<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 14, 1999
ERC INDUSTRIES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation)
0-14439 76-0382879
------- ------------
(Commission File Number) (I.R.S. Employer Identification No.)
1441 Park Ten Boulevard, Houston, Texas 77084
---------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (281) 398-8901
--------------
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF THE BUSINESSES ACQUIRED
The audited historical balance sheets of Arabian Oil Equipment Services
LLC and Wood Group Engineering Services (Peterhead) Limited as of
December 31, 1998 and 1997, audited statements of operations,
comprehensive income, shareholders' equity and cash flows for the years
ended December 31, 1998 and 1997 are set forth as ATTACHMENT A and are
incorporated herein by reference.
(b) PRO FORMA FINANCIAL INFORMATION
Pro forma financial information for the businesses acquired subsequent to
December 31, 1998 is set forth as ATTACHMENT B and is incorporated herein
by reference.
2
<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 hereunto duly authorized.
ERC INDUSTRIES, INC.
By: /s/ James E. Klima
---------------------------------------
James E. Klima
Vice President and Chief Financial Officer
DATE: June 18, 1999
3
<PAGE>
ATTACHMENT A
June 13, 1999
To the Shareholders of
Arabian Oil Equipment Services LLC
In our opinion, based upon our audits, the accompanying balance sheet and the
related statements of operations, of comprehensive income, of shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Arabian Oil Equipment Services LLC at December 31, 1998
and 1997 in conformity with generally accepted accounting principles in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
BDO Patel
Abu Dhabi
4
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
BALANCE SHEET
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------- -----------------
$'000 $'000
<S> <C> <C>
ASSETS
Current assets:
Cash 227 79
Accounts receivable, net of allowance for uncollectible
debts of $52 and $34 respectively 1,129 523
Accounts receivable stockholder and affiliated companies
(Note 9) 49 76
Inventories (Note 4) 314 87
Other current assets 128 99
------ ------
TOTAL CURRENT ASSETS 1,847 864
Property, plant and equipment, net (Note 5) 120 612
Goodwill, net of amortization (Note 6) 72 101
------ ------
TOTAL ASSETS $2,039 $1,577
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit from banks (Note 8) 255 235
Accounts payable 260 97
Accounts payable stockholder and affiliated companies
(Note 9) 895 928
Other accrued liabilities 475 382
------ ------
TOTAL LIABILITIES 1,885 1,642
------ ------
Shareholders' equity:
Capital stock 44 44
Legal reserve 20 20
Capital Contribution 1,214 1,214
Accumulated deficit (1,135) (1,350)
Accumulated other comprehensive income 11 7
------ ------
TOTAL SHAREHOLDERS' EQUITY 154 (65)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,039 $1,577
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------ ------
$'000 $'000
<S> <C> <C>
Revenues 3,060 1,463
Cost of goods sold 2,132 1,328
------ -----
Gross profit 928 135
Selling, general and administrative expenses 654 679
------ -----
Operating income (loss) 274 (544)
Interest expense 59 100
------ -----
Income (loss) before provision for income taxes 215 (644)
Provision for income taxes (Note 7) - -
------ -----
Net income (loss) 215 (644)
------ -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
$000 $000
<S> <C> <C>
Net income (loss) $215 $(644)
Other comprehensive income 4 7
---- -----
Total comprehensive income (loss) 219 (637)
==== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
STATEMENT OF SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
CAPITAL LEGAL CAPITAL ACCUMULATED COMPREHENSIVE
STOCK RESERVE CONTRIBUTION DEFICIT INCOME
------- -------- --------------- ----------- ----------------
'000 '000 '000 '000 '000
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $44 $20 $ 482 $ (706) $ -
Net loss - - - (644) -
Goodwill arising in year - - 60 - -
Increase in capital contributions - - 672 - -
Other comprehensive income - - - - 7
--- --- ------ ------- ---
Balance as of December 31, 1997 44 20 1,214 (1,350) 7
Net income - - - 215 -
Other comprehensive income - - - - 4
--- --- ------ ------- ---
Balance as of December 31, 1998 $44 $20 $1,214 $(1,135) $11
=== === ====== ======= ===
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
$'000 $'000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 215 (644)
Adjustments to reconcile net income (loss)
to net cash used in operating activities -
Depreciation 131 217
Amortization 29 29
Increase in capital contribution - 672
Gain on sale of property, plant and equipment (1) (4)
Increase (decrease) in cash resulting from changes
in current assets and liabilities -
Accounts receivable (606) 734
Inventories (227) 170
Prepaid expenses and other assets (29) (82)
Balances to stockholder and affiliated companies 6 (1,188)
Accounts payable 163 (60)
Accrued liabilities 93 17
---- ------
Net cash used in operating activities (226) (139)
---- ------
NET CASH USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (27) (25)
Proceeds from sale of property, plant and equipment 381 4
---- ------
Net cash provided by (used in) investing activities 354 (21)
---- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES:
Line of credit receipts from bank 20 3
---- ------
Net cash provided by financing activities 20 3
---- ------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year 148 (157)
At beginning of the year 79 236
---- ------
At end of the year 227 79
---- ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
ARABIAN OIL EQUIPMENT SERVICES LLC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. INCORPORATION AND ACTIVITIES:
The Company was incorporated into a limited liability company in 1991 at which
time the original capital of Dh 1 million was reduced to Dh 150,000 (100 shares
at Dh 1,500 each) and the surplus of Dh 850,000 was treated as a capital
contribution. An additional capital contribution of Dh 2,501,000 was
transferred from John Wood Group PLC's loan account in 1997. The company is
engaged in the manufacture, installation and maintenance of wellhead equipment.
