<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, 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)
(713) 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 June 21, 1996
Common stock, $0.01 par value 21,248,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I PAGE
FINANCIAL INFORMATION:
<S> <C>
Condensed Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995................. 2
Condensed Statements of Income
(Unaudited) - Three and Six Months Ended
June 30, 1996 and June 30, 1995................................. 3
Condensed Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 1996 and June 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>
June 30, December 31,
1996 1995
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,799 $ -
Trade accounts receivable, net of allowance for
doubtful accounts of $597 and $492, respectively 8,551 6,671
Inventory 10,562 8,599
Prepaid expenses and other current assets - 60
Deferred tax asset 401 499
-------------- -------------
Total current assets 21,313 15,829
Property, plant and equipment, net 3,036 2,860
Other assets 443 493
Excess cost over net assets acquired, net 1,463 1,697
-------------- -------------
$ 26,255 $ 20,879
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within one year $ 298 $ 2,815
Accounts payable 5,829 4,182
Other accrued liabilities 2,031 2,182
-------------- -------------
Total current liabilities 8,158 9,179
Long-term debt 2,147 1,787
Deferred taxes - -
-------------- -------------
2,147 1,787
-------------- -------------
Commitments and contingencies - -
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
June 30, 1996 and December 31, 1995, respectively 212 139
Additional paid-in capital 11,021 5,237
Retained earnings from January 10, 1989 4,717 4,537
-------------- -------------
Total shareholders' equity 15,950 9,913
-------------- -------------
$ 26,255 $ 20,879
============== =============
</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,
-------------------------- ------------------------
1996 1995 1996 1995
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 11,817 $ 8,523 $ 21,645 $ 16,443
Cost of goods sold 8,891 6,525 16,680 12,541
---------- ---------- ---------- ----------
Gross profit 2,926 1,998 4,965 3,902
Selling, general and administrative expenses 2,479 1,975 4,509 3,830
---------- ---------- ---------- ----------
Operating income 447 23 456 72
---------- ---------- ---------- ----------
Other (income) expense:
Interest expense 91 107 192 197
Other, net (9) (8) (14) (28)
---------- ---------- ---------- ----------
82 99 178 169
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes 365 (76) 278 (97)
Provision (benefit) for income taxes 115 (7) 98 (14)
---------- ---------- ---------- ----------
Net income (loss) $ 250 $ (69) $ 180 $ (83)
========== ========== ========== ==========
Net income per share $ 0.02 $ none $ 0.01 $ (0.01)
========== ========== ========== ==========
Weighted average number of shares outstanding 15,790 13,864 14,838 $ 13,864
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION> Six Months Ended:
June 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 180 $ (83)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 665 535
Bad debt expense 51 83
Deferred tax benefit 98 (14)
(Gain) on sale of property, plant and equipment - (4)
(Decrease) increase in other assets (185) 162
Net effect of changes in operating accounts (2,338) (2,513)
---------- ---------
Net cash used in operating activities (1,529) (1,834)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (372) (340)
Proceeds from sale of property, plant and equipment - 13
---------- ---------
Net cash used in investing activities (372) (327)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net (2,425) 2,075
Principal payments on long-term debt and capital
lease obligations 268 (226)
Net proceeds from issue of common stock 5,857
---------- ---------
Net cash provided by financing activities 3,700 1,849
---------- ---------
Net increase in cash and cash equivalents 1,799 (312)
Cash and cash equivalents, beginning of period - 312
---------- ---------
Cash and cash equivalents, end of period $ 1,799 $ -
========== =========
</TABLE>
See notes to financial statements.
4
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to June 30, 1996 and the
three and six months ended June 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 six months ended June 30, 1996 and 1995.
The results of interim periods are not necessarily indicative of results to
be expected for the year.
(2) At June 30, 1996, the Company had net operating loss carryforwards ("NOL
Carryforwards") available to offset future taxable income in the
approximate amount of $26,444,000. 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.
