-----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, DxVLx2COZTrMjr54vx+hPW5X2oPDenAkW1RVAgbKsN+aWwQzXK3LcMF5ccztEITx FFwQI5sRy6cugZocjFDg5Q== 0000899243-98-000546.txt : 19980401 0000899243-98-000546.hdr.sgml : 19980401 ACCESSION NUMBER: 0000899243-98-000546 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98582871 BUSINESS ADDRESS: STREET 1: 2906 HOLMES RD CITY: HOUSTON STATE: TX ZIP: 77051 BUSINESS PHONE: 7137339301 MAIL ADDRESS: STREET 2: 2906 HOLMES RD CITY: HOUSTON STATE: TX ZIP: 77051 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, 1997 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) 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 16, 1998 was $7,901,425. The number of shares outstanding of the registrant's common stock, as of March 17, 1998 was 27,498,272. Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement relating to its 1998 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....................... 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Consolidated Financial Statements and Supplementary Data.. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 14 PART III Item 10. Directors and Executive Officers of the Registrant....... 15 Item 11. Executive Compensation................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 15 Item 13. Certain Relationships and Related Transactions........... 15 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.................................. 16 Signatures............................................................ 20 PART I ITEM 1. BUSINESS GENERAL ERC Industries, Inc., a Delaware corporation (the "Company" or "ERC"), is an oilfield service company engaged in the manufacture, remanufacture and servicing of oilfield wellhead equipment. On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation registered in Scotland and incorporated under the Companies Act 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. ("Barton") 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. 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. The Company continues to operate the business in substantially the same manner as it was operated prior to the acquisition. 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 operated in substantially the same manner as it operated prior to the acquisition, in addition the two principal stockholders of Church entered into employment agreements with the Company in connection with the transaction. Church is presently doing business as Wood Group Drilling Products ("WGDP"), a new business unit of the Company. WGDP produces and sells blow out preventers, high pressure valves and specialized engineering -1- services. WGDP's 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, par value $0.01 per share. The aggregate purchase price for the shares was $10 million or $1.60 per share. Following this transaction the Wood Group owns approximately 88.5% of the Company. OPERATIONS The equipment and components offered for sale by the Company are comprised of items manufactured by the Company in its own facilities, consisting principally of wellhead equipment and valves, drilling products, and items acquired and reconditioned under the Company's wellhead management program and new products acquired from other manufacturers. The services offered by the Company consist of reconditioning out-of-service equipment for others, and installing and repairing oil field equipment. The Company also leases certain oilfield equipment to customers. ERC'S ORIGINAL BUSINESS Old ERC's predecessor, 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. A substantial portion of the Company's oilfield equipment business is conducted through surplus wellhead equipment management programs. Under these programs, the Company collects out-of-service equipment at the wellhead or accepts delivery from a given customer at a branch location. All equipment is inspected by the Company and classified based upon its condition and degree of obsolescence at the time of receipt at the Company's service center. If deemed salvageable, the equipment is cleaned, disassembled, and, if needed, heat treated. Components are either replaced or repaired, usually by machining and welding. The equipment is then remachined on the Company's lathes, boring mills, radial drills, milling machines and grinding machines to new equipment standards. The reconditioned equipment may then be reemployed by the customer in accordance with its requirements. Reconditioned equipment is accompanied by a warranty similar to a manufacturer's warranty. The customer is charged for this reconditioning service based on an established price schedule, in addition to charges for receiving, inspecting and classifying the equipment. If the customer so desires, the Company may purchase the customer's used equipment for resale to other customers. The resale price of the equipment is typically based upon a percentage of the current list -2- price of new equipment. The payment for the customer's equipment may be in the form of a merchandise credit to be applied towards future purchases by that customer. 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 has the equipment and then resell the equipment to the customer that is in need of the required equipment. In addition to remanufacturing customer equipment, the Company purchases used equipment for its own account from various sources which the Company then remanufactures for sale. BUSINESS DEVELOPMENT AND ACQUISITIONS The acquisitions of Barton, Seaboard and Church in 1993, 1996 and 1997, respectively, 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 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; and Cumbernauld, Scotland are ISO 9001 registered, as well as certified under a range of API licenses. 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. -3- 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 Aberdeen, Cumbernauld, London, Abu Dhabi, Jordan, Saudi Arabia, Germany, Australia and Venezuela. These locations are managed by seasoned industry professionals with many years of international experience. 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 intends to focus on increasing international sales in 1998. As of March 16, 1998, the Company's wellhead and related equipment operations are conducted from 23 domestic locations, 11 international locations, and 3 distributorships. The Company's manufacturing facilities are located in Houston, Texas; Shawnee, Oklahoma; Cumbernauld, Scotland; and Maracaibo, Venezuela. ENGINEERING RESEARCH AND DEVELOPMENT The Company is involved in an active research and development program. It expects to file for and receive patents on new products aimed at growth in target geographic and product markets. New wellhead products were launched during 1997 and are expected to enable additional market participation. Additionally, value engineering projects continue to focus on a broad range of cost reductions. 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 2003. The Company believes that its patents and trademark/service mark are important to its marketing efforts. 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 our customers. This program includes repair of customer -4- 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. 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 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. 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. The Company believes that it is in substantial compliance with such laws, rules and regulations. The Company is dependent on the demand for equipment and services from the oil and gas exploration and production industry and, accordingly, is affected by changes in laws relating to the energy business. The Company's business is affected generally by political developments and by federal, state, local and foreign laws and regulations that may relate directly to the oil and gas industry. The adoption of laws and regulations, both domestic and foreign, that curtail exploration and production of oil and gas for economic, environmental and other policy reasons may adversely affect the Company's operations by limiting available equipment sales and service opportunities. -5- EMPLOYEES As of February 20, 1998, the Company had 583 employees, as compared to 456 employees as of February 26, 1997. No employees of the Company are represented by a union. CUSTOMERS In 1997 and 1995, the Company had no customers that comprised 10% or more of its sales. Conoco Incorporated contributed approximately 10% of the Company's total revenues in 1996. RECENT DEVELOPMENTS On February 2, 1998, the Company, in a privately-negotiated transaction, completed its acquisition of Bompet, C.A., a Venezuelan company ("Bompet"). The acquisition was accomplished by the purchase of 100% of the issued and outstanding capital stock of Bompet. 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. The Company plans to continue to operate Bompet as a subsidiary of the Company in substantially the same manner as it was operated prior to the acquisition. 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. The source of the funds for the purchase was cash on hand and bank debt. The Company intends to account for the transaction as a purchase. YEAR 2000 DATE CONVERSION In 1997, the Company began to modify its computer information systems to ensure proper processing of transactions relating to the year 2000 and beyond and expects to complete the required modifications during 1998. The amount charged to expense in 1997, as well as the amounts anticipated to be charged to expense in 1998 related to the year 2000 computer compliance modifications, have not been nor will be material to the Company's financial position, results of operations or cash flows. -6- ITEM 2. PROPERTIES Set forth below is certain information as of December 31, 1997, regarding the Company's headquarters, manufacturing and other facilities, most of which are located on leased premises. Lease Location Expiration Dates -------- ---------------- Manufacturing - Houston, Texas (Leased)/(1)/ Through July 14, 2001 Shawnee, Oklahoma (Owned)/(2)/ Cumbernauld, Scotland (Owned)/(3)/ 2 Headquarters Offices (Leased) Through July 31, 2004 6 Branch Offices and Various through Machine Shops (Leased) October 31, 2006 /(4)/ 6 Branch Offices and Machine Shops (Owned) 4 Sales Offices Various through (Owned and Leased) August 1, 1999 7 Sales and Service Various through Offices (Leased) February 9, 2000 /(4)/ 9 International Sales and Service Various through Offices (Leased) December 31, 1998 /(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 five 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. See Note 9 to the Consolidated Financial Statements. -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, 1997. -8- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is included on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The trading symbol under which the Common Stock trades is "ERCI". The following table sets forth the high and low reported bid prices for the Company's Common Stock as reported by NASDAQ by fiscal quarter from January 1, 1996 through December 31, 1997. 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, 1996 January 1, 1996 - March 31, 1996..... $1.06 $0.75 April 1, 1996 - June 30, 1996........ $1.06 $0.75 July 1, 1996 - September 30, 1996.... $1.56 $0.63 October 1, 1996 - December 31, 1996.. $2.50 $0.97 FISCAL YEAR ENDED DECEMBER 31, 1997 January 1, 1997 - March 31, 1997..... $2.25 $1.13 April 1, 1997 - June 30, 1997........ $2.13 $1.13 July 1, 1997 - September 30, 1997.... $2.50 $1.63 October 1, 1997 - December 31, 1997.. $4.63 $1.69
As of March 17, 1998, there were 1,184 holders of record of the Company's Common Stock, as reported by the Company's transfer agent for its Common Stock. As of March 16, 1998, the closing price of the Common Stock as reported on NASDAQ was $2.50 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. The terms of the Company's line of credit also restricts the ability of the Company to pay cash dividends. See Note 6 to the Consolidated Financial Statements. During the fourth quarter of 1997, the Company made no unregistered sales of securities. -9- ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
Years Ended Eleven Months December 31, Ended ------------------------------------------------ December 31, 1997(2)(3)(4) 1996(2)(3) 1995(2) 1994(2) 1993(2) ------------ ---------- ------- ------- ------------- Revenues $80,845 $ 50,961 $34,840 $32,926 $23,167 Income (loss) before provision for income taxes $ 2,618 $ 1,588 $(1,048) $ 628 $ 1,157 Provision (benefit) for income taxes (1) $ 1,394 $ 573 $ (273) $ 264 $ 421 Net income (loss) $ 1,224 $ 1,015 $ (775) $ 364 $ 736 Basic net income (loss) per common share $.05 $.06 $(.06 ) $.03 $.05 Total assets $60,383 $ 35,309 $20,879 $19,119 $17,375 Total long-term debt including current portion $12,133 $ 5,121 $ 4,602 $ 3,325 $ 2,852 Working capital $22,015 $ 12,099 $ 6,650 $ 7,937 $ 7,641 Shareholders' equity (1) $31,902 $ 17,621 $ 9,913 $10,683 $10,192 Capital expenditures $ 2,514 $ 644 $ 442 $ 1,024 $ 768 Cash dividends per share none none none none none
(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 additional paid-in capital conforming to the accounting rules for quasi-reorganized companies. (2) Includes effects of the Barton acquisition completed on November 16, 1993. (3) Includes effects of Seaboard Lloyd Limited acquisition completed on September 27, 1996. (4) Includes effects of Church acquisition completed on July 1, 1997. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Industry wide, the average active domestic rig count as reported by Baker Hughes Incorporated increased 21.1% to an average of 943 in 1997, as compared to 779 in 1996 and 723 in 1995. The active domestic rig count as of March 13, 1998 was 942. 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. RESULTS OF OPERATIONS - 1997 AS COMPARED TO 1996 AND 1996 AS COMPARED TO 1995 The Company's revenues increased by 58.6% to $80.8 million in 1997 compared with $51 million in 1996. 1996's revenues increased 46.3% to $51 million compared with $34.8 million for 1995. 1997 revenues increased by $29.9 million over 1996 due to an increase in customer activity, market share gains, increased WGPCL sales and sales generated by the acquisition of Church Oil Tools. This acquisition added approximately $4.3 million to 1997 revenues. 1996 revenues increased over 1995 by $16.1 million due to market share gains, increased sales activity, and sales generated at WGPCL. In connection with revenues over the three year period, cost of goods sold were $61.8 million in 1997, $38.8 million in 1996, and $27.4 million in 1995. The gross profit percentage was 23.6% in 1997, compared with 23.9% in 1996 and 21.4% in 1995. The decrease in 1997 gross profit percentage as compared to 1996 is due to changes in product mix. The increase in 1996 gross profit as compared with 1995 was due to process improvements at the manufacturing facility which created cost reductions, as well as fewer repairs and maintenance expenses at the facility. Selling, General and Administrative expenses ("SG&A") increased by $5.3 million to $15.5 million in 1997 as compared with $10.2 million in 1996. This increase is due to costs incurred to open additional domestic sales offices, increases in international and domestic sales personnel, and the addition of Church in 1997. SG&A, as a percentage of revenues, was 19.1% in 1997 and 19.9% in 1996. This decrease was due to sales growth in excess of growth in fixed SG&A costs. SG&A increased to $10.2 million in 1996 compared with $8.1 million in 1995. The increase was caused by the addition of international sales personnel and the related expenses to advance new business and support continuing business. As a percentage of revenues, SG&A decreased to 19.9% in 1996 from 23.3% in 1995. In 1997, interest expense increased $667,000 over 1996 caused by an increase in outstanding debt. -11- In 1996, interest expense decreased by $117,000 from 1995, as a result of reduced average debt during the year. This reduction resulted from the use of proceeds of the sale of stock to the Wood Group to reduce debt outstanding. Income before provision for income tax was $2.6 million in 1997, compared to $1.6 million in 1996. The increase in 1997 is primarily due to increased sales partially offset by higher interest expense and increased SG&A costs. Income before provision for income taxes was $1.6 million in 1996 compared to a loss of $1 million in 1995. The increase in 1996 was primarily due to increased sales at higher gross margins and decreased interest expense partially offset by increased SG&A costs. Net income for 1997, 1996 and 1995 includes provision/(benefit) for income taxes of $1.4 million, $573,000 and ($273,000), respectively. Of these amounts, $3.2 million, $796,000 and $5,000, in 1997, 1996 and 1995, respectively, represent non-cash charges which reflect the income tax benefit of the utilization of the Company's NOL Carryforwards arising prior to a quasi-reorganization; such amounts are included in the respective balance sheets as increases in additional paid-in capital. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $22 million at December 31, 1997 compared with $12.1 million at December 31, 1996. This improvement is primarily the result of increases in accounts receivable and inventory resulting from higher sales activity, that were only partially offset by increases in debt and accounts payable. The Company amended its domestic line of credit in June 1997, effectively increasing its line of credit to $10 million. The loan facility now provides for maximum borrowings of the lesser of $10 million or eligible trade accounts receivable and inventory (as defined in the line of credit). Interest on outstanding balances are payable monthly at the bank's prime rate minus three quarters of one percent. At December 31, 1997, the bank's prime rate was 8.5%. The loan facility requires the Company to maintain a ratio of total indebtedness to tangible net worth of no greater than 2.0 to 1.0. Additionally, the terms of the agreement restrict the Company from paying cash dividends. The facility is collateralized by trade accounts receivable and inventory. At December 31, 1997, loan amounts outstanding under the agreement were $5.2 million. In addition, the Company had outstanding, against the revolving line of credit, irrevocable letters of credit amounting to $55,000. At December 31, 1997, the Company's maximum amount available for additional borrowings was $4.8 million. The Company also has a line of credit overdraft facility in Scotland, which expires in September 1998 and provides a line of credit of three million pounds (approximately $4.9 million at December 31, 1997). The line of credit is used for the purpose of general working capital requirements and provides overdraft, acceptance credit, loan and documentary credit facilities. Interest payable on the overdraft facility is equal to the Bank's Base rate plus 1 percent per annum. At December 31, 1997, the bank's base rate was 7.25%. This credit agreement is collateralized by -12- substantially all of the assets of Wood Group Pressure Control Limited and is guaranteed by ERC Industries, Inc. At December 31, 1997, amounts outstanding under the various facilities were: overdraft, $1.6 million; guarantees and letters of credit, $424,000. At December 31, 1997, the Company's maximum amount available for additional borrowings was $2.9 million. Pursuant to the Company's long-term debt agreements, $8.2 million in principal payments are due over the next twelve months. The Company believes its line of credit facilities, combined with cash generated from operations, will be adequate to fund its operations for at least the next twelve months. The Company currently anticipates incurring capital expenditures of $4.1 million principally for machinery and equipment, plant improvements and vehicle purchases, through the fiscal year ending December 31, 1998. 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. 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. PENDING ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 is effective for the Company for the year ended December 31, 1998. Assuming the Company adopted SFAS No. 130 in 1995, comprehensive income would have been approximately $1.2 million and $1.1 million and comprehensive loss would have been $775,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. -13- CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS Certain information contained herein in Item 1 - "Business" and in Item 7 - "Management's Discussion and Analysis of Financial Conditions and Results of Operations" may be deemed to be forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provision in that enacted legislation. These statements are based on current expectations and involve a number of risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements as a result of various factors including, but not limited to the following: expectations of operating levels at the Company's facilities, expectations of the future customer and product mix, retention of major customers, competition and the Company's position in the market, discussions about future costs, the overall oil and gas market and timing of capital expenditures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. CONSOLIDATED 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. -14- 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 1998 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. -15- 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, 1997 and 1996.................. F-2 Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995.............................................................. F-3 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995........................................... F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995.............................................................. F-5 Notes to Consolidated Financial Statements................................... F-6 Consolidated Financial Statement Schedules:
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. 3. Exhibits: 2. ( 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. -16- ( 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. 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 Stock Purchase Agreement dated October 15, 1992, among Quantum Fund, N.V., Warren H. Haber, Lawrence M. Pohly, John L. Teeger, ERC Industries, Inc. and John Wood Group PLC, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.2 Standstill and Voting Agreement dated October 15, 1992, among Quantum Fund, N.V. and John Wood Group PLC and related irrevocable proxy, filed as Exhibits 2.2 and 2.3 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.3 Agreement dated as of December 4, 1992 between ERC Industries, Inc. and John Wood Group PLC, filed as Exhibit 2.4 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.4 Agreement dated December 4, 1992 by and among ERC Industries, Inc., John Wood Group PLC, Steven J. Gilbert, Gary S. Gladstein, Warren H. Haber, Gerard E. Manolovici and Richard H. Rau, filed as Exhibit 2.5 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.5 Credit Agreement, as amended, with Texas Commerce Bank, N.A., filed as Exhibit 10.7 to the Company's Registration Statement on Form S-4 (Registration No. 33-57504) as filed with the Securities and Exchange Commission, and incorporated herein by reference. 10.6 Fifth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 28, 1994/(1)/. 10.7 Sixth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 27, 1995/(2)/. -17- 10.8 Seventh Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of July 3, 1995/(3)/. 10.9 Eighth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of December 7, 1995/(3)/. 10.10 Ninth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 26, 1996/(3)/. 10.11 Tenth Amendment to the Credit Agreement with Texas Commerce Bank, N.A. extending expiration date to June 30, 1996, dated April 1, 1996 /(4)/. 10.12 Letter Agreement with Texas Commerce Bank National Association dated June 30, 1996. 10.13 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. 10.14 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. 10.15 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. 10.16 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. 10.17 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. 10.18 Letter Agreement with Texas Commerce Bank, N.A. dated as of June 4, 1997/(5)/. 10.19 Stock Purchase Agreement by and among the Company, Inversiones Western, C.A. and Jimmy J. Marzoula dated January 30, 1997, filed as Exhibit 10.1 to the Current Report on Form 8-K dated February 2, 1998 and incorporated herein by reference. 27 Financial Data Schedule/(5)/. __________________ /(1)/ Filed as Exhibits 3(a), (b) and (c), 4(a), and 10.6, respectively, of the Company's Annual Report on Form 10-K for its fiscal year ended January 31, 1993, and incorporated by reference herein. /(2)/ Filed as Exhibit 10.7 of the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994 and incorporated herein by reference. /(3)/ Filed as Exhibits to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and incorporated herein by reference. /(4)/ Filed as exhibits to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1996. /(5)/ Filed herewith. -18- (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, 1997. -19- 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 30, 1998 /s/ J. Derek P. Jones --------------------- J. Derek P. Jones 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 30, 1998 /s/ J. Derek P. Jones ---------------------- J. Derek P. Jones Chairman and Director Dated: March 30, 1998 /s/ Wendell R. Brooks --------------------- Wendell R. Brooks President and Director (Principal Executive Officer) Dated: March 30, 1998 /s/ James E. Klima -------------------- James E. Klima Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -20- Dated: March 30, 1998 /s/ Allister G. Langlands ------------------------- Allister G. Langlands Director Dated: March 30, 1998 /s/ Anthony Howells ------------------- Anthony Howells Director Dated: March 30, 1998 /s/ Jorge Estrada ----------------- Jorge Estrada Director -21- REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of ERC Industries, Inc. We have audited the accompanying consolidated balance sheet of ERC Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ERC Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas March 27, 1998 F-1 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 1 Trade accounts receivable, net of allowance for doubtful accounts of $681 and $534, respectively 18,689 11,738 Inventory 25,081 15,314 Prepaid expenses and other current assets 229 257 Deferred tax asset 2,520 651 ------- ------- Total current assets 46,519 27,961 Property, plant and equipment, net 7,743 4,932 Other assets 1,634 532 Deferred tax asset-non current 170 170 Excess cost over net assets acquired, net 4,317 1,714 ------- ------- Total assets $60,383 $35,309 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt and capital leases due within one year $ 8,156 $ 3,295 Accounts payable 11,587 9,655 Other accrued liabilities 4,761 2,912 ------- ------- Total current liabilities 24,504 15,862 ------- ------- Long-term debt 3,977 1,826 Commitments and contingencies (see Note 9) - - Shareholders' equity: Preferred stock, par value $1; authorized and unissued - 10,000,000 shares - - Common stock, par value $0.01; authorized - 30,000,000 shares; 27,498,272 and 21,248,272 issued and outstanding as of December 31, 1997 and 1996, respectively 275 212 Additional paid-in capital 24,842 11,792 Retained earnings from January 10, 1989 6,776 5,552 Translation adjustment 9 65 ------- ------- Total shareholders' equity 31,902 17,621 ------- ------- $60,383 $35,309 ======= =======
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, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 ------- ------- ------- Revenues $80,845 $50,961 $34,840 Cost of goods sold 61,780 38,787 27,399 ------- ------- ------- Gross profit 19,065 12,174 7,441 Property impairment - 203 - Selling, general and administrative expenses 15,458 10,159 8,116 ------- ------- ------- Operating income (loss) 3,607 1,812 (675) ------- ------- ------- Other (income) expense: Interest expense 989 322 439 Other, net - (98) (66) ------- ------- ------- 989 224 373 ------- ------- ------- Income (loss) before provision (benefit) for income taxes 2,618 1,588 (1,048) Provision (benefit) for income taxes 1,394 573 (273) ------- ------- ------- Net income (loss) $ 1,224 $ 1,015 $ (775) ======= ======= ======= Basic net income (loss) per share $0.05 $0.06 $(0.06) ======= ======= ======= Weighted average number of shares outstanding 23,217 18,060 13,864 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-3 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------- PAID-IN RETAINED TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ------ ------ ----------- -------- ----------- Balance as of December 31, 1994 13,864 $ 139 $ 5,232 $5,312 $ - Net loss - - - (775) - Income tax benefit of pre-quasi-reorganization net operating loss tax carryforwards - - 5 - - ------ ------- ------- ------ ---- Balance as of December 31, 1995 13,864 $ 139 $ 5,237 $4,537 $ - Net income - - - 1,015 - Sale of common stock 7,384 73 5,759 - - Foreign currency translation adjustment - - - - 65 Income tax benefit of pre-quasi-reorganization net operating loss tax carryforwards - - 796 - - ------ ------- ------- ------ ---- Balance as of December 31, 1996 21,248 $ 212 $11,792 $5,552 $65 Net income - - - 1,224 - Sale of common stock 6,250 63 9,844 - - Foreign currency translation adjustment - - - - (56) Income tax benefit of pre-quasi-reorganization net operation loss tax carryforwards - - 3,206 - - ------ ------- ------- ------ ---- Balance as of December 31, 1997 27,498 $ 275 $24,842 $6,776 $ 9 ====== ======= ======= ====== ====
