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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, 1996
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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
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ERC INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 76-0382879
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(State of incorporation) (I.R.S. Employer Identification No.)
15835 Park Ten Place, Suite 115 Houston, Texas 77084
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(Address of principal executive offices)
Registrant's telephone number, including area code (281) 398-8901
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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
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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 13, 1997 was $4,345,784.
The number of shares outstanding of the registrant's common stock, as of
February 28, 1997 was 21,248,272.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1996
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.............................................. 8
Item 3. Legal Proceedings....................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 10
Item 6. Selected Financial Data................................. 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 8. Consolidated Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 14
PART III
Item 10. Directors and Executive Officers of the Registrant...... 15
Item 11. Executive Compensation.................................. 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 15
Item 13. Certain Relationships and Related Transactions.......... 15
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K................................. 16
Signatures.......................................................... 19
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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.
On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation
registered in Scotland and incorporated under the Companies Act of the United
Kingdom, completed the purchase of approximately 47% of the issued and
outstanding shares of Common Stock of Old ERC.
On November 16, 1993, the Company entered into an agreement with Barton
Industries, Inc. ("Barton") of Shawnee, Oklahoma, and three creditors of Barton.
The agreement provided for the purchase of Barton's valve business and certain
of its assets.
On June 6, 1996, the Company and the Wood Group entered into an Investment
Agreement pursuant to which the Company agreed to issue and sell, and Wood Group
agreed to purchase, 7,384,616 shares of the Company's common stock, par value
$0.01 per share. The aggregate purchase price for the shares was $6,000,000, or
$0.8125 per share. Following this transaction the Wood Group owns approximately
85% of the Company.
On September 27, 1996, the Company acquired 100% of the issued and outstanding
capital shares of Seaboard Lloyd Limited ("Seaboard"), a private company
incorporated in Scotland under the Companies Acts of the United Kingdom. The
business of Seaboard is the manufacture, supply, repair, maintenance and
refurbishment of wellheads, xmas trees, gate valves, choke valves, clamped pipe
connectors, actuators, electric feed through systems for downhole pumps and
subsea ball and check valves, all as used in the oil and gas industry (the
"Business"). The Business is operated in one facility located in Cumbernauld,
Scotland. The Company plans to continue to operate the Business in
substantially the same manner as it was operated prior to the acquisition.
In January 1997, the Company and all of its subsidiaries began conducting
business under the name of Wood Group Pressure Control.
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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.
ERC'S ORIGINAL BUSINESS
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.
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In addition to remanufacturing customer equipment, the Company purchases used
equipment for its own account from various sources which it then remanufactures
for sale.
BUSINESS DEVELOPMENT AND ACQUISITIONS
The addition of Barton in 1993 and Seaboard in 1996 has expanded the Company's
capabilities and it is now able to offer a complete line of gate valves and
conventional wellhead equipment. Valves are available in 1-13/16" to 24" sizes
for working pressures from 300 p.s.i. to 15,000 p.s.i. and are produced in eight
basic material trims and "custom trims" to meet individual customer
requirements. The facilities are licensed by the API to distribute its products
with the API monogram in accordance with API Specification 6A (wellhead valves),
Specification 6D (pipeline valves) and Specification 14D (surface safety valves
for offshore use). The use of API monogram is considered by management to be
essential to compete successfully in the oil and gas valve market. The
Company's manufacturing facilities in Shawnee, Oklahoma and Cumbernauld,
Scotland are ISO 9001 registered, as well as API 6A and 14D certified.
To manufacture products, the plant 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.
The Company's strategy, with regard to both acquisitions made to date, has been
to continue expanding its presence in the domestic market as well as to advance
its presence in the international market. ERC now operates in Aberdeen,
Cumbernauld, London, Abu Dhabi, Jordan, Saudi Arabia, Germany, Australia and
Venezuela. These locations are managed by seasoned industry professionals with
many years of international experience. This local presence has generated a
high degree of customer interest and a growing backlog. The Company intends to
focus on increasing international sales in 1997.
As of March 1997, the Company's wellhead and related equipment operations are
conducted from 22 domestic locations, 9 international locations, and 2
distributorships. The Company's manufacturing facilities are located in
Shawnee, Oklahoma and Cumbernauld, Scotland.
ENGINEERING RESEARCH AND DEVELOPMENT
The Company is involved in an active R & D program. It expects to file for and
receive patents on new products aimed at growth in target geographic and product
markets. New wellhead products were launched during 1996 that enable additional
market participation. Additionally, value engineering projects focused on a
broad range of cost reductions in 1996.
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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 in the United States from Branch facilities
located in most major oil and gas producing areas requiring wellhead equipment.
Each Branch maintains inventory for local customer requirements, trained service
technicians, and machine shop capability to provide quick delivery. Each Branch
offers a range of products and services including new equipment, re-manufactured
equipment, and inventory management of customer property.
Internationally, the Company sells its products through a mixture of Company
operated Branch locations, overseas subsidiaries, and through independent sales
agents. Sales offices are maintained in metropolitan areas where customers are
typically headquartered or maintain regional offices.
The Company's marketing program emphasizes providing complete supply chain
management of wellhead and valve requirements for our customers. This program
includes repair of customer equipment, sale of re-manufactured equipment, sale
of new equipment, maintenance services, and a broad distribution network of
Branch locations and sales offices to provide prompt local service and support.
COMPETITION
Oilfield equipment is sold by many manufacturers, distributors and dealers,
including 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 has continued to have a
substantial impact on profit margins. There is no assurance that these trends
will not continue in the future.
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GOVERNMENT REGULATION
The exploration, development and production of oil and gas in the United States
is affected by comprehensive federal and state regulations including those
governing allowable rates of production, marketing, environmental matters and
pricing. To date, the Company has operated successfully in this environment.
EMPLOYEES
As of February 26, 1997, the Company had 456 employees, as compared to 284
employees as of February 23, 1996. No employees of the Company are represented
by a union.
CUSTOMERS
Conoco Incorporated accounted for approximately 10% of the Company's total
revenues in 1996. The Company had no customers that comprised 10% or more of its
1995 and 1994 sales.
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ITEM 2. PROPERTIES
Set forth below is certain information as of December 31, 1996, regarding the
Company's headquarters, manufacturing and other facilities, most of which are
located on leased premises.
Lease
Location Expiration Date
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Manufacturing -
Shawnee, Oklahoma (Leased)(1) February 28, 1998
Cumbernauld, Scotland (Owned)(2)
7 Branch Offices and Various through
Machine Shops (Leased)(3) December 21, 2000
6 Branch Offices and
Machine Shops (Owned)
4 Sales Offices Various through
(Owned and Leased) January 31, 1997
4 Sales and Service Various through
Offices (Leased)(3) October 31, 1997
8 International Sales and Service Various through
Offices (Leased)(3) July 14, 1997
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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) The manufacturing facility at Cumbernauld, Scotland is a 31,000 square foot
building on a total site of 3 acres.
(3) 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 8 to the Consolidated Financial
Statements.
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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, cash flows or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the Company's fiscal year ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is included on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). The following table sets forth
the high and low reported bid prices for the Company's Common Stock as reported
by NASDAQ by fiscal quarter from January 1, 1995 through December 31, 1996.
Such prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
High Low
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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
FISCAL YEAR ENDED DECEMBER 31, 1996....
January 1, 1996 - March 31, 1996..... $1.06 $0.75
April 1, 1996 - June 30, 1996........ $1.06 $0.75
July 1, 1996 - September 30, 1996.... $1.56 $0.63
October 1, 1996 - December 31, 1996.. $2.50 $0.97
As of March 17, 1997, there were 715 holders of record of the Company's Common
Stock, as reported by the Company's transfer agent for its Common Stock. As of
March 13, 1997, the closing price of the Common Stock as reported on NASDAQ was
$1.38 per share.
The present policy of the Board of Directors is to retain earnings to provide
operating funds for the Company. As a result, the Company has not paid
dividends and does not intend to do so in the foreseeable future. The terms of
the Company's line of credit also restricts the ability of the Company to pay
cash dividends. See Note 5 to the Consolidated Financial Statements.
The trading symbol under which the Common Stock trades is "ERCI".
During the fourth quarter of 1996, the Company made no unregistered sales of
securities.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
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Eleven Months
Years Ended Ended Year Ended
December 31, December 31, January 31,
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1996(2)(3) 1995(2) 1994(2) 1993(2) 1993
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Revenues............................................................. $50,961 $34,840 $32,926 $23,167 $19,656
(Loss) income before provision for income taxes...................... $ 1,588 $(1,048) $ 628 $ 1,157 $ 378
(Benefit) provision for income taxes(1).............................. $ 573 $ (273) $ 264 $ 421 $ 149
Net (loss) income.................................................... $ 1,015 $ (775) $ 364 $ 736 $ 229
Net (loss) income per common share................................... $ .06 $ (.06) $ .03 $ .05 $ .02
Total assets......................................................... $35,309 $20,879 $19,119 $17,375 $12,014
Total long-term debt including a portion classified as a current
liability........................................................... $ 5,121 $ 4,602 $ 3,325 $ 2,852 $ 472
Working capital...................................................... $12,099 $ 6,650 $ 7,937 $ 7,641 $ 6,014
Shareholder's equity(1).............................................. $17,621 $ 9,913 $10,683 $10,192 $ 8,647
Capital expenditures................................................. $ 1,420 $ 567 $ 1,024 $ 768 $ 297
Cash dividends per share............................................. none none none none none
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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 additional paid-in-capital
conforming to the current accounting rules for quasi-reorganized companies.
(2) Includes effects of the Barton Wood acquisition completed on November 16,
1993.
(3) Includes effects of Seaboard Lloyd Limited acquisition completed on
September 27, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated increased 17.7% to an average of 851 in 1996, as compared to 723 in
1995 and 775 in 1994. The active domestic rig count as of March 7, 1997 was 838.
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 (IN THOUSANDS)
1996 AS COMPARED TO 1995 AND 1995 AS COMPARED TO 1994
The Company's revenues increased by 46.3% to $50,961 in 1996 compared with
$34,840 in 1995. 1995's revenues increased 5.8% to $34,840 compared with $32,926
for 1994, despite a decrease in the rig count.
1996 revenues increased by $16,121 over 1995 due to an increase in customer
activity, market share gains, and sales generated at Seaboard. This acquisition
added approximately $2,571 in 1996 revenues. 1995 revenues increased over 1994
due to market share gains and increased sales activity.
In connection with revenues over the three year period, cost of goods sold were
$38,787 in 1996, $27,399 in 1995, and $25,058 in 1994. The gross profit
percentage was 23.9% in 1996, compared with 21.4% in 1995 and 23.9% in 1994.
1996 gross profit increased as compared to 1995 due to process improvements at
the manufacturing facility which created cost reductions, as well as fewer
repairs and maintenance expenses at the facility. The decrease in 1995 gross
profit as compared with 1994 was due to unfavorable manufacturing cost variances
at the manufacturing facility and certain relocation and severance expenses.
Selling, General and Administrative expenses ("SG&A") increased by $2,043 to
$10,159 in 1996 compared with $8,116 in 1995. This increase is due to costs
incurred to open additional domestic sales offices, increases in international
and domestic sales personnel, and the addition of Seaboard Lloyd in 1996. SG&A,
as a percentage of sales, was 19.9% in 1996 and 23.3% in 1995. This decrease was
due to sales growth in excess of growth in fixed SG&A costs.
SG&A increased to $8,116 in 1995 compared with $7,037 in 1994. Contributing to
the increase was additional international sales personnel and the related
expenses to advance new business and support continuing business. SG&A, as a
percentage of sales, was 23.3% in 1995 and 21.4% in 1994.
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Net income before provision for income tax was $1,588 in 1996, compared to net
loss of $1,048 in 1995. The increase in 1996 is primarily due to increased
sales at higher gross margins, and reduced interest expense, partially offset by
increased SG&A costs incurred to open additional domestic sales offices, and
increases in international sales personnel.
Loss before provision for income taxes was $1,048 in 1995 compared to net income
of $628 in 1994. The decrease in 1995 was primarily due to three factors: (i)
increased sales at lower gross margins, (ii) increased SG&A costs incurred to
open additional domestic sales offices, increases in international sales
personnel, and certain relocation and severance expenses, and (iii) increased
interest expenses due to a higher borrowing level to support increased
inventory levels.
1996, 1995 and 1994 include provision/(benefit) for income taxes of $573,
($273), and $264, respectively. Of these amounts, $796, $5, and $127,
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 are included in the respective balance sheets as increases
in additional paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)
Working capital increased to $12,099 at December 31, 1996 compared with $6,650
at December 31, 1995. This improvement is primarily the result of increases in
accounts receivable and inventory resulting from higher sales activity, that
were primarily funded by the proceeds of the stock sold to the Wood Group.
