<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, 1999
[_] 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)
1441 Park Ten Boulevard, 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 November 15, 1999
- ----------------------------- --------------------------------
Common stock, $0.01 par value 30,698,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
PAGE
PART I
Item 1: Financial Information
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998.......................... 2
Condensed Consolidated Statement of Operations
Three and Nine Months Ended September 30, 1999 and 1998........... 3
Condensed Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1999.............................. 4
Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 1999 and 1998........... 5
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1999 and 1998..................... 6
Notes to Condensed Consolidated Financial Statements................. 7
Item 2: Management's Discussion and Analysis........................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II
OTHER INFORMATION...................................................... 15
Signature Page....................................................... 16
<PAGE>
Part I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(restated)
----------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 663 $ 2,246
Trade accounts receivable, net of allowance for
doubtful accounts of $700 and $825, respectively 19,464 22,634
Inventory 32,240 31,853
Prepaid expenses and other current assets 2,012 2,546
Deferred tax asset 3,886 3,814
------- --------
Total current assets 58,265 63,093
Property, plant and equipment, net 9,824 9,990
Excess cost over net assets acquired, net 3,796 4,231
------- --------
Total assets $71,885 $77,314
======= ========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit from banks $ 9,562 $ 3,881
Line of credit from parent 15,742 19,509
Current portion of long-term debt 1,000 1,237
Accounts payable 8,908 10,645
Other accrued liabilities 5,945 6,465
------- -------
Total current liabilities 41,157 41,737
Deferred tax liability 100 100
Long-term debt 1,201 2,710
------- -------
Total Liabilities 42,458 44,547
------- -------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, par value $1; authorized - 10,000,000 shares
(1,850,000 issued and outstanding at December 1998; converted
into ordinary stock during September 1999) - 1,850
Common stock, par value $0.01; authorized - 40,000,000 shares;
30,698,272 issued and outstanding (December 1998: 28,848,272) 307 289
Additional paid-in capital 27,498 25,946
Retained earnings 1,606 4,671
Accumulated other comprehensive income 16 11
------- -------
Total shareholders' equity 29,427 32,767
------- -------
Total liabilities and stockholders' equity $71,885 $77,314
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------ -------------------------------------------
1999 1998 1999 1998
------------------------------------------------ -------------------------------------------
(restated) (restated)
------------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 22,083 $ 30,439 $ 63,460 $ 91,364
Cost of goods sold 17,067 22,242 49,209 66,874
----------- ---------- ---------- ----------
Gross profit 5,016 8,197 14,251 24,490
Selling, general and
administrative expenses 5,279 6,579 15,931 18,439
----------- ---------- ---------- ----------
Operating (loss) income (263) 1,618 (1,680) 6,051
----------- ---------- ---------- ----------
Other (income) expense:
Interest expense 406 616 1,275 1,454
Other, net - (15) - (110)
=========== ========== ========== ==========
406 601 1,275 1,344
----------- ---------- ---------- ----------
(Loss) income before provision
for income taxes (669) 1,017 (2,955) 4,707
Provision for income taxes 20 428 110 1,888
----------- ---------- ---------- ----------
Net (loss) income $ (689) $ 589 $ (3,065) $ 2,819
=========== ========== ========== ==========
Basic income per share
Basic $ (0.02) $ 0.02 $ (0.11) $ 0.10
=========== =========== =========== ===========
Diluted $ (0.02) $ 0.02 $ (0.11) $ 0.09
=========== =========== =========== ===========
Weighted average number of
shares outstanding
Basic 28,928,707 28,848,272 28,875,378 28,848,272
=========== =========== =========== ===========
Diluted 28,928,707 30,698,272 28,875,378 30,698,272
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional Accumulated Other
Preferred Common Paid-in Retained Comprehensive
Stock Stock Capital Earnings Income
------------------------------------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1998 (restated) $ 1,850 $ 289 $ 25,946 $ 4,671 $ 11
Net loss - - - (3,065) -
Income tax benefit of pre-quasi-reorganization
net operating loss carryforwards - - (280) - -
Other comprehensive income - - - - 5
Conversion of preferred stock into common stock (1,850) 18 1,832 - -
--------------------------------------------------------------------------------
Balance as of September 30, 1999 $ 0 $ 307 $ 27,498 $ 1,606 $ 16
========= ====== ========= ======== =======
</TABLE>
The accompanying notes are an intergral part of the
condensed consolidated financial statements.