The accompanying notes are an integral part of the consolidated financial statements. F-4 ERC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,224 $ 1,015 $ (775) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,873 1,212 1,095 Provision for losses on trade accounts receivable 171 51 175 Provision for inventory obsolescence 392 335 221 Deferred income tax provision (benefit) and non-cash charge for income taxes 1,237 523 (238) Gain on sale of property, plant and equipment (27) (16) (5) Property impairment - 203 - (Increase) decrease in cash resulting from changes in: Trade accounts receivable (6,183) (4,155) (1,182) Inventories (9,593) (5,919) (1,884) Prepaid expenses and other assets (1,195) (375) 163 Accounts payable 1,238 5,564 (505) Accrued liabilities 1,754 (199) 807 -------- ------- ------- Net cash used in operating activities (9,109) (1,761) (2,128) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (net of cash acquired of $1,152 in 1997) 152 (1,580) - Purchases of property, plant and equipment (2,514) (644) (442) Proceeds from sale of property, plant and equipment 57 30 26 -------- ------- ------- Net cash used in investing activities (2,305) (2,194) (416) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances from line of credit 20,675 2,884 2,425 Line of credit payments (16,600) (3,525) (750) Principal payments on long-term debt and capital leases (2,454) (554) (523) (Decrease) increase in book overdrafts (115) (660) 1,080 Net proceeds from issuances of common stock 9,907 5,832 - -------- ------- ------- Net cash provided by financing activities 11,413 3,977 2,232 -------- ------- ------- Effect of exchange rate changes on cash and cash equivalents - (21) - -------- ------- ------- Net increase (decrease) in cash and cash equivalents (1) 1 (312) Cash and cash equivalents, beginning of year 1 0 312 -------- ------- ------- Cash and cash equivalents, end of year $ 0 $ 1 $ 0 ======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 ERC INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS As of December 31, 1997, approximately 88.5% of the outstanding shares of ERC Industries, Inc.'s (the "Company") 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, its wholly owned subsidiaries Wood Group Pressure Control Limited (previously Seaboard Lloyd Limited), and Church Oil Tools, Inc. ("Church"). The Company engages in the manufacture, remanufacture and servicing of oilfield valves and wellhead equipment. To a lessor extent, the Company also serves the geothermal valve market through its Barton Wood division and serves the drilling products market through Church. 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 Aberdeen, Cumbernauld, London, Abu Dhabi, Jordan, Saudi Arabia, Germany, Australia and Venezuela. All intercompany accounts and transactions are eliminated in 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, semi-finished and raw materials which are carried at the lower of cost (specific identification or standard cost which approximates FIFO) or market. F-6 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 ranges 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, 1997 and 1996, amounted to approximately $1 million and $673,000, 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. F-7 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. EARNINGS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 specifies the computation, presentation, and disclosure requirements of earnings per share and supercedes Accounting Principles Board Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which is based on the weighted average number of common shares outstanding, replaces primary earnings per share. Diluted earnings per share, which is based on the weighted average number of common and dilutive potential common shares outstanding, replaces fully diluted earnings per share. SFAS No. 128 is effective for the Company in 1997 and requires all prior-period earnings per share data conform to its presentation. Adoption of this standard has had no impact on previously reported earnings per share since the Company has no common stock equivalents or dilutive securities. 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. 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 F-8 estimates made by management include the recoverability of deferred tax assets, reserves for inventory obsolescence, allowance for doubtful accounts receivable and accruals for contingencies. RECLASSIFICATIONS Certain amounts included in the prior year financial statements have been reclassified to conform with current year presentation. PENDING ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 is effective for the Company for the year ended December 31, 1998. Assuming the Company adopted SFAS No. 130 in 1995, comprehensive income would have been approximately $1.2 million and $1.1 million and comprehensive loss would have been $775,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. F-9 2. ACQUISITIONS On July 1, 1997, the Company acquired 100% of the issued and outstanding capital shares of Church Oil Tools, Inc. ("Church"), a company incorporated in Texas. The business of Church is the manufacture of oilfield equipment. Church operates from a facility located in Houston, 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. 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 3,034 Accounts Payable (809) Accrued Expenses (95) Deferred Tax Liability (100) Long-Term Debt-Current and Non-Current (459) ------ $5,000 ====== 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. The business of Seaboard is the manufacture of oilfield equipment. Seaboard now operates as Wood Group Pressure Control Limited ("WGPCL") from a facility located in Cumbernauld, Scotland. The Company paid a purchase price of $1,580,000. The source of the funds for the purchase was approximately $1,080,000 in cash on hand and $500,000 borrowed under the Company's existing credit facility. The acquisition was accounted for under the purchase method of accounting and the purchase price was allocated as follows (in thousands): Accounts Receivable $ 963 Inventory 1,131 Property, Plant and Equipment 1,702 Excess Cost Over Net Assets Acquired 232 Accounts Payable (569) Accrued Expenses (929) Long-Term Debt-Current and Non-Current (950) ------ $1,580 ====== F-10 The operating results of WGPCL and Church are included in operations from their dates of acquisition. The following represents the pro-forma results of operations as if the acquisitions of WGPCL and Church had occurred on January 1, 1996 (in thousands, except per share data): Year Ended December 31, ----------------------- 1997 1996 -------- -------- (unaudited) (unaudited) Revenues $85,791 $62,091 Net income 2,050 969 Net income per share .09 .05 3. INVENTORY Inventory consisted of the following (in thousands): December 31, ---------------- 1997 1996 ------- ------- Raw Materials $ 2,275 $ 1,917 Work-In-Progress 3,440 1,875 Finished Goods 23,047 14,856 ------- ------- 28,762 18,648 Less inventory obsolescence reserves 3,681 3,334 ------- ------- Total Inventory $25,081 $15,314 ======= ======= 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands): December 31, ---------------- 1997 1996 ------- ------- Land............................................ $ 597 $ 497 Leased property under capital leases............ 1,595 1,719 Machinery and equipment......................... 12,136 9,520 Buildings, improvements and other............... 8,060 7,412 ------- ------- Total Gross property, plant and equipment.... 22,388 19,148 Less accumulated depreciation and amortization............................... 14,645 14,216 ------- ------- Net property, plant and equipment............... $ 7,743 $ 4,932 ======= ======= Leased property is primarily composed of automobiles. Accumulated amortization of capital leases amounted to approximately $1.1 million and $1.2 million as of December 31, 1997 and 1996, respectively. Depreciation and amortization expense was approximately $1.3 million, $845,000, and $791,000 for the fiscal years ended December 31, 1997, 1996 and 1995, respectively. In March 1996, the Company recognized an impairment loss of approximately $203,000 on certain property owned by the Company. Operations are continuing at the property. F-11 5. OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following (in thousands): December 31, -------------- 1997 1996 ------ ------ Insurance............. $ 632 $ 540 Vacation.............. 389 309 Salaries.............. 850 428 In-transit inventory.. 1,080 -- Warranty.............. 331 239 Other................. 1,479 1,396 ------ ------ Total other accrued liabilities........ $4,761 $2,912 ====== ====== 6. DEBT Long-term debt consisted of the following (in thousands) : December 31 ---------------- 1997 1996 ------- ------- Lines of credit due to banks............................... $ 6,787 $2,712 Notes payable related to acquisition of Church, bearing interest at 8%, due in annual installments of $1 million commencing July 1, 1998................... 4,000 - Note payable to a bank due in quarterly installments of $62,500 plus interest................................ - 1,748 Obligations under capital leases and other debt bearing interest at various rates, due in various installments.. 1,346 661 ------- ------ Total debt................................................. 12,133 5,121 Less current maturities.................................... 8,156 3,295 ------- ------ Long-term debt............................................. $ 3,977 $1,826 ======= ====== The aggregate maturities of long-term debt, including obligations under capital leases during the five years subsequent to December 31, 1997 are (in thousands): December 31 ----------- 1998 $ 8,156 1999 1,193 2000 1,147 2001 1,157 2002 and thereafter 480 ------- Total $12,133 ======= F-12 Management believes that the carrying value of debt approximates its fair value at December 31, 1997 and 1996 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. The Company amended its domestic line of credit in June 1997, effectively increasing its line of credit to $10 million. The loan facility now provides for maximum borrowings of the lesser of $10 million or eligible trade accounts receivable and inventory (as defined in the line of credit). Interest on outstanding balances are payable monthly at the bank's prime rate minus three quarters of one percent. At December 31, 1997 and 1996, the bank's prime rate was 8.5% and 8.25%, respectively. The loan facility requires the Company to maintain a ratio of total indebtedness to tangible net worth of no greater than 2.0 to 1.0. Additionally, the terms of the agreement restrict the Company from paying cash dividends. The facility is collateralized by trade accounts receivable and inventory and expires in June 1998. At December 31, 1997, loan amounts outstanding under the agreement were $5.2 million. In addition, the Company had outstanding, against the revolving line of credit, irrevocable letters of credit amounting to $55,000. At December 31, 1997, the Company's maximum amount available for additional borrowings was $4.8 million. The Company also has a line of credit overdraft facility in Scotland, which expires in September 1998 and provides a line of credit of three million pounds (approximately $4.9 million at December 31, 1997). The line of credit is used for the purpose of general working capital requirements and provides overdraft, acceptance credit, loan and documentary credit facilities. Interest payable on the overdraft facility is equal to the Bank's Base rate plus 1 percent per annum. At December 31, 1997 and 1996, the bank's base rate was 7.25% and 6.00%, respectively. This credit agreement is collateralized by substantially all of the assets of Wood Group Pressure Control Limited and is guaranteed by ERC Industries, Inc. At December 31, 1997, amounts outstanding under the various facilities were: overdraft, $1.6 million; guarantees and letters of credit, $424,000. At December 31, 1997, the Company's maximum amount available for additional borrowings was $2.9 million. F-13 7. 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, ------------------- 1997 1996 --------- -------- Deferred tax assets: Net operating loss............... $ 7,253 $ 8,184 Tax over book inventory basis.... 668 232 Allowance for doubtful accounts.. 236 182 Other............................ 386 407 Valuation allowance.............. (5,853) (8,184) ------- ------- Total deferred tax assets........ $ 2,690 $ 821 ======= ======= The valuation allowance was reduced during 1997 by approximately $2.3 million. At December 31, 1997, the Company had federal net operating loss (NOL) carryforwards available to offset future taxable income in the approximate amount of $19.6 million. Of these NOL carryforwards, approximately $16.8 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-14 The following is a summary of the provision for income taxes (in thousands): Year Ended December 31, ------------------------ 1997 1996 1995 -------- ------- ------ Current - due to alternative minimum tax $ 97 $ 50 $ (35) Current - foreign provision 60 - - Non-cash charge in lieu of income taxes 3,206 796 5 Deferred tax (benefit) charge (1,969) (273) (243) ------- ----- ----- Provision (benefit) for income taxes $ 1,394 $ 573 $(273) ======= ===== ===== The non-cash charges in lieu of income taxes represents 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, 1997, 1996 and 1995 is as follows: 1997 1996 1995 ------- ------ ------ U.S. federal statutory rate 34.0% 34.0% (34.0%) Current foreign losses with no future tax benefits 11.2 - - Non-deductible Expenses 5.1 4.3 4.3 State Taxes 3.0 - - Other - (2.2) 3.6 ----- ----- ------ Effective Tax Rate 53.3% 36.1% (26.1%) ===== ===== ====== The Company incurred losses in its Venezuelan operations that management believes will not provide future tax benefits to the Company. The impact of these losses on the provision for income taxes was recorded in the fourth quarter of 1997. 8. RELATED PARTY TRANSACTIONS The Company and Wood Group have agreed to an annual provision for administrative and financial services fees in amounts to be determined on an annual basis. The Company paid or accrued approximately $389,000, $188,000 and $173,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 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. F-15 On June 6, 1996, the Company agreed to issue and sell to the Wood Group 7,384,616 shares of the Company's common stock, par value $.01 per share. The aggregate purchase price for the shares was $6 million, or $0.8125 per share. 9. COMMITMENTS AND CONTINGENCIES The Company leases office space and various equipment under noncancellable operating leases expiring through 2004. 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 noncancellable leases for minimum lease commitment amounts during the five years subsequent to December 31, 1997 as follows (in thousands): December 31 - ----------- 1998 $1,006 1999 846 2000 814 2001 650 2002 and thereafter 532 ----- Total $3,848 ====== Rental expenses for the years ended December 31, 1997, 1996 and 1995 were approximately $662,000, $424,000, and $447,000, respectively. In connection with the Barton Wood acquisition in late 1993, the Company leased and had an option to purchase, certain real property and equipment from the Barton lenders ("lessors") at any time during the term of the leases, which extended through February, 1998. During 1997 the Company exercised its options and purchased the real property and equipment for $2.4 million. Pursuant to the agreement to acquire Church, 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 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 1997, 1996 and 1995. 10. 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 paid $27,000 during 1995 for contributions accrued at December 31, 1994. No contributions were paid or F-16 accrued for the year ended December 31, 1995. In June 1996, the Company began matching employee's contributions up to 6% of their eligible compensation at a rate of 25% of employee contributions. The Company's matching contributions totaled approximately $130,000 in 1997 and $53,000 in 1996. 11. SALES TO SIGNIFICANT CUSTOMERS In 1997 and 1995, the Company had no customers that comprised 10% or more of its sales. The Company had one customer in 1996 which accounted for approximately 10% of its sales. 12. SUPPLEMENTAL CASH FLOW DISCLOSURES Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 ------------------ ----------------- ----------------- (in thousands) (in thousands) (in thousands) Cash paid for: Interest $913 $324 $418 ==== ==== ==== Income taxes $ 52 $ 0 $ 9 ==== ==== ==== The Company entered into capital lease obligations of $160,000, $426,000 and $125,000 during the periods ended December 31, 1997, 1996 and 1995, respectively. During the year ended December 31, 1997, the company purchased $785,000 of property, plant and equipment by issuing a note payable to seller. Under the Company's cash management system, checks issued but not presented to bank frequently result in overdraft balances for accounting purposes and are classified as "Accounts Payable" in the balance sheet and as "Increases (Decreases) in Bank Overdrafts" in the statement of cash flows. F-17 12. QUARTERLY FINANCIAL DATA (UNAUDITED) March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (In thousands, except per share data) 1997 ---- Net Sales.................... $16,534 $17,521 $22,208 $24,582 Gross profit................. 3,956 4,017 5,484 5,608 Net income................... 220 248 621 135 Net income per share......... $ .01 $ .01 $ .03 $ none 1996 ---- Net Sales.................... $ 9,828 $11,817 $13,304 $16,012 Gross profit................. 2,039 2,926 3,060 4,149 Net income (loss)............ (70) 250 392 443 Net income (loss) per share.. $ (.01) $ .02 $ .02 $ .02 13. DOMESTIC AND FOREIGN OPERATIONS The Company primarily conducts its operations in various locations throughout the United States and United Kingdom. During the years ended December 31, 1997 and 1998, approximately $15 million and $2.6 million of operating revenues and approximately $157,000 and $152,000 of operating income was recorded by WGPCL, respectively. No significant operations of the Company existed in the United Kingdom during the year ended December 31, 1995. Identifiable assets in the United Kingdom were approximately $8.2 million and $7 million as of December 31, 1997 and 1996, respectively. 14. SUBSEQUENT EVENTS On February 2, 1998, the Company completed the acquisition of all the issued and outstanding capital stock of Bompet, C.A., a Venezuelan company ("Bompet"). 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. 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. The source of the funds for the purchase was cash on hand and bank debt. The Company intends to account for the transaction as a purchase. F-18 EX-10.18 2 LETTER AGREEMENT EXHIBIT 10.18 June 4, 1997 ("Effective Date") ERC Industries, Inc. 16920 Park Row Houston, Texas 77084 RE: $10,000,000.00 Revolving Line of Credit from Texas Commerce Bank National Association ("Bank") to ERC Industries, Inc., ("Borrower") Gentlemen: Bank is pleased to renew and increase to $10,000,000.00 the revolving line of credit (the "Revolving Line of Credit") for loans and the issuance of commercial and standby letters of credit, subject to the terms and conditions stated herein (as the same may be amended, renewed, extended, supplemented or restated from time to time, this "Letter Agreement" or "Agreement"). NOW THEREFORE, in consideration of the above stated premises, Bank and Borrower hereby agree as follows: T E R M S A N D C O N D I T I O N S ------------------------------------- SECTION 1 - THE LINE OF CREDIT --------- ------------------ Section 1.1 REVOLVING LINE OF CREDIT A. Advances: The Bank agrees to make advances (an "Advance" or "Advances") to Borrower, upon request of Borrower from time to time from the Effective Date to but not including May 25, 1998 not to exceed at any one time outstanding the lesser of the Borrowing Base or $10,000,000.00, Borrower having the right to borrow, repay and reborrow. Advances shall be used for the purpose of meeting the working capital requirements and general corporate purposes of Borrower. Advances shall be evidenced by, and made as provided in a promissory note of even date herewith executed by Borrower and delivered to Bank ("Note"), a copy of which is attached hereto as Exhibit "A" and made a part hereof for all purposes (the "Note" as used in this Agreement, shall include without limitation, any and all renewals, extensions, modifications, rearrangements, replacements thereof and substitutions therefor). B. Letters of Credit: The Bank agrees to issue standby and commercial letters of credit (an "L/C" or "L/Cs") from time to time, from the Effective Date to but not including May 25, 1998, for the account of Borrower and in favor of such person or persons as may be designated by Borrower. Each L/C shall have an expiration date of no later than May 25, 1999. The Borrower shall reimburse the Bank immediately upon demand for any drawings made under an L/C. Prior to May 25, 1998, the Borrower may request an Advance under the Note, and the Bank is hereby authorized to make such an Advance without notice to the Borrower, to pay any drawing under any L/C. C. Maximum Amount: The maximum amount which will be available to Borrower under the Revolving Line of Credit is the lesser of the Borrowing Base or $10,000,000.00 ("Maximum Amount"), which in determining whether any amounts are available under the Revolving Line of Credit, Bank will deduct from the Maximum Amount, the amount of all unpaid Advances (the outstanding principal balance on the Note) and all L/C Obligations. The term "L/C Obligations" shall mean the face amount of all L/Cs issued and outstanding plus any unreimbursed drawings under the L/Cs plus any other amounts owing to Bank under or in respect of any L/C or Application (as hereinafter defined). Borrower and Bank agree that the following outstanding L/Cs shall be deemed made under and subject to the terms of this Agreement.
VALUE EXPIR. NUMBER DATE DATE AMOUNT --------- -------- -------- ----------- I444134 03/09/94 03/01/95 $ 7,662.08 I451961 03/22/95 02/15/98 150,000.00 I455643 08/29/95 10/31/97 2,820.00 I460191 03/05/96 08/30/96 10,000.00 I464760 09/16/96 09/30/98 1,648.00 I465275 10/04/96 08/15/97 6,000.00
Section 1.2 BORROWING BASE REPORT. Within 30 days after the end of every calendar month Borrower shall furnish the Bank a Borrowing Base Report substantially in the form of Exhibit B, together with an accounts receivable aging and listing. Section 1.3 BORROWING BASE. The Borrowing Base shall be the amount available for borrowing on each Borrowing Base Report, subject to verification by the Bank. If the Bank upon such verification does not agree with the Borrowing Base Report submitted, within 5 days after written notice by Bank to Borrower, Borrower shall correct such Borrowing Base Report and paydown the Note in accordance with the corrected Borrowing Base Report. If no Borrowing Base Report is received within the time specified, the Bank may in its sole discretion set the Borrowing Base at any amount it deems appropriate. Page 1 of 5 Pages ERC INDUSTRIES, INC. Letter Agreement June 4, 1997 ("Effective Date") Section 1.4 REQUIRED PAYDOWNS. If the outstanding principal balance of the Note plus all L/C obligations at any time exceeds the Borrowing Base then in effect, Borrower shall make a paydown on the Note in an amount sufficient to reduce the unpaid balance on the Note to an amount that when added to all L/C Obligations is no greater than the Borrowing Base. Such paydown shall be accompanied by: (a) all accrued and unpaid interest on the amount prepaid; and (b) any prepayment charge required by the Note and shall be due concurrently with the Borrowing Base Report. Section 1.5 INTEREST RATE, TERMS AND FEES: A. The Note: Advances under the Note shall bear interest at the rates of interest as determined in accordance with the terms of the Note. Principal and interest on each Advance shall be made as more particularly described in the Note. B. Letter of Credit Fees: In consideration for the issuance of any L/C, Borrower agrees to pay to Bank a letter of credit issuance fee ("Fee") in respect of such L/C in an amount equal to: (1) in the case of commercial L/Cs, one quarter of one percent (1/4%) per quarter or fraction thereof on the face amount of such L/C; and (2) in the case of standby L/Cs one percent (1%) per annum on the face amount of such L/C. The Fee shall be paid to Bank at its offices at 712 Main Street, Third Floor, Houston, Texas 77002 to the attention of the Manager, Documentary Services Division, or such other address designated by the Bank, in advance of the date of issuance of such L/C. The Fee in respect of each L/C shall be calculated from the date of issuance of the L/C to and including the date of expiration of such L/C calculated in accordance with the then current fee schedule of Bank. Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on May 25, 1998; or (ii) such earlier date resulting from acceleration as defined in Section 5 hereof. Section 1.7 COLLATERAL: Borrower ratifies and confirms that its obligations under the Revolving Line of Credit, the Note, L/Cs and Applications are secured by a security interest of first priority in Borrower's accounts receivables and inventory as evidenced by a Security Agreement dated February 26, 1991 executed by Borrower and Bank as amended by a First Amendment dated as of February 26, 1991 (as further amended, supplemented or replaced from time to time, the "Security Agreement"). References to the Credit Agreement and Note in the Security Agreement shall mean this Agreement and the Note referenced herein. The Agreement, the Security Agreement, the Note, the Applications, the L/Cs and each and every other written document, instrument, agreement related to the Revolving Line of Credit (together with any and all renewals, extensions, modifications, supplements, amendments and replacements thereof) that may be required to be executed and delivered by Borrower to Bank shall hereinafter be called the "Loan Documents". Section 1.8 NEGATIVE PLEDGE: Borrower will not create or permit to exist any lien upon any of its property now owned or hereafter acquired, or acquire any property upon any conditional sale or other title retention device or arrangement or any purchase money security agreement; or in any manner directly or indirectly sell, assign, pledge or otherwise transfer any of its accounts or other property, except: (a) liens, not for borrowed money, arising in the ordinary course of business; (b) liens for taxes not delinquent or being contested in good faith by appropriate proceedings; (c) liens in effect on the date hereof and disclosed to Bank in writing, so long as neither the indebtedness secured thereby nor the property covered thereby increases; (d) liens in favor of Bank, or otherwise approved in writing by Bank; (e) liens resulting from the leasing of equipment; and (f) purchase money liens not to exceed $300,000.00 in the aggregate per year, arising in the ordinary course of business. Notwithstanding anything to the contrary herein, Borrower will not permit any Lien on any accounts receivable or inventory that secures the Loans unless Bank shall provide Borrower with Bank's prior written consent. SECTION 2 - CONDITIONS PRECEDENT --------- -------------------- Section 2.1 CONDITIONS PRECEDENT: The Bank shall be under no obligation to make any Advance or issue any L/C, until the Borrower has executed and delivered, in form and substance satisfactory to Bank, the following documents: (i) this Agreement; (ii) the Note; (iii) an application substantially in the form of, in the case of each commercial L/C, Exhibit "C-1" attached hereto, and in the case of each standby L/C, Exhibit "C-2" attached hereto, in each case, duly completed and executed by Borrower to the complete satisfaction of Bank ("Application" or "Applications") not less than two Business Days prior to the date on which the L/C is requested to be issued; and (iv) any other document, instrument, certificate or instrument that Bank may reasonably require to consider the request. SECTION 3 - REPRESENTATION AND WARRANTIES --------- ----------------------------- To induce Bank to enter into this Agreement and to make Advances and issue L/Cs, Borrower represents and warrants that on the date hereof and on the date of each request for an Advance and submission of each Application, and on the date of making an Advance and the date of issuance of any L/C, and at all times during the term of this Agreement: Section 3.1 ORGANIZATION, DUE EXECUTION, AND ENFORCEABILITY: Borrower is and shall remain duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; has all the power and authority to conduct its business as presently conducted, and is duly qualified to do business and in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification desirable; the execution of the Loan Documents by Borrower has been duly authorized and does not contravene the articles of incorporation or, by-laws of Borrower, and will not result in the breach of, or constitute a default under any agreement, judgment, order or decree binding upon Borrower, and the Loan Documents executed by Borrower are legally binding obligations of Borrower, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency and other similar laws; Page 2 of 5 Pages ERC INDUSTRIES, INC. Letter Agreement June 4, 1997 ("Effective Date") Section 3.2 ACCURATE INFORMATION: The information in the financial statements and other information provided, or to be provided to Bank by Borrower is true, correct and accurate in all material respects as of the date provided and shall be true and correct in all material respects on the date that any Advance or L/C is requested to be funded or issued; Section 3.3 NO DEFAULTS: No Event of Default (as defined hereinafter) or default exists under this Agreement or under any of the other Loan Documents and no default exists under any other agreement material to the financial condition of Borrower or is continuing; Section 3.4 NO LITIGATION, ETC.: Borrower is not subject to any order, judgment, or litigation which could materially and adversely affect its respective financial condition, business affairs or operations; Section 3.5 PAYMENT OF TAXES: Borrower has paid all its taxes due and owing including without limitation employment taxes, except for those for which extensions have been obtained and those being contested in good faith and for which adequate reserves have been established; Section 3.6 COMPLIANCE, GOVERNMENTAL REQUIREMENTS AND PERMITS: Borrower is not subject to any governmental order, any administrative or judicial order or judgment that could materially and adversely affect its financial condition, business affairs or operations of its business. Borrower has no material contingent liability with respect to compliance with laws, rules and regulations applicable to Borrower; and Section 3.7 REGULATION U: None of the proceeds of any Advance shall be used for the purpose of purchasing or carrying directly or indirectly, any margin stock or for any other purpose which would make any credit provided by Bank to Borrower hereunder a purpose credit within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. SECTION 4 - COVENANTS --------- --------- Borrower covenants and agrees that so long as any amounts remain unpaid under the Note or any L/C is outstanding or any amounts are owing under the other Loan Documents it shall: Section 4.1 FINANCIAL STATEMENTS AND FINANCIAL COVENANTS: ensure that financial statements and financial covenants comply with the financial covenants and other covenants described, and calculated as set forth, in Exhibit "D". Unless otherwise provided on Exhibit "D", all such amounts and ratios will be calculated: (a) on the basis of United States GAAP for the Borrower; and (b) on a consolidated basis. Compliance with the requirements of Exhibit "D" will be determined as of the dates of the financial statements to be provided to Bank; Section 4.2 REPRESENTATION AND WARRANTIES: ensure that each of the representations and warranties of Borrower contained herein shall be true and correct when given and when deemed given hereunder and notify Bank immediately should any representation or warranty become untrue or misleading; Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify Bank in writing at least 30 days prior to any date that Borrower changes its name or the location of its principal place of business or the location of its books and records, and notify Bank immediately if Borrower becomes a party to any merger or consolidation, or if there is a change or modification to its business or legal structure; and Section 4.4 COMPLIANCE: at all times comply with applicable laws, rules, regulations, ordinances and Executive Orders. SECTION 5 - EVENTS OF DEFAULT AND REMEDIES --------- ------------------------------ If any of the following events ("Events of Default") shall occur, then Bank may do any or all of the following: (1) declare the Note to be, and thereupon the principal balance of the Note shall forthwith become, immediately due and payable, together with all accrued and unpaid interest thereon and all fees and all other obligations and indebtedness of Borrower under the Loan Documents, without notice of acceleration or of intention to accelerate, presentment and demand or protest, all of which are hereby expressly waived; (2) without notice to Borrower, terminate the Revolving Line of Credit and refuse to consider requests for Advances and issuances of L/Cs; (3) set off, in any order, against the indebtedness of Borrower under the Loan Documents any debt owing by Bank to Borrower, including, but not limited to, any deposit account, which right is hereby granted by Borrower to Bank; and (4) exercise