The Company amended its domestic line of credit in June 1996, effectively
increasing its line of credit to $5 million. The loan facility now provides for
maximum borrowings of the lesser of $5 million or eligible trade accounts
receivable and inventory (as defined in the line of credit). Interest on
outstanding balances are payable monthly at the bank's prime rate minus three
quarters of one percent. At December 31, 1996, the bank's prime rate was 8.25%.
The loan facility requires the Company to maintain a ratio of total indebtedness
to tangible net worth of no greater than 1.2 to 1.0. Additionally, the terms of
the agreement restrict the Company from paying cash dividends. The facility is
collateralized by trade accounts receivable and inventory. At December 31,
1996, loan amounts outstanding under the agreement were $1.0 million. In
addition, the Company had outstanding, against the revolving line of credit,
irrevocable letters of credit amounting to $233. At December 31, 1996, the
Company's maximum amount available for additional borrowings was $3,767.
The Company also has a line of credit overdraft facility in Scotland, which
expires in September 1997 and provides a line of credit of three million
pounds (approximately $5.1 million at December 31, 1996). The line of credit is
used for the purpose of general working capital requirements and provides
overdraft, acceptance credit, loan and documentary credit facilities. Interest
payable on the overdraft facility is equal to the Bank's Base
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rate plus 1 percent per annum. At December 31, 1996, the bank's base rate was
6.0%. This credit agreement is collateralized by substantially all of the assets
of Seaboard and is guaranteed by ERC Industries, Inc. At December 31, 1996,
amounts outstanding under the various facilities were: overdraft, $1,712;
guarantees and letters of credit, $1,645. At December 31, 1996, the Company's
maximum amount available for additional borrowings was $1,776.
Pursuant to the Company's long-term debt agreements, $3,295 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.
The Company currently anticipates incurring capital expenditures of $3,500
principally for machinery and equipment, plant improvements and vehicle
purchases, through the fiscal year ending December 31, 1997. 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.
Numerous companies, some of which have substantially greater resources than the
Company, are engaged primarily in the manufacturing, installation and
maintenance of wellheads, valves and drilling equipment as well as other types
of oilfield equipment. In addition, some foreign manufacturers make only valves.
Over the past several years, severe price competition has continued to have a
substantial impact on profit margins. There is no assurance that these trends
will not continue in the future.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained herein in Item 1 - "Business" and in Item 7 -
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" may be deemed to be forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995 and are subject to the
"Safe Harbor" provision in that enacted legislation. These statements are based
on current expectations and involve a number of risks and uncertainties. Actual
results could differ materially from those described in the forward-looking
statements as a result of various factors including, but not limited to the
following: expectations of operating levels at the Company's facilities,
expectations of the future customer and product mix, retention of major
customers, competition and the Company's position in the market, discussions
about future costs, the overall oil and gas market and timing of capital
expenditures.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 for Index to Consolidated Financial Statements and
Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 1996 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.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
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Page No.
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Report of Independent Accountants................................................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 and 1995.................. F-2
Consolidated Statement of Operations for the years ended December 31, 1996,
1995 and 1994.............................................................. F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1996,
1995 and 1994.............................................................. F-5
Notes to Consolidated Financial Statements................................... F-6
Consolidated Financial Statement Schedules:
Schedule II - Valuation And Qualifying Accounts.............................. F-16
</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.
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(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 Credit Agreement, as amended, with Texas Commerce Bank, N.A., filed
as Exhibit 10.7 to the Company's Registration Statement on Form S-4
(Registration No. 33-57504) as filed with the Securities and
Exchange Commission, and incorporated herein by reference.
10.6 Fifth Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of February 28, 1994(1).
10.7 Sixth Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of February 27, 1995(2).
- 17 -
<PAGE>
10.8 Seventh Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of July 3, 1995(3).
10.9 Eighth Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of December 7, 1995(3).
10.10 Ninth Amendment to Credit Agreement with Texas Commerce Bank,
N.A. dated as of February 26, 1996(3).
10.11 Tenth Amendment extending expiration date to June 30, 1996.(4)
10.12 Letter Agreement with Texas Commerce Bank National Association
dated June 30, 1996.(4)
__________________
(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 10.7 of the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1994.
(3) Filed as Exhibits of the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1995.
(4) Filed herewith.
(B) REPORTS ON FORM 8-K :
During the fourth quarter of the fiscal year ended December 31, 1996, the
Company filed the following Forms 8-K regarding the Seaboard acquisition:
Form 8-K, dated November 11, 1996
Form 8-K/A, dated December 12, 1996
- 18 -
<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 27, 1997 /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 27, 1997 /s/ J. Derek P. Jones
----------------------
J. Derek P. Jones
Chairman and Director
Dated: March 27, 1997 /s/ Wendell R. Brooks
---------------------
Wendell R. Brooks
President and Director
(Principal Executive Officer)
Dated: March 27, 1997 /s/ James E. Klima
--------------------
James E. Klima
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
- 19 -
<PAGE>
Dated: March 27, 1997 /s/ Allister G. Langlands
--------------------------
Allister G. Langlands
Director
Dated: March 27, 1997 /s/ George W. Tilley
---------------------
George W. Tilley
Director
Dated:March 27, 1997 /s/ Anthony Howells
--------------------
Anthony Howells
Director
- 20 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
ERC Industries, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of ERC Industries, Inc. and Subsidiary listed in the index on
page 16 of this Form 10-K. 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 consolidated financial position of ERC Industries,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 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
February 21, 1997
F-1
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1 $ _
Trade accounts receivable, net of allowance
for doubtful accounts of $534 and $492,
respectively 11,738 6,671
Inventory 15,314 8,599
Prepaid expenses and other current assets 257 60
Deferred tax asset 651 499
------------ ------------
Total current assets 27,961 15,829
Property, plant and equipment, net 4,932 2,860
Other assets 532 444
Deferred tax asset-non current 170 49
Excess cost over net assets acquired, net 1,714 1,697
------------ ------------
Total assets $ 35,309 $ 20,879
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within
one year $ 3,295 $ 2,815
Accounts payable 9,655 4,182
Other accrued liabilities 2,912 2,182
------------ ------------
Total current liabilities 15,862 9,179
------------ ------------
Long-term debt 1,826 1,787
Commitments and contingencies (see Note 8) - -
Shareholders' equity:
Preferred Stock, par value $1; authorized and
unissued - 10,000,000 shares - -
Common stock, par value $0.01; authorized -
30,000,000 shares; 21,248,272 and 13,863,656
issued and outstanding as of December 31, 1996
and 1995, respectively 212 139
Additional paid-in capital 11,792 5,237
Retained earnings from January 10, 1989 5,552 4,537
Translation adjustment 65 -
------------ ------------
Total shareholders' equity 17,621 9,913
------------ ------------
Total liabilities and shareholders' equity $ 35,309 $ 20,879
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 50,961 $ 34,840 $ 32,926
Cost of goods sold 38,787 27,399 25,058
----------- ---------- ----------
Gross profit 12,174 7,441 7,868
Property impairment 203 - -
Selling, general and administrative
expenses 10,159 8,116 7,037
----------- ---------- ----------
Operating income (loss) 1,812 (675) 831
----------- ---------- ----------
Other (income) expense:
Interest expense 322 439 326
Other, net (98) (66) (123)
----------- ---------- ----------
224 373 203
----------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes 1,588 (1,048) 628
Provision (benefit) for income taxes 573 (273) 264
----------- ---------- ----------
Net income (loss) $ 1,015 $ (775) $ 364
=========== ========== ==========
Net income (loss) per share $ 0.06 $ (0.06) $ 0.03
=========== ========== ==========
Weighted average number of shares
outstanding 18,060 13,864 13,864
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED TRANSLATION
COMMON STOCK CAPITAL EARNINGS ADJUSTMENT
--------------------- --------- -------- ----------
SHARES AMOUNT
--------- ----------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 13,864 $ 139 $ 5,105 $ 4,948 -
Net income - - - 364 -
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards - - 127 - -
------ ------ -------- --------- -------
Balance as of December 31, 1994 13,864 139 5,232 5,312 -
Net loss - - - (775) -
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards - - 5 - -
------ ------ -------- --------- -------
Balance as of December 31, 1995 13,864 139 5,237 4,537 -
Net income - - - 1,015 -
Sale of common stock 7,384 73 5,759 - -
Foreign Currency translation gain - - - - $ 65
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards - - 796 - -
------ ------ -------- --------- -------
Balance as of December 31, 1996 21,248 $ 212 $ 11,792 $ 5,552 $ 65
====== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,015 $ (775) $ 364
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,212 1,095 1,014
Provision for losses on trade accounts receivable 51 175 143
Deferred income taxes provision (benefit) and non-cash charge for income taxes 523 (238) 237
Gain on sale of property, plant and equipment (16) (5) (7)
Property impairment 203 - -
(Increase) decrease in cash resulting from changes in:
Trade accounts receivable (4,155) (1,182) (1,342)
Inventories (5,584) (1,663) (1,779)
Prepaid expenses and other assets (375) 163 (105)
Accounts Payable 5,564 (505) 1,285
Accrued liabilities (199) 807 (344)
----------- ---------- ----------
Net cash used in operating activities (1,761) (2,128) (534)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary - Seaboard (1,580) - -
Purchases of property, plant and equipment (644) (442) (722)
Proceeds from sale of property, plant and equipment 30 26 12
----------- ---------- ----------
Net cash used in investing activities (2,194) (416) (710)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from line of credit 2,884 2,425 750
Line of credit payments (3,525) (750) -
Principal payments on long-term debt and capital lease obligations (554) (523) (506)
Increase (decrease) in book overdrafts (660) 1,080 -
Payments pursuant to reorganization plan:
Payments made on plan obligations - - (24)
Net proceeds from issuance of common stock 5,832 - -
----------- ---------- ----------
Net cash provided by financing activities 3,977 2,232 220
----------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents (21) - -
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1 (312) (1,024)
Cash and cash equivalents, beginning of year 0 312 1,336
----------- ---------- ----------
Cash and cash equivalents, end of year $ 1 $ 0 $ 312
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
As of December 31, 1996, approximately 85% of the outstanding shares of ERC
Industries, Inc.'s (the "Company") common stock was owned by John Wood Group
PLC ("Wood Group"), a corporation registered in Scotland and incorporated
under the laws of the United Kingdom.
The consolidated financial statements include the accounts of ERC
Industries, Inc. and its wholly owned subsidiary Wood Group Pressure Control
Limited (previously Seaboard Lloyd Limited), which are engaged in the
manufacture, remanufacture and servicing of oilfield valves and wellhead
equipment. To a lesser extent, the Company 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 and overseas. The
Company has expanded sales to international oil and gas producing regions.
All intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments purchased with original
maturities of three months or less at the date of acquisition. Cash
equivalents are stated at cost which approximates market because of their
short maturity.
INVENTORY
Inventory consists primarily of finished 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 range from 3 to 25 years. Major renewals and
betterments that extend the lives of equipment are capitalized while all
other repairs and maintenance are charged to operations
F-6
<PAGE>
as incurred. Disposals are removed at cost less accumulated depreciation
with any resulting gain or loss reflected in operations.
EXCESS COST OVER NET ASSETS ACQUIRED
Excess cost over net assets acquired is carried at cost and is amortized
using the straight-line method over the estimated useful life of 10 years.
Accumulated amortization, as of December 31, 1996 and 1995, amounted to
approximately $673,000 and $458,000, respectively. 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.
ACCOUNTING FOR POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates the impairment of long-lived assets, such as
property, plant and equipment, identifiable intangibles including patents and
trademarks, and excess cost over net assets acquired related to those assets.
In connection with such evaluation, the Company estimates the future cash
flows resulting from the use of that asset and its eventual disposition. If
the sum of the expected future cash flows is less than the carrying value of
the asset, an impairment loss is recognized. The impairment loss is measured
as the amount by which the carrying amount exceeds the fair value of the
asset as determined by quoted market prices when available, or the present
value of the expected future cash flows.
INCOME TAXES
The Company records deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse.
F-7
<PAGE>
FOREIGN CURRENCY TRANSLATION
The translation of foreign currencies into U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using an average exchange
rate for the period. The gains or losses resulting from translation are
included in shareholders' equity.
EARNINGS PER COMMON SHARE
Primary earnings per common share is based on the weighted average number of
shares outstanding during the year.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. The Company maintains cash deposits with several major
banks, which from time-to-time, may exceed federally insured limits.
