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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, 1995
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.)
15835 Park Ten Place, Suite 115 Houston, Texas 77084
(Address of principal executive offices)
Registrant's telephone number, including area code (713) 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 25, 1996 was $4,231,089.
The number of shares outstanding of the registrant's common stock, as of March
25, 1996 was 13,863,656.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1995
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.
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ERC INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business........................................... 3
Item 2. Properties......................................... 10
Item 3. Legal Proceedings.................................. 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 11
Item 6. Selected Financial Data............................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 13
Item 8. Financial Statements and Supplementary Data........ 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 16
PART III
Item 10. Directors and Executive Officers of the Registrant. 17
Item 11. Executive Compensation............................. 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 17
Item 13. Certain Relationships and Related Transactions..... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 18
Signatures...................................................... 21
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PART I
ITEM 1. BUSINESS
GENERAL
ERC Industries, Inc., a Delaware corporation (the "Company"), is an oilfield
service company engaged in the manufacture, remanufacture and servicing of
oilfield wellhead equipment.
In October of 1992, the Company's predecessor, ERC Industries, Inc., a Delaware
corporation ("Old ERC") incorporated the Company as a wholly owned subsidiary.
Old ERC merged into this wholly owned subsidiary after the stockholders of Old
ERC approved the transaction at a special meeting held on April 16, 1993.
Effective with the merger, the Company changed its name to ERC Industries, Inc.
For further discussion, see "Merger" below.
On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation
registered in Scotland and incorporated under the laws of the United Kingdom,
completed the purchase of approximately 47% of the issued and outstanding shares
of Common Stock of Old ERC. In March, 1996, Wood Group purchased additional
shares and now owns approximately 58% of the Company. The Company has been
advised that Wood Group is recognized as the United Kingdom's largest indigenous
oil service company, having over 20 years experience in servicing the oil and
gas industries. For further discussion, see "Merger - Background."
On November 16, 1993, the Company entered into an agreement with Barton
Industries, Inc. ("Barton") of Shawnee, Oklahoma, and three secured creditors of
Barton. The agreement provided for the purchase of Barton's valve business and
certain of its assets. The Barton business is now a division of the Company
known as "Barton Wood," the name of the founder of the valve and the name of the
principal stockholder of the Company. For a further discussion, see "Barton
Wood Business Development" and "Barton Wood Operations" below and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Where the context requires, the term "Company" as used herein shall also refer
to Old ERC.
OPERATIONS
The equipment and components offered by the Company are comprised of items
manufactured by the Company in its own facilities, consisting principally of
wellhead equipment and valves, 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, installations and repairs. The Company
also leases certain oilfield equipment to customers.
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ERC'S OPERATIONS
Old ERC's predecessor, Equipment Renewal Company, was founded in 1962 based on
the concept of remanufacturing and reemploying used, out-of-service wellhead
equipment. 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 upon receipt at the Company's service center. If deemed
salvageable, the equipment is cleaned and 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 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 it.
In addition to remanufacturing customer equipment, the Company purchases used
equipment for its own account from various sources which it then remanufactures
for sale.
The Company manufactures a complete line of wellhead equipment. Forgings and
other components and supplies required for manufacturing are available from
numerous sources, and the Company does not presently depend on any single
source.
As of March 1996, the Company's wellhead and related equipment operations are
conducted from 21 domestic locations, four international locations, and three
distributorships. The Company's manufacturing facilities are located in
Shawnee, Oklahoma.
4
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BARTON WOOD OPERATIONS
The Barton Wood Division has expanded its capabilities and is now able to offer
a complete line of gate valves and conventional wellhead equipment. Valves are
available in 1-13/16" to 16" sizes for working pressures from 300 p.s.i. to
15,000 p.s.i. and are produced in eight basic material trims. Barton Wood also
produces "custom trims" to meet individual customer requirements. The division
is licensed by the 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 achieved ISO
9001 registration for its manufacturing facility during 1995. This provides
assurances, required by many customers, that ERC Barton Wood meets International
quality standards.
To manufacture products, Barton Wood purchases major raw material components
from foundries, forging houses, and steel suppliers, then machines 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.
Barton Wood valves are typically used in the oil and gas industry on producing
wellheads, pipelines, processing plants, secondary and tertiary recovery
systems, and in gas storage fields. The Barton Wood valve has also been used to
control many other common gases and liquids.
In addition to the Oil and Gas sectors, Barton Wood is a participant in applying
its products to the growing Geothermal market. The Company's high temperature
valve design enjoys a technical preference for Geothermal Wellhead applications.
The valve is also used in pipelines between steam producing wells and power
plants.
Barton Wood also produces valves for steam injection, carbon dioxide service and
a line of chokes used to control the flow of fluid or gas through an orifice.
The Company's strategy, with regard to the Barton Wood division, is to continue
expanding its presence in the domestic market as well as to advance its presence
in the international market. Barton Wood opened sales offices in Europe, the
Middle East, Latin America, Australia and Southeast Asia during 1995. These
locations are managed by seasoned industry professionals with many years
international experience. This local presence has generated a high degree of
customer interest and a growing backlog. The division intends to focus on
increasing international sales in 1996.
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ENGINEERING RESEARCH AND DEVELOPMENT
The Company is involved in an active R & D program. Barton Wood 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 1995 that enable
additional market participation. Additionally, value engineering projects
focused on a broad range of cost reductions in 1996.
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 at
various times 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 from its branch facilities located in most
major oil and gas producing areas in the United States requiring wellhead
equipment. Each branch facility maintains a substantial inventory of new and
remanufactured wellhead equipment, a complete machine shop, welding and heat
treatment facilities and a staff of trained sales and service personnel. This
gives each branch the capability to provide a full range of products and
services, including new or remanufactured equipment sales, renewals of customer
equipment, a wellhead equipment management program and an installation and
service capability. Sales and service offices are located in areas served by a
branch but which require additional sales and service effort. A sales and
service office operates in conjunction with a branch. Sales offices are located
in metropolitan areas, principally Houston, Dallas, New Orleans, Denver and
Tulsa, where customers are typically headquartered or maintain regional offices.
The Company's marketing program emphasizes new equipment, remanufactured
equipment (with a new equipment warranty) available at a substantial cost
savings and surplus equipment management programs, along with installation and
service capabilities, renewal and repair services and a close proximity to most
customer locations.
The Company also offers a computer-based equipment management system, which
provides the customer with a listing of all of its equipment nationwide. The
system can also be customized to satisfy individual customer requirements.
6
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COMPETITION
Oilfield equipment is sold by many manufacturers, distributors and dealers,
including those offering used equipment. 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. In offering 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, as a result of
shrinking demand, has continued to have a substantial impact on profit margins.
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.
EMPLOYEES
As of February 23, 1996, the Company had 284 employees, as compared to 293
employees as of February 16, 1995. No employees of the Company are represented
by a union.
CUSTOMERS
The Company has no customers that comprised 10% or more of its 1995 and 1994
sales. During the eleven months ended December 31, 1993, Conoco Incorporated
contributed approximately 10% of the Company's total revenues.
7
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MERGER
Background. On October 15, 1992, Quantum Fund N.V. ("Quantum"), then the
Company's largest stockholder, and Warren H. Haber (then a director of the
Company), Lawrence M. Pohly and John L. Teeger (collectively referred to, with
Quantum, as the "Sellers"), along with the Company, entered into a Stock
Purchase Agreement (the "Purchase Agreement") with Wood Group, whereby the
Sellers agreed to sell, and Wood Group agreed to purchase, subject to the terms
and conditions of the Purchase Agreement, an aggregate of 6,538,686 shares of
the Common Stock of the Company ("Common Stock").
On December 10, 1992, Wood Group completed the terms of the Purchase Agreement.
On April 16, 1993, Old ERC merged into the Company after the merger was approved
by Old ERC stockholders and the Company changed its name to "ERC Industries,
Inc." The total of 6,538,686 shares purchased by Wood Group represented
approximately 47% of the outstanding shares of Common Stock. In March 1996,
Wood Group purchased an additional 1,544,518 shares of Common Stock in privately
negotiated transactions. As a result, the Wood Group currently owns 8,083,204
shares representing approximately 58% of the outstanding shares of Common Stock
of New ERC.
Certain Information Concerning Wood Group. Wood Group is engaged in the
businesses of oilfield logistics and supplies, oilfield drilling and production
services, gas turbine overhaul and repair, engineering contracting and design
and engineering services. Wood Group employs approximately 4,200 personnel
worldwide. Wood Group's results of operations for 1995 reflected sales of
approximately 372.4 million pounds sterling and profit on ordinary activities
before taxation of approximately 23.1 million pounds sterling (as determined in
accordance with U.K. statutory accounting principles).
