-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BNHAEE+FNTKZmEZLCOrLFuM2l4A34FqXHuW6ppA5FVRiBpwIeY9iqMrtlNMNSjGV fuqRt3eIUwjESACFVKzQMg== 0000899243-00-001298.txt : 20000515 0000899243-00-001298.hdr.sgml : 20000515 ACCESSION NUMBER: 0000899243-00-001298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERC INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000775477 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 760382879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14439 FILM NUMBER: 628227 BUSINESS ADDRESS: STREET 1: 1441 PARK TEN BOULEVARD CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 2813988901 MAIL ADDRESS: STREET 1: 1441 PARK TEN BOULEVARD CITY: HOUSTON STATE: TX ZIP: 77084 FORMER COMPANY: FORMER CONFORMED NAME: ERC CORP /DE/ DATE OF NAME CHANGE: 19851103 10-Q 1 FOR THE PERIOD ENDING MARCH 31, 2000 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, 2000 [_] 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 May 10, 2000 - ----------------------------- --------------------------- Common stock, $0.01 par value 30,698,272 shares ERC INDUSTRIES, INC. INDEX
PAGE PART I Financial Information: Condensed Consolidated Balance Sheet - March 31, 2000 and December 31, 1999.......................... 2 Condensed Consolidated Statement of Operations Three Months Ended March 31, 2000 and 1999.................... 3 Condensed Consolidated Statement of Shareholders' Equity Three Months Ended March 31, 2000............................. 4 Condensed Consolidated Statement of Comprehensive Income (Loss) Three Months Ended March 31, 2000 and 1999.................... 5 Condensed Consolidated Statement of Cash Flows Three Months Ended March 31, 2000 and 1999.................... 6 Notes to Condensed Consolidated Financial Statements............. 7 Management's Discussion and Analysis............................. 9 PART II Other Information.................................................. 11 Signature Page................................................... 12
Part I. FINANCIAL INFORMATION ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except for share amounts) (unaudited)
March 31, December 31, 2000 1999 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 614 $ 1,387 Trade accounts receivable, net of allowance for doubtful accounts of $920 and $1,032, respectively 22,167 21,333 Inventory 32,196 31,970 Prepaid expenses and other current assets 2,445 1,915 Deferred tax asset 3,789 3,789 ------------- ------------- Total current assets 61,211 60,394 Property, plant and equipment, net 8,867 9,528 Excess cost over net assets acquired, net 955 1,015 Deferred tax asset, non-current 284 284 ------------- ------------- Total assets $ 71,317 $ 71,221 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Line of credit from banks $ 10,555 $ 9,734 Line of credit from parent 16,210 16,254 Current portion of long-term debt 1,000 1,000 Accounts payable 11,609 10,920 Other accrued liabilities 4,110 5,137 ------------- ------------- Total current liabilities 43,484 43,045 Other liabilities, non-current 105 105 Long-term debt 1,486 1,511 ------------- ------------- Total Liabilities 45,075 44,661 ------------- ------------- Commitments and contingencies - - Shareholders' equity: Preferred stock, par value $1; authorized - 10,000,000 shares; none issued and outstanding (December 31, 1999: 1,850,000) - 1,850 Common stock, par value $0.01; authorized - 40,000,000 shares; 30,698,272 issued and outstanding (December 31, 1999: 28,848,272) 307 289 Additional paid-in capital 27,495 25,663 Accumulated deficit (1,561) (1,226) Accumulated other comprehensive income 1 (16) ------------- ------------- Total shareholders' equity 26,242 26,560 ------------- ------------- Total liabilities and stockholders' equity $ 71,317 $ 71,221 ============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements. -2- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ---------------------------- (restated) Revenues $ 26,627 $ 22,666 Cost of goods sold 21,137 17,642 ------------ ------------ Gross profit 5,490 5,024 Selling, general and administrative expenses 5,455 5,481 ------------ ------------ Operating income (loss) 35 (457) Interest expense 516 471 ------------ ------------ Loss before provision for income taxes (481) (928) (Benefit from) provision for income taxes (146) (169) ------------ ------------ Net loss $ (335) $ (759) ============ ============ Basic and diluted loss per share $ (0.01) $ (0.03) ============ ============ Weighted average number of shares outstanding-basic and diluted 29,641 28,848 ============ ============ The accompanying notes are an integral part of the condensed consolidated financial statements. -3- ERC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands) (unaudited)
