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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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________
Commission file number 0-14439
ERC INDUSTRIES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0382879
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(State of incorporation) (I.R.S. Employer Identification No.)
1441 Park Ten Boulevard, Houston, Texas 77084
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(Address of principal executive offices)
Registrant's telephone number, including area code (281) 398-8901
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 1998 was $7,901,425.
The number of shares outstanding of the registrant's common stock, as of March
17, 1998 was 27,498,272.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III of this Form 10-K.
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ERC INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business.................................................. 1
Item 2. Properties................................................ 7
Item 3. Legal Proceedings......................................... 8
Item 4. Submission of Matters to a Vote of Security Holders....... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Financial Data................................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14
Item 8. Consolidated Financial Statements and Supplementary Data.. 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant....... 15
Item 11. Executive Compensation................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 15
Item 13. Certain Relationships and Related Transactions........... 15
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K.................................. 16
Signatures............................................................ 20
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PART I
ITEM 1. BUSINESS
GENERAL
ERC Industries, Inc., a Delaware corporation (the "Company" or "ERC"), is an
oilfield service company engaged in the manufacture, remanufacture and servicing
of oilfield wellhead equipment.
On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation
registered in Scotland and incorporated under the Companies Act of the United
Kingdom, completed the purchase of approximately 47% of the issued and
outstanding shares of common stock of ERC.
On November 16, 1993, the Company acquired the valve business and certain assets
of Barton Industries, Inc. ("Barton") of Shawnee, Oklahoma.
On June 6, 1996, the Company and the Wood Group entered into an Investment
Agreement pursuant to which the Company issued and sold, and Wood Group
purchased, 7,384,616 shares of the Company's common stock, par value $0.01 per
share ("Common Stock"). The aggregate purchase price for the shares was $6
million or $0.8125 per share. Following this transaction the Wood Group owned
approximately 73% of the Company.
On September 27, 1996, the Company acquired 100% of the issued and outstanding
capital shares of Seaboard Lloyd Limited ("Seaboard"), a private company
incorporated in Scotland under the Companies Acts of the United Kingdom.
Seaboard is currently operated as a wholly-owned subsidiary of the Company under
the name Wood Group Pressure Control Limited ("WGPCL"). The business of WGPCL is
the manufacture, supply, repair, maintenance and refurbishment of wellheads,
Christmas trees, gate valves, choke valves, clamped pipe connectors, actuators,
electric feed through systems for downhole pumps and subsea ball and check
valves, all as used in the oil and gas industry. The business is operated in one
facility located in Cumbernauld, Scotland. The Company continues to operate the
business in substantially the same manner as it was operated prior to the
acquisition.
In January 1997, the Company and all of its subsidiaries began conducting
business under the name of Wood Group Pressure Control.
On July 1, 1997, the Company acquired 100% of the issued and outstanding capital
stock of Church Oil Tools, Inc. ("Church"). Church is a Houston, Texas based
manufacturer serving the drilling equipment market. Church is operated in
substantially the same manner as it operated prior to the acquisition, in
addition the two principal stockholders of Church entered into employment
agreements with the Company in connection with the transaction. Church is
presently doing business as Wood Group Drilling Products ("WGDP"), a new
business unit of the Company. WGDP produces and sells blow out preventers, high
pressure valves and specialized engineering
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services. WGDP's customers include drilling contractors, rental tool companies
and other related oilfield service companies.
On September 8, 1997, the Company and the Wood Group entered into an Investment
Agreement pursuant to which the Company agreed to issue and sell, and Wood Group
agreed to purchase, 6,250,000 shares of the Company's common stock, par value
$0.01 per share. The aggregate purchase price for the shares was $10 million or
$1.60 per share. Following this transaction the Wood Group owns approximately
88.5% of the Company.
OPERATIONS
The equipment and components offered for sale by the Company are comprised of
items manufactured by the Company in its own facilities, consisting principally
of wellhead equipment and valves, drilling products, and items acquired and
reconditioned under the Company's wellhead management program and new products
acquired from other manufacturers. The services offered by the Company consist
of reconditioning out-of-service equipment for others, and installing and
repairing oil field equipment. The Company also leases certain oilfield
equipment to customers.
ERC'S ORIGINAL BUSINESS
Old ERC's predecessor, Equipment Renewal Company, was founded in 1962 to
remanufacture and re-employ used, out-of-service wellhead equipment, a service
the Company continues to provide. Wellhead equipment is designed to support the
casing and production pipe on a completed well and includes casing heads, tubing
heads and casing and tubing hangers. Valves are assembled with other components
into a device known as the "Christmas Tree" which is mounted on the wellhead
equipment and is used to control pressure and the flow of oil and gas from
producing wells. A substantial portion of the Company's oilfield equipment
business is conducted through surplus wellhead equipment management programs.
Under these programs, the Company collects out-of-service equipment at the
wellhead or accepts delivery from a given customer at a branch location. All
equipment is inspected by the Company and classified based upon its condition
and degree of obsolescence at the time of receipt at the Company's service
center. If deemed salvageable, the equipment is cleaned, disassembled, and,
if needed, heat treated. Components are either replaced or repaired, usually by
machining and welding. The equipment is then remachined on the Company's
lathes, boring mills, radial drills, milling machines and grinding machines to
new equipment standards.
The reconditioned equipment may then be reemployed by the customer in accordance
with its requirements. Reconditioned equipment is accompanied by a warranty
similar to a manufacturer's warranty. The customer is charged for this
reconditioning service based on an established price schedule, in addition to
charges for receiving, inspecting and classifying the equipment. If the
customer so desires, the Company may purchase the customer's used equipment for
resale to other customers. The resale price of the equipment is typically based
upon a percentage of the current list
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price of new equipment. The payment for the customer's equipment may be in the
form of a merchandise credit to be applied towards future purchases by that
customer.
The branches, sales and service offices of the Company act, in part, as clearing
houses for oilfield operators. If the operator, at a particular location,
requires a unique component held by the Company on behalf of another customer,
the Company may contact the customer and effect a purchase from the customer
that has the equipment and then resell the equipment to the customer that is in
need of the required equipment.
In addition to remanufacturing customer equipment, the Company purchases used
equipment for its own account from various sources which the Company then
remanufactures for sale.
BUSINESS DEVELOPMENT AND ACQUISITIONS
The acquisitions of Barton, Seaboard and Church in 1993, 1996 and 1997,
respectively, have expanded the Company's operations to include a complete line
of gate valves and conventional wellhead equipment. Valves are available in
1-13/16" to 24" sizes for working pressures from 300 p.s.i. to 15,000 p.s.i. and
are produced in eight basic material trims and "custom trims" to meet individual
customer requirements. The facilities are licensed by the American Petroleum
Institute ("API") to distribute its products with the API monogram in accordance
with API Specification 6A (wellhead valves), Specification 6D (pipeline valves)
and Specification 14D (surface safety valves for offshore use). The use of API
monogram is considered by management to be essential to compete successfully in
the oil and gas valve market. The Company's manufacturing facilities in
Shawnee, Oklahoma; Houston, Texas; and Cumbernauld, Scotland are ISO 9001
registered, as well as certified under a range of API licenses.
To manufacture products, each of the Company's plants purchase major raw
material components from foundries, forging houses, and steel suppliers, then
machine such materials into finished products using CNC machines, which are
essentially computer controlled lathes and machine centers, and other
conventional machine tools. Special heat treatment and surface conditioning are
applied as appropriate to individual components to improve product performance
and to meet varying service condition requirements.
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The Company's strategy, with regard to all acquisitions made to date, has been
to expand its presence in the domestic and the international markets. The
Company currently operates in Aberdeen, Cumbernauld, London, Abu Dhabi, Jordan,
Saudi Arabia, Germany, Australia and Venezuela. These locations are managed by
seasoned industry professionals with many years of international experience.
This local presence has generated a high degree of customer interest and an
increase in demand for the Company's products and services. The Company intends
to focus on increasing international sales in 1998.
As of March 16, 1998, the Company's wellhead and related equipment operations
are conducted from 23 domestic locations, 11 international locations, and 3
distributorships. The Company's manufacturing facilities are located in
Houston, Texas; Shawnee, Oklahoma; Cumbernauld, Scotland; and Maracaibo,
Venezuela.
ENGINEERING RESEARCH AND DEVELOPMENT
The Company is involved in an active research and development program. It
expects to file for and receive patents on new products aimed at growth in
target geographic and product markets. New wellhead products were launched
during 1997 and are expected to enable additional market participation.
Additionally, value engineering projects continue to focus on a broad range of
cost reductions.
PATENTS AND SERVICE MARKS
The Company holds several patents and trademark/service marks. Many of these
are registered with the United States Patent and Trademark Office and expire on
various dates through 2003. The Company believes that its patents and
trademark/service mark are important to its marketing efforts.
SALES AND MARKETING
The Company conducts its operations in the United States from branch facilities
located in many major oil and gas producing areas requiring wellhead equipment.
Each branch facility maintains inventory for local customer requirements,
trained service technicians, and machine shop capability to provide quick
delivery. Each branch facility offers a range of products and services
including new equipment, re-manufactured equipment, and inventory management of
customer property.
Internationally, the Company sells its products through a mixture of Company-
operated branch locations, overseas subsidiaries and through independent sales
agents. Sales offices are located in metropolitan areas where customers are
typically headquartered or maintain regional offices.
The Company's marketing program emphasizes providing complete supply chain
management of wellhead and valve requirements for our customers. This program
includes repair of customer
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equipment, sale of re-manufactured equipment, sale of new equipment, maintenance
services and a broad distribution network of Branch locations and sales offices
to provide prompt local service and support.
COMPETITION
The market for used and new oilfield equipment is highly competitive as there
are numerous manufacturers, distributors and dealers; however, the Company
believes that relatively few competitors offer programs involving maintenance,
reconditioning, storage, distribution and management of equipment such as those
offered by the Company. With its programs, the Company emphasizes its ability
to provide reconditioned oilfield equipment at favorable prices while at the
same time performing services which the customer would otherwise have to perform
at a substantial cost and inconvenience.
Numerous companies, some of which have substantially greater resources than the
Company, are engaged primarily in the manufacturing, installation and
maintenance of wellheads, valves and drilling equipment as well as other types
of oilfield equipment. In addition, some foreign manufacturers make only
valves. Over the past several years, severe price competition has continued to
have a substantial impact on profit margins. There is no assurance that these
trends will not continue in the future.
GOVERNMENT REGULATION
The exploration, development and production of oil and gas in the United States
is affected by comprehensive federal and state regulations including those
governing allowable rates of production, marketing, environmental matters and
pricing. The Company believes that it is in substantial compliance with such
laws, rules and regulations.
The Company is dependent on the demand for equipment and services from the oil
and gas exploration and production industry and, accordingly, is affected by
changes in laws relating to the energy business. The Company's business is
affected generally by political developments and by federal, state, local and
foreign laws and regulations that may relate directly to the oil and gas
industry. The adoption of laws and regulations, both domestic and foreign, that
curtail exploration and production of oil and gas for economic, environmental
and other policy reasons may adversely affect the Company's operations by
limiting available equipment sales and service opportunities.
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EMPLOYEES
As of February 20, 1998, the Company had 583 employees, as compared to 456
employees as of February 26, 1997. No employees of the Company are represented
by a union.
CUSTOMERS
In 1997 and 1995, the Company had no customers that comprised 10% or more of its
sales. Conoco Incorporated contributed approximately 10% of the Company's total
revenues in 1996.
RECENT DEVELOPMENTS
On February 2, 1998, the Company, in a privately-negotiated transaction,
completed its acquisition of Bompet, C.A., a Venezuelan company ("Bompet"). The
acquisition was accomplished by the purchase of 100% of the issued and
outstanding capital stock of Bompet.
Bompet is a Venezuelan based manufacturer of products used in the drilling and
production segment of the oil and gas industry. Bompet sells wellheads and gate
valves (and related assemblies) along with specialized services to oil and gas
producers throughout Latin America. Bompet has a facility in Cuidad Ojeda on
the east side of Lake Maracaibo. The Company plans to continue to operate
Bompet as a subsidiary of the Company in substantially the same manner as it was
operated prior to the acquisition.
In connection with the transaction, the Company paid the sole Bompet
stockholder, Inversiones Western C.A., a purchase price of $2.6 million. In
addition, the Company will pay up to a maximum of $3.4 million in the event that
Bompet's earnings exceed certain thresholds during 1998, 1999 and 2000.
The source of the funds for the purchase was cash on hand and bank debt. The
Company intends to account for the transaction as a purchase.
YEAR 2000 DATE CONVERSION
In 1997, the Company began to modify its computer information systems to ensure
proper processing of transactions relating to the year 2000 and beyond and
expects to complete the required modifications during 1998. The amount charged
to expense in 1997, as well as the amounts anticipated to be charged to expense
in 1998 related to the year 2000 computer compliance modifications, have not
been nor will be material to the Company's financial position, results of
operations or cash flows.
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ITEM 2. PROPERTIES
Set forth below is certain information as of December 31, 1997, regarding the
Company's headquarters, manufacturing and other facilities, most of which are
located on leased premises.
Lease
Location Expiration Dates
-------- ----------------
Manufacturing -
Houston, Texas (Leased)/(1)/ Through July 14, 2001
Shawnee, Oklahoma (Owned)/(2)/
Cumbernauld, Scotland (Owned)/(3)/
2 Headquarters Offices (Leased) Through July 31, 2004
6 Branch Offices and Various through
Machine Shops (Leased) October 31, 2006 /(4)/
6 Branch Offices and
Machine Shops (Owned)
4 Sales Offices Various through
(Owned and Leased) August 1, 1999
7 Sales and Service Various through
Offices (Leased) February 9, 2000 /(4)/
9 International Sales and Service Various through
Offices (Leased) December 31, 1998 /(4)/
___________________
/(1)/ The Church facility in Houston, Texas is a 28,942 square foot building on
a total site of 3 acres.
/(2)/ The Shawnee, Oklahoma facility is an 89,000 square foot building plus an
additional five acres contiguous to the property.
/(3)/ The manufacturing facility at Cumbernauld, Scotland is a 31,000 square
foot building on a total site of 3 acres.
/(4)/ Most of these leases are on a month-to-month basis. The Company does not
expect the expiration of any of these leases to have a material adverse
effect on its operations. See Note 9 to the Consolidated Financial
Statements.
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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 to be part of the ordinary
course of its business. Currently, the Company is not aware of any current or
pending litigation or proceedings that would have a material or adverse effect
on the Company's results of operations, cash flows or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the Company's fiscal year ended December 31, 1997.
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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 trading symbol under which
the Common Stock trades is "ERCI". The following table sets forth the high and
low reported bid prices for the Company's Common Stock as reported by NASDAQ by
fiscal quarter from January 1, 1996 through December 31, 1997. Such prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
January 1, 1996 - March 31, 1996..... $1.06 $0.75
April 1, 1996 - June 30, 1996........ $1.06 $0.75
July 1, 1996 - September 30, 1996.... $1.56 $0.63
October 1, 1996 - December 31, 1996.. $2.50 $0.97
FISCAL YEAR ENDED DECEMBER 31, 1997
January 1, 1997 - March 31, 1997..... $2.25 $1.13
April 1, 1997 - June 30, 1997........ $2.13 $1.13
July 1, 1997 - September 30, 1997.... $2.50 $1.63
October 1, 1997 - December 31, 1997.. $4.63 $1.69
</TABLE>
As of March 17, 1998, there were 1,184 holders of record of the Company's Common
Stock, as reported by the Company's transfer agent for its Common Stock. As of
March 16, 1998, the closing price of the Common Stock as reported on NASDAQ was
$2.50 per share.
The present policy of the Board of Directors is to retain earnings to provide
operating funds for the Company. As a result, the Company has not paid
dividends and does not intend to do so in the foreseeable future. The terms of
the Company's line of credit also restricts the ability of the Company to pay
cash dividends. See Note 6 to the Consolidated Financial Statements.