4
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
--------------------------- --------------------------
(restated) (restated)
------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net (loss) income $(680) $589 $(3,065) $2,819
Other comprehensive (loss) income 67 (10) 5 19
------ ---- ------- ------
Total comprehensive (loss) income $(622) $579 $(3,060) $2,838
====== ==== ======= ======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------------
1999 1998
---------------- --------------------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (432) $(9,779)
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (2,520)
Purchases of property, plant and equipment (1,543) (2,138)
Proceeds from sale of property, plant and equipment 224 419
------- -------
Net cash used in investing activities (1,319) (4,239)
------- -------
Cash flows from financing activities:
Line of credit (payments to)/receipts from parent company, net (3,767) 18,668
Line of credit borrowings from banks, net 5,681 279
Principal payments on long-term debt and capital
lease obligations (1,746) (4,541)
------- -------
Net cash provided by financing activities 168 14,406
------- -------
Effect of exchange rate changes on cash - -
------- -------
Net increase (decrease) in cash and cash equivalents (1,583) 388
Cash and cash equivalents, beginning of period 2,246 79
------- -------
Cash and cash equivalents, end of period $ 663 $ 467
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
6
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The information contained herein with respect to September 30, 1999 and the
three and nine months ended September 30, 1999 and 1998, has not been
audited but was prepared in conformity with the accounting principles and
policies described in the ERC Industries, Inc. (the "Company") annual
report (Form 10-K) for the year ended December 31, 1998. Included are all
adjustments (consisting of normal recurring 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,
1999 and 1998. The results of interim periods are not necessarily
indicative of results to be expected for the year.
The Company has restated the previously issued financial statements as of
December 31, 1998 and for the three and nine months ended September 30,
1998 to reflect the acquisition on May 14, 1999 of all of the outstanding
capital stock of Wood Group Pressure Control Holdings Limited, ("WGPCHL") a
company incorporated in Scotland under the Companies Act of the United
Kingdom. Prior to the acquisition, WGPCHL was a wholly owned subsidiary of
John Wood Group PLC ("Wood Group"). WGPCHL owned Wood Group Pressure
Control and Engineering Services Limited and Wood Group (Middle East)
Limited, the latter of which beneficially owns Wood Group Pressure Control
(Arabian) LLC (collectively, the "Group Companies").
With the Company and the Group Companies all being under the common control
of the Wood Group, the above transaction has been accounted for similar to
a pooling of interests. The historical financial statements of the Company
for periods prior to the consummation of the acquisition have been restated
as though the Companies had been combined from the period when they first
were under common control of the Wood Group.
(2) Acquisitions:
On February 2, 1998, the Company entered into a definitive purchase
agreement for the acquisition of Bompet, C.A. ("Bompet"), a Venezuelan
company. In connection with the transaction, the Company paid the sole
Bompet stockholder, Inversiones Western C.A., a purchase price of $2.6
million. In addition, the Company will pay up to a maximum of $3.4 million
in the event that Bompet's earnings exceed certain thresholds during 1998,
1999 and 2000. No amount has been accrued or paid in respect of this
commitment as of September 30, 1999.
The acquisition of Bompet was accounted for under the purchase method of
accounting and the purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash $ 80
Accounts Receivable 2,556
Inventory 1,784
Property, Plant and Equipment 556
Other Assets 15
Excess Cost Over Net Assets Acquired 1,213
Accounts Payable (1,438)
Accrued Expenses (1,298)
Long-Term Debt-Current and Non-Current (868)
-------
$ 2,600
=======
</TABLE>
7
<PAGE>
The pro-forma impact of the Bompet acquisition on the Company's 1998
results of operations is not material. During the fourth quarter of 1998,
Bompet was advised that it had lost its contract with its major customer.
As a result of the loss of this contract, the Company determined that its
investment in Bompet was impaired and accordingly wrote off the goodwill
arising from the acquisition of Bompet.
As noted in Note (1) above, on May 14, 1999, the Company, in a privately
negotiated transaction (the "Pressure Control Acquisition"), completed its
acquisition from Wood Group of all of the outstanding capital stock of
WGPCHL. In connection with the transaction and in exchange for all of the
shares of the capital stock of WGPCHL, the Company issued to Wood Group,
1,350,000 shares of its common stock, par value $0.01 per share (the
"Common Stock"), representing approximately 0.5% of the currently issued
and outstanding shares of Common Stock. In addition, the Company issued
1,850,000 shares of its Series A Cumulative Convertible Preferred Stock
(the "Series A Preferred Stock").
