<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 0-14439
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ERC INDUSTRIES, INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0382879
------------------------ ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER I.D. NO.)
INCORPORATION OR ORGANIZATION)
1441 PARK TEN BOULEVARD, HOUSTON, TEXAS 77084
- - --------------------------------------- -------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281) 398-8901
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 1998
----- --------------------------------
Common stock, $0.01 par value 27,498,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
Page
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Operations
Three and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1998 5
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis 10
Quantitative and Qualitative Disclosures about Market Risk 14
PART II
OTHER INFORMATION 14
Signature Page 16
Exhibit Index 17
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<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 457 $ -
Trade accounts receivable, net of allowance for
doubtful accounts of $795 and $681, respectively 22,319 18,689
Inventory 33,246 25,081
Prepaid expenses and other current assets 718 229
Deferred tax asset 2,520 2,520
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Total current assets 59,260 46,519
Property, plant and equipment, net 9,127 7,743
Other assets 2,136 1,634
Deferred tax asset-noncurrent 170 170
Excess cost over net assets acquired, net 5,178 4,317
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Total assets $75,871 $60,383
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,228 $ 8,156
Line of credit from parent 19,000 -
Accounts payable 8,422 11,587
Other accrued liabilities 4,468 4,761
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Total current liabilities 37,118 24,504
Long-term debt 2,900 3,977
Commitments and contingencies - -
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 issued and outstanding 275 275
Additional paid-in capital 26,341 24,842
Retained earnings from January 10, 1989 9,160 6,776
Accumulated other comprehensive income 77 9
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Total shareholders' equity 35,853 31,902
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Total liabilities and stockholders' equity $75,871 $60,383
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $27,417 $22,208 $83,398 $56,263
Cost of goods sold 19,864 16,724 60,582 42,806
------- ------- ------- -------
Gross profit 7,553 5,484 22,816 13,457
Selling, general and administrative expenses 6,165 4,088 17,393 10,940
------- ------- ------- -------
Operating income 1,388 1,396 5,423 2,517
Other (income) expense:
Interest expense 584 320 1,383 653
Other, net (15) 17 (110) 44
------- ------- ------- -------
569 337 1,273 697
Income before provision for income taxes 819 1,059 4,150 1,820
Provision for income taxes 380 438 1,766 731
------- ------- ------- -------
Net income $ 439 $ 621 $ 2,384 $ 1,089
======= ======= ======= =======
Basic income per share $ 0.02 $ 0.03 $ 0.09 $ 0.05
Weighted average number of shares
outstanding 27,498 22,811 27,498 21,775
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
COMMON STOCK CAPITAL EARNINGS INCOME
---------------------- ----------- ---------- -------------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 27,498 $275 $24,842 $6,776 $ 9
Net income - - - 2,384 -
Foreign currency translation adjustment - - - - 68
Income tax benefit of pre-quasi-reorganization
net operations loss carryforwards - - 1,499 - -
------ ---- ------- ------ ---
Balance as of September 30, 1998 27,498 275 26,341 9,160 77
====== ==== ======= ====== ===
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities, net of the effect
of acquisitions $(9,110) $(9,692)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired of $80 in 1998 and
$1,152 in 1997 (2,520) 152
Purchases of property, plant and equipment (2,072) (726)
Proceeds from sale of property, plant and equipment 32 6
------- -------
Net cash used in investing activities (4,560) (568)
======= =======
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and long-term debt 18,668 3,239
Principal payments on long-term debt and capital
lease obligations (4,541) (1,994)
Net proceeds from issuance of common stock - 9,926
------- -------
Net cash provided by financing activities 14,127 11,171
======= =======
Net increase (decrease) in cash and cash equivalents 457 911
Cash and cash equivalents, beginning of period - 1
------- -------
Cash and cash equivalents, end of period $ 457 $ 912
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The unaudited condensed consolidated financial statements included herein have
been prepared by ERC Industries, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all material adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for the fair presentation of
such financial statements for the interim periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the interim information presented not misleading, certain information
relating to the Company's organization and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted in this Form 10-Q pursuant
to such rules and regulations. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. The results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the results
expected for the full year.
Note 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.