During the fourth quarter of 1997, the Company made no unregistered sales of
securities.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Eleven Months
December 31, Ended
------------------------------------------------ December 31,
1997(2)(3)(4) 1996(2)(3) 1995(2) 1994(2) 1993(2)
------------ ---------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $80,845 $ 50,961 $34,840 $32,926 $23,167
Income (loss) before provision for
income taxes $ 2,618 $ 1,588 $(1,048) $ 628 $ 1,157
Provision (benefit) for income taxes (1) $ 1,394 $ 573 $ (273) $ 264 $ 421
Net income (loss) $ 1,224 $ 1,015 $ (775) $ 364 $ 736
Basic net income (loss) per common share $.05 $.06 $(.06 ) $.03 $.05
Total assets $60,383 $ 35,309 $20,879 $19,119 $17,375
Total long-term debt including current portion $12,133 $ 5,121 $ 4,602 $ 3,325 $ 2,852
Working capital $22,015 $ 12,099 $ 6,650 $ 7,937 $ 7,641
Shareholders' equity (1) $31,902 $ 17,621 $ 9,913 $10,683 $10,192
Capital expenditures $ 2,514 $ 644 $ 442 $ 1,024 $ 768
Cash dividends per share none none none none none
</TABLE>
(1) The Company's net operating loss carryforwards substantially reduce the
federal income taxes paid by the Company. The Company reports these
reductions of income taxes paid as an increase to additional paid-in
capital conforming to the accounting rules for quasi-reorganized companies.
(2) Includes effects of the Barton acquisition completed on November 16, 1993.
(3) Includes effects of Seaboard Lloyd Limited acquisition completed on
September 27, 1996.
(4) Includes effects of Church acquisition completed on July 1, 1997.
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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 21.1% to an average of 943 in 1997, as compared to 779 in
1996 and 723 in 1995. The active domestic rig count as of March 13, 1998 was
942. The average active rig count is a clear indicator of the likely demand in
the market in which the Company operates, based on prior years' experience.
RESULTS OF OPERATIONS - 1997 AS COMPARED TO 1996 AND 1996 AS COMPARED TO 1995
The Company's revenues increased by 58.6% to $80.8 million in 1997 compared with
$51 million in 1996. 1996's revenues increased 46.3% to $51 million compared
with $34.8 million for 1995.
1997 revenues increased by $29.9 million over 1996 due to an increase in
customer activity, market share gains, increased WGPCL sales and sales generated
by the acquisition of Church Oil Tools. This acquisition added approximately
$4.3 million to 1997 revenues. 1996 revenues increased over 1995 by $16.1
million due to market share gains, increased sales activity, and sales generated
at WGPCL.
In connection with revenues over the three year period, cost of goods sold were
$61.8 million in 1997, $38.8 million in 1996, and $27.4 million in 1995. The
gross profit percentage was 23.6% in 1997, compared with 23.9% in 1996 and 21.4%
in 1995. The decrease in 1997 gross profit percentage as compared to 1996 is
due to changes in product mix. The increase in 1996 gross profit as compared
with 1995 was due to process improvements at the manufacturing facility which
created cost reductions, as well as fewer repairs and maintenance expenses at
the facility.
Selling, General and Administrative expenses ("SG&A") increased by $5.3 million
to $15.5 million in 1997 as compared with $10.2 million in 1996. This increase
is due to costs incurred to open additional domestic sales offices, increases in
international and domestic sales personnel, and the addition of Church in 1997.
SG&A, as a percentage of revenues, was 19.1% in 1997 and 19.9% in 1996. This
decrease was due to sales growth in excess of growth in fixed SG&A costs.
SG&A increased to $10.2 million in 1996 compared with $8.1 million in 1995. The
increase was caused by the addition of international sales personnel and the
related expenses to advance new business and support continuing business. As a
percentage of revenues, SG&A decreased to 19.9% in 1996 from 23.3% in 1995.
In 1997, interest expense increased $667,000 over 1996 caused by an increase in
outstanding debt.
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In 1996, interest expense decreased by $117,000 from 1995, as a result of
reduced average debt during the year. This reduction resulted from the use of
proceeds of the sale of stock to the Wood Group to reduce debt outstanding.
Income before provision for income tax was $2.6 million in 1997, compared to
$1.6 million in 1996. The increase in 1997 is primarily due to increased sales
partially offset by higher interest expense and increased SG&A costs.
Income before provision for income taxes was $1.6 million in 1996 compared to a
loss of $1 million in 1995. The increase in 1996 was primarily due to increased
sales at higher gross margins and decreased interest expense partially offset by
increased SG&A costs.
Net income for 1997, 1996 and 1995 includes provision/(benefit) for income taxes
of $1.4 million, $573,000 and ($273,000), respectively. Of these amounts, $3.2
million, $796,000 and $5,000, in 1997, 1996 and 1995, respectively, represent
non-cash charges which reflect the income tax benefit of the utilization of the
Company's NOL Carryforwards arising prior to a quasi-reorganization; such
amounts are included in the respective balance sheets as increases in additional
paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $22 million at December 31, 1997 compared with
$12.1 million at December 31, 1996. This improvement is primarily the result of
increases in accounts receivable and inventory resulting from higher sales
activity, that were only partially offset by increases in debt and accounts
payable.
The Company amended its domestic line of credit in June 1997, effectively
increasing its line of credit to $10 million. The loan facility now provides
for maximum borrowings of the lesser of $10 million or eligible trade accounts
receivable and inventory (as defined in the line of credit). Interest on
outstanding balances are payable monthly at the bank's prime rate minus three
quarters of one percent. At December 31, 1997, the bank's prime rate was 8.5%.
The loan facility requires the Company to maintain a ratio of total indebtedness
to tangible net worth of no greater than 2.0 to 1.0. Additionally, the terms of
the agreement restrict the Company from paying cash dividends. The facility is
collateralized by trade accounts receivable and inventory. At December 31,
1997, loan amounts outstanding under the agreement were $5.2 million. In
addition, the Company had outstanding, against the revolving line of credit,
irrevocable letters of credit amounting to $55,000. At December 31, 1997, the
Company's maximum amount available for additional borrowings was $4.8 million.
The Company also has a line of credit overdraft facility in Scotland, which
expires in September 1998 and provides a line of credit of three million pounds
(approximately $4.9 million at December 31, 1997). The line of credit is used
for the purpose of general working capital requirements and provides overdraft,
acceptance credit, loan and documentary credit facilities. Interest payable on
the overdraft facility is equal to the Bank's Base rate plus 1 percent per
annum. At December 31, 1997, the bank's base rate was 7.25%. This credit
agreement is collateralized by
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substantially all of the assets of Wood Group Pressure Control Limited and is
guaranteed by ERC Industries, Inc. At December 31, 1997, amounts outstanding
under the various facilities were: overdraft, $1.6 million; guarantees and
letters of credit, $424,000. At December 31, 1997, the Company's maximum amount
available for additional borrowings was $2.9 million.
Pursuant to the Company's long-term debt agreements, $8.2 million in principal
payments are due over the next twelve months. The Company believes its line of
credit facilities, combined with cash generated from operations, will be
adequate to fund its operations for at least the next twelve months.
The Company currently anticipates incurring capital expenditures of $4.1 million
principally for machinery and equipment, plant improvements and vehicle
purchases, through the fiscal year ending December 31, 1998. The Company
expects to fund these expenditures from amounts available under the line of
credit facilities, cash provided by operations and/or capital lease
transactions.
Numerous companies, some of which have substantially greater resources than the
Company, are engaged primarily in the manufacturing, installation and
maintenance of wellheads, valves and drilling equipment as well as other types
of oilfield equipment. In addition, some foreign manufacturers make only
valves. Over the past several years, severe price competition has continued to
have a substantial impact on profit margins. There is no assurance that these
trends will not continue in the future.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Assuming the Company adopted SFAS No. 130 in 1995,
comprehensive income would have been approximately $1.2 million and $1.1 million
and comprehensive loss would have been $775,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997.
Adoption is not recognized for interim periods in the initial year of
application. Adoption of this statement will not have a material impact on the
consolidated financial statements of the Company.
-13-
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained herein in Item 1 - "Business" and in Item 7 -
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" may be deemed to be forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995 and are subject to the
"Safe Harbor" provision in that enacted legislation. These statements are based
on current expectations and involve a number of risks and uncertainties. Actual
results could differ materially from those described in the forward-looking
statements as a result of various factors including, but not limited to the
following: expectations of operating levels at the Company's facilities,
expectations of the future customer and product mix, retention of major
customers, competition and the Company's position in the market, discussions
about future costs, the overall oil and gas market and timing of capital
expenditures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 for Index to Consolidated Financial Statements and
Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-14-
<PAGE>
PART III
The information required by Part III of this Form 10-K is to be provided by
incorporating portions of the Company's definitive proxy statement relating to
its 1998 Annual Meeting of Stockholders (The Proxy Statement), which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the end of the fiscal year covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears under the caption "Directors and
Executive Officers" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption "Executive
Compensation" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the definitive Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption "Certain
Transactions" in the definitive Proxy Statement, which information is
incorporated herein by reference.
-15-
<PAGE>
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:
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Independent Accountants................................................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 and 1996.................. F-2
Consolidated Statement of Operations for the years ended December 31, 1997,
1996 and 1995.............................................................. F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995........................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1997,
1996 and 1995.............................................................. F-5
Notes to Consolidated Financial Statements................................... F-6
Consolidated Financial Statement Schedules:
</TABLE>
All schedules are omitted since the required information is either (a) not
present or not present in amounts sufficient to require submission of the
schedule, or (b) because the information required is included in the
financial statements or notes thereto.
3. Exhibits:
2. ( A ) Agreement dated July 20, 1993 by and among ERC Industries, Inc.,
Barton Industries, Inc., American Bank & Trust Company, American National Bank
and Trust Company, and Oklahoma Industrial Finance Authority, filed as Exhibit
(c)(1) to the Company's Current Report on Form 8-K dated November 16, 1993 and
incorporated herein by reference.
-16-
<PAGE>
( B ) First Modification Agreement between ERC Industries, Inc. and
American Bank & Trust Company, filed as Exhibit (c)(2) to the Company's
Current Report on Form 8-K dated November 16, 1993 and incorporated herein by
reference.
( C ) Real Property Lease Agreement dated November 15, 1993 between
American National Bank and Trust Company and ERC Industries, Inc. and Second
Modification Agreement dated November 2, 1993, filed as Exhibit (c)(3) to the
Company's Current Report on Form 8-K dated November 16, 1993 and incorporated
herein by reference.
( D ) Equipment Lease Agreement dated November 15, 1993 between Oklahoma
Industrial Finance Authority and ERC Industries, Inc. and Third Modification
Agreement, filed as Exhibit (c)(4) to the Company's Current Report on Form 8-K
dated November 16, 1993 and incorporated herein by reference.
3. ( A ) Certificate of Incorporation of ERC Industries, Inc./(1)/
( B ) Certificate of Ownership and Merger, dated April 16, 1993,
merging ERC Industries, Inc. into ERC Subsidiary, Inc./(1)/
( C ) Bylaws of ERC Industries, Inc./(1)/
4. ( A ) Specimen of Common Stock Certificate of ERC Industries, Inc./(1)/
10.1 Stock Purchase Agreement dated October 15, 1992, among Quantum Fund,
N.V., Warren H. Haber, Lawrence M. Pohly, John L. Teeger, ERC
Industries, Inc. and John Wood Group PLC, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 4, 1992 and
incorporated herein by reference.
10.2 Standstill and Voting Agreement dated October 15, 1992, among Quantum
Fund, N.V. and John Wood Group PLC and related irrevocable proxy,
filed as Exhibits 2.2 and 2.3 to the Company's Current Report on Form
8-K dated December 4, 1992 and incorporated herein by reference.
10.3 Agreement dated as of December 4, 1992 between ERC Industries, Inc.
and John Wood Group PLC, filed as Exhibit 2.4 to the Company's Current
Report on Form 8-K dated December 4, 1992 and incorporated herein by
reference.
10.4 Agreement dated December 4, 1992 by and among ERC Industries, Inc.,
John Wood Group PLC, Steven J. Gilbert, Gary S. Gladstein, Warren H.
Haber, Gerard E. Manolovici and Richard H. Rau, filed as Exhibit 2.5
to the Company's Current Report on Form 8-K dated December 4, 1992 and
incorporated herein by reference.
10.5 Credit Agreement, as amended, with Texas Commerce Bank, N.A., filed as
Exhibit 10.7 to the Company's Registration Statement on Form S-4
(Registration No. 33-57504) as filed with the Securities and Exchange
Commission, and incorporated herein by reference.
10.6 Fifth Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of February 28, 1994/(1)/.
10.7 Sixth Amendment to Credit Agreement with Texas Commerce Bank, N.A.
dated as of February 27, 1995/(2)/.
-17-
<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 to the Credit Agreement with Texas Commerce Bank, N.A.
extending expiration date to June 30, 1996, dated April 1, 1996 /(4)/.
10.12 Letter Agreement with Texas Commerce Bank National Association
dated June 30, 1996.
10.13 Investment Agreement, dated as of June 6, 1996, by and between the
Company and Wood Group, filed as Exhibit 10.1 to the Current Report of
the Company on Form 8-K dated June 6, 1996 and incorporated herein by
reference.
10.14 Registration Rights Agreement, dated as of June 6, 1996, by and
between the Company and Wood Group, filed as Exhibit 10.2 to the
Current Report of the Company on Form 8-K, dated June 6, 1996 and
incorporated herein by reference.
10.15 Purchase Agreement dated September 27, 1996, filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K dated September 27, 1996 and
incorporated herein by reference.
10.16 Investment Agreement, dated September 8, 1997, by and between the
Company and Wood Group, filed as Exhibit 10.1 to the Current Report on
Form 8-K dated September 8, 1997 and incorporated herein by reference.
10.17 Registration Rights Agreement, dated September 8, 1997 by and between
the Company and Wood Group filed as Exhibit 10.2 to the Current Report
on Form 8-K dated September 8, 1997 and incorporated herein by
reference.
10.18 Letter Agreement with Texas Commerce Bank, N.A. dated as of June 4,
1997/(5)/.
10.19 Stock Purchase Agreement by and among the Company, Inversiones
Western, C.A. and Jimmy J. Marzoula dated January 30, 1997, filed as
Exhibit 10.1 to the Current Report on Form 8-K dated February 2, 1998
and incorporated herein by reference.
27 Financial Data Schedule/(5)/.
__________________
/(1)/ Filed as Exhibits 3(a), (b) and (c), 4(a), and 10.6, respectively, of the
Company's Annual Report on Form 10-K for its fiscal year ended January 31,
1993, and incorporated by reference herein.
/(2)/ Filed as Exhibit 10.7 of the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1994 and incorporated herein by reference.
/(3)/ Filed as Exhibits to the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1995 and incorporated herein by reference.
/(4)/ Filed as exhibits to the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1996.
/(5)/ Filed herewith.
-18-
<PAGE>
(B) REPORTS ON FORM 8-K :
No Reports on Form 8-K were filed by the Company during the fourth quarter of
the fiscal year ended December 31, 1997.
-19-
<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 30, 1998 /s/ J. Derek P. Jones
---------------------
J. Derek P. Jones
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Dated: March 30, 1998 /s/ J. Derek P. Jones
----------------------
J. Derek P. Jones
Chairman and Director
Dated: March 30, 1998 /s/ Wendell R. Brooks
---------------------
Wendell R. Brooks
President and Director
(Principal Executive Officer)
Dated: March 30, 1998 /s/ James E. Klima
--------------------
James E. Klima
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-20-
<PAGE>
Dated: March 30, 1998 /s/ Allister G. Langlands
-------------------------
Allister G. Langlands
Director
Dated: March 30, 1998 /s/ Anthony Howells
-------------------
Anthony Howells
Director
Dated: March 30, 1998 /s/ Jorge Estrada
-----------------
Jorge Estrada
Director
-21-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
ERC Industries, Inc.
