-----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, KxEieriZSXZ6rXaRaNYdFF9qW821UKEoz65LThP+Ivy3IDnxvQkJtl0vEohRWWfb J+eEAiys96Skd4Mlm2Ek9Q== 0000899243-00-000703.txt : 20000331 0000899243-00-000703.hdr.sgml : 20000331 ACCESSION NUMBER: 0000899243-00-000703 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K SEC ACT: SEC FILE NUMBER: 000-14439 FILM NUMBER: 587828 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _________________________ Commission file number 0-14439 ------- ERC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 76-0382879 - --------------------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 1441 Park Ten Boulevard, Houston, Texas 77084 - ---------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (281) 398-8901 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 17, 2000 was $7,515,855. The number of shares outstanding of the registrant's common stock, as of March 17, 2000 was 30,698,272. Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission are incorporated by reference into Part III of this Form 10-K. ERC INDUSTRIES, INC. TABLE OF CONTENTS PART I PAGE Item 1. Business............................................... 1 Item 2. Properties............................................. 7 Item 3. Legal Proceedings...................................... 8 Item 4. Submission of Matters to a Vote of Security Holders.... 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................... 9 Item 6. Selected Financial Data................................ 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................................. 13 Item 8. Financial Statements and Supplementary Data............ 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 13 PART III Item 10. Directors and Executive Officers of the Registrant..... 14 Item 11. Executive Compensation................................. 14 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 14 Item 13. Certain Relationships and Related Transactions......... 14 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K............................... 15 Signatures............................................................ 18 PART I GENERAL This Form 10-K 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-K 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 effects of and risks associated with acquisitions, the level of petroleum industry exploration and production expenditures, risks associated with doing business abroad, world economic conditions, the prices of and the demand for crude oil and natural gas, the uncertainties inherent in litigation, drilling activity, increased pressure on the Company's prices for its products and services and the margins thereon, 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. ITEM 1. BUSINESS BUSINESS ERC Industries, Inc., a Delaware corporation (the "Company"), is an oilfield service company engaged in the manufacture, remanufacture and service of oilfield wellhead equipment. ORIGINAL BUSINESS AND HISTORY Equipment Renewal Company was founded in 1962 to remanufacture and re-employ used, out-of-service wellhead equipment, a service the Company continues to provide. Wellhead equipment is designed to support the casing and production pipe on a completed well and includes casing heads, tubing heads and casing and tubing hangers. Valves are assembled with other components into a device known as the "Christmas Tree" which is mounted on the wellhead equipment and is used to control pressure and the flow of oil and gas from producing wells. On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation registered in Scotland and incorporated under the Companies Acts of the United Kingdom, completed the purchase of approximately 47% of the issued and outstanding shares of common stock of ERC. On November 16, 1993, the Company acquired the valve business and certain assets of Barton Industries, Inc. of Shawnee, Oklahoma. On June 6, 1996, the Company and the Wood Group entered into an Investment Agreement pursuant to which the Company issued and sold, and Wood Group purchased, 7,384,616 shares of the Company's common stock, par value $0.01 per share ("Common Stock"). The aggregate purchase price for the shares was $6 million or $0.8125 per share. Following this transaction, the Wood Group owned approximately 73% of the Company. 1 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. Seaboard is currently operated as a wholly-owned subsidiary of the Company under the name Wood Group Pressure Control Limited ("WGPCL"). The business of WGPCL is the manufacture, supply, repair, maintenance and refurbishment of wellheads, Christmas trees, gate valves, choke valves, clamped pipe connectors, actuators, electric feed through systems for downhole pumps and subsea ball and check valves, all as used in the oil and gas industry. The business is operated in one facility located in Cumbernauld, Scotland. In January 1997, the Company and all of its subsidiaries began conducting business under the name of Wood Group Pressure Control. On July 1, 1997, the Company acquired 100% of the issued and outstanding capital stock of Church Oil Tools, Inc. ("Church"). Church is a Houston, Texas based manufacturer serving the drilling equipment market. Church is presently doing business as Wood Group Drilling Products ("WGDP"). WGDP produces, remanufactures and sells blow-out preventers, high-pressure valves and specialized engineering services. Its customers include drilling contractors, rental tool companies and other related oilfield service companies. On September 8, 1997, the Company and the Wood Group entered into an Investment Agreement pursuant to which the Company agreed to issue and sell, and Wood Group agreed to purchase, 6,250,000 shares of the Company's Common Stock. The aggregate purchase price for the shares was $10 million or $1.60 per share. Following this transaction, the Wood Group owned approximately 88.5% of the Company. On February 2, 1998, the Company completed the acquisition of all of the issued and outstanding capital stock of Bompet, C.A. ("Bompet"), a Venezuelan company. Bompet is a Venezuelan based manufacturer of products used in the drilling and production segment of the Oil and Gas Industry. Bompet sells wellheads and gate valves (and related assemblies) along with specialized services to oil and gas producers throughout Latin America. Bompet has a facility in Cuidad Ojeda on the east side of Lake Maracaibo. 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 Wood Group Pressure Control Holdings Limited, ("WGPCHL") a company incorporated in Scotland under the Companies Acts of the United Kingdom. Prior to the acquisition, WGPCHL was a wholly owned subsidiary of Wood Group. WGPCHL owned Wood Group Pressure Control and Engineering Services Limited ("WGPCS") and Wood Group (Middle East) Limited, the latter of which beneficially owns Wood Group Pressure Control (Arabian) LLC ("Arabian"). 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, 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"). Following this transaction, the Wood Group owned approximately 89.0% of the outstanding Common Stock of the Company. On February 22, 2000, the 1,850,000 shares of Series A Preferred Stock were converted into 1,850,000 shares of Common Stock. Following this transaction, the Wood Group owns 89.7% of the Company's equity securities. 2 WGPCS is based in Peterhead, Scotland, and is engaged in the repair and refurbishment of valves and wellhead equipment, as well as the surveying of offshore valve systems. Arabian is based in Abu Dhabi and is engaged in the manufacture, installation and maintenance of wellhead equipment. This company provides services to a range of customers in the Middle East. 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 Wood Group 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. OPERATIONS The Company supplies and services the pressure containment and flow handling equipment needs of the oil and gas industry worldwide. During recent years it has continued its transition from a U.S. domestic re-manufacturer of valves and wellheads into a recognized international supplier of a more advanced range of new and re-manufactured valves, wellheads and blow-out preventors. Through surplus wellhead equipment management programs, the Company collects out-of-service equipment at the wellhead or accepts delivery at branch locations. If the customer so desires, the Company may purchase the customer's used equipment for resale to other customers. In this way, the branches, sales and service offices of the Company act, in part, as clearing houses for oilfield operators. If the operator, at a particular location, requires a unique component held by the Company on behalf of another customer, the Company may contact the customer and effect a purchase from the customer that owned the equipment and then resell the equipment to the customer that is in need of the required equipment. In addition to re-manufacturing customer equipment, the Company purchases used equipment from various sources, which the Company then re-manufactures for sale. BUSINESS DEVELOPMENT AND ACQUISITIONS The acquisitions made since 1993 have expanded the Company's operations to include a complete line of gate valves and conventional wellhead equipment. Valves are available in 1-13/16" to 24" sizes for working pressures from 300 p.s.i. to 15,000 p.s.i. and are produced in eight basic material trims and custom trims to meet individual customer requirements. The facilities are licensed by the American Petroleum Institute ("API") to distribute its products with the API monogram in accordance with API Specification 6A (wellhead valves), Specification 6D (pipeline valves) and Specification 14D (surface safety valves for offshore use). The use of the API monogram is considered by management to be essential to compete successfully in the oil and gas valve market. The Company's manufacturing facilities in Shawnee, Oklahoma; Houston, Texas; Cumbernauld and Peterhead in Scotland; Cuidad Ojeda, Venezuela; Queensland, Australia and Abu Dhabi are ISO 9001 registered, as well as certified under a range of API licenses. 3 To manufacture products, each of the Company's plants purchase major raw material components from foundries, forging houses, and steel suppliers, then machine such materials into finished products using CNC machines, which are essentially computer controlled lathes and machine centers, and other conventional machine tools. Special heat treatment and surface conditioning are applied as appropriate to individual components to improve product performance and to meet varying service condition requirements. The Company has not had and currently does not anticipate having difficulties in obtaining raw materials for its operations. The Company's strategy, with regard to all acquisitions made to date, has been to expand its presence in the domestic and the international markets. The Company currently operates in the United States, United Kingdom, Middle and Far East, and Latin America. These locations are managed by seasoned industry professionals with international experience. In the past, this local presence has generated a high degree of customer interest and an increase in demand for the Company's products and services. The Company's wellhead and related equipment operations are conducted from 20 domestic locations and 13 international locations. The Company's manufacturing facilities are located in Houston, Texas; Shawnee, Oklahoma; Cumbernauld and Peterhead in Scotland; Abu Dhabi; Queensland, Australia and Cuidad Ojeda, Venezuela. PATENTS AND SERVICE MARKS The Company holds several patents and trademark/service marks. Many of these are registered with the United States Patent and Trademark Office and expire on various dates through 2020. Although the Company considers its patents important to the operation of its business, and a loss of one or more patents could adversely affect a particular product, the Company does not believe that any significant portion of its business is materially dependent upon any single patent or group of patents or generally upon patent protection. SALES AND MARKETING The Company conducts its operations in the United States from branch facilities located in many major oil and gas producing areas requiring wellhead equipment. Each branch facility maintains inventory for local customer requirements, trained service technicians, and machine shop capability to provide quick delivery. Each branch facility offers a range of products and services including new equipment, re-manufactured equipment, and inventory management of customer property. Internationally, the Company sells its products through a mixture of Company- operated branch locations, overseas subsidiaries and through independent sales agents. Sales offices are located in metropolitan areas where customers are typically headquartered or maintain regional offices. The Company's marketing program emphasizes providing complete supply chain management of wellhead and valve requirements for its customers. This program includes repair of customer equipment, sale of re-manufactured equipment, sale of new equipment, maintenance services and a broad distribution network of branch locations and sales offices to provide prompt local service and support. 