Management periodically assesses the financial condition of these financial
institutions and believes that any possible credit risk is minimal. The
Company generally sells its products and services to customers in the oil and
gas production industry located in the major oil and gas producing regions of
the world. Procedures are in effect to monitor the credit worthiness of
customers and bad debts have not been significant in relation to the volume
of revenues. The Company generally does not obtain collateral for accounts
receivable.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant estimates made
by management include the recoverability of deferred tax assets, reserves for
inventory obsolescence, allowance for doubtful accounts receivable and
accruals for contingencies.
RECLASSIFICATIONS
Certain amounts included in the prior year financial statements have been
reclassified to conform with current year presentation.
F-8
<PAGE>
2. ACQUISITIONS
On September 27, 1996, the Company acquired 100% of the issued and
outstanding capital shares of Seaboard Lloyd Limited ("Seaboard"), a private
company incorporated in Scotland under the Companies Acts of the United
Kingdom in a privately negotiated transaction.
The business of Seaboard is the manufacture of oilfield equipment. Seaboard
operates from a facility located in Cumbernauld, Scotland. The Company plans
to continue to operate Seaboard in substantially the same manner as it was
operated prior to the acquisition.
The Company paid a purchase price of $1,580,000 cash for the issued share
capital of Seaboard. The source of the funds for the purchase was
approximately $1,080,000 in cash on hand and $500,000 borrowed under the
Company's existing credit facility. The purchase price was allocated as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts Receivable $ 963
Inventory 1,131
Property, plant and equipment 1,702
Excess cost over net
assets acquired 232
Accounts Payable (569)
Accrued Expenses (929)
Long-Term Debt-
Current and non current (950)
------
$1,580
======
</TABLE>
The operating results of Seaboard are included in operations
from the date of acquisition. The following represents the pro-
forma results of operations as if the acquisition of Seaboard had occurred
on January 1, 1995 (in thousands, except per share data)
Year Ended December 31,
1996 1995
---- ----
(unaudited) (unaudited)
Revenues $57,097 $ 41,986
Net income (loss) 908 (1,138)
Net income (loss) per share .05 (.08)
F-9
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Land............................................ $ 497 $ 497
Leased property under capital leases............ 1,719 1,328
Machinery and equipment......................... 9,520 5,236
Buildings, improvements and other............... 7,412 4,763
------- -------
19,148 11,824
Less accumulated depreciation and amortization.. 14,216 8,964
------- -------
Net property, plant and equipment............... $ 4,932 $ 2,860
======= =======
</TABLE>
Leased property is primarily composed of automobiles. Accumulated
amortization of leased property under capital leases amounted to
approximately $1,201,000 and $982,000 as of December 31, 1996 and 1995,
respectively. Depreciation and amortization expense was approximately
$845,000, $791,000, and $705,000 for the fiscal years ended December 31,
1996, 1995, and 1994, respectively.
In March 1996, the Company recognized an impairment loss of approximately
$203,000 on certain property owned by the Company. Management had
contemplated selling this property and obtained an appraisal. The property
was written down to its appraised value less estimated costs to sell.
Operations are continuing at the property. The Company continues to
evaluate its decision regarding whether or not to sell the property.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Insurance.......................... $ 540 $ 554
Vacation........................... 309 253
Salaries........................... 428 357
Other.............................. 1,635 1,018
------ ------
$2,912 $2,182
====== ======
</TABLE>
F-10
<PAGE>
5. DEBT
Long-term debt consisted of the following (in thousands) :
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
------ -------
<S> <C> <C>
Line of credit due to banks................................ $2,712 $2,425
Note payable to a bank due in quarterly installments
of $62,500 plus interest through November 2003.......... 1,748 2,000
Obligations under capital leases and other debt bearing
interest at various rates, due in various installments
through December 1997................................... 661 177
------ ------
Total debt................................................. 5,121 4,602
Less current maturities.................................... 3,295 2,815
------ ------
Long-term debt............................................. $1,826 $1,787
====== ======
</TABLE>
The aggregate maturities of long-term debt, including obligations under
capital leases during the five years subsequent to December 31, 1996 are
$3,295,000, $492,160, $332,290, $250,000 and $250,000, respectively.
Management believes that the carrying value of debt approximates its fair
value at December 31, 1996 and 1995 since the substantial majority of debt
bears interest at variable rates.
In connection with the Barton Wood acquisition, the Company entered into a
10-year $2,500,000 note payable with one of the Barton lenders. At December
31, 1996, the note required 28 remaining quarterly installments of $62,500,
plus interest at the bank's prime rate (8.25% at December 31, 1996 and 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 amended its domestic line of credit in June 1996, effectively
increasing its line of credit to $5 million. The loan facility now provides
for maximum borrowings of the lesser of $5 million or eligible trade accounts
receivable and inventory (as defined in the line of credit). Interest on
outstanding balances are payable monthly at the bank's prime rate minus three
quarters of one percent. At December 31, 1996 and 1995, the bank's prime rate
was 8.25%. The loan facility requires the Company to maintain a ratio of
total indebtedness to tangible net worth of no greater than 1.2 to 1.0.
Additionally, the terms of the agreement restrict the Company from paying
cash dividends. The facility is collateralized by trade accounts receivable
and inventory and expires in June 1997. At December 31, 1996, loan amounts
outstanding under the agreement were $1.0 million. In addition, the Company
had outstanding, against the revolving line of credit, irrevocable letters of
credit amounting to $233,000. At December 31, 1996, the Company's maximum
amount available for additional borrowings was $3,767,000.
F-11
<PAGE>
The Company also has a line of credit overdraft facility in Scotland, which
expires in September 1997 and provides a line of credit of three million
pounds (approximately $5.1 million at December 31, 1996). The line of credit
is used for the purpose of general working capital requirements and provides
overdraft, acceptance credit, loan and documentary credit facilities.
Interest payable on the overdraft facility is equal to the bank's base rate
from time to time plus 1 percent per annum. At December 31, 1996, the bank's
base rate was 6.0%. The credit agreement is collateralized by substantially
all of the assets of Seaboard and is guaranteed by the Company. At December
31, 1996, amounts outstanding under the various facilities were approximately
$1,712,000. In addition, Seaboard had outstanding, against the line of
credit, guarantees and letters of credit in the amount of $1,645,000. At
December 31, 1996, the Company's maximum amount available for additional
borrowings was approximately $1,776,000.
6. 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 (in thousands):
December 31,
------------------
1996 1995
------ ------
Deferred tax liabilities:
Tax over book depreciation $ - $ 48
------- ------
Total deferred tax liabilities... - 48
------- ------
Deferred tax assets:
Net operating loss............... 8,184 8,991
Tax over book inventory basis.... 232 210
Allowance for doubtful accounts.. 182 167
Other............................ 407 219
Valuation allowance.............. (8,184) (8,991)
------- -------
Total deferred tax assets........ 821 596
------- -------
Net deferred tax asset....... $ 821 $ 548
======= =======
F-12
<PAGE>
The valuation allowance was reduced during 1996 by $807,000 and was increased
by $169,000 during 1995. At December 31, 1996, the Company had federal net
operating loss (NOL) carryforwards available to offset future taxable income
in the approximate amount of $24.1 million. Of these NOL carryforwards,
approximately $21.6 million were generated before the Company affected a
quasi-reorganization and expire between the years 2001 and 2003. The balance
of the NOL carryforwards were generated after the quasi-reorganization and
expire in 2009 and 2010. Special limitations exist under the law which may
restrict the utilization of the net loss carryforwards, including the
alternative minimum tax.
Realization of deferred tax assets is dependent on generating sufficient
taxable income in the future to offset these future tax deductions and NOL
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets in excess of the
valuation allowance recorded will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced. Alternatively, if the Company
can maintain the current levels of taxable income into the future then the
deferred tax asset considered realizable could be increased in the near
term.
The following is a summary of the provision for income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Current - (due to alternative minimum tax) $ 50 $ (35) $ 7
Non-cash charge in lieu of income taxes 796 5 127
Deferred tax (benefit) provision (273) (243) 130
----- ----- -----
Provision (benefit) for income taxes $ 573 $(273) $ 264
===== ===== =====
</TABLE>
The non-cash charges in lieu of income taxes represents the amount of income
taxes the Company would pay absent the NOL carryforward which was generated
before the Company affected a quasi-reorganization. Such charges are offset
within shareholders' equity by an increase in additional paid-in capital.
The reconciliation between the actual (benefit)/provision recorded for income
taxes and the (benefit)/provision for income taxes at the United States
federal statutory rate for the years ended December 31, 1996, 1995 and 1994
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------- -----
<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% 4.3% 8.0%
Other (2.2%) 3.6%
---- ----- ----
Effective Tax Rate 36.1% (26.1%) 42.0%
==== ===== ====
</TABLE>
F-13
<PAGE>
7. RELATED PARTY TRANSACTIONS
The Company and Wood Group have agreed to an annual provision for
administrative and financial services fees in amounts to be determined on an
annual basis. The Company paid or accrued approximately $188,000, $173,000
and $155,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
On June 6, 1996, the Company and Wood Group entered into an Investment
Agreement pursuant to which the Company agreed to issue and sell, and Wood
Group agreed to purchase, 7,384,616 shares of the Company's common stock, par
value $0.01 per share. The aggregate purchase price for the shares was
$6,000,000, or $0.8125 per share.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment under noncancellable
operating leases expiring through 2001. The leases provide for minimum
monthly payments, plus in certain instances, payment for taxes, insurance and
maintenance. Certain leases also contain renewal options. The Company is
liable under noncancellable leases for minimum lease commitment amounts
during the five years subsequent to December 31, 1996 as follows: $419,000,
$211,000, $155,000, $124,000 and $27,000, respectively.
Rental expense for the years ended December 31, 1996, 1995 and 1994 were
approximately $424,000, $447,000, and $405,000, respectively.
In connection with the Barton Wood acquisition in late 1993, the Company
leased, and has an option to purchase certain real property from the Barton
lenders ("lessors") at any time during the term of the lease, which extends
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 lessors, which is renewed annually.
The Company has authorized a long-term incentive program for its key
employees. Incentive payments are based on the improvement in pre-tax
earnings per share over a stated amount. No amounts have been earned during
1996, 1995 and 1994.
F-14
<PAGE>
9. 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 were paid or accrued for the
year ended December 31, 1995. In June 1996, the Company began matching
employee's contributions up to 6% of their eligible compensation at a rate of
25% of employee contributions. The Company matching contributions totaled
approximately $53,000 in 1996.
10. SALES TO SIGNIFICANT CUSTOMERS
The Company had one customer in 1996 that accounted for approximately 10% of
its sales. There were no customers during 1995 or 1994 with sales of 10% or
more.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Cash paid for:
Interest $324 $418 $302
==== ==== ====
Income taxes $ 0 $ 9 $ 30
==== ==== ====
</TABLE>
The Company entered into capital lease obligations of $426,000, $125,000, and
$302,000, during the periods ended December 31, 1996, 1995, and 1994,
respectively. During the year ended December 31, 1996 the Company purchased
$350,000 of property, plant and equipment by issuing a note payable to
seller.
Under the Company's cash management system, checks issued but not presented
to bank frequently result in overdraft balances for accounting purposes and
are classified as "Accounts Payable" in the balance sheet and as "Increases
(Decreases) in Bank Overdrafts" in the statement of cash flows.
F-15
<PAGE>
ERC INDUSTRIES, INC.AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance --------------------------
at charged to Balance
beginning costs and charged to at end
of period expenses other accounts Deductions of period
- ---------------------------------- --------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
- --------------------------------
December 31, 1994................. $433 $143 $ 64(a) $512
========= ========== ======== ========= =======
December 31, 1995................. $512 $175 $195(a) $492
========= ========== ======== ========= =======
December 31, 1996................. $492 $ 51 $9(a) $534
========= ========== ======== ========= =======
Inventory Obsolescence Reserve:
- -------------------------------
December 31, 1994................. $2,226 $238(b) $366(c) $2,098
========= ========== ========= ========= =======
December 31, 1995................. $2,098 $414(b) $486(c) $2,026
========= ========== ========= ========= =======
December 31, 1996................. $2,026 $310(b) $264(c) $2,072
========= ========== ========= ========= =======
</TABLE>
(a) Uncollectible accounts written-off.
(b) Valuation adjustments.
(c) Inventory written-off.
F-16
<PAGE>
EXHIBIT 10.11
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 terms 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 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 I460191,
I451961, I444134, I455643 and I456977 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 interests 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 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 its 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 WHEREOF, the parties hereto have caused this Amendment to be executed
effective as of the Effective Date.