We have audited the accompanying consolidated balance sheet of ERC Industries,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ERC
Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 27, 1998
F-1
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1
Trade accounts receivable, net of allowance
for doubtful accounts of $681 and $534, respectively 18,689 11,738
Inventory 25,081 15,314
Prepaid expenses and other current assets 229 257
Deferred tax asset 2,520 651
------- -------
Total current assets 46,519 27,961
Property, plant and equipment, net 7,743 4,932
Other assets 1,634 532
Deferred tax asset-non current 170 170
Excess cost over net assets acquired, net 4,317 1,714
------- -------
Total assets $60,383 $35,309
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within one year $ 8,156 $ 3,295
Accounts payable 11,587 9,655
Other accrued liabilities 4,761 2,912
------- -------
Total current liabilities 24,504 15,862
------- -------
Long-term debt 3,977 1,826
Commitments and contingencies (see Note 9) - -
Shareholders' equity:
Preferred stock, par value $1; authorized and
unissued - 10,000,000 shares - -
Common stock, par value $0.01; authorized -
30,000,000 shares; 27,498,272 and 21,248,272
issued and outstanding as of December 31, 1997
and 1996, respectively 275 212
Additional paid-in capital 24,842 11,792
Retained earnings from January 10, 1989 6,776 5,552
Translation adjustment 9 65
------- -------
Total shareholders' equity 31,902 17,621
------- -------
$60,383 $35,309
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues $80,845 $50,961 $34,840
Cost of goods sold 61,780 38,787 27,399
------- ------- -------
Gross profit 19,065 12,174 7,441
Property impairment - 203 -
Selling, general and administrative expenses 15,458 10,159 8,116
------- ------- -------
Operating income (loss) 3,607 1,812 (675)
------- ------- -------
Other (income) expense:
Interest expense 989 322 439
Other, net - (98) (66)
------- ------- -------
989 224 373
------- ------- -------
Income (loss) before provision
(benefit) for income taxes 2,618 1,588 (1,048)
Provision (benefit) for income taxes 1,394 573 (273)
------- ------- -------
Net income (loss) $ 1,224 $ 1,015 $ (775)
======= ======= =======
Basic net income (loss) per share $0.05 $0.06 $(0.06)
======= ======= =======
Weighted average number of shares
outstanding 23,217 18,060 13,864
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
------ ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 13,864 $ 139 $ 5,232 $5,312 $ -
Net loss - - - (775) -
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards - - 5 - -
------ ------- ------- ------ ----
Balance as of December 31, 1995 13,864 $ 139 $ 5,237 $4,537 $ -
Net income - - - 1,015 -
Sale of common stock 7,384 73 5,759 - -
Foreign currency translation adjustment - - - - 65
Income tax benefit of pre-quasi-reorganization
net operating loss tax carryforwards - - 796 - -
------ ------- ------- ------ ----
Balance as of December 31, 1996 21,248 $ 212 $11,792 $5,552 $65
Net income - - - 1,224 -
Sale of common stock 6,250 63 9,844 - -
Foreign currency translation adjustment - - - - (56)
Income tax benefit of pre-quasi-reorganization
net operation loss tax carryforwards - - 3,206 - -
------ ------- ------- ------ ----
Balance as of December 31, 1997 27,498 $ 275 $24,842 $6,776 $ 9
====== ======= ======= ====== ====
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,224 $ 1,015 $ (775)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,873 1,212 1,095
Provision for losses on trade accounts receivable 171 51 175
Provision for inventory obsolescence 392 335 221
Deferred income tax provision (benefit) and non-cash charge
for income taxes 1,237 523 (238)
Gain on sale of property, plant and equipment (27) (16) (5)
Property impairment - 203 -
(Increase) decrease in cash resulting from changes in:
Trade accounts receivable (6,183) (4,155) (1,182)
Inventories (9,593) (5,919) (1,884)
Prepaid expenses and other assets (1,195) (375) 163
Accounts payable 1,238 5,564 (505)
Accrued liabilities 1,754 (199) 807
-------- ------- -------
Net cash used in operating activities (9,109) (1,761) (2,128)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (net of cash acquired of $1,152 in 1997) 152 (1,580) -
Purchases of property, plant and equipment (2,514) (644) (442)
Proceeds from sale of property, plant and equipment 57 30 26
-------- ------- -------
Net cash used in investing activities (2,305) (2,194) (416)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from line of credit 20,675 2,884 2,425
Line of credit payments (16,600) (3,525) (750)
Principal payments on long-term debt and capital leases (2,454) (554) (523)
(Decrease) increase in book overdrafts (115) (660) 1,080
Net proceeds from issuances of common stock 9,907 5,832 -
-------- ------- -------
Net cash provided by financing activities 11,413 3,977 2,232
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents - (21) -
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (1) 1 (312)
Cash and cash equivalents, beginning of year 1 0 312
-------- ------- -------
Cash and cash equivalents, end of year $ 0 $ 1 $ 0
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
As of December 31, 1997, approximately 88.5% of the outstanding shares of ERC
Industries, Inc.'s (the "Company") common stock was owned by John Wood Group
PLC ("Wood Group"), a corporation registered in Scotland and incorporated
under the laws of the United Kingdom.
The consolidated financial statements include the accounts of ERC
Industries, Inc, its wholly owned subsidiaries Wood Group Pressure Control
Limited (previously Seaboard Lloyd Limited), and Church Oil Tools, Inc.
("Church"). The Company engages in the manufacture, remanufacture and
servicing of oilfield valves and wellhead equipment. To a lessor extent, the
Company also serves the geothermal valve market through its Barton Wood
division and serves the drilling products market through Church. The Company
primarily sells its products to customers in the oil and gas production
industry located in the major oil and gas producing regions of the United
States. The Company has expanded sales to international oil and gas
producing regions such as Aberdeen, Cumbernauld, London, Abu Dhabi, Jordan,
Saudi Arabia, Germany, Australia and Venezuela. All intercompany accounts
and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments purchased with original
maturities of three months or less at the date of acquisition. Cash
equivalents are stated at cost which approximates market because of their
short maturity.
INVENTORY
Inventory consists primarily of finished, semi-finished and raw materials
which are carried at the lower of cost (specific identification or standard
cost which approximates FIFO) or market.
F-6
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the various
classes of assets which ranges from 3 years for leased property under capital
leases, 5 to 10 years for machinery and equipment and 3 to 31.5 years for
buildings, improvements and other. Major renewals and betterments which
extend the lives of equipment are capitalized while all other repairs and
maintenance are charged to operations as incurred. Disposals are removed at
cost less accumulated depreciation with any resulting gain or loss reflected
in operations.
EXCESS COST OVER NET ASSETS ACQUIRED
Excess cost over net assets acquired is carried at cost and is amortized
using the straight-line method over the estimated useful life of 10 years.
Accumulated amortization, as of December 31, 1997 and 1996, amounted to
approximately $1 million and $673,000, respectively. Periodically, the
Company's management assesses recorded balances of excess cost over net
assets of businesses acquired for impairment in light of historical and
projected operating results, trends and profitability, new product
development and general economic conditions.
ACCOUNTING FOR POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates the impairment of long-lived assets, such as
property, plant and equipment, identifiable intangibles including patents and
trademarks, and excess cost over net assets acquired related to those assets.
In connection with such evaluation, the Company estimates the future cash
flows resulting from the use of that asset and its eventual disposition. If
the sum of the expected future cash flows is less than the carrying value of
the asset, an impairment loss is recognized. The impairment loss is measured
as the amount by which the carrying amount exceeds the fair value of the
asset as determined by quoted market prices when available, or the present
value of the expected future cash flows.
INCOME TAXES
The Company records deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse.
F-7
<PAGE>
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is the
local currency, except for those operations that exist in highly inflationary
economies, for which the U.S. dollar is the functional currency. The
translation of foreign currencies into U.S. dollars is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet
date and for revenue and expense accounts using an average exchange rate for
the period. Adjustments resulting from translation are included in
shareholders' equity.
EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No.
128"). SFAS No. 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supercedes Accounting Principles Board
Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share. Basic earnings per
share, which is based on the weighted average number of common shares
outstanding, replaces primary earnings per share. Diluted earnings per
share, which is based on the weighted average number of common and dilutive
potential common shares outstanding, replaces fully diluted earnings per
share. SFAS No. 128 is effective for the Company in 1997 and requires all
prior-period earnings per share data conform to its presentation. Adoption
of this standard has had no impact on previously reported earnings per share
since the Company has no common stock equivalents or dilutive securities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. The Company maintains cash deposits with several major
banks, which from time-to-time, may exceed federally insured limits.
Management periodically assesses the financial condition of these financial
institutions and believes that any possible credit risk is minimal. The
Company generally sells its products and services to customers in the oil and
gas production industry located in the major oil and gas producing regions of
the world. Procedures are in effect to monitor the credit worthiness of
customers and bad debts have not been significant in relation to the volume
of revenues. The Company generally does not obtain collateral for accounts
receivable.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant
F-8
<PAGE>
estimates made by management include the recoverability of deferred tax
assets, reserves for inventory obsolescence, allowance for doubtful accounts
receivable and accruals for contingencies.
RECLASSIFICATIONS
Certain amounts included in the prior year financial statements have been
reclassified to conform with current year presentation.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation
of comprehensive income and its components. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources and
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS No. 130 is effective
for the Company for the year ended December 31, 1998. Assuming the Company
adopted SFAS No. 130 in 1995, comprehensive income would have been
approximately $1.2 million and $1.1 million and comprehensive loss would have
been $775,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. Adoption is not recognized for interim periods in
the initial year of application. Adoption of this statement will not have a
material impact on the consolidated financial statements of the Company.
F-9
<PAGE>
2. ACQUISITIONS
On July 1, 1997, the Company acquired 100% of the issued and outstanding
capital shares of Church Oil Tools, Inc. ("Church"), a company incorporated
in Texas. The business of Church is the manufacture of oilfield equipment.
Church operates from a facility located in Houston, Texas.
The Company paid a purchase price of $5 million. The source of the funds for
the purchase was approximately $1 million in cash on hand and $4 million of
promissory notes to the Sellers. The acquisition was accounted for under the
purchase method of accounting and the purchase price was allocated as follows
(in thousands):
Cash $1,152
Accounts Receivable 939
Inventory 566
Property, Plant and Equipment 772
Excess Cost Over Net Assets Acquired 3,034
Accounts Payable (809)
Accrued Expenses (95)
Deferred Tax Liability (100)
Long-Term Debt-Current and Non-Current (459)
------
$5,000
======
On September 27, 1996, the Company acquired 100% of the issued and
outstanding capital shares of Seaboard Lloyd Limited ("Seaboard"), a private
company incorporated in Scotland under the Companies Acts of the United
Kingdom. The business of Seaboard is the manufacture of oilfield equipment.
Seaboard now operates as Wood Group Pressure Control Limited ("WGPCL") from a
facility located in Cumbernauld, Scotland.
The Company paid a purchase price of $1,580,000. The source of the funds for
the purchase was approximately $1,080,000 in cash on hand and $500,000
borrowed under the Company's existing credit facility. The acquisition was
accounted for under the purchase method of accounting and the purchase price
was allocated as follows (in thousands):
Accounts Receivable $ 963
Inventory 1,131
Property, Plant and Equipment 1,702
Excess Cost Over Net Assets Acquired 232
Accounts Payable (569)
Accrued Expenses (929)
Long-Term Debt-Current and Non-Current (950)
------
$1,580
======
F-10
<PAGE>
The operating results of WGPCL and Church are included in operations from
their dates of acquisition. The following represents the pro-forma results
of operations as if the acquisitions of WGPCL and Church had occurred on
January 1, 1996 (in thousands, except per share data):
Year Ended December 31,
-----------------------
1997 1996
-------- --------
(unaudited) (unaudited)
Revenues $85,791 $62,091
Net income 2,050 969
Net income per share .09 .05
3. INVENTORY
Inventory consisted of the following (in thousands):
December 31,
----------------
1997 1996
------- -------
Raw Materials $ 2,275 $ 1,917
Work-In-Progress 3,440 1,875
Finished Goods 23,047 14,856
------- -------
28,762 18,648
Less inventory
obsolescence
reserves 3,681 3,334
------- -------
Total Inventory $25,081 $15,314
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
December 31,
----------------
1997 1996
------- -------
Land............................................ $ 597 $ 497
Leased property under capital leases............ 1,595 1,719
Machinery and equipment......................... 12,136 9,520
Buildings, improvements and other............... 8,060 7,412
------- -------
Total Gross property, plant and equipment.... 22,388 19,148
Less accumulated depreciation and
amortization............................... 14,645 14,216
------- -------
Net property, plant and equipment............... $ 7,743 $ 4,932
======= =======
Leased property is primarily composed of automobiles. Accumulated
amortization of capital leases amounted to approximately $1.1 million and
$1.2 million as of December 31, 1997 and 1996, respectively. Depreciation
and amortization expense was approximately $1.3 million, $845,000, and
$791,000 for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively.
In March 1996, the Company recognized an impairment loss of approximately
$203,000 on certain property owned by the Company. Operations are
continuing at the property.
F-11
<PAGE>
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following (in thousands):
December 31,
--------------
1997 1996
------ ------
Insurance............. $ 632 $ 540
Vacation.............. 389 309
Salaries.............. 850 428
In-transit inventory.. 1,080 --
Warranty.............. 331 239
Other................. 1,479 1,396
------ ------
Total other accrued
liabilities........ $4,761 $2,912
====== ======
6. DEBT
Long-term debt consisted of the following (in thousands) :
December 31
----------------
1997 1996
------- -------
Lines of credit due to banks............................... $ 6,787 $2,712
Notes payable related to acquisition of Church,
bearing interest at 8%, due in annual installments
of $1 million commencing July 1, 1998................... 4,000 -
Note payable to a bank due in quarterly installments
of $62,500 plus interest................................ - 1,748
Obligations under capital leases and other debt bearing
interest at various rates, due in various installments.. 1,346 661
------- ------
Total debt................................................. 12,133 5,121
Less current maturities.................................... 8,156 3,295
------- ------
Long-term debt............................................. $ 3,977 $1,826
======= ======
The aggregate maturities of long-term debt, including obligations under
capital leases during the five years subsequent to December 31, 1997 are (in
thousands):
December 31
-----------
1998 $ 8,156
1999 1,193
2000 1,147
2001 1,157
2002 and thereafter 480
-------
Total $12,133
=======
F-12
<PAGE>
Management believes that the carrying value of debt approximates its fair
value at December 31, 1997 and 1996 since the lines of credit bear interest
at variable rates and the various fixed rates on notes payable and capital
leases are not materially different from current market rates.
The Company amended its domestic line of credit in June 1997, effectively
increasing its line of credit to $10 million. The loan facility now provides
for maximum borrowings of the lesser of $10 million or eligible trade
accounts receivable and inventory (as defined in the line of credit).
Interest on outstanding balances are payable monthly at the bank's prime rate
minus three quarters of one percent. At December 31, 1997 and 1996, the
bank's prime rate was 8.5% and 8.25%, respectively. The loan facility
requires the Company to maintain a ratio of total indebtedness to tangible
net worth of no greater than 2.0 to 1.0. Additionally, the terms of the
agreement restrict the Company from paying cash dividends. The facility is
collateralized by trade accounts receivable and inventory and expires in June
1998. At December 31, 1997, loan amounts outstanding under the agreement
were $5.2 million. In addition, the Company had outstanding, against the
revolving line of credit, irrevocable letters of credit amounting to $55,000.
At December 31, 1997, the Company's maximum amount available for additional
borrowings was $4.8 million.
The Company also has a line of credit overdraft facility in Scotland, which
expires in September 1998 and provides a line of credit of three million
pounds (approximately $4.9 million at December 31, 1997). The line of credit
is used for the purpose of general working capital requirements and provides
overdraft, acceptance credit, loan and documentary credit facilities.
