<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
Commission File No. 0-14439
-------
ERC INDUSTRIES, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0382879
-------- ----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2906 Holmes Road, Houston, Texas 77051
-------------------------------- -------
(Address of principal executive offices) (Zip Code)
(713) 733-9301
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1995
----- ---------------------------
Common stock, $0.01 par value 13,863,656 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
FINANCIAL INFORMATION:
Condensed Balance Sheets -
March 31, 1995 (Unaudited) and December 31, 1994.................... 2
Condensed Statements of Income
(Unaudited) - Three Months Ended March 31, 1995 and March 31, 1994.. 3
Condensed Statements of Cash Flows
(Unaudited) - Three Months Ended March 31, 1995 and March 31, 1994.. 4
Notes to Condensed Financial Statements................................ 5
Management's Discussion and Analysis................................... 7
PART II
OTHER INFORMATION........................................................ 9
Signature Page......................................................... 10
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 312
Trade accounts receivable, net of
allowance for doubtful accounts of $551
and $512, respectively 5,608 5,664
Inventory 7,687 6,936
Prepaid expenses and other current
assets 217 57
Deferred tax asset 441 434
------- -------
Total current assets 13,953 13,403
Property, plant and equipment, net 3,108 3,102
Other assets 522 701
Excess cost over net assets acquired, net 1,859 1,913
------- -------
$19,442 $19,119
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt due within one year $ 481 $ 533
Line of credit 2 175 -
Accounts payable 2,620 3,607
Other accrued liabilities 1,349 1,326
------- -------
Total current liabilities 6,625 5,466
------- -------
Long-term debt 2,019 2,841
Deferred taxes 129 129
------- -------
2,148 2,970
------- -------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, par value $1;
authorized and unissued -
10,000,000 shares - -
Common stock, par value $.01;
authorized - 30,000,000
shares; issued and outstanding -
13,863,656 shares 139 139
Additional paid-in capital 5,232 5,232
Retained earnings from January 10, 1989 5,298 5,312
------- -------
Total shareholders' equity 10,669 10,683
------- -------
$19,442 $19,119
======= =======
</TABLE>
See notes to financial statements.
2
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended:
March 31,
-----------------------
1995 1994
--------- ----------
<S> <C> <C>
Revenues $ 7,920 $ 7,467
Cost of goods sold 6,016 5,646
------- -------
Gross profit 1,904 1,821
Selling, general and administrative
expenses 1,855 1,797
------- -------
Operating income 49 24
------- -------
Other (income) expense:
Interest expense 90 48
Other, net (20) (36)
------- -------
70 12
------- -------
(Loss) income before (benefit)
provision for income taxes (21) 12
(Benefit) provision for income taxes (7) 11
------- -------
Net (loss) income $ (14) $ 1
======= =======
Net income per share $ none $ none
======= =======
Weighted average number of shares
outstanding 13,864 13,864
======= =======
</TABLE>
See notes to financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended:
March 31,
-------------------------
1995 1994
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $ (14) $ 1
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation and amortization 265 231
Bad debt expense 40 38
Deferred tax benefit (7) (377)
(Gain) on sale of property, plant and equipment (4) -
Non-cash charge for income taxes - 377
(Decrease) increase in other assets 156 (1)
Net effect of changes in operating accounts (1,859) (1,932)
------- -------
Net cash used in operating activities (1,423) (1,663)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (182) (428)
Proceeds from sale of property, plant and equipment 10 -
------- -------
Net cash used in investing activities (172) (428)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 1,425 1,400
Principal payments on long-term debt and capital
lease obligations (142) (104)
Payments pursuant to reorganization plan:
Payments made on plan obligations - (23)
------- -------
Net cash provided by financing activities 1,283 1,273
------- -------
Net decrease in cash and cash equivalents (312) (818)
Cash and cash equivalents, beginning of period 312 1,336
------- -------
Cash and cash equivalents, end of period $ 0 $ 518
======= =======
</TABLE>
See notes to financial statements.