On January 30, 1998, the Company entered into a definitive purchase agreement
for the acquisition of Bompet, C.A. (Bompet), a Venezuelan company. The
acquisition was accomplished by the purchase of 100% of the issued and
outstanding capital stock of Bompet.
On January 30, 1998, the only remaining condition to completion of the
acquisition of Bompet was the wire transfer of funds from the Company's bank to
the seller. This condition was met on February 2, 1998, the subsequent business
day.
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.
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<PAGE>
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. No
amount has been accrued for Bompet's 1998 earnings exceeding certain thresholds
as of September 30, 1998.
The acquisition of Bompet was accounted for under the purchase method of
accounting and the purchase price was allocated as follows (in thousands):
Cash $ 80
Accounts Receivable 2,556
Inventory 2,086
Property, Plant and Equipment 556
Other Assets 15
Excess Cost Over Net Assets Acquired 911
Accounts Payable (1,438)
Accrued Expenses (1,298)
Long-Term Debt-Current and Non-Current (868)
-------
$ 2,600
=======
The operating results of Bompet and Church are included in operations from
January 1, 1998 and July 1, 1997, respectively. The following represents the
pro-forma results of operations as if the acquisitions of Bompet and Church had
occurred on January 1, 1997 (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
Revenues $24,708 $66,533
Net income 1,021 3,591
Basic income per share 0.04 0.16
Note 3 - Debt
On September 2, 1998, the Company obtained a $22 million secured line of
credit ("the New Line") with its parent, John Wood Group PLC. The line has
substantially the same terms as the Company's previous line of credit. The New
Line, payable on demand, expires on September 2, 1999 and bears interest at the
LIBOR rate plus 0.85%, which was approximately 5.9% at September 30, 1998.
On September 11, 1998, the Company repaid its outstanding balance on its
previous line of credit.
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<PAGE>
Note 4 - Recent Accounting Pronouncements
In September 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net Income $439 $621 $2,384 $1,089
Cumulative translation adjustment 40 (84) 68 (32)
---- ---- ------ ------
Total comprehensive income $479 $537 $2,452 $1,057
==== ==== ====== ======
</TABLE>
In September 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 required for interim periods in the initial year of application.
Management believes that adoption of this statement will not have a material
impact on the consolidated financial statements.
Note 5 - Commitments and Contingencies
The Company is involved in various claims and disputes in the normal course of
its business. Management of the Company believes the disposition of all such
claims, individually or in the aggregate, will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
Note 6 - Reclassifications
Certain reclassifications of prior year balances have been made to conform such
amounts to corresponding 1998 classifications. These reclassifications had no
impact on net income or shareholders' equity.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Quarterly Report on Form 10-Q contains projections and other
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect",
"plan", "intend", "project", "forecasts", "could" and similar expressions are
intended to identify forward-looking statements. All statements other than
statements of historical facts included in this Form 10-Q regarding the
Company's financial position, business strategy, the markets for the Company's
products, future capital expenditures, the Year 2000 compliance issues, and
future net cash flows, are forward-looking statements and may contain certain
information concerning financial results, economic conditions and trends.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, no assurance can be given that actual results
may not differ materially from those in the forward-looking statements herein
for reasons including the effect of competition, the level of petroleum industry
exploration and production expenditures, world economic conditions, prices of,
and the demand for crude oil and natural gas, drilling activity, weather, the
legislative environment in the United States and other countries, and the
condition of the capital and equity markets.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Business Environment
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. 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 oilfield equipment. The
Company also leases certain oilfield equipment to customers.
The business environment for oilfield operations and its corresponding operating
results are affected significantly by petroleum industry exploration and
production expenditures. These expenditures are influenced strongly by oil
company expectations as to energy prices and the supply and demand for crude oil
and natural gas. Petroleum supply and demand, and pricing, in turn, are
influenced by numerous factors including, but not limited to, the effect of
competition, the level of petroleum industry exploration and production
expenditures, world economic conditions, prices of, and the demand for crude oil
and natural gas, drilling activity, weather, the legislative environment in the
United States and other countries, and the condition of the capital and equity
markets.