4 OPERATING RISKS AND INSURANCE The Company's products are used for the exploration and production of oil and natural gas. Such operations are subject to hazards inherent in the oil and gas industry, such as fires, explosions, blowouts and oil spills, that can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and marine life, and suspension of operations. Litigation arising from an occurrence at a location where the Company's products or services are used or provided may in the future result in the Company being named as a defendant in lawsuits asserting potentially large claims. The Company maintains insurance coverage that it believes to be customary in the industry against these hazards. COMPETITION The market for used and new oilfield equipment is highly competitive as there are numerous manufacturers, distributors and dealers; however, the Company believes that relatively few competitors offer programs involving maintenance, reconditioning, storage, distribution and management of equipment such as those offered by the Company. With its programs, the Company emphasizes its ability to provide reconditioned oilfield equipment at favorable prices while at the same time performing services in which the customer would otherwise have to perform at a substantial cost and inconvenience. 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. There is no assurance that these trends will not continue in the future. CUSTOMERS The customers for the Company's products include both domestic and international oil and natural gas companies. Because the Company's products are designed primarily for drilling, sales of these products are sensitive to fluctuations in the price outlook for oil and natural gas and related levels of exploration activity. During 1998 and for most of 1999, there was a decline in the number of rigs utilized, which was attributed to a reduction in the price of oil. This has had an adverse impact on the level of demand for the Company's products, and the margins that the Company achieves from the services it renders. GOVERNMENT REGULATION The exploration, development and production of oil and gas in the United States is affected by comprehensive federal and state regulations including those governing allowable rates of production, marketing, environmental matters and pricing. To date, the Company has operated successfully in this regulatory environment. 5 YEAR 2000 DATE CONVERSION The Company has experienced little disruption or malfunctions since the turn of the year arising from its own computer systems or equipment with embedded date- reliant computer chips. There has also been little disruption from failure of third party computer systems. The lack of disruption from the Company's own systems and equipment is attributed to: (i) the analysis of risks carried out in 1998 and 1999 to determine the impact of the year 2000 problem on our activities; and (ii) the consequential modifications to, or replacement of, hardware and software suspected of harboring the faulty date-reliant software or computer chips that were carried out during 1998 and the first half of 1999. The total cost incurred during 1999 to complete modifications to our computer hardware and software was $0.7 million, a portion of which was for new equipment and systems enhancements that have been capitalized. The Company does not anticipate any further costs arising from the year 2000 issue. FOREIGN OPERATIONS Operations and sales in foreign markets are subject to substantial competition from large multinational corporations and government-owned entities and to a variety of local laws and regulations requiring qualifications, use of local labor, the provision of financial assurances or other restrictions and conditions on operations. Foreign operations are also subject to risks associated with doing business outside the U.S., including risk of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation. Foreign operations may also subject the Company to risks relating to fluctuations in currency exchange rates. However, to date, currency fluctuations have not had a material adverse impact on the Company. EMPLOYEES As of December 31, 1999, the Company employed approximately 567 employees. The Company considers its relations with its employees to be generally satisfactory. No employees of the Company are represented by a union. 6 ITEM 2. PROPERTIES Set forth below is certain information as of December 31, 1999, regarding the Company's headquarters, manufacturing and other facilities, most of which are located on leased premises. Location Expiration Dates Manufacturing - Houston, Texas (Leased) (1) July 14, 2001 Shawnee, Oklahoma (Owned) (2) Cumbernauld, Scotland (Owned) (3) 1 Headquarters Office (Leased) Through July 31, 2004 7 Branch Offices and Various through Machine Shops (Leased) March 31, 2003 (4) 5 Branch Offices and Machine Shops (Owned) 2 Sales Offices Various through (Owned and Leased) May 1, 2000 (4) 5 Sales and Service Various through Offices (Leased) February 9, 2001 (4) 13 International Sales and Service Various through Offices (Leased) August 28, 2002 (4) (1) The Church facility in Houston, Texas is a 28,942 square foot building on a total site of 3 acres. (2) The Shawnee, Oklahoma facility is an 89,000 square foot building plus an additional 5 acres contiguous to the property. (3) The manufacturing facility at Cumbernauld, Scotland is a 31,000 square foot building on a total site of 3 acres. (4) Most of these leases are on a month-to-month basis. The Company does not expect the expiration of any of these leases to have a material adverse effect on its operations. 7 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is party to what it believes is routine litigation and proceedings that may be considered to be part of the ordinary course of its business. Currently, the Company is not aware of any current or pending litigation or proceedings that would have a material or adverse effect on the Company's results of operations, cash flows or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the Company's fiscal year ended December 31, 1999. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Up until November 5, 1999, the Company's Common Stock was included on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The trading symbol under which the Common Stock trades is "ERCI". On November 5, 1999, the Company announced that it had received notice from NASDAQ that its Common Stock would be delisted from the NASDAQ Small Cap Market effective with the close of business. 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. The following table sets forth the high and low reported bid prices for the Company's Common Stock as reported by NASDAQ/OTC by fiscal quarter from January 1, 1998 through December 31, 1999. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ----- ----- FISCAL YEAR ENDED DECEMBER 31, 1998 January 1, 1998 - March 31, 1998...... $4.50 $1.88 April 1, 1998 - June 30, 1998......... $3.25 $2.00 July 1, 1998 - September 30, 1998..... $2.38 $1.63 October 1, 1998 - December 31, 1998... $1.75 $0.50 FISCAL YEAR ENDED DECEMBER 31, 1999 January 1, 1999 - March 31, 1999...... $1.47 $0.69 April 1, 1999 - June 30, 1999......... $2.25 $0.69 July 1, 1999 - September 30, 1999..... $1.19 $0.69 October 1, 1999 - December 31, 1999... $1.56 $0.44 As of March 17, 2000, there were 779 holders of record of the Company's Common Stock, as reported by the Company's transfer agent for its Common Stock. As of March 17, 2000, the closing price of the Common Stock as reported on OTC was $1.50 per share. The present policy of the Board of Directors is to retain earnings to provide operating funds for the Company. As a result, the Company has not paid dividends and does not intend to do so in the foreseeable future. During the fourth quarter of 1999, the Company made no unregistered sales of its equity securities. 9 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected historical consolidated financial data of the Company and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The following information may not be deemed indicative of future operating results of the Company.
Years Ended/As of December 31, -------------------------------------------------------------------------- 1999 1998 (2)(3)(4)(5)) 1997(3)(4)(5) 1996(4)(5) 1995(5) $ $ $ $ $ -------------------------------------------------------------------------- Revenues 88,876 117,679 87,897 59,271 41,095 Selling, general and administrative expenses 21,155 24,018 16,732 11,179 9,253 Operating Income (Loss) (4,214) 2,367 3,354 2,374 (875) Net Income (Loss) (5,897) (647) 777 1,398 (1,070) Basic net income (loss) per share (0.20) (0.02) 0.03 0.07 (0.07) Diluted net income (loss) per share (0.20) (0.02) 0.03 0.07 (0.07) Total Assets 71,221 77,314 64,771 40,396 24,175 Total Liabilities 44,661 44,547 31,829 21,846 13,809 Working Capital 17,349 21,356 21,434 11,061 5,720 Shareholders' Equity (1) 26,560 32,767 32,942 18,550 10,367 Cash dividends per share N/A N/A N/A N/A N/A
(1) The Company's net operating loss carryforwards substantially reduce the federal income taxes paid by the Company. The Company reports these reductions of income taxes paid as an increase to paid-in-capital conforming to the accounting rules for quasi-reorganized companies. (2) Includes effects of Bompet acquisition completed on February 2, 1998. (3) Includes effects of Church acquisition completed on July 1, 1997. (4) Includes effects of Seaboard Lloyd Limited acquisition completed on September 27, 1996. (5) Includes effects of acquisition of WGPCS and Arabian on May 14, 1999, which 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is an international manufacturer and supplier of engineered oilfield tools and equipment. The Company has achieved significant revenue growth in recent years through a consistent strategy of synergistic acquisitions and internal development. Acquisitions have focused on the acquisition of name brand products, the development of complete product lines and savings through consolidation. Internal development has focused on product development and geographic expansion. Industry wide, the average active domestic rig count as reported by Baker Hughes Incorporated decreased 23.0% to an average of 625 in 1999, as compared to 811 in 1998 and 943 in 1997. The active domestic rig count as of March 17, 2000 was 764. The average active rig count is a clear indicator of the likely demand in the market in which the Company operates, based on prior years' experience. 10 RESULTS OF OPERATIONS - 1999 AS COMPARED TO 1998 AS COMPARED TO 1997 The Company's revenues decreased by 24.5% to $88.9 million in 1999 compared with $117.7 million in 1998. Revenues for 1999 decreased by $28.8 million over 1998 due to a decrease in customer activity. Revenues for 1998 increased by 33.9% to $117.7 million compared with $87.9 million in 1997, due to increased customer activity during the first three quarters of 1998. In connection with revenues over the period, cost of goods sold were $69.3 million in 1999, as compared to $88.3 million in 1998, and $67.8 million in 1997. The gross profit percentage was 22.0% in 1999, compared with 25.0% in 1998 and 22.9% in 1997. 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. The increase in 1998 gross profit percentage as compared to 1997 is due to changes in product mix, process improvements at the manufacturing facilities which created cost reductions, as well as fewer repairs and maintenance expenses at the facilities. Selling, general and administrative expenses ("SG&A") decreased by $2.8 million to $21.2 million in 1999 as compared with $24.0 million in 1998. The decrease arises from reductions in headcount and other administrative costs to reflect lower levels of activity. SG&A, as a percentage of sales, was 23.8% in 1999 and 20.4% in 1998. 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 SG&A. In 1998, SG&A increased by $7.3 million to $24.0 million from $16.7 million in 1997. This increase was due to costs incurred to open additional domestic sales offices, increases in international and domestic sales personnel, a full year's activity from Wood Group Drilling Products, and the addition of Bompet in 1998. While the financial performance of most of the Company's operating units showed signs of improvement following the increases in US rig count during the fourth quarter of 1999, Wood Group Drilling Products continued to experience difficult market conditions. Fluctuations in the level of drilling products business can be attributed to drilling fleets, which have continued to operate at low capacities. Due to the continuing uncertainty over future prospects, the Company decided that its investment in Wood Group Drilling Products was impaired and accordingly wrote off the remaining goodwill of $2.6 million arising from the acquisition of the company. This charge has been recorded on the consolidated statement of operations as an asset impairment. As a result of the difficult market conditions experienced in the latter part of 1998, the Company conducted a detailed review of the carrying value of its assets. Following this review, provisions of $1.9 million were made against certain product lines included within inventory. In addition, the Company determined that its investment in Bompet was impaired and accordingly wrote off the goodwill arising from the acquisition of Bompet. These charges have been recorded on the statement of operations as asset impairment. In 1999, interest expense reduced by $0.3 million over 1998, and in 1998, interest expense increased $0.9 million over 1997. These movements are due to changes in the level of outstanding debt. Net loss before provision for income tax was $6.0 million in 1999, compared to income before provision for income tax of $0.3 million in 1998 and $2.3 million in 1997. The decreases in 1999 and 1998 are primarily due to difficult market conditions experienced following the reduction in oil and gas prices and its resultant effect on drilling activity. 