4
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to March 31, 1995 and the
three months ended March 31, 1995 and 1994, has not been audited but was
prepared in conformity with the accounting principles and policies
described in the Company's annual report (Form 10-K) for the year ended
December 31, 1994. Included are all adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial
information for the three months ended March 31, 1995 and 1994. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
(2) The FASB No. 109, "Accounting for Income Taxes" requires recording deferred
tax liabilities or assets for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
March 31,
1995
----------
(thousands)
<S> <C>
Deferred tax liabilities:
Tax over book depreciation............. $ 129
-------
Total deferred tax liabilities......... 129
-------
Deferred tax assets:
Net operating loss..................... 7,925
Tax over book inventory basis.......... 1,129
Other.................................. 209
Valuation allowance.................... (8,822)
-------
Total deferred tax assets.............. 441
-------
Net deferred tax asset........... $ 312
=======
</TABLE>
At March 31, 1995, the Company had net operating loss carryforwards ("NOL
Carryforwards") available to offset future taxable income in the
approximate amount of $23,309,000. These amounts expire between the years
2001 and 2003. Special limitations exist under the law which may restrict
utilization of the regular tax and alternative minimum tax NOL
Carryforwards.
5
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Three
Months Ended
------------------
1995 1994
------ ------
(thousands)
<S> <C> <C>
Current -
(due to alternative minimum tax) $ - $ 11
Non-cash charge in lieu
of income taxes - 377
Deferred benefit (7) (377)
----- -----
Credit, provision for income taxes $ (7) $ 11
===== =====
</TABLE>
The non-cash charges in lieu of income taxes represent the amount of income
taxes the Company would pay absent the NOL Carryforwards which was generated
before the Company affected a quasi-reorganization. Such charges are offset
within shareholders' equity by an increase in additional paid-in capital.
(3) The following is a summary of the net effect of the changes in operating
accounts on cash flows from operating activities for the three months
ended March 31, 1995 and March 31, 1994 (thousands):
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1994
-------- -------
<S> <C> <C>
Decrease (increase) in trade $ 16 $ (556)
accounts receivable
(Increase) in inventories (751) (1,583)
(Increase) decrease in prepaid (160) 63
expenses and other current assets
(Decrease) in accounts payable (987) (112)
Increase in other accrued 23 256
liabilities ------- -------
Net effect of changes in operating
accounts $(1,859) $(1,932)
======= =======
</TABLE>
The Company made the following cash payments: (i) interest of $71,000 and
$30,000 for the three months ended March 31, 1995 and 1994, respectively,
and (ii) income taxes of $1,750 and $5,000 for the three months ended March
31, 1995 and 1994, respectively.
6
<PAGE>
ERC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, decreased by 6.9% to 705 for the
three months ended March 31, 1995, compared with 757 for the three months ended
March 31, 1994. The average active rig count is a clear indicator of the market
in which the Company operates.
The Company's revenues however, increased by $453,000 for the three months ended
March 31, 1995 to $7,920,000 from $7,467,000 for the three months ended March
31, 1994, a 6.1% increase contrasted with the 6.9% rig count decrease. The
increase in revenues is principally the result of (i) certain large customers
increasing their levels of activity and (ii) an increase in the Company's
customer base. Historically, market activity generally improves during the
last three quarters of the fiscal year.
The gross margin for the three months ended March 31, 1995 increased by $83,000
to $1,904,000, from $1,821,000 for the three months ended March 31, 1994. The
gross profit percentage was 24.0% for the three months ended March 31, 1995
compared with 24.4% for the three months ended March 31, 1994.
Selling, general and administrative expenses increased by $58,000 to $1,855,000
for the three months ended March 31, 1995 from $1,797,000 for the three months
ended March 31, 1994. The primary reason for the increase was due to costs
associated with international marketing efforts and additional sales personnel.
The Company generated operating income of $49,000 for the three months ended
March 31, 1995 compared with operating income of $24,000 for the three months
ended March 31, 1994. The increase in operating profit was due to an increase
in sales offset by an increase in selling, general and administrative expenses.