Interest payable on the overdraft facility is equal to the Bank's Base rate
plus 1 percent per annum. At December 31, 1997 and 1996, the bank's base rate
was 7.25% and 6.00%, respectively. This credit agreement is collateralized by
substantially all of the assets of Wood Group Pressure Control Limited and is
guaranteed by ERC Industries, Inc. At December 31, 1997, amounts outstanding
under the various facilities were: overdraft, $1.6 million; guarantees and
letters of credit, $424,000. At December 31, 1997, the Company's maximum
amount available for additional borrowings was $2.9 million.
F-13
<PAGE>
7. INCOME TAXES
The Company records deferred income tax liabilities or assets for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets
are as follows (in thousands):
December 31,
-------------------
1997 1996
--------- --------
Deferred tax assets:
Net operating loss............... $ 7,253 $ 8,184
Tax over book inventory basis.... 668 232
Allowance for doubtful accounts.. 236 182
Other............................ 386 407
Valuation allowance.............. (5,853) (8,184)
------- -------
Total deferred tax assets........ $ 2,690 $ 821
======= =======
The valuation allowance was reduced during 1997 by approximately $2.3
million. At December 31, 1997, the Company had federal net operating loss
(NOL) carryforwards available to offset future taxable income in the
approximate amount of $19.6 million. Of these NOL carryforwards,
approximately $16.8 million were generated before the Company affected a
quasi-reorganization and expire between the years 2001 and 2003. The balance
of the NOL carryforwards were generated after the quasi-reorganization and
expire in 2009 and 2010. Special limitations exist under the law which may
restrict the utilization of the net loss carryforwards, including the
alternative minimum tax.
Realization of deferred tax assets is dependent on generating sufficient
taxable income in the future to offset these tax deductions and NOL
carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets in excess of the
valuation allowance recorded will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced. Alternatively, if the
Company can maintain the current levels of taxable income into the future
then the deferred tax asset considered realizable could be increased in the
near term.
F-14
<PAGE>
The following is a summary of the provision for income taxes (in thousands):
Year Ended December 31,
------------------------
1997 1996 1995
-------- ------- ------
Current - due to alternative minimum tax $ 97 $ 50 $ (35)
Current - foreign provision 60 - -
Non-cash charge in lieu of income taxes 3,206 796 5
Deferred tax (benefit) charge (1,969) (273) (243)
------- ----- -----
Provision (benefit) for income taxes $ 1,394 $ 573 $(273)
======= ===== =====
The non-cash charges in lieu of income taxes represents the amount of income
taxes the Company would pay absent the NOL carryforward which was generated
before the Company affected a quasi-reorganization. Such charges are offset
within shareholders' equity by an increase in additional paid-in capital.
The reconciliation between the actual (benefit)/provision recorded for income
taxes and the (benefit)/provision for income taxes at the United States
federal statutory rate for the years ended December 31, 1997, 1996 and 1995
is as follows:
1997 1996 1995
------- ------ ------
U.S. federal statutory rate 34.0% 34.0% (34.0%)
Current foreign losses with no
future tax benefits 11.2 - -
Non-deductible Expenses 5.1 4.3 4.3
State Taxes 3.0 - -
Other - (2.2) 3.6
----- ----- ------
Effective Tax Rate 53.3% 36.1% (26.1%)
===== ===== ======
The Company incurred losses in its Venezuelan operations that management
believes will not provide future tax benefits to the Company. The impact of
these losses on the provision for income taxes was recorded in the fourth
quarter of 1997.
8. RELATED PARTY TRANSACTIONS
The Company and Wood Group have agreed to an annual provision for
administrative and financial services fees in amounts to be determined on an
annual basis. The Company paid or accrued approximately $389,000, $188,000
and $173,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
On September 8, 1997, the Company agreed to issue and sell to the Wood Group
6,250,000 shares of the Company's common stock, par value $0.01 per share.
The aggregate purchase price for the shares was $10 million, or $1.60 per
share.
F-15
<PAGE>
On June 6, 1996, the Company agreed to issue and sell to the Wood Group
7,384,616 shares of the Company's common stock, par value $.01 per share.
The aggregate purchase price for the shares was $6 million, or $0.8125 per
share.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment under noncancellable
operating leases expiring through 2004. The leases provide for minimum
monthly payments, plus in certain instances, payment for taxes, insurance and
maintenance. Certain leases also contain renewal options. The Company is
liable under noncancellable leases for minimum lease commitment amounts
during the five years subsequent to December 31, 1997 as follows (in
thousands):
December 31
- -----------
1998 $1,006
1999 846
2000 814
2001 650
2002 and thereafter 532
-----
Total $3,848
======
Rental expenses for the years ended December 31, 1997, 1996 and 1995 were
approximately $662,000, $424,000, and $447,000, respectively.
In connection with the Barton Wood acquisition in late 1993, the Company
leased and had an option to purchase, certain real property and equipment
from the Barton lenders ("lessors") at any time during the term of the
leases, which extended through February, 1998. During 1997 the Company
exercised its options and purchased the real property and equipment for $2.4
million.
Pursuant to the agreement to acquire Church, the Company will pay up to an
additional $1 million in the event that Church's average earnings in 1999 and
2000 exceed certain thresholds.
The Company has authorized a long-term incentive program for its key
employees. Incentive payments are based on the improvement in pre-tax
earnings per share over a stated amount. No amounts have been earned during
1997, 1996 and 1995.
10. PROFIT SHARING AND 401(K) PLANS
The Company has a defined contribution 401(k) profit sharing plan. The plan
covers substantially all employees subject to certain length of service
requirements. Contributions are made at the discretion of the Board of
Directors. The Company paid $27,000 during 1995 for contributions accrued at
December 31, 1994. No contributions were paid or
F-16
<PAGE>
accrued for the year ended December 31, 1995. In June 1996, the Company began
matching employee's contributions up to 6% of their eligible compensation at
a rate of 25% of employee contributions. The Company's matching contributions
totaled approximately $130,000 in 1997 and $53,000 in 1996.
11. SALES TO SIGNIFICANT CUSTOMERS
In 1997 and 1995, the Company had no customers that comprised 10% or more of
its sales. The Company had one customer in 1996 which accounted for
approximately 10% of its sales.
12. SUPPLEMENTAL CASH FLOW DISCLOSURES
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------ ----------------- -----------------
(in thousands) (in thousands) (in thousands)
Cash paid for:
Interest $913 $324 $418
==== ==== ====
Income taxes $ 52 $ 0 $ 9
==== ==== ====
The Company entered into capital lease obligations of $160,000, $426,000 and
$125,000 during the periods ended December 31, 1997, 1996 and 1995,
respectively. During the year ended December 31, 1997, the company purchased
$785,000 of property, plant and equipment by issuing a note payable to
seller.
Under the Company's cash management system, checks issued but not presented
to bank frequently result in overdraft balances for accounting purposes and
are classified as "Accounts Payable" in the balance sheet and as "Increases
(Decreases) in Bank Overdrafts" in the statement of cash flows.
F-17
<PAGE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In thousands, except per share data)
1997
----
Net Sales.................... $16,534 $17,521 $22,208 $24,582
Gross profit................. 3,956 4,017 5,484 5,608
Net income................... 220 248 621 135
Net income per share......... $ .01 $ .01 $ .03 $ none
1996
----
Net Sales.................... $ 9,828 $11,817 $13,304 $16,012
Gross profit................. 2,039 2,926 3,060 4,149
Net income (loss)............ (70) 250 392 443
Net income (loss) per share.. $ (.01) $ .02 $ .02 $ .02
13. DOMESTIC AND FOREIGN OPERATIONS
The Company primarily conducts its operations in various locations throughout
the United States and United Kingdom. During the years ended December 31,
1997 and 1998, approximately $15 million and $2.6 million of operating
revenues and approximately $157,000 and $152,000 of operating income was
recorded by WGPCL, respectively. No significant operations of the Company
existed in the United Kingdom during the year ended December 31, 1995.
Identifiable assets in the United Kingdom were approximately $8.2 million and
$7 million as of December 31, 1997 and 1996, respectively.
14. SUBSEQUENT EVENTS
On February 2, 1998, the Company completed the acquisition of all the issued
and outstanding capital stock of Bompet, C.A., a Venezuelan company
("Bompet"). Bompet is a Venezuelan based manufacturer of products used in
the drilling and production segment of the Oil and Gas Industry. Bompet
sells wellheads and gate valves (and related assemblies) along with
specialized services to oil and gas producers throughout Latin America.
Bompet has a facility in Cuidad Ojeda on the east side of Lake Maracaibo.
In connection with the transaction, the Company paid the sole Bompet
stockholder, Inversiones Western C.A., a purchase price of $2.6 million. In
addition, the Company will pay up to a maximum of $3.4 million in the event
that Bompet's earnings exceed certain thresholds during 1998, 1999 and 2000.
The source of the funds for the purchase was cash on hand and bank debt. The
Company intends to account for the transaction as a purchase.
F-18
<PAGE>
EXHIBIT 10.18
June 4, 1997
("Effective Date")
ERC Industries, Inc.
16920 Park Row
Houston, Texas 77084
RE: $10,000,000.00 Revolving Line of Credit from Texas Commerce Bank National
Association ("Bank") to ERC Industries, Inc., ("Borrower")
Gentlemen:
Bank is pleased to renew and increase to $10,000,000.00 the revolving line
of credit (the "Revolving Line of Credit") for loans and the issuance of
commercial and standby letters of credit, subject to the terms and conditions
stated herein (as the same may be amended, renewed, extended, supplemented or
restated from time to time, this "Letter Agreement" or "Agreement").
NOW THEREFORE, in consideration of the above stated premises, Bank and
Borrower hereby agree as follows:
T E R M S A N D C O N D I T I O N S
-------------------------------------
SECTION 1 - THE LINE OF CREDIT
--------- ------------------
Section 1.1 REVOLVING LINE OF CREDIT
A. Advances: The Bank agrees to make advances (an "Advance" or "Advances") to
Borrower, upon request of Borrower from time to time from the Effective
Date to but not including May 25, 1998 not to exceed at any one time
outstanding the lesser of the Borrowing Base or $10,000,000.00, Borrower
having the right to borrow, repay and reborrow. Advances shall be used for
the purpose of meeting the working capital requirements and general
corporate purposes of Borrower. Advances shall be evidenced by, and made
as provided in a promissory note of even date herewith executed by Borrower
and delivered to Bank ("Note"), a copy of which is attached hereto as
Exhibit "A" and made a part hereof for all purposes (the "Note" as used in
this Agreement, shall include without limitation, any and all renewals,
extensions, modifications, rearrangements, replacements thereof and
substitutions therefor).
B. Letters of Credit: The Bank agrees to issue standby and commercial letters
of credit (an "L/C" or "L/Cs") from time to time, from the Effective Date
to but not including May 25, 1998, for the account of Borrower and in favor
of such person or persons as may be designated by Borrower. Each L/C shall
have an expiration date of no later than May 25, 1999. The Borrower shall
reimburse the Bank immediately upon demand for any drawings made under an
L/C. Prior to May 25, 1998, the Borrower may request an Advance under the
Note, and the Bank is hereby authorized to make such an Advance without
notice to the Borrower, to pay any drawing under any L/C.
C. Maximum Amount:
The maximum amount which will be available to Borrower under the Revolving
Line of Credit is the lesser of the Borrowing Base or $10,000,000.00
("Maximum Amount"), which in determining whether any amounts are available
under the Revolving Line of Credit, Bank will deduct from the Maximum
Amount, the amount of all unpaid Advances (the outstanding principal
balance on the Note) and all L/C Obligations. The term "L/C Obligations"
shall mean the face amount of all L/Cs issued and outstanding plus any
unreimbursed drawings under the L/Cs plus any other amounts owing to Bank
under or in respect of any L/C or Application (as hereinafter defined).
Borrower and Bank agree that the following outstanding L/Cs shall be deemed
made under and subject to the terms of this Agreement.
<TABLE>
<CAPTION>
VALUE EXPIR.
NUMBER DATE DATE AMOUNT
--------- -------- -------- -----------
<S> <C> <C> <C>
I444134 03/09/94 03/01/95 $ 7,662.08
I451961 03/22/95 02/15/98 150,000.00
I455643 08/29/95 10/31/97 2,820.00
I460191 03/05/96 08/30/96 10,000.00
I464760 09/16/96 09/30/98 1,648.00
I465275 10/04/96 08/15/97 6,000.00
</TABLE>
Section 1.2 BORROWING BASE REPORT. Within 30 days after the end of every
calendar month Borrower shall furnish the Bank a Borrowing Base Report
substantially in the form of Exhibit B, together with an accounts receivable
aging and listing.
Section 1.3 BORROWING BASE. The Borrowing Base shall be the amount available
for borrowing on each Borrowing Base Report, subject to verification by the
Bank. If the Bank upon such verification does not agree with the Borrowing Base
Report submitted, within 5 days after written notice by Bank to Borrower,
Borrower shall correct such Borrowing Base Report and paydown the Note in
accordance with the corrected Borrowing Base Report. If no Borrowing Base
Report is received within the time specified, the Bank may in its sole
discretion set the Borrowing Base at any amount it deems appropriate.
Page 1 of 5 Pages
<PAGE>
ERC INDUSTRIES, INC.
Letter Agreement
June 4, 1997 ("Effective Date")
Section 1.4 REQUIRED PAYDOWNS. If the outstanding principal balance of the
Note plus all L/C obligations at any time exceeds the Borrowing Base then in
effect, Borrower shall make a paydown on the Note in an amount sufficient to
reduce the unpaid balance on the Note to an amount that when added to all L/C
Obligations is no greater than the Borrowing Base. Such paydown shall be
accompanied by: (a) all accrued and unpaid interest on the amount prepaid; and
(b) any prepayment charge required by the Note and shall be due concurrently
with the Borrowing Base Report.
Section 1.5 INTEREST RATE, TERMS AND FEES:
A. The Note: Advances under the Note shall bear interest at the rates of
interest as determined in accordance with the terms of the Note. Principal
and interest on each Advance shall be made as more particularly described
in the Note.
B. Letter of Credit Fees: In consideration for the issuance of any L/C,
Borrower agrees to pay to Bank a letter of credit issuance fee ("Fee") in
respect of such L/C in an amount equal to: (1) in the case of commercial
L/Cs, one quarter of one percent (1/4%) per quarter or fraction thereof on
the face amount of such L/C; and (2) in the case of standby L/Cs one
percent (1%) per annum on the face amount of such L/C. The Fee shall be
paid to Bank at its offices at 712 Main Street, Third Floor, Houston, Texas
77002 to the attention of the Manager, Documentary Services Division, or
such other address designated by the Bank, in advance of the date of
issuance of such L/C. The Fee in respect of each L/C shall be calculated
from the date of issuance of the L/C to and including the date of
expiration of such L/C calculated in accordance with the then current fee
schedule of Bank.
Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on May
25, 1998; or (ii) such earlier date resulting from acceleration as defined in
Section 5 hereof.
Section 1.7 COLLATERAL: Borrower ratifies and confirms that its obligations
under the Revolving Line of Credit, the Note, L/Cs and Applications are secured
by a security interest of first priority in Borrower's accounts receivables and
inventory as evidenced by a Security Agreement dated February 26, 1991 executed
by Borrower and Bank as amended by a First Amendment dated as of February 26,
1991 (as further amended, supplemented or replaced from time to time, the
"Security Agreement"). References to the Credit Agreement and Note in the
Security Agreement shall mean this Agreement and the Note referenced herein.
The Agreement, the Security Agreement, the Note, the Applications, the L/Cs and
each and every other written document, instrument, agreement related to the
Revolving Line of Credit (together with any and all renewals, extensions,
modifications, supplements, amendments and replacements thereof) that may be
required to be executed and delivered by Borrower to Bank shall hereinafter be
called the "Loan Documents".