The Series A Preferred Stock has a liquidation preference of $1.00 per
share and an annual dividend of $0.01 per share beginning in January 2000.
Each share of Series A Preferred Stock will be convertible into one share
of the Company's common stock. At the Company annual meeting in September
1999 the Company's stockholders approved such conversion.
Combined and separate results of operations of the Company prior to
consummation of the transaction for the restated periods are as follows:
<TABLE>
<CAPTION>
WGPC WGPC
Company (Arabian) Eng. Services Combined
------- --------- ------------- --------
<S> <C> <C> <C> <C>
Three months ended September 30, 1998
(unaudited)
Revenues $27,417 $ 902 $2,120 $30,439
Profit before provision for
income taxes $ 819 $ 62 $ 136 $ 1,017
Net income $ 439 $ 62 $ 88 $ 589
Nine months ended September 30, 1998
(unaudited)
Revenues $83,398 $2,204 $5,762 $91,364
Profit before provision for
income taxes $ 4,150 $ 209 $ 348 $ 4,707
Net income $ 2,384 $ 209 $ 226 $ 2,819
Three months ended March 31, 1999
(unaudited)
Revenues $20,401 $ 533 $1,732 $22,666
Profit before provision for
income taxes $ (889) $ (156) $ 117 $ (928)
Net income (loss) $ (722) $ (156) $ 119 $ (759)
</TABLE>
8
<PAGE>
(3) Segment and Related Information
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information.
Summarized financial information of the Company's reportable segments for
the three and nine months ended September 30, 1999 and 1998 is shown in the
following table:
<TABLE>
<CAPTION>
U.S. Eastern
Operations Hemisphere Other Total
----------- ---------- ------- --------
<S> <C> <C> <C> <C>
Three months ended September 30, 1999
Revenues from external customers $12,566 $ 8,331 $1,186 $22,083
EBIT (1) (264) 203 (202) (263)
Total Assets $43,347 $22,548 $5,990 $71,885
Three months ended September 30, 1998
Revenues from external customers $21,091 $ 7,914 $1,434 $30,439
EBIT (1) 1,020 546 52 1,618
Nine months ended September 30, 1999
Revenues from external customers $38,259 $21,577 $3,624 $63,460
EBIT (1) (1,845) 452 (287) (1,680)
Nine months ended September 30, 1998
Revenues from external customers $64,604 $20,856 $5,904 $91,364
EBIT (1) 4,058 1,475 518 6,051
</TABLE>
(1) EBIT represents earnings before other (income) expense and taxes.
The following table is a reconciliation of reportable segment EBIT to the
Company's consolidated totals:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
----- ------ ------- ------
(restated) (restated)
<S> <C> <C> <C> <C>
Total EBIT for reportable segments $(263) $1,618 $(1,680) $6,051
Other (income) expense 406 601 1,275 1,344
----- ------ ------- ------
Total consolidated (loss) income
before taxes $(669) $1,017 $(2,955) $4,707
===== ====== ======= ======
</TABLE>
(4) Debt
On January 20, 1999, the Company obtained a $2 million unsecured line of
credit with a U.S. bank, which is guaranteed by the Company's principal
stockholder, John Wood Group PLC. The line of credit is used for the
purpose of general working capital requirements, and $0.35 million was
available for additional borrowings on the line of credit at September 30,
1999.
9
<PAGE>
On September 2, 1998, the Company obtained a $22 million line of credit
with John Wood Group PLC. At September 30, 1999, $10.25 million was
available for additional borrowings under this line of credit.
Wood Group Pressure Control and Engineering Services Limited has a line of
credit with a bank in Scotland provided as part of a group banking
arrangement with John Wood Group PLC. The line of credit is issued for the
purpose of general working capital requirements and provides overdraft and
documentary credit facilities.
The Company's United Kingdom subsidiaries have lines of credit with a bank
in Scotland provided as part of a group banking arrangement with John Wood
Group PLC. The lines of credit are issued for the purpose of general
working capital requirements and provide overdraft and documentary credit
facilities.
Wood Group Pressure Control Limited also has a loan from John Wood Group
PLC amounting to $3.2 million, which is repayable on demand. The loan is
used for the purpose of general working capital requirements.
The Company's Abu Dhabi subsidiary has a line of credit of up to DHS 2
million ($545,000) with a bank in Scotland provided as part of a group
banking arrangement with John Wood Group PLC. The line of credit is used
for the purpose of general working capital requirements and provides
overdraft and documentary facilities. In addition, the subsidiary has a
loan of DHS 2.5 million ($681,000) from John Wood Group PLC.