BORROWER: ERC INDUSTRIES, INC. BANK: TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: By:
Name: Name:
Title: Title:
<PAGE>
PROMISSORY NOTE
(this "Note")
U.S. $1,000,000.00 April 1, 1996 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC. (the "Maker"), a Delaware
corporation, promises to pay to the order of TEXAS COMMERCE BANK NATIONAL
ASSOCIATION (the "Bank") on or before June 30, 1996 (the "Termination Date"), at
its banking house at 712 Main Street, Houston, Harris County, Texas, or at such
other location as the Bank may designate, in lawful money of the United States
of America, the lesser of: (i) the principal sum of ONE MILLION AND NO/100THS
DOLLARS (U.S. $1,000,000.00) (the "Maximum Loan Total"); or (ii) the aggregate
unpaid principal amount of all loans made by the Bank hereunder (each such loan
being a "Loan"), which may be outstanding on the Termination Date. Each Loan
shall be due and payable on the maturity date agreed to by the Bank and the
Maker with respect to such Loan (the "Maturity Date"). In no event shall any
Maturity Date fall on a date after the Termination Date. Subject to the
limitations set forth herein, Maker may borrow, repay and reborrow hereunder and
there is no limitation on the number of Loans made hereunder so long as the
total unpaid principal amount at anytime outstanding does not exceed the Maximum
Loan Total.
The Loans may be either Prime Rate Loans (as hereinafter defined) or
Eurodollar Loans (as hereinafter defined).
The Maker shall pay interest on each Prime Rate Loan for the Interest
Period (as hereinafter defined) with respect thereto at a rate per annum equal
to the lesser of: (i) the Prime Rate (as hereinafter defined) in effect from
time to time minus one half of one percent (1/2%) (the "Effective Prime Rate");
or (ii) the Highest Lawful Rate (as hereinafter defined), which interest shall
be due and payable on the last day of each calendar quarter and on the last day
of each Interest Period.
The Maker shall pay interest on each Eurodollar Loan for the Interest
Period with respect thereto on the unpaid principal amount thereof at a rate per
annum equal to the lesser of: (i) the Eurodollar Rate (as hereinafter defined)
plus two percent (2%) (the "Effective Eurodollar Rate"); or (ii) the Highest
Lawful Rate, which interest shall be due and payable on the last day of each
such Interest Period.
Any amount not paid when due with respect to principal (whether at
Maturity Date, by acceleration or otherwise), costs, expenses, and to the extent
permitted by applicable law, interest, shall bear interest at a rate per annum
equal to the lesser of: (i) the Prime Rate in effect from time to time plus five
percent (5%); or (ii) the Highest Lawful Rate, which interest shall be due and
payable on demand. The principal of any Loan shall be deemed past due if not
paid on or before the Maturity Date or any earlier maturity date resulting from
acceleration in accordance with the terms of this Note or as provided by law or
otherwise. Interest accrued and unpaid with respect to any Loan shall be deemed
past due if not paid on or before the applicable interest payment due date as
provided for herein.
Notwithstanding the foregoing, if at any time the effective rate of
interest which would otherwise be payable on any Loan evidenced by this Note
exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid
principal balance of such Loan during all such times shall be limited to the
Highest Lawful Rate, but any subsequent reductions in such interest rate shall
not become effective to reduce such interest rate below the Highest Lawful Rate
until the total amount of interest accrued on the unpaid principal balance of
such Loan equals the total amount of interest which would have accrued if the
Effective Prime Rate, or Effective Eurodollar Rate, whichever is applicable, had
at all times been in effect.
Each Loan shall be in an amount not less than $100,000.00 and an
integral multiple of $100,000.00. Interest with respect to Prime Rate Loans and
Eurodollar Loans shall be calculated on the basis of a 360 day year for the
actual days elapsed, unless such calculation would result in a usurious interest
rate, in which case such interest shall be calculated on the basis of a 365 day
or 366 day year, as the case may be.
The following terms shall have the respective meanings indicated:
"Borrowing Date" means any Business Day on which the Bank shall make a
Loan hereunder.
"Business Day" means a day: (i) on which the Bank and commercial banks
in New York City are generally open for business; and (ii) with respect to
Eurodollar Loans, on which dealings in United States Dollar deposits are
carried out in the Eurodollar interbank markets.
"Eurodollar Lending Office" means the office of the Bank located at
712 Main Street, Houston, Texas, or such other office of the Bank as the
Bank may from time to time specify to the Maker.
"Eurodollar Loan" means a Loan which bears interest at a rate
determined by reference to the Eurodollar Rate.
"Eurodollar Rate" means, for each Eurodollar Loan, an interest rate
per annum determined by the Bank by dividing: (i) the rate per annum
determined by the Bank at or before 10:00 a.m. (Houston time) (or as soon
thereafter as practicable) two Business Days before the first day of such
Interest Period to be the rate per annum at which deposits of dollars are
offered to the Bank by prime banks in whatever Eurodollar interbank market
may be selected by the Bank in its sole discretion, acting in good faith,
at the time of determination and in accordance with the usual practice in
such market for delivery on the first day of such Interest Period in
immediately available funds and for a period equal to such Interest Period
and in an amount substantially equal to the amount of the Bank's Eurodollar
Loan during such Interest Period; by (ii) Statutory Reserves.
<PAGE>
"Highest Lawful Rate" as used herein shall mean the maximum
nonusurious interest rate permitted from time to time to be contracted for,
taken, reserved, charged or received on any Loan under applicable federal
or Texas laws, whichever permits the higher lawful rate; provided, however,
that in the event: (i) such maximum nonusurious interest rate shall, at any
time or times during the term of a Loan evidenced hereby, be reduced to a
rate less than the maximum nonusurious rate in effect on the date of such
Loan; and (ii) applicable law permits contracting for, taking, reserving,
charging, and receiving on such Loan throughout the duration thereof the
maximum nonusurious rate in effect on the date such Loan was made, then and
at all such times the Highest Lawful Rate shall be the maximum nonusurious
rate permitted to be contracted for, taken, reserved, charged or received
on such Loan under applicable law in effect on the date of such Loan. At
all such times, if any, as Texas law shall establish the Highest Lawful
Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as
defined in Tex. Rev. Civ. Stat. art. 5069-1.04) from time to time in
effect.
"Interest Period" means, with respect to any Loan, the period
commencing on the Borrowing Date and ending on the Maturity Date,
consistent with the following provisions. The duration of each Interest
Period shall be:
(a) in the case of a Prime Rate Loan, a period of up to the Termination
Date; and (b) in the case of a Eurodollar Loan, 1, 2, or 3 months; in each
case as selected by the Maker and agreed to by the Bank. The Maker's
choice of Interest Period is also subject to the following limitations:
(i) No Interest Period shall end on a date after the Termination Date; and
(ii) If the last day of an Interest Period would be a day other than a
Business Day, the Interest Period shall end on the next succeeding Business
Day (unless the Interest Period relates to a Eurodollar Loan and the next
succeeding Business Day is in a different calendar month than the day on
which the Interest Period would otherwise end, in which case the Interest
Period shall end on the next preceding Business Day).
"Prime Rate" shall mean the rate of interest per annum determined from
time to time by the Bank as its prime rate in effect at its principal
office in Houston, Texas and thereafter entered in the minutes of its Loan
and Discount Committee; each change in the Prime Rate shall be effective on
the date such change is determined; without special notice to the Maker or
any other person or entity. THE PRIME RATE IS A REFERENCE RATE AND DOES
NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE ACTUALLY CHARGED TO ANY
CUSTOMER AND ANY STATEMENT, REPRESENTATION OR WARRANTY IN THAT REGARD OR TO
THAT EFFECT IS EXPRESSLY DISCLAIMED BY BANK. BANK MAY MAKE LOANS AT RATES
OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE.
"Prime Rate Loan" means a loan which bears interest at a rate
determined by reference to the Prime Rate
"Statutory Reserves" shall mean the difference (expressed as a
decimal) of the number one minus the aggregate of the maximum reserve
percentages (including, without limitation, any marginal, special,
emergency, or supplemental reserves) expressed as a decimal established by
the Board and any other banking authority to which the Bank is subject: (a)
with respect to the CD Rate, for new negotiable time deposits in dollars of
over $100,000 with maturities approximately equal to the applicable
Interest Period; and (b) with respect to the Eurodollar Rate, for
Eurocurrency Liabilities (as defined in Regulation D of the Board). Such
reserve percentages shall include, without limitation, those imposed under
such Regulation D. Eurodollar Loans shall be deemed to constitute
Eurocurrency Liabilities and as such shall be deemed to be subject to such
reserve requirements without benefit of or credit for proration, exceptions
or offsets which may be available from time to time to any Bank under such
Regulation D. Statutory Reserves shall be adjusted automatically on and as
of the effective date of any change in any reserve percentage.
The unpaid principal balance of this Note at any time shall be the
total of all Loans made by the Bank to or for the benefit of the Maker, less the
amount of all payments of principal made hereon by or for the account of the
Maker. The Bank's records shall serve as presumptive evidence of any and all
amounts outstanding hereunder.
Any Loan which the Bank agrees to make hereunder shall be made on the
Maker's irrevocable notice, given not later than 10:00 A.M. (Houston time) on,
in the case of Eurodollar Loans, the third Business Day prior to the proposed
Borrowing Date or, in the case of Prime Rate Loans, the first Business Day prior
to the proposed Borrowing Date, from the Maker to the Bank. Each such notice of
a requested borrowing (a "Notice of Requested Borrowing") under this paragraph
may be oral or written, and shall specify: (i) the requested amount of such
Loan; (ii) the proposed Borrowing Date; (iii) whether the requested Loan is to
be a Prime Rate Loan, or Eurodollar Loan; and (iv) the Interest Period for such
Loan. If any Notice of Requested Borrowing shall be oral, the Maker shall
deliver to the Bank prior to the Borrowing Date a confirmatory written Notice of
Requested Borrowing.
If at any time the Bank determines in good faith (which determination
shall be conclusive) that any change in any applicable law, rule or regulation
or in the interpretation, application or administration thereof makes it
unlawful, or any central bank or other governmental authority asserts that it is
unlawful, for the Bank or its foreign branch or branches to maintain or fund any
Loan by means of dollar deposits obtained in any Eurodollar interbank market
(any of the above being described as a "Eurodollar Event"), then, at the option
of the Bank, the aggregate principal amount of the Bank's Eurodollar Loans then
outstanding, which Loans are directly affected by such Eurodollar Event, shall
be prepaid by the Maker. Upon the occurrence of any Eurodollar Event, and at
any time thereafter so long as such Eurodollar Event shall continue, the Bank
may exercise its aforesaid option by giving written notice thereof to the Maker.
Any prepayment of any Eurodollar Loan which is required under the
preceding paragraph shall be made, together with accrued and unpaid interest and
all other amounts payable to the Bank under this Note with respect to such
prepaid Eurodollar Loan on the date stated in the notice to the Maker referred
to above, which date ("required prepayment date") shall be not less than 15 days
from the date of such notice. If any Eurodollar Loan is required to be prepaid
under the
<PAGE>
preceding paragraph, the Bank shall make on the required prepayment date an
Alternate Base Rate Loan in the same principal amount and with an Interest
Period ending on the same day as the Eurodollar Loan so prepaid.
If any domestic or foreign law, treaty, rule or regulation (whether
now in effect or hereinafter enacted or promulgated, including Regulation D of
the Board of Governors of the Federal Reserve System) or any interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof (whether or not having the force of
law):
(a) changes, imposes, modifies, applies or deems applicable any reserve,
special deposit or similar requirements in respect of any such Loan
(excluding those for which the Bank is fully compensated pursuant to
adjustments made in the definition of the CD Rate) or against assets
of, deposits with or for the account of, or credit extended or
committed by, the Bank; or
(b) imposes on the Bank or the interbank eurocurrency deposit and transfer
market or the market for domestic bank certificates of deposit any
other condition affecting any such Loan;
and the result of any of the foregoing is to impose a cost to the Bank of
agreeing to make, funding or maintaining any such Loan or to reduce the amount
of any sum receivable by the Bank in respect of any such Loan, then the Bank may
notify the Maker in writing of the happening of such event and Maker shall upon
demand pay to the Bank such additional amounts as will compensate the Bank for
such costs. Without prejudice to the survival of any other agreement of the
Maker under this Note, the obligations of the Maker under this paragraph shall
survive the termination of this Note.
The Maker may on any Business Day prepay the outstanding principal
amount of any Prime Rate Loan, in whole or in part, together with accrued
interest to the date of such prepayment on the principal amount prepaid.
Partial prepayments shall be in an aggregate principal amount of $100,000.00 or
a greater integral multiple of $100,000.00. Except as specified in this
paragraph, the Maker shall have no right to prepay any Loan.