Other expense, net increased by $58,000. This was principally due to an
increase in interest expense as a result of higher inventory levels since March
of 1994, which required an increase in the company's line of credit borrowing.
The provision for income taxes for the three months ended March 31, 1995 and
1994 resulted in a benefit of $7,000 and a charge of $11,000, respectively.
The current provision for income taxes of $11,000 for the three months ended
March 31, 1994 represents a provision for alternative minimum taxes.
7
<PAGE>
Liquidity and Capital Resources
Working capital decreased by $609,000 to $7,328,000 at March 31, 1995 compared
with $7,937,000 at December 31, 1994. The decrease in working capital was due
to the reclassification of the line of credit facility from a long term
obligation to a short term obligation maturing on February 26, 1996. This was
the result of a February 27, 1995 amendment of the Company's line of credit
agreement. The amendment also resulted in the bank lowering its lending rate
by one-half of one percent (.50%) from the bank's prime rate. The bank reduced
one of its restrictive covenants which requires the Company to maintain total
liabilities to a net worth ratio of 1 to 1, (previously it was .85 to 1).
The line of credit balance at March 31, 1995 was $2,175,000 compared with
$750,000 at December 31, 1994. The increase in the line of credit was due to
increased inventory levels of approximately $751,000, a decrease in the trade
payables balance of $987,000 and capital expenditures of $182,000. Long term
debt as a percentage of shareholder's equity decreased to 23.4% as of March 31,
1995 compared with 31.6% as of December 31, 1994. This was due to the
reclassification of the Company's line of credit from long-term to short-term.
Pursuant to the Company's long-term debt agreements, approximately $481,000 in
principal payments are due over the next twelve months. In addition, the
Company's line of credit facility expires February 26, 1996. The Company
anticipates extending its line of credit facility prior to its expiration. The
Company believes cash generated from operations, along with its line of credit
facility will be adequate to fund its operations for at least the next twelve
months.
As of March 31, 1995, the Company had $150,000 in letter of credit obligations
outstanding under the credit agreement and $2,175,000 in line of credit
borrowings, leaving a balance of $675,000 maximum amount available for
borrowings. The Company believes that it is currently in compliance with all
covenants under the credit agreement.
The Company currently anticipates incurring capital expenditures of
approximately $491,000 through 1995, principally for manufacturing equipment,
plant improvements and vehicle purchases. The Company expects to fund these
expenditures from cash provided by operations, additional capital lease
obligations and from the Company's line of credit facility.
8
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various claims and disputes in the normal
course of its business. Management of the Company believes the
disposition of all such claims, individually or in the aggregate, will
not have a material adverse effect on the Company's financial condition
or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein: Long term incentive
plan ("Stock Appreciation Rights Plan"), dated November 8, 1994 for
the Company's key employees.
(b) Reports on Form 8-K: None.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1995 ERC INDUSTRIES, INC.
-----------------------------
/s/
-----------------------------
Richard H. Rau
President, Secretary & Director
/s/
-----------------------------
Carl R. Caldwell
Controller & Chief Accounting
Officer
10
<PAGE>
EXHIBITS
11
<PAGE>
EXHIBIT 1
ERC INDUSTRIES, INC.
STOCK APPRECIATION RIGHTS PLAN
SECTION 1. PURPOSE. The purpose of the ERC Industries, Inc. Stock
Appreciation Rights Plan (the "PLAN") is to provide a means whereby ERC
Industries, Inc., a Delaware corporation (the "COMPANY"), may grant stock
appreciation rights ("SARS") with respect to the Company's $0.01 par value per
share common stock ("SHARES") to key employees of the Company and its
subsidiaries who contribute significantly to the success of the Company and its
subsidiaries ("KEY EMPLOYEES"), in order that the Key Employees will be
encouraged to exert their best efforts on behalf of the Company and its
subsidiaries and remain in their employ. Key Employees will be selected from
among employees of the Company and of a parent or subsidiary corporation of the
Company (as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "CODE")).