11 Net income for 1999 includes a benefit for income taxes of $0.1 million. Net income for 1998 and 1997 includes provisions for income taxes of $1.0 million and $1.5 million, respectively. Of these amounts, $0 million, $1.7 million and $3.2 million in 1999, 1998 and 1997, respectively, represent non-cash charges which reflect the income tax benefit of the utilization of the Company's NOL carry forwards arising prior to a quasi-reorganization; such amounts are included in the respective balance sheets as increases in additional paid-in-capital. 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. With the increase in oil and gas prices so far in 2000, the Company has seen an increase in demand for its products. However, price competition continues to have a negative impact on the Company's margins, and 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, Wood Group. The line of credit is used for the purpose of general working capital requirements, and $1.4 million was available for additional borrowings on the line of credit at December 31, 1999. On September 2, 1998, the Company obtained a $22 million secured line of credit with its principal stockholder, Wood Group. The line bears interest at the LIBOR rate plus 0.85%, which was approximately 6.5% and 5.9% at December 31, 1999 and 1998, respectively. At December 31, 1999, loan amounts outstanding under the agreement were $12.3 million. WGPCL and WGPCS have lines of credit with a bank in Scotland provided as part of a group banking arrangement with Wood Group. The lines of credit are used for the purpose of general working capital requirements and provide overdraft and documentary credit facilities. Interest payable on the overdrafts is equal to the bank's base rate plus 1% per annum. At December 31, 1999, the bank's base rate was 5.5% (1998: 6.25%). The amounts outstanding under this agreement at December 31, 1999 and 1998 were $8.3 million and $3.6 million, respectively. WGPCL has a loan from Wood Group at December 1999 and 1998 amounting to $3.2 million, which is repayable on demand. The loan is used for the purpose of general working capital requirements. Interest payable on the loan is charged at base rate plus 0.85% per annum. 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 December 31, 1999 was $0.4 million (1998: $0.3 million). Interest is charged at bank base rate plus 0.5%. At December 31, 1999 the base rate was 7.25% (1998: 6.48%). 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 $0.7 million at December 31, 1999 and 1998 from Wood Group. Interest payable on the loan is charged at 6.7%. 12 The Company believes it will be able to renew the line of credit and loans with Wood Group so as to ensure that the Company will have sufficient financial resources to fund its working capital requirements and operations through 2000. Working capital at December 31, 1999 and at December 31, 1998 was $17.3 million and $21.4 million, respectively. The decrease in working capital is due largely to increases in lines of credit outstanding. 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 starting 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 position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposures to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments to manage these risks. A 1% increase in interest rates would increase interest expense by approximately $0.25 million on an annualized basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 14 for Index to Consolidated Financial Statements and Schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 PART III The information required by Part III of this Form 10-K is to be provided by incorporating portions of the Company's definitive proxy statement relating to its 2000 Annual Meeting of Stockholders (The Proxy Statement), which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears under the caption "Directors and Executive Officers" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears under the caption "Executive Compensation" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the caption "Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Certain Transactions" in the definitive Proxy Statement, which information is incorporated herein by reference. 14 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: PAGE NO. Report of Independent Accountants............................... F-1 Consolidated Financial Statements: Consolidated Balance Sheet as of December 31, 1999 and 1998.. F-2 Consolidated Statement of Operations for the years ended December 31, 1999, 1998 and 1997............................ F-3 Consolidated Statement of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997...................... F-4 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997...................... F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................ F-6 Notes to Consolidated Financial Statements................... F-7 All schedules are omitted since the required information is either (a) not present or not present in amounts sufficient to require submission of the schedule, or (b) because the information required is included in the financial statements or notes thereto. Exhibits: (A) Agreement dated July 20, 1993 by and among ERC Industries, Inc., Barton Industries, Inc., American Bank & Trust Company, American National Bank and Trust Company, and Oklahoma Industrial Finance Authority, filed as Exhibit (c)(1) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. (B) First Modification Agreement between ERC Industries, Inc. and American Bank & Trust Company, filed as Exhibit (c)(2) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. (C) Real Property Lease Agreement dated November 15, 1993 between American National Bank and Trust Company and ERC Industries, Inc. and Second Modification Agreement dated November 2, 1993, filed as Exhibit (c)(3) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. (D) Equipment Lease Agreement dated November 15, 1993 between Oklahoma Industrial Finance Authority and ERC Industries, Inc. and Third Modification Agreement, filed as Exhibit (c)(4) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. 15 3. (A) Certificate of Incorporation of ERC Industries, Inc. (1) (B) Certificate of Ownership and Merger, dated April 16, 1993, merging ERC Industries, Inc. into ERC Subsidiary, Inc.(1) (C) Bylaws of ERC Industries, Inc. (1) 4. (A) Specimen of Common Stock Certificate of ERC Industries, Inc. (1) 10.1 Investment Agreement, dated as of June 6, 1996, by and between the Company and Wood Group, filed as Exhibit 10.1 to the Current Report of the Company on Form 8-K dated June 6, 1996 and incorporated herein by reference. 10.2 Registration Rights Agreement, dated as of June 6, 1996, by and between the Company and Wood Group, filed as Exhibit 10-2 to the Current Report of the Company on Form 8-K, dated June 6, 1996 and incorporated herein by reference. 10.3 Purchase Agreement dated September 27, 1996, filed as Exhibit 10-1 to the Company's Current Report on Form 8-K dated September 27, 1996 and incorporated herein by reference. 10.4 Investment Agreement, dated September 8, 1997, by and between the Company and Wood Group, filed as Exhibit 10.1 to the Current Report on Form 8-K dated September 8, 1997 and incorporated herein by reference. 10.5 Registration Rights Agreement, dated September 8, 1997 by and between the Company and Wood Group filed as Exhibit 10.2 to the Current Report on Form 8-K dated September 8, 1997 and incorporated herein by reference. 10.6 Stock Purchase Agreement by and among the Company, Inversiones Western, C.A. and Jimmy J. Marzoula dated January 30, 1998, filed as Exhibit 10.1 to the Current Report on Form 8-K dated February 2, 1998 and incorporated herein by reference. 10.7 Letter Agreement with Wood Group regarding Overdraft Facility dated as of June 16, 1998, filed as Exhibit 10.2 to the Company's Quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 10.8 $22,000,000 Revolving Line of Credit from Wood Group dated as of September 2, 1998, filed as Exhibit 10.1 to the Company's Quarterly report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference. 10.9 Promissory Note dated January 20, 1999 with Bank One Oklahoma, N.A. filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference. 10.10 Share Sale and Purchase Agreement between the Company and John Wood Group PLC dated May 14, 1999, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 14, 1999 and incorporated herein by reference. 10.11 Certificate of Designations of Series A Cumulative Convertible Preferred Stock dated May 14, 1999, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated May 14, 1999 and incorporated herein by reference. 16 10.12 Registration Rights Agreement between the Company and John Wood Group PLC dated May 14, 1999, filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated May 14, 1999 and incorporated herein by reference. *10.13 Form of Indemnification Agreement by and between the Company and each of its directors, each dated as of November 24, 1999. *10.14 Agreement and Plan of Merger dated March 28, 2000 by and among the Company, Wood Group and Merger Sub. *27.1 Financial Data Schedule __________________ (1) Filed as Exhibits 3(a), (b) and (c) and 4(a), respectively, of the Company's Annual Report on Form 10-K for its fiscal year ended January 31, 1993, and incorporated by reference herein. * Filed herewith (B) REPORTS ON FORM 8-K: No Reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year ended December 31, 1999. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ERC INDUSTRIES, INC. - -------------------- Dated: March 28, 2000 /s/ Wendell R. Brooks ------------------------- Wendell R. Brooks Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. Dated: March 28, 2000 /s/ Wendell R. Brooks ------------------------- Wendell R. Brooks Chairman and Director Dated: March 28, 2000 /s/ J. Derek P. Jones ------------------------- J. Derek P. Jones Director Dated: March 28, 2000 /s/ Alan D. Senn ------------------------- Alan D. Senn President and Director (Principal Executive Officer) Dated: March 28, 2000 /s/ James E. Klima ---------------------- James E. Klima Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 18 Dated: March 28, 2000 /s/ Allister G. Langlands ----------------------------- Allister G. Langlands Director Dated: March 28, 2000 /s/ George Tilley --------------------- George Tilley Director Dated: March 28, 2000 /s/ Jorge Estrada --------------------- Jorge Estrada Director 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of ERC Industries, Inc: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of comprehensive income, of shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of ERC Industries, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Houston, Texas March 28, 2000 F-1 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31, December 31, 1999 1998 ------------------- -------------- ASSETS (RESTATED) Current assets: Cash and cash equivalents $ 1,387 $ 2,246 Accounts receivable, net of allowance for uncollectible accounts of $1,032 and $825, respectively 21,333 22,634 Inventory 31,970 31,853 Deferred tax asset 3,789 3,814 Other current assets 1,915 2,546 ------- ------- TOTAL CURRENT ASSETS 60,394 63,093 Property, plant and equipment, net 9,528 9,990 Excess cost over net assets acquired, net 1,015 4,231 Deferred tax asset, non-current 284 - ------- ------- TOTAL ASSETS $71,221 $77,314 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit from banks 9,734 3,881 Line of credit from parent 16,254 19,509 Current portion of long-term debt 1,000 1,237 Accounts payable 10,920 10,645 Other accrued liabilities 5,137 6,465 ------- ------- TOTAL CURRENT LIABILITIES 43,045 41,737 Other liabilities, non-current 105 100 Long-term debt 1,511 2,710 ------- ------- TOTAL LIABILITIES 44,661 44,547 ------- ------- Commitments and contingencies (see Note 10) - - Shareholders' equity: Preferred stock, par value $1; authorized - 10,000,000 shares; 1,850,000 issued and outstanding as of December 31, 1999 and 1998 1,850 1,850 Common stock, par value $0.01; authorized - 40,000,000 shares; 28,848,272 issued and outstanding as of December 31, 1999 and 1998 289 289 Additional paid-in-capital 25,663 25,946 Retained earnings (accumulated deficit) from January 10, 1989 (1,226) 4,671 Accumulated other comprehensive income (16) 11 ------- ------- TOTAL SHAREHOLDERS' EQUITY 26,560 32,767 ------- ------- $71,221 $77,314 ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
F-2 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------- 1999 1998 1997 ------- -------- ------ (RESTATED) (RESTATED) Revenues $88,876 $117,679 $87,897 Cost of goods sold 69,327 88,284 67,811 ------- -------- --------- Gross profit 19,549 29,395 20,086 Selling, general and administrative expenses 21,155 24,018 16,732 Asset impairment 2,608 3,010 - ------- -------- --------- Operating income (loss) (4,214) 2,367 3,354 Interest expense 1,745 2,040 1,099 ------- -------- --------- Income (loss) before provision for income taxes (5,959) 327 2,255 (Benefit from) / provision for income taxes (62) 974 1,478 ------- -------- --------- Net income (loss) $(5,897) $ (647) $ 777 ======= ======== ========= Basic net income (loss) per share $ (0.20) $ (0.02) $ 0.03 ======= ======== ========= Diluted net income (loss) per share $ (0.20) $ (0.02) $ 0.03 ======= ======== ========= Weighted average number of shares outstanding - Basic 28,848 28,848 24,567 ======= ======== ========= Weighted average number of shares outstanding - Diluted 28,848 28,848 26,417 ======= ======== ========= The accompanying notes are an integral part of the consolidated financial statements.