Principal Reasons for the Merger. The Company effected the Merger primarily to
preserve and maximize the Company's ability to offset taxable income with the
Company's net operating losses available for carryforwards ("NOL
Carryforwards"). Under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Regulations issued thereunder, a corporation's
future use of its federal income tax net operating losses available for
carryforwards to future periods may be limited after the occurrence of an
"ownership change." An ownership change is a transaction or series of
transactions resulting in an increase of more than 50 percentage points in the
percentage of ownership interests of stockholders who, before or after such
ownership change, own, directly or indirectly, stock representing 5% or more of
the aggregate fair market value of the outstanding stock of such corporation.
The Certificate of Incorporation of the Company now contains certain stock
transfer restrictions in order to seek to preserve the Company's NOL
Carryforwards. The Certificate of Incorporation of the Company provides that no
person who, as a result of any attempted transfer of Common Stock of the
Company, would own, directly or indirectly, Common Stock having a fair market
value equal to 5% or more of the aggregate fair market value of the outstanding
shares of Common Stock, may acquire shares of Common Stock (or options, warrants
or rights or securities exercisable, convertible or exchangeable therefor),
unless such person obtains the approval of the Board of Directors of the
Company. Each certificate representing shares of Common Stock issued in
connection with the
8
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Merger bears a legend referencing this restriction on transfer. Approval of the
Board of Directors must be obtained by written request addressed to the
Company's Board of Directors at the address of the Company's principal executive
offices. Any attempted transfer without Board approval (or approval of a duly
appointed committee of the Board) would be void and without effect, and the
intended transferee would be deemed to have appointed the Company as exclusive
agent to sell such shares to a transferee eligible to acquire such shares or
otherwise approved by the Board of Directors of the Company (or a committee
thereof). All proceeds from the sale of such shares shall be remitted to such
appointed transferee. This restriction on transfer would terminate upon the
earliest to occur of (I) December 31, 2002, (ii) the date when the existing NOL
Carryforwards expires or (iii) the date when the NOL Carryforwards becomes
subject to the limitations of Section 382 of the Code.
As of December 31, 1995, the Company had approximately $26,444,000 of NOL
Carryforwards which could be used to offset future taxable earnings. The Board
of Directors believes that the protection of the NOL Carryforwards is important
to the Company's results of operations and financial position since it may
permit the retention of cash flows which would otherwise go to the payment of
federal income taxes. The NOL Carryforwards are only useful to the Company to
the extent that the Company has taxable income to offset. $23,800,000 of these
NOL Carryforwards must be used, or will begin to expire in the fiscal year
ending on December 31, 2001, and they will expire in full during the fiscal year
ending December 31, 2003. The balance of the NOL carryforwards will expire
during the fiscal year ending December 31, 2009. The largest portion of the NOL
Carryforwards will expire in the fiscal year ending on December 31, 2002.
ITEM 2. PROPERTIES
Set forth below is certain information as of December 31, 1995, regarding the
Company's headquarters, manufacturing and other facilities, most of which are
located on leased premises.
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Lease
Location Expiration Dates
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Manufacturing -
Shawnee, Oklahoma (Leased)/(1)/ February 28, 1998
4 Branch Offices and Various through
Machine Shops (Leased)/(2)/ December 21, 2000
6 Branch Offices and
Machine Shops (Owned)
6 Sales Offices Various through
(Owned and Leased) January 31, 1997
5 Sales and Service Various through
Offices (Leased)/(2)/ October 31, 1997
</TABLE>
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/(1)/The Shawnee, Oklahoma facility is an 89,000 square foot building plus an
additional five acres contiguous to the property. The real property lease
provides the Company with an option to purchase the real property including the
building at any time during the life of the 51-month lease term for $1,320,000
plus a price escalation of 3.25% per year from the consummation date to the date
of exercise.
/(2)/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 7 of Notes to Financial Statements.
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 as 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 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, 1995.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low reported bid prices for the
Company's Common Stock as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") by fiscal quarter from January 1,
1994 through December 31, 1995. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
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High Low
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FISCAL YEAR ENDED DECEMBER 31, 1994
January 1, 1994 - March 31, 1994..... $1.06 $0.75
April 1, 1994 - June 30, 1994........ $0.94 $0.75
July 1, 1994 - September 30, 1994.... $1.06 $0.94
October 1, 1994 - December 31, 1994.. $1.06 $0.88
FISCAL YEAR ENDED DECEMBER 31, 1995
January 1, 1995 - March 31, 1995..... $0.88 $0.81
April 1, 1995 - June 30, 1995........ $0.88 $0.63
July 1, 1995 - September 30, 1995.... $1.00 $0.63
October 1, 1995 - December 31, 1995.. $1.00 $0.69
</TABLE>
As of March 25, 1996, there were 1,390 holders of record of the Company's Common
Stock, as reported by the Company's transfer agent for its Common Stock. As of
March 25, 1996, the closing price of the Common Stock as reported on NASDAQ was
$0.75 per share.
The present policy of the Board of Directors is to retain earnings to provide
operating funds for the Company. The terms of the Company's line of credit also
restricts the ability of the Company to pay cash dividends. See Note 4 of Notes
to Financial Statements.
The trading symbol under which the Common Stock trades is "ERCI".
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Years ended December 31, Years ended January 31,
-------------------------------------------- -----------------------
Twelve Twelve Eleven
Months Months Months
1995(2) 1994(2) 1993(2) 1993 1992
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Revenues......................................... $34,840 $32,926 $23,167 $19,656 $19,626
(Loss) income before provision for income taxes.. $(1,048) $ 628 $ 1,157 $ 378 $ 1,449
(Benefit) provision for income taxes............. $ (273) $ 264 $ 421 $ 149 $ 512
Net (loss) income................................ $ (775) $ 364 $ 736 $ 299 $ 937
Net (loss) income per common share............... $ (.06) $ .03 $ .05 $ .02 $ .07
Total assets..................................... $20,879 $19,119 $17,375 $12,014 $11,250
Total long-term debt including a portion
classified as a current liability............... $ 4,602 $ 3,325 $ 2,852 $ 472 $ 925
Working capital.................................. $ 6,650 $ 7,937 $ 7,641 $ 6,014 $ 5,555
Shareholders' equity(1).......................... $ 9,913 $10,683 $10,192 $ 8,647 $ 8,302
Capital expenditures............................. $ 567 $ 1,024 $ 768 $ 297 $ 566
Cash dividends per share......................... none none none none none
</TABLE>
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(1) The Company's net operating loss carryforwards substantially reduce the
federal income taxes paid by the Company. The Company reports these
reductions of income taxes paid as an increase to Paid-In-Capital conforming
to the current accounting rules for quasi-reorganized companies.
(2) Includes effects of the Barton Wood acquisiton completed on November 16,
1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On June 15, 1993, the Company changed its fiscal year end from January 31 to
December 31. As a result, the Company is comparing the twelve months ended
December 31, 1995 ("Fiscal 1995") and December 31, 1994 ("Fiscal 1994") with the
eleven months ended December 31, 1993 ("Fiscal December 1993"). A complete
recasting of Fiscal December 1993 was not prepared due to the fact that the
Company believes the eleven month fiscal period ended December 31, 1993 is
sufficiently comparable for assessing the Company's results of operations
compared to Fiscal 1995 and Fiscal 1994. Footnote 11 of the Notes to Financial
Statements contains a comparison of the twelve months ended December 31, 1995
with the twelve months ended December 31, 1994 and 1993.
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated decreased 6.7% to an average of 723 in Fiscal 1995, as compared to
775 for Fiscal 1994. The active domestic rig count as of March 15, 1996 was
693. The average active rig count is a clear indicator of the market in which
the Company operates, based on prior years' experience.
RESULTS OF OPERATIONS
FISCAL 1995 VS. FISCAL 1994 VS. FISCAL DECEMBER 1993
The Company's revenues increased by 5.8% to $34,840,000 for Fiscal 1995 compared
with $32,926,000 for Fiscal 1994, despite a decrease in the rig count. Fiscal
1994's revenues increased by 42.1% to $32,926,000 compared with $23,167,000 for
Fiscal December 1993, with only a marginal improvement in the average rig count.