SECTION 2. NUMBER OF SARS AVAILABLE UNDER PLAN. SARs may be awarded from
time to time to Key Employees equivalent to an aggregate maximum of 1,386,366
Shares, subject to adjustment in the number of Shares as provided in Section
4(e), awarded to all Key Employees.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company (the "BOARD"). Notwithstanding any other provision
hereof, no member of the Board shall participate in any manner in the Board's
determination to grant to such member SARs hereunder, nor in the determination
of the terms and conditions thereof.
The Board shall make such rules and regulations for its operation as it
deems appropriate. A majority of the Board shall constitute a quorum and the
act of a majority of the members of the Board present at a meeting at which a
quorum is present shall be the act of the Board. The Board shall (i) determine
and designate from time to time the Key Employees to whom SARs will be granted
(collectively referred to herein as the "HOLDERS" and individually as a
"HOLDER") and the number of SARs to be granted to such Key Employees, (ii)
interpret the Plan, (iii) prescribe, amend, and rescind any rules and
regulations necessary or appropriate for the administration of the Plan, and
(iv) make such other determinations and take such other action as it deems
necessary or advisable. Without limiting the generality of the foregoing
sentence, the Board may, in its sole discretion (but in a uniform and consistent
manner), treat all or any portion of any period during which a Holder is on
military leave or on an approved leave of absence from the Company as a period
of employment of such Holder by the Company for the purpose of determining his
or her SARs Period under Section 4(a). Any interpretation, determination, or
other action made or taken by the Board shall be final, binding, and conclusive
on all interested parties.
SECTION 4. TERMS AND CONDITIONS. SARs granted under the Plan shall be
evidenced by a "STOCK APPRECIATION RIGHTS AGREEMENT" in the form attached hereto
as EXHIBIT A, with such changes therein as the Board may approve from time to
time, which
1
<PAGE>
shall be subject to the following express terms and conditions, and subject to
such other terms and conditions which, in the reasonable judgment of the Board,
are not inconsistent with the following, and which the Board, in its sole
discretion, deems otherwise appropriate.
(a) SARS PERIOD. Each Stock Appreciation Rights Agreement shall
specify the period during which the SARs granted pursuant to such agreement
may be exercised and converted into cash. Any SARs which are unexercised
shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(i) the date on which the Holder shall resign, be discharged, or
otherwise terminate his or her employment with the Employer except by
reason of retirement, death or disability;
(ii) the expiration of 12 months after the Holder's employment with
the Employer is terminated by reason of the Holder's retirement, death
or disability (for all purposes hereunder "retirement" shall be the
normal retirement age pursuant to the Company's 401(k) Plan if the
Company has such a Plan, or if the Company does not have such a Plan,
then age 65, and "disability" shall have the meaning provided in
Section 105(d)(4) of the Code and the determination of which shall be
made by the Board in its sole discretion, but in a uniform and
consistent manner); or
(iii) at such earlier time or upon the occurrence of such earlier
event as the Board, in its sole discretion, may provide in the Stock
Appreciation Rights Agreement in question.
(b) SARS EXERCISE PRICE. The SARs exercise price for each Share
subject to an SARs that is granted to the Holder shall be determined by the
Board.
(c) EXERCISE OF SARS. Subject to the provisions of paragraph (a) of
this Section 4, SARs granted under the Plan may be exercised and converted
into cash at such times and in such amounts as set forth in the applicable
Stock Appreciation Rights Agreement (but in no event earlier than 3 years
after the grant of an SARs or later than 7 years after the grant of an
SARs), and in accordance with the terms and conditions and subject to such
restrictions as are set forth in the applicable Stock Appreciation Rights
Agreement. If the Holder of an SARs elects to exercise his or her SARs,
the Holder must irrevocably elect in writing to exercise the SARs between
February 1 and March 31 of the year in which the Holder desires to exercise
the SARs (the "WINDOW PERIOD"). Such irrevocable election must be
delivered to and received by the Board during such Window Period. Unless
the Board otherwise provides, the maximum amount of SARs which may be
exercised with respect to any grant (a "GRANT" being the total SARs granted
pursuant to a Stock Appreciation Rights Agreement and not including SARs
granted pursuant to other agreements with such Key Employee) during any
year following such grant is as follows:
2
<PAGE>
<TABLE>
<CAPTION>
=================================================================
End of Year Following The Maximum Percentage Vested and
Year of Grant Exercisable
- - -----------------------------------------------------------------
<S> <C>
3 20%
- - -----------------------------------------------------------------
4 40%
- - -----------------------------------------------------------------
5 60%
- - -----------------------------------------------------------------
6 80%
- - -----------------------------------------------------------------
7 Balance of the Grant (including SARs
which were not exercised in a prior
year in which they were exercisable)
=================================================================
</TABLE>
(d) NONTRANSFERABILITY. No SARs granted under this Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the Key Employee, SARs shall be exercised only by
the Key Employee.