F-3 ERC INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
--------------------------------------- 1999 1998 1997 ------- ----- ----- (RESTATED) (RESTATED) Net income (loss) $(5,897) $(647) $ 777 Other comprehensive income (loss) (27) 27 (148) ------- ----- ----- Total comprehensive (loss) income $(5,924) $(620) $ 629 ======= ===== =====
The accompanying notes are an integral part of the consolidated financial statements. F-4 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
RETAINED ADDITIONAL EARNINGS ACCUMULATED OTHER PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCK STOCK CAPITAL DEFICIT) INCOME --------- ------ ---------- -------- ----------------- Balance as of December 31, 1996 $1850 $226 $10,474 $5,868 $ 132 Net income - - - 777 - Issuance of common stock - 63 9,844 - - Income tax benefit of pre-quasi-reorganization net operating tax loss carryforwards - - 3,206 - - Other comprehensive loss - - - - (148) Goodwill arising in year - - 60 - - Contribution from related party - - 672 - - Distribution to related party - - - (82) - -------------------------------------------------------------------------------- Balance as of December 31, 1997 1850 289 24,256 6,563 (16) Net loss - - - (647) - Income tax benefit of pre-quasi-reorganization net operating tax loss carryforwards - - 1,690 - - Other comprehensive income - - - - 27 Distribution to related party - - - (1,245) - -------------------------------------------------------------------------------- Balance as of December 31, 1998 1850 289 25,946 4,671 11 Net Loss - - - (5,897) - Other - - (283) - - Other comprehensive loss - - - - (27) -------------------------------------------------------------------------------- Balance as of December 31, 1999 $1,850 $289 $25,663 $(1,226) $(16) ================================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-5 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
--------------------------------------- 1999 1998 1997 ------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: (restated) (restated) Net income (loss) $ (5,897) $ (647) $ 777 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,748 2,787 2,239 Provision for losses on trade accounts receivable 471 92 170 Provision for inventory obsolescence 531 1,157 392 Deferred income tax (benefit) provision and non-cash charge for income taxes (259) 561 1,237 Gain on sale of property, plant and equipment (72) (84) (61) Asset impairment 2,608 3,010 - INCREASE (DECREASE) IN CASH RESULTING FROM CHANGES IN ASSETS AND LIABILITIES (EXCLUDING EFFECTS OF ACQUISITIONS) Trade accounts receivable 830 322 (5,799) Inventories (648) (7,335) (9,760) Prepaid expenses and other assets 631 (2,180) (1,288) Non-current assets - 1,634 - Accounts payable 275 (3,598) 327 Accrued liabilities (1,633) (852) 1,708 -------- -------- -------- Net cash used in operating activities (415) (5,133) (10,058) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (net of cash acquired of $80 in 1998 and $1,152 in - (2,520) 152 1997) Purchases of property, plant and equipment (1,854) (2,553) (2,592) Proceeds from sale of property, plant and equipment 248 582 114 -------- -------- -------- Net cash used in investing activities (1,606) (4,491) (2,326) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payment on note related to acquisition (1,000) (1,000) - Line of credit borrowings from parent - 22,328 - Line of credit payments to parent (3,255) (3,500) - Line of credit borrowings from bank 41,014 22,901 20,757 Line of credit payments to bank (35,161) (26,121) (16,600) Principal payments on capital leases and other debt (436) (1,267) (2,454) Decrease in book overdrafts - (305) (115) Contribution from related party - - 672 Net proceeds from issuances of common stock - - 9,907 Distribution to related party - (1,245) (82) -------- -------- -------- Net cash provided by financing activities 1,162 11,791 12,085 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (859) 2,167 (299) Cash and cash equivalents, beginning of year 2,246 79 378 -------- -------- -------- Cash and cash equivalents, end of year $ 1,387 $ 2,246 $ 79 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 ERC INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations As of December 31, 1999, approximately 89% of the outstanding shares of ERC Industries, Inc.'s (the "Company's") common stock was owned by John Wood Group PLC ("Wood Group"), a corporation registered in Scotland and incorporated under the laws of the United Kingdom. The consolidated financial statements include the accounts of ERC Industries, Inc. and its following wholly owned subsidiaries: Wood Group Pressure Control Holdings Limited, Wood Group Pressure Control Limited (previously Seaboard Lloyd Limited), Wood Group Pressure Control and Engineering Services Limited, Wood Group (Middle East) Limited, Wood Group Pressure Control (Arabian) LLC, Wood Group Pressure Control Venezuela (previously Bompet), Church Oil Tools, Inc., Wood Group Pressure Control Mexico S.A., and Wood Group Pressure Control (Australia) Pty. The Company engages in the manufacture, remanufacture and servicing of oilfield valves and wellhead equipment and drilling products. The Company primarily sells its products to customers in the oil and gas production industry located in the major oil and gas producing regions of the United States. The Company has expanded sales to international oil and gas producing regions such as the United Kingdom, Middle and Far East, and Latin America. All intercompany accounts and transactions are eliminated on consolidation. CASH AND CASH EQUIVALENTS Cash equivalents include highly liquid investments purchased with original maturities of three months or less at the date of acquisition. Cash equivalents are stated at cost, which approximates market because of their short maturity. INVENTORY Inventory consists primarily of finished goods, semi-finished goods and raw materials which are carried at the lower of cost (specific identification or standard cost which approximates FIFO) or market. F-7 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets which range from 3 years for leased property under capital leases, 5 to 10 years for machinery and equipment, and 3 to 31.5 years for buildings, improvements and other. Major renewals and betterments which extend the lives of equipment are capitalized while all other repairs and maintenance are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation with any resulting gain or loss reflected in operations. EXCESS COST OVER NET ASSETS ACQUIRED Excess cost over net assets acquired is carried at cost and is amortized using the straight-line method over the estimated useful life of 10 years. Accumulated amortization, as of December 31, 1999 and 1998, amounted to approximately $6.5 million and $3.3 million, respectively. Periodically, the Company's management assesses recorded balances of excess cost over net assets of businesses acquired for impairment in light of historical and projected operating results, trends and profitability, new product development and general economic conditions. ACCOUNTING FOR POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS The Company regularly evaluates the impairment of long-lived assets, such as property, plant and equipment, identifiable intangibles including patents and trademarks, and excess cost over net assets acquired related to those assets. In connection with such evaluation, the Company estimates the future cash flows resulting from the use of that asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying value of the asset, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset as determined by quoted market prices when available, or the present value of the expected future cash flows. INCOME TAXES The Company records deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. EARNINGS PER COMMON SHARE Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common and dilutive potential common shares outstanding. During the years ended December 31, 1999 and 1998, 1,850,000 potential common shares were excluded from weighted average diluted shares outstanding because their effect was anti-dilutive. F-8 FOREIGN CURRENCY TRANSLATION The functional currency of the Company's international operations is the local currency, except for those operations that exist in highly inflationary economies, for which the U.S. dollar is the functional currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Adjustments resulting from translation are included in shareholders' equity. For subsidiaries operating in highly inflationary economies, adjustments resulting from translation are included in results of operations. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains cash deposits with several major banks, which from time-to-time may exceed federally insured limits. Management periodically assesses the financial condition of these financial institutions and believes that any possible credit risk is minimal. The Company generally sells its products and services to customers in the oil and gas production industry located in the major oil and gas producing regions of the world. Procedures are in effect to monitor the credit worthiness of customers, and bad debts have not been significant in relation to the volume of revenues. The Company generally does not obtain collateral for accounts receivable. CERTAIN SIGNIFICANT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include the recoverability of deferred tax assets, reserves for inventory obsolescence, allowance for doubtful accounts receivable and accruals for contingencies. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For all periods presented, other comprehensive income and accumulated comprehensive income consisted of foreign currency translation adjustments. F-9 RECLASSIFICATIONS Certain amounts included in the prior year financial statements have been reclassified to conform to current year presentation. 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 position. 2. ACQUISITIONS 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 Wood Group Pressure Control Holdings Limited, ("WGPCHL") a company incorporated in Scotland under the Companies Acts 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"). 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, which took effect in February 2000. On July 1, 1997, the Company acquired 100% of the issued and outstanding capital shares of Church, a company incorporated in Texas. The company paid a purchase price of $5 million. The source of the funds for the purchase was approximately $1 million in cash on hand and $4 million of promissory notes to the Sellers. In addition, the Company will pay up to an additional $1 million in the event that Church's average earnings in 1999 and 2000 exceed certain thresholds. The acquisition was accounted for under the purchase method of accounting and the purchase price was allocated as follows (in thousands): Cash $ 1,152 Accounts Receivable 939 Inventory 566 Property, Plant and Equipment 772 Excess Cost Over Net Assets Acquired 3,536 Accounts Payable (809) Accrued Expenses (597) Deferred Tax Liability (100) Long-Term Debt-Current and Non-Current (459) ---------- $ 5,000 ========== F-10 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. On February 2, 1998, the Company entered into a definitive purchase agreement for the acquisition of Bompet, a Venezuelan company. The acquisition was accomplished by the purchase of 100% of the issued and outstanding capital stock of Bompet. 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 December 31, 1999. The acquisition of Bompet was accounted for under the purchase method of accounting and the purchase price was allocated as follows (in thousands): 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 ======= The pro-forma impact of the Bompet acquisition on the Company's 1998 results of operations is not material. 3. ASSET IMPAIRMENT As a result of difficult market conditions the Company conducted detailed reviews of the carrying value of its assets. The following provisions were made following this review (in thousands): 1999 1998 1997 ------ ------ ----- Inventory $ - $1,910 $ - Goodwill 2,608 1,100 - ------ ------ ----- $2,608 $3,010 $ - ====== ====== ===== F-11 While the financial performance of most of the Company's operating units showed signs of improvement following the increases in US rig count during the fourth quarter of 1999, Wood Group Drilling Products continued to experience difficult trading conditions. Fluctuations in the level of drilling products business can be attributed to drilling fleets, which have continued to operate at low capacities. Due to the continuing uncertainty over future prospects, the Company decided that its investment in Wood Group Drilling Products was impaired and accordingly wrote off the unamoritized goodwill arising from the acquisition of Church. During 1998, provisions of $1.9 million were made against certain product lines included within inventory to cover product lines which management believe have limited or no potential to earn future revenues. During the final quarter in 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. 4. INVENTORY Inventory consisted of the following (in thousands): December 31, -------------------- 1999 1998 ------- ---------- (restated) Raw Materials $ 4,941 $ 4,185 Work-In-Progress 2,833 2,535 Finished Goods 24,196 25,133 ------- ------- Total Inventory $31,970 $31,853 ======= ======= 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands): December 31, -------------------- 1999 1998 ------- ---------- (restated) Land $ 700 $ 703 Leased property under capital leases 1,813 1,837 Machinery and equipment 20,863 20,854 Buildings, improvements and other 5,553 5,614 ------- ------- 28,929 29,008 Less accumulated depreciation and amortization 19,401 19,018 ------- ------- Net property, plant and equipment $ 9,528 $ 9,990 ======= ======= F-12 Depreciation and amortization expense was approximately $2.1 million, $2.0 million, and $1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following (in thousands): December 31, ------------------- 1999 1998 ------ ---------- (restated) Insurance.................................... $ 514 $ 682 Payroll related.............................. 1,960 1,812 Warranty..................................... 940 780 Other........................................ 1,723 3,191 ------- ------ $ 5,137 $6,465 ======= ====== 7. DEBT Debt consisted of the following (in thousands): December 31, -------------------- 1999 1998 ---------- ------- (restated) Lines of credit with parent company............. $16,254 $19,509 Line of credit due to banks..................... 9,734 3,881 ------- ------- Long-term debt: Notes payable related to acquisition of Church, bearing interest at 8%, due in annual installments of $1 million commencing July 1, 1998................................. 2,000 3,000 Obligations under capital leases and other debt bearing interest at various rates, due in various installments......................... 511 947 ------- ------- Total debt...................................... 2,511 3,947 Less current maturities......................... 1,000 1,237 ------- ------- Long-term debt.................................. $ 1,511 $ 2,710 ======= ======= The aggregate maturities of long-term debt, including obligations under capital leases during the five years subsequent to December 31, 1999 are (in thousands): December 31 ----------- 2000 $ 1,000 2001 1,130 2002 130 2003 130 2004 and thereafter 121 ----- Total $2,511 ====== F-13 Management believes that the carrying value of debt approximates its fair value at December 31, 1999 and 1998 since the lines of credit bear interest at variable rates and the various fixed rates on notes payable and capital leases are not materially different from current market rates. 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, Wood Group. The line of credit is used for the purpose of general working capital requirements, and $1.4 million was available for additional borrowings on the line of credit at December 31, 1999. On September 2, 1998, the Company obtained a $22 million secured line of credit with its principal stockholder, Wood Group. The line bears interest at the LIBOR rate plus 0.85%, which was approximately 6.5% and 5.9% at December 31, 1999 and December 31, 1998, respectively. At December 31, 1999 and 1998 loan amounts outstanding under the agreement were $12.3 million and $15.5 million respectively. WGPCL and WGPCS have lines of credit with a bank in Scotland provided as part of a group banking arrangement with Wood Group. The lines of credit are used for the purpose of general working capital requirements and provide overdraft and documentary credit facilities. Interest payable on the overdrafts is equal to the bank's base rate plus 1% per annum. At December 31, 1999 and 1998 the bank's base rate was 5.5% and 6.25% respectively. The amounts outstanding under this agreement at December 31, 1999 and 1998 were $8.3 million and $3.6 million respectively. WGPCL has a loan at December 31, 1999 and 1998 from Wood Group amounting to $3.2 million which is repayable on demand. The loan is used for the purpose of general working capital requirements. Interest payable on the loan is charged at base rate plus 0.85% per annum. 