While the Company anticipates continued long-term growth in the worldwide demand
for hydrocarbons will result in increased spending by oil and gas companies for
the development of the hydrocarbon supply, in recent years, oil and natural gas
prices have reacted to actual and perceived
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<PAGE>
changes in the supply of and demand for oil and natural gas, which has resulted
in volatile levels of oil and gas exploration and drilling activity. This price
volatility has caused some market uncertainties. Historically, crude oil prices,
natural gas prices and the number of rotary rigs in operation have been a
significant factor in determining the amount of worldwide exploration and
production expenditures. Lower oil prices have resulted in a reduction in the
rig count and related drilling activity in the United States, and reductions in
the exploration and development budgets of producers. As prices for oil have
continued to decline and remain depressed, the Company and others in the
industry continue to experience a softening in demand for their products and
services, in particular products associated with exploration activity. A
significant or prolonged decline in future oil and natural gas prices would
likely result in reduced exploration and development of oil and gas and a
decline in the demand for the Company's products.
Results of Operations
The Company's consolidated revenues increased by $5.2 million to $27.4 million
for the three months ended September 30, 1998, from $22.2 million for the three
months ended September 30, 1997. In addition, the Company's nine month
revenues increased by $27.1 million to $83.4 million for the nine months ended
September 30, 1998, from $56.3 million for the nine months ended September 30,
1997. The increase in revenues is principally due to additional sales
attributable to the acquisitions of Church and Bompet and increased domestic and
international sales volume.
The Company's consolidated gross profit for the three months ended September 30,
1998 increased by $2.1 million to $7.6 million from $5.5 million for the same
period in 1997. The gross profit for the nine months ended September 30, 1998
increased by $9.3 million to $22.8 million, from $13.5 million for the same
period in 1997. The Company's gross margins were 27.6% and 27.4% for the three
and nine months ended September 30, 1998, respectively, as compared with 24.7%
and 23.9% for the three and nine months ended September 30, 1997, respectively.
The increase was primarily due to outsourcing certain manufacturing processes at
lower costs and a change in product mix arising from the acquisitions of Church
and Bompet.
Selling, general and administrative expenses increased by $2.1 million, or 51%
for the three months ended September 30, 1998 as compared with the same three
month period for 1997. The same expenses increased by $6.5 million, or 59% for
the nine month period ended September 30, 1998 as compared to the same period in
1997. Selling, general and administrative expenses, as a percentage of sales was
22.5% for the three months ended September 30, 1998 as compared to 18.4% for the
same period in 1997. These same expenses as a percentage of sales for the nine
months ended September 30, 1998 was 20.9% compared with 19.4% for the first nine
months of 1997. The increases are primarily due to increased administrative
costs to pursue international acquisitions, additional expenses associated with
acquisitions of and management of Church and Bompet, and the upgrade of the
Company's management information systems.
The Company generated consolidated operating income of $1.4 million and $5.4
million for the three and nine months ended September 30, 1998, respectively,
compared with operating income of $1.4 and $2.5 million for the three and nine
months ended September 30, 1997, respectively. The increase in operating income
for the nine months ended September 30, 1998 is principally due to additional
sales attributable to the acquisitions of Church and Bompet and increased
domestic and international sales volume which was only partially offset by
increases in selling, general and administrative expenses.
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<PAGE>
Other (income) expense increased by $232,000 for the three months ended
September 30, 1998 as compared to the same period in 1997. Other (income)
expense increased by $576,000 for the nine month period ended September 30, 1998
as compared to the same period in 1997. This increase was principally due to an
increase in interest expense as a result of higher borrowings from the Company's
line of credit to support higher inventory and receivables levels and debt
incurred in the acquisitions of Church and Bompet, partially offset by favorable
currency translation adjustment relating to Bompet.
The effective tax rate increased from 40.2% to 42.6% in 1998 primarily because
of non-deductible goodwill amortization related to the Company's acquisition of
Church and Bompet.
CAPITAL RESOURCES AND LIQUIDITY
On September 2, 1998, the Company obtained a $22 million secured line of
credit with its parent, John Wood Group PLC. The line has substantially the
same terms as the Company's previous line of credit. The new line, payable on
demand, expires on September 2, 1999 and bears interest at the LIBOR rate plus
0.85%, which was approximately 5.9% at September 30, 1998.