At December 31, 1998 and 1997 the Company was a wholly owned subsidiary of John
Wood Group PLC.
In accordance with the provisions of the U.A.E. Federal Commercial Companies Law
No. 8 (as amended), a legal reserve has been accumulated by transferring 10% of
the net profit of the Company. This reserve may be restricted to 50% of the
capital and is not available for distribution.
2. TRANSLATION INTO U.S. DOLLARS:
The Company must maintain its financial records in UAE dirhams ("Dh") in
accordance with generally accepted accounting principles in the U.S.
The translation of the historical dirham financial statements into U.S.
dollars has been conducted in accordance with Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation".
The translation into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate for the period. Adjustments
resulting from translation are included in shareholders' equity.
3. SIGNIFICANT ACCOUNTING PRINCIPLES IN USE:
INVENTORIES
Inventory consists primarily of finished, semi-finished and raw materials which
are carried at the lower of cost (specific identification or standard cost which
approximates FIFO) or market.
10
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the various
classes of assets, which range from 3 to 10 years for machinery and equipment.
Major renewals and betterments, which extend the lives of equipment, are
capitalized while all other repairs and maintenance are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations.
GOODWILL
Goodwill, representing the excess of cost over net assets acquired, is amortized
using the straight-line method over the estimated useful life of 10 years.
4. INVENTORIES:
Inventories comprise the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
$'000 $'000
<S> <C> <C>
Work In Progress 51 8
Raw Materials 263 79
----- -----
314 87
----- -----
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment comprises the following:
<TABLE>
<CAPTION>
1998 1997
------ -------
$'000 $ '000
<S> <C> <C>
Plant and Machinery 887 1,398
Accumulated depreciation (767) (786)
----- ------
120 612
----- ------
</TABLE>
11
<PAGE>
6. GOODWILL
<TABLE>
<CAPTION>
1998 1997
----- -----
$'000 $'000
<S> <C> <C>
Cost 290 290
Accumulated amortization (218) (189)
----- -----
72 101
----- -----
</TABLE>
During 1991 Wood Group Engineering (Middle East) Limited, a wholly owned
subsidiary of John Wood Group PLC, acquired 49% of Arabian Oil Equipment
Services LLC for a consideration of GBP 165,000. During 1997, Wood Group
Engineering (Middle East) Limited acquired the remaining stock for a
consideration of GBP 540,000. The combined goodwill arising from these two
purchases amounts to $290,000, of which $229,000 is attributable to the first
purchase.
7. TAXES
Under the tax laws existing within Abu Dhabi, profits or losses generated by
companies are not subject to income tax. Accordingly, the Company does not
believe that it is liable to pay taxes in respect of income generated from its
operations.
8. DEBT
The Company has a line of credit of up to Dh 2 million with a bank in Scotland
provided as part of a group banking arrangement with John Wood Group PLC. The
line of credit is used for the purpose of general working capital requirements
and provides overdraft and documentary facilities. Interest is charged at a
fixed rate of 7.75%.