ADDITIONAL ACCUMULATED OTHER PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCK STOCK CAPITAL EARNINGS INCOME --------------------------- -------- ----------- ----------------- Balance as of December 31, 1999 1,850 289 25,663 (1,226) (16) Net loss - - - (335) - Conversion of preferred stock into common stock (1,850) 18 1,832 - - Other comprehensive income - - - - 17 ----------------------------------------------------------------------------- Balance as of March 31, 2000 - $ 307 $ 27,495 $ (1,561) $ 1 ========= ============ ========== ============= ===================
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- ERC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ------------ ----------- (restated) Net loss $ (335) $ (759) Other comprehensive (loss) income 17 (46) ------------ ----------- Total comprehensive loss $ (318) $ (805) ============ =========== The accompanying notes are an integral part of the condensed consolidated financial statements -5- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, -------------------------------- 2000 1999 ------------- ------------- Cash flows from operating activities: (restated) Net cash provided by (used in) operating activities $ (1,661) $ 2,308 ------------- ------------- Cash flows from investing activities: Purchases of property, plant and equipment (59) (297) Proceeds from sale of property, plant and equipment 195 36 ------------- ------------- Net cash provided by (used in) investing activities 136 (261) ------------- ------------- Cash flows from financing activities: Line of credit borrowings from parent company, net (44) (2,820) Line of credit borrowings from banks, net 821 406 Principal payments on long-term debt and capital lease obligations (25) (155) ------------- ------------- Net cash (used in) provided by financing activities 752 (2,569) ------------- ------------- Net decrease in cash and cash equivalents (773) (522) Cash and cash equivalents, beginning of period 1,387 2,246 ------------- ------------- Cash and cash equivalents, end of period $ 614 $ 1,724 ============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements. -6- ERC INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) The information contained herein with respect to March 31, 2000 and the three months ended March 31, 2000 and 1999, 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, 1999. 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 months ended March 31, 2000 and 1999. The results of interim periods are not necessarily indicative of results to be expected for the year. (2) Acquisitions: On May 14, 1999, the Company, in a privately-negotiated transaction (the "Pressure Control Acquisition"), completed its acquisition from John Wood Group PLC ("Wood Group") of all of the outstanding capital stock of Wood Group Pressure Control Holdings Limited, a company incorporated in Scotland under the Companies Act of the United Kingdom ("WGPCHL"). Prior to the Pressure Control Acquisition, WGPCHL was a wholly-owned subsidiary of Wood Group. The sole assets of WGPCHL consist of all of the issued and outstanding capital stock of each of Wood Group Engineering Services (Peterhead) Limited and Wood Group Engineering (Middle East) Limited, which in turn beneficially owns Arabian Oil Equipment Services LLC (collectively, the "Group Companies"). The Group Companies market, manufacture and service products used in the drilling and production segment of the Oil and Gas Industry, primarily consisting of the repair and overhaul of valves and wellheads. 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"), which was converted into an aggregate of 1,850,000 shares of Common Stock in February 2000. 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. -7- (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 quarters ended March 31, 2000 and 1999 is shown in the following table:
U.S. Eastern Operations Hemisphere Other Total ----------- ----------- ----- ----- 2000 ---- Revenues from external customers $18,879 $ 6,074 $1,674 $26,627 EBIT /(1)/ 775 (763) 23 35 Total Assets $47,210 $17,634 $6,473 $71,317 1999 (restated) --------------- Revenues from external customers $14,002 $ 7,749 $ 915 $22,666 EBIT /(1)/ (622) 257 (92) (457) Total Assets $48,020 $18,069 $5,606 $71,695
(1) EBIT represents earnings before interest expense and taxes. The following table is a reconciliation of reportable segment EBIT to the Company's consolidated totals: 2000 1999 ----- ----- (restated) Total EBIT for reportable segments $ 35 $(457) Interest expense (516) (471) ----- ----- Total consolidated loss before taxes $(481) $(928) ===== ===== -8- ERC INDUSTRIES, INC. 