The Maker will indemnify the Bank against, and reimburse the Bank on
demand for, any loss, cost or expense incurred or sustained by the Bank
(including without limitation any loss, cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by the Bank
to fund or maintain Loans bearing interest at the Eurodollar Rate) as a result
of: (a) any payment or prepayment (whether permitted by the Bank or required
hereunder or otherwise) of all or a portion of any Eurodollar Loan on a day
other than Maturity Date of such Loan; (b) any payment or prepayment, whether
required hereunder or otherwise, of any Eurodollar Loan made after the delivery
of a Notice of Requested Borrowing but before the applicable Borrowing Date if
such payment or prepayment prevents the proposed Loan from becoming fully
effective; or (c) the failure of any Eurodollar Loan to be made by the Bank due
to any action or inaction of the Maker. For purposes of this paragraph, funding
losses arising by reason of liquidation or reemployment of deposits or other
funds acquired by the Bank to fund or maintain Loans bearing interest at the
Eurodollar Rate shall be calculated as the remainder obtained by subtracting:
(i) the yield (reflecting both stated interest rate and discount, if any) to
maturity of obligations of the United States Treasury in an amount equal or
comparable to such Loan for the period of time commencing on the date of the
payment, prepayment or change of rate as provided above and ending on the last
day of the subject Interest Period; from (ii) the interest payable at the
Eurodollar Rate for the period commencing on the date of such payment,
prepayment or change of rate and ending on the last day of such Interest Period.
Such funding losses and other costs and expenses shall be calculated and billed
by the Bank and such bill shall, as to the costs incurred, be conclusive absent
manifest error.
If after the date of this Note, the Bank shall have determined that
the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Bank with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on the
Bank's capital as a consequence of making any Loans hereunder to a level below
that which the Bank could have achieved but for such adoption, change or
compliance (taking into consideration the Bank's policies with respect to
capital adequacy) by an amount deemed by the Bank in good faith to be material,
then from time to time, the Maker shall pay to the Bank such additional amount
or amounts as will compensate the Bank for such reduction.
A certificate of the Bank setting forth such amount or amounts as
shall be necessary to compensate the Bank as specified in the immediately
preceding paragraphs above shall be delivered as soon as practicable to the
Maker and shall be conclusive and binding, absent manifest error. The Maker
shall pay the Bank the amount shown as due on any such certificate within 15
days after Bank delivers such certificate. In preparing such certificate, the
Bank may employ such assumptions and allocations of costs and expenses as it
shall in good faith deem reasonable and may use any reasonable averaging and
attribution method.
If any payment of interest or principal herein provided for is not
paid when due, or if the holder or owner of this Note shall deem itself
insecure, then the owner or holder of this Note may at its option, by notice to
the Maker, declare the unpaid principal balance of all Loans, all accrued and
unpaid interest thereon and all other amounts payable under this Note to be
forthwith due and payable, whereupon the Loans, all such interest and all such
amounts shall become and be forthwith due and payable in full, without
presentment, demand, protest, notice of intent to accelerate, notice of actual
acceleration or further notice of any kind, all of which are hereby expressly
waived by the Maker.
If default is made in the payment of this Note and it is placed in the
hands of an attorney for collection, or collected through probate or bankruptcy
proceedings, or if suit is brought on the same, the Maker agrees to pay
attorneys' fees and all costs and expenses.
<PAGE>
This Note is issued by the Maker to evidence Loans outstanding from time
to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$1,000,000.00 line of credit (the "Line of Credit") extended by the Bank to the
Maker. This Note is a renewal and modification of the promissory note of Maker
delivered to Bank dated July 3, 1995, in the principal amount of $1,000,000.00
and is the "Note 2" as defined in and subject to the terms and conditions of a
Credit Agreement dated as of February 25, 1991, as duly amended through the date
hereof (the "Credit Agreement"). This Note, the Credit Agreement, and all other
agreements, documents, instruments, certificates or other writings executed or
delivered in connection with or pursuant to the terms of any of the foregoing
are herein referred to as the "Loan Documents").
The Maker warrants and represents to the Bank, and to all other owners
and/or holders of any indebtedness evidenced hereby, that all Loans evidenced by
this Note are for business, commercial, investment or other similar purpose and
not primarily for personal, family, household or agricultural use, as such terms
are used in Chapter One of the Texas Credit Code, Tex. Rev. Civ. Stat. arts.
5069-1.01 et. seq.
The Maker warrants and represents to the Bank and to all other owners or
holders of this Note that no Loans shall be used for the purchase or carrying of
any "margin stock" within the meaning of Regulation "U" of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect on the
date hereof.
Except as otherwise specified in this Note, the Maker and any and all
co-makers, endorsers, guarantors and sureties hereby severally waive grace,
presentment, demand, notice of default, notice of intent to accelerate, notice
of acceleration, and all other demands and notices of any nature or type
whatsoever, in connection with the delivery, acceptance, performance, default,
dishonor or enforcement of, or entry of judgment in connection with this Note,
and further waive the filing of suit hereon for the purpose of fixing liability.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS
NOTE SHALL BE PERFORMABLE FOR ALL PURPOSES IN THE COUNTY OF THE BANK'S PRINCIPAL
OFFICE IN TEXAS, AND THE MAKER AND THE BANK AGREE THAT THE COUNTY IN WHICH
BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR
PROCEEDING BROUGHT BY THE MAKER OR THE BANK, WHETHER IN CONTRACT, TORT, OR
OTHERWISE. ANY ACTION OR PROCEEDING AGAINST THE MAKER MAY BE BROUGHT IN ANY
STATE OR FEDERAL COURT IN SUCH COUNTY. THE MAKER HEREBY IRREVOCABLY (A) SUBMITS
TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT
MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. THE
MAKER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW.
NOTHING HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS SHALL AFFECT THE RIGHT OF
THE BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE MAKER OR
WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS OR VENUES.
The Maker and the Bank expressly agree, pursuant to Article 15.10(b) of
Chapter 15 ("Chapter 15") of the Texas Credit Code, that Chapter 15 shall not
apply to this Note or to any Loan and that this Note and all such Loans shall
not be governed by or subject to the provisions of Chapter 15 in any manner
whatsoever.
It is the intention of Maker and Bank to comply with usury laws in force
in the State of Texas and in the United States of America as applicable.
Anything in this Note to the contrary notwithstanding, the Maker shall never be
required to pay unearned interest on this Note and shall never be required to
pay interest on this Note at a rate in excess of the Highest Lawful Rate, and if
the effective rate of interest which would otherwise be payable under this Note
would exceed the Highest Lawful Rate, or if the holder of the Note shall receive
any unearned interest or shall receive monies that are deemed to constitute
interest which would increase the effective rate of interest payable under this
Note to a rate in excess of the Highest Lawful Rate, then: (i) the amount of
interest which would otherwise be payable under this Note shall be reduced to
the amount allowed under applicable law; and (ii) any unearned interest paid by
the Maker or any interest paid by the Maker in excess of the Highest Lawful Rate
shall, at the option of the holder of this Note, be either refunded to the Maker
or credited on the principal of this Note. It is further agreed that, without
limitation of the foregoing, all calculations of the rate of interest contracted
for, charged or received by the Bank or any holder of this Note that are made
for the purpose of determining whether such rate exceeds the Highest Lawful Rate
shall be made, to the extent permitted by usury laws applicable to the Bank (now
or hereafter enacted), by amortizing, prorating and spreading in equal parts
during the period of the full stated term of the Loans evidenced by this Note
all interest at any time contracted for, charged or received by the Bank in
connection therewith.
The Bank reserves the right in its sole discretion without notice to
Maker, to sell participations or assign its interest, or both in all or part of
the Loans, the Note, or the Line of Credit.
THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the Maker has executed this Note effective the Date
first aforesaid.
MAKER: ERC INDUSTRIES, INC.
<PAGE>
By:
Name:
Title:
Acknowledged for purposes of
notice pursuant to the above
cited statute by:
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
Name:
Title:
<PAGE>
EXHIBIT 10.12
June 30, 1996
(Effective Date")
ERC Industries, Inc.
16920 Park Row
Houston, Texas 77084
RE: $5,000,000.00 Revolving Line of Credit from Texas Commerce Bank National
Association ("Bank") to ERC Industries, Inc., ("Borrower")
Gentlemen:
Bank is pleased to extend to Borrower a revolving line of credit in
the amount of $5,000,000.00 (the "Revolving Line of Credit") for loans and the
issuance of commercial and standby letters of credit, subject to the terms and
conditions stated herein (as the same may be amended, renewed, extended,
supplemented or restated from time to time, this "Agreement").
NOW THEREFORE, in consideration of the above stated premises, Bank and
Borrower hereby agree as follows:
T E R M S A N D C O N D I T I O N S
-------------------------------------
SECTION 1 - THE LINE OF CREDIT
--------- ------------------
Section 1.1 REVOLVING LINE OF CREDIT
A. Advances: The Bank agrees to make advances (an "Advance" or "Advances") to
Borrower, upon request of Borrower from time to time from the Effective
Date to but not including June 30, 1997 not to exceed at any one time
outstanding the lesser of the Borrowing Base or $5,000,000.00, Borrower
having the right to borrow, repay and reborrow. Advances shall be used for
the purpose of meeting the working capital requirements and general
corporate purposes of Borrower. Advances shall be evidenced by, and made
as provided in a promissory note of even date herewith executed by Borrower
and delivered to Bank ("Note"), a copy of which is attached hereto as
Exhibit "A" and made a part hereof for all purposes (the "Note" as used in
this Agreement, shall include without limitation, any and all renewals,
extensions, modifications, rearrangements, replacements thereof and
substitutions therefor).
B. Letters of Credit: The Bank agrees to issue standby and commercial letters
of credit (an "L/C" or "L/Cs") from time to time, from the Effective Date
to but not including June 30, 1997, for the account of Borrower and in
favor of such person or persons as may be designated by Borrower. Each L/C
shall have an expiration date of no later than June 30, 1998. The Borrower
shall reimburse the Bank immediately upon demand for any drawings made
under an L/C. Prior to June 30, 1997, the Borrower may request an Advance
under the Note, and the Bank is hereby authorized to make such an Advance
without notice to the Borrower, to pay any drawing under any L/C.
C. Maximum Amount:
The maximum amount which will be available to Borrower under the Revolving
Line of Credit is the lesser of the Borrowing Base or $5,000,000.00
("Maximum Amount"), which in determining whether any amounts are available
under the Revolving Line of Credit, Bank will deduct from the Maximum
Amount, the amount of all unpaid Advances (the outstanding principal
balance on the Note) and all L/C Obligations. The term "L/C Obligations"
shall mean the face amount of all L/Cs issued and outstanding plus any
unreimbursed drawings under the L/Cs plus any other amounts owing to Bank
under or in respect of any L/C or Application (as hereinafter defined).
Borrower and Bank agree that the following outstanding L/Cs shall be deemed
made under and subject to the terms of this Agreement.
VALUE EXPIR.
NUMBER DATE DATE AMOUNT
------------ -------- -------- ----------
I444134 03/09/94 03/01/95 7,662.08
I451961 03/22/95 02/15/97 150,000.00
I455643 08/29/95 10/31/97 2,820.00
I456977 11/02/95 08/19/96 8,200.00
I460191 03/05/96 08/30/96 10,000.00
I460864 03/29/96 08/28/96 8,200.00
I461290 04/17/96 07/24/96 10,000.00
I461292 04/17/96 07/24/96 10,000.00
I461946 05/16/96 10/25/96 10,000.00
I461964 05/17/96 11/25/96 27,600.00
I462469 06/10/96 09/11/96 9,929.03
I463156 07/09/96 12/08/96 9,000.00
Section 1.2 BORROWING BASE REPORT. Within 30 days after the end of every
calendar month Borrower shall furnish the Bank a Borrowing Base Report
substantially in the form of Exhibit B, together with an accounts receivable
aging and listing.
<PAGE>
Section 1.3 BORROWING BASE. The Borrowing Base shall be the amount available
for borrowing on each Borrowing Base Report, subject to verification by the
Bank. If the Bank upon such verification does not agree with the Borrowing Base
Report submitted, within 5 days after written notice by Bank to Borrower,
Borrower shall correct such Borrowing Base Report and paydown the Note in
accordance with the corrected Borrowing Base Report. If no Borrowing Base
Report is received within the time specified, the Bank may in its sole
discretion set the Borrowing Base at any amount it deems appropriate.