Included within balances due to stockholder and affiliated companies at both
December 31, 1998 and 1997 is a loan of Dh 2,500,000 payable to John Wood Group
PLC. There are no repayment terms in respect of this loan upon which interest is
charged at 70 to 75 points above LIBOR. The rates of interest at December 31,
1998 and 1997 were 6.48% and 6.62%, respectively.
9. RELATED PARTIES
1998 1997
---- ----
$'000 $'000
Accounts receivable - stockholder and affiliated companies 49 76
--- ---
Accounts payable - stockholder and affiliated companies 895 928
--- ---
Included within accounts payable - stockholder and affiliated companies at
December 31, 1998 and 1997 is a line of credit from John Wood Group PLC
amounting to $681,000 and $683,000 respectively. The remaining balances arise
from the provision of services to and from other Group companies.
During 1998, the Company transferred plant and equipment with a cost of $591,000
and accumulated amortization of $208,000 at no gain or loss to Wood Group
Pressure Control Limited, an existing subsidiary of ERC Industries.
12
<PAGE>
ATTACHMENT A
April 8, 1999
To the Shareholders of
Wood Group Engineering Services (Peterhead) Limited
In our opinion the accompanying balance sheet and the related statement of
operations, of comprehensive income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Wood Group
Engineering Services (Peterhead) Limited, at December 31, 1998 and 1997 and for
the years then ended, in conformity with generally accepted accounting
principles in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
Aberdeen, Scotland
13
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------ ------
$000 $000
<S> <C> <C>
Revenues 7,933 5,606
Cost of goods sold 6,702 4,717
----- -----
Gross profit 1,231 889
Selling, general and administrative expenses 641 600
----- -----
Operating income 590 289
Interest expense 50 10
----- -----
Income before provision for income taxes 540 279
Provision for income taxes (Note 6) 171 84
----- -----
Net income 369 195
----- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
BALANCE SHEET
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
$'000 $'000
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable 1,170 1,143
Inventories (Note 4) 1,580 633
Accounts receivable - stockholder and
affiliated companies (Note 7) 202 59
Other current assets 48 24
------ ------
TOTAL CURRENT ASSETS 3,000 1,859
Property, plant and equipment, net (Note 5) 956 1,008
------ ------
TOTAL ASSETS $3,956 $2,867
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Line of credit from bank (Note 8) 1,574 79
Accounts payable 1,183 1,084
Accounts payable - stockholder and affiliated companies (Note 7) 107 105
Other accrued liabilities 754 392
------ ------
TOTAL CURRENT LIABILITIES 3,618 1,660
Deferred tax (Note 7) 100 105
------ ------
TOTAL LIABILITIES 3,718 1,765
------ ------
Commitments and Contingencies (Note 9) - -
Stockholder's equity:
Capital stock (Note 1) - -
Retained earnings 261 1,137
Accumulated other comprehensive income (23) (35)
------ ------
TOTAL STOCKHOLDER'S EQUITY 238 1,102
------ ------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,956 $2,867
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------ ------
$000 $000
<S> <C> <C>
Net income $369 $195
Other comprehensive income (loss) 12 (35)
---- ----
Total comprehensive income $381 $160
==== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
CAPITAL RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME
-------------- -------------- -----------------------
$000 $000 $000
<S> <C> <C> <C>
Balance as of December 31, 1996 1,024 -
Net income - 195 -
Distribution - (82) -
Other comprehensive loss - - (35)
--- ------ ----
Balance as of December 31, 1997 - 1,137 (35)
Net income - 369 -
Distribution - (1,245) -
Other comprehensive income - - 12
--- ------ ----
Balance as of December 31, 1998 - 261 (23)
=== ====== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
STATEMENT OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- -------
$'000 $'000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 369 196
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation 116 120
Gain on sale of property, plant and equipment - (30)
Deferred income tax provision increase (decrease) (5) -
Increase (decrease) in cash resulting from changes
in current assets and liabilities -
Accounts receivable (27) (350)
Inventories (947) (337)
Prepaid expenses and other assets (25) (11)
Balances with stockholder and affiliated companies (141) 41
Accounts payable 99 296
Other accrued liabilities 366 (63)
------ ----
Net cash used in operating activities (195) (138)
------ ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (55) (53)
Proceeds from sale of property, plant and equipment - 53
------ ----
Net cash used in investing activities (55) -
------ ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit from bank, net 1,495 79
Distributions made (1,245) (82)
------ ----
Net cash provided by (used in) financing activities 250 (3)
------ ----
CASH AND CASH EQUIVALENTS:
Decrease for the year - (141)
At beginning of the year - 141
------ ----
At end of the year - -
------ ----
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
WOOD GROUP ENGINEERING SERVICES (PETERHEAD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. INCORPORATION AND ACTIVITIES:
The Company was incorporated in January 1975 and as of December 31, 1998 and
1997 was a wholly owned subsidiary of John Wood Group PLC. The Company is
engaged in the repair and refurbishment of valves and wellhead equipment, and
surveying of offshore valve systems. The Company has an authorized share
capital of GBP 100,000 and has issued two ordinary shares of GBP 1 each.