any and all other rights pursuant to the Loan Documents, at law, in equity or otherwise: (a) Borrower shall fail to pay any principal of or interest on the Note or any other obligation under any Application or under any other Loan Document as and when due; or (b) Borrower shall fail to pay at maturity, or within any applicable period of grace, any principal of or interest on any other borrowed money obligation or shall fail to observe or perform any term, covenant or agreement contained in any agreement or obligation by which it is bound; or (c) Any representation or warranty made in connection with any Loan Document shall prove to have been incorrect, false or misleading; or (d) Default shall occur in the punctual and complete performance of any covenant contained in any Loan Document; or (e) Final judgment for the payment of money shall be rendered against Borrower and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed; or (f) Any order shall be entered in any proceeding against Borrower decreeing the dissolution, liquidation or split-up thereof, and such order shall remain in effect for 30 days; or (g) Borrower shall make a general assignment for the benefit of creditors or shall petition or apply to any tribunal for the appointment of a trustee, custodian, receiver or liquidator of all or any substantial part of its business, estate or assets or shall Page 3 of 5 Pages ERC INDUSTRIES, INC. Letter Agreement June 4, 1997 ("Effective Date") commence any proceeding under any bankruptcy, insolvency, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect; or any such petition or application shall be filed or any such proceeding shall be commenced against Borrower and Borrower, by act or omission shall indicate approval thereof, consent thereto or acquiescence therein, or an order shall be entered appointing a trustee, custodian, receiver or liquidator of all or any substantial part of the assets of Borrower or granting relief to Borrower or approving the petition in any such proceeding, and such order shall remain in effect for more than 30 days; or Borrower shall fail generally to pay its debts as they become due or suffer any writ of attachment or execution or any similar process to be issued or levied against it or any substantial part of its property which is not released, stayed, bonded or vacated within 30 days after its issue or levy; or (h) Borrower shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or (i) Any change shall occur in the ownership of Borrower, such that John Wood Group P.L.C. shall not remain directly or indirectly, the majority owner of Borrower. SECTION 6 - MISCELLANEOUS --------- ------------- Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the part of Bank in exercising any power or right in connection herewith or under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other power or right. No course of dealing between Borrower and Bank shall operate as a waiver of any provision of this Agreement or any other Loan Document nor any consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by the person against whom enforcement thereof is to be sought, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 6.2 EXPENSES: Any provision to the contrary notwithstanding, and whether or not the transactions contemplated by this Agreement shall be consummated, Borrower agrees to pay on demand all reasonable out-of-pocket expenses (including, without limitation, the fees and expenses of counsel for Bank) in connection with the negotiation, preparation, execution, filing, recording, modification, supplementing and waiver of the Loan Documents and the making, servicing and collection of any of the indebtedness evidenced by the Note and any Application. The obligations of Borrower under this and the following section shall survive the termination of this Agreement. Section 6.3 USURY: It is the intent of Borrower and of Bank in the execution and performance of this Agreement and any other Loan Document to contract in strict compliance with the usury laws of the State of Texas and as applicable, the United States of America. Borrower and Bank agree that none of the terms and provisions contained in this Agreement or any other Loan Document shall ever be construed to create a contract to pay for the use, forbearance or detention of money with interest at a rate in excess of the maximum nonusurious rate of interest permitted to be charged by applicable Federal or Texas law (whichever shall permit the higher lawful rate) from time to time in effect ("Highest Lawful Rate"). At all times, if any, that Chapter One of the Texas Credit Code shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" as defined in that Chapter. The provisions of this paragraph shall control over all other provisions of this Agreement and all other Loan Documents which may be in apparent conflict herewith. In the event Bank shall collect moneys which are deemed to constitute interest in excess of the legal rate, such moneys shall be immediately returned to the payor thereof (or, at the option of Bank, credited against the unpaid principal of the Note) upon such determination. Section 6.4 SURVIVAL: All representations, warranties, covenants and agreements made by or on behalf of Borrower in connection with the Loan Documents shall survive the execution and delivery of the Loan Documents; shall not be affected by any investigation made by Bank, and shall bind Borrower and successors, trustees, receivers and assigns of Borrower and inure to the benefit of the successors and assigns of Bank; provided that the undertaking of Bank hereunder to consider making Advances to and for issuances of L/Cs upon the application of Borrower shall not inure to the benefit of any successor or assign of Borrower. Except as otherwise provided herein, the term of this Agreement shall be until the final maturity of the Note and the full and final payment of all amounts due under the Note and any Application and the Loan Documents. Section 6.5 DOCUMENTARY MATTERS: This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. The headings and captions appearing in the Loan Documents have been included solely for convenience and shall not be considered in construing the Loan Documents. The Loan Documents embody the entire agreement between Borrower and Bank and supersede all prior proposals, agreements and understandings. If any provision of any Loan Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. Section 6.6 PRIOR CREDIT AGREEMENT: This Letter Agreement supersedes that certain Agreement dated June 30, 1996 executed by Bank and Borrower in connection with the $5,000,000.00 Revolving Line of Credit available to the Borrower to but not including June 30, 1997. Section 6.7 GOVERNING LAW: THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE THE LAWS OF THE UNITED STATES OF AMERICA. Page 4 of 5 Pages ERC INDUSTRIES, INC. Letter Agreement June 4, 1997 ("Effective Date") Section 6.8 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Sincerely Yours, TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: ________________________________ Name: ______________________________ Title: _____________________________ Acknowledged and agreed to this _____ day of June, 1997, but effective as of the Effective Date, by: "BORROWER" ERC INDUSTRIES, INC. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ EXHIBITS: A Promissory Note B Borrowing Base Report C-1 Application for Commercial Letters of Credit C-2 Application for Standby Letters of Credit D Financial Covenants And Compliance Certificate Page 5 of 5 Pages EXHIBIT A PROMISSORY NOTE (this "Note") U.S. $10,000,000.00 June 4, 1997 ("Date") FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"), promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("Bank") on or before May 25, 1998, (the "Termination Date"), at its banking house at 712 Main Street, Houston, Harris County, Texas, or at such other location as Bank may designate, in lawful money of the United States of America, the lesser of: (i) the principal sum of TEN MILLION AND NO/100THS UNITED STATES DOLLARS (U.S. $10,000,000.00); or (ii) the aggregate unpaid principal amount of all loans made by Bank (each such loan being a "Loan"), which may be outstanding on the Termination Date. Each Loan shall be due and payable on the maturity date agreed to by Bank and Borrower with respect to such Loan (the "Maturity Date"). In no event shall any Maturity Date fall on a date after the Termination Date. Subject to the terms and conditions of this Note and the Letter Agreement, Borrower may borrow, repay and reborrow all or any part of the credit provided for herein at any time before the Termination Date, there being no limitation on the number of Loans made so long as the total unpaid principal amount at any time outstanding does not exceed the Maximum Loan Total. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Letter Agreement. "Adjusted LIBOR Rate" means a per annum interest rate determined by Bank by dividing: (i) the LIBOR Rate by (ii) Statutory Reserves provided that Statutory Reserves is greater than zero, otherwise Adjusted LIBOR Rate means a per annum interest rate equal to the LIBOR Rate. "LIBOR Rate" means with respect to any LIBOR Loan for any Interest Period the interest rate determined by Bank by reference to the British Bankers' Association Interest Settlement Rates (as set forth by any service selected by Bank which has been nominated by the British Bankers' Association as an authorized information vender for the purpose of displaying such rates including but not limited to Bloomberg, Reuters or Telerate) to be the rate at approximately 11:00 a.m. London time, two Business Days prior to the commencement of such Interest Period for dollar deposits in an amount comparable to such LIBOR Loan with a maturity comparable to such Interest Period. "Board" means the Board of Governors of the Federal Reserve System of the United States. "Borrowing Date" means any Business Day on which Bank shall make or continue a Loan hereunder. "Business Day" means a day: (i) on which Bank and commercial banks in New York City are generally open for business; and (ii) with respect to LIBOR Loans, on which dealings in United States Dollar deposits are carried out in the London interbank market. "Highest Lawful Rate" means the maximum nonusurious rate of interest from time to time permitted by applicable law. If Texas law determines the Highest Lawful Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas Credit Code or any successor statute. Bank may from time to time, as to current and future balances, elect and implement any other ceiling under such Code and/or revise the index, formula or provisions of law used to compute the rate on this open-end account by notice to Borrower, if and to the extent permitted by, and in the manner provided in such Code. "Interest Period" means the period commencing on the Borrowing Date and ending on the Maturity Date, consistent with the following provisions. The duration of each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of up to the Termination Date unless any portion thereof is converted to a LIBOR Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two, three or six months; in each case as selected by Borrower and agreed to by Bank. Borrower's choice of Interest Period is subject to the following limitations: (i) No Interest Period shall end on a date after the Termination Date; and (ii) If the last day of an Interest Period would be a day other than a Business Day, the Interest Period shall end on the next succeeding Business Day (unless the Interest Period relates to a LIBOR Loan and the next succeeding Business Day is in a different calendar month than the day on which the Interest Period would otherwise end, in which case the Interest Period shall end on the next preceding Business Day). "Letter Agreement" means the Letter Agreement of even date herewith executed by the Borrower and the Bank, as amended from time to time. "LIBOR Loan" means a Loan which bears interest at a rate determined by reference to the Adjusted LIBOR Rate. "Loan Documents" means this Note, the Letter Agreement and any document or instrument evidencing, securing, guaranteeing or given in connection with this Note. "Maximum Loan Total" means (a) the lesser of (i) $10,000,000.00 or (ii) the Borrowing Base less (b) L/C Obligations. "Obligations" means all principal, interest and other amounts which are or become owing under this Note or any other Loan Document. "Obligor" means Borrower and any guarantor, surety, co-signer, general partner or other person who may now or hereafter be obligated to pay all or any part of the Obligations. "Prime Rate" means the rate determined from time to time by Bank as its prime rate. The Prime Rate shall change automatically from time to time without notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE BANK'S LOWEST RATE. "Prime Rate Loan" means a Loan which bears interest at a rate determined by reference to the Prime Rate. "Statutory Reserves" means the difference (expressed as a decimal) of the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. LIBOR Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay interest on the unpaid principal amount of each Prime Rate Loan at a rate per annum equal to the lesser of: (i) the Prime Rate in effect from time to time minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and payable on the last day of each calendar quarter, on the date of any conversion to a LIBOR Loan and on the Termination Date. Borrower shall pay interest on the unpaid principal amount of each LIBOR Loan for the Interest Period with respect thereto at a rate per annum equal to the lesser of: (i) the Adjusted LIBOR Rate plus one percent (1%) (the "Effective LIBOR Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each LIBOR Loan is due on the last day of each Interest Period applicable thereto, and in the case of an Interest Period in excess of three months, on each day which occurs every three months after the initial date of such Interest Period, and on any prepayment (on the amount prepaid). If at any time the effective rate of interest which would otherwise be payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid principal balance of such Loan during all such times shall be limited to the Highest Lawful Rate, but any subsequent reductions in such interest rate shall not become effective to reduce such interest rate below the Highest Lawful Rate until the total amount of interest accrued on the unpaid principal balance of such Loan equals the total amount of interest which would have accrued if the Effective Prime Rate, or Effective LIBOR Rate, whichever is applicable, had at all times been in effect. Each LIBOR Loan shall be in an amount not less than $150,000.00 and an integral multiple of $50,000.00 in excess thereof. Each Prime Rate Loan shall be in an amount not less than $50,000.00 and an integral multiple of $50,000.00 in excess thereof. Interest with respect to Prime Rate Loans shall be computed on the basis of the actual number of days elapsed and a year comprised of: 365 (or 366 as the case may be) days. Interest with respect to LIBOR Loans shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 or 366 day year, as the case may be. EXHIBIT A Page 1 of 4 Pages Signed for Identification By:_____________________ EXHIBIT A PROMISSORY NOTE ERC INDUSTRIES, INC. June 4, 1997 ("Date") The unpaid principal balance of this Note at any time will be the total amounts advanced by Bank, less the amount of all payments or prepayments of principal. Absent manifest error, the records of Bank will be conclusive as to amounts owed. Loans shall be made on Borrower's irrevocable notice to Bank, given not later than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans, the third Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date. Each notice of a requested borrowing (a "Notice of Requested Borrowing") under this paragraph may be oral or written, and shall specify: (i) the requested