Section 1.8 NEGATIVE PLEDGE: Borrower will not create or permit to exist any
lien upon any of its property now owned or hereafter acquired, or acquire any
property upon any conditional sale or other title retention device or
arrangement or any purchase money security agreement; or in any manner directly
or indirectly sell, assign, pledge or otherwise transfer any of its accounts or
other property, except: (a) liens, not for borrowed money, arising in the
ordinary course of business; (b) liens for taxes not delinquent or being
contested in good faith by appropriate proceedings; (c) liens in effect on the
date hereof and disclosed to Bank in writing, so long as neither the
indebtedness secured thereby nor the property covered thereby increases; (d)
liens in favor of Bank, or otherwise approved in writing by Bank; (e) liens
resulting from the leasing of equipment; and (f) purchase money liens not to
exceed $300,000.00 in the aggregate per year, arising in the ordinary course of
business. Notwithstanding anything to the contrary herein, Borrower will not
permit any Lien on any accounts receivable or inventory that secures the Loans
unless Bank shall provide Borrower with Bank's prior written consent.
SECTION 2 - CONDITIONS PRECEDENT
--------- --------------------
Section 2.1 CONDITIONS PRECEDENT: The Bank shall be under no obligation to
make any Advance or issue any L/C, until the Borrower has executed and
delivered, in form and substance satisfactory to Bank, the following documents:
(i) this Agreement; (ii) the Note; (iii) an application substantially in the
form of, in the case of each commercial L/C, Exhibit "C-1" attached hereto, and
in the case of each standby L/C, Exhibit "C-2" attached hereto, in each case,
duly completed and executed by Borrower to the complete satisfaction of Bank
("Application" or "Applications") not less than two Business Days prior to the
date on which the L/C is requested to be issued; and (iv) any other document,
instrument, certificate or instrument that Bank may reasonably require to
consider the request.
SECTION 3 - REPRESENTATION AND WARRANTIES
--------- -----------------------------
To induce Bank to enter into this Agreement and to make Advances and issue
L/Cs, Borrower represents and warrants that on the date hereof and on the date
of each request for an Advance and submission of each Application, and on the
date of making an Advance and the date of issuance of any L/C, and at all times
during the term of this Agreement:
Section 3.1 ORGANIZATION, DUE EXECUTION, AND ENFORCEABILITY: Borrower is and
shall remain duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization; has all the power and authority to
conduct its business as presently conducted, and is duly qualified to do
business and in good standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification desirable; the execution of
the Loan Documents by Borrower has been duly authorized and does not contravene
the articles of incorporation or, by-laws of Borrower, and will not result in
the breach of, or constitute a default under any agreement, judgment, order or
decree binding upon Borrower, and the Loan Documents executed by Borrower are
legally binding obligations of Borrower, enforceable in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency and other
similar laws;
Page 2 of 5 Pages
<PAGE>
ERC INDUSTRIES, INC.
Letter Agreement
June 4, 1997 ("Effective Date")
Section 3.2 ACCURATE INFORMATION: The information in the financial statements
and other information provided, or to be provided to Bank by Borrower is true,
correct and accurate in all material respects as of the date provided and shall
be true and correct in all material respects on the date that any Advance or
L/C is requested to be funded or issued;
Section 3.3 NO DEFAULTS: No Event of Default (as defined hereinafter) or
default exists under this Agreement or under any of the other Loan Documents and
no default exists under any other agreement material to the financial condition
of Borrower or is continuing;
Section 3.4 NO LITIGATION, ETC.: Borrower is not subject to any order,
judgment, or litigation which could materially and adversely affect its
respective financial condition, business affairs or operations;
Section 3.5 PAYMENT OF TAXES: Borrower has paid all its taxes due and owing
including without limitation employment taxes, except for those for which
extensions have been obtained and those being contested in good faith and for
which adequate reserves have been established;
Section 3.6 COMPLIANCE, GOVERNMENTAL REQUIREMENTS AND PERMITS: Borrower is not
subject to any governmental order, any administrative or judicial order or
judgment that could materially and adversely affect its financial condition,
business affairs or operations of its business. Borrower has no material
contingent liability with respect to compliance with laws, rules and regulations
applicable to Borrower; and
Section 3.7 REGULATION U: None of the proceeds of any Advance shall be used
for the purpose of purchasing or carrying directly or indirectly, any margin
stock or for any other purpose which would make any credit provided by Bank to
Borrower hereunder a purpose credit within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System.
SECTION 4 - COVENANTS
--------- ---------
Borrower covenants and agrees that so long as any amounts remain unpaid under
the Note or any L/C is outstanding or any amounts are owing under the other Loan
Documents it shall:
Section 4.1 FINANCIAL STATEMENTS AND FINANCIAL COVENANTS: ensure that
financial statements and financial covenants comply with the financial covenants
and other covenants described, and calculated as set forth, in Exhibit "D".
Unless otherwise provided on Exhibit "D", all such amounts and ratios will be
calculated: (a) on the basis of United States GAAP for the Borrower; and (b) on
a consolidated basis. Compliance with the requirements of Exhibit "D" will be
determined as of the dates of the financial statements to be provided to Bank;
Section 4.2 REPRESENTATION AND WARRANTIES: ensure that each of the
representations and warranties of Borrower contained herein shall be true and
correct when given and when deemed given hereunder and notify Bank immediately
should any representation or warranty become untrue or misleading;
Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify Bank in
writing at least 30 days prior to any date that Borrower changes its name or the
location of its principal place of business or the location of its books and
records, and notify Bank immediately if Borrower becomes a party to any merger
or consolidation, or if there is a change or modification to its business or
legal structure; and
Section 4.4 COMPLIANCE: at all times comply with applicable laws, rules,
regulations, ordinances and Executive Orders.
SECTION 5 - EVENTS OF DEFAULT AND REMEDIES
--------- ------------------------------
If any of the following events ("Events of Default") shall occur, then Bank
may do any or all of the following: (1) declare the Note to be, and thereupon
the principal balance of the Note shall forthwith become, immediately due and
payable, together with all accrued and unpaid interest thereon and all fees and
all other obligations and indebtedness of Borrower under the Loan Documents,
without notice of acceleration or of intention to accelerate, presentment and
demand or protest, all of which are hereby expressly waived; (2) without notice
to Borrower, terminate the Revolving Line of Credit and refuse to consider
requests for Advances and issuances of L/Cs; (3) set off, in any order, against
the indebtedness of Borrower under the Loan Documents any debt owing by Bank to
Borrower, including, but not limited to, any deposit account, which right is
hereby granted by Borrower to Bank; and (4) exercise any and all other rights
pursuant to the Loan Documents, at law, in equity or otherwise:
(a) Borrower shall fail to pay any principal of or interest on the Note or any
other obligation under any Application or under any other Loan Document as and
when due; or
(b) Borrower shall fail to pay at maturity, or within any applicable period of
grace, any principal of or interest on any other borrowed money obligation or
shall fail to observe or perform any term, covenant or agreement contained in
any agreement or obligation by which it is bound; or
(c) Any representation or warranty made in connection with any Loan Document
shall prove to have been incorrect, false or misleading; or
(d) Default shall occur in the punctual and complete performance of any covenant
contained in any Loan Document; or
(e) Final judgment for the payment of money shall be rendered against Borrower
and the same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed; or
(f) Any order shall be entered in any proceeding against Borrower decreeing the
dissolution, liquidation or split-up thereof, and such order shall remain in
effect for 30 days; or
(g) Borrower shall make a general assignment for the benefit of creditors or
shall petition or apply to any tribunal for the appointment of a trustee,
custodian, receiver or liquidator of all or any substantial part of its
business, estate or assets or shall
Page 3 of 5 Pages
<PAGE>
ERC INDUSTRIES, INC.
Letter Agreement
June 4, 1997 ("Effective Date")
commence any proceeding under any bankruptcy, insolvency, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect; or any
such petition or application shall be filed or any such proceeding shall be
commenced against Borrower and Borrower, by act or omission shall indicate
approval thereof, consent thereto or acquiescence therein, or an order shall be
entered appointing a trustee, custodian, receiver or liquidator of all or any
substantial part of the assets of Borrower or granting relief to Borrower or
approving the petition in any such proceeding, and such order shall remain in
effect for more than 30 days; or Borrower shall fail generally to pay its debts
as they become due or suffer any writ of attachment or execution or any similar
process to be issued or levied against it or any substantial part of its
property which is not released, stayed, bonded or vacated within 30 days after
its issue or levy; or
(h) Borrower shall have concealed, removed, or permitted to be concealed or
removed, any part of its property, with intent to hinder, delay or defraud its
creditors or any of them, or made or suffered a transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or shall have made any transfer of its property to or for the benefit of a
creditor at a time when other creditors similarly situated have not been paid;
or
(i) Any change shall occur in the ownership of Borrower, such that John Wood
Group P.L.C. shall not remain directly or indirectly, the majority owner of
Borrower.
SECTION 6 - MISCELLANEOUS
--------- -------------
Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the
part of Bank in exercising any power or right in connection herewith or under
any of the Loan Documents shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other power or right. No
course of dealing between Borrower and Bank shall operate as a waiver of any
provision of this Agreement or any other Loan Document nor any consent to any
departure therefrom shall in any event be effective unless the same shall be in
writing and signed by the person against whom enforcement thereof is to be
sought, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given.
Section 6.2 EXPENSES: Any provision to the contrary notwithstanding, and
whether or not the transactions contemplated by this Agreement shall be
consummated, Borrower agrees to pay on demand all reasonable out-of-pocket
expenses (including, without limitation, the fees and expenses of counsel for
Bank) in connection with the negotiation, preparation, execution, filing,
recording, modification, supplementing and waiver of the Loan Documents and the
making, servicing and collection of any of the indebtedness evidenced by the
Note and any Application. The obligations of Borrower under this and the
following section shall survive the termination of this Agreement.
Section 6.3 USURY: It is the intent of Borrower and of Bank in the execution
and performance of this Agreement and any other Loan Document to contract in
strict compliance with the usury laws of the State of Texas and as applicable,
the United States of America. Borrower and Bank agree that none of the terms
and provisions contained in this Agreement or any other Loan Document shall ever
be construed to create a contract to pay for the use, forbearance or detention
of money with interest at a rate in excess of the maximum nonusurious rate of
interest permitted to be charged by applicable Federal or Texas law (whichever
shall permit the higher lawful rate) from time to time in effect ("Highest
Lawful Rate"). At all times, if any, that Chapter One of the Texas Credit Code
shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the
"indicated rate ceiling" as defined in that Chapter. The provisions of this
paragraph shall control over all other provisions of this Agreement and all
other Loan Documents which may be in apparent conflict herewith. In the event
Bank shall collect moneys which are deemed to constitute interest in excess of
the legal rate, such moneys shall be immediately returned to the payor thereof
(or, at the option of Bank, credited against the unpaid principal of the Note)
upon such determination.
Section 6.4 SURVIVAL: All representations, warranties, covenants and
agreements made by or on behalf of Borrower in connection with the Loan
Documents shall survive the execution and delivery of the Loan Documents; shall
not be affected by any investigation made by Bank, and shall bind Borrower and
successors, trustees, receivers and assigns of Borrower and inure to the benefit
of the successors and assigns of Bank; provided that the undertaking of Bank
hereunder to consider making Advances to and for issuances of L/Cs upon the
application of Borrower shall not inure to the benefit of any successor or
assign of Borrower. Except as otherwise provided herein, the term of this
Agreement shall be until the final maturity of the Note and the full and final
payment of all amounts due under the Note and any Application and the Loan
Documents.
Section 6.5 DOCUMENTARY MATTERS: This Agreement may be executed in several
identical counterparts, and by the parties hereto on separate counterparts, and
each counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts shall constitute but one and the
same instrument. The headings and captions appearing in the Loan Documents have
been included solely for convenience and shall not be considered in construing
the Loan Documents. The Loan Documents embody the entire agreement between
Borrower and Bank and supersede all prior proposals, agreements and
understandings. If any provision of any Loan Document shall be invalid, illegal
or unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions shall not be affected or impaired
thereby.
Section 6.6 PRIOR CREDIT AGREEMENT: This Letter Agreement supersedes that
certain Agreement dated June 30, 1996 executed by Bank and Borrower in
connection with the $5,000,000.00 Revolving Line of Credit available to the
Borrower to but not including June 30, 1997.
Section 6.7 GOVERNING LAW: THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE THE LAWS OF THE
UNITED STATES OF AMERICA.
Page 4 of 5 Pages
<PAGE>
ERC INDUSTRIES, INC.
Letter Agreement
June 4, 1997 ("Effective Date")
Section 6.8 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE
TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Sincerely Yours,
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: ________________________________
Name: ______________________________
Title: _____________________________
Acknowledged and agreed to this _____ day of June, 1997, but effective as of the
Effective Date, by:
"BORROWER"
ERC INDUSTRIES, INC.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
EXHIBITS:
A Promissory Note
B Borrowing Base Report
C-1 Application for Commercial Letters of Credit
C-2 Application for Standby Letters of Credit
D Financial Covenants And Compliance Certificate
Page 5 of 5 Pages
<PAGE>
EXHIBIT A
PROMISSORY NOTE
(this "Note")
U.S. $10,000,000.00 June 4, 1997 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"),
promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION
("Bank") on or before May 25, 1998, (the "Termination Date"), at its banking
house at 712 Main Street, Houston, Harris County, Texas, or at such other
location as Bank may designate, in lawful money of the United States of America,
the lesser of: (i) the principal sum of TEN MILLION AND NO/100THS UNITED STATES
DOLLARS (U.S. $10,000,000.00); or (ii) the aggregate unpaid principal amount of
all loans made by Bank (each such loan being a "Loan"), which may be outstanding
on the Termination Date. Each Loan shall be due and payable on the maturity
date agreed to by Bank and Borrower with respect to such Loan (the "Maturity
Date"). In no event shall any Maturity Date fall on a date after the
Termination Date. Subject to the terms and conditions of this Note and the
Letter Agreement, Borrower may borrow, repay and reborrow all or any part of the
credit provided for herein at any time before the Termination Date, there being
no limitation on the number of Loans made so long as the total unpaid principal
amount at any time outstanding does not exceed the Maximum Loan Total.
Capitalized terms used but not otherwise defined herein shall have the meanings
assigned to them in the Letter Agreement.
"Adjusted LIBOR Rate" means a per annum interest rate determined by Bank by
dividing: (i) the LIBOR Rate by (ii) Statutory Reserves provided that Statutory
Reserves is greater than zero, otherwise Adjusted LIBOR Rate means a per annum
interest rate equal to the LIBOR Rate. "LIBOR Rate" means with respect to any
LIBOR Loan for any Interest Period the interest rate determined by Bank by
reference to the British Bankers' Association Interest Settlement Rates (as set
forth by any service selected by Bank which has been nominated by the British
Bankers' Association as an authorized information vender for the purpose of
displaying such rates including but not limited to Bloomberg, Reuters or
Telerate) to be the rate at approximately 11:00 a.m. London time, two Business
Days prior to the commencement of such Interest Period for dollar deposits in an
amount comparable to such LIBOR Loan with a maturity comparable to such Interest
Period.
"Board" means the Board of Governors of the Federal Reserve System of the United
States.
"Borrowing Date" means any Business Day on which Bank shall make or continue a
Loan hereunder.
"Business Day" means a day: (i) on which Bank and commercial banks in New York
City are generally open for business; and (ii) with respect to LIBOR Loans, on
which dealings in United States Dollar deposits are carried out in the London
interbank market.
"Highest Lawful Rate" means the maximum nonusurious rate of interest from time
to time permitted by applicable law. If Texas law determines the Highest Lawful
Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas
Credit Code or any successor statute. Bank may from time to time, as to current
and future balances, elect and implement any other ceiling under such Code
and/or revise the index, formula or provisions of law used to compute the rate
on this open-end account by notice to Borrower, if and to the extent permitted
by, and in the manner provided in such Code.
