<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 76-0382879
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1441 Park Ten Boulevard, Houston, Texas 77084
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(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 May 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 -
March 31, 1998 and December 31, 1997................................. 2
Condensed Consolidated Statement of Operations
Three Months Ended March 31, 1998 and 1997........................... 3
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1998 and 1997........................... 4
Notes to Condensed Consolidated Financial Statements.................... 5
Management's Discussion and Analysis.................................... 8
PART II
OTHER INFORMATION......................................................... 11
Signature Page.......................................................... 12
<PAGE>
PART I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 194 $ -
Trade accounts receivable, net of allowance for
doubtful accounts of $712 and $681, respectively 22,384 18,689
Inventory 31,057 25,081
Prepaid expenses and other current assets 299 229
Deferred tax asset 2,520 2,520
-------- --------
Total current assets 56,454 46,519
Property, plant and equipment, net 8,509 7,743
Other assets 1,720 1,634
Deferred tax asset-noncurrent 170 170
Excess cost over net assets acquired, net 5,528 4,317
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Total assets $ 72,381 $ 60,383
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within one year $ 17,753 $ 8,156
Accounts payable 13,562 13,465
Other accrued liabilities 4,030 2,883
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Total current liabilities 35,345 24,504
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Long-term debt 3,905 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 24,842 24,842
Retained earnings from January 10, 1989 7,976 6,776
Accumulated other comprehensive income 38 9
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Total shareholders' equity 33,131 31,902
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Total liabilities and stockholders' equity $ 72,381 $ 60,383
======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
--------------------
1998 1997
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Revenues $ 27,626 $ 16,534
Cost of goods sold 20,306 12,578
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Gross profit 7,320 3,956
Selling, general and administrative expenses 5,086 3,436
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Operating income 2,234 520
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Other (income) expense:
Interest expense 341 143
Other, net (74) 38
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267 181
-------- --------
Income before provision for income taxes 1,967 339
Provision for income taxes 767 119
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Net income $ 1,200 $ 220
======== ========
Basic income per share $ 0.04 $ 0.01
======== ========
Weighted average number of shares
outstanding 27,242 21,248
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities, net of the
effect of acquisitions $ (5,301) $ (3,028)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired of $80 (2,520) -
Purchases of property, plant and equipment (674) (328)
Proceeds from sale of property, plant and equipment - 6
-------- --------
Net cash used in investing activities (3,194) (322)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 9,138 3,616
Principal payments on long-term debt and capital
lease obligations (481) (195)
-------- --------
Net cash provided by financing activities 8,657 3,421
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Effect of exchange rate changes on cash 32 (72)
-------- --------
Net increase (decrease) in cash and cash equivalents 194 (1)
Cash and cash equivalents, beginning of period - 1
-------- --------
Cash and cash equivalents, end of period $ 194 $ -
======== ========
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
(1) The information contained herein with respect to March 31, 1998 and the
three months ended March 31, 1998 and 1997, has not been audited but was
prepared in conformity with the accounting principles and policies described
in the ERC Industries, Inc. (the "Company") annual report (Form 10-K) for
the year ended December 31, 1997. Included are all adjustments (consisting
of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of the financial information for the three
months ended March 31, 1998 and 1997. The results of interim periods are not
necessarily indicative of results to be expected for the year.
(2) Supplemental Cash Flow Information:
The acquisition of Church Oil Tools, Inc. (see Note 3) was partially
financed through $4 million of promissory notes to the sellers.
(3) 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.
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.
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<PAGE>
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)
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$ 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
March 31, 1997
------------------
Revenues $ 20,700
Net income 1,898
Net income per share .09
(4) Recent 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 in 1998. Comprehensive income was $1.2
million and $148,000 for the quarters ended March 31, 1998 and 1997,
respectively. Other comprehensive income consisted of the foreign currency
translation adjustment for the quarters ended March 31, 1998 and 1997.
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
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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.
(5) Subsequent Event:
The Company negotiated a new domestic $15.5 million line of credit with
its bank in April, 1998. The line has substantially the same terms as the
Company's previous line of credit and expires in June, 1998.
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<PAGE>
ERC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, was up 13.5% to 968 for the three
months ended March 31, 1998, compared with 853 for the three months ended March
31, 1997. The average actual rig count for the three months ended March 31,
1998 as compared to the three months ended December 31, 1997 declined 2.9% from
997 to 968. The average active rig count is an important indicator of activity
levels in the market in which the Company operates.