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
(thousands) (thousands)
<S> <C> <C> <C> <C>
Non-cash charge in lieu
of income taxes $ 115 $ - $ 98 $ -
Deferred benefit - (7) - (14)
----- ----- ----- -----
Provision (benefit) for income taxes $115 $ (7) $ 98 $ (14)
===== ===== ===== =====
</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 was generated
before the Company affected a quasi-reorganization.
5
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(3) 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
June 30, 1996 and June 30, 1995 (thousands):
<TABLE>
<CAPTION>
June 30,
1996 1995
--------- --------
<S> <C> <C>
(Increase) in trade accounts receivable $(1,880) $ (381)
(Increase) in inventories (1,963) (1,144)
Decrease (increase) in prepaid exp. and other current assets 60 (128)
Increase (decrease) in accounts payable 1,647 (1,105)
(Decrease) increase in other accrued liabilities (202) 245
------- -------
Net effect of changes in operating accounts $(2,338) $(2,513)
======= =======
</TABLE>
The Company made the following cash payments: (i) interest of $187,712 and
$181,000 for the six months ended June 30, 1996 and 1995, respectively, and (ii)
income taxes of $0 and $6,800 for the six months ended June 30, 1996 and 1995,
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 730 for the six months ended June
30, 1996, compared with 691 for the six months ended June 30, 1995. The average
active rig count is an indicator of the market in which the Company operates.
The Company's revenues increased by $3,294,000 (38.6%) to $11,817,000 for the
three month period ended June 30, 1996, from $8,523,000 for the three month
period ended June 30, 1995. In addition, the Company's six month revenues
increased by $5,202,000 (31.6%) to $21,645,000 for the six months ended June 30,
1996, from $16,443,000 for the six months ended June 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.
The gross margin for the six months ended June 30, 1996 increased by $1,063,000
to $4,965,000, from $3,902,000 for the six months ended June 30, 1995. The
gross profit percentage was 22.9% for the six months ended June 30, 1996
compared with 23.7% for the six months ended June 30, 1995. This decrease is a
result of a 1996 accrual of $125,000 for the cost of not exercising an option to
purchase certain leased equipment at Barton Wood.
Selling, general and administrative expenses increased by $679,000 to $4,509,000
for the six months ended June 30, 1996 from $3,830,000 for the six months ended
June 30, 1995. The primary reason for the increase was due to costs associated
with international marketing efforts and additional sales personnel. The
selling, general and administrative expense, as a percentage of sales, was 20.8%
in the first six months of 1996 compared with 23.3% for the first six months of
1995.
The Company generated operating income of $447,000 and $456,000 for the three
and six months ended June 30, 1996 compared with operating income of $23,000 and
$72,000 for the three and six months ended June 30, 1995. The increase in
operating profit was due to increased sales volume with moderate increases in
selling, general and administrative expenses.
The provision for income taxes for the six months ended June 30, 1996 and 1995
resulted in a provision of $98,000 for 1996 and a benefit of $14,000 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 has been amended to extend the line of
credit through June 30, 1997 and the total availability was increased to
$5,000,000.
Pursuant to the Company's long-term debt agreements, approximately $298,000 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 $1,300,000 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: None.
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: August 14, 1996 ERC INDUSTRIES, INC.
/s/ WENDELL R. BROOKS
-------------------------------
Wendell R. Brooks
President, Secretary & Director
/s/ JAMES E. KLIMA
-------------------------------
James E. Klima
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET, INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,799
<SECURITIES> 0
<RECEIVABLES> 9,148
<ALLOWANCES> 597
<INVENTORY> 10,562
<CURRENT-ASSETS> 21,313
<PP&E> 12,526
<DEPRECIATION> 9,490
<TOTAL-ASSETS> 26,255
<CURRENT-LIABILITIES> 8,158
<BONDS> 0
0
0
<COMMON> 212
<OTHER-SE> 15,738
<TOTAL-LIABILITY-AND-EQUITY> 26,255
<SALES> 21,645
<TOTAL-REVENUES> 21,645
<CGS> 16,680
<TOTAL-COSTS> 4,458
<OTHER-EXPENSES> (14)
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 278
<INCOME-TAX> (98)
<INCOME-CONTINUING> 180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