Section 1.4 REQUIRED PAYDOWNS. If the outstanding principal balance of the
Note plus all L/C obligations at any time exceeds the Borrowing Base then in
effect, Borrower shall make a paydown on the Note in an amount sufficient to
reduce the unpaid balance on the Note to an amount that when added to all L/C
Obligations is no greater than the Borrowing Base. Such paydown shall be
accompanied by: (a) all accrued and unpaid interest on the amount prepaid; and
(b) any prepayment charge required by the Note and shall be due concurrently
with the Borrowing Base Report.
Section 1.5 INTEREST RATE, TERMS AND FEES:
A. The Note: Advances under the Note shall bear interest at the rates of
interest as determined in accordance with the terms of the Note. Principal
and interest on each Advance shall be made as more particularly described
in the Note.
B. Letter of Credit Fees: In consideration for the issuance of any L/C,
Borrower agrees to pay to Bank a letter of credit issuance fee ("Fee") in
respect of such L/C in an amount equal to: (1) in the case of commercial
L/Cs, one quarter of one percent (1/4%) per quarter or fraction thereof on
the face amount of such L/C; and (2) in the case of standby L/Cs one
percent (1%) per annum on the face amount of such L/C. The Fee shall be
paid to Bank at its offices at 712 Main Street, Third Floor, Houston, Texas
77002 to the attention of the Manager, Documentary Services Division, or
such other address designated by the Bank, in advance of the date of
issuance of such L/C. The Fee in respect of each L/C shall be calculated
from the date of issuance of the L/C to and including the date of
expiration of such L/C calculated in accordance with the then current fee
schedule of Bank.
Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on June
30, 1997; or (ii) such earlier date resulting from acceleration as defined in
Section 5 hereof.
Section 1.7 COLLATERAL: Borrower ratifies and confirms that its obligations
under the Revolving Line of Credit, the Note, L/Cs and Applications are secured
by a security interest of first priority in Borrower's accounts receivables and
inventory as evidenced by a Security Agreement dated February 25, 1991 executed
by Borrower and Bank as amended by a First Amendment dated as of February 25,
1991 (as further amended, supplemented or replaced from time to time, the
"Security Agreement"). References to the Credit Agreement and Note in the
Security Agreement shall mean this Agreement and the Note referenced herein.
The Agreement, the Security Agreement, the Note, the Applications, the L/Cs and
each and every other written document, instrument, agreement related to the
Revolving Line of Credit (together with any and all renewals, extensions,
modifications, supplements, amendments and replacements thereof) that may be
required to be executed and delivered by Borrower to Bank shall hereinafter be
called the "Loan Documents".
Section 1.8 NEGATIVE PLEDGE: Borrower will not create or permit to exist any
lien upon any of its property now owned or hereafter acquired, or acquire any
property upon any conditional sale or other title retention device or
arrangement or any purchase money security agreement; or in any manner directly
or indirectly sell, assign, pledge or otherwise transfer any of its accounts or
other property, except: (a) liens, not for borrowed money, arising in the
ordinary course of business; (b) liens for taxes not delinquent or being
contested in good faith by appropriate proceedings; (c) liens in effect on the
date hereof and disclosed to Bank in writing, so long as neither the
indebtedness secured thereby nor the property covered thereby increases; (d)
liens in favor of Bank, or otherwise approved in writing by Bank; (e) liens
resulting from the leasing of equipment; and (f) purchase money liens not to
exceed $300,000.00 in the aggregate per year, arising in the ordinary course of
business. Notwithstanding anything to the contrary herein, Borrower will not
permit any Lien on any accounts receivable or inventory that secures the Loans
unless Bank shall provide Borrower with Bank's prior written consent.
SECTION 2 - CONDITIONS PRECEDENT
--------- --------------------
Section 2.1 CONDITIONS PRECEDENT: The Bank shall be under no obligation to
make any Advance or issue any L/C, until the Borrower has executed and
delivered, in form and substance satisfactory to Bank, the following documents:
(i) this Agreement; (ii) the Note; (iii) an application substantially in the
form of, in the case of each commercial L/C, Exhibit "C-1" attached hereto, and
in the case of each standby L/C, Exhibit "C-2" attached hereto, in each case,
duly completed and executed by Borrower to the complete satisfaction of Bank
("Application" or "Applications") not less than two Business Days prior to the
date on which the L/C is requested to be issued; and (iv) any other document,
instrument, certificate or instrument that Bank may reasonably require to
consider the request.
SECTION 3 - REPRESENTATION AND WARRANTIES
--------- -----------------------------
To induce Bank to enter into this Agreement and to make Advances and
issue L/Cs, Borrower represents and warrants that on the date hereof and on the
date of each request for an Advance and submission of each Application, and on
the date of making an Advance and the date of issuance of any L/C, and at all
times during the term of this Agreement:
Section 3.1 ORGANIZATION, DUE EXECUTION, AND ENFORCEABILITY: Borrower is and
shall remain duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization; has all the power and authority to
conduct its business as presently conducted, and is duly qualified to do
business and in good standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification desirable; the execution of
the Loan Documents by Borrower has been duly authorized and does not contravene
the articles of incorporation or, by-laws of Borrower, and will not result in
the breach of, or constitute a default under any agreement, judgment, order or
decree binding upon Borrower, and the Loan Documents executed by Borrower are
legally binding
<PAGE>
obligations of Borrower, enforceable in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency and other similar laws;
Section 3.2 ACCURATE INFORMATION: The information in the financial statements
and other information provided, or to be provided to Bank by Borrower is true,
correct and accurate in all material respects as of the date provided and shall
be true and correct in all material respects on the date that any Advance or
L/C is requested to be funded or issued;
Section 3.3 NO DEFAULTS: No Event of Default (as defined hereinafter) or
default exists under this Agreement or under any of the other Loan Documents and
no default exists under any other agreement material to the financial condition
of Borrower or is continuing;
Section 3.4 NO LITIGATION, ETC.: Borrower is not subject to any order,
judgment, or litigation which could materially and adversely affect its
respective financial condition, business affairs or operations;
Section 3.5 PAYMENT OF TAXES: Borrower has paid all its taxes due and owing
including without limitation employment taxes, except for those for which
extensions have been obtained and those being contested in good faith and for
which adequate reserves have been established;
Section 3.6 COMPLIANCE, GOVERNMENTAL REQUIREMENTS AND PERMITS: Borrower is not
subject to any governmental order, any administrative or judicial order or
judgment that could materially and adversely affect its financial condition,
business affairs or operations of its business. Borrower has no material
contingent liability with respect to compliance with laws, rules and regulations
applicable to Borrower; and
Section 3.7 REGULATION U: None of the proceeds of any Advance shall be used
for the purpose of purchasing or carrying directly or indirectly, any margin
stock or for any other purpose which would make any credit provided by Bank to
Borrower hereunder a purpose credit within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System.
SECTION 4 - COVENANTS
--------- ---------
Borrower covenants and agrees that so long as any amounts remain
unpaid under the Note or any L/C is outstanding or any amounts are owing under
the other Loan Documents it shall:
Section 4.1 FINANCIAL STATEMENTS AND FINANCIAL COVENANTS: ensure that
financial statements and financial covenants comply with the financial covenants
and other covenants described, and calculated as set forth, in Exhibit "D".
Unless otherwise provided on Exhibit "D", all such amounts and ratios will be
calculated: (a) on the basis of United States GAAP for the Borrower; and (b) on
a consolidated basis. Compliance with the requirements of Exhibit "D" will be
determined as of the dates of the financial statements to be provided to Bank;
Section 4.2 REPRESENTATION AND WARRANTIES: ensure that each of the
representations and warranties of Borrower contained herein shall be true and
correct when given and when deemed given hereunder and notify Bank immediately
should any representation or warranty become untrue or misleading;
Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify Bank in
writing at least 30 days prior to any date that Borrower changes its name or the
location of its principal place of business or the location of its books and
records, and notify Bank immediately if Borrower becomes a party to any merger
or consolidation, or if there is a change or modification to its business or
legal structure; and
Section 4.4 COMPLIANCE: at all times comply with applicable laws, rules,
regulations, ordinances and Executive Orders.
SECTION 5 - EVENTS OF DEFAULT AND REMEDIES
--------- ------------------------------
If any of the following events ("Events of Default") shall occur, then
Bank may do any or all of the following: (1) declare the Note to be, and
thereupon the principal balance of the Note shall forthwith become, immediately
due and payable, together with all accrued and unpaid interest thereon and all
fees and all other obligations and indebtedness of Borrower under the Loan
Documents, without notice of acceleration or of intention to accelerate,
presentment and demand or protest, all of which are hereby expressly waived; (2)
without notice to Borrower, terminate the Revolving Line of Credit and refuse to
consider requests for Advances and issuances of L/Cs; (3) set off, in any order,
against the indebtedness of Borrower under the Loan Documents any debt owing by
Bank to Borrower, including, but not limited to, any deposit account, which
right is hereby granted by Borrower to Bank; and (4) exercise any and all other
rights pursuant to the Loan Documents, at law, in equity or otherwise:
(a) Borrower shall fail to pay any principal of or interest on the Note or any
other obligation under any Application or under any other Loan Document as and
when due; or
(b) Borrower shall fail to pay at maturity, or within any applicable period of
grace, any principal of or interest on any other borrowed money obligation or
shall fail to observe or perform any term, covenant or agreement contained in
any agreement or obligation by which it is bound; or
(c) Any representation or warranty made in connection with any Loan Document
shall prove to have been incorrect, false or misleading; or
(d) Default shall occur in the punctual and complete performance of any covenant
contained in any Loan Document; or
(e) Final judgment for the payment of money shall be rendered against Borrower
and the same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed; or
(f) Any order shall be entered in any proceeding against Borrower decreeing the
dissolution, liquidation or split-up thereof, and such order shall remain in
effect for 30 days; or
<PAGE>
(g) Borrower shall make a general assignment for the benefit of creditors or
shall petition or apply to any tribunal for the appointment of a trustee,
custodian, receiver or liquidator of all or any substantial part of its
business, estate or assets or shall commence any proceeding under any
bankruptcy, insolvency, dissolution or liquidation law of any jurisdiction,
whether now or hereafter in effect; or any such petition or application shall be
filed or any such proceeding shall be commenced against Borrower and Borrower,
by act or omission shall indicate approval thereof, consent thereto or
acquiescence therein, or an order shall be entered appointing a trustee,
custodian, receiver or liquidator of all or any substantial part of the assets
of Borrower or granting relief to Borrower or approving the petition in any such
proceeding, and such order shall remain in effect for more than 30 days; or
Borrower shall fail generally to pay its debts as they become due or suffer any
writ of attachment or execution or any similar process to be issued or levied
against it or any substantial part of its property which is not released,
stayed, bonded or vacated within 30 days after its issue or levy; or
(h) Borrower shall have concealed, removed, or permitted to be concealed or
removed, any part of its property, with intent to hinder, delay or defraud its
creditors or any of them, or made or suffered a transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or shall have made any transfer of its property to or for the benefit of a
creditor at a time when other creditors similarly situated have not been paid;
or
(i) Any change shall occur in the ownership of Borrower, such that John Wood
Group P.L.C. shall not remain directly or indirectly, the majority owner of
Borrower.
SECTION 6 - MISCELLANEOUS
--------- -------------
Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the
part of Bank in exercising any power or right in connection herewith or under
any of the Loan Documents shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other power or right. No
course of dealing between Borrower and Bank shall operate as a waiver of any
provision of this Agreement or any other Loan Document nor any consent to any
departure therefrom shall in any event be effective unless the same shall be in
writing and signed by the person against whom enforcement thereof is to be
sought, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given.
Section 6.2 EXPENSES: Any provision to the contrary notwithstanding, and
whether or not the transactions contemplated by this Agreement shall be
consummated, Borrower agrees to pay on demand all reasonable out-of-pocket
expenses (including, without limitation, the fees and expenses of counsel for
Bank) in connection with the negotiation, preparation, execution, filing,
recording, modification, supplementing and waiver of the Loan Documents and the
making, servicing and collection of any of the indebtedness evidenced by the
Note and any Application. The obligations of Borrower under this and the
following section shall survive the termination of this Agreement.
Section 6.3 USURY: It is the intent of Borrower and of Bank in the execution
and performance of this Agreement and any other Loan Document to contract in
strict compliance with the usury laws of the State of Texas and as applicable,
the United States of America. Borrower and Bank agree that none of the terms
and provisions contained in this Agreement or any other Loan Document shall ever
be construed to create a contract to pay for the use, forbearance or detention
of money with interest at a rate in excess of the maximum nonusurious rate of
interest permitted to be charged by applicable Federal or Texas law (whichever
shall permit the higher lawful rate) from time to time in effect ("Highest
Lawful Rate"). At all times, if any, that Chapter One of the Texas Credit Code
shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the
"indicated rate ceiling" as defined in that Chapter. The provisions of this
paragraph shall control over all other provisions of this Agreement and all
other Loan Documents which may be in apparent conflict herewith. In the event
Bank shall collect moneys which are deemed to constitute interest in excess of
the legal rate, such moneys shall be immediately returned to the payor thereof
(or, at the option of Bank, credited against the unpaid principal of the Note)
upon such determination.