On September 11, 1998, the Company repaid its outstanding balance on its
previous line of credit.
Working capital remained constant at $22 million at September 30, 1998, as
compared to working capital at December 31, 1997.
Pursuant to the Company's long-term debt and capital lease agreements,
approximately $24.2 million in principal payments are due over the next twelve
months. The Company believes its line of credit facility will be adequate to
fund its operations for at least the next twelve months.
The Company currently anticipates incurring additional capital expenditures of
$500,000 principally for machinery and equipment, plant improvements and vehicle
purchases, during the quarter ended December 31, 1998. The Company expects to
fund these expenditures from amounts available under the line of credit
facilities and/or capital lease transactions.
Recent Accounting Pronouncements
In September 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 required for interim periods in the initial year of application.
Management believes adoption of this statement will not have a material impact
on the consolidated financial statements.
-12-
<PAGE>
Acquisitions
On February 2, 1998, the Company completed the acquisition of all the issued and
outstanding capital stock of Bompet, a Venezuelan Company. In connection with
the transaction, the Company paid the sole stockholder of Bompet, 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. No amount has been accrued for
Bompet's 1998 earnings exceeding certain thresholds as of September 30, 1998.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs that use only two digits
to identify a year rather than four. If not corrected, computer applications
could fail or create erroneous results before, during and after the Year 2000.
The Company is currently assessing the cost and uncertainties related to the
Year 2000 issue using internal and external resources. Based on preliminary
information, the Company currently believes that with certain modification,
upgrades and, in some instances, converting to new software, the Company will
have substantially addressed the Year 2000 issues with respect to its software
hardware and products without significant impact on its operations. The Company
estimates that its Year 2000 project will be completed by the second quarter of
fiscal year 1999. The estimated costs for the Company to substantially address
these Year 2000 issues are not expected to be material to the Company's
financial position, results of operations or cash flows. There is inherent
uncertainty in the Year 2000 problem due to the possibility of unanticipated
failures by third party customers and suppliers. Accordingly, the Company is
unable, at this time, to assess the extent and resulting materiality of the
impact of possible Year 2000 failures on its operations, liquidity or financial
position. The Company has designated personnel responsible to identify and
respond to these issues and once all identifications and reviews are completed,
a contingency plan will be developed to mitigate the risk of business
interruption.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is involved in various claims and disputes in the normal
course of its business. Management of the Company believes the
disposition of all such claims, individually or in the aggregate, will not
have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
Item 2. Changes in Securities.
---------------------
During the nine months ended September 30, 1998, the Company made no
unregistered sales of its equity securities.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
10.1 Revolving Line of Credit from John Wood Group PLC to ERC Industries,
Inc.*
27.1 Financial Data Schedule*
* filed herewith
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998, the Registrant filed no reports on
Form 8-K.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERC INDUSTRIES, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Wendell R. Brooks
President
(Principal Executive Officer)
By /s/ James E. Klima
Chief Financial Officer
(Principal Financial Officer, Principal
Accounting Officer)
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<PAGE>
Exhibit Index
10.1 Revolving Line of Credit from John Wood Group PLC to ERC Industries,
Inc.*
27.1 Financial Data Schedule*
* Filed herewith
-17-
<PAGE>
EXHIBIT 10.1
September 2, 1998
("Effective Date")
ERC Industries, Inc.
1441 Park Ten Blvd.
Houston, Texas 77084
RE: $22,000,000.00 Revolving Line of Credit from John Wood Group PLC ("PLC") to
ERC Industries, Inc., ("Borrower")
Gentlemen:
PLC is pleased to make available a $22,000,000.00 revolving line of credit
(the "Revolving Line of Credit") for loans 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, PLC and
Borrower hereby agree as follows:
TERMS AND CONDITIONS
SECTION 1 - THE LINE OF CREDIT
Section 1.l REVOLVING LINE OF CREDIT
A. Advances: PLC 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 September 2, 1999 not to exceed at any one time
outstanding $22,000,000.00, 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 PLC ("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
<PAGE>
all renewals, extensions, modifications, rearrangements, replacements
thereof and substitutions therefor).