(e) CAPITAL ADJUSTMENTS. If at any time while (i) the Plan is in
effect or (ii) SARs which are unexercised are outstanding there shall be
any increase or decrease in the number of issued and outstanding Shares
through the declaration of a stock dividend or through any recapitalization
resulting in a stock split-up, combination, or exchange of Shares, then and
in such event:
(1) An appropriate adjustment shall be made in the maximum number of
SARs then subject to being awarded under the Plan, to the end
that the same proportion of the Company's issued and outstanding
Shares shall continue to be subject to being so awarded; and
(2) Appropriate adjustments shall be made in the number of SARs and
the SARs Price thereof then subject to each of such SARs
previously granted and unexercised, to the end that the same
proportion of SARs in each such instance shall remain subject to
exercise at the same aggregate exercise price.
Except as otherwise expressly provided herein, the issuance by the
Company of Shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with a direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of Shares or obligations of the Company
convertible into such Shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of
or SARs price of SARs then outstanding or granted under the Plan.
(f) RECAPITALIZATION, MERGER AND CONSOLIDATION. The existence of
this Plan and SARs granted hereunder shall not affect in any way the right
or power of the
3
<PAGE>
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's
capital structure or its business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference
stocks ranking prior to or otherwise affecting the Shares or the rights
thereof (or any rights, options or warrants to purchase same), or the
dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
(g) NO RIGHTS AS A STOCKHOLDER. A Holder shall not have any rights
as a stockholder with respect to the SARs.
(h) NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any SARs
granted under the Plan shall confer upon any Holder any right with respect
to continuance of employment by the Employer.
SECTION 5. EXERCISE OF SARS; PAYMENT OF APPRECIATED VALUE.
(a) EXERCISE. SARs may be exercised only upon receipt by the Company
of a written notice of such exercise during a Window Period that shall
state the percentage of the then exercisable portion of the Holder's SARs
to be exercised. For the purposes of the Plan, such date of exercise shall
be deemed to be the date when such notice is sent by registered or
certified mail, or when receipt is acknowledged by the Company if mailed by
other than registered or certified mail or if delivered by hand or by any
telegraphic communications equipment of the sender or otherwise delivered
(the "EXERCISE DATE"). If a notice of exercise is received by the Company
during a period other than a Window Period, the Exercise Date will be the
first day of the next succeeding Window Period.
(b) AMOUNT PAYABLE. Upon exercise by a Holder in accordance with the
terms of this Plan and his or her Stock Appreciation Rights Agreement, the
Holder shall be entitled to receive an amount of cash equal to the excess
of (A) the aggregate Current Value (hereinafter defined) of the Shares
covered by the portion of the SARs so exercised over (B) the aggregate SARs
Price for such Shares so exercised. The Company shall pay to a Holder,
within 30 days after the Exercise Date, the cash amount payable to the
Holder. The cash shall be paid by the Company to a Holder subject to such
conditions as are deemed advisable by the Board to permit compliance by the
Company with the federal and state withholding provisions applicable to
employers, including withholding under the Code.