2. TRANSLATION INTO U.S. DOLLARS:
The Company must maintain its financial records in sterling ("GBP") in
accordance with U.K. generally accepted accounting principles.
The remeasurement of the historical sterling financial statements into U.S.
dollars has been conducted in accordance with Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation".
The translation of foreign currencies into U.S. dollars is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet date
and for revenue and expense accounts using an average exchange rate for the
period. Adjustments resulting from translation are included in stockholders'
equity.
3. SIGNIFICANT ACCOUNTING PRINCIPLES IN USE:
INVENTORIES
Inventory consists primarily of finished, semi-finished and raw materials which
are carried at the lower of cost (specific identification or standard cost which
approximates FIFO) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the various
classes of assets. Plant and machinery is depreciated over 3 to 10 years while
the Company's leasehold properties are depreciated over the periods of the
leases, which range from 45 to 65 years.
19
<PAGE>
INCOME TAXES
The Company records deferred income tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
4. INVENTORIES:
Inventories comprise the following:
<TABLE>
<CAPTION>
1998 1997
------ -----
$'000 $'000
<S> <C> <C>
Work In Progress 884 358
Raw Materials 696 275
----- -----
1,580 633
----- -----
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprises the following:
<TABLE>
<CAPTION>
1998 1997
------ -------
$'000 $ '000
<S> <C> <C>
Land and Buildings (leasehold) 932 921
Plant and Machinery 923 873
Accumulated depreciation (899) (786)
----- ------
956 1,008
----- ------
</TABLE>
20
<PAGE>
6. TAXES
The following is a summary of the provisions for income taxes:
<TABLE>
<CAPTION>
1998 1997
------ -----
$'000 $'000
<S> <C> <C>
Current 176 84
Deferred tax (5) -
----- -----
171 84
===== =====
</TABLE>
The deferred tax liability as of December 31, 1998 and 1997 is attributable to
tax depreciation in excess of book depreciation for property, plant and
equipment.
7. RELATED PARTIES
The Company provides services to affiliated companies and purchases services
from affiliated companies. During the years ended December 31, 1998 and 1997,
the Company had net revenues to affiliated companies of $663,000 and $508,000,
respectively. Included within administrative expenses for the year ended
December 31, 1998 and 1997 are amounts of $0 and $46,000 respectively in
respect of services provided by affiliated companies.
At December 31, a summary of the balances with stockholder as affiliated
companies is set out below:
<TABLE>
<CAPTION>
1998 1997
----- -----
$'000 $'000
<S> <C> <C>
Accounts receivable-stockholder and
affiliated companies
Wood Group Engineering Limited 52 -
Enterprise Engineering Services Limited 90 -
Wood Group Pressure Control Limited 52 29
Sulzer Wood Limited 3 2
Arabian Oil Equipment Services LLC 5 28
----- -----
202 59
----- -----
Accounts payable-stockholder and
affiliated companies
Wood Group Engineering Limited 2 25
John Wood Group PLC 75 29
Rolls Wood Group (Repair & Overhauls) Limited 27 51
Wood Group Pressure Control Limited 3 -
----- -----
107 105
----- -----
</TABLE>
21
<PAGE>
8. DEBT
The Company has an overdraft with a bank in Scotland provided as part of a group
banking arrangement with John Wood Group PLC. The overdraft is used for the
purpose of general working capital requirements and provides overdraft and
documentary credit facilities. Interest payable on the overdraft is equal to
the bank's base rate plus 1 percent per annum. At December 31, 1998 and 1997,
the bank's base rate was 6.25% and 7.25%, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment under non-cancelable
operating leases. The leases provide for minimum monthly payments, plus in
certain instances, payments for taxes, insurance and maintenance. The Company
is liable under non-cancelable leases for minimum lease commitment amounts
during the five years subsequent to December 31, 1998 as follows (in thousands):
<TABLE>
<CAPTION>
December 31
<S> <C>
1999 $ 52
2000 43
2001 33
2002 28
2003 and thereafter 28
----
$184
----
</TABLE>
Rental expenses for the years ended December 31, 1998 and 1997 were
approximately $51,000 and $72,000, respectively.