10
<PAGE>
ERC INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement for Purposes of Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-Q regarding
the Company's financial position, business strategy, and plans and objectives of
management for future operations are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that actual results may not
differ materially from those in the forward-looking statements herein for
reasons including the effect of competition, the effects of and risks associated
with acquisitions, the level of petroleum industry exploration and production
expenditures, world economic conditions, prices of, and the demand for crude oil
and natural gas, drilling activity, weather, the legislative environment in the
United States and other countries, the condition of the capital and equity
markets, and other risk factors identified herein.
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, was down 35.2% to 570 for the nine
months ended September 30, 1999, compared with 879 for the nine months ended
September 30, 1998. The average actual rig count for the three months ended
September 30, 1999, as compared to the three months ended September 30, 1998
declined 20.4% from 800 to 637. The average active rig count is an important
indicator of activity levels in the market in which the Company operates.
The Company's revenues decreased by $8.3 million (27.3%) to $22.1 million for
the three months ended September 30, 1999, from $30.4 million for the three
months ended September 30, 1998. In addition, the Company's nine month
revenues decreased by $27.9 million (30.5%) to $63.5 million for the nine months
ended September 30, 1999, from $91.4 million for the nine months ended September
30, 1998. The decrease in revenues is principally due to the decline in the
number of rigs utilized which has had an adverse impact on the level of demand
for the Company's products.
The gross profit for the three months ended September 30, 1999 decreased by $3.2
million to $5.0 million from $8.2 million for the same period last year. The
gross profit for the nine months ended September 30, 1999 decreased by $10.2
million to $14.3 million, from $24.5 million for the same period in 1998. Gross
profit as a percentage of sales was 22.7% and 22.5% for the three and nine
months ended September 30, 1999 as compared with 26.9% and 26.8% for the three
and nine months ended September 30, 1998, respectively. The decrease in gross
profit percentage compared to last year is due primarily to the need to lower
prices in order to retain business during a period of reduced rig activity.
11
<PAGE>
Selling, general and administrative expenses decreased by $1.3 million for the
three months ended September 30, 1999 as compared with the same three month
period for 1998. The same expenses decreased by $2.5 million to $15.9 million
for the nine months ended September 30, 1999 from $18.4 million for the nine
months ended September 30, 1998. The decrease arises from reductions in
headcount and other administrative costs to reflect lower levels of activity.
Selling, general and administrative expenses, as a percentage of sales were
25.1% in the first nine months of 1999, compared with 20.2% for the first nine
months of 1998. These expenses increased as a percentage of sales from 21.6% in
the three months ended September 30, 1998 to 23.9% for the three months ended
September 30, 1999. The increase as a percentage of sales is due to the
reduction in revenues in the period being proportionately higher than the
savings made in selling, general and administrative expenses.
The Company incurred operating losses of $0.3 million and $1.7 million for the
three and nine months ended September 30, 1999 compared with operating income of
$1.6 million and $6.1 million for the three and nine months ended September 30,
1998. The decrease in operating income is due to reduced sales volume and
resulting gross profit.
Other (income) expense was $0.4 million for the three months ended September 30,
1999, compared to $0.6 million for the same period in 1998. Other (income)
expense for the nine months ended September 30, 1999 at $1.3 million was the
same as the amount shown for the same period in 1998.
The provision for income taxes for the three and nine months ended September 30,
1999 was $20,000 and $110,000 respectively, compared to provisions of
$0.4 million and $1.9 million for the equivalent periods in 1998. The high
effective tax rate in 1999 is due primarily to management's current estimate
that tax losses incurred this year may not provide future tax benefits to the
Company.
On November 5, 1999, the Company announced that it received notice from Nasdaq
that its common stock would be delisted from the Nasdaq Small Cap Market
effective with the close of business on that date. Nasdaq attributed the
delisting decision to the Company's inability to satisfy continued listing
standards by maintaining a minimum bid price of $1.00 per share of common stock.
The Company's common stock commenced trading on the OTC Bulletin Board under the
symbol ERCI effective with the opening of the market on Monday, November 8,
1999.
Liquidity and Capital Resources
On January 20, 1999, the Company obtained a $2 million unsecured line of credit
with a U.S. bank, which is guaranteed by the Company's principal stockholder,
John Wood Group PLC. The line of credit is used for the purpose of general
working capital requirements, and $0.35 million was available for additional
borrowings on the line of credit at September 30, 1999.