Fiscal 1995 revenues increased by $1,914,000 over Fiscal 1994 due to a net
increase in customer activity and market share gains. Fiscal 1994 revenues
dramatically increased over Fiscal December 1993 due to market share gains and
increased sales activity related to the valve manufacturing business and related
assets of Barton Wood, which was acquired from Barton Industries' secured
creditors on November 16, 1993, as more fully described in Item 1. This
acquisition added revenues of approximately $4,563,000 in Fiscal 1994, compared
with $730,000 in Fiscal December 1993. All subsequent references to this
purchase shall be referred to as the "Barton Wood" acquisition.
In connection with revenues over the three year period, cost of goods sold were
$27,399,000 in Fiscal 1995, $25,058,000 in Fiscal 1994, and $16,053,000 for
Fiscal December 1993. The gross profit percentage was 21.4% in Fiscal 1995,
compared with 23.9% in Fiscal 1994 and 30.7% in Fiscal December 1993.
Fiscal 1995's gross margin percentage was affected by unfavorable manufacturing
cost variances at the Barton Wood facility and one-time severance expenses. The
Company has implemented certain process improvements to the Barton Wood
manufacturing facility.
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The decrease in margins in Fiscal 1994, compared with Fiscal December 1993 was
due to (I) costs associated with the closing of the manufacturing facility in
Houston during the first two quarters of Fiscal 1994, (ii) additional fixed
costs associated with the new Barton Wood facility, (iii) cost increases in used
equipment purchased for resale, and (iv) a product mix shift toward lower-margin
products. As anticipated, Barton Wood's new equipment sales have been at lower
margins than ERC's previous mix, effectively lowering the Company's overall
gross margin. Additionally, as expected, there has been a shift toward new
equipment in ERC's traditional markets as the availability of used equipment for
repair has tightened.
Selling, General and Administrative expenses ("SG&A") increased by $1,079,000 to
$8,116,000 in Fiscal 1995 compared with $7,037,000 for Fiscal 1994. This
increase is due to costs incurred to open additional domestic sales offices,
increases in international sales personnel, and a one-time relocation and
severance expense. SG&A, as a percentage of sales, was 23.3% in Fiscal 1995 and
21.4% in Fiscal 1994.
SG&A increased to $7,037,000 in Fiscal 1994 compared with $6,063,000 in Fiscal
December 1993. Contributing to the increase was additional sales personnel and
the related expenses to advance new business and support continuing business,
additional SG&A expenses related to the Barton Wood operation and additional bad
debt reserves. SG&A, as a percentage of sales, was 21.4% in Fiscal 1994 and
26.2% in Fiscal December 1993.
Net loss before provision for income tax was $1,048,000 in Fiscal 1995, compared
to net income of $628,000 in Fiscal 1994. The decrease in Fiscal 1995 is
primarily due to the following factors: (i) lower gross margin percentage
resulting from unfavorable manufacturing cost variances at the Barton Wood
facility, (ii) increased SG&A costs incurred to open additional domestic sales
offices, increases in international sales personnel, and a one-time relocation
and severance expenses, and (iii) increased interest expenses due to a higher
borrowing level to support increased inventory levels.
Income before provision for income taxes was $628,000 in Fiscal 1994 down from
$1,157,000 in Fiscal December 1993. The decrease in Fiscal 1994 was primarily
due to three factors: (I) a less favorable product mix sold during the year,
(ii) increased SG&A expenses, primarily due to the addition of Barton Wood for
the full year, and (iii) increased interest expense due to borrowings used to
fund the Barton Wood acquisition and related increased inventory levels.
Fiscal 1995, 1994 and Fiscal December 1993 include (benefit)/provisions for
income taxes of ($273,000), $264,000 and $421,000, respectively. Of these
amounts, $5,000, $127,000 and $809,000, 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, and is included in
the respective balance sheets as increases in additional paid-in capital.
14
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LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to $6,650,000 at December 31, 1995 compared with
$7,937,000 at December 31, 1994. This was primarily due to a $2,331,000
increase in short term bank debt, a $575,000 increase in accounts payables, an
offsetting increase in inventory of $1,663,000, and an increase in accounts
receivable of $1,007,000. The increase in receivables is a reflection of an
increase in business volume over the prior year and a slowing in payment
practices of certain of the Company's customers. The increase in inventory was
a planned effort to increase the faster moving raw material at the Barton Wood
facility and to increase the Company's levels of used equipment inventory. The
increase in inventories also required the Company to further utilize its bank
line of credit facility.
In connection with the Barton Wood acquisition in Fiscal December 1993, the
Company entered into a 10-year $2,500,000 note payable with one of the Barton
secured lenders. At December 31, 1995, the note required 32 remaining quarterly
installments of $62,500, plus interest at the bank's prime rate, payable each
February, May, August and November 16. The note is collateralized by specified
general intangibles and proprietary rights (including certain patents and
trademarks). The agreement contains cross-default provisions to the Company's
bank line of credit agreement.
The Company amended its line of credit in July 1995, effectively increasing its
line of credit by $1,000,000. The loan facility now provides for maximum
borrowings of the lesser of $4,000,000 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 one-half percent. At
December 31, 1995 the bank's prime rate was 8.5%. The Company also amended its
loan facility on December 7, 1995 to change the covenant of maximum debt to
total net worth from a 1 to 1 ratio to 1.2 to 1. The facility is collateralized
by trade accounts receivable and inventory. Additionally, the terms of the
agreement restrict the Company from paying cash dividends. At December 31,
1995, loan amounts outstanding under the agreement were $2,425,000. In
addition, the Company had outstanding, against the revolving line of credit,
irrevocable letters of credit amounting to approximately $175,000. At December
31, 1995, the Company's maximum amount available for additional borrowings was
$1,400,000.
Subsequent to December 31, 1995, the loan facility has been amended to extend
the line of credit through June 30, 1996. Management intends to either continue
obtaining extensions on the current line of credit or negotiate a new long term
credit agreement depending on which is more advantageous for the Company.
Pursuant to the Company's long-term debt agreements, approximately $2,815,000 in
principal payments are due over the next twelve months. The Company believes
its line of credit facility, combined with cash generated from operations, will
be adequate to fund its operations for at least the next twelve months.
15
<PAGE>
The Company currently anticipates incurring capital expenditures of
approximately $642,000, principally for machinery and equipment, plant
improvements and vehicle purchases, through the fiscal year ending December 31,
1996. The Company expects to fund these expenditures from amounts available
under the line of credit facility, cash provided by operations and/or capital
lease transactions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 for Index to Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
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 1995 Annual Meeting of Stockholders, 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.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Independent Accountants................................................. F-1
Financial Statements:
Balance Sheet as of December 31, 1995 and 1994................................. F-2
Statement of Income for the twelve month periods ended December 31, 1995,
and 1994, and the eleven month period ended December 31, 1993................ F-3
Statement of Shareholders' Equity for the twelve month periods ended
December 31, 1995 and 1994, and the eleven month period ended
December 31, 1993............................................................ F-4
Statement of Cash Flows for the twelve month periods ended December 31, 1995,
and 1994, and the eleven month period ended December 31, 1993............... F-5
Notes to Financial Statements.................................................. F-6
Financial Statement Schedules:
Schedule II - Valuation And Qualifying Accounts................................ F-17
</TABLE>
All other 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.
18
<PAGE>
(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)/
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 Employment Agreement between ERC Industries, Inc. and Richard H. Rau,
filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1991, and incorporated herein by
reference.
10.6 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.
10.7 Fifth Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of February 28, 1994, filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
19
<PAGE>
10.8 Sixth Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of February 27, 1995/(2)/.
10.9 Seventh Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of July 3, 1995/(3)/.
10.10 Eighth Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of December 7, 1995/(3)/.
10.11 Ninth Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of February 26, 1996/(3)/.
10.12 Tenth Amendment extending expiration date to June 30, 1996./(3)/
27 Financial Data Schedule
__________________
/(1)/ Filed as Exhibits 3(a), (b) and (c), and 4(a), respectively, of the
Company's Annual Report on Form 10-K for its fiscal year ended January 31,
1993, which are incorporated by reference herein.
/(2)/ Filed as Exhibit 10.8 of the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1994.
/(3)/ Filed herewith.
(B) REPORTS ON FORM 8-K :
During the fourth quarter of the fiscal year ended December 31, 1995, the
Company filed the following Form 8-K's:
None
20
<PAGE>
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 29, 1996 /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 29, 1996 /s/ J. Derek P. Jones
----------------------
J. Derek P. Jones
Chairman and Director
Dated: March 29, 1996 /s/ Wendell R. Brooks
---------------------
Wendell R. Brooks
President and Director
(Principal Executive Officer)
Dated: March 29, 1996 /s/ James E. Klima
--------------------
James E. Klima
Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
<PAGE>
Dated: March 29, 1996 /s/ Allister G. Langlands
-------------------------
Allister G. Langlands
Director
22
<PAGE>
Dated: March 29, 1996 /s/ George W. Tilley
--------------------
George W. Tilley
Director
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
ERC Industries, Inc.