Section 6.4 SURVIVAL: All representations, warranties, covenants and
agreements made by or on behalf of Borrower in connection with the Loan
Documents shall survive the execution and delivery of the Loan Documents; shall
not be affected by any investigation made by Bank, and shall bind Borrower and
successors, trustees, receivers and assigns of Borrower and inure to the benefit
of the successors and assigns of Bank; provided that the undertaking of Bank
hereunder to consider making Advances to and for issuances of L/Cs upon the
application of Borrower shall not inure to the benefit of any successor or
assign of Borrower. Except as otherwise provided herein, the term of this
Agreement shall be until the final maturity of the Note and the full and final
payment of all amounts due under the Note and any Application and the Loan
Documents.
Section 6.5 DOCUMENTARY MATTERS: This Agreement may be executed in several
identical counterparts, and by the parties hereto on separate counterparts, and
each counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts shall constitute but one and the
same instrument. The headings and captions appearing in the Loan Documents have
been included solely for convenience and shall not be considered in construing
the Loan Documents. The Loan Documents embody the entire agreement between
Borrower and Bank and supersede all prior proposals, agreements and
understandings. If any provision of any Loan Document shall be invalid, illegal
or unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions shall not be affected or impaired
thereby.
Section 6.6 PRIOR CREDIT AGREEMENT: This Agreement supersedes that Credit
Agreement (Borrowing Base), dated February 25, 1991 executed by Borrower and
Bank, as 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, Ninth Amendment dated February 26, 1996 and Tenth
Amendment dated April 1, 1996.
Section 6.7 GOVERNING LAW: THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE THE LAWS OF THE
UNITED STATES OF AMERICA.
<PAGE>
Section 6.8 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE
TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Sincerely Yours,
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
Name:
Title:
Acknowledged and agreed to this _____ day of ____________, 1996, but effective
as of the Effective Date, by:
"BORROWER"
ERC INDUSTRIES, INC.
By:
Name:
Title:
EXHIBITS:
A Promissory Note
B Borrowing Base Report
C-1 Application for Commercial Letters of Credit
C-2 Application for Standby Letters of Credit
D Financial Covenants And Compliance Certificate
<PAGE>
EXHIBIT A
PROMISSORY NOTE
(this "Note")
U.S. $5,000,000.00 June 30, 1996 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation (the "Maker"),
promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the
"Bank") on or before June 30, 1997 (the "Termination Date"), at its banking
house at 712 Main Street, Houston, Harris County, Texas, or at such other
location as the Bank may designate, in lawful money of the United States of
America, the lesser of: (i) the principal sum of FIVE MILLION AND NO/100THS
UNITED STATES DOLLARS (U.S. $5,000,000.00) (the "Maximum Loan Total"); or (ii)
the aggregate unpaid principal amount of all loans made by the Bank hereunder
(each such loan being a "Loan"), which may be outstanding on the Termination
Date. Each Loan shall be due and payable on the maturity date agreed to by the
Bank and the Maker with respect to such Loan (the "Maturity Date"). In no event
shall any Maturity Date fall on a date after the Termination Date. Subject to
the limitations set forth herein, Maker may borrow, repay and reborrow hereunder
and there is no limitation on the number of Loans made hereunder so long as the
total unpaid principal amount at any time outstanding does not exceed the
Maximum Loan Total.
The Loans may be either Prime Rate Loans (as hereinafter defined) or Eurodollar
Loans (as hereinafter defined).
The Maker shall pay interest on each Prime Rate Loan for the Interest Period (as
hereinafter defined) with respect thereto on the unpaid principal amount thereof
at a rate per annum equal to the lesser of: (i) the Prime Rate (as hereinafter
defined) in effect from time to time minus three-quarters of one percent (3/4%)
(the "Effective Prime Rate"); or (ii) the Highest Lawful Rate (as hereinafter
defined), which interest shall be due and payable on the last day of each
calendar quarter and on the last day of each Interest Period.
The Maker shall pay interest on each Eurodollar Loan for the Interest Period
with respect thereto on the unpaid principal amount thereof at a rate per annum
equal to the lesser of: (i) the Eurodollar Rate (as hereinafter defined) plus
one and one-quarter of one percent (1 1/4%) (the "Effective Eurodollar Rate");
or (ii) the Highest Lawful Rate, which interest shall be due and payable on the
last day of each such Interest Period, and if such Interest Period has a
duration exceeding three months, on the last day of each third month during such
Interest Period.
Any amount not paid when due with respect to principal (whether at Maturity
Date, by acceleration or otherwise), costs, expenses, and to the extent
permitted by applicable law, interest, shall bear interest at a rate per annum
equal to the lesser of: (i) the Prime Rate in effect from time to time plus five
percent (5.00%); or (ii) the Highest Lawful Rate, which interest shall be due
and payable on demand. The principal of any Loan shall be deemed past due if
not paid on or before the Maturity Date or any earlier maturity date resulting
from acceleration in accordance with the terms of this Note or as provided by
law or otherwise. Interest accrued and unpaid with respect to any Loan shall be
deemed past due if not paid on or before the applicable interest payment due
date as provided for herein.
Notwithstanding the foregoing, if at any time the effective rate of interest
which would otherwise be payable on any Loan evidenced by this Note exceeds the
Highest Lawful Rate, the rate of interest to accrue on the unpaid principal
balance of such Loan during all such times shall be limited to the Highest
Lawful Rate, but any subsequent reductions in such interest rate shall not
become effective to reduce such interest rate below the Highest Lawful Rate
until the total amount of interest accrued on the unpaid principal balance of
such Loan equals the total amount of interest which would have accrued if the
Effective Prime Rate or Effective Eurodollar Rate, whichever is applicable, had
at all times been in effect.
Each Prime Rate Loan shall be in an amount not less than $50,000.00 or an
integral multiple of $50,000.00 in excess thereof; and each Eurodollar Loan
shall be in an amount not less than $150,000.00 or an integral multiple of
$50,000.00 in excess thereof. Interest with respect to Prime Rate Loans shall
be calculated on the basis of a 365 day year or 366 day year, as the case may
be, for the actual number of days elapsed. Interest with respect to Eurodollar
Loans shall be calculated on the basis of a 360 day year for the actual days
elapsed, unless such calculation would result in a usurious interest rate, in
which case such interest shall be calculated on the basis of a 365 day or 366
day year, as the case may be.
The following terms shall have the respective meanings indicated:
"Borrowing Date" means any Business Day on which the Bank shall make a Loan
hereunder.
"Business Day" means a day: (i) on which the Bank and commercial banks in
New York City are generally open for business; and (ii) with respect to
Eurodollar Loans, on which dealings in United States Dollar deposits are
carried out in the Eurodollar interbank markets.
"Eurodollar Lending Office" means the office of the Bank located at 712
Main Street, Houston, Texas, or such other office of the Bank as the Bank
may from time to time specify to the Maker.
"Eurodollar Loan" means a Loan which bears interest at a rate determined by
reference to the Eurodollar Rate.
"Eurodollar Rate" means, for each Eurodollar Loan, an interest rate per
annum determined by the Bank by dividing: (i) the rate per annum determined
by the Bank at or before 10:00 a.m. (Houston time) (or as soon thereafter
as practicable) two Business Days before the first day of such Interest
Period to be the rate per annum at which deposits of dollars are offered to
the Bank by prime banks in whatever Eurodollar interbank market may be
selected by the Bank in its sole discretion, acting in good faith, at the
time of determination and in accordance with the usual practice in such
market for delivery on the first day of such
<PAGE>
Interest Period in immediately available funds and for a period equal to
such Interest Period and in an amount substantially equal to the amount of
the Bank's Eurodollar Loan during such Interest Period; by (ii) Statutory
Reserves.
"Highest Lawful Rate" as used herein shall mean the maximum nonusurious
interest rate permitted from time to time to be contracted for, taken,
reserved, charged or received on any Loan under applicable federal or Texas
laws, whichever permits the higher lawful rate; provided, however, that in
the event: (i) such maximum nonusurious interest rate shall, at any time or
times during the term of a Loan evidenced hereby, be reduced to a rate less
than the maximum nonusurious rate in effect on the date of such Loan; and
(ii) applicable law permits contracting for, taking, reserving, charging,
and receiving on such Loan throughout the duration thereof the maximum
nonusurious rate in effect on the date such Loan was made, then and at all
such times the Highest Lawful Rate shall be the maximum nonusurious rate
permitted to be contracted for, taken, reserved, charged or received on
such Loan under applicable law in effect on the date of such Loan. At all
such times, if any, as Texas law shall establish the Highest Lawful Rate,
the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined
in Tex. Rev. Civ. Stat. art. 5069-1.04) from time to time in effect.
"Interest Period" means, with respect to any Loan, the period commencing on
the Borrowing Date and ending on the Maturity Date, consistent with the
following provisions. The duration of each Interest Period shall be:
(a) in the case of an Prime Rate Loan, a period of up to the Termination
Date; and
(b) in the case of a Eurodollar Loan, 1, 2, 3 or 6 months;
in each case as selected by the Maker and agreed to by the Bank. The
Maker's choice of Interest Period is also subject to the following
limitations:
(i) No Interest Period shall end on a date after the Termination
Date; and
(ii) If the last day of an Interest Period would be a day other than a
Business Day, the Interest Period shall end on the next
succeeding Business Day (unless the Interest Period relates to a
Eurodollar Loan and the next succeeding Business Day is in a
different calendar month than the day on which the Interest
Period would otherwise end, in which case the Interest Period
shall end on the next preceding Business Day).
"Prime Rate" shall mean the rate of interest per annum determined from time
to time by the Bank as its prime rate in effect at its principal office in
Houston, Texas and thereafter entered in the minutes of its Loan and
Discount Committee; each change in the Prime Rate shall be effective on the
date such change is determined; without special notice to the Maker or any
other person or entity. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT
NECESSARILY REPRESENT THE LOWEST OR BEST RATE ACTUALLY CHARGED TO ANY
CUSTOMER AND ANY STATEMENT, REPRESENTATION OR WARRANTY IN THAT REGARD OR TO
THAT EFFECT IS EXPRESSLY DISCLAIMED BY BANK. BANK MAY MAKE LOANS AT RATES
OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE.
"Prime Rate Loan" means a Loan which bears interest at a rate determined by
reference to the Prime Rate.
"Statutory Reserves" shall mean the difference (expressed as a decimal) of
the number one minus the aggregate of the maximum reserve percentages
(including, without limitation, any marginal, special, emergency, or
supplemental reserves) expressed as a decimal established by the Board and
any other banking authority to which the Bank is subject with respect to
the Eurodollar Rate, for Eurocurrency Liabilities (as defined in Regulation
D of the Board). Such reserve percentages shall include, without
limitation, those imposed under such Regulation D. Eurodollar Loans shall
be deemed to constitute Eurocurrency Liabilities and as such shall be
deemed to be subject to such reserve requirements without benefit of or
credit for proration, exceptions or offsets which may be available from
time to time to any Bank under such Regulation D. Statutory Reserves shall
be adjusted automatically on and as of the effective date of any change in
any reserve percentage.
The unpaid principal balance of this Note at any time shall be the total of all
Loans made by the Bank to or for the benefit of the Maker, less the amount of
all payments of principal made hereon by or for the account of the Maker. The
Bank's records shall serve as presumptive evidence of any and all amounts
outstanding hereunder.
Each Loan shall be made on the Maker's irrevocable notice, given not later than
10:00 A.M. (Houston time) on, in the case of Eurodollar Loans, the second
Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate
Loans, the proposed Borrowing Date, from the Maker to the Bank. Each such
notice of a requested borrowing (a "Notice of Requested Borrowing") under this
paragraph may be oral or written, and shall specify: (i) the requested amount of
such Loan; (ii) the proposed Borrowing Date; (iii) whether the requested Loan is
to be a Prime Rate Loan or Eurodollar Loan; and (iv) the Interest Period for
such Loan. If any Notice of Requested Borrowing shall be oral, the Maker shall
deliver to the Bank prior to the Borrowing Date a confirmatory written Notice of
Requested Borrowing.