On September 2, 1998, the Company obtained a $22 million line of credit with
John Wood Group PLC. At September 30, 1999, $10.25 million was available for
additional borrowings under this line of credit.
12
<PAGE>
The Company's United Kingdom subsidiaries have lines of credit with a bank in
Scotland provided as part of a group banking arrangement with John Wood Group
PLC. The lines of credit are issued for the purpose of general working capital
requirements and provide overdraft and documentary credit facilities.
Wood Group Pressure Control Limited also has a loan from John Wood Group PLC
amounting to $3.2 million, which is repayable on demand. The loan is used for
the purpose of general working capital requirements.
The Company's Abu Dhabi subsidiary has a line of credit of up to DHS 2 million
($545,000) with a bank in Scotland provided as part of a group banking
arrangement with John Wood Group PLC. The line of credit is used for the
purpose of general working capital requirements and provides overdraft and
documentary facilities. In addition, the subsidiary has a loan of DHS 2.5
million ($681,000) from John Wood Group PLC.
The Company believes it will be able to renew the line of credit and loans with
Wood Group and therefore will have sufficient financial resources to fund its
working capital requirements through 2000.
Working capital at September 30, 1999 was $17.0 million compared to $21.4
million at December 31, 1998. The Company currently anticipates incurring
capital expenditures of $1.5 million through the fiscal year ending December 31,
1999. The Company expects to fund these expenditures from amounts available
under the line of credit facilities, cash provided by operations and/or capital
lease transactions.
13
<PAGE>
Year 2000 Date Conversion
A plan has been put in place to identify, quantify and correct systems,
products, services, and sources of supply, which may be adversely affected by
the Year 2000 `problem'. The Company is taking advantage of this detailed
review to quantify the scale of the problem to standardize and replace aging
systems.
Awareness and investigation phase began in late 1997 and, during the course of
1998, a Year 2000 Project Team, supported by high level management, was
assigned. Equipment and software inventory along with compliance and risk has
been quantified. Cost estimates for replacement and/or correction of problems
have been determined. All the main replacement financial, operating and
information systems are now either implemented or in the process of
installation. The Year 2000 plans are designed to have all business critical
elements compliant by early December 1999, with the additional objective of
minimizing the impact in current business operations.
Management expects that the current schedules will allow adequate time for
testing, and progress at all sites is monitored and reported to senior
management on a monthly basis.
To address the business risk from the third parties, we have contacted all
critical suppliers and customers, and are maintaining a database of their plans
and intentions. Alternative sources will be established for those who pose any
major risk to the Company's business.
The Company cannot be certain of avoiding a business disruption; for example a
noncompliance in a supplier's supply chain may ultimately affect the Company's
business. If the Company or the third parties on which the Company principally
relies are unable to address these issues in a timely manner, a material adverse
impact on results of operations, cash flows and financial position could occur.
However, contingency plans are also being developed to minimize any risk.
The cost associated with Year 2000 compliance amounted to approximately $1
million in 1998, and it is envisaged that total expenditure will not exceed $2
million through the end of 1999. This project includes investment in capital
cost for new systems which are deemed necessary and which eliminate the need to
test and modify existing systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes regarding market risk during the third
quarter of 1999. Accordingly, no additional disclosures have been provided in
accordance with Regulation S-K, Item 305.
14
<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,
results of operations or cash flows.
Item 2. Changes in Securities.
None.
During the three months ended September 30, 1999, the Company made no
unregistered sales of its equity securities.
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 September 27,
1999, the shareholders of the Company re-elected to the Board of
Directors, Allister G. Langlands by a unanimous vote of 27,699,128 shares,
and Wendell R. Brooks by a unanimous vote of 27,699,128 shares. The
shareholders also ratified the appointment of PricewaterhouseCoopers LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 1999 by a vote of 27,649,886 shares in favor, 2,892 against
and 46,350 shares abstaining. The shareholders also approved the issuance
of up to 1,850,000 shares of Common Stock upon conversion of the Company's
Series A Preferred Stock by a vote of 26,236,098 shares in favor, 32,200
against and 56,136 shares abstaining.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule(1).
(b) Reports on Form 8-K:
None
----------------------------
(1) Filed herewith.
15
<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 15, 1999 ERC INDUSTRIES, INC.
-------------------------------------
/s/ Alan D. Senn
-------------------------------------
Alan D. Senn
President and Chief Operating Officer
/s/ James E. Klima
-------------------------------------
James E. Klima
Vice President and Chief
Financial Officer
16
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