We have audited the accompanying balance sheet of ERC Industries, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity, and cash flows for the two years ended December 31, 1995
and the eleven month period ended December 31, 1993, and the related financial
statement schedule. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of ERC Industries, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the two years ended December 31, 1995 and the eleven month period ended
December 31, 1993, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 1, 1996
F-1
<PAGE>
ERC INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 312
Trade accounts receivable, net of allowance for
doubtful accounts of $492 and $512, respectively 6,671 5,664
Inventory 8,599 6,936
Prepaid expenses and other current assets 60 57
Deferred tax asset 499 434
------- -------
Total current assets 15,829 13,403
Property, plant and equipment, net 2,860 3,102
Other assets 493 701
Excess cost over net assets acquired, net 1,697 1,913
------- -------
$20,879 $19,119
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt and capital leases due within
one year $ 2,815 $ 484
Accounts payable 4,182 3,607
Other accrued liabilities 2,182 1,375
------- -------
Total current liabilities 9,179 5,466
------- -------
Long-term debt 1,787 2,841
Deferred taxes -- 129
------- -------
1,787 2,970
Commitments and contingencies-See note 7 -- --
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 5,237 5,232
Retained earnings from January 10, 1989 4,537 5,312
------- -------
Total shareholders' equity 9,913 10,683
------- -------
$20,879 $19,119
======= =======
</TABLE>
See notes to financial statements.
F-2
<PAGE>
ERC INDUSTRIES, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months
Ended Ended Ended
December 31, December 31, December 31,
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Revenues $34,840 $32,926 $23,167
Cost of goods sold 27,399 25,058 16,053
------- ------- -------
Gross profit 7,441 7,868 7,114
Selling, general and administrative expenses 8,116 7,037 6,063
------- ------- -------
Operating (loss) income (675) 831 1,051
------- ------- -------
Other (income) expense:
Interest expense 439 326 54
Other, net (66) (123) (160)
------- ------- -------
373 203 (106)
------- ------- -------
(Loss) income before provision for income taxes (1,048) 628 1,157
(Benefit) provision for income taxes (273) 264 421
------- ------- -------
Net (loss) income $ (775) $ 364 $ 736
======= ======= =======
Net (loss) income per share $ (.06) $ 0.03 $ 0.05
======= ======= =======
Weighted average number of shares outstanding 13,864 13,864 13,864
======= ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ERC INDUSTRIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
--------------------------- Capital Earnings
Shares Amount ---------- --------
------ ------
<S> <C> <C> <C> <C>
Balance, January 31, 1993 13,864 $139 $4,296 $4,212
Net income (11 months) -- -- -- 736
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards -- -- 809 --
------ ---- ------ ------
Balance, December 31, 1993 13,864 $139 5,105 4,948
Net income -- -- -- 364
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards -- -- 127 --
------ ---- ------ ------
Balance, 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, December 31, 1995 13,864 $139 $5,237 $4,537
====== ==== ====== ======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ERC INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Eleven Months
Ended Ended Ended
December 31, December 31, December 31,
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (775) $ 364 $ 736
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,095 1,014 521
Bad debt expense 175 143 --
Deferred tax (benefit) provision (243) 110 (415)
Gain on sale of property, plant and
equipment (5) (7) (4)
Non-cash charge for income taxes 5 127 809
(Increase) decrease in other assets 166 (458) (62)
Net effect of changes in operating accounts (2,546) (1,827) (636)
------- ------- -------
Net cash (used in) provided by operating
activities (2,128) (534) 949
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (442) (722) (493)
Proceeds from sale of property, plant and
equipment 26 12 15
Business acquisition, net -- -- (929)
------- ------- -------
Net cash used in investing activities (416) (710) (1,407)
------- ------- -------
Cash flows from financing activities:
Line of credit borrowings, net 1,675 750 --
Increase in Book overdrafts 1,080 -- --
Principal payments on long-term debt and capital
lease obligations (523) (506) (194)
Payments pursuant to reorganization plan:
Payments made on plan obligations -- (24) (161)
------- ------- -------
Net cash provided by (used in) financing
activities 2,232 220 (355)
------- ------- -------
Net decrease in cash and cash equivalents (312) (1,024) (813)
Cash and cash equivalents, beginning of period 312 1,336 2,149
------- ------- -------
Cash and cash equivalents, end of period $ 0 $ 312 $ 1,336
======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The financial statements include the accounts of ERC Industries, Inc., an
oilfield services company engaged in the manufacture, remanufacture and
servicing of oilfield valves and wellhead equipment. To a lessor extent, it
also serves the geothermal valve market through its Barton Wood division.
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 intends to expand sales to international oil and
gas producing regions.
As of December 31, 1995, approximately 47% 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 Wood Group acquired an additional
11% of the Company's stock subsequent to December 31, 1995.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments purchased with 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 and semi-finished goods which are
carried at the lower of cost (specific identification or standard cost which
approximates FIFO) or market.
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 to 25 years. 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 income.
F-6
<PAGE>
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, 1995, amounted to approximately
$458,000. Periodically, the Company's management assesses recorded balances
of excess cost over net assets of businesses acquired, for impairment in
light of historic and projected operating results, trends and profitability,
new product development and general economic conditions. Should management
adversely change its estimate as to recoverability of this asset from future
operating cash flow, it would be reasonably possible that the carrying amount
of this asset would change in the near term.
During 1995, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of." SFAS No. 121 addresses the accounting
for the impairment of long-lived assets, such as property, plant and
equipment, identifiable intangibles including patents and trademarks, and
goodwill related to those assets. In accordance with that standard, 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, and 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. Adoption of SFAS No. 121 has had no impact on net income of the
Company in 1995.
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 or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
EARNINGS PER COMMON SHARE
Primary earnings per common share is based on the weighted average number of
shares outstanding during the year.
F-7
<PAGE>
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 the institutions
and believes that any possible credit risk is minimal. The Company generally
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.
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 does not obtain collateral for accounts receivable.
ESTIMATES AND ASSUMPTIONS
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 period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts included in the prior year financial statements have been
reclassified to conform with current year presentation.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following :
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
------- -----------
(thousands)
<S> <C> <C>
Land............................................ $ 497 $ 497
Leased property under capital leases............ 1,328 1,350
Machinery and equipment......................... 5,236 5,022
Buildings, improvements and other............... 4,763 4,538
------- -------
11,824 11,407
Less accumulated depreciation and amortization.. 8,964 8,305
------- -------
Net property, plant and equipment............... $ 2,860 $ 3,102
======= =======
</TABLE>
F-8
<PAGE>
Leased property is primarily composed of automobiles. Accumulated amortization
of capital leases amounted to $982,000 and $862,000 as of December 31, 1995 and
December 31, 1994, respectively. Depreciation expense was $791,000, $705,000
and $487,000 for the fiscal years ended December 31, 1995, 1994, and 1993,
respectively.
3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------ ------
(thousands)
<S> <C> <C>
Ad valorem taxes......................... $ 130 $ 22
Insurance................................ 554 320
Vacation................................. 253 253
Federal and state tax obligations........ 115 75
Professional fees........................ 41 49
Salaries................................. 357 192
Interest................................. 48 27
Other.................................... 684 437
------ ------
$2,182 $1,375
====== ======
</TABLE>
4. DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1995 1994
------ -----------
(thousands)
<S> <C> <C>
Line of credit due to bank............................. $2,425 $ 750
Note payable to a bank due in quarterly installments
of $62,500 plus interest through November 2003...... 2,000 2,250
Obligations under capital leases bearing interest at
various rates, due in various installments through
December 1996....................................... 177 325
------ ------
Total debt............................................. 4,602 3,325
Less current maturities................................ 2,815 484
------ ------
Long-term debt......................................... $1,787 $2,841
====== ======
</TABLE>
The aggregate maturities of long-term debt, including obligations under
capital leases during the five years subsequent to December 31, 1995 are
$2,815,000, $287,400, $250,000, $250,000 and $250,000, respectively.