amount; (ii) proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan. If any Notice of Requested Borrowing shall be oral, Borrower shall deliver to Bank prior to the Borrowing Date a confirmatory written Notice of Requested Borrowing. Borrower may on any Business Day prepay the outstanding principal amount of any Prime Rate Loan, in whole or in part. Partial prepayments shall be in an aggregate principal amount of $50,000.00 or a greater integral multiple of $50,000.00. Borrower shall have no right to prepay any LIBOR Loan. Provided that no Event of Default has occurred and is continuing, Borrower may elect to continue all or any part of any LIBOR Loan beyond the expiration of the then current Interest Period relating thereto by providing Bank at least three Business Day's written or telecopy notice of such election, specifying the Loan or portion thereof to be continued and the Interest Period therefor and whether it is to be a Prime Rate Loan or LIBOR Loan provided that any continuation as a LIBOR Loan shall not be less than $150,000.00 and shall be in an integral multiple of $50,000.00. If an Event of Default shall have occurred and be continuing, the Borrower shall not have the option to elect to continue any such LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans. Provided that no Event of Default has occurred and is continuing, Borrower may elect to convert any Prime Rate Loan at any time or from time to time to a LIBOR Loan by providing Bank at least three Business Day's written or telecopy notice of such election, specifying each Interest Period therefor. Any conversion of Prime Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than $150,000.00 and in integral multiples of $50,000.00. If at any time Bank determines in good faith (which determination shall be conclusive) that any change in any applicable law, rule or regulation or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for Bank or its foreign branch or branches to maintain any LIBOR Loan by means of dollar deposits obtained in the London interbank market (any of the above being described as a "LIBOR Event"), then, at the option of Bank, the aggregate principal amount of all LIBOR Loans outstanding shall be prepaid; however the prepayment may be made at the sole option of the Bank with a Prime Rate Loan. Upon the occurrence of any LIBOR Event, and at any time thereafter so long as such LIBOR Event shall continue, the Bank may exercise its aforesaid option by giving written notice thereof to Borrower. If Bank determines after the date of this Note that any change in applicable laws, rules or regulations regarding capital adequacy, or any change in the interpretation or administration thereof by any appropriate governmental agency, or compliance with any request or directive to Bank regarding capital adequacy (whether or not having the force of law) of any such agency, increases the capital required to be maintained with respect to any Loan and therefore reduces the rate of return on Bank's capital below the level Bank could have achieved but for such change or compliance (taking into consideration Bank's policies with respect to capital adequacy), then Borrower will pay to Bank from time to time, within 15 days of Bank's request, any additional amount required to compensate Bank for such reduction. Bank will request any additional amount by delivering to Borrower a certificate of Bank setting forth the amount necessary to compensate Bank. The certificate will be conclusive and binding, absent manifest error. Bank may make any assumptions, and may use any allocations of costs and expenses and any averaging and attribution methods, which Bank in good faith finds reasonable. If any domestic or foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D of the Board) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) changes, imposes, modifies, applies or deems applicable any reserve, special deposit or similar requirements in respect of any Loan or against assets of, deposits with or for the account of, or credit extended or committed by, Bank; or (b) imposes on Bank or the interbank eurocurrency deposit and transfer market or the market for domestic bank certificates or deposit any other condition affecting any such Loan; and the result of any of the foregoing is to impose a cost to Bank of agreeing to make, funding or maintaining any such Loan or to reduce the amount of any sum receivable by Bank in respect of any such Loan, then Bank may notify Borrower in writing of the happening of such event and Borrower shall upon demand pay to Bank such additional amounts as will compensate Bank for such costs as determined by Bank. Without prejudice to the survival of any other agreement of Borrower under this Note, the obligations of Borrower under this paragraph shall survive the termination of this Note. Borrower will indemnify Bank against, and reimburse Bank on demand for, any loss, cost or expense incurred or sustained by Bank (including without limitation any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain LIBOR Loans) as a result of: (a) any payment or prepayment (whether permitted by Bank or required hereunder or otherwise) of all or a portion of any LIBOR Loan on a day other than the Maturity Date of such Loan; (b) any payment or prepayment, whether required hereunder or otherwise, of any LIBOR Loan made after the delivery of a Notice of Requested Borrowing but before the applicable Borrowing Date if such payment or prepayment prevents the proposed Loan from becoming fully effective; or (c) the failure of any LIBOR Loan to be made by Bank due to any action or inaction of Borrower. Such funding losses and other costs and expenses shall be calculated and billed by Bank and such bill shall, as to the costs incurred, be conclusive absent manifest error. All past-due principal and interest on this Note, will, at Bank's option, bear interest at the Highest Lawful Rate, or if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to the Prime Rate plus five percent (5%). In addition to all principal and accrued interest on this Note, Borrower agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all owners and holders of this Note in collecting this Note through probate, reorganization, bankruptcy or any other proceeding; and (b) reasonable attorney's fees if and when this Note is placed in the hands of an attorney for collection. Borrower and Bank intend to conform strictly to applicable usury laws. Therefore, the total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Bank contracts for, charges or receives any excess interest, it will be deemed a mistake. Bank will automatically reform the contract or charge to conform to applicable law, and if excess interest has been received, Bank will either refund the excess to Borrower or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. If any payment of interest or principal herein provided for is not paid when due, or if any Event of Default occurs under the terms of the Letter Agreement, then Bank may do any or all of the following: (i) cease making Loans hereunder; (ii) declare the Obligations to be immediately due and payable, without notice of acceleration or of intention to accelerate, presentment and demand or protest or notice of any kind, all of which are hereby expressly waived; (iii) set off, in any order, against the Obligations any debt owing by Bank to any Obligor, including, but not limited to, any deposit account, which right is hereby granted by each Obligor to Bank; and (iv) exercise any and all other rights under the Loan Documents, at law, in equity or otherwise. No waiver of any default is a waiver of any other default. Bank's delay in exercising any right or power under any Loan Document is not a waiver of such right or power. Each Obligor severally waives notice, demand, presentment for payment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, protest, notice of protest, and the filing of suit and diligence in collecting this Note and all other demands and notices, and consents and agrees that its liabilities and obligations will not be released or discharged by any or all of the following, whether with or without EXHIBIT A Page 2 of 4 Pages Signed for Identification By:_____________________ EXHIBIT A PROMISSORY NOTE ERC INDUSTRIES, INC. June 4, 1997 ("Date") notice to it or any other Obligor, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure, if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that acceptance of any partial payment will not constitute a waiver and that waiver of any default will not constitute waiver of any prior or subsequent default. Where appropriate the neuter gender includes the feminine and the masculine and the singular number includes the plural number. Borrower represents and agrees that: all Loans evidenced by this Note are and will be for business, commercial, investment or other similar purpose and not primarily for personal, family, or household use as such terms are used in Chapter One of the Texas Credit Code. Borrower represents and agrees that each of the following statements is true unless the box preceding that statement is checked and initialed by Borrower and Bank: (i) [ ] ___________ ___________ No advances will be used primarily for agricultural purposes as such term is used in the Texas Credit Code. (ii) [ ] _____________ _____________ No advances will be used for the purpose of purchasing or carrying any margin stock as that term is defined in Regulation U of the Board. Notwithstanding anything contained herein or in any other Loan Document, if this is a consumer credit obligation (as defined or described in 12 C.F.R. 227, Regulation AA, promulgated by the Board), the security for this credit obligation will not extend to any non- possessory security interest in household goods (as defined in Regulation AA) other than a purchase money security interest, and no waiver of any notice contained herein or therein will extend to any waiver of notice prohibited by Regulation AA. Chapter 15 of the Texas Credit Code shall not apply to this Note or to any Loan evidenced by this Note. This Note is issued by the Maker to evidence Loans outstanding from time to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a $10,000,000.00 revolving line of credit (the "Revolving Line of Credit") extended by the Bank to the Maker pursuant to the Letter Agreement. It is given in renewal, increase and modification of that certain promissory note dated June 30, 1996 executed by Maker and payable to the order of the Bank on or before June 30, 1997 in the principal amount of $5,000,000.00. This Note is governed by Texas law. If any provision of this Note is illegal or unenforceable, that illegality or unenforceability will not affect the remaining provisions of this Note. BORROWER AND BANK AGREE THAT THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER OR BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. BANK MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER PROPER JURISDICTIONS OR VENUES. For purposes of this Note, any assignee or subsequent holder of this Note will be considered the "Bank," and each successor to Borrower will be considered the "Borrower." Each Borrower and cosigner represents that if it is not a natural person, it is duly organized and validly existing and in good standing under the laws of the state of its incorporation or organization; has full power to own its properties and to carry on its business as now conducted; is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification desirable; and has not commenced any dissolution proceedings. Each Borrower and cosigner that is subject to the Texas Revised Partnership Act ("TRPA") agrees that Bank is not required to comply with Section 3.05(d) of the TRPA and agrees that Bank may proceed directly against one or more partners or their property without first seeking satisfaction from partnership property. Each Borrower and cosigner represents that if it conducts business under an assumed business or professional name it has properly filed Assumed Name Certificate(s) in the office(s) required by Chapter 36 of the Texas Business and Commerce Code. Each of the persons signing below as Borrower or cosigner represents that he/she has full requisite power and authority to execute and deliver this Note to Bank on behalf of the party for whom he/she signs and to bind such party to the terms and conditions of this Note and that this Note is enforceable against such party. NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. EXHIBIT A Page 3 of 4 Pages Signed for Identification By:____________________ EXHIBIT A PROMISSORY NOTE ERC INDUSTIES, INC. June 4, 1997 ("Date") THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Borrower has executed this Note effective the day, month and year first aforesaid. BORROWER: ERC INDUSTRIES, INC. By:_______________________________________________ Name:_____________________________________________ Title:____________________________________________ (Bank's signature is provided as its acknowledgment of the above as the final written agreement between the parties and as its agreement with each Borrower subject to TRPA that Bank is not required to comply with Section 3.05(d) of TRPA.) TEXAS COMMERCE BANK NATIONAL ASSOCIATION By:___________________________________________ Name:_________________________________________ Title:________________________________________ EXHIBIT A Page 4 of 4 Pages Signed for Identification By:____________________ EXHIBIT B BORROWING BASE REPORT ACCOUNTS AND INVENTORY Borrowing Base Report for Period Beginning: ____________________ AND ENDING ____________________ ("CURRENT PERIOD") REQUIRED BY THE CREDIT AGREEMENT DATED THE EFFECTIVE DATE (AS AMENDED, RESTATED, AND SUPPLEMENTED FROM TIME TO TIME, THE "AGREEMENT") BY AND BETWEEN ERC INDUSTRIES, INC. AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION _____________________________________________________________________________ THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 30 DAYS OF THE LAST DAY OF EACH CALENDAR MONTH BORROWER MUST PROVIDE ALONG WITH THE BORROWING BASE REPORT: AN ACCOUNTS RECEIVABLE AGINGS AND LISTING. ______________________________________________________________________________
Line 1. Total Accounts as of the end of the Current Period $_________________ INELIGIBLE ACCOUNTS AS OF THE END OF THE CURRENT PERIOD: 2. That portion (e.g., invoice) of all of the Accounts of any Account Debtor where the Account is more than 90 days from invoice date $__________________ 3. All of the Accounts, not already included in Line 2, of any Account Debtor if 20% of the dollar amount of all of the Accounts of such Account Debtor are more than 90 days from invoice date $__________________ 4. That portion of all of the Accounts of any Account Debtor which exceeds 10% of the dollar amount of the total of all Accounts for all Account Debtors for the Current Period (Line 1) $__________________ 5. Intercompany and Affiliate Accounts $__________________ 6. Government Accounts [GOVERNMENT ACCOUNTS MEANS receivables owed by the U.S. government or by the GOVERNMENT OF ANY STATE, COUNTY, MUNICIPALITY, OR OTHER POLITICAL SUBDIVISION AS TO WHICH BANK'S SECURITY INTEREST OR ABILITY TO OBTAIN DIRECT PAYMENT OF THE PROCEEDS IS GOVERNED BY ANY FEDERAL OR STATE 7. Foreign Accounts (unless secured by a letter of credit issued by a bank satisfactory to the Bank, covered by Eximbank insurance or otherwise approved by Bank) $__________________ 8. Accounts subject to any dispute or setoff or contra account $__________________ 9. Other Ineligible Accounts $___________________ 10. Total Ineligible Accounts for the Current Period $___________________ (Add Lines 2 through 9) 11. Total Eligible Accounts for the Current Period $____________________ (Line 1 - Line 10) 12. Multiplied by: Accounts Advance Factor 80% 13. Equals: ACCOUNTS COMPONENT OF BORROWING BASE $____________________ 14. Total Inventory as of the end of the Current Period $____________________ INELIGIBLE INVENTORY AS OF THE END OF THE CURRENT PERIOD: 15. Work in Process $____________________ 16. Private label $____________________ 17. Obsolete $____________________ 18. Returned/damaged $____________________ 19. Consigned/unowned $____________________ 20. Subject to Purchase Money Security Interest $____________________ 21. Slow moving $____________________ 22. Other Ineligible Inventory $____________________ 23. Total Ineligible Inventory as of the end of the Current Period (Lines 15 + 16 + 17 + 18 + 19 + 20 + 21 + 22) $____________________ 24. Total Eligible Inventory as of the end of the Current Period (Line 14 - Line 23) $____________________ 25. Multiplied by: Inventory Advance Factor 50% 26. Equals: INVENTORY COMPONENT OF BORROWING BASE $____________________ (Not to exceed 50% of the Borrowing Base) 27. Total BORROWING BASE (not to exceed $10,000,000.00) as of the end of the Current Period (Line 13 + Line 26) $____________________ 28. Less: Aggregate principal amount outstanding under the Note as of the end of the Current Period $____________________ 29. Less: Outstanding L/C Obligations as of the end of the Current Period $____________________ 30. Total Outstandings (Line 28 + Line 29) $____________________ 31. Equals: Amount available for borrowing subject to the terms of the Agreement, if positive; or amount due, if negative $____________________