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 December 31, 1999 and 1998 was $0.4 million and $0.3 million respectively. Interest is charged at bank base rate plus 0.5%. At December 31, 1999 and 1998 the base rate was 7.25% and 6.48% respectively. 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 $0.7 million from Wood Group at December 31, 1999 and 1998. Interest payable on the loan is charged at 6.7%. The Company believes it will be able to renew the line of credit and loan with Wood Group so as to ensure that the Company will have sufficient financial resources to fund its working capital requirements through 2000. F-14 8. INCOME TAXES The Company records deferred income 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 assets are as follows (in thousands): December 31, ----------------- 1999 1998 ------ -------- Deferred tax assets: Net operating loss................ $5,415 $ 3,930 AMT credit carryforwards.......... 537 565 Tax over book inventory basis..... 2,866 2,981 Allowance for doubtful accounts... 198 269 Accruals.......................... 550 298 Other............................. 459 266 Valuation allowance............... (5,952) (4,495) ------ ------- Total deferred tax assets......... $4,073 $ 3,814 ====== ======= The valuation allowance was increased during 1999 by approximately $1.5 million. At December 31, 1999, the Company had federal net operating loss (NOL) carryforwards available to offset future taxable income in the approximate amount of $11.0 million and foreign operating loss carryforwards available to offset taxable income in the approximate amount of $4.9 million. Of these NOL carryforwards, approximately $7.7 million were generated before the Company affected a quasi-reorganization and expire between the years 2001 and 2003. The balance of the NOL carryforwards were generated after the quasi-reorganization and expire in 2009 and 2010. Special limitations exist under the law, which may restrict the utilization of the net loss carryforwards, including the alternative minimum tax. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future to offset these tax deductions and NOL carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets in excess of the valuation allowance recorded will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. Alternatively, if the Company can maintain the current levels of taxable income into the future, then the deferred tax asset considered realizable could be increased in the near term. F-15 The following is a summary of the provision for income taxes (in thousands):
Year Ended December 31, --------------------------------------- 1999 1998 1997 ------- ---------- ---------- (restated) (restated) Current - U.S. $ 176 $ 155 $ 97 Current - foreign provision 13 253 144 Non-cash charge in lieu of income taxes - 1,690 3,206 Deferred tax (benefit) - U.S. (259) (1,124) (1,969) Deferred tax charge - foreign 8 - - ----- ------- ------- (Benefit from) provision for income taxes $ (62) $ 974 $ 1,478 ===== ======= =======
The non-cash charges in lieu of income taxes represent the amount of income taxes the Company would pay absent the NOL carryforward 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. The reconciliation between the actual (benefit)/provision recorded for income taxes and the (benefit)/provision for income taxes at the United States federal statutory rate for the years ended December 31, 1999, 1998 and 1997 is as follows: 1999 1998 1997 --------- ---------- --------- (restated) (restated) U.S. federal statutory rate (34.0)% 34.0% 34.0% Current foreign losses with no future tax benefits 13.6% 30.0% 1.6% Difference in overseas tax rates 4.0% (25.4)% 8.8% Write-off of Bompet goodwill - 113.8% - Write-off of Drilling Products goodwill 14.9% - - Non-deductible Expenses 2.5% 157.8% 15.2% State Taxes 0.9% 4.6% 5.2% Other (2.9)% - - ------- ------ ------ Effective Tax Rate (1.0)% 297.8% 64.7% ======= ====== ====== The Company incurred losses in its United Kingdom and Venezuelan operations, which management believes may not provide future tax benefits to the Company. The impact of these losses and the provision for income taxes was recorded throughout 1999 and in the fourth quarter of 1998. F-16 9. RELATED PARTY TRANSACTIONS The Company and Wood Group have agreed to an annual provision for administrative and financial service fees in amounts to be determined on an annual basis. The Company was charged approximately $667,000, $898,000 and $389,000 for the years ended December 31, 1999, 1998 and 1997 respectively. 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"). Following this transaction, the Wood Group owned approximately 89% of the Company. On February 22, 2000, the 1,850,000 shares of Series A Cumulative Convertible Preferred Stock were converted into 1,850,000 shares of Common Stock. Following this transaction, the Wood Group owns 89.7% of the Company. On September 8, 1997, the Company agreed to issue and sell to the Wood Group 6,250,000 shares of the Company's common stock, par value $0.01 per share. The aggregate purchase price for the shares was $10 million, or $1.60 per share. During 1997 and 1998, WGPCS paid distributions of $82,000 and $1,245,000 respectively to Wood Group Engineering and Operations Support Limited, a fellow Wood Group subsidiary who were then the immediate parent of WGPCS. During 1997, Wood Group made a capital contribution of $672,000 to WGPCS. The Company and certain of its subsidiaries have various debt agreements with Wood Group. See Note 7 for further details. F-17 10. COMMITMENTS AND CONTINGENCIES The Company leases office space and various equipment under non-cancellable operating leases. The leases provide for minimum monthly payments, plus in certain instances, payment for taxes, insurance and maintenance. Certain leases also contain renewal options. The Company is liable under non- cancellable leases for minimum lease commitment amounts during the five years subsequent to December 31, 1999 as follows (in thousands): December 31 ----------- 2000 $1,962 2001 1,091 2002 650 2003 415 2004 and thereafter 1,507 ------ Total $5,625 ====== Rental expenses for the years ended December 31, 1999, 1998 and 1997 were approximately $1.8 million, $1.3 million and $1.4 million, respectively. Pursuant to the agreement to acquire Church, the Company will pay up to an additional $1.0 million in the event that Church's average earnings in 1999 and 2000 exceed certain thresholds. Pursuant to the agreement to acquire Bompet, 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. The Company has authorized a long-term incentive program for its key employees. Incentive payments are based on the improvement in pre-tax earnings per share over a stated amount. No amounts have been earned during 1999, 1998 and 1997. 11. PROFIT SHARING AND 401(k) PLANS The Company has a defined contribution 401(k) profit sharing plan. The plan covers substantially all employees subject to certain length of service requirements. Contributions are made at the discretion of the Board of Directors. The Company matches employee's contributions up to 6% of their eligible compensation at a rate of 50% of employee contributions. The Company's matching contributions totaled approximately $282,000, $389,000 and $130,000 during the years ended December 31, 1999, 1998 and 1997, respectively. F-18 12. SUPPLEMENTAL CASH FLOW DISCLOSURES Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1997 ----------------- ----------------- ----------------- (in thousands) (in thousands) (in thousands) (restated) (restated) Cash paid for: Interest $1,752 $2,043 $1,023 ====== ====== ====== Income taxes $ 248 $ 420 $ 136 ====== ====== ====== The Company entered into capital lease obligations of $160,000 during the period ended December 31, 1997. During the year ended December 31, 1997, the company purchased $785,000 of property, plant and equipment by issuing a note payable to the seller. 13. SEGMENT AND RELATED INFORMATION Summarized financial information of the Company's reportable segments for the years ended December 31, 1999, 1998 and 1997 is shown in the following table based on how the Company is managed:
U.S. Eastern Operations(2) Hemisphere(2) Other(2) Total ------------ ------------ -------- ----- 1999 ---- Revenues from external customers $52,544 $31,249 $ 5,083 $ 88,876 Depreciation and amortization 1,918 547 283 2,748 EBIT (1) (1,715) (2,129) (370) (4,214) Total Assets $52,872 $12,394 $ 5,955 $ 71,221 1998 (restated) --------------- Revenues from external customers $82,143 $27,885 $ 7,651 $117,679 Depreciation and amortization 2,130 450 207 2,787 EBIT (1) 1,149 693 525 2,367 Total Assets $52,436 $18,739 $ 6,139 $ 77,314 1997 (restated) --------------- Revenues from external customers $65,855 $22,042 $ - $ 87,897 Depreciation and amortization 1,682 557 - 2,239 EBIT (1) 3,410 (56) - 3,354 Total Assets $52,344 $12,326 $ - $ 64,670
(1) EBIT represents earnings before other (income) expense and taxes. (2) U.S. operations comprises ERC Industries, Inc. and Wood Group Drilling Products. Other relates to Wood Group Pressure Control Venezuela. Eastern Hemisphere comprises all remaining subsidiaries. F-19 The following table is a reconciliation of reportable segment EBIT to the Company's consolidated totals:
1999 1998 1997 --------- ---------- ---------- (restated) (restated) Total EBIT for reportable segments $(4,214) $ 2,367 $ 3,354 Other income / (expense) (1,745) (2,040) (1,099) ------- -------- ------- Total consolidated income / (loss) before taxes $(5,959) $ 327 $ 2,255 ======= ======== =======
The following table presents revenues based on the location of the service provided:
1999 1998 1997 ------- -------- ------- (restated) (restated) U.S.A. $51,751 $ 81,138 $64,153 United Kingdom 12,587 11,285 12,296 Venezuela 5,083 7,651 275 United Arab Emirates 15,359 12,142 9,103 Other 4,096 5,463 2,070 ------- -------- ------- Total Revenues $88,876 $117,679 $87,897 ======= ======== =======
The Company has one customer who accounted for 11%, 15% and 10% of its revenues in 1999, 1998 and 1997, respectively. 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31 June 30 Sept. 30 Dec. 31 --------- -------- --------- --------- (In thousands, except per share data) 1999 (MARCH 31 RESTATED) - --------------- Revenues................................. $22,666 $18,711 $22,083 $25,416 Gross profit............................. 5,024 4,211 5,016 5,298 Net income (loss)........................ (759) (1,615) (689) (2,832) Basic net income (loss) per share........ $ (0.03) $ (0.06) $ (0.02) $ (0.09) Diluted net income (loss) per share...... $ (0.03) $ (0.06) $ (0.02) $ (0.09) 1998 (RESTATED) - --------------- Revenues................................. $29,457 $31,468 $30,439 $26,315 Gross profit............................. 7,866 8,427 8,197 4,905 Net income (loss)........................ 1,264 966 589 (3,466) Basic net income (loss) per share........ $ 0.04 $ 0.03 $ 0.02 $ (0.12) Diluted net income (loss) per share...... $ 0.04 $ 0.03 $ 0.02 $ (0.12)
15. SUBSEQUENT EVENT On March 29, 2000, the Company has entered into a merger agreement with Wood Group PLC, pursuant to which the Wood Group would acquire all outstanding shares of the Company's common stock not currently owned by it for a cash price of $1.60 per share. The merger agreement specifies certain conditions that must be satisfied prior to the closing of the merger. As a result of the merger, the Wood Group would own 100% of the outstanding shares of the surviving corporation, and the common stock of the Company would 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. F-20 EX-10.13 2 FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT This AGREEMENT is made and entered into as of the 24/th/ day of November, 1999, by and between ERC Industries, Inc., a Delaware corporation (the "Company"), and ________________. ("Indemnitee"). WHEREAS, it is essential to the Company and its mission to retain and attract as directors the most capable persons available; WHEREAS, Indemnitee is a director of the Company; WHEREAS, both the Company and Indemnitee recognize the omnipresent risk of litigation and other claims that are routinely asserted against directors of companies operating in the public arena in today's environment, and the attendant costs of defending even wholly frivolous claims; WHEREAS, it has become increasingly difficult to obtain insurance against the risk of personal liability of directors on terms providing reasonable protection to the individual at reasonable cost to the companies; WHEREAS, the Bylaws of the Company provide certain indemnification rights to the directors of the Company, and its directors have relied on this assurance of indemnification, as provided by Delaware law; WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner, the increasing difficulty in obtaining and maintaining satisfactory insurance coverage, and Indemnitee's reliance on assurance of indemnification, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent permitted by law (whether partial or complete) and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies; NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and Indemnitee's continuing to serve as a director of the Company, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS: (a) Change in Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding Voting Securities (other than any such person or any affiliate thereof that is such a 20% beneficial owner as of the date hereof), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors of nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (b) Claim: any threatened, pending or completed action, suit or proceeding, whether instituted by the Company or any other party, or any inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil (including intentional or unintentional tort claims), criminal, administrative, investigative or other. (c) Expenses: include attorneys' fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (e) Independent Legal Counsel: an attorney or firm of attorneys, selected in accordance with the provisions of Section 3, who shall not have otherwise performed services for the Company or Indemnitee within the last five years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnities under similar indemnification agreements). (f) Reviewing Party: any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Company's Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel. (g) Voting Securities: any securities of the Company which vote generally in the election of directors. 2. BASIC INDEMNIFICATION ARRANGEMENT. (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim. If so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses to Indemnitee (an "Expense Advance") upon compliance by Indemnitee with Section 145(e) of the Delaware General Corporation Law. (b) Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 3 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding, and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change of Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 3 hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and agrees to appear in any such proceedings. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 3. CHANGE IN CONTROL. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or Company Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events, the Company shall seek legal advice only from Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether or to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. 4. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee (whether pursuant to Section 17 of this Agreement or otherwise) for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Company Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 5. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 6. BURDEN OF PROOF. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 7. NO PRESUMPTIONS. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard or conduct or had any particular belief, or an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law shall be a defense to Indemnitee's claim or create a presumption that the Indemnitee has not met any particular standard of conduct or did not have any particular belief. 8. NONEXCLUSIVITY; SUBSEQUENT CHANGE IN LAW. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Bylaws or under Delaware law, or otherwise. To the extent that a change in Delaware law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 9. LIABILITY INSURANCE. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 10. AMENDMENTS, WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 11. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 12. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 13. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director of the Company or of any other enterprise at the Company's request. 14. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable in any respect, and the validity and enforceability of any such provision in every other respect and of the remaining provision hereof shall not be in any way impaired and shall remain enforceable to the fullest extent permitted by law. 15. EFFECTIVE DATE. This Agreement shall be effective as of the date hereof and shall apply to any claim for indemnification by the Indemnitee on or after such date. 16. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 17. INJUNCTIVE RELIEF. The parties hereto agree that Indemnitee may enforce this Agreement by seeking specific performance hereof, without any necessity of showing irreparable harm or posting a bond, which requirements are hereby waived, and that by seeking specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to which he may be entitled. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. ERC INDUSTRIES, INC. By: ------------------------- Title: ---------------------- ------------------------- EX-10.14 3 AGREEMENT AND PLAN OF MERGER - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER among JOHN WOOD GROUP PLC, ERC ACQUISITION, INC. and ERC INDUSTRIES, INC. Dated as of March 29, 2000 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE 1 THE MERGER Section 1.1 The Merger.......................................... 1 Section 1.2 The Closing......................................... 1 Section 1.3 Effective Time...................................... 2 ARTICLE 2 CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION Section 2.1 Certificate of Incorporation....................... 2 Section 2.2 Bylaws............................................. 2 ARTICLE 3 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION Section 3.1 Directors of Surviving Corporation................. 2 Section 3.2 Officers of Surviving Corporation.................. 2 ARTICLE 4 EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS Section 4.1 Effect of Merger on Capital Stock.................. 3 Section 4.2 Exchange of Certificates Representing Company Common Stock..................................... 3 Section 4.3 Dissenting Shares.................................. 5 Section 4.4 Adjustment of Consideration........................ 5 Section 4.5 Treatment of Units................................. 6 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 5.1 Existence; Good Standing; Corporate Authority...... 6 Section 5.2 Authorization, Validity and Effect of Agreements... 6 Section 5.3 Capitalization..................................... 6 Section 5.4 No Conflict........................................ 7 Section 5.5 SEC Documents...................................... 7 Section 5.6 No Brokers......................................... 8 i Section 5.7 Vote Required...................................... 8 Section 5.8 Opinion of Financial Advisor....................... 8 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Section 6.1 Existence; Good Standing; Corporate Authority...... 9 Section 6.2 Authorization, Validity and Effect of Agreements... 9 Section 6.3 No Brokers......................................... 9 Section 6.4 No Conflict........................................ 9 Section 6.5 Merger Sub......................................... 10 Section 6.6 Financing.......................................... 10 ARTICLE 7 COVENANTS Section 7.1 Conduct of Businesses.............................. 10 Section 7.2 Meetings of Stockholders........................... 11 Section 7.3 Proxy Statement.................................... 12 Section 7.4 Expenses........................................... 12 Section 7.5 Consents........................................... 12 Section 7.6 Publicity.......................................... 13 Section 7.7 Indemnification; Insurance......................... 13 ARTICLE 8 CONDITIONS Section 8.1 Conditions to Each Party's Obligation to Effect the Merger................................ 14 Section 8.2 Conditions to Obligation of the Company to Effect the Merger................................ 14 Section 8.3 Conditions to Obligation of Parent and Merger Sub to Effect the Merger............................. 15 ARTICLE 9 TERMINATION Section 9.1 Termination by Mutual Consent...................... 15 Section 9.2 Termination by Parent or the Company............... 15 Section 9.3 Termination by the Company......................... 16 Section 9.4 Termination by Parent.............................. 16 Section 9.5 Effect of Termination.............................. 16 Section 9.6 Extension; Waiver.................................. 17 ii ARTICLE 10 GENERAL PROVISIONS Section 10.1 Nonsurvival of Representations, Warranties and Agreements................................... 17 Section 10.2 Notices............................................ 17 Section 10.3 Assignment; Binding Effect; Benefit................ 18 Section 10.4 Entire Agreement................................... 18 Section 10.5 Amendments......................................... 18 Section 10.6 Governing Law...................................... 19 Section 10.7 Counterparts....................................... 19 Section 10.8 Headings........................................... 19 Section 10.9 Interpretation..................................... 19 Section 10.10 Waivers............................................ 20 Section 10.11 Severability....................................... 20 Section 10.12 Obligation of Parent............................... 20 Section 10.13 Subsidiaries....................................... 20 Section 10.14 Action by the Company.............................. 20 iii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of March 29, 2000 is among John Wood Group PLC, a company incorporated in the United Kingdom and registered in Scotland ("Parent"), ERC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and ERC Industries, Inc., a Delaware corporation (the "Company"). RECITALS WHEREAS, as of the date hereof, Parent owns 89.7% of the outstanding shares of common stock, par value $0.01 per share, of the Company ("Company Common Stock"); WHEREAS, the parties hereto desire to merge Merger Sub with and into the Company (the "Merger"), with the Company surviving as a wholly owned subsidiary of Parent, pursuant to which each share of the Company Common Stock not owned by Parent will be converted into the right to receive $1.60 in cash; WHEREAS, the respective Boards of Directors of Merger Sub and the Company have determined the Merger, in the manner contemplated herein, to be advisable and in the best interests of their respective corporations and stockholders and to be consistent with, and in furtherance of, their respective business strategies and goals, and, by resolutions duly adopted, have approved and adopted this Agreement; NOW, THEREFORE, in consideration of the foregoing, and of the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 THE MERGER Section 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company in accordance with this Agreement, and the separate corporate existence of Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The Merger shall have the effects specified in the General Corporation Law of the State of Delaware (the "DGCL"). Section 1.2 The Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") shall take place (a) at the offices of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas, at 9:00 a.m., local time, on the first business day on which the last to be fulfilled or waived of the conditions set forth in Article 8 shall be fulfilled 1 or waived in accordance herewith or (b) at such other time, date or place as Parent and the Company may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.3 Effective Time. If all the conditions to the Merger set forth in Article 8 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, Parent, Merger Sub and the Company shall cause a certificate of merger (the "Certificate of Merger") meeting the requirements of section 251 of the DGCL to be properly executed and filed in accordance with such section on the Closing Date. The Merger shall become effective at the time of filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the DGCL, or at such later time that the parties hereto shall have agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time"). ARTICLE 2 CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION Section 2.1 Certificate of Incorporation. The certificate of incorporation of the Company in effect immediately prior to the Effective Time shall be the certificate of incorporation of the Surviving Corporation, until duly amended in accordance with applicable law. Section 2.2 Bylaws. The bylaws of the Company in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation, until duly amended in accordance with applicable law. ARTICLE 3 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION Section 3.1 Directors of Surviving Corporation. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation as of the Effective Time. Section 3.2 Officers of Surviving Corporation. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation as of the Effective Time. 2 ARTICLE 4 EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS Section 4.1 Effect of Merger on Capital Stock. (a) At the Effective Time, each share of the common stock, par value $0.01 per share, of Merger Sub outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and non-assessable share of Common Stock, par value $0.01 per share, of the Surviving Corporation. (b) At the Effective Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than (i) Dissenting Shares (as defined in Section 4.3) and (ii) shares of Company Common Stock (x) held in the Company's treasury or (y) owned by Parent, Merger Sub or any other wholly owned Subsidiary (as defined in Section 10.13) of Parent or the Company) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive $1.60 in cash (the "Consideration"), subject to adjustment as provided in Section 4.4. (c) As a result of the Merger and without any action on the part of the holder thereof, each share of Company Common Stock shall cease to be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate (a "Certificate") representing any shares of Company Common Stock (other than (i) Dissenting Shares and (ii) shares of Company Common Stock (x) held in the Company's treasury or (y) owned by Parent, Merger Sub or any other wholly owned Subsidiary of Parent or the Company) shall thereafter cease to have any rights with respect to such shares, except the right to receive, without interest, the Consideration in accordance with Section 4.2(b) upon the surrender of such Certificate. (d) Each share of Company Common Stock and all other shares of capital stock of the Company that are held in the Company's treasury, and each share of Company Common Stock and all other shares of capital stock of the Company that are owned by Parent, Merger Sub or any other wholly owned Subsidiary of Parent or the Company, shall, at the Effective Time and by virtue of the Merger, cease to be outstanding, be canceled and retired and cease to exist without payment of any consideration therefor, and no stock of Parent or other consideration shall be delivered in exchange therefor. Section 4.2 Exchange of Certificates Representing Company Common Stock. (a) As of the Effective Time, Parent shall deposit, or shall cause to be deposited, with an exchange agent selected by Parent (the "Exchange Agent"), for the benefit of the holders of shares of Company Common Stock (other than Dissenting Shares), for exchange in accordance with this Article 4, cash in an amount equal to the total aggregate Consideration (such cash being 3 hereinafter referred to as the "Exchange Fund") to be paid pursuant to Section 4.1(b) in exchange for outstanding shares of Company Common Stock. (b) As soon as reasonably practicable after the Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record of one or more Certificates (other than to (i) holders of Dissenting Shares and (ii) holders of Company Common Stock that, pursuant to Section 4.1(d), are canceled without payment of any consideration therefor): (A) a letter of transmittal (the "Letter of Transmittal") which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify and (B) instructions for use in effecting the surrender of the Certificates in exchange for the Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such Letter of Transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange for each share of Company Common Stock represented by such Certificate cash in an amount equal to the Consideration, after giving effect to any required withholding tax, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on the cash payable to holders of Certificates. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, the Consideration shall be paid to such a transferee if the Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. (c) At or after the Effective Time, there shall be no transfers on the stock transfer books of the Company of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Exchange Agent, the presented Certificates shall be canceled and exchanged for cash in an amount equal to the Consideration deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this Article 4. (d) Any portion of the Exchange Fund (including the proceeds of any investments thereof) that remains unclaimed by the former stockholders of the Company one year after the Effective Time shall be delivered to Parent. Any former stockholders of the Company who have not theretofore complied with this Article 4 shall thereafter look only to Parent for payment of the Consideration deliverable in respect of each Certificate such former stockholder holds as determined pursuant to this Agreement. (e) None of Parent, the Surviving Corporation, the Exchange Agent or any other person shall be liable to any former holder of shares of Company Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. 4 (f) Parent and the Exchange Agent shall be entitled to deduct and withhold from the Consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Parent or the Exchange Agent reasonably determines is required to be deducted and withheld with respect to the making of such payment under the United States Internal Revenue Code of 1986, as amended, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent or the Exchange Agent. (g) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate cash in an amount equal to the Consideration deliverable in respect thereof pursuant to this Agreement. Section 4.3 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, no share of Company Common Stock, the holder of which shall not have voted shares in favor of the Merger and shall have properly complied with the provisions of Section 262 of the DGCL as to appraisal rights (a "Dissenting Share"), shall be deemed converted into and to represent the right to receive the Consideration hereunder; and the holders of Dissenting Shares, if any, shall be entitled to payment, solely from the Surviving Corporation, of the appraised value of such Dissenting Shares to the extent permitted by and in accordance with the provisions of Section 262 of the DGCL; provided, however, that (i) if any holder of Dissenting Shares shall, under the circumstances permitted by the DGCL, subsequently deliver a written withdrawal of his or her demand for appraisal of such Dissenting Shares, (ii) if any holder fails to establish his or her entitlement to rights to payment as provided in such Section 262 or (iii) if neither any holder of Dissenting Shares nor the Surviving Corporation has filed a petition demanding a determination of the value of all Dissenting Shares within the time provided in such Section 262, such holder or holders (as the case may be) shall forfeit such right to payment for such Dissenting Shares pursuant to such Section 262 and each such Dissenting Share shall thereupon be deemed to be converted into the right to receive the Consideration. Section 4.4 Adjustment of Consideration. In the event that, subsequent to the date of this Agreement but prior to the Effective Time, the Company changes the number of shares of Company Common Stock issued and outstanding as a result of a stock split, reverse stock split, stock dividend, recapitalization or other similar transaction without receipt of consideration with respect to Company Common Stock, the Consideration shall be appropriately adjusted. 