
$1,580,000
==========
</TABLE>
(3) At September 30, 1996, the Company had net operating loss carryforwards
("NOL Carryforwards") available to offset future taxable income in the
approximate amount of $25,830,000. 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 NOL
Carryforwards.
5
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
(thousands) (thousands)
<S> <C> <C> <C> <C>
Taxes currently payable $ 38 $ $ 38 $
Non-cash charge in lieu
of income taxes 516 - 614 -
Deferred benefit (282) (79) (282) (93)
----- ---- ----- ----
Provision (benefit) for income taxes $ 272 $(79) $ 370 $(93)
===== ==== ===== ====
</TABLE>
The non-cash charges in lieu of income taxes represent the amount of income
taxes the Company would pay absent the NOL Carryforwards which were
generated before the Company affected a quasi-reorganization.
(4) The following is a summary of the net effect of the changes in operating
accounts on cash flows from operating activities for the nine months ended
September 30, 1996 and September 30, 1995 (in thousands):
<TABLE>
<CAPTION>
September 30,
1996 1995
--------- --------
<S> <C> <C>
(Increase) in trade accounts receivable $(2,243) $(1,672)
(Increase) in inventories (3,790) (1,606)
(Increase) decrease in prepaid expense/other current assets (156) 22
Increase in accounts payable 2,676 327
Increase in other accrued liabilities 197 582
------- -------
Net effect of changes in operating accounts $(3,316) $(2,347)
======= =======
</TABLE>
The Company made the following cash payments: (i) interest of $270,000 and
$314,000 for the nine months ended September 30, 1996 and 1995,
respectively, and (ii) income taxes of $0 and $6,800 for the nine months
ended September 30, 1996 and 1995, respectively.
6
<PAGE>
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 757 for the nine months ended
September 30, 1996, compared with 709 for the nine months ended September 30,
1995. The average active rig count is an indicator of the market in which the
Company operates.
The Company's revenues increased by $4,033,000 (43.5%) to $13,304,000 for the
three month period ended September 30, 1996, from $9,271,000 for the three month
period ended September 30, 1995. In addition, the Company's nine month revenues
increased by $9,235,000 (35.9%) to $34,949,000 for the nine months ended
September 30, 1996, from $25,714,000 for the nine months ended September 30,
1995. The increase in revenues is principally the result of (i) higher
drilling activity (ii) certain large customers increasing their levels of
activity (iii) an increase in the Company's customer base, and (iv) higher
international volume.
Gross profit for the nine months ended September 30, 1996 increased by
$2,275,000 to $8,025,000, from $5,750,000 for the nine months ended September
30, 1995. The gross profit percentage was 23.0% for the nine months ended
September 30, 1996, compared with 22.4% for the nine months ended September 30,
1995. This increase is the result of higher fixed cost utilization and
additional savings on outsourcing of materials.
Selling, general and administrative expenses increased by $1,074,000 to
$6,906,000 for the nine months ended September 30, 1996 from $5,832,000 for the
nine months ended September 30, 1995. The primary reason for the increase is
due to costs associated with international marketing efforts and additional
sales personnel. The selling, general and administrative expense, as a
percentage of sales, was 19.8% in the first nine months of 1996 compared with
22.7% for the same period in 1995.
The Company generated operating income of $663,000 and $1,119,000 for the three
and nine months ended September 30, 1996, compared with operating losses of
$144,000 and $82,000 for the three and nine months ended September 30, 1995.
The increase in operating profit is due to increased sales volume with relative
decreases in direct, indirect, selling and administrative costs.
The provision for income taxes for the nine months ended September 30, 1996 and
1995 resulted in a provision of $370,000 for 1996 and a benefit of $93,000 for
1995, respectively.
7
<PAGE>
Liquidity and Capital Resources
On June 6, 1996, the Company entered into an Investment Agreement pursuant to
which John Wood Group PLC purchased and the Company sold an aggregate of
7,384,616 shares of Common Stock at a purchase price of $0.8125 (13/16) per
share (or an aggregate consideration of $6,000,000.50).
On August 6, 1996, the loan facility was amended to extend the line of
credit through June 30, 1997 and the total availability was increased to
$5,000,000.
On September 27, 1996, the Company acquired 100% of the issued and outstanding
capital shares of Seaboard Lloyd Limited ("Seaboard"), a private company
incorporated in Scotland under the Companies Acts of the United Kingdom in a
privately negotiated transaction.
The business of Seaboard is the manufacture of oilfield equipment. Seaboard
operates from a facility located in Cumbernauld, Scotland. The Company plans to
continue to operate Seaboard in substantially the same manner as it was operated
prior to the acquisition.
The Company paid a purchase price of $1,580,000 cash for the issued share
capital of Seaboard. The source of the funds for the purchase was approximately
$1,080,000 in cash on hand and $500,000 borrowed under the Company's existing
credit facility.
Pursuant to the Company's long-term debt agreements, approximately $293,000 in
principal payments are due over the next twelve months. The Company believes
its line of credit facility, combined with cash generated from operations, will
be adequate to fund its operations for at least the next twelve months.
The Company currently anticipates incurring capital expenditures of
approximately $1,000,000 through 1996, principally for machine tools, vehicles
and computer purchases. 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.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On November 13, 1996, the Company filed a Current Report on Form
8-K, pursuant to Item 2 and 7 thereof, regarding its acquisition
of the capital stocks of Seaboard Lloyd Limited.
9
<PAGE>
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: November 14, 1996 ERC INDUSTRIES, INC.
--------------------
/s/
------------------------------
Wendell R. Brooks
President, Secretary & Director
/s/
------------------------------
James E. Klima
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,406
<ALLOWANCES> 612
<INVENTORY> 13,477
<CURRENT-ASSETS> 24,268
<PP&E> 14,474
<DEPRECIATION> 9,690
<TOTAL-ASSETS> 31,428
<CURRENT-LIABILITIES> 12,390
<BONDS> 0
<COMMON> 212
0
0
<OTHER-SE> 16,721
<TOTAL-LIABILITY-AND-EQUITY> 31,428
<SALES> 34,949
<TOTAL-REVENUES> 34,949
<CGS> 26,924
<TOTAL-COSTS> 6,855
<OTHER-EXPENSES> (34)
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 942
<INCOME-TAX> (370)
<INCOME-CONTINUING> 572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 572
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