If at any time the Bank determines in good faith (which determination shall be
conclusive) that any change in any applicable law, rule or regulation or in the
interpretation, application or administration thereof makes it unlawful, or any
central bank or other governmental authority asserts that it is unlawful, for
the Bank or its foreign branch or branches to maintain or fund any Loan by means
of dollar deposits obtained in any Eurodollar interbank market (any of the above
being described as a "Eurodollar Event"), then, at the option of the Bank, the
aggregate principal amount of the Bank's Eurodollar Loans then outstanding,
which Loans are directly affected by such
<PAGE>
Eurodollar Event, shall be prepaid by the Maker. Upon the occurrence of any
Eurodollar Event, and at any time thereafter so long as such Eurodollar Event
shall continue, the Bank may exercise its aforesaid option by giving written
notice thereof to the Maker.
Any prepayment of any Eurodollar Loan which is required under the preceding
paragraph shall be made, together with accrued and unpaid interest and all other
amounts payable to the Bank under this Note with respect to such prepaid
Eurodollar Loan on the date stated in the notice to the Maker referred to above,
which date ("required prepayment date") shall be not less than 15 days from the
date of such notice. If any Eurodollar Loan is required to be prepaid under the
preceding paragraph, the Bank shall make on the required prepayment date a Prime
Rate Loan in the same principal amount and with an Interest Period ending on the
same day as the Eurodollar Loan so prepaid.
If any domestic or foreign law, treaty, rule or regulation (whether now in
effect or hereinafter enacted or promulgated, including Regulation D of the
Board of Governors of the Federal Reserve System) or any interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof (whether or not having the force of
law):
(a) changes, imposes, modifies, applies or deems applicable any reserve,
special deposit or similar requirements in respect of any such Loan or
against assets of, deposits with or for the account of, or credit
extended or committed by, the Bank; or
(b) imposes on the Bank or the interbank eurocurrency deposit and transfer
market or the market for domestic bank certificates of deposit any
other condition affecting any such Loan;
and the result of any of the foregoing is to impose a cost to the Bank of
agreeing to make, funding or maintaining any such Loan or to reduce the amount
of any sum receivable by the Bank in respect of any such Loan, then the Bank may
notify the Maker in writing of the happening of such event and Maker shall upon
demand pay to the Bank such additional amounts as will compensate the Bank for
such costs. Without prejudice to the survival of any other agreement of the
Maker under this Note, the obligations of the Maker under this paragraph shall
survive the termination of this Note.
The Maker may on any Business Day prepay the outstanding principal amount of any
Prime Rate Loan, in whole or in part, together with accrued interest to the date
of such prepayment on the principal amount prepaid. Partial prepayments shall
be in an aggregate principal amount of $50,000.00 or a greater integral multiple
of $50,000.00. Except as specified in this paragraph, the Maker shall have no
right to prepay any Loan.
The Maker will indemnify the Bank against, and reimburse the Bank on demand for,
any loss, cost or expense incurred or sustained by the Bank (including without
limitation any loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by the Bank to fund or maintain
Loans bearing interest at the Eurodollar Rate) as a result of: (a) any payment
or prepayment (whether permitted by the Bank or required hereunder or otherwise)
of all or a portion of any Eurodollar Loan on a day other than Maturity Date of
such Loan; (b) any payment or prepayment, whether required hereunder or
otherwise, of any Eurodollar Loan made after the delivery of a Notice of
Requested Borrowing but before the applicable Borrowing Date if such payment or
prepayment prevents the proposed Loan from becoming fully effective; or (c) the
failure of any Eurodollar Loan to be made by the Bank due to any action or
inaction of the Maker. For purposes of this paragraph, funding losses arising
by reason of liquidation or reemployment of deposits or other funds acquired by
the Bank to fund or maintain Loans bearing interest at the Eurodollar Rate shall
be calculated as the remainder obtained by subtracting: (i) the yield
(reflecting both stated interest rate and discount, if any) to maturity of
obligations of the United States Treasury in an amount equal or comparable to
such Loan for the period of time commencing on the date of the payment,
prepayment or change of rate as provided above and ending on the last day of the
subject Interest Period; from (ii) the interest payable at the Eurodollar Rate
for the period commencing on the date of such payment, prepayment or change of
rate and ending on the last day of such Interest Period. Such funding losses
and other costs and expenses shall be calculated and billed by the Bank and such
bill shall, as to the costs incurred, be conclusive absent manifest error.
If after the date of this Note, the Bank shall have determined that the adoption
of any applicable law, rule or regulation regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on the Bank's capital as a
consequence of making any Loans hereunder to a level below that which the Bank
could have achieved but for such adoption, change or compliance (taking into
consideration the Bank's policies with respect to capital adequacy) by an amount
deemed by the Bank in good faith to be material, then from time to time, the
Maker shall pay to the Bank such additional amount or amounts as will compensate
the Bank for such reduction. A certificate of the Bank setting forth such
amount or amounts as shall be necessary to compensate the Bank as specified in
the immediately preceding paragraphs above shall be delivered as soon as
practicable to the Maker and shall be conclusive and binding, absent manifest
error. The Maker shall pay the Bank the amount shown as due on any such
certificate within 15 days after Bank delivers such certificate. In preparing
such certificate, the Bank may employ such assumptions and allocations of costs
and expenses as it shall in good faith deem reasonable and may use any
reasonable averaging and attribution method.
Any and all payments by the Maker hereunder shall be made free and clear of and
without deduction for any and all deductions, charges or withholdings, and (if
Maker is not a citizen of the United States domiciled in the United States) all
present and future taxes and tax withholdings, and all liabilities with respect
thereto, excluding taxes imposed on the Bank's income (including penalties and
interest payable in respect thereof) (all such non-excluded taxes, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If the Maker shall be required by law to deduct any Taxes from or in respect of
any sum payable hereunder to the Bank: (i) the sum payable shall be increased as
may be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this paragraph) the Bank
receives an amount equal to the sum it would have received had no such
<PAGE>
deductions been made; and (ii) the Maker shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law. In addition, the Maker agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Note
(hereinafter referred to as "Other Taxes"). The Maker will indemnify the Bank
for the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this
paragraph) paid by the Bank and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, whether or not such Taxes
or Other Taxes were correctly or legally asserted. This indemnification shall
be made within 30 days from the date the Bank makes written demand therefor;
provided, however, to the extent that the Bank is reimbursed for any Taxes or
Other Taxes that were incorrectly or illegally asserted, the Bank shall return
to the Maker the amount of such reimbursement, together with any interest that
may have been paid with respect thereto, to the extent the Maker has actually
indemnified the Bank with respect thereto. Within 30 days after the date of any
payment of Taxes, the Maker will furnish to the Bank the original or a certified
copy of a receipt evidencing payment thereof. Without prejudice to the survival
of any other agreement of the Maker hereunder, the agreement and obligations of
the Maker contained in this paragraph shall survive the payment in full of
principal and interest under this Note.
If any payment of interest or principal herein provided for is not paid when
due, or if an Event of Default occurs under the terms of the Letter Agreement
(as defined below), then the owner or holder of this Note may at its option, by
notice to the Maker, declare the unpaid principal balance of all Loans, all
accrued and unpaid interest thereon and all other amounts payable under this
Note to be forthwith due and payable, whereupon the Loans, all such interest and
all such amounts shall become and be forthwith due and payable in full, without
presentment, demand, protest, notice of intent to accelerate, notice of actual
acceleration or further notice of any kind, all of which are hereby expressly
waived by the Maker.
If default is made in the payment of this Note and it is placed in the hands of
an attorney for collection, or collected through probate or bankruptcy
proceedings, or if suit is brought on the same, the Maker agrees to pay
reasonable attorneys' fees and all costs and expenses.
This Note is issued by the Maker to evidence Loans outstanding from time to time
not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$5,000,000.00 revolving line of credit (the "Revolving Line of Credit") extended
by the Bank to the Maker pursuant to that certain Letter Agreement of even date
herewith, as amended from time to time (the "Letter Agreement"). It is given in
renewal, increase and modification of two (2) promissory notes dated April 1,
1996 executed by Maker and payable to the order of the Bank on or before June
30, 1996 in the principal amounts of $3,000,000.00 and $1,000,000.00
respectively.
The Maker warrants and represents to the Bank, and to all other owners and/or
holders of any indebtedness evidenced hereby, that all Loans evidenced by this
Note are for business, commercial, investment or other similar purpose and not
primarily for personal, family, household or agricultural use, as such terms are
used in Chapter One of the Texas Credit Code, Tex. Rev. Civ. Stat. arts. 5069-
1.01 et. seq.
The Maker warrants and represents to the Bank and to all other owners or holders
of this Note that no Loans shall be used for the purchase or carrying of any
"margin stock" within the meaning of Regulation "U" of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 221, as in effect on the date hereof.
Except as otherwise specified in this Note, the Maker and any and all co-makers,
endorsers, guarantors and sureties hereby severally waive grace, presentment,
demand, notice of default, notice of intent to accelerate, notice of
acceleration, and all other demands and notices of any nature or type
whatsoever, in connection with the delivery, acceptance, performance, default,
dishonor or enforcement of, or entry of judgment in connection with this Note,
and further waive the filing of suit hereon for the purpose of fixing liability.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS
NOTE SHALL BE PERFORMABLE FOR ALL PURPOSES IN THE COUNTY OF THE BANK'S PRINCIPAL
OFFICE IN TEXAS, AND THE MAKER AND THE BANK AGREE THAT THE COUNTY IN WHICH
BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR
PROCEEDING BROUGHT BY THE MAKER OR THE BANK, WHETHER IN CONTRACT, TORT, OR
OTHERWISE. ANY ACTION OR PROCEEDING AGAINST THE MAKER MAY BE BROUGHT IN ANY
STATE OR FEDERAL COURT IN SUCH COUNTY. THE MAKER HEREBY IRREVOCABLY (A) SUBMITS
TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT
MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. THE
MAKER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW.
NOTHING HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS SHALL AFFECT THE RIGHT OF
THE BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE MAKER OR
WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS OR VENUES.
The Maker and the Bank expressly agree, pursuant to Article 15.10(b) of Chapter
15 ("Chapter 15") of the Texas Credit Code, that Chapter 15 shall not apply to
this Note or to any Loan and that this Note and all such Loans shall not be
governed by or subject to the provisions of Chapter 15 in any manner whatsoever.
It is the intention of Maker and Bank to comply with usury laws in force in the
State of Texas and in the United States of America as applicable. Anything in
this Note to the contrary notwithstanding, the Maker shall never be required to
pay unearned interest on this Note and shall never be required to pay interest
on this Note at a rate in excess of the Highest Lawful Rate, and if the
effective rate of interest which would otherwise be payable under this Note
would exceed the Highest Lawful Rate, or if the holder of the Note shall
<PAGE>
receive any unearned interest or shall receive monies that are deemed to
constitute interest which would increase the effective rate of interest payable
under this Note to a rate in excess of the Highest Lawful Rate, then: (i) the
amount of interest which would otherwise be payable under this Note shall be
reduced to the amount allowed under applicable law; and (ii) any unearned
interest paid by the Maker or any interest paid by the Maker in excess of the
Highest Lawful Rate shall, at the option of the holder of this Note, be either
refunded to the Maker or credited on the principal of this Note. It is further
agreed that, without limitation of the foregoing, all calculations of the rate
of interest contracted for, charged or received by the Bank or any holder of
this Note that are made for the purpose of determining whether such rate exceeds
the Highest Lawful Rate shall be made, to the extent permitted by usury laws
applicable to the Bank (now or hereafter enacted), by amortizing, prorating and
spreading in equal parts during the period of the full stated term of the Loans
evidenced by this Note all interest at any time contracted for, charged or
received by the Bank in connection therewith.
The Bank reserves the right in its sole discretion without notice to Maker, to
sell participations or assign its interest, or both in all or part of the Loans,
the Note, or the Line of Credit.
THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the Maker has executed this Note effective the day, month
and year first aforesaid.
"MAKER"
ERC INDUSTRIES, INC.
By:
Name:
Title:
Acknowledged for purposes of notice pursuant to the above cited statute by:
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 12,272
<ALLOWANCES> 534
<INVENTORY> 15,314
<CURRENT-ASSETS> 27,961
<PP&E> 19,148
<DEPRECIATION> 14,216
<TOTAL-ASSETS> 35,309
<CURRENT-LIABILITIES> 15,862
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0
0
<COMMON> 213
<OTHER-SE> 17,408
<TOTAL-LIABILITY-AND-EQUITY> 35,309
<SALES> 50,961
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<CGS> 38,787
<TOTAL-COSTS> 10,514
<OTHER-EXPENSES> (98)
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<INCOME-PRETAX> 1,588
<INCOME-TAX> (573)
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<NET-INCOME> 1,015
<EPS-PRIMARY> .06
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</TABLE>