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, prospects in its industry, 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 effects of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, the effect of and risks associated with acquisitions, prices of, and the demand for crude oil and natural gas, drilling activity, weather, increased pressure on the Company's prices for its products and the margins thereon, 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 up 32.2% to 711 for the three months ended March 31, 2000, compared with 538 for the three months ended March 31, 1999. The average active rig count is an important indicator of activity levels in the U.S. market. The Company's revenues increased by $3.9 million to $26.6 million for the three months ended March 31, 2000 from $22.7 million for the three months ended March 31, 1999. The increase in revenues is principally due to the increase in the number of domestic rigs utilized which has had a favorable impact on the level of demand in the U.S. for the Company's products, offset partially by a decline in the level of activity in overseas markets. The gross profit for the three months ended March 31, 2000 increased by $0.5 million to $5.5 million from $5.0 million for the same period last year. Gross profit as a percentage of revenues was 20.6% for the three months ended March 31, 2000 as compared with 22.2% for the three months ended March 31, 1999. The decrease in gross profit percentage was primarily due to the need to lower margins in order to retain business during a period of increased competition to maintain market share. Selling, general and administrative expenses were $5.5 million for both the three months ended March 31, 2000 and 1999. The decrease in selling, general and administrative expenses, as a percentage of sales to 20.4% in the first three months of 2000 compared with 24.2% for the first three months of 1999 is due to an increase in revenues in the period while SG&A expense has remained constant. -9- The Company generated an operating income of $35,000 for the three months ended March 31, 2000 compared with an operating loss of $0.5 million for the three months ended March 31, 1999. The increase in operating income was due to increased sales volume. Interest expense at $0.5 million for the three months ended March 31, 2000 was unchanged compared to the same period in 1999. The benefit for income taxes for the three months ended March 31, 2000 was $146,000 compared to a benefit of $169,000 for the equivalent period in 1999. The effective tax rate moved from 18% in 1999 to 30% in 2000 primarily because management believed the losses incurred by its U.K. and Venezuelan operations during the period to March 1999 may not provide future tax benefits to the Company. Numerous companies, some of which have substantially greater resources than the Company, are engaged primarily in the manufacturing, installation and maintenance of wellheads, valves and drilling equipment as well as other types of oilfield equipment. In addition, some foreign manufacturers make only valves. Over the past several years, severe price competition has continued to have a substantial impact on profit margins. The Company believes that the reduction in demand in the latter part of 1998 and during 1999 for its services was largely attributable to depressed oil prices. While the increase in oil and gas prices so far in 2000 has seen an increase in demand for its products, the Company cannot predict the future level of demand for its services or future conditions in the oil and gas service industry, management believes a complete recovery in the Company's market will require sustained recovery in the oil and gas industry as a whole. 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 $0.6 million was available for additional borrowings on the line of credit at March 31, 2000. On September 2, 1998, the Company obtained a $22 million line of credit with John Wood Group PLC. At March 31, 2000, $9.6 million was available for additional borrowings under this line of credit. 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 line of credit is issued for the purpose of general working capital requirements and provides overdraft and documentary credit facilities. The amount outstanding under this agreement at March 31, 2000 was $8.5 million. Wood Group Pressure Control U.K. 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 requirements. The Company's Abu Dhabi subsidiary has a line of credit of up to $0.5 million with a bank in Scotland provided as part of a group banking arrangement with Wood Group. The amount outstanding under this agreement at March 31, 2000 was $0.1 million. In addition, the subsidiary has a loan of $0.7 million from Wood Group. The Company believes it will be able to renew the line of credit and loan with John Wood Group PLC so as to ensure that the Company will have sufficient financial resources to fund its working capital requirements through 2000. Working capital at March 31, 2000 was $17.6 million compared to $17.4 million at December 31, 1999. The Company currently anticipates incurring capital expenditures of $1.3 million through the fiscal year ending December 31, 2000. 