The Company's revenues increased by $11.1 million to $27.6 million for the three
months ended March 31, 1998 from $16.5 million for the three months ended March
31, 1997. The increase in revenues is principally due to increased activity
with existing customers as a result of higher drilling activity, additional
sales attributable to the acquisition of Church and Bompet and increased
international sales volume.
The gross profit for the three months ended March 31, 1998 increased by $3.3
million to $7.3 million from $4 million for the same period last year. Gross
profit as a percentage of sales was 26.5% for the three months ended March 31,
1998 as compared with 23.9% for the three months ended March 31, 1997. The
increase was primarily due to outsourcing of manufacturing at lower costs and
change in product mix largely arising from the acquisitions of Church and
Bompet.
Selling, general and administrative expenses increased by $1.7 million for the
three months ended March 31, 1998. The primary reasons for the increase is the
addition of Church and Bompet, costs associated with international marketing
efforts and additional sales personnel. Selling, general and administrative
expenses, as a percentage of sales was 18.4% in the first three months of 1998,
compared with 20.8% for the first three months of 1997.
The Company generated operating income of $2.2 million for the three months
ended March 31, 1998 compared with operating income of $520,000 for the three
months ended March 31, 1997. The increase in operating income was due to
increased sales volume and resulting gross profit, which was only partially
offset by increases in selling, general and administrative expenses.
Other (income) expense increased by $86,000 for the three months ended March 31,
1998 over the same period in 1997. This was principally due to an increase in
interest expense as a result of higher inventory and receivables levels which
required an increase in borrowing from the company's line of credit partially
offset by favorable currency translation adjustment relating to Bompet.
The provision for income taxes for the three months ended March 31, 1998 and
1997 resulted in an expense of $767,000 and $119,000, respectively. The
effective tax rate increased from 35% in 1997 to 39% in 1998 primarily because
of non-deductible amortization of goodwill recorded in the Church and Bompet
acquisitions.
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<PAGE>
Liquidity and Capital Resources
Working capital decreased by $906,000 to $21.1 million at March 31, 1998
compared with $22 million at December 31, 1997. The decrease was due primarily
to a $9.6 million increase in the Company's credit facilities which were
partially offset by increased accounts receivable and inventory resulting from
increased sales and sales demand, and the acquisition of Bompet.
Pursuant to the Company's long-term debt agreements, approximately $17.8 million
in principal payments are due over the next twelve months. The Company believes
its line of credit facility, combined with cash generated from operations, will
be adequate to fund its operations for at least the next twelve months.
The Company currently anticipates incurring capital expenditures of $4 million
principally for machinery and equipment, plant improvements and vehicle
purchases, through the fiscal year ended 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.
Recent Accounting Pronouncements
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.
Acquisition
On February 2, 1998, the Company completed the acquisition ("Acquisition") of
all the issued and outstanding capital stock of Bompet, C.A. ("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
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<PAGE>
$3.4 million in the event that Bompet's earnings exceed certain thresholds
during 1998, 1999 and 2000.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Item 2 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: the effects of acquisitions, 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.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various claims and disputes in the normal
course of its business. Management of the Company believes the
disposition of all such claims, individually or in the aggregate, will
not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Item 2. Changes in Securities.
None.
During the three months ended March 31, 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Letter Agreement with Chase Bank of Texas, N.A. dated as of
April 8, 1998/(1)/.
27.1 Financial Data Schedule/(1)/.
(b) Reports on Form 8-K:
During the first quarter of the fiscal year ended December 31,
1998, the Company filed the following Form 8-K:
On February 17, 1998, the Company filed a Current Report on Form
8-K under Item 2, disclosing the acquisition of Bompet, C.A.
---------------
/(1)/ Filed herewith.
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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.
Date: May 14, 1998 ERC INDUSTRIES, INC.
-------------------------------
/s/ Wendell R. Brooks
-------------------------------
Wendell R. Brooks
President, Secretary & Director
/s/ James E. Klima
-------------------------------
James E. Klima
Chief Financial Officer
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<PAGE>
PROMISSORY NOTE
(this "Note")
----
U.S. $15,500,000.00 April 8, 1998 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"),
promises to pay to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
formerly known as Texas Commerce Bank National Association ("Bank") on or before
June 30, 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 FIFTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100THS UNITED
STATES DOLLARS (U.S. $15,500,000.00); 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 dated June 4, 1997 executed by the
Borrower and the Bank, as amended by a First Amendment dated January 30, 1998
and as amended by a Second Amendment dated of even date herewith and as further
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) $15,500,000.00 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 June 30, 1998, 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 3 Pages
Signed for Identification
By:_________________
<PAGE>
Promissory Note
ERC Industries, Inc.
April 8, 1998 ("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.