5 Section 4.5 Treatment of Units. All units outstanding as of the Effective Time under the Company's long-term incentive plan (the "LTIP") shall continue in full force and effect and shall not be affected in any manner as a result of the Merger. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent that: Section 5.1 Existence; Good Standing; Corporate Authority. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. The copies of the Company's certificate of incorporation and bylaws previously made available to Parent are true and correct and contain all amendments as of the date hereof. Section 5.2 Authorization, Validity and Effect of Agreements. The Company has the requisite corporate power and authority to execute and deliver this Agreement and all other agreements and documents contemplated hereby. This Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby has been duly authorized and approved by a unanimous vote of a special committee of the Board of Directors of the Company consisting solely of directors who are not affiliated with Parent (the "Special Committee") and by all other requisite corporate action, other than, with respect to the Merger, the approval and adoption of this Agreement by the Company's stockholders. This Agreement constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. Section 5.3 Capitalization. The authorized capital stock of the Company consists of 40,000,000 shares of Company Common Stock and 10,000,000 shares of serial preferred stock, par value $1.00 per share, of the Company ("Company Preferred Stock"). As of March 29, 2000, (i) 30,698,272 shares of Company Common Stock and no shares of Company Preferred Stock were issued and outstanding and (ii) no shares of Company Common Stock or Company Preferred Stock were reserved for issuance. All such issued and outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. There are no outstanding shares of capital stock and there are no options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments that obligate the Company or any of its Subsidiaries to issue, transfer or sell any shares of capital stock or other voting securities of the Company or any of its Subsidiaries. The Company has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. 6 Section 5.4 No Conflict. (a) Neither the execution and delivery by the Company of this Agreement nor the consummation by the Company of the transactions contemplated hereby in accordance with the terms hereof will: (i) conflict with or result in a breach of any provisions of the certificate of incorporation or bylaws of the Company; (ii) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or give rise to a right of purchase under, or accelerate the performance required by, or result in the creation of any lien upon any of the properties of the Company or its Subsidiaries under, or result in being declared void, voidable, or without further binding effect, or otherwise result in a detriment to the Company or any of its Subsidiaries under, any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement, joint venture or other instrument or obligation to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries or any of their properties is bound or affected; or (iii) contravene or conflict with or constitute a violation of any provision of any law, rule, regulation, judgment, order or decree binding upon or applicable to the Company or any of its Subsidiaries, except, in the case of matters described in clause (ii) or (iii), as would not have, individually or in the aggregate, a Company Material Adverse Effect. (b) Neither the execution and delivery by the Company of this Agreement nor the consummation by the Company of the transactions contemplated hereby in accordance with the terms hereof will require any consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, other than (i) the filings provided for in Article 1 and (ii) filings required the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to the meeting of the stockholders of the Company to approve and adopt this Agreement and the transactions contemplated hereby (collectively, the "Filings"), except for any consent, approval or authorization the failure of which to obtain and for any filing or registration the failure of which to make would not have a Company Material Adverse Effect. Section 5.5 SEC Documents. The Company has made available to Parent each registration statement, report, schedule, proxy statement or information statement (other than preliminary materials) filed by the Company with the Securities and Exchange Commission (the "SEC") since January 1, 1998, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Company Reports"). As of their respective dates, the Company Reports (i) were prepared in all material respects in accordance with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act and the rules and regulations promulgated thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except for such statements, if any, as have been modified by subsequent filings with the SEC prior to the date hereof. Each of the consolidated balance sheets included in or incorporated by reference into the 7 Company Reports (including the related notes and schedules) fairly presents in all material respects the consolidated financial position of the Company and its Subsidiaries as of its date and each of the consolidated statements of income, cash flows and changes in stockholders' equity of the Company included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presents in all material respects the results of operations, cash flows or changes in stockholders' equity, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to (x) such exceptions as may be permitted by Form 10-Q of the SEC and (y) normal year-end audit adjustments), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Except as and to the extent set forth on the consolidated balance sheet of the Company and its Subsidiaries at December 31, 1998, including all notes thereto, as of such date, neither the Company nor any of its Subsidiaries had any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of the Company or in the notes thereto prepared in accordance with generally accepted accounting principles consistently applied, other than liabilities or obligations which would not have, individually or in the aggregate, a Company Material Adverse Effect. Section 5.6 No Brokers. The Company has not entered into any contract, arrangement or understanding with any person or firm that may result in the obligation of the Company or Parent to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except that the Special Committee has retained Schroder & Co. Inc. as its financial advisor, the arrangements with which have been disclosed in writing to Parent prior to the date hereof. Section 5.7 Vote Required. The affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock, together with the vote contemplated by Section 8.1(a)(ii), is the only vote of the holders of any class or series of Company capital stock necessary to approve and adopt this Agreement and the transactions contemplated hereby. Section 5.8 Opinion of Financial Advisor. The Special Committee has received the opinion dated March 28, 2000 (the "Fairness Opinion") of Schroder & Co. Inc. to the effect that, as of the date thereof, the Consideration is fair, from a financial point of view, to the holders of the Company Common Stock other than Parent. 8 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub, jointly and severally, represent and warrant to the Company that: Section 6.1 Existence; Good Standing; Corporate Authority. Parent and Merger Sub are corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Parent has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. The copies of Parent's certificate of incorporation and bylaws previously made available to the Company are true and correct and contain all amendments as of the date hereof. Section 6.2 Authorization, Validity and Effect of Agreements. Each of Parent and Merger Sub has the requisite corporate power and authority to execute and deliver this Agreement and all other agreements and documents contemplated hereby to which it is a party. This Agreement and the consummation by Parent and Merger Sub of the transactions contemplated hereby has been duly authorized by all requisite corporate action on the part of Parent and Merger Sub. This Agreement constitutes the valid and legally binding obligation of each of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. Section 6.3 No Brokers. Parent has not entered into any contract, arrangement or understanding with any person or firm that may result in the obligation of the Company or Parent to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Section 6.4 No Conflict. (a) Neither the execution and delivery by Parent and Merger Sub of this Agreement nor the consummation by Parent and Merger Sub of the transactions contemplated hereby in accordance with the terms hereof will: (i) conflict with or result in a breach of any provisions of the certificate of incorporation or bylaws of Parent or Merger Sub; (ii) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or give rise to a right of purchase under, or accelerate the performance required by, or result in the creation of any lien upon any of the properties of Parent or its Subsidiaries under, or result in being declared void, voidable, or without further binding effect, or otherwise result in a detriment to Parent or any of its Subsidiaries under, any of the terms, conditions 9 or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement, joint venture or other instrument or obligation to which Parent or any of its Subsidiaries is a party, or by which Parent or any of its Subsidiaries or any of their properties is bound or affected; or (iii) contravene or conflict with or constitute a violation of any provision of any law, rule, regulation, judgment, order or decree binding upon or applicable to Parent or any of its Subsidiaries, except, in the case of matters described in clause (ii) or (iii), as would not have, individually or in the aggregate, a Parent Material Adverse Effect. (b) Neither the execution and delivery by Parent or Merger Sub of this Agreement nor the consummation by Parent or Merger Sub of the transactions contemplated hereby in accordance with the terms hereof will require any consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, other than the Filings, except for any consent, approval or authorization the failure of which to obtain and for any filing or registration the failure of which to make would not have a Parent Material Adverse Effect. Section 6.5 Merger Sub. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement and has not engaged in any activities other than in connection with or as contemplated by this Agreement. Section 6.6 Financing. Parent has the financial resources to consummate the transactions contemplated by this Agreement and to pay the total aggregate Consideration. ARTICLE 7 COVENANTS Section 7.1 Conduct of Businesses. Prior to the Effective Time, except as expressly contemplated by any other provision of this Agreement or as required by applicable law, unless Parent has consented in writing thereto, the Company: (a) shall, and shall cause each of its Subsidiaries to, conduct its operations according to their usual, regular and ordinary course in substantially the same manner as heretofore conducted; (b) shall use its reasonable best efforts, and shall cause each of its Subsidiaries to use its reasonable best efforts, to preserve intact their business organizations and goodwill, keep available the services of their respective officers and employees and maintain satisfactory relationships with those persons having business relationships with them; (c) shall not amend its certificate of incorporation or bylaws; (d) shall promptly deliver to Parent true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement; 10 (e) shall not (i) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof, issue any shares of its capital stock, effect any stock split or otherwise change its capitalization as it existed on the date hereof; (ii) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any shares of its capital stock; (iii) increase any compensation or benefits, except in the ordinary course of business consistent with past practice, or enter into or amend any employment agreement with any of its present or future officers or directors, except with new employees consistent with past practice; or (iv) adopt any new employee benefit plan (including any stock option, stock benefit or stock purchase plan) or amend (except as required by law) any existing employee benefit plan in any material respect, except for changes which are less favorable to participants in such plans; (f) shall not (i) declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its capital stock or (ii) redeem, purchase or otherwise acquire any shares of its capital stock or capital stock of any of its Subsidiaries, or make any commitment for any such action; (g) shall not, and shall not permit any of its Subsidiaries to, sell, lease or otherwise dispose of any of its assets (including capital stock of Subsidiaries) that are material to the Company, individually or in the aggregate, except in the ordinary course of business; (h) shall not, nor shall it permit any of its Subsidiaries to, agree in writing or otherwise to take any of the foregoing actions; and (i) shall not take any action that is likely to delay materially or adversely affect the ability of any of the parties hereto (i) to obtain any consent, authorization, order or approval of any governmental commission, board or other regulatory body or (ii) to consummate the Merger. Section 7.2 Meetings of Stockholders. (a) The Company will take all action necessary in accordance with applicable law and its certificate of incorporation and bylaws to convene a meeting of its stockholders as promptly as practicable to consider and vote upon the approval and adoption of this Agreement and the Merger. (b) The Company, through the Special Committee, shall recommend approval of such matters subject to the determination by the Board of Directors of the Company after consultation with counsel that recommending approval of such matters would not be inconsistent with its fiduciary obligations. Additionally, the Special Committee may at any time prior to the Effective Time withdraw, modify, or change any recommendation and declaration regarding this Agreement or the Merger if in the opinion of the Special Committee after consultation with its 11 counsel the failure to so withdraw, modify, or change its recommendation and declaration would be inconsistent with its fiduciary obligations. Section 7.3 Proxy Statement. (a) Each of Parent and the Company shall cooperate and promptly prepare and the Company shall file as soon as practicable with the SEC under the Exchange Act a proxy statement with respect to the meeting of the stockholders of the Company to approve and adopt this Agreement and the transactions contemplated hereby (the "Proxy Statement"). The respective parties will cause the Proxy Statement to comply as to form in all material respects with the applicable provisions of the Exchange Act and the rules and regulations promulgated thereunder, including Rule 13e-3. The Company will advise Parent, promptly after it receives notice thereof, of any request by the SEC for amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. (b) The Company will use its reasonable best efforts to cause the Proxy Statement to be mailed to its stockholders as promptly as practicable after the date hereof. (c) Each of Parent and the Company agrees that the information provided by it for inclusion in the Proxy Statement and each amendment or supplement thereto, at the time of mailing thereof and at the time of the meeting of stockholders of the Company, (i) will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) will comply as to form in all material respects with the provisions of the Exchange Act. (d) As soon as practicable after the date of this Agreement, Parent, Merger Sub and the Company shall file with the SEC a Rule 13E-3 Transaction Statement on Schedule 13E-3 ("Schedule 13E-3"), with respect to the Merger. Each of the parties hereto agrees to use its reasonable best efforts to cooperate and to provide each other with such information as any of such parties may reasonably request in connection with the preparation of the Schedule 13E-3. Each party hereto agrees promptly to supplement, update and correct any information provided by it for use in the Schedule 13E-3 if and to the extent that it is or shall have become incomplete, false or misleading. Section 7.4 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Section 7.5 Consents. Each of the Company and Parent shall cooperate, and use its reasonable best efforts, to make all filings and obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties necessary to consummate the transactions contemplated by this Agreement. 