(c) CURRENT VALUE. The Current Value of a Share shall be determined
as of the end of the Company's fiscal year preceding the Exercise Date (the
"VALUATION DATE"). Current Value of a Share shall mean the average net
consolidated pre-tax earnings of the Company for the two (2) years ending
prior to the Window Period in which the Holder gives notice of his or her
election to exercise SARs pursuant to the
4
<PAGE>
Plan and the applicable Stock Appreciation Rights Agreement, multiplied by
a factor of five (5) and this result shall be the Current Value of the
entire Company as of the Valuation Date and such Current Value shall be
divided by the sum of (x) the number of issued and outstanding Shares on
the Valuation Date, plus (y) the number of SARs which are issued and
outstanding on the Valuation Date. For purposes of determining the
Company's net consolidated pre-tax earnings, the earnings will be
determined after (1) subtracting all exceptional costs including (i) bonus
payments, (ii) contributions to qualified employee benefit plans, such as
the Company's 401(k) plans, pension plans or other retirement plans or
trusts, and (iii) management fees, and (2) setting aside any portion of the
earnings which are restricted or which are subject to a preference in favor
of any preferred stock or other senior securities issued by the Company.
SECTION 6. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Board may
obtain such agreements or undertakings, if any, as the Board may deem necessary
or advisable to assure compliance with any law or regulation of any governmental
authority or any national securities exchange or other forum in which Shares are
traded. The Plan, any grant of SARs, and the exercise of SARs hereunder shall
be subject to all applicable federal and state laws, rules and regulations and
to such approvals by any government or regulatory agency as may be required.
SECTION 7. AMENDMENT AND DISCONTINUANCE. The Board may from time to time
amend, suspend or discontinue the Plan, or amend any Stock Appreciation Rights
Agreement issued hereunder. Provided further, that (except to the extent
provided in Section 4(e)) without the written consent of a Holder, no amendment
or suspension of the Plan or any Stock Appreciation Rights Agreement issued
hereunder shall substantially impair any Stock Appreciation Rights Agreement
previously granted to any Holder.
SECTION 8. TAX REQUIREMENTS. The employee receiving cash upon exercise of
any SARs shall have withheld any taxes which the Company is required to withhold
with respect to such exercise. The payment of taxes with respect to the
exercise of any SARs will be the obligation of the employee or other person
exercising the SARs.
SECTION 9. INDEMNIFICATION OF BOARD. No member of the Board, and no
officer or employee of the Company acting on behalf of the Board, shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board and each
and any officer or employee of the Company acting on their behalf shall, to the
maximum extent permitted by applicable law, be fully indemnified and protected
by the Company in respect of any such action, determination or interpretation.
SECTION 10. EFFECTIVE DATE AND TERMINATION DATE. The effective date of
the Plan shall be the date on which it is approved and adopted by the Board; and
the Plan shall end ("TERMINATION DATE") on the tenth anniversary of the
effective date.
5
<PAGE>
SECTION 11. NAME. The Plan shall be known as the "ERC INDUSTRIES, INC.
STOCK APPRECIATION RIGHTS PLAN."
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
as of the 8th day of November, 1994, by its President pursuant to prior action
taken by its Board of Directors.
ERC INDUSTRIES, INC.
By: /s/ Richard H. Rau
------------------------------
Richard H. Rau, President
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,159
<ALLOWANCES> 551
<INVENTORY> 7,687
<CURRENT-ASSETS> 13,953
<PP&E> 11,591
<DEPRECIATION> 8,483
<TOTAL-ASSETS> 19,442
<CURRENT-LIABILITIES> 6,625
<BONDS> 0
<COMMON> 139
0
0
<OTHER-SE> 10,530
<TOTAL-LIABILITY-AND-EQUITY> 19,442
<SALES> 7,920
<TOTAL-REVENUES> 7,920
<CGS> 6,016
<TOTAL-COSTS> 1,815
<OTHER-EXPENSES> (20)
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> (21)
<INCOME-TAX> (7)
<INCOME-CONTINUING> (14)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14)
<EPS-PRIMARY> (.001)
<EPS-DILUTED> (.001)
</TABLE>