Page 2 of 3 Pages
Signed for Identification
By:_________________
<PAGE>
Promissory Note
ERC Industries, Inc.
April 8, 1998 ("Date")
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 346 of the Texas Finance Code shall not apply to this Note or to any
Loan evidenced by this Note.
This Note is issued by the Borrower to evidence Loans outstanding from time to
time not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$15,500,000.00 revolving line of credit (the "Revolving Line of Credit")
extended by the Bank to the Borrower pursuant to the Letter Agreement. It is
given in increase, extension and modification of that certain promissory note
dated January 30, 1998 executed by Borrower and payable to the order of the Bank
on or before May 25, 1998 in the principal amount of $13,000,000.00.
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.
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.)
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
formerly known as
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: ____________________________________
Name: __________________________________
Title: _________________________________
Page 3 of 3 Pages
<PAGE>
EXHIBIT A
PROMISSORY NOTE
(this "Note")
U.S. $15,500,000.00 April 8, 1998 ("Date")
FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"),
promises to pay to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
formerly known as Texas Commerce Bank National Association ("Bank") on or before
June 30, 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 FIFTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100THS UNITED
STATES DOLLARS (U.S. $15,500,000.00); 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 dated June 4, 1997 executed by the
Borrower and the Bank, as amended by a First Amendment dated January 30, 1998
and as amended by a Second Amendment dated of even date herewith and as further
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) $15,500,000.00 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 June 30, 1998, 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
EXHIBIT A Page 1 of 3 Pages
Signed for Identification
By:_______________
<PAGE>
Promissory Note
ERC Industries, Inc.
April 8, 1998 ("Date")
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 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.
EXHIBIT A Page 2 of 3 Pages
Signed for Identification
By:_______________
<PAGE>
Promissory Note
ERC Industries, Inc.
April 8, 1998 ("Date")
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 346 of the Texas Finance Code shall not apply to this Note or to any
Loan evidenced by this Note.
This Note is issued by the Borrower to evidence Loans outstanding from time to
time not to exceed the Maximum Loan Total in the aggregate, pursuant to a
$15,500,000.00 revolving line of credit (the "Revolving Line of Credit")
extended by the Bank to the Borrower pursuant to the Letter Agreement. It is
given in increase, extension and modification of that certain promissory note
dated January 30, 1998 executed by Borrower and payable to the order of the Bank
on or before May 25, 1998 in the principal amount of $13,000,000.00.
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.
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.)
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
formerly known as
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
EXHIBIT A Page 3 of 3 Pages
<PAGE>
SECOND AMENDMENT TO LETTER AGREEMENT
THIS SECOND AMENDMENT TO LETTER AGREEMENT (this "Amendment") dated effective as
of April 8, 1998 (the "Effective Date"), is by and between ERC INDUSTRIES, INC.
("Borrower"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, formerly known as
Texas Commerce Bank National Association, ("Bank").
PRELIMINARY STATEMENT. Bank and Borrower have entered into a Letter Agreement
dated as of June 4, 1997 as amended by First Amendment to Letter Agreement dated
effective as of January 30, 1998 ("Letter Agreement"). All capitalized terms
defined in the Letter Agreement and not otherwise defined herein shall have the
same meanings herein as in the Letter Agreement. Bank and Borrower have agreed
to amend the Letter Agreement to the extent set forth herein in order to
increase the Revolving Line of Credit from $13,000,000.00 to $15,500,000.00.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, Bank and Borrower hereby agree as follows:
1. Revolving Line of Credit. Section 1.1 of the Letter Agreement is amended by
substituting the following for the Section 1.1 of the Letter Agreement:
"Section 1.1 REVOLVING LINE OF CREDIT
A. Advances: The Bank agrees to make advances (an "Advance" or
"Advances") to Borrower, upon request of Borrower from time to time
from the Effective Date to but not including June 30, 1998 not to
exceed at any one time outstanding the lesser of the Borrowing Base or
$15,500,000.00, Borrower having the right to borrow, repay and
reborrow. Advances shall be used for the purpose of meeting the
working capital requirements and general corporate purposes of
Borrower. Advances shall be evidenced by, and made as provided in a
promissory note of even date herewith executed by Borrower and
delivered to Bank ("Note"), a copy of which is attached hereto as
Exhibit "A" and made a part hereof for all purposes (the "Note" as
used in this Agreement, shall include without limitation, any and all
renewals, extensions, modifications, rearrangements, replacements
thereof and substitutions therefor).