In connection with the Barton Wood acquisition, the Company entered into a
10-year $2,500,000 note payable with one of the Barton secured lenders. At
December 31, 1995, the
F-9
<PAGE>
note required 32 remaining quarterly installments of $62,500, plus interest
at the bank's prime rate (8.25% at December 31, 1995), payable each February,
May, August and November 16. The note is collateralized by specified general
intangibles and proprietary rights (including certain patents and
trademarks). The note also contains certain covenants, the most restrictive
of which are contained in the Company's line of credit agreement through the
cross-default provisions of this installment note payable.
The Company's present line of credit loan facility, which expires June 30,
1996, provides for maximum borrowings of the lesser of $4,000,000 or eligible
trade accounts receivable and inventory (as defined in the loan facility).
Interest on outstanding balances are payable monthly at the bank's prime rate
minus one-half percent. At December 31, 1995 the bank's prime rate was 8.5%.
The facility is collateralized by trade accounts receivable and inventory.
Additionally, the terms of the facility restrict the Company from paying cash
dividends and require that the Company maintain a ratio of debt to total net
worth of not more than 1.2 to 1. At December 31, 1995, amounts outstanding
under this loan facility were $2,425,000. In addition, the Company had
outstanding, against the revolving line of credit facility, irrevocable
letters of credit amounting to approximately $175,000. At December 31, 1995,
the Company's maximum amount available for additional borrowings was
$1,400,000.
5. 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
liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------ ------
(thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation...... $ 48 $ 129
------- -------
Total deferred tax liabilities.. 48 129
------- -------
Deferred tax assets:
Net operating loss.............. 8,991 7,918
Tax over book inventory basis... 210 1,129
Other........................... 386 209
Valuation allowance............. (8,991) (8,822)
------- -------
Total deferred tax assets....... 596 434
------- -------
Net deferred tax asset...... $ 548 $ 305
======= =======
</TABLE>
The valuation allowance was increased during 1995 by $169,000. At December
31, 1995, the Company had federal net operating loss (NOL) carryforwards
available to offset future taxable income in the approximate amount of
$26,444,000. Of these NOL carryforwards,
F-10
<PAGE>
approximately $23,800,000 expire between the years 2001 and 2003 with the
balance expiring in 2009. Special limitations exist under the law which may
restrict the utilization of the net loss carryforwards, including the
alternative minimum tax.
The Company has recorded a net deferred tax asset of $548,000 reflecting the
benefit of approximately $1,612,000 in temporary differences which will
provide tax deductions on future income tax returns. Realization of these
assets is dependent on generating sufficient taxable income in the future to
offset these tax deductions. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset 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.
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Twelve Twelve Eleven
Months Ended Months Ended Months Ended
December 31, December 31, December 31,
1995 1994 1993
------------- ------------ -------------
(thousands)
<S> <C> <C> <C>
Current - (due to alternative minimum tax) $ (35) $ 7 $ 27
Non-cash charge in lieu of income taxes 5 127 809
Deferred tax (benefit) charge (243) 130 (415)
----- ----- -----
(Benefit) provision for income taxes $(273) $ 264 $ 421
===== ===== =====
</TABLE>
The non-cash charges in lieu of income taxes represents 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.
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, 1995 and 1994, and
for the eleven months ended December 31, 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate (34.0%) 34.0% 34.0%
Meals and Entertainment Expenses
Not Deductible for Income Taxes 4.3% 8.0% 2.4%
Other 3.6%
----- ---- ----
Effective Tax Rate (26.1%) 42.0% 36.4%
</TABLE>
F-11
<PAGE>
6. 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 $173,000 and $155,000 for the
years ended December 31, 1995 and 1994, respectively, and $96,000 in such
fees for the eleven months ended December 31, 1993.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment under noncancelable
operating leases expiring through the year 2000. 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 noncancelable leases for minimum lease commitment
amounts during the five years subsequent to December 31, 1995 as follows:
$321,000, $295,000, $105,000, $30,000, and $30,000 respectively.
Rental expenses for the years ended December 31, 1995 and 1994 and the eleven
months ended December 31, 1993, were $447,000, $405,000, and $186,000,
respectively.
In connection with the Barton Wood acquisition in late 1993, the Company
leased, and has an option to purchase, certain real property and equipment
from the Barton secured lenders ("lessors") at any time during the term of
the leases, which extend through February, 1998. In the event the Company
does not exercise its option, it will be required to pay $150,000 to the
lessors of the real property. This obligation is collateralized by a
commercial bank letter of credit issued for the benefit of the lessor, which
is renewed annually. Similarly, should the Company not exercise its option
to buy the leased equipment, it will be required to pay $125,000 to the
lessor. Subsequent to year end, management decided not to exercise its
option to buy the leased equipment.
Effective January 1, 1994, the Company has authorized a long-term incentive
program for its key employees. The incentive payments will be based on the
improvement in pre-tax earnings per share over a stated amount. The program
has been implemented, but had no impact on operations during 1995 and 1994.
8. 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 $49,000 during 1994 for contributions accrued at
December 31, 1993. The Company paid $27,000 during 1995 for contributions
accrued at December 31, 1994. No contributions will be paid or accrued for
the year ended December 31, 1995.
F-12
<PAGE>
9. SALES TO SIGNIFICANT CUSTOMERS
The Company had no customers which accounted for 10% or more of its sales
during the 1995 and 1994 fiscal years. The Company had one customer who
accounted for approximately 10% of the total revenues for the eleven month
period ended December 31, 1993.
10. SUPPLEMENTAL CASH FLOW DISCLOSURES
The following is a summary of the effect of the changes in the operating
accounts on cash flows from operating activities:
<TABLE>
<CAPTION>
Year Year Eleven Mos.
End. Dec. 31, End. Dec. 31, End. Dec. 31,
1995 1994 1993
------------ ------------- ------------
(thousands)
<S> <C> <C> <C>
(Increase) in trade
accounts receivable,
net of allowance for
doubtful accounts $(1,182) $(1,342) $(927)
(Increase) decrease in
inventory (1,663) (1,779) (626)
(Increase) decrease in
prepaid expenses and
other current assets (3) 353 (32)
(Decrease) increase in
accounts payable (505) 1,285 909
Increase (decrease) in
other accrued liabilities 807 (344) 40
------- ------- -----
$(2,546) $(1,827) $(636)
======= ======= =====
</TABLE>
Cash paid for interest and income taxes were as follows:
<TABLE>
<CAPTION>
Eleven
Year Ended Year Ended Months Ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------
(thousands)
<S> <C> <C> <C>
Interest $ 418 $ 302 $ 50
======= ======= =====
Income taxes $ 9 $ 30 $ 27
======= ======= =====
</TABLE>
The Company entered into capital lease obligations of $125,000, $302,000, and
$235,000, during the periods ended December 31, 1995, 1994, and 1993,
respectively.
Total advances under the bank line of credit agreement were $2,425,000 and
$750,000 in 1995 and 1994, respectively.
Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes and
are classified as "Accounts Payable" in the balance sheet and as "increases
in Bank Overdrafts" in the statement of cash flows.
F-13
<PAGE>
11. CHANGES IN FISCAL YEARS (UNAUDITED)
On June 15, 1993, the Company changed its fiscal year end from January 31 to
December 31.
The following table reflects a comparison of the year ended December 31,
1995, 1994, and 1993.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 1995 December 1994 December 1993
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $34,840 $32,926 $25,059
Operating (loss) income (675) 831 1,153
(Benefit) provision for (273) 264 459
Income taxes
Net (loss) income (775) 364 802
</TABLE>
F-14
<PAGE>
ERC INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THE ELEVEN MONTH PERIOD
ENDED DECEMBER 31, 1993,
(THOUSANDS)
<TABLE>
<CAPTION>
Balance Additions
at charged to Balance
beginning costs and at end
of period expenses Deductions of period
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
- ----------------------------------
December 31, 1993................. $509 $ - $ 76(a) $433
========= ========= ========== =========
December 31, 1994................. $433 $143 $ 64(a) $512
========= ========= ========== =========
December 31, 1995................. $512 $175 $195(a) $492
========= ========= ========== =========
</TABLE>
/(a)/Uncollectible accounts written-off.
F-15
<PAGE>
EXHIBIT 10.9
SEVENTH AMENDMENT TO CREDIT AGREEMENT
(WITH BORROWING BASE)
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of
July 3, 1995, (the "Effective Date") is by and between ERC INDUSTRIES, INC.
("Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking
association whose principal office is located in Houston, Texas (the "Bank").