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. Pending Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in Other Comprehensive Income pending recognition in earnings. SFAS 133 is effective for the Company in 2001. The impact of SFAS 133 on our financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of actual foreign currency transactions, the extent of our hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adoption will have a material effect on the Company's results of operations, cash flows or financial conditions. Recent Developments In November 1999, the Company received a proposal from Wood Group to acquire all outstanding shares of Common Stock not currently owned by it at a price of $1.50 per share. In response to the Wood Group proposal, the Company's Board of Directors appointed a special committee comprised of its independent directors to review and analyze the proposal. The special committee appointed its own legal and financial advisors and negotiated a per share cash price of $1.60 for each outstanding share of Common Stock not currently owned by the Wood Group. On March 29, 2000, the Company, Wood Group and ERC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of the Reporting Person ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "Merger") of Merger Sub with and into the Company. In the Merger, each share of Common Stock of the Company outstanding immediately prior to the effective time the Merger (other than shares held by the Wood Group, Merger Sub or any subsidiary of the Wood Group or the Company, or held in the Company's treasury, which will be canceled, or shares held by stockholders who have exercised their statutory right under the laws of the state of Delaware to have such shares appraised and be paid the fair value thereof ("Dissenting Shares")) will be converted into the right to receive $1.60 in cash, without any interest thereon (such cash paid for the shares of Common Stock is hereinafter referred to as the "Merger Consideration"), and each outstanding share of common stock of Merger Sub will be converted into one share of the common stock of the Company, as the surviving corporation in the Merger (the "Surviving Corporation"). The Merger Agreement specifies certain conditions that must be satisfied prior to the closing of the Merger, including, among other things, (a) the approval and adoption of the Merger Agreement and the Merger by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock not owned by the Reporting Person that are voting for or against the matter at the meeting of stockholders called for such purpose, and (b) the absence of any court order, decree or injunction that prohibits the consummation of the Merger. As a result of the Merger, (a) all the outstanding shares of Common Stock (other than Dissenting Shares and shares held by the Wood Group, Merger Sub or any subsidiary of the Wood Group or the Company, or held in the Company's treasury, which will be canceled) will be converted into the right to receive the Merger Consideration, and the shares of Merger Sub will become the shares of the Surviving Corporation, (b) the Reporting Person will own 100% of the outstanding shares of the Surviving Corporation, (c) the Common Stock of the Company will cease to be authorized to be quoted on the OTC Bulletin Board or on any other interdealer quotation system of a registered national securities association, (d) the Common Stock will be removed from registration under the 1934 Act, (e) the directors of Merger Sub will become the directors of the Surviving Corporation and (f) the officers of the Company will become the officers of the Surviving Corporation. On May 1, 2000, Alan Senn resigned as Company President (while retaining his position on the Board) to become President of Wood Corp. ESP, a fellow affiliate of Wood Corp. Also on May 1, 2000, Scott Bender joined the Company's Board and was elected as President, and Joel Bender joined the Company as Senior Vice President, Operations. -10- 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 March 31, 2000, 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. --------------------------------------------------- None. 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: During the first quarter of the fiscal year ended December 31, 2000, the Company filed no reports on Form 8-K. ______________________ /(1)/ Filed herewith. -11- 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 11, 2000 ERC INDUSTRIES, INC. ------------------------------------------ /s/ Scott J. Bender ------------------------------------------ Scott J. Bender President and Chief Operating Officer /s/ James E. Klima ------------------------------------------ James E. Klima Vice President and Chief Financial Officer -12- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 614 0 23,087 920 32,196 61,211 28,393 19,526 71,317 43,484 0 0 0 307 25,934 71,317 26,627 26,627 21,137 5,455 0 0 516 (481) 146 (335) 0 0 0 (335) (0.01) (0.01)
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