22
<PAGE>
ATTACHMENT B
ERC Industries, Inc.
Pro Forma Condensed Consolidated Financial Statements
On May 14, 1999, the Company, in a privately-negotiated transaction (the
"Pressure Control Acquisition"), completed its acquisition from John Wood Group
PLC ("Wood Group") of all of the outstanding capital stock of Wood Group
Pressure Control Holdings Limited ("WGPCHL"), a company incorporated in Scotland
under the Companies Act of the United Kingdom. Prior to the Pressure Control
Acquisition, WGPCHL was a wholly owned subsidiary of Wood Group. The sole assets
of WGPCHL consist of all of the issued and outstanding capital stock of each of
Wood Group Engineering Services (Peterhead) Limited and Wood Group Engineering
(Middle East) Limited, the latter of which in turn beneficially owns Arabian Oil
Equipment Services LLC (collectively, the "Group Companies"). The Group
Companies market, manufacture and service products used in the drilling and
production segment of the Oil and Gas Industry, primarily consisting of the
repair and overhaul of valves and wellheads.
In connection with the transaction and in exchange for all of the shares of the
capital stock of WGPCHL, the Company issued to Wood Group 1,350,000 shares of
its common stock, par value $0.01 per share (the "Common Stock"), representing
approximately 0.5% of the currently issued and outstanding shares of Common
Stock. In addition, the Company issued 1,850,000 shares of its Series A
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). The
Series A Preferred Stock has a liquidation preference of $1.00 per share and an
annual dividend of $0.01 per share beginning in January 2000. Each share of
Series A Preferred Stock will be convertible into one share of the Company's
common stock, following the approval of the Company's stockholders of such
conversion.
With the Company and the Group Companies all being under the common control of
the Wood Group, the above transaction has been accounted for similar to pooling
of interests and, accordingly, the consolidated pro forma condensed consolidated
financial statements presented combine the historical accounts of Wood Group
Engineering Services (Peterhead) Limited and Arabian Oil Equipment Services LLC
with the accounts of the Company. The historical financial statements of the
Company for periods prior to the consummation of the Pressure Control
Acquisition have been restated as though the Companies had been combined from
the period when they first were under common control of the Wood Group.
On May 31, 1999 Arabian Oil Equipment Services LLC changed its name to Wood
Group Pressure Control (Arabian) LLC. On June 7, 1999 Wood Group Engineering
Services (Peterhead) Limited changed its name to Wood Group Pressure Control and
Engineering Services Limited.
23
<PAGE>
Pursuant to the SEC's regulations, permitted pro forma adjustments include only
the effects of events directly attributable to a transaction that are factually
supportable and are expected to have a continuing impact, and should be read in
conjunction with the historical consolidated financial statements included in
ERC's annual report on Form 10-K for the years ended December 31, 1998.
24
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands of U.S. Dollars, except per share data)
(unaudited)
<TABLE>
<CAPTION>
ERC Businesses Acquired Pro Forma
December 31, At December 31, Adjustments Pro Forma
1998 1998
------------------------------------------------------------------------
AOES* Phd**
<S> <C> <C> <C> <C> <C>
Revenues $107,111 $3,060 $7,933 $ (425)(a) $117,679
Cost of goods sold 79,839 2,132 6,702 (389)(a) 88,284
-------- ------ ------ ------ --------
Gross profit 27,272 928 1,231 (36) 29,395
Selling, general and administrative expenses 22,759 654 641 (36)(a) 24,018
Asset impairment 3,010 - - - 3,010
-------- ------ ------ ------ --------
Operating (loss) income 1,503 274 590 - 2,367
Other (income) expense:
Interest expense 1,931 59 50 - 2,040
-------- ------ ------ ------ --------
(Loss) income before provision for income taxes (428) 215 540 - 327
Provision for income taxes 803 - 171 - 974
-------- ------ ------ ------ --------
Net (loss) income $ (1,231) $ 215 $ 369 $ - $ (647)
======== ====== ====== ======= ========
Basic and diluted net loss per share (0.04) (0.02)
======== ========
Weighted average number of common shares
outstanding 27,498 1,350 (b) 28,848
======== ====== ========
Weighted average number of common and
dilutive potential common shares outstanding 27,498 3,200 (b) 30,698
======== ====== ========
</TABLE>
- -------------
* Wood Group Pressure Control (Arabian) LLC (formerly Arabian Oil Equipment
Services LLC)
** Wood Group Pressure Control and Engineering Services Limited (formerly Wood
Group Engineering Services (Peterhead) Limited)
The accompanying notes are an integral part of the pro forma unaudited
condensed consolidated financial statements.