PRELIMINARY STATEMENT
The Bank and the Borrower have entered into a Credit Agreement (Borrowing
Base), dated as of February 25, 1991 (the "Credit Agreement") and which Credit
Agreement (Borrowing Base) was subsequently amended by that certain First
Amendment to Credit Agreement (Borrowing Base), dated effective as of August 31,
1991 (the "First Amendment") and by that certain Second Amendment to Credit
Agreement (With Borrowing Base), dated effective as of January 3, 1992 (the
"Second Amendment") and by that certain Third Amendment to Credit Agreement
(With Borrowing Base), dated effective as of May 31, 1992 (the "Third
Amendment") and by certain Fourth Amendment to Credit Agreement (With Borrowing
Base), dated effective as of December 30, 1992 (the "Fourth Amendment") by that
certain Fifth Amendment to Credit Agreement (Borrowing Base) dated effective as
of February 28, 1994 and by that certain Sixth Amendment to Credit Agreement
(Borrowing Base) dated effective as of February 27, 1995. The "Credit
Agreement" shall refer to the Credit Agreement as amended by the First
Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment
and Sixth Amendment. All capitalized terms defined in the Credit Agreement and
not otherwise defined herein shall have the same meanings herein as the Credit
Agreement. The Bank and the Borrower have agreed to amend the Credit Agreement
to the extent set forth herein. The "Agreement" shall also refer to the Credit
Agreement as amended by this Amendment.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the Bank and the Borrower hereby agree as follows:
1. The Credit Agreement is hereby amended by adding the following as a new
Section 1.1.C after Section 1.1.B of the Credit Agreement:
"Revolving Credit Note 1.1.C. Subject to the terms and conditions hereof
the Bank agrees to make a loan or loans ("Loan 2" or "Loans 2") to the
Borrower from time to time before April 1, 1996 not to exceed at any one
time outstanding for Borrower the lesser of the Borrowing Base or
$1,000,000.00 (the "Commitment 2"), Borrower having the right to borrow,
repay and reborrow. The Bank and the Borrower agree that Chapter 15 of the
Texas Credit Code shall not apply to this Agreement,
1
<PAGE>
the Note 2 (as hereinafter defined) or any Loan 2. The Loans 2 shall be
evidenced by and shall bear interest and be payable as provided in the note
of the Borrower of even date herewith (together with any and all renewals,
extensions, modifications and replacements thereof and substitutions
therefor, the "Note 2")."
2. Section 1.5 of the Credit Agreement entitled "Commitment Fee" is amended by
adding the following at the end of the text of such Section 1.5:
"In consideration for the Commitment 2, Borrower agrees to pay a Commitment
fee (computed on the basis of the actual number of days elapsed in a year
composed of 365/366 days of .12% per annum and the daily average difference
between the Commitment 2 and the principal balance of the Note 2 from
August 14, 1994 to the maturity date of the Note 2 (as such Note 2 may be
renewed, modified or extended from time to time), such fee to be due and
payable in quarterly installments beginning October 3, 1995 and on the last
day of each calendar quarter thereafter."
3. Section 1.6 of the Credit Agreement entitled, "Loan Documents" is hereby
amended by adding the following at the end of the text of such Section 1.6:
"The terms "Loan," "Loans" and "Loan 2" or "Loans 2" shall be hereafter
referred to collectively as "Loan" or "Loans." The terms "Commitment" or
"Commitment 2" shall be hereafter referred to collectively as "Commitment."
The terms "Note" and "Note 2" shall be hereafter referred to collectively
as "Note."
4. Section 7.4 of the Credit Agreement entitled, "Survival; Parties Bound" is
hereby amended by deleting the last sentence of such Section 7.4 and
substituting in lieu thereof the following:
"Except as otherwise provided herein, the term of this Agreement shall be
until the final maturity of the Note or the Note 2 and the full and final
payment of all amounts due under the Loan Documents."
5. Exhibit A, the Borrowing Base Report of the Credit Agreement, is hereby
amended by replacing Exhibit A of the Credit Agreement with the Exhibit A
attached hereto and hereby incorporated in the Agreement by reference for
all purposes.
6. Borrower confirms and ratifies each of the liens, security interests and
other interests granted to Bank in each and all security agreements
executed in connection with, related to, or securing the Note and the L/C
Obligations as extending to and securing the Loans, L/C Obligations, the
Note and the Note 2 including but not limited to, each of those interests
and liens described in the
2
<PAGE>
following listed Security Agreements. Borrower further agrees and
acknowledges that the Collateral as described in any security agreement
including any supplemental security agreements executed in connection with
related to, or securing the Note, or any other indebtedness of Borrower to
Bank included, but not limited to, the following security agreements
(including any amendments and supplements thereto) executed by Borrower and
delivered to Bank: Security Agreement - (Accounts, Inventory, Equipment,
Fixtures, General Intangibles, Other) dated February 26, 1991; Agreement
and First Amendment to Security Agreement effective as of February 26,
1991; and any other security agreements previously executed by Borrower and
delivered to Bank and not released by Bank and all security agreements
executed as of or on or about the Effective Date (each and all "Security
Agreements") secures each and all indebtedness of all character and kind
related to or evidenced by the Note, the Note 2, the L/C Obligations and
the Loan Documents.
7. The Borrower hereby represents and warrants to the Bank that after giving
effect to the execution and delivery of this Amendment: (a) the
representations and warranties set forth in the Credit Agreement are true
and correct on the date hereof as though made on and as of such date; and
(b) no Event of Default, or event which with passage of time, the giving of
notice or both would become an Event of Default, has occurred and is
continuing as of the date hereof.
8. This Amendment shall become effective as of the Effective Date upon its
execution and delivery by each of the parties named in the signature lines
below and receipt of additional documents in Proper Form as Bank may
require in connection with this Amendment.
9. Borrower further acknowledges that each of the other Loan Documents are in
all respects ratified and confirmed, and all of the rights, powers and
privileges created thereby or thereunder are ratified, confirmed, extended,
carried forward and remain in full force and effect except as the Credit
Agreement is amended by this Amendment.
10. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
11. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES
OF AMERICA.
12. This Amendment and the Credit Agreement as amended by this Amendment shall
be included within the definition of "Loan Documents" as used in the
3
<PAGE>
Credit Agreement and "Agreement", as used in the Credit Agreement, shall
mean the Credit Agreement as amended by this Amendment.
THIS WRITTEN AMENDMENT 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.
IN WITNESS THEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
BORROWER: ERC INDUSTRIES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
4
<PAGE>
EXHIBIT 10.10
EIGHTH AMENDMENT TO CREDIT AGREEMENT
(WITH BORROWING BASE)
THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of
December 7, 1995, (the "Effective Date") is by and between ERC INDUSTRIES, INC.
("Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking
association whose principal office is located in Houston, Texas (the "Bank").
PRELIMINARY STATEMENT
The Bank and the Borrower have entered into a Credit Agreement (Borrowing
Base), dated as of February 25, 1991 (the "Credit Agreement") as amended by that
certain First Amendment to Credit Agreement (Borrowing Base), dated effective as
of August 31, 1991 (the "First Amendment"), by Second Amendment to Credit
Agreement (With Borrowing Base), dated effective as of January 3, 1992 (the
"Second Amendment"), by Third Amendment to Credit Agreement (With Borrowing
Base), dated effective as of May 31, 1992 (the "Third Amendment"), by Fourth
Amendment to Credit Agreement (With Borrowing Base), dated effective as of
December 30, 1992 (the "Fourth Amendment"), by Fifth Amendment to Credit
Agreement (Borrowing Base) dated effective as of February 28, 1994 (the "Fifth
Amendment"), by Sixth Amendment to Credit Agreement (Borrowing Base) dated
effective as of February 27, 1995 (the "Sixth Amendment"), and by Seventh
Amendment to Credit Agreement (Borrowing Base) dated effective as of July 3,
1995 (the "Seventh Amendment"). The "Credit Agreement" shall refer to the
Credit Agreement as amended by the First Amendment, Second Amendment, Third
Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment and Seventh
Amendment. All capitalized terms defined in the Credit Agreement and not
otherwise defined herein shall have the same meanings herein as the Credit
Agreement. The Bank and the Borrower have agreed to amend the Credit Agreement
to the extent set forth herein. The "Agreement" shall also refer to the Credit
Agreement as amended by this Amendment.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the Bank and the Borrower hereby agree as follows:
1. Annex III, the Financial Covenants of the Credit Agreement, is hereby
amended by replacing Annex III of the Credit Agreement with the Annex III
attached hereto and hereby incorporated in the Agreement by reference for
all purposes.
