<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 March 31, 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
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ERC INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 76-0382879
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(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
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(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 ______
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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 May 13, 1996
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Common stock, $0.01 par value 13,863,656 shares
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ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
FINANCIAL INFORMATION:
<S> <C>
Condensed Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995.................... 2
Condensed Statements of Income
(Unaudited) - Three Months Ended March 31, 1996 and March 31, 1995.. 3
Condensed Statements of Cash Flows
(Unaudited) - Three Months Ended March 31, 1996 and March 31, 1995.. 4
Notes to Condensed Financial Statements................................ 5
Management's Discussion and Analysis................................... 7
PART II
OTHER INFORMATION........................................................ 9
Signature Page......................................................... 10
</TABLE>
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PART I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1996 1995
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 558 $ -
Trade accounts receivable, net of allowance for
doubtful accounts of $551 and $512, respectively 6,214 6,671
Inventory 9,073 8,599
Prepaid expenses and other current assets - 60
Deferred tax asset 516 499
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Total current assets 16,361 15,829
Property, plant and equipment, net 3,203 2,860
Other assets 472 493
Excess cost over net assets acquired, net 1,643 1,697
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$21,679 $20,879
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within one year $ 3,477 $ 2,815
Accounts payable 3,556 4,182
Other accrued liabilities 2,638 2,182
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Total current liabilities 9,671 9,179
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Long-term debt 2,165 1,787
Deferred taxes - -
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2,165 1,787
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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 5,237 5,237
Retained earnings from January 10, 1989 4,467 4,537
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Total shareholders' equity 9,843 9,913
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$21,679 $20,879
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</TABLE>
See notes to financial statements.
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ERC INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
------------------------
1996 1995
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Revenues $ 9,828 $ 7,920
Cost of goods sold 7,789 6,016
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Gross profit 2,039 1,904
Selling, general and administrative expenses 2,030 1,855
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Operating income 9 49
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Other (income) expense:
Interest expense 101 90
Other, net (5) (20)
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96 70
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(Loss) before (benefit) for income taxes (87) (21)
(Benefit) for income taxes (17) (7)
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Net (loss) $ (70) $ (14)
============ ==========
Net (loss) per share $ (.01) $ none
============ ==========
Weighted average number of shares
outstanding 13,864 13,864
============ ==========
See notes to financial statements.
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ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
--------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (70) $ (14)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 262 265
Bad debt expense 33 40
Deferred tax benefit (17) (7)
(Gain) on sale of property, plant and equipment - (4)
Non-cash charge for income taxes - -
(Decrease) increase in other assets (192) 156
Net effect of changes in operating accounts (160) (1,859)
----------- -------------
Net cash used in operating activities (144) (1,423)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (338) (182)
Proceeds from sale of property, plant and equipment - 10
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Net cash used in investing activities (338) (172)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 675 1,425
Increase (decrease) on long-term debt and capital
lease obligations 365 (142)
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Net cash provided by financing activities 1,040 1,283
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Net increase (decrease) in cash and cash equivalents 558 (312)
Cash and cash equivalents, beginning of period - 312
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Cash and cash equivalents, end of period $ 558 $ -
============= ============
</TABLE>
See notes to financial statements.
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ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to March 31, 1996 and the
three months ended March 31, 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 months ended March 31, 1996 and 1995. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
(2) The 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>
<S> <C>
March 31,
1996
---------
(thousands)
Deferred tax liabilities:
Tax over book depreciation...... $ 48
-------
Total deferred tax liabilities.. 48
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Deferred tax assets:
Net operating loss.............. 8,991
Tax over book inventory basis... 210
Other........................... 386
Valuation allowance............. (8,991)
-------
Total deferred tax assets....... 596
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Net deferred tax asset......... $ 548
=======
</TABLE>
At March 31, 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.
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ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Three
Months Ended
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1996 1995
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(thousands)
<S> <C> <C>
Current -
(due to alternative minimum tax) $ - $ -
Non-cash charge in lieu
of income taxes - -
Deferred benefit (17) (7)
----- ----------
Credit, provision for income taxes $ (17) $ (7)
===== ==========
</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. Such charges are offset
within shareholders' equity by an increase in additional paid-in capital.