B. MAXIMUM AMOUNT:
The maximum amount which will be available to Borrower under the Revolving
Line of Credit is $22,000,000.00 ("Maximum Amount"), which in determining
whether any amounts are available under the Revolving Line of Credit, PLC
will deduct from the Maximum Amount, the amount of all unpaid Advances (the
outstanding principal balance on the Note).
Section 1.2 REQUIRED PAYDOWNS. If the outstanding principal balance of the
Note at any time exceeds the Maximum Amount 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 is not greater than the Maximum Amount. 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
immediately on the outstanding principal balance exceeding the Maximum Amount.
Section 1.3 INTEREST RATE, TERMS AND FEES: 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.
Section 1.4 MATURITY: The Revolving Line of Credit shall expire: (i) on
September 2, 1999; or (ii) such earlier date resulting from acceleration as
defined in Section 5 hereof.
Section 1.5 COLLATERAL: Borrower ratifies and confirms that its obligations
under the Revolving Line of Credit, the Note, 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 Chase
Bank of Texas, National Association as amended by First Amendment dated as of
February 26, 1991 and as subsequently assigned to PLC (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 and the Note and each and every other written document, instrument and
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 PLC
shall hereinafter be called the "Loan Documents".
Section 1.6 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 PLC in writing, so long as neither the indebtedness
secured thereby nor the property covered thereby increases; (d) liens in
<PAGE>
favor of PLC, or otherwise approved in writing by PLC; (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 PLC
shall provide Borrower with PLC's prior written consent.
SECTION 2 - CONDITIONS PRECEDENT
Section 2.1 CONDITIONS PRECEDENT: PLC shall be under no obligation to make any
Advance until the Borrower has executed and delivered, in form and substance
satisfactory to PLC, the following documents: (i) this Agreement; (ii) the Note,
(iii) the Security Agreement and (iv) any document, certificate or instrument
that PLC may reasonably require to consider the request.
SECTION 3 - REPRESENTATION AND WARRANTIES
To induce PLC to enter into this Agreement and to made Advances, Borrower
represents and warrants that on the date hereof and on the date of each request
for an Advance and on the date of making an Advance 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;
Section 3.2 ACCURATE INFORMATION: The information in the financial statements
and other information provided, or to be provided to PLC 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 is
made;
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:
<PAGE>
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 PLC 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 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 "B".
Unless otherwise provided on Exhibit "B", 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 "B" will be
determined as of the dates of the financial statements to be provided to PLC;
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 PLC immediately
should any representation or warranty become untrue or misleading;
Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify PLC 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 PLC 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 PLC
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
<PAGE>
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, (3) set off, in any
order, against the indebtedness of Borrower under the Loan Documents any debt
owing by PLC to Borrower; 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 or interest on any other borrowed money obligation or shall
fail to observe or perform any material 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 to any material extent;
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 60 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 60 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 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 60 days; or
process to be issued or levied against it or any substantial part of its
property which is not released, stayed, bonded or vacated within 60 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.
SECTION 6 - MISCELLANEOUS
Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the
part of PLC 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
<PAGE>
right or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any or further exercise thereof or the exercise of any
other power or right. No course of dealing between Borrower and PLC 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 expenses in
connection with recording, modification, supplementing and waiver of the Loan
Documents and the making, servicing and collection of any of the indebtedness
evidenced by the Note. 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 PLC 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 PLC agree that none of the terms and
provisions contained in the 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 the 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
PLC 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 PLC, 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 PLC, and shall bind Borrower and
successors, trustee, receivers and assigns of Borrower and inure to the benefit
of the successors and assigns of PLC; provided that the undertaking of PLC
hereunder to consider making Advances to 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 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
<PAGE>
construing the Loan Documents. The Loan Documents embody the entire agreement
between Borrower and PLC 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 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.
Section 6.7 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.01(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,
JOHN WOOD GROUP PLC
By:
-------------------------
Name:
-----------------------
Title:
----------------------
Acknowledged and agreed to this day of November, 1998 but effective as of the
Effective Date, by:
"BORROWER"
ERC INDUSTRIES, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
EXHIBITS:
A Promissory Note
B Financial Covenants and Compliance Certificate
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