2. Borrower confirms and ratifies each of the liens, security interests and
other interests granted to Bank in each of all security agreements executed
in connection with, related to, or securing the Note and the L/C Obligations
as extending to and securing the Loans, L/C Obligations, the Note and the
Note
1
<PAGE>
2 including but not limited to, each of those interests and liens described
in the following listed Security Agreements. Borrower further agrees and
acknowledges that the Collateral as described in any security agreement
including any supplemental security agreements executed in connection with
related to, or securing the Note, or any other indebtedness of Borrower to
Bank including, but not limited to, the following security agreements
(including any amendments and supplements thereto) executed by Borrower and
delivered to Bank: Security Agreement - (Accounts, Inventory, Equipment,
Fixtures, General Intangibles, Other) dated February 26, 1991; Agreement and
First Amendment to Security Agreement effective as of February 26, 1991; and
any other security agreements previously executed by Borrower and delivered
to Bank and not released by Bank and all security agreements executed as of
or on or about the Effective Date (each and all "Security Agreements")
secures each all indebtedness of all character and kind related to or
evidenced by the Note, the Note 2, the L/C Obligations and the Loan
Documents.
3. The Borrower hereby represents and warrants to the Bank that after giving
effect to the execution and delivery of this Amendment: (a) the
representations and warranties set forth in the Credit Agreement are true
and correct on the date hereof as though made on and as of such date; and
(b) no Event of Default, or event which with passage of time, the giving of
notice or both would become an Event of Default, has occurred and is
continuing as of the date hereof.
4. This Amendment shall become effective as of the Effective Date upon its
execution and delivery by each of the parties named in the signature lines
below and receipt of additional documents in Proper Form as Bank may require
in connection with this Amendment.
5. Borrower further acknowledges that each of the other Loan Documents are in
all respects ratified and confirmed, and all of the rights, powers and
privileges created thereby or thereunder are ratified, confirmed, extended,
carried forward and remain in full force and effect except as the Credit
Agreement is amended by this Amendment.
6. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
7. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES
OF AMERICA.
8. This Amendment and the Credit Agreement as amended by this Amendment shall
be included within the definition of "Loan Documents" as used in the
2
<PAGE>
Credit Agreement and "Agreement", as used in the Credit Agreement, shall
mean the Credit Agreement as amended by this Amendment.
9. WAIVER AGREEMENT. Pursuant to Section 5.2 of the Agreement, Borrower agreed
to comply with and maintain the financial covenants set forth on Annex III
of the Credit Agreement, including maintaining a maximum Debt to Net Worth
ratio of not more than 1.0 : 1.0. Borrower has informed Bank that Borrower
is out of compliance with this covenant for the periods ended June 30, 1995
through October 31, 1995. Although Borrower is in default under the Credit
Agreement because of the failure to comply with the above-referenced
covenant as required, Bank is electing to waive this specific default but
only for the time period ended June 30, 1995 through October 31, 1995. This
waiver does not constitute a waiver of any other defaults that may currently
exist or that may hereafter occur, including but not limited to the above
cited Section of the Agreement. Bank's delay in exercising any of its rights
under the Credit Agreement does not constitute a waiver of any rights or
interests of Bank except as specifically agreed to in writing by Bank. This
Section is not a general waiver of the above-referenced covenant or any
other requirements contained in this Agreement or any other Loan Document.
In the past Bank may have made advances under the Commitment at times when
Borrower did not satisfy all of the conditions precedent to advances and/or
because Borrower was in default under the Credit Agreement. Bank has the
right to refuse to fund an advance at any time that Borrower is not in
compliance with the terms of the Agreement. If Bank elects to make any
advance to Borrower while Borrower is out of compliance with the Agreement,
the making of such advances shall not constitute a waiver of any defaults
then existing or thereafter arising under the Agreement, and will not
constitute the agreement of Bank to make further advances in similar
circumstances. This Section constitutes the only evidence of Bank's waiver
of compliance with the above cited Section of the Credit Agreement.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN DOCUMENT"
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.
3
<PAGE>
IN WITNESS THEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
BORROWER: ERC INDUSTRIES, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
4
<PAGE>
EXHIBIT 10.11
NINTH AMENDMENT TO CREDIT AGREEMENT
THIS NINTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment" or "Ninth
Amendment") dated as of February 26, 1996, ("Effective Date") is between ERC
INDUSTRIES, INC. ("Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a
national banking association ("Bank").
PRELIMINARY STATEMENT. Bank and Borrower have entered into a Credit Agreement
(Borrowing Base), dated February 25, 1991, amended by a First Amendment dated
August 31, 1991, Second Amendment dated January 3, 1992, Third Amendment dated
May 31, 1992, Fourth Amendment dated December 30, 1992, Fifth Amendment dated
February 28, 1994, Sixth Amendment dated February 27, 1995, Seventh Amendment
dated July 3, 1995 and Eighth Amendment dated December 7, 1995 (as amended,
"Credit Agreement" or "Agreement). All defined terms and section, exhibit and
annex references shall refer to the Credit Agreement as amended. The Bank and
the Borrower have agreed to amend the Credit Agreement to the extent set forth
herein, and in order to, among other things, renew, extend and modify the
Commitment.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the Bank and the Borrower hereby agree as follows:
1. Subsection 1.1.A of the Credit Agreement is amended by substituting the
following for the Subsection 1.1.A of the Credit Agreement:
"REVOLVING CREDIT NOTE 1.1.A. Subject to the terms and conditions
hereof, the Bank agrees to make loans to the Borrower from time to time
before the Termination Date, not to exceed at any one time outstanding
for Borrower the lesser of the Borrowing Base or $3,000,000.00 (the
"Commitment"). Loans shall take the form of advances under the Note (as
hereinafter defined) (each and all advances hereinafter referred to as
"Loan" or "Loans"), or payments of commercial letters of credit
("Commercial L/Cs") and/or standby letters of credit ("Standby L/Cs") by
Bank. Commercial L/Cs and Standby L/Cs issued by Bank hereunder are
hereinafter referred to individually as "Letter of Credit" and
collectively as "Letters of Credit". Borrower shall have the right to
borrow, repay and reborrow under the Note. The Bank and the Borrower
agree that Chapter 15 of the Texas Credit Code shall not apply to this
Agreement, the Note, or any Loan. The Loans shall be evidenced by and
shall bear interest and be payable as provided in the promissory note of
Borrower dated as of the Effective Date of the Ninth Amendment in the
original principal amount of $3,000,000.00 (together with any and all
renewals, extensions, modifications replacements, and
1
<PAGE>
rearrangements thereof and substitutions therefor, the "Note"), which
promissory note is given in renewal and modification of that certain
promissory note dated February 27, 1995, in the original principal
amount of $3,000,000.00 (including all prior notes of which said note
represents a renewal, extension, modification, increase, decrease,
substitution, rearrangement or replacement thereof, the "Renewed Note").
The parties hereto agree that there is as of this Ninth Amendment
Effective Date an outstanding principal balance of $2,825,000.00 under
the Note, and an aggregate of $168,682.08 in L/C Obligations
(representing Letter of Credit numbers 1451961, 1444134, 1455643 and
1456977 issued and outstanding as of the Ninth Amendment Effective Date)
for a total outstanding against the Commitment of $2,993,682.08; leaving
$6317.92 availability under the Commitment for additional Loans and
issuances of Letters of Credit subject to the terms and conditions of
this Agreement."
2. Section 8. Definitions. The definition of Termination date in the Credit
Agreement is hereby amended by substituting "April 1, 1996" in place of
"February 26, 1996", where the latter appears.
3. Borrower confirms and ratifies each of the liens, security interests and
other interests granted to Bank in each and all security agreements executed
in connection with, related to, or securing the Renewed Note, L/C
Obligations and Note as extending to the securing the Loans, L/C
Obligations, and the Note, including but not limited to, each of those
interests and liens described in the following listed Security Agreements.
Borrower further agrees and acknowledges that the Collateral as described in
any security agreement including any supplemental security agreements
executed in connection with related to, or securing the Renewed Note, or any
other indebtedness of Borrower to Bank including, but not limited to, the
following security agreements (including any amendments and supplements
thereto) executed by Borrower and delivered to Bank: Security Agreement -
(Accounts, Inventory, Equipment, Fixtures, General Intangibles, Other) dated
February 26, 1991; Agreement and First Amendment to Security Agreement
effective as of February 26, 1991; and any other security agreements
previously executed by Borrower and delivered to Bank and not released by
Bank and all security agreements executed as of or on or about the Effective
Date (each and all "Security Agreements") include, but are not limited to,
each and all indebtedness of all character and kind related to or evidenced
by the Renewed Note, the Note, the L/C Obligations and the Loan Documents.