12 Section 7.6 Publicity. The parties will consult with each other and will mutually agree upon any press releases or public announcements pertaining to this Agreement or the transactions contemplated hereby and shall not issue any such press releases or make any such public announcements prior to such consultation and agreement, except as may be required by applicable law or by obligations pursuant to any listing agreement with any national securities exchange, in which case the party proposing to issue such press release or make such public announcement shall use its best efforts to consult in good faith with the other party before issuing any such press releases or making any such public announcements. Section 7.7 Indemnification; Insurance. (a) From and after the Effective Time, Parent shall cause the Surviving Corporation to indemnify, defend and hold harmless to the fullest extent permitted under applicable law each person who is now, or has been at any time prior to the date hereof, an officer or director of the Company or any Subsidiary thereof (individually, an "Indemnified Party" and, collectively, the "Indemnified Parties") against all losses, claims, damages, liabilities, costs or expenses (including reasonable attorneys' fees), judgments, fines, penalties and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation arising out of or pertaining to acts or omissions, or alleged acts or omissions, with respect to matters occurring through the Effective Time, by them in their capacities as such, whether commenced, asserted or claimed before or after the Effective Time. In the event of any such claim, action, suit, proceeding or investigation (an "Action"), (i) Parent shall cause the Surviving Corporation to pay, as incurred, the reasonable fees and expenses of counsel selected by the Indemnified Party, which counsel shall be reasonably acceptable to the Surviving Corporation, in advance of the final disposition of any such Action to the fullest extent permitted by applicable law, upon receipt of any undertaking required by applicable law, and (ii) Parent shall cause the Surviving Corporation to cooperate in the defense of any such matter; provided, however, the Surviving Corporation shall not be liable for any settlement effected without its written consent, and provided further that the Surviving Corporation shall not be obligated pursuant to this Section 7.7 to pay the fees and disbursements of more than one counsel for all Indemnified Parties in any single Action, unless, in the opinion of counsel for any of the Indemnified Parties, there is a conflict of interests between two or more of such Indemnified Parties. (b) The parties agree that the rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, in the certificate of incorporation and bylaws of the Company with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Action pending or asserted within such period shall continue until the disposition of such Action. (c) For a period of six years after the Effective Time, Parent shall cause to be maintained officers' and directors' liability insurance covering the Indemnified Parties who are currently covered, in their capacities as officers and directors, by Parent's existing officers' and directors' liability insurance policies on terms substantially no less advantageous to the Indemnified 13 Parties than such existing insurance, with respect to matters occurring through the Effective Time; provided that Parent shall not be required to pay annual premiums in excess of the last annual premium paid by Parent prior to the date hereof, but in such case shall purchase as much coverage as reasonably practicable for such amount. (d) The rights of each Indemnified Party hereunder shall be in addition to any other rights such Indemnified Party may have under the certificate of incorporation or bylaws of the Company, under the DGCL, under indemnity agreements with the Company existing on the date hereof or otherwise. The provisions of this Section 7.7 shall survive the consummation of the Merger and expressly are intended to benefit each of the Indemnified Parties. ARTICLE 8 CONDITIONS Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) This Agreement and the Merger shall have been adopted and approved by the affirmative vote of (i) holders of a majority of the issued and outstanding shares of Company Common Stock entitled to vote thereon and (ii) holders of a majority of the issued and outstanding shares of Company Common Stock not owned, directly or indirectly, by Parent that are entitled to vote thereon and that are voting for or against the matter in person or by proxy at the meeting of stockholders of the Company called for such purpose. (b) None of the parties hereto shall be subject to any decree, order or injunction of a court of competent jurisdiction, U.S. or foreign, which prohibits the consummation of the Merger; provided, however, that prior to invoking this condition each party agrees to use its reasonable best efforts to have any such decree, order or injunction lifted or vacated; and no statute, rule or regulation shall have been enacted by any governmental authority which prohibits or makes unlawful the consummation of the Merger. Section 8.2 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) Parent shall have performed in all material respects its covenants and agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Parent and Merger Sub contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (except for representations and warranties made as of a specified date, which need be true and correct in all material respects only as of the specified date), and the Company shall have received 14 a certificate of the Parent, executed on its behalf by its President or a Vice President of Parent, dated the Closing Date, certifying to such effect. (b) At any time after the date of this Agreement, there shall not have been any event or occurrence that has had or is likely to have a Parent Material Adverse Effect. (c) At the time of the mailing of the Proxy Statement to the stockholders of the Company and at the Effective Time, Schroder & Co. Inc. shall not have withdrawn the Fairness Opinion. Section 8.3 Conditions to Obligation of Parent and Merger Sub to Effect the Merger. The obligations of Parent and Merger Sub to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) The Company shall have performed in all material respects its covenants and agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of the Company contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (except for representations and warranties made as of a specified date, which need be true and correct in all material respects only as of the specified date), and Parent shall have received a certificate of the Company, executed on its behalf by its President or a Vice President of the Company, dated the Closing Date, certifying to such effect. (b) At any time after the date of this Agreement, there shall not have been any event or occurrence that has had or is likely to have a Company Material Adverse Effect. ARTICLE 9 TERMINATION Section 9.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Effective Time by the mutual written consent of the Company and Parent. Section 9.2 Termination by Parent or the Company. This Agreement may be terminated by Parent or the Company if: (a) a meeting (including adjournments and postponements) of the Company's stockholders for the purpose of obtaining the approvals required by Section 8.1(a) shall have been held and such stockholder approvals shall not have been obtained; or (b) a court of competent jurisdiction (U.S. or foreign) or a U.S. or foreign governmental, regulatory or administrative agency or commission shall have issued an order, 15 decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable; provided, however, that the party seeking to terminate this Agreement pursuant to this clause (b) shall have used its reasonable best efforts to remove such injunction, order or decree. Section 9.4 Termination by the Company. This Agreement may be terminated prior to the Effective Time, by action of the Board of Directors of the Company, if (i) there has been a breach by Parent or Merger Sub of any representation, warranty, covenant or agreement set forth in this Agreement or if any representation or warranty of Parent or Merger Sub shall have become untrue, in either case such that the conditions set forth in Section 8.2(a) would not be satisfied and (ii) such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given to Parent by the Company; provided, however, that the right to terminate this Agreement pursuant to this Section 9.3 shall not be available to the Company if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth in this Agreement such that the condition set forth in Section 8.3(a) shall not be satisfied. Section 9.4 Termination by Parent. This Agreement may be terminated at any time prior to the Effective Time, by action of the Board of Directors of Parent, if: (a) (i) there has been a breach by the Company of any representation, warranty covenant or agreement set forth in this Agreement or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 8.3(a) would not be satisfied and (ii) such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given by Parent to the Company; provided, however, that the right to terminate this Agreement pursuant to this Section 9.4(a) shall not be available to Parent if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth in this Agreement such that the conditions set forth in Section 8.2(a) shall not be satisfied; or (b) the Board of Directors of the Company or the Special Committee shall have withdrawn or materially modified, in a manner adverse to Parent, its approval or recommendation of the Merger, or resolved to do so. Section 9.2 Effect of Termination. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article 9, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to this Section 9.5 and Section 7.4 and except for the provisions of Sections 10.3, 10.4, 10.6, 10.8, 10.9, 10.11 and 10.12, provided that nothing herein shall relieve any party from any liability for any willful and material breach by such party of any of its covenants or agreements set forth in this Agreement and all rights and remedies of such nonbreaching party under this Agreement in the case of such a willful and material breach, at law or in equity, shall be preserved. 16 Section 9.6 Extension; Waiver. At any time prior to the Effective Time, each party may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE 10 GENERAL PROVISIONS Section 10.1 Nonsurvival of Representations, Warranties and Agreements. All representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Merger; provided, however, that the agreements contained in Article 4, in Sections 7.4 and 7.7 and this Article 10 shall survive the Merger. Section 10.2 Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission or by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: (a) if to Parent or Merger Sub: John Wood Group PLC John Wood House East Tullos Greenwell Road Aberdeen, Scotland AB12 3AX Attention: General Counsel Facsimile: 011-44-1-224-851-110 with a copy to: J. David Kirkland, Jr., Esq. Baker Botts L.L.P. One Shell Plaza 910 Louisiana Houston, Texas 77002-4995 Facsimile: (713) 229-1522 17 (b) if to the Company: ERC Industries, Inc. 1441 Park Ten Boulevard Houston, Texas 77084 Attention: President Facsimile: (281) 398-8086 with a copy to: Bryce D. Linsenmayer Haynes and Boone, LLP 1000 Louisiana, Suite 4300 Houston, Texas 77002-5012 Facsimile: (713) 547-2600 or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. Section 10.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Article 4 and Section 7.7, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. The provisions of Article 4 and Section 7.7 may be enforced by the beneficiaries thereof. Section 10.4 Entire Agreement. This Agreement and any documents delivered by the parties in connection herewith constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. Section 10.5 Amendments. This Agreement may be amended by the parties hereto (in the case of the Company, only if authorized by the Special Committee), at any time before or after approval of matters presented in connection with the Merger by the stockholders of the Company, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This 18 Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 10.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws. Each of the Company and Parent hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Delaware and of the United States of America located in the State of Delaware (the "Delaware Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum. Section 10.7 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Section 10.8 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretative effect whatsoever. Section 10.9 Interpretation. In this Agreement: (a) Unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. (b) The phrase "to the knowledge of" and similar phrases relating to knowledge of the Company or Parent, as the case may be, shall mean the actual knowledge of its executive officers. (c) "Company Material Adverse Effect" shall mean a material adverse effect or change on (a) the business or financial condition of the Company and its Subsidiaries on a consolidated basis, except for such changes or effects in general economic, capital market, regulatory or political conditions or changes that affect generally the energy services industry, or (b) the ability of the Company to consummate the transactions contemplated by this Agreement or fulfill the conditions to Closing. 19 (d) "Parent Material Adverse Effect" shall mean a material adverse effect or change on the ability of Parent to consummate the transactions contemplated by this Agreement or fulfill the conditions to Closing. Section 10.10 Waivers. Except as provided in this Agreement, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder. Section 10.11 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broadly as is enforceable. Section 10.12 Obligation of Parent. Whenever this Agreement requires Merger Sub (or its successors) to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause Merger Sub to take such action and a guarantee of the performance thereof. Section 10.13 Subsidiaries. As used in this Agreement, the word "Subsidiary" when used with respect to any party means any corporation or other organization, whether incorporated or unincorporated, of which such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such party is a general partner; provided, however, that for purposes of this Agreement, prior to the Effective Time, neither the Company nor any of its Subsidiaries shall be deemed a Subsidiary of Parent. Section 10.14 Action by the Company. Any action permitted to be taken by the Company pursuant to Article VIII or IX shall be taken only if authorized by the Special Committee prior thereto. 20 IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same to be duly delivered on their behalf on the day and year first written above. JOHN WOOD GROUP PLC By: /s/ Wendell Brooks -------------------------------------- Name: Wendell Brooks Title: Director ERC ACQUISITION, INC. By: /s/ Wendell Brooks -------------------------------------- Name: Wendell Brooks Title: President ERC INDUSTRIES, INC. By: /s/ Alan Senn -------------------------------------- Name: Alan Senn Title: President EX-27.1 4 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,387 0 22,365 1,032 31,970 60,394 28,929 19,401 71,221 43,045 0 0 1,850 289 24,421 71,221 88,876 88,876 69,327 21,155 2,608 0 1,745 (5,959) 62 (5,897) 0 0 0 (5,897) (0.20) (0.20)
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