The terms "Accounts" and "Inventory" have the respective meanings as set forth in the Texas Business and Commerce Code in effect as of the date of the Agreement. Inventory shall be valued at the lesser of: (a) market value; and (b) cost. "Other Ineligible Accounts" mean all such Accounts of Borrower that are not subject to a first and prior Lien in favor of Bank, those Accounts that are subject to any Lien not in favor of Bank and those Accounts of Borrower as shall be deemed from time to time to be, in the sole judgment of Bank, ineligible for purposes of determining the Borrowing Base. "Other Ineligible Inventory" means that Inventory of Borrower that is not subject to a first and prior Lien in favor of Bank, that Inventory that is subject to any Lien not in favor of Bank and that Inventory of Borrower as shall be deemed from time to time to be in the sole judgment of Bank, ineligible for purposes of determining the Borrowing Base. All other terms not defined herein shall have the respective meanings as in the Agreement. Borrower certifies that the above information and computations are true, correct, complete and not misleading as of the date hereof. Borrower: ERC INDUSTRIES, INC. By:_____________________________________________________________________________ Name:___________________________________________________________________________ Title:__________________________________________________________________________ Address:________________________________________________________________________ Date:___________________________________________________________________________ EXHIBIT B Page 1 of 1 EXHIBIT C-1 Application for Commercial Letters of Credit [Insert application here marked as Exhibit C-1] EXHIBIT C-1 EXHIBIT C-2 Application for Standby Letters of Credit [Insert application here marked as Exhibit C-2] EXHIBIT C-2 EXHIBIT D to Agreement between ERC INDUSTRIES, INC. ("Borrower") and Texas Commerce Bank National Association ("Bank") dated the Effective Date as same may be amended, restated and supplemented in writing. REPORTING REQUIREMENTS, FINANCIAL COVENANTS AND COMPLIANCE CERTIFICATE FOR CURRENT REPORTING PERIOD ENDING ________, 199__ ("END DATE") A. REPORTING PERIOD. THIS EXHIBIT WILL BE IN PROPER FORM AND SUBMITTED WITHIN 30 DAYS OF THE END OF EACH CALENDAR QUARTER INCLUDING THE LAST REPORTING PERIOD OF THE FISCAL YEAR AND WITH THE FISCAL YEAR END FINANCIAL STATEMENT. BORROWER'S FISCAL YEAR ENDS ON , 19 . B. Reporting
================================================================================================================================== Financial Reporting. Borrower will provide the following Compliance financial information within the times indicated: Certificate ================================================================================================================================== WHO WHEN DUE WHAT Compliance --- -------- ---- (Circle) Yes No - ----------------------------------------------------------------------------------------------------------------------------------- BORROWER (i) Within 100 days of fiscal year end Annual financial statements (balance Yes No sheet, income statement, cash flow statement) audited (with unqualified opinion) by independent certified public accountants satisfactory to Bank, accompanied by Compliance Certificate --------------------------------------------------------------------------------------------------- (ii) Within 30 days of each Reporting Period Unaudited interim financial statements Yes No End Date, including final period of accompanied by Compliance Certificate fiscal year --------------------------------------------------------------------------------------------------- (iii) Within 30 days of each month end Borrowing Base Report (Exhibit B) Yes No ===================================================================================================================================
C.
==================================================================================================================================== FINANCIAL COVENANTS. Borrower will comply with the COMPLIANCE CERTIFICATE following financial covenants, defined in accordance with GAAP and the definitions in Section 8, and incorporating the calculation adjustments indicated on the Compliance Certificate: - ------------------------------------------------------------------------------------------------------------------------------------ REQUIRED ACTUAL REPORTED Compliance -------- --------------- (Circle) Except as specified otherwise, each covenant will be For Current Reporting Period/as Yes No maintained at all times and reported for each of the End Date Reporting Period or as of each Reporting Period End Date, as appropriate: - ----------------------------------------------------------------------------------------------------------------------------------- 1. Maintain a Tangible Net Worth as adjusted of at least Stockholders' Equity $ _____ Yes No $15,500,000.00. Minus: Goodwill $ _____ Other Intangible Assets $ _____ Loans/Advances to Equity holders $ _____ Loans to Affiliates $ _____ Plus: Subordinated Debt $ _____ = Tangible Net Worth as adjusted $ _____ - ------------------------------------------------------------------------------------------------------------------------------------ 2. Maintain a Current Ratio of at least 1.25 to 1.0. $_________/$_________= $___________ Yes No Current Assets Current Liabilities Current Ratio - ------------------------------------------------------------------------------------------------------------------------------------ 3. Maintain a ratio of total Indebtedness as adjusted to Liabilities (GAAP) $ _____ Yes No Tangible Net Worth as adjusted no greater than Plus: Contingent obligations $ _____ 2.00 to 1.0. Liens on Borrower's Property not included in Borrower's liabilities $ _____ Minus: Subordinated Debt $ _____ Equals:Indebtedness as adjusted $ _____ Stockholders' Equity $ _____ Minus: Goodwill $ _____ Other Intangible Assets $ _____ Loans/Advances to Equity holders $ _____ Loans to Affiliates $ _____ Plus: Subordinated Debt $ _____ = Tangible Net Worth as adjusted $ _____ $____________/$____________ = _______ Indebtedness (adjusted) TNW (adjusted) =============================================================================================================================
EXHIBIT D Page 1 of 2 Pages
================================================================================================================================ D. Other Required Covenants to be maintained and to be certified. COMPLIANCE CERTIFICATE ================================================================================================================================ REQUIRED ACTUAL REPORTED Compliance - -------------------------------------------------------------------- ---------------------------- (Circle) (i) Borrower shall not declare or pay any dividend Yes No ================================================================================================================================
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND THE AGREEMENT, THE AGREEMENT SHALL CONTROL. The undersigned hereby certifies that the above information and computations are true and correct and not misleading as of the date hereof, and that since the date of the Borrower's most recent Compliance Certificate (if any): [ ] No default or Event of Default has occurred under the Agreement during the current Reporting Period, or been discovered from a prior period, and not reported. [ ] A default or Event of Default (as described below) has occurred during the current Reporting Period or has been discovered from a prior period and is being reported for the first time and: [ ] was cured on ___________________________________. [ ] was waived by Bank in writing on ______________________________. [ ] is continuing. Description of Event of Default: _________________________________________ __________________________________________________________________________ __________________________________________________________________________ Executed this _________ day of _________________________, 19________________. BORROWER: ERC INDUSTRIES, INC. SIGNATURE:______________________________________________________________________ NAME:___________________________________________________________________________ TITLE: (Chief Financial Officer or President) _________________________________________________________________________ ADDRESS: 16920 Park Row, Houston, TX 77084 EXHIBIT D Page 2 of 2 Pages PROMISSORY NOTE (this "Note") U.S. $10,000,000.00 June 4, 1997 ("Date") FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"), promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("Bank") on or before May 25, 1998, (the "Termination Date"), at its banking house at 712 Main Street, Houston, Harris County, Texas, or at such other location as Bank may designate, in lawful money of the United States of America, the lesser of: (i) the principal sum of TEN MILLION AND NO/100THS UNITED STATES DOLLARS (U.S. $10,000,000.00); or (ii) the aggregate unpaid principal amount of all loans made by Bank (each such loan being a "Loan"), which may be outstanding on the Termination Date. Each Loan shall be due and payable on the maturity date agreed to by Bank and Borrower with respect to such Loan (the "Maturity Date"). In no event shall any Maturity Date fall on a date after the Termination Date. Subject to the terms and conditions of this Note and the Letter Agreement, Borrower may borrow, repay and reborrow all or any part of the credit provided for herein at any time before the Termination Date, there being no limitation on the number of Loans made so long as the total unpaid principal amount at any time outstanding does not exceed the Maximum Loan Total. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Letter Agreement. "Adjusted LIBOR Rate" means a per annum interest rate determined by Bank by dividing: (i) the LIBOR Rate by (ii) Statutory Reserves provided that Statutory Reserves is greater than zero, otherwise Adjusted LIBOR Rate means a per annum interest rate equal to the LIBOR Rate. "LIBOR Rate" means with respect to any LIBOR Loan for any Interest Period the interest rate determined by Bank by reference to the British Bankers' Association Interest Settlement Rates (as set forth by any service selected by Bank which has been nominated by the British Bankers' Association as an authorized information vender for the purpose of displaying such rates including but not limited to Bloomberg, Reuters or Telerate) to be the rate at approximately 11:00 a.m. London time, two Business Days prior to the commencement of such Interest Period for dollar deposits in an amount comparable to such LIBOR Loan with a maturity comparable to such Interest Period. "Board" means the Board of Governors of the Federal Reserve System of the United States. "Borrowing Date" means any Business Day on which Bank shall make or continue a Loan hereunder. "Business Day" means a day: (i) on which Bank and commercial banks in New York City are generally open for business; and (ii) with respect to LIBOR Loans, on which dealings in United States Dollar deposits are carried out in the London interbank market. "Highest Lawful Rate" means the maximum nonusurious rate of interest from time to time permitted by applicable law. If Texas law determines the Highest Lawful Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas Credit Code or any successor statute. Bank may from time to time, as to current and future balances, elect and implement any other ceiling under such Code and/or revise the index, formula or provisions of law used to compute the rate on this open-end account by notice to Borrower, if and to the extent permitted by, and in the manner provided in such Code. "Interest Period" means the period commencing on the Borrowing Date and ending on the Maturity Date, consistent with the following provisions. The duration of each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of up to the Termination Date unless any portion thereof is converted to a LIBOR Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two, three or six months; in each case as selected by Borrower and agreed to by Bank. Borrower's choice of Interest Period is subject to the following limitations: (i) No Interest Period shall end on a date after the Termination Date; and (ii) If the last day of an Interest Period would be a day other than a Business Day, the Interest Period shall end on the next succeeding Business Day (unless the Interest Period relates to a LIBOR Loan and the next succeeding Business Day is in a different calendar month than the day on which the Interest Period would otherwise end, in which case the Interest Period shall end on the next preceding Business Day). "Letter Agreement" means the Letter Agreement of even date herewith executed by the Borrower and the Bank, as amended from time to time. "LIBOR Loan" means a Loan which bears interest at a rate determined by reference to the Adjusted LIBOR Rate. "Loan Documents" means this Note, the Letter Agreement and any document or instrument evidencing, securing, guaranteeing or given in connection with this Note. "Maximum Loan Total" means (a) the lesser of (i) $10,000,000.00 or (ii) the Borrowing Base less (b) L/C Obligations. "Obligations" means all principal, interest and other amounts which are or become owing under this Note or any other Loan Document. "Obligor" means Borrower and any guarantor, surety, co-signer, general partner or other person who may now or hereafter be obligated to pay all or any part of the Obligations. "Prime Rate" means the rate determined from time to time by Bank as its prime rate. The Prime Rate shall change automatically from time to time without notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE BANK'S LOWEST RATE. "Prime Rate Loan" means a Loan which bears interest at a rate determined by reference to the Prime Rate. "Statutory Reserves" means the difference (expressed as a decimal) of the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. LIBOR Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay interest on the unpaid principal amount of each Prime Rate Loan at a rate per annum equal to the lesser of: (i) the Prime Rate in effect from time to time minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and payable on the last day of each calendar quarter, on the date of any conversion to a LIBOR Loan and on the Termination Date. Borrower shall pay interest on the unpaid principal amount of each LIBOR Loan for the Interest Period with respect thereto at a rate per annum equal