"Interest Period" means the period commencing on the Borrowing Date and ending
on the Maturity Date, consistent with the following provisions. The duration of
each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of
up to the Termination Date unless any portion thereof is converted to a LIBOR
Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two,
three or six months; in each case as selected by Borrower and agreed to by Bank.
Borrower's choice of Interest Period is subject to the following limitations:
(i) No Interest Period shall end on a date after the Termination Date; and (ii)
If the last day of an Interest Period would be a day other than a Business Day,
the Interest Period shall end on the next succeeding Business Day (unless the
Interest Period relates to a LIBOR Loan and the next succeeding Business Day is
in a different calendar month than the day on which the Interest Period would
otherwise end, in which case the Interest Period shall end on the next preceding
Business Day).
"Letter Agreement" means the Letter Agreement of even date herewith executed by
the Borrower and the Bank, as amended from time to time.
"LIBOR Loan" means a Loan which bears interest at a rate determined by reference
to the Adjusted LIBOR Rate.
"Loan Documents" means this Note, the Letter Agreement and any document or
instrument evidencing, securing, guaranteeing or given in connection with this
Note.
"Maximum Loan Total" means (a) the lesser of (i) $10,000,000.00 or (ii) the
Borrowing Base less (b) L/C Obligations.
"Obligations" means all principal, interest and other amounts which are or
become owing under this Note or any other Loan Document.
"Obligor" means Borrower and any guarantor, surety, co-signer, general partner
or other person who may now or hereafter be obligated to pay all or any part of
the Obligations.
"Prime Rate" means the rate determined from time to time by Bank as its prime
rate. The Prime Rate shall change automatically from time to time without
notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND
MAY NOT BE BANK'S LOWEST RATE.
"Prime Rate Loan" means a Loan which bears interest at a rate determined by
reference to the Prime Rate.
"Statutory Reserves" means the difference (expressed as a decimal) of the number
one minus the aggregate of the maximum reserve percentages (including, without
limitation, any marginal, special, emergency, or supplemental reserves)
expressed as a decimal established by the Board and any other banking authority
to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency
Liabilities (as defined in Regulation D of the Board). Such reserve percentages
shall include, without limitation, those imposed under such Regulation D. LIBOR
Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall
be deemed to be subject to such reserve requirements without benefit of or
credit for proration, exceptions or offsets which may be available from time to
time to any bank under such Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay
interest on the unpaid principal amount of each Prime Rate Loan at a rate per
annum equal to the lesser of: (i) the Prime Rate in effect from time to time
minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii)
the Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and
payable on the last day of each calendar quarter, on the date of any conversion
to a LIBOR Loan and on the Termination Date. Borrower shall pay interest on the
unpaid principal amount of each LIBOR Loan for the Interest Period with respect
thereto at a rate per annum equal to the lesser of: (i) the Adjusted LIBOR Rate
plus one percent (1%) (the "Effective LIBOR Rate"); or (ii) the Highest Lawful
Rate. Accrued interest on each LIBOR Loan is due on the last day of each
Interest Period applicable thereto, and in the case of an Interest Period in
excess of three months, on each day which occurs every three months after the
initial date of such Interest Period, and on any prepayment (on the amount
prepaid).
If at any time the effective rate of interest which would otherwise be payable
on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of
interest to accrue on the unpaid principal balance of such Loan during all such
times shall be limited to the Highest Lawful Rate, but any subsequent reductions
in such interest rate shall not become effective to reduce such interest rate
below the Highest Lawful Rate until the total amount of interest accrued on the
unpaid principal balance of such Loan equals the total amount of interest which
would have accrued if the Effective Prime Rate, or Effective LIBOR Rate,
whichever is applicable, had at all times been in effect.
Each LIBOR Loan shall be in an amount not less than $150,000.00 and an
integral multiple of $50,000.00 in excess thereof. Each Prime Rate Loan shall
be in an amount not less than $50,000.00 and an integral multiple of $50,000.00
in excess thereof. Interest with respect to Prime Rate Loans shall be computed
on the basis of the actual number of days elapsed and a year comprised of: 365
(or 366 as the case may be) days. Interest with respect to LIBOR Loans shall be
calculated on the basis of a 360 day year for the actual days elapsed, unless
such calculation would result in a usurious interest rate, in which case such
interest shall be calculated on the basis of a 365 or 366 day year, as the case
may be.
EXHIBIT A Page 1 of 4 Pages
Signed for Identification
By:_____________________
<PAGE>
EXHIBIT A
PROMISSORY NOTE
ERC INDUSTRIES, INC.
June 4, 1997 ("Date")
The unpaid principal balance of this Note at any time will be the total
amounts advanced by Bank, less the amount of all payments or prepayments of
principal. Absent manifest error, the records of Bank will be conclusive as to
amounts owed. Loans shall be made on Borrower's irrevocable notice to Bank,
given not later than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans,
the third Business Day prior to the proposed Borrowing Date or, in the case of
Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date.
Each notice of a requested borrowing (a "Notice of Requested Borrowing") under
this paragraph may be oral or written, and shall specify: (i) the requested
amount; (ii) proposed Borrowing Date; (iii) whether the requested Loan is to be
a Prime Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan.
If any Notice of Requested Borrowing shall be oral, Borrower shall deliver to
Bank prior to the Borrowing Date a confirmatory written Notice of Requested
Borrowing.
Borrower may on any Business Day prepay the outstanding principal amount of
any Prime Rate Loan, in whole or in part. Partial prepayments shall be in an
aggregate principal amount of $50,000.00 or a greater integral multiple of
$50,000.00. Borrower shall have no right to prepay any LIBOR Loan.
Provided that no Event of Default has occurred and is continuing, Borrower may
elect to continue all or any part of any LIBOR Loan beyond the expiration of the
then current Interest Period relating thereto by providing Bank at least three
Business Day's written or telecopy notice of such election, specifying the Loan
or portion thereof to be continued and the Interest Period therefor and whether
it is to be a Prime Rate Loan or LIBOR Loan provided that any continuation as a
LIBOR Loan shall not be less than $150,000.00 and shall be in an integral
multiple of $50,000.00. If an Event of Default shall have occurred and be
continuing, the Borrower shall not have the option to elect to continue any such
LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans. Provided that no
Event of Default has occurred and is continuing, Borrower may elect to convert
any Prime Rate Loan at any time or from time to time to a LIBOR Loan by
providing Bank at least three Business Day's written or telecopy notice of such
election, specifying each Interest Period therefor. Any conversion of Prime
Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than
$150,000.00 and in integral multiples of $50,000.00.
If at any time Bank determines in good faith (which determination shall be
conclusive) that any change in any applicable law, rule or regulation or in the
interpretation, application or administration thereof makes it unlawful, or any
central bank or other governmental authority asserts that it is unlawful, for
Bank or its foreign branch or branches to maintain any LIBOR Loan by means of
dollar deposits obtained in the London interbank market (any of the above being
described as a "LIBOR Event"), then, at the option of Bank, the aggregate
principal amount of all LIBOR Loans outstanding shall be prepaid; however the
prepayment may be made at the sole option of the Bank with a Prime Rate Loan.
Upon the occurrence of any LIBOR Event, and at any time thereafter so long as
such LIBOR Event shall continue, the Bank may exercise its aforesaid option by
giving written notice thereof to Borrower.
If Bank determines after the date of this Note that any change in applicable
laws, rules or regulations regarding capital adequacy, or any change in the
interpretation or administration thereof by any appropriate governmental agency,
or compliance with any request or directive to Bank regarding capital adequacy
(whether or not having the force of law) of any such agency, increases the
capital required to be maintained with respect to any Loan and therefore reduces
the rate of return on Bank's capital below the level Bank could have achieved
but for such change or compliance (taking into consideration Bank's policies
with respect to capital adequacy), then Borrower will pay to Bank from time to
time, within 15 days of Bank's request, any additional amount required to
compensate Bank for such reduction. Bank will request any additional amount by
delivering to Borrower a certificate of Bank setting forth the amount necessary
to compensate Bank. The certificate will be conclusive and binding, absent
manifest error. Bank may make any assumptions, and may use any allocations of
costs and expenses and any averaging and attribution methods, which Bank in good
faith finds reasonable.
If any domestic or foreign law, treaty, rule or regulation (whether now in
effect or hereinafter enacted or promulgated, including Regulation D of the
Board) or any interpretation or administration thereof by any governmental
authority charged with the interpretation or administration thereof (whether or
not having the force of law): (a) changes, imposes, modifies, applies or deems
applicable any reserve, special deposit or similar requirements in respect of
any Loan or against assets of, deposits with or for the account of, or credit
extended or committed by, Bank; or (b) imposes on Bank or the interbank
eurocurrency deposit and transfer market or the market for domestic bank
certificates or deposit any other condition affecting any such Loan; and the
result of any of the foregoing is to impose a cost to Bank of agreeing to make,
funding or maintaining any such Loan or to reduce the amount of any sum
receivable by Bank in respect of any such Loan, then Bank may notify Borrower in
writing of the happening of such event and Borrower shall upon demand pay to
Bank such additional amounts as will compensate Bank for such costs as
determined by Bank. Without prejudice to the survival of any other agreement of
Borrower under this Note, the obligations of Borrower under this paragraph shall
survive the termination of this Note.
Borrower will indemnify Bank against, and reimburse Bank on demand for, any
loss, cost or expense incurred or sustained by Bank (including without
limitation any loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by Bank to fund or maintain
LIBOR Loans) as a result of: (a) any payment or prepayment (whether permitted by
Bank or required hereunder or otherwise) of all or a portion of any LIBOR Loan
on a day other than the Maturity Date of such Loan; (b) any payment or
prepayment, whether required hereunder or otherwise, of any LIBOR Loan made
after the delivery of a Notice of Requested Borrowing but before the applicable
Borrowing Date if such payment or prepayment prevents the proposed Loan from
becoming fully effective; or (c) the failure of any LIBOR Loan to be made by
Bank due to any action or inaction of Borrower. Such funding losses and other
costs and expenses shall be calculated and billed by Bank and such bill shall,
as to the costs incurred, be conclusive absent manifest error.
All past-due principal and interest on this Note, will, at Bank's option, bear
interest at the Highest Lawful Rate, or if applicable law does not provide for a
maximum nonusurious rate of interest, at a rate per annum equal to the Prime
Rate plus five percent (5%).
In addition to all principal and accrued interest on this Note, Borrower
agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all
owners and holders of this Note in collecting this Note through probate,
reorganization, bankruptcy or any other proceeding; and (b) reasonable
attorney's fees if and when this Note is placed in the hands of an attorney for
collection.
Borrower and Bank intend to conform strictly to applicable usury laws.
Therefore, the total amount of interest (as defined under applicable law)
contracted for, charged or collected under this Note will never exceed the
Highest Lawful Rate. If Bank contracts for, charges or receives any excess
interest, it will be deemed a mistake. Bank will automatically reform the
contract or charge to conform to applicable law, and if excess interest has been
received, Bank will either refund the excess to Borrower or credit the excess on
the unpaid principal amount of this Note. All amounts constituting interest
will be spread throughout the full term of this Note in determining whether
interest exceeds lawful amounts.
If any payment of interest or principal herein provided for is not paid when
due, or if any Event of Default occurs under the terms of the Letter Agreement,
then Bank may do any or all of the following: (i) cease making Loans hereunder;
(ii) declare the Obligations to be immediately due and payable, without notice
of acceleration or of intention to accelerate, presentment and demand or protest
or notice of any kind, all of which are hereby expressly waived; (iii) set off,
in any order, against the Obligations any debt owing by Bank to any Obligor,
including, but not limited to, any deposit account, which right is hereby
granted by each Obligor to Bank; and (iv) exercise any and all other rights
under the Loan Documents, at law, in equity or otherwise.
No waiver of any default is a waiver of any other default. Bank's delay in
exercising any right or power under any Loan Document is not a waiver of such
right or power.
Each Obligor severally waives notice, demand, presentment for payment, notice
of nonpayment, notice of intent to accelerate, notice of acceleration, protest,
notice of protest, and the filing of suit and diligence in collecting this Note
and all other demands and notices, and consents and agrees that its liabilities
and obligations will not be released or discharged by any or all of the
following, whether with or without
EXHIBIT A Page 2 of 4 Pages
Signed for Identification
By:_____________________
<PAGE>
EXHIBIT A
PROMISSORY NOTE
ERC INDUSTRIES, INC.
June 4, 1997 ("Date")
notice to it or any other Obligor, and whether before or after the stated
maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii)
acceptances of partial payments; (iv) releases or substitutions of any
collateral or any Obligor; and (v) failure, if any, to perfect or maintain
perfection of any security interest in any collateral. Each Obligor agrees that
acceptance of any partial payment will not constitute a waiver and that waiver
of any default will not constitute waiver of any prior or subsequent default.
Where appropriate the neuter gender includes the feminine and the masculine
and the singular number includes the plural number.
Borrower represents and agrees that: all Loans evidenced by this Note are and
will be for business, commercial, investment or other similar purpose and not
primarily for personal, family, or household use as such terms are used in
Chapter One of the Texas Credit Code. Borrower represents and agrees that each
of the following statements is true unless the box preceding that statement is
checked and initialed by Borrower and Bank: (i) [ ] ___________ ___________ No
advances will be used primarily for agricultural purposes as such term is used
in the Texas Credit Code. (ii) [ ] _____________ _____________ No advances will
be used for the purpose of purchasing or carrying any margin stock as that term
is defined in Regulation U of the Board. Notwithstanding anything contained
herein or in any other Loan Document, if this is a consumer credit obligation
(as defined or described in 12 C.F.R. 227, Regulation AA, promulgated by the
Board), the security for this credit obligation will not extend to any non-
possessory security interest in household goods (as defined in Regulation AA)
other than a purchase money security interest, and no waiver of any notice
contained herein or therein will extend to any waiver of notice prohibited by
Regulation AA.
Chapter 15 of the Texas Credit Code shall not apply to this Note or to any
Loan evidenced by this Note.
This Note is issued by the Maker to evidence Loans outstanding from time to
time not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$10,000,000.00 revolving line of credit (the "Revolving Line of Credit")
extended by the Bank to the Maker pursuant to the Letter Agreement. It is given
in renewal, increase and modification of that certain promissory note dated June
30, 1996 executed by Maker and payable to the order of the Bank on or before
June 30, 1997 in the principal amount of $5,000,000.00.
This Note is governed by Texas law. If any provision of this Note is illegal
or unenforceable, that illegality or unenforceability will not affect the
remaining provisions of this Note. BORROWER AND BANK AGREE THAT THE COUNTY IN
WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION
OR PROCEEDING BROUGHT BY BORROWER OR BANK, WHETHER IN CONTRACT, TORT, OR
OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER MAY BE BROUGHT IN ANY
STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A)
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY
OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT
FORUM. BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED
OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW.
BANK MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN
COURTS IN OTHER PROPER JURISDICTIONS OR VENUES.
For purposes of this Note, any assignee or subsequent holder of this Note will
be considered the "Bank," and each successor to Borrower will be considered the
"Borrower."
Each Borrower and cosigner represents that if it is not a natural person, it
is duly organized and validly existing and in good standing under the laws of
the state of its incorporation or organization; has full power to own its
properties and to carry on its business as now conducted; is duly qualified to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it makes such qualification desirable; and has not
commenced any dissolution proceedings. Each Borrower and cosigner that is
subject to the Texas Revised Partnership Act ("TRPA") agrees that Bank is not
required to comply with Section 3.05(d) of the TRPA and agrees that Bank may
proceed directly against one or more partners or their property without first
seeking satisfaction from partnership property. Each Borrower and cosigner
represents that if it conducts business under an assumed business or
professional name it has properly filed Assumed Name Certificate(s) in the
office(s) required by Chapter 36 of the Texas Business and Commerce Code. Each
of the persons signing below as Borrower or cosigner represents that he/she has
full requisite power and authority to execute and deliver this Note to Bank on
behalf of the party for whom he/she signs and to bind such party to the terms
and conditions of this Note and that this Note is enforceable against such
party.
NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO
TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO
CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT.
THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
EXHIBIT A Page 3 of 4 Pages
Signed for Identification
By:____________________
<PAGE>
EXHIBIT A
PROMISSORY NOTE
ERC INDUSTIES, INC.
June 4, 1997 ("Date")
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Borrower has executed this Note effective the day, month and
year first aforesaid.
BORROWER: ERC INDUSTRIES, INC.
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
(Bank's signature is provided as its acknowledgment of the above as the final
written agreement between the parties and as its agreement with each Borrower
subject to TRPA that Bank is not required to comply with Section 3.05(d) of
TRPA.)
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:___________________________________________
Name:_________________________________________
Title:________________________________________
EXHIBIT A Page 4 of 4 Pages
Signed for Identification
By:____________________
<PAGE>
EXHIBIT B
BORROWING BASE REPORT
ACCOUNTS AND INVENTORY
Borrowing Base Report for Period Beginning: ____________________ AND ENDING
____________________ ("CURRENT PERIOD") REQUIRED BY THE CREDIT AGREEMENT DATED
THE EFFECTIVE DATE (AS AMENDED, RESTATED, AND SUPPLEMENTED FROM TIME TO TIME,
THE "AGREEMENT") BY AND BETWEEN ERC INDUSTRIES, INC. AND TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
_____________________________________________________________________________
THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 30 DAYS OF THE LAST
DAY OF EACH CALENDAR MONTH BORROWER MUST PROVIDE ALONG WITH THE BORROWING BASE
REPORT: AN ACCOUNTS RECEIVABLE AGINGS AND LISTING.
______________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C>
Line 1. Total Accounts as of the end of the Current Period $_________________
INELIGIBLE ACCOUNTS AS OF THE END OF THE CURRENT PERIOD:
2. That portion (e.g., invoice) of all of the Accounts
of any Account Debtor where the Account is more than
90 days from invoice date $__________________
3. All of the Accounts, not already included in Line 2,
of any Account Debtor if 20% of the dollar amount of all
of the Accounts of such Account Debtor are more than
90 days from invoice date $__________________
4. That portion of all of the Accounts of any Account
Debtor which exceeds 10% of the dollar amount of the
total of all Accounts for all Account Debtors for
the Current Period (Line 1) $__________________
5. Intercompany and Affiliate Accounts $__________________
6. Government Accounts [GOVERNMENT ACCOUNTS MEANS
receivables owed by the U.S. government or by the
GOVERNMENT OF ANY STATE, COUNTY, MUNICIPALITY, OR
OTHER POLITICAL SUBDIVISION AS TO WHICH BANK'S
SECURITY INTEREST OR ABILITY TO OBTAIN DIRECT PAYMENT
OF THE PROCEEDS IS GOVERNED BY ANY FEDERAL OR STATE
7. Foreign Accounts (unless secured by a letter
of credit issued by a bank satisfactory to the Bank, covered
by Eximbank insurance or otherwise approved by Bank) $__________________
8. Accounts subject to any dispute or setoff or contra account $__________________
9. Other Ineligible Accounts $___________________
10. Total Ineligible Accounts for the Current Period $___________________
(Add Lines 2 through 9)
11. Total Eligible Accounts for the Current Period $____________________
(Line 1 - Line 10)
12. Multiplied by: Accounts Advance Factor 80%
13. Equals: ACCOUNTS COMPONENT OF BORROWING BASE $____________________
14. Total Inventory as of the end of the Current Period $____________________
INELIGIBLE INVENTORY AS OF THE END OF THE CURRENT PERIOD:
15. Work in Process $____________________
16. Private label $____________________
17. Obsolete $____________________
18. Returned/damaged $____________________
19. Consigned/unowned $____________________
20. Subject to Purchase Money Security Interest $____________________
21. Slow moving $____________________
22. Other Ineligible Inventory $____________________
23. Total Ineligible Inventory as of the end of the
Current Period (Lines 15 + 16 + 17 + 18 + 19 + 20 + 21 + 22) $____________________
24. Total Eligible Inventory as of the end of the
Current Period (Line 14 - Line 23) $____________________
25. Multiplied by: Inventory Advance Factor 50%
26. Equals: INVENTORY COMPONENT OF BORROWING BASE $____________________
(Not to exceed 50% of the Borrowing Base)
27. Total BORROWING BASE (not to exceed $10,000,000.00) as of
the end of the Current Period (Line 13 + Line 26) $____________________
28. Less: Aggregate principal amount outstanding under
the Note as of the end of the Current Period $____________________
29. Less: Outstanding L/C Obligations as of the end of the
Current Period $____________________
30. Total Outstandings (Line 28 + Line 29) $____________________
31. Equals: Amount available for borrowing subject to the terms of
the Agreement, if positive; or amount due, if negative $____________________
</TABLE>
The terms "Accounts" and "Inventory" have the respective meanings as set forth
in the Texas Business and Commerce Code in effect as of the date of the
Agreement. Inventory shall be valued at the lesser of: (a) market value; and
(b) cost. "Other Ineligible Accounts" mean all such Accounts of Borrower that
are not subject to a first and prior Lien in favor of Bank, those Accounts that
are subject to any Lien not in favor of Bank and those Accounts of Borrower as
shall be deemed from time to time to be, in the sole judgment of Bank,
ineligible for purposes of determining the Borrowing Base. "Other Ineligible
Inventory" means that Inventory of Borrower that is not subject to a first and
prior Lien in favor of Bank, that Inventory that is subject to any Lien not in
favor of Bank and that Inventory of Borrower as shall be deemed from time to
time to be in the sole judgment of Bank, ineligible for purposes of determining
the Borrowing Base. All other terms not defined herein shall have the
respective meanings as in the Agreement.
Borrower certifies that the above information and computations are true,
correct, complete and not misleading as of the date hereof.
Borrower: ERC INDUSTRIES, INC.
By:_____________________________________________________________________________
Name:___________________________________________________________________________
Title:__________________________________________________________________________
Address:________________________________________________________________________
Date:___________________________________________________________________________
EXHIBIT B Page 1 of 1
<PAGE>
EXHIBIT C-1
Application for Commercial Letters of Credit
[Insert application here marked as Exhibit C-1]
EXHIBIT C-1
<PAGE>
EXHIBIT C-2
Application for Standby Letters of Credit
[Insert application here marked as Exhibit C-2]
EXHIBIT C-2
<PAGE>
EXHIBIT D to Agreement between
ERC INDUSTRIES, INC. ("Borrower") and
Texas Commerce Bank National Association ("Bank")
dated the Effective Date as same may be amended,
restated and supplemented in writing.
REPORTING REQUIREMENTS, FINANCIAL COVENANTS
AND
COMPLIANCE CERTIFICATE FOR CURRENT REPORTING
PERIOD ENDING ________, 199__ ("END DATE")
A. REPORTING PERIOD. THIS EXHIBIT WILL BE IN PROPER FORM AND SUBMITTED WITHIN
30 DAYS OF THE END OF EACH CALENDAR QUARTER INCLUDING THE LAST REPORTING
PERIOD OF THE FISCAL YEAR AND WITH THE FISCAL YEAR END FINANCIAL STATEMENT.
BORROWER'S FISCAL YEAR ENDS ON , 19 .
B. Reporting
<TABLE>
<CAPTION>
==================================================================================================================================
Financial Reporting. Borrower will provide the following Compliance
financial information within the times indicated: Certificate
==================================================================================================================================
<S> <C> <C> <C> <C>
WHO WHEN DUE WHAT Compliance
--- -------- ---- (Circle)
Yes No
- -----------------------------------------------------------------------------------------------------------------------------------
BORROWER (i) Within 100 days of fiscal year end Annual financial statements (balance Yes No
sheet, income statement, cash flow
statement) audited (with unqualified
opinion) by independent certified public
accountants satisfactory to Bank,
accompanied by Compliance Certificate
---------------------------------------------------------------------------------------------------
(ii) Within 30 days of each Reporting Period Unaudited interim financial statements Yes No
End Date, including final period of accompanied by Compliance Certificate
fiscal year
---------------------------------------------------------------------------------------------------
(iii) Within 30 days of each month end Borrowing Base Report (Exhibit B) Yes No
===================================================================================================================================
</TABLE>
C.
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL COVENANTS. Borrower will comply with the COMPLIANCE CERTIFICATE
following financial covenants, defined in accordance with GAAP
and the definitions in Section 8, and incorporating the
calculation adjustments indicated on the Compliance Certificate:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REQUIRED ACTUAL REPORTED Compliance
-------- --------------- (Circle)
Except as specified otherwise, each covenant will be For Current Reporting Period/as Yes No
maintained at all times and reported for each of the End Date
Reporting Period or as of each Reporting Period End
Date, as appropriate:
- -----------------------------------------------------------------------------------------------------------------------------------
1. Maintain a Tangible Net Worth as adjusted of at least Stockholders' Equity $ _____ Yes No
$15,500,000.00. Minus: Goodwill $ _____
Other Intangible Assets $ _____
Loans/Advances to
Equity holders $ _____
Loans to Affiliates $ _____
Plus: Subordinated Debt $ _____
= Tangible Net Worth as adjusted $ _____
- ------------------------------------------------------------------------------------------------------------------------------------
2. Maintain a Current Ratio of at least 1.25 to 1.0. $_________/$_________= $___________ Yes No
Current Assets Current Liabilities Current Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
3. Maintain a ratio of total Indebtedness as adjusted to Liabilities (GAAP) $ _____ Yes No
Tangible Net Worth as adjusted no greater than Plus: Contingent obligations $ _____
2.00 to 1.0. Liens on Borrower's Property
not included in Borrower's
liabilities $ _____
Minus: Subordinated Debt $ _____
Equals:Indebtedness as adjusted $ _____
Stockholders' Equity $ _____
Minus: Goodwill $ _____
Other Intangible Assets $ _____
Loans/Advances to
Equity holders $ _____
Loans to Affiliates $ _____
Plus: Subordinated Debt $ _____
= Tangible Net Worth as adjusted $ _____
$____________/$____________ = _______
Indebtedness (adjusted) TNW (adjusted)
=============================================================================================================================
</TABLE>
EXHIBIT D Page 1 of 2 Pages
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
================================================================================================================================
D. Other Required Covenants to be maintained and to be certified. COMPLIANCE CERTIFICATE
================================================================================================================================
REQUIRED ACTUAL REPORTED Compliance
- -------------------------------------------------------------------- ---------------------------- (Circle)
(i) Borrower shall not declare or pay any dividend Yes No
================================================================================================================================
</TABLE>
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN
THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND
CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND THE
AGREEMENT, THE AGREEMENT SHALL CONTROL.
The undersigned hereby certifies that the above information and computations are
true and correct and not misleading as of the date hereof, and that since the
date of the Borrower's most recent Compliance Certificate (if any):
[ ] No default or Event of Default has occurred under the Agreement during
the current Reporting Period, or been discovered from a prior period, and
not reported.
[ ] A default or Event of Default (as described below) has occurred during
the current Reporting Period or has been discovered from a prior period
and is being reported for the first time and:
[ ] was cured on ___________________________________.
[ ] was waived by Bank in writing on ______________________________.
[ ] is continuing.
Description of Event of Default: _________________________________________
__________________________________________________________________________
__________________________________________________________________________
Executed this _________ day of _________________________, 19________________.
BORROWER: ERC INDUSTRIES, INC.
SIGNATURE:______________________________________________________________________
NAME:___________________________________________________________________________
TITLE: (Chief Financial Officer or President)
_________________________________________________________________________
ADDRESS: 16920 Park Row, Houston, TX 77084
EXHIBIT D Page 2 of 2 Pages
<PAGE>
PROMISSORY NOTE
(this "Note")
U.S. $10,000,000.00 June 4, 1997 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"),
promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION
("Bank") on or before May 25, 1998, (the "Termination Date"), at its banking
house at 712 Main Street, Houston, Harris County, Texas, or at such other
location as Bank may designate, in lawful money of the United States of America,
the lesser of: (i) the principal sum of TEN MILLION AND NO/100THS UNITED STATES
DOLLARS (U.S. $10,000,000.00); or (ii) the aggregate unpaid principal amount of
all loans made by Bank (each such loan being a "Loan"), which may be outstanding
on the Termination Date. Each Loan shall be due and payable on the maturity
date agreed to by Bank and Borrower with respect to such Loan (the "Maturity
Date"). In no event shall any Maturity Date fall on a date after the
Termination Date. Subject to the terms and conditions of this Note and the
Letter Agreement, Borrower may borrow, repay and reborrow all or any part of the
credit provided for herein at any time before the Termination Date, there being
no limitation on the number of Loans made so long as the total unpaid principal
amount at any time outstanding does not exceed the Maximum Loan Total.
Capitalized terms used but not otherwise defined herein shall have the meanings
assigned to them in the Letter Agreement.
"Adjusted LIBOR Rate" means a per annum interest rate determined by Bank by
dividing: (i) the LIBOR Rate by (ii) Statutory Reserves provided that Statutory
Reserves is greater than zero, otherwise Adjusted LIBOR Rate means a per annum
interest rate equal to the LIBOR Rate. "LIBOR Rate" means with respect to any
LIBOR Loan for any Interest Period the interest rate determined by Bank by
reference to the British Bankers' Association Interest Settlement Rates (as set
forth by any service selected by Bank which has been nominated by the British
Bankers' Association as an authorized information vender for the purpose of
displaying such rates including but not limited to Bloomberg, Reuters or
Telerate) to be the rate at approximately 11:00 a.m. London time, two Business
Days prior to the commencement of such Interest Period for dollar deposits in an
amount comparable to such LIBOR Loan with a maturity comparable to such Interest
Period.
"Board" means the Board of Governors of the Federal Reserve System of the United
States.
"Borrowing Date" means any Business Day on which Bank shall make or continue a
Loan hereunder.
"Business Day" means a day: (i) on which Bank and commercial banks in New York
City are generally open for business; and (ii) with respect to LIBOR Loans, on
which dealings in United States Dollar deposits are carried out in the London
interbank market.
"Highest Lawful Rate" means the maximum nonusurious rate of interest from time
to time permitted by applicable law. If Texas law determines the Highest Lawful
Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas
Credit Code or any successor statute. Bank may from time to time, as to current
and future balances, elect and implement any other ceiling under such Code
and/or revise the index, formula or provisions of law used to compute the rate
on this open-end account by notice to Borrower, if and to the extent permitted
by, and in the manner provided in such Code.
"Interest Period" means the period commencing on the Borrowing Date and ending
on the Maturity Date, consistent with the following provisions. The duration of
each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of
up to the Termination Date unless any portion thereof is converted to a LIBOR
Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two,
three or six months; in each case as selected by Borrower and agreed to by Bank.
Borrower's choice of Interest Period is subject to the following limitations:
(i) No Interest Period shall end on a date after the Termination Date; and (ii)
If the last day of an Interest Period would be a day other than a Business Day,
the Interest Period shall end on the next succeeding Business Day (unless the
Interest Period relates to a LIBOR Loan and the next succeeding Business Day is
in a different calendar month than the day on which the Interest Period would
otherwise end, in which case the Interest Period shall end on the next preceding
Business Day).
"Letter Agreement" means the Letter Agreement of even date herewith executed by
the Borrower and the Bank, as amended from time to time.
"LIBOR Loan" means a Loan which bears interest at a rate determined by reference
to the Adjusted LIBOR Rate.
"Loan Documents" means this Note, the Letter Agreement and any document or
instrument evidencing, securing, guaranteeing or given in connection with this
Note.
"Maximum Loan Total" means (a) the lesser of (i) $10,000,000.00 or (ii) the
Borrowing Base less (b) L/C Obligations.