4. Each of the other Loan Documents are in all respects ratified and confirmed,
and all of the rights, powers and privileges created thereby or thereunder
are ratified, confirmed, extended, carried forward and remain in full force
and effect except as the Credit Agreement is amended by this
2
<PAGE>
Amendment. Borrower hereby represents and warrants to the Bank that after
giving effect to the execution and delivery of this Amendment: (a) the
representations and warranties set forth in the Credit Agreement are true
and correct on the date hereof as though made on and a of such date; and (b)
no Event of Default, or event which with passage of time, the giving of
notice or both would become an Event of Default,, has occurred and is
continuing as of the date hereof.
5. This Amendment shall become effective as of the Effective Date upon its
execution and delivery by each of the parties named in the signature lines
below and receipt of additional documents in Proper Form as Bank may require
in connection with this Amendment. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed an original and
all of which taken together shall constitute but one and the same agreement.
This Amendment and the Credit Agreement as amended by this Amendment shall
be included within the definition of "Loan Documents" as used in the Credit
Agreement and "Agreement", as used in the Credit Agreement, shall mean the
Credit Agreement as amended by this Amendment.
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA.
THIS WRITTEN AMENDMENT 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.
IN WITNESS THEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
BORROWER: ERC INDUSTRIES, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
3
<PAGE>
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
4
<PAGE>
EXHIBIT 10.12
TENTH AMENDMENT TO CREDIT AGREEMENT
THIS TENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment" or "Tenth
Amendment") dated as of April 1, 1996, ("Effective Date") is between ERC
INDUSTRIES, INC. ("Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a
national banking association ("Bank").
PRELIMINARY STATEMENT. Bank and Borrower have entered into a Credit Agreement
(Borrowing Base), dated February 25, 1991, amended by a First Amendment dated
August 31, 1991, Second Amendment dated January 3, 1992, Third Amendment dated
May 31, 1992, Fourth Amendment dated December 30, 1992, Fifth Amendment dated
February 28, 1994, Sixth Amendment dated February 27, 1995, Seventh Amendment
dated July 3, 1995, Eighth Amendment dated December 7, 1995 and Ninth Amendment
dated February 26, 1996 (as amended, "Credit Agreement" or "Agreement). All
defined terms and section, exhibit and annex references shall refer to the
Credit Agreement as amended. The Bank and the Borrower have agreed to amend the
Credit Agreement to the extent set forth herein, and in order to, among other
things, renew, extend and modify the Commitment and the Commitment 2.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the Bank and the Borrower hereby agree as follows:
1. Subsection 1.1.A is amended to read as follows:
"REVOLVING CREDIT NOTE 1.1.A. Subject to the terns and conditions hereof,
Bank agrees to make loans to Borrower from time to time before the
Termination Date, not to exceed at any one time outstanding the lesser of
the Borrowing Base or $3,000,000.00 ("Commitment"). Loans shall take the
form of advances under the note (as hereinafter defined) (each a "Loan"), or
issuances by Bank of commercial letters of credit ("Commercial L/Cs") and/or
standby letters of credit ("Standby L/Cs") (collectively, "Letters of
Credit"). Borrower shall have the right to borrow, repay and reborrow under
the note. Bank and Borrower agree that Chapter 15 of the Texas Credit Code
shall not apply to this Agreement, the Note, or any Loan. Loans shall be
evidenced by and shall bear interest and be payable as provided in
Borrower's $3,000,000.00 promissory note dated the Tenth Amendment Effective
Date (together with any and all renewals, extensions, modifications
replacements, and rearrangements thereof and substitutions therefor,
"Note"), given in renewal and modification of Borrower's $3,000,000.00
promissory note dated February 26, 1996 (including all prior notes of which
said note represents a renewal, extension, modification, increase, decrease,
substitution, rearrangement or replacement thereof, a "Renewed Note"). As of
March 27, 1996 there was an outstanding principal
1
<PAGE>
balance of $2,800,000.00 under the Commitment, and an aggregate of
$178,682.08 in L/C Obligations (representing Letter of Credit numbers
1460191, 1451961, 1444134, 1455643 and 1456977 issued and outstanding as of
such date) for a total outstanding against the Commitment of $2,978,682.08;
leaving $21,317.92 available under the Commitment on such date for
additional Loans and issuances of Letters of Credit subject to the terms and
conditions of this Agreement. Loans and Letters of Credit under the
Commitment shall be for the purpose of providing working capital and letters
of credit for Borrower's regular business operations."
2. Subsection 1.1.C is amended to read as follows:
"REVOLVING CREDIT NOTE-2 1.1.C. Subject to the terms and conditions hereof
the Bank agrees to make loans ("Loans 2") to the Borrower from time to time
before June 30, 1996 not to exceed at any one time outstanding the lesser of
the Borrowing Base or $1,000,000.00 ("Commitment 2"), Borrower having the
right to borrow, repay and reborrow. Bank and Borrower agree that Chapter 15
of the Texas Credit Code shall not apply to this Agreement, Note 2 (as
hereinafter defined) or any Loan 2. Loans 2 shall be evidenced by and shall
bear interest and be payable as provided in Borrower's $1,000,000.00
promissory note dated the Tenth Amendment Effective Date (together with any
and all renewals, extensions, modifications and replacements thereof and
substitutions therefor, the "Note 2"), given in renewal and modification of
Borrower's $1,000,000.00 promissory note dated July 3, 1995 (including all
prior notes of which said note represents a renewal, extension,
modification, increase, decrease, substitution, rearrangement or replacement
thereof, a "Renewed Note"). As of March 27, 1996 there was an outstanding
principal balance of $300,000.00 under the Commitment-2, leaving $700,000.00
available under Commitment-2 for additional Loans 2 subject to the terms and
conditions of this Agreement. Loans 2 shall be for the purpose of providing
working capital for Borrower's regular business operations."
3. Section 8. The definition of Termination Date is amended by substituting
"June 30, 1996" in place of "April 1, 1996", where the latter appears.
4. Exhibit A is replaced with Exhibit A attached hereto.
5. Borrower confirms and ratifies each of the liens, security interests and
other interests granted to Bank in each and all security agreements executed
in connection with, related to, or securing each Renewed Note, L/C
Obligation and Note as extending to and securing all Loans, L/C Obligations,
and Notes, including but not limited to, each of those interest and liens
described in the following listed Security Agreements. Borrower further
agrees and acknowledges that "indebtedness secured hereby", "secured
indebtedness", "Obligation" and any similar reference in any Security
2
<PAGE>
Agreement includes each and all of the Loans, Loans 2, Note, Note 2, L/C
Obligations, Applications and all other indebtedness evidenced or provided
for in the Credit Agreement and Loan Documents. "Security Agreement"
includes the following as executed and delivered by Borrower in favor of
Bank: Security Agreement - (Accounts, Inventory, Equipment, Fixtures,
General Intangibles, Other) dated February 26, 1991; Agreement and First
Amendment to Security Agreement effective as of February 26, 1991; and any
other security agreement previously executed by Borrower and delivered to
Bank and not released by Bank which by its terms (general or specific)
secure indebtedness provided for in the Credit Agreement; and all security
agreements executed as of or on or about the Tenth Amendment Effective Date.
6. Each of the other Loan Documents are in all respects ratified and confirmed,
and all of the rights, powers and privileges created thereby or thereunder
are ratified, confirmed, extended, carried forward and remain in full force
and effect except as the Credit Agreement is amended by this Amendment.
Borrower hereby represents and warrants to the Bank that after giving effect
to the execution and delivery of this Amendment: (a) the representations and
warranties set forth in the Credit Agreement are true and correct on the
date hereof as though made on and as of such date; and (b) no Event of
Default, or event which with passage of time, the giving of notice or both
would become an Event of Default, has occurred and is continuing as of the
date hereof.
7. This Amendment shall become effective as of the Effective Date upon its
execution and delivery by each of the parties named in the signature lines
below and receipt of additional documents in Proper Form as Bank may require
in connection with this Amendment. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed an original and
all of which taken together shall constitute but one and the same agreement.
This Amendment and the Credit Agreement as amended by this Amendment shall
be included within the definition of "Loan Documents" as used in the Credit
Agreement and "Agreement", as used in the Credit Agreement, shall mean the
Credit Agreement as amended by this Amendment.
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA.
THIS WRITTEN AMENDMENT 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
3
<PAGE>
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS THEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
4
<PAGE>
BORROWER: ERC INDUSTRIES, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
5
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<PERIOD-START> JAN-01-1995
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