B. Letters of Credit: The Bank agrees to issue standby and commercial
letters of credit (an "L/C" or "L/Cs") from time to time, from the
Effective Date to but not including June 30, 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
June 30, 1999. The Borrower shall reimburse the Bank immediately upon
demand for any drawings made under an L/C. Prior to June 30, 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 $15,500,000.00 ("Maximum Amount"), which in
determining whether any amounts are available under the Revolving Line
of Credit, Bank will deduct from the Maximum Amount, the amount of all
unpaid Advances (the outstanding principal balance on the Note) and
all L/C Obligations. The term "L/C Obligations" shall mean the face
amount of all L/Cs issued and outstanding plus any unreimbursed
drawings under the L/Cs plus any other amounts owing to Bank under or
in respect of any L/C or Application (as hereinafter defined).
Borrower and Bank agree that the following outstanding L/Cs shall be
deemed made under and subject to the terms of this Agreement.
VALUE EXPIR.
NUMBER DATE DATE AMOUNT
---------- -------- -------- -----------
I464024 08/12/96 05/09/97 $10,000.00
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"
2. Section 1.6 of the Letter Agreement is amended by substituting the following
for the Section 1.6 of the Letter Agreement:
"Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on
June 30, 1998; or (ii) such earlier date resulting from acceleration as
defined in Section 5. hereof."
3. Exhibit A and Exhibit B of the Letter Agreement are hereby amended by
replacing the existing Exhibit A and Exhibit B with the Exhibit A and Exhibit B
attached hereto and hereby incorporated into this Amendment and the Letter
Agreement for all purposes.
4. Borrower hereby represents and warrants to the Bank that after giving effect
to the execution and delivery of this Amendment: (a) the representations and
warranties set forth in the Letter Agreement are true and correct on the date
hereof as though made on and as of such date; and (b) no Event of Default, or
event which with passage of time, the giving of notice or both would become an
Event of Default, has occurred and is continuing as of the date hereof.
5. This Amendment shall become effective as of the Effective Date upon its
execution and delivery by each of the parties named in the signature lines
below, and the term "Agreement" as used in the Letter Agreement shall also refer
to the Letter Agreement as amended by this Amendment.
Page 1 of 2 Pages
<PAGE>
Second Amendment to Letter Agreement
ERC INDUSTRIES, INC.
April 8, 1998
6. Borrower further acknowledges that each of the other Loan Documents,
including the Security Agreement, is in all other respects ratified and
confirmed, and all of the rights, powers and privileges created thereby or
thereunder are ratified, extended, carried forward and remain in full force and
effect except as the Letter Agreement is amended by this Amendment.
7. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
8. This Amendment shall be included within the definition of "Loan Documents"
as used in the Agreement.
9. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF
AMERICA.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE CODE,
AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
effective as of the Effective Date.
BORROWER: ERC INDUSTRIES, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
FORMERLY KNOWN AS
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: _____________________________
Name: ___________________________
Title: __________________________
Page 2 of 2 Page
<PAGE>
EXHIBIT B
BORROWING BASE REPORT
ACCOUNTS AND INVENTORY
Borrowing Base Report for Period Beginning: ____________________ AND ENDING
____________________ ("CURRENT PERIOD") REQUIRED BY THE LETTER AGREEMENT DATED
JUNE 4, 1997 (AS AMENDED, RESTATED, AND SUPPLEMENTED FROM TIME TO TIME, THE
"AGREEMENT") BY AND BETWEEN ERC INDUSTRIES, INC. AND CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION FORMERLY KNOWN AS 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
STATUTORY REQUIREMENTS OTHER THAN THOSE OF THE UNIFORM
COMMERCIAL CODE, INCLUDING, WITHOUT LIMITATION,
THE FEDERAL ASSIGNMENT OF CLAIMS ACT OF 1940,
AS AMENDED.] $__________________
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 $15,500,000.00) 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 194
<SECURITIES> 0
<RECEIVABLES> 23,096
<ALLOWANCES> 712
<INVENTORY> 31,057
<CURRENT-ASSETS> 56,454
<PP&E> 24,759
<DEPRECIATION> 16,250
<TOTAL-ASSETS> 72,481
<CURRENT-LIABILITIES> 35,384
<BONDS> 0
0
0
<COMMON> 275
<OTHER-SE> 32,917
<TOTAL-LIABILITY-AND-EQUITY> 72,481
<SALES> 27,626
<TOTAL-REVENUES> 27,626
<CGS> 20,206
<TOTAL-COSTS> 5,086
<OTHER-EXPENSES> (74)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341
<INCOME-PRETAX> 2,067
<INCOME-TAX> 806
<INCOME-CONTINUING> 1,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,261
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