"Obligations" means all principal, interest and other amounts which are or
become owing under this Note or any other Loan Document.
"Obligor" means Borrower and any guarantor, surety, co-signer, general partner
or other person who may now or hereafter be obligated to pay all or any part of
the Obligations.
"Prime Rate" means the rate determined from time to time by Bank as its prime
rate. The Prime Rate shall change automatically from time to time without
notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND
MAY NOT BE BANK'S LOWEST RATE.
"Prime Rate Loan" means a Loan which bears interest at a rate determined by
reference to the Prime Rate.
"Statutory Reserves" means the difference (expressed as a decimal) of the number
one minus the aggregate of the maximum reserve percentages (including, without
limitation, any marginal, special, emergency, or supplemental reserves)
expressed as a decimal established by the Board and any other banking authority
to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency
Liabilities (as defined in Regulation D of the Board). Such reserve percentages
shall include, without limitation, those imposed under such Regulation D. LIBOR
Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall
be deemed to be subject to such reserve requirements without benefit of or
credit for proration, exceptions or offsets which may be available from time to
time to any bank under such Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay
interest on the unpaid principal amount of each Prime Rate Loan at a rate per
annum equal to the lesser of: (i) the Prime Rate in effect from time to time
minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii)
the Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and
payable on the last day of each calendar quarter, on the date of any conversion
to a LIBOR Loan and on the Termination Date. Borrower shall pay interest on the
unpaid principal amount of each LIBOR Loan for the Interest Period with respect
thereto at a rate per annum equal to the lesser of: (i) the Adjusted LIBOR Rate
plus one percent (1%) (the "Effective LIBOR Rate"); or (ii) the Highest Lawful
Rate. Accrued interest on each LIBOR Loan is due on the last day of each
Interest Period applicable thereto, and in the case of an Interest Period in
excess of three months, on each day which occurs every three months after the
initial date of such Interest Period, and on any prepayment (on the amount
prepaid).
If at any time the effective rate of interest which would otherwise be payable
on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of
interest to accrue on the unpaid principal balance of such Loan during all such
times shall be limited to the Highest Lawful Rate, but any subsequent reductions
in such interest rate shall not become effective to reduce such interest rate
below the Highest Lawful Rate until the total amount of interest accrued on the
unpaid principal balance of such Loan equals the total amount of interest which
would have accrued if the Effective Prime Rate, or Effective LIBOR Rate,
whichever is applicable, had at all times been in effect.
Each LIBOR Loan shall be in an amount not less than $150,000.00 and an
integral multiple of $50,000.00 in excess thereof. Each Prime Rate Loan shall
be in an amount not less than $50,000.00 and an integral multiple of $50,000.00
in excess thereof. Interest with respect to Prime Rate Loans shall be computed
on the basis of the actual number of days elapsed and a year comprised of: 365
(or 366 as the case may be) days. Interest with respect to LIBOR Loans shall be
calculated on the basis of a 360 day year for the actual days elapsed, unless
such calculation would result in a usurious interest rate, in which case such
interest shall be calculated on the basis of a 365 or 366 day year, as the case
may be.
The unpaid principal balance of this Note at any time will be the total
amounts advanced by Bank, less the amount of all payments or prepayments of
principal. Absent manifest error, the records of Bank will be conclusive as to
amounts owed. Loans shall be made on Borrower's irrevocable notice to Bank,
given not later than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans,
the third Business Day prior to the proposed Borrowing Date or, in the case of
Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date.
Each notice of a requested borrowing (a "Notice of Requested Borrowing") under
this paragraph may be oral or written, and shall specify: (i) the requested
amount; (ii) proposed Borrowing Date; (iii) whether the requested Loan is to be
a Prime Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan.
If any Notice of Requested Borrowing shall be oral, Borrower shall deliver to
Bank prior to the Borrowing Date a confirmatory written Notice of Requested
Borrowing.
Page 1 of 4
Signed for Identification
By:______________________
<PAGE>
PROMISSORY NOTE
ERC INDUSTRIES, INC.
June 4, 1997 ("Date")
Borrower may on any Business Day prepay the outstanding principal amount of
any Prime Rate Loan, in whole or in part. Partial prepayments shall be in an
aggregate principal amount of $50,000.00 or a greater integral multiple of
$50,000.00. Borrower shall have no right to prepay any LIBOR Loan.
Provided that no Event of Default has occurred and is continuing, Borrower may
elect to continue all or any part of any LIBOR Loan beyond the expiration of the
then current Interest Period relating thereto by providing Bank at least three
Business Day's written or telecopy notice of such election, specifying the Loan
or portion thereof to be continued and the Interest Period therefor and whether
it is to be a Prime Rate Loan or LIBOR Loan provided that any continuation as a
LIBOR Loan shall not be less than $150,000.00 and shall be in an integral
multiple of $50,000.00. If an Event of Default shall have occurred and be
continuing, the Borrower shall not have the option to elect to continue any such
LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans. Provided that no
Event of Default has occurred and is continuing, Borrower may elect to convert
any Prime Rate Loan at any time or from time to time to a LIBOR Loan by
providing Bank at least three Business Day's written or telecopy notice of such
election, specifying each Interest Period therefor. Any conversion of Prime
Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than
$150,000.00 and in integral multiples of $50,000.00.
If at any time Bank determines in good faith (which determination shall be
conclusive) that any change in any applicable law, rule or regulation or in the
interpretation, application or administration thereof makes it unlawful, or any
central bank or other governmental authority asserts that it is unlawful, for
Bank or its foreign branch or branches to maintain any LIBOR Loan by means of
dollar deposits obtained in the London interbank market (any of the above being
described as a "LIBOR Event"), then, at the option of Bank, the aggregate
principal amount of all LIBOR Loans outstanding shall be prepaid; however the
prepayment may be made at the sole option of the Bank with a Prime Rate Loan.
Upon the occurrence of any LIBOR Event, and at any time thereafter so long as
such LIBOR Event shall continue, the Bank may exercise its aforesaid option by
giving written notice thereof to Borrower.
If Bank determines after the date of this Note that any change in applicable
laws, rules or regulations regarding capital adequacy, or any change in the
interpretation or administration thereof by any appropriate governmental agency,
or compliance with any request or directive to Bank regarding capital adequacy
(whether or not having the force of law) of any such agency, increases the
capital required to be maintained with respect to any Loan and therefore reduces
the rate of return on Bank's capital below the level Bank could have achieved
but for such change or compliance (taking into consideration Bank's policies
with respect to capital adequacy), then Borrower will pay to Bank from time to
time, within 15 days of Bank's request, any additional amount required to
compensate Bank for such reduction. Bank will request any additional amount by
delivering to Borrower a certificate of Bank setting forth the amount necessary
to compensate Bank. The certificate will be conclusive and binding, absent
manifest error. Bank may make any assumptions, and may use any allocations of
costs and expenses and any averaging and attribution methods, which Bank in good
faith finds reasonable.
If any domestic or foreign law, treaty, rule or regulation (whether now in
effect or hereinafter enacted or promulgated, including Regulation D of the
Board) or any interpretation or administration thereof by any governmental
authority charged with the interpretation or administration thereof (whether or
not having the force of law): (a) changes, imposes, modifies, applies or deems
applicable any reserve, special deposit or similar requirements in respect of
any Loan or against assets of, deposits with or for the account of, or credit
extended or committed by, Bank; or (b) imposes on Bank or the interbank
eurocurrency deposit and transfer market or the market for domestic bank
certificates or deposit any other condition affecting any such Loan; and the
result of any of the foregoing is to impose a cost to Bank of agreeing to make,
funding or maintaining any such Loan or to reduce the amount of any sum
receivable by Bank in respect of any such Loan, then Bank may notify Borrower in
writing of the happening of such event and Borrower shall upon demand pay to
Bank such additional amounts as will compensate Bank for such costs as
determined by Bank. Without prejudice to the survival of any other agreement of
Borrower under this Note, the obligations of Borrower under this paragraph shall
survive the termination of this Note.
Borrower will indemnify Bank against, and reimburse Bank on demand for, any
loss, cost or expense incurred or sustained by Bank (including without
limitation any loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by Bank to fund or maintain
LIBOR Loans) as a result of: (a) any payment or prepayment (whether permitted by
Bank or required hereunder or otherwise) of all or a portion of any LIBOR Loan
on a day other than the Maturity Date of such Loan; (b) any payment or
prepayment, whether required hereunder or otherwise, of any LIBOR Loan made
after the delivery of a Notice of Requested Borrowing but before the applicable
Borrowing Date if such payment or prepayment prevents the proposed Loan from
becoming fully effective; or (c) the failure of any LIBOR Loan to be made by
Bank due to any action or inaction of Borrower. Such funding losses and other
costs and expenses shall be calculated and billed by Bank and such bill shall,
as to the costs incurred, be conclusive absent manifest error.
All past-due principal and interest on this Note, will, at Bank's option, bear
interest at the Highest Lawful Rate, or if applicable law does not provide for a
maximum nonusurious rate of interest, at a rate per annum equal to the Prime
Rate plus five percent (5%).
In addition to all principal and accrued interest on this Note, Borrower
agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all
owners and holders of this Note in collecting this Note through probate,
reorganization, bankruptcy or any other proceeding; and (b) reasonable
attorney's fees if and when this Note is placed in the hands of an attorney for
collection.
Borrower and Bank intend to conform strictly to applicable usury laws.
Therefore, the total amount of interest (as defined under applicable law)
contracted for, charged or collected under this Note will never exceed the
Highest Lawful Rate. If Bank contracts for, charges or receives any excess
interest, it will be deemed a mistake. Bank will automatically reform the
contract or charge to conform to applicable law, and if excess interest has been
received, Bank will either refund the excess to Borrower or credit the excess on
the unpaid principal amount of this Note. All amounts constituting interest
will be spread throughout the full term of this Note in determining whether
interest exceeds lawful amounts.
If any payment of interest or principal herein provided for is not paid when
due, or if any Event of Default occurs under the terms of the Letter Agreement,
then Bank may do any or all of the following: (i) cease making Loans hereunder;
(ii) declare the Obligations to be immediately due and payable, without notice
of acceleration or of intention to accelerate, presentment and demand or protest
or notice of any kind, all of which are hereby expressly waived; (iii) set off,
in any order, against the Obligations any debt owing by Bank to any Obligor,
including, but not limited to, any deposit account, which right is hereby
granted by each Obligor to Bank; and (iv) exercise any and all other rights
under the Loan Documents, at law, in equity or otherwise.
No waiver of any default is a waiver of any other default. Bank's delay in
exercising any right or power under any Loan Document is not a waiver of such
right or power.
Each Obligor severally waives notice, demand, presentment for payment, notice
of nonpayment, notice of intent to accelerate, notice of acceleration, protest,
notice of protest, and the filing of suit and diligence in collecting this Note
and all other demands and notices, and consents and agrees that its liabilities
and obligations will not be released or discharged by any or all of the
following, whether with or without notice to it or any other Obligor, and
whether before or after the stated maturity hereof: (i) extensions of the time
of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases
or substitutions of any collateral or any Obligor; and (v) failure, if any, to
perfect or maintain perfection of any security interest in any collateral. Each
Obligor agrees that acceptance of any partial payment will not constitute a
waiver and that waiver of any default will not constitute waiver of any prior or
subsequent default.
Where appropriate the neuter gender includes the feminine and the masculine
and the singular number includes the plural number.
Borrower represents and agrees that: all Loans evidenced by this Note are and
will be for business, commercial, investment or other similar purpose and not
primarily for personal, family, or household use as such terms are used in
Chapter One of the Texas Credit Code. Borrower represents and agrees that each
of the following statements is true unless the box preceding that statement is
checked and initialed by Borrower and Bank: (i) [ ] ___________ ___________ No
advances will be used primarily for agricultural purposes as such term is used
in the Texas Credit Code. (ii) [ ] _____________ _____________ No advances will
be used for the purpose of purchasing or carrying any margin stock as that term
is defined in Regulation U of the Board. Notwithstanding anything
Page 2 of 4
Signed for Identification
By:______________________
<PAGE>
PROMISSORY NOTE
ERC INDUSTRIES, INC.
June 4, 1997 ("Date")
contained herein or in any other Loan Document, if this is a consumer credit
obligation (as defined or described in 12 C.F.R. 227, Regulation AA, promulgated
by the Board), the security for this credit obligation will not extend to any
non-possessory security interest in household goods (as defined in Regulation
AA) other than a purchase money security interest, and no waiver of any notice
contained herein or therein will extend to any waiver of notice prohibited by
Regulation AA.
Chapter 15 of the Texas Credit Code shall not apply to this Note or to any
Loan evidenced by this Note.
This Note is issued by the Maker to evidence Loans outstanding from time to
time not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$10,000,000.00 revolving line of credit (the "Revolving Line of Credit")
extended by the Bank to the Maker pursuant to the Letter Agreement. It is given
in renewal, increase and modification of that certain promissory note dated June
30, 1996 executed by Maker and payable to the order of the Bank on or before
June 30, 1997 in the principal amount of $5,000,000.00.
This Note is governed by Texas law. If any provision of this Note is illegal
or unenforceable, that illegality or unenforceability will not affect the
remaining provisions of this Note. BORROWER AND BANK AGREE THAT THE COUNTY IN
WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION
OR PROCEEDING BROUGHT BY BORROWER OR BANK, WHETHER IN CONTRACT, TORT, OR
OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER MAY BE BROUGHT IN ANY
STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE
LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A)
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY
OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT
FORUM. BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED
OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW.
BANK MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN
COURTS IN OTHER PROPER JURISDICTIONS OR VENUES.
For purposes of this Note, any assignee or subsequent holder of this Note will
be considered the "Bank," and each successor to Borrower will be considered the
"Borrower."
Each Borrower and cosigner represents that if it is not a natural person, it
is duly organized and validly existing and in good standing under the laws of
the state of its incorporation or organization; has full power to own its
properties and to carry on its business as now conducted; is duly qualified to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it makes such qualification desirable; and has not
commenced any dissolution proceedings. Each Borrower and cosigner that is
subject to the Texas Revised Partnership Act ("TRPA") agrees that Bank is not
required to comply with Section 3.05(d) of the TRPA and agrees that Bank may
proceed directly against one or more partners or their property without first
seeking satisfaction from partnership property. Each Borrower and cosigner
represents that if it conducts business under an assumed business or
professional name it has properly filed Assumed Name Certificate(s) in the
office(s) required by Chapter 36 of the Texas Business and Commerce Code. Each
of the persons signing below as Borrower or cosigner represents that he/she has
full requisite power and authority to execute and deliver this Note to Bank on
behalf of the party for whom he/she signs and to bind such party to the terms
and conditions of this Note and that this Note is enforceable against such
party.
NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO
TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO
CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT.
THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
Page 3 of 4
Signed for Identification
By:______________________
<PAGE>
PROMISSORY NOTE
ERC INDUSTRIES, INC.
June 4, 1997 ("Date")
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Borrower has executed this Note effective the day,
month and year first aforesaid.
BORROWER: ERC INDUSTRIES, INC.
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
(Bank's signature is provided as its acknowledgment of the above as the final
written agreement between the parties and as its agreement with each Borrower
subject to TRPA that Bank is not required to comply with Section 3.05(d) of
TRPA.)
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By:__________________________________________
Name:________________________________________
Title:_______________________________________
Page 4 of 4
Signed for Identification
By:______________________
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 0
<RECEIVABLES> 19,370
<ALLOWANCES> 681
<INVENTORY> 25,081
<CURRENT-ASSETS> 46,519
<PP&E> 22,388
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0
0
<COMMON> 275
<OTHER-SE> 31,627
<TOTAL-LIABILITY-AND-EQUITY> 60,383
<SALES> 80,845
<TOTAL-REVENUES> 80,845
<CGS> 61,780
<TOTAL-COSTS> 15,548
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