25
<PAGE>
Part I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
ERC Businesses Acquired
December 31, At December 31, Pro Forma
1998 1998 Adjustments Pro Forma
AOES Phd
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,019 $ 227 $ - $ - $ 2,246
Trade accounts receivable, net of allowance for
doubtful accounts 20,198 1,178 1,372 (114)(a) 22,634
Inventory 29,959 314 1,580 - 31,853
Prepaid expenses and other current assets 2,370 128 48 - 2,546
Deferred tax asset 3,814 - - - 3,814
-----------------------------------------------------------------------
Total current assets 58,360 1,847 3,000 (114) 63,093
Property, plant and equipment, net 8,914 120 956 - 9,990
Excess cost over net assets acquired, net 4,159 72 - - 4,231
-----------------------------------------------------------------------
Total assets $71,433 $2,039 $3,956 $(114) $77,314
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit from banks $ 2,052 $ 255 $1,574 $ - $ 3,881
Line of credit from parent 18,828 681 - - 19,509
Current portion of long-term debt 1,237 - - - 1,237
Accounts payable 8,995 474 1,290 (114)(a) 10,645
Other accrued liabilities 5,236 475 754 - 6,465
-----------------------------------------------------------------------
Total current liabilities 36,348 1,885 3,618 (114) 41,737
Deferred tax liability - - 100 - 100
Long-term debt 2,710 - - - 2,710
-----------------------------------------------------------------------
TOTAL LIABILITIES $39,058 1,885 3,718 (114) 44,547
-----------------------------------------------------------------------
Commitments and contingencies - - - - -
Shareholders' equity:
Preferred stock - - - 1,850 (b) 1,850
Common stock 275 44 - (30)(b) 289
Legal reserve - 20 - (20)(b) -
Additional paid-in capital 26,532 1,214 - (1,800)(b) 25,946
Retained earnings 5,545 (1,135) 261 - 4,671
Accumulated other comprehensive income 23 11 (23) - 11
-----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 32,375 154 238 - 32,767
-----------------------------------------------------------------------
Total liabilities and shareholders' equity $71,433 2,039 $ 3,956 $ (114) $77,314
=======================================================================
</TABLE>
The accompanying notes are an integral part of the pro forma unaudited
condensed consolidated financial statements.
26
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial statements
(the "Pro Forma Financial Statements") for ERC Industries, Inc. (the "Company")
have been prepared based upon certain pro forma adjustments to the historical
consolidated financial statements of the Company set forth in its previously
filed Annual Report on Form 10-K for the year ended December 31, 1998.
The Pro Forma Financial Statements do not purport to be indicative of the
results which would actually have been obtained had the acquisition been
completed on the date indicated or which may be obtained in the future.
The pro forma adjustments which have been made to the accompanying Pro Forma
Financial Statements are described below:
(a) Reflects the elimination on consolidation of transactions and balances
between the acquired companies and the Company and its existing
subsidiaries.
(b) Reflects adjustments to equity arising from the transaction. The Company
has the following stock:
(i) 10,000,000 shares of preferred stock with a par value of $1. No
preferred shares were issued as of December 31, 1998. 1,850,000
shares of preferred stock were issued in connection with the
transaction and have been recorded at par value with a corresponding
reduction to additional paid-in capital.
(ii) 30,000,000 shares of common stock with a par value of $0.01.
27,498,272 shares were issued and outstanding as of December 31,
1998. 1,350,000 shares of common stock were issued in connection with
the transaction, and have been recorded at par value with a
corresponding reduction in additional paid-in capital.
(iii) The common stock and legal reserve balances for the acquired
companies have been reclassified to additional paid-in capital.
27