to the lesser of: (i) the Adjusted LIBOR Rate plus one percent (1%) (the "Effective LIBOR Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each LIBOR Loan is due on the last day of each Interest Period applicable thereto, and in the case of an Interest Period in excess of three months, on each day which occurs every three months after the initial date of such Interest Period, and on any prepayment (on the amount prepaid). If at any time the effective rate of interest which would otherwise be payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid principal balance of such Loan during all such times shall be limited to the Highest Lawful Rate, but any subsequent reductions in such interest rate shall not become effective to reduce such interest rate below the Highest Lawful Rate until the total amount of interest accrued on the unpaid principal balance of such Loan equals the total amount of interest which would have accrued if the Effective Prime Rate, or Effective LIBOR Rate, whichever is applicable, had at all times been in effect. Each LIBOR Loan shall be in an amount not less than $150,000.00 and an integral multiple of $50,000.00 in excess thereof. Each Prime Rate Loan shall be in an amount not less than $50,000.00 and an integral multiple of $50,000.00 in excess thereof. Interest with respect to Prime Rate Loans shall be computed on the basis of the actual number of days elapsed and a year comprised of: 365 (or 366 as the case may be) days. Interest with respect to LIBOR Loans shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 or 366 day year, as the case may be. The unpaid principal balance of this Note at any time will be the total amounts advanced by Bank, less the amount of all payments or prepayments of principal. Absent manifest error, the records of Bank will be conclusive as to amounts owed. Loans shall be made on Borrower's irrevocable notice to Bank, given not later than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans, the third Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date. Each notice of a requested borrowing (a "Notice of Requested Borrowing") under this paragraph may be oral or written, and shall specify: (i) the requested amount; (ii) proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan. If any Notice of Requested Borrowing shall be oral, Borrower shall deliver to Bank prior to the Borrowing Date a confirmatory written Notice of Requested Borrowing. Page 1 of 4 Signed for Identification By:______________________ PROMISSORY NOTE ERC INDUSTRIES, INC. June 4, 1997 ("Date") Borrower may on any Business Day prepay the outstanding principal amount of any Prime Rate Loan, in whole or in part. Partial prepayments shall be in an aggregate principal amount of $50,000.00 or a greater integral multiple of $50,000.00. Borrower shall have no right to prepay any LIBOR Loan. Provided that no Event of Default has occurred and is continuing, Borrower may elect to continue all or any part of any LIBOR Loan beyond the expiration of the then current Interest Period relating thereto by providing Bank at least three Business Day's written or telecopy notice of such election, specifying the Loan or portion thereof to be continued and the Interest Period therefor and whether it is to be a Prime Rate Loan or LIBOR Loan provided that any continuation as a LIBOR Loan shall not be less than $150,000.00 and shall be in an integral multiple of $50,000.00. If an Event of Default shall have occurred and be continuing, the Borrower shall not have the option to elect to continue any such LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans. Provided that no Event of Default has occurred and is continuing, Borrower may elect to convert any Prime Rate Loan at any time or from time to time to a LIBOR Loan by providing Bank at least three Business Day's written or telecopy notice of such election, specifying each Interest Period therefor. Any conversion of Prime Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than $150,000.00 and in integral multiples of $50,000.00. If at any time Bank determines in good faith (which determination shall be conclusive) that any change in any applicable law, rule or regulation or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for Bank or its foreign branch or branches to maintain any LIBOR Loan by means of dollar deposits obtained in the London interbank market (any of the above being described as a "LIBOR Event"), then, at the option of Bank, the aggregate principal amount of all LIBOR Loans outstanding shall be prepaid; however the prepayment may be made at the sole option of the Bank with a Prime Rate Loan. Upon the occurrence of any LIBOR Event, and at any time thereafter so long as such LIBOR Event shall continue, the Bank may exercise its aforesaid option by giving written notice thereof to Borrower. If Bank determines after the date of this Note that any change in applicable laws, rules or regulations regarding capital adequacy, or any change in the interpretation or administration thereof by any appropriate governmental agency, or compliance with any request or directive to Bank regarding capital adequacy (whether or not having the force of law) of any such agency, increases the capital required to be maintained with respect to any Loan and therefore reduces the rate of return on Bank's capital below the level Bank could have achieved but for such change or compliance (taking into consideration Bank's policies with respect to capital adequacy), then Borrower will pay to Bank from time to time, within 15 days of Bank's request, any additional amount required to compensate Bank for such reduction. Bank will request any additional amount by delivering to Borrower a certificate of Bank setting forth the amount necessary to compensate Bank. The certificate will be conclusive and binding, absent manifest error. Bank may make any assumptions, and may use any allocations of costs and expenses and any averaging and attribution methods, which Bank in good faith finds reasonable. If any domestic or foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D of the Board) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) changes, imposes, modifies, applies or deems applicable any reserve, special deposit or similar requirements in respect of any Loan or against assets of, deposits with or for the account of, or credit extended or committed by, Bank; or (b) imposes on Bank or the interbank eurocurrency deposit and transfer market or the market for domestic bank certificates or deposit any other condition affecting any such Loan; and the result of any of the foregoing is to impose a cost to Bank of agreeing to make, funding or maintaining any such Loan or to reduce the amount of any sum receivable by Bank in respect of any such Loan, then Bank may notify Borrower in writing of the happening of such event and Borrower shall upon demand pay to Bank such additional amounts as will compensate Bank for such costs as determined by Bank. Without prejudice to the survival of any other agreement of Borrower under this Note, the obligations of Borrower under this paragraph shall survive the termination of this Note. Borrower will indemnify Bank against, and reimburse Bank on demand for, any loss, cost or expense incurred or sustained by Bank (including without limitation any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain LIBOR Loans) as a result of: (a) any payment or prepayment (whether permitted by Bank or required hereunder or otherwise) of all or a portion of any LIBOR Loan on a day other than the Maturity Date of such Loan; (b) any payment or prepayment, whether required hereunder or otherwise, of any LIBOR Loan made after the delivery of a Notice of Requested Borrowing but before the applicable Borrowing Date if such payment or prepayment prevents the proposed Loan from becoming fully effective; or (c) the failure of any LIBOR Loan to be made by Bank due to any action or inaction of Borrower. Such funding losses and other costs and expenses shall be calculated and billed by Bank and such bill shall, as to the costs incurred, be conclusive absent manifest error. All past-due principal and interest on this Note, will, at Bank's option, bear interest at the Highest Lawful Rate, or if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to the Prime Rate plus five percent (5%). In addition to all principal and accrued interest on this Note, Borrower agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all owners and holders of this Note in collecting this Note through probate, reorganization, bankruptcy or any other proceeding; and (b) reasonable attorney's fees if and when this Note is placed in the hands of an attorney for collection. Borrower and Bank intend to conform strictly to applicable usury laws. Therefore, the total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Bank contracts for, charges or receives any excess interest, it will be deemed a mistake. Bank will automatically reform the contract or charge to conform to applicable law, and if excess interest has been received, Bank will either refund the excess to Borrower or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. If any payment of interest or principal herein provided for is not paid when due, or if any Event of Default occurs under the terms of the Letter Agreement, then Bank may do any or all of the following: (i) cease making Loans hereunder; (ii) declare the Obligations to be immediately due and payable, without notice of acceleration or of intention to accelerate, presentment and demand or protest or notice of any kind, all of which are hereby expressly waived; (iii) set off, in any order, against the Obligations any debt owing by Bank to any Obligor, including, but not limited to, any deposit account, which right is hereby granted by each Obligor to Bank; and (iv) exercise any and all other rights under the Loan Documents, at law, in equity or otherwise. No waiver of any default is a waiver of any other default. Bank's delay in exercising any right or power under any Loan Document is not a waiver of such right or power. Each Obligor severally waives notice, demand, presentment for payment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, protest, notice of protest, and the filing of suit and diligence in collecting this Note and all other demands and notices, and consents and agrees that its liabilities and obligations will not be released or discharged by any or all of the following, whether with or without notice to it or any other Obligor, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure, if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that acceptance of any partial payment will not constitute a waiver and that waiver of any default will not constitute waiver of any prior or subsequent default. Where appropriate the neuter gender includes the feminine and the masculine and the singular number includes the plural number. Borrower represents and agrees that: all Loans evidenced by this Note are and will be for business, commercial, investment or other similar purpose and not primarily for personal, family, or household use as such terms are used in Chapter One of the Texas Credit Code. Borrower represents and agrees that each of the following statements is true unless the box preceding that statement is checked and initialed by Borrower and Bank: (i) [ ] ___________ ___________ No advances will be used primarily for agricultural purposes as such term is used in the Texas Credit Code. (ii) [ ] _____________ _____________ No advances will be used for the purpose of purchasing or carrying any margin stock as that term is defined in Regulation U of the Board. Notwithstanding anything Page 2 of 4 Signed for Identification By:______________________ PROMISSORY NOTE ERC INDUSTRIES, INC. June 4, 1997 ("Date") contained herein or in any other Loan Document, if this is a consumer credit obligation (as defined or described in 12 C.F.R. 227, Regulation AA, promulgated by the Board), the security for this credit obligation will not extend to any non-possessory security interest in household goods (as defined in Regulation AA) other than a purchase money security interest, and no waiver of any notice contained herein or therein will extend to any waiver of notice prohibited by Regulation AA. Chapter 15 of the Texas Credit Code shall not apply to this Note or to any Loan evidenced by this Note. This Note is issued by the Maker to evidence Loans outstanding from time to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a $10,000,000.00 revolving line of credit (the "Revolving Line of Credit") extended by the Bank to the Maker pursuant to the Letter Agreement. It is given in renewal, increase and modification of that certain promissory note dated June 30, 1996 executed by Maker and payable to the order of the Bank on or before June 30, 1997 in the principal amount of $5,000,000.00. This Note is governed by Texas law. If any provision of this Note is illegal or unenforceable, that illegality or unenforceability will not affect the remaining provisions of this Note. BORROWER AND BANK AGREE THAT THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER OR BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. BANK MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER PROPER JURISDICTIONS OR VENUES. For purposes of this Note, any assignee or subsequent holder of this Note will be considered the "Bank," and each successor to Borrower will be considered the "Borrower." Each Borrower and cosigner represents that if it is not a natural person, it is duly organized and validly existing and in good standing under the laws of the state of its incorporation or organization; has full power to own its properties and to carry on its business as now conducted; is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification desirable; and has not commenced any dissolution proceedings. Each Borrower and cosigner that is subject to the Texas Revised Partnership Act ("TRPA") agrees that Bank is not required to comply with Section 3.05(d) of the TRPA and agrees that Bank may proceed directly against one or more partners or their property without first seeking satisfaction from partnership property. Each Borrower and cosigner represents that if it conducts business under an assumed business or professional name it has properly filed Assumed Name Certificate(s) in the office(s) required by Chapter 36 of the Texas Business and Commerce Code. Each of the persons signing below as Borrower or cosigner represents that he/she has full requisite power and authority to execute and deliver this Note to Bank on behalf of the party for whom he/she signs and to bind such party to the terms and conditions of this Note and that this Note is enforceable against such party. NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. Page 3 of 4 Signed for Identification By:______________________ PROMISSORY NOTE ERC INDUSTRIES, INC. June 4, 1997 ("Date") THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Borrower has executed this Note effective the day, month and year first aforesaid. BORROWER: ERC INDUSTRIES, INC. By:______________________________________________ Name:____________________________________________ Title:___________________________________________ (Bank's signature is provided as its acknowledgment of the above as the final written agreement between the parties and as its agreement with each Borrower subject to TRPA that Bank is not required to comply with Section 3.05(d) of TRPA.) TEXAS COMMERCE BANK NATIONAL ASSOCIATION By:__________________________________________ Name:________________________________________ Title:_______________________________________ Page 4 of 4 Signed for Identification By:______________________ EX-27 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 0 0 19,370 681 25,081 46,519 22,388 14,645 60,383 24,504 0 0 0 275 31,627 60,383 80,845 80,845 61,780 15,548 0 0 989 2,618 1,394 1,224 0 0 0 1,224 .05 .05
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