(3)The following is a summary of the net effect of the changes in operating
accounts on cash flows from operating activities for the three months ended
March 31, 1996 and March 31, 1995 (thousands):
<TABLE>
<CAPTION>
March 31,
1996 1995
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<S> <C> <C>
Decrease in trade accounts receivable $ 457 $ 16
(Increase) in inventories (474) (751)
(Increase) decrease in prepaid expenses and other current assets 27 (160)
(Decrease) in accounts payable (626) (987)
Increase in other accrued liabilities 456 23
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Net effect of changes in operating accounts $(160) $(1,859)
===== =======
</TABLE>
The Company made the following cash payments: (I) interest of $101,000 and
$71,000 for the three months ended March 31, 1996 and 1995, respectively, and
(ii) income taxes of $0 and $1,750 for the three months ended March 31, 1996 and
1995, respectively.
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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 708 for the three months ended
March 31, 1996, compared with 705 for the three months ended March 31, 1995.
The Company's revenues increased by $1,908,000 for the three months ended March
31, 1996 to $9,828,000 from $7,920,000 for the three months ended March 31,
1995, a 24.1% increase contrasted with a flat rig count. 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 three months ended March 31, 1996 increased by $135,000
to $2,039,000, from $1,904,000 for the three months ended March 31, 1995. The
gross profit percentage was 20.7% for the three months ended March 31, 1996
compared with 24.0% for the three months ended March 31, 1995. This decrease is
a result of (i) production inefficiencies at Barton Wood (ii) product mix shift
toward lower margin products, and (iii) accrual of $125,000 for the cost of not
exercising an option to purchase the equipment at Barton Wood.
Selling, general and administrative expenses increased by $175,000 to $2,030,000
for the three months ended March 31, 1996 from $1,855,000 for the three months
ended March 31, 1995. The primary reason for the increase was due to costs
associated with international marketing efforts and additional sales personnel.
The Company generated operating income of $9,000 for the three months ended
March 31, 1996 compared with operating income of $49,000 for the three months
ended March 31, 1995. The decrease in operating profit was due to decreased
gross margin percentages and increased selling, general and administrative
expenses.
Other expense, net increased by $26,000. This was principally due to an
increase in interest expense as a result of higher inventory levels since March
of 1995, which required an increase in the company's line of credit borrowing.
The provision for income taxes for the three months ended March 31, 1996 and
1995 resulted in a benefit of $17,000 and $7,000, respectively.
Liquidity and Capital Resources
Working capital increased by $40,000 to $6,690,000 at March 31, 1996 compared
with $6,650,000 at December 31, 1995. The increase in working capital was due
to lower trade receivables in spite of higher volume, and higher inventory
levels to support the increased activity offset by higher
-7-
<PAGE>
current liabilities.
Subsequent to December 31, 1995, the loan facility has been amended to extend
the line of credit through June 30, 1996. Management intends to either continue
obtaining extensions on the current line of credit or negotiate a new long term
credit agreement depending on which is more advantageous for the Company.
Pursuant to the Company's long-term debt agreements, approximately $3,477,000 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 $650,000 through 1996, principally for 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.
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<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.
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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.
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<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: May 14, 1996 ERC INDUSTRIES, INC.
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/s/
------------------------------------------
Wendell R. Brooks
President, Secretary & Director
/s/
------------------------------------------
James E. Klima
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 558
<SECURITIES> 0
<RECEIVABLES> 6,765
<ALLOWANCES> 551
<INVENTORY> 9,073
<CURRENT-ASSETS> 16,361
<PP&E> 12,352
<DEPRECIATION> 9,149
<TOTAL-ASSETS> 21,679
<CURRENT-LIABILITIES> 9,671
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 9,704
<TOTAL-LIABILITY-AND-EQUITY> 21,679
<SALES> 9,828
<TOTAL-REVENUES> 9,828
<CGS> 7,789
<TOTAL-COSTS> 1,997
<OTHER-EXPENSES> (5)
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> (87)
<INCOME-TAX> (17)
<INCOME-CONTINUING> (70)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
