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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________________
Commission file number 0-14439
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ERC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0382879
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(State of incorporation) (I.R.S. Employer Identification No.)
1441 Park Ten Boulevard, Houston, Texas 77084
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (281) 398-8901
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 2000 was $7,515,855.
The number of shares outstanding of the registrant's common stock, as of
March 17, 2000 was 30,698,272.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 2000
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III of this Form 10-K.
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ERC INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business............................................... 1
Item 2. Properties............................................. 7
Item 3. Legal Proceedings...................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 9
Item 6. Selected Financial Data................................ 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.................................................. 13
Item 8. Financial Statements and Supplementary Data............ 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 13
PART III
Item 10. Directors and Executive Officers of the Registrant..... 14
Item 11. Executive Compensation................................. 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 14
Item 13. Certain Relationships and Related Transactions......... 14
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K............................... 15
Signatures............................................................ 18
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PART I
GENERAL
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-K regarding
the Company's financial position, business strategy, prospects in its industry,
and plans and objectives of management for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be given that
actual results may not differ materially from those in the forward-looking
statements herein for reasons including the effects of competition, the effects
of and risks associated with acquisitions, the level of petroleum industry
exploration and production expenditures, risks associated with doing business
abroad, world economic conditions, the prices of and the demand for crude oil
and natural gas, the uncertainties inherent in litigation, drilling activity,
increased pressure on the Company's prices for its products and services and the
margins thereon, weather, the legislative environment in the United States and
other countries, the condition of the capital and equity markets and other risk
factors identified herein.
ITEM 1. BUSINESS
BUSINESS
ERC Industries, Inc., a Delaware corporation (the "Company"), is an oilfield
service company engaged in the manufacture, remanufacture and service of
oilfield wellhead equipment.
ORIGINAL BUSINESS AND HISTORY
Equipment Renewal Company was founded in 1962 to remanufacture and re-employ
used, out-of-service wellhead equipment, a service the Company continues to
provide. Wellhead equipment is designed to support the casing and production
pipe on a completed well and includes casing heads, tubing heads and casing and
tubing hangers. Valves are assembled with other components into a device known
as the "Christmas Tree" which is mounted on the wellhead equipment and is used
to control pressure and the flow of oil and gas from producing wells.
On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation
registered in Scotland and incorporated under the Companies Acts of the United
Kingdom, completed the purchase of approximately 47% of the issued and
outstanding shares of common stock of ERC.
On November 16, 1993, the Company acquired the valve business and certain assets
of Barton Industries, Inc. of Shawnee, Oklahoma.
On June 6, 1996, the Company and the Wood Group entered into an Investment
Agreement pursuant to which the Company issued and sold, and Wood Group
purchased, 7,384,616 shares of the Company's common stock, par value $0.01 per
share ("Common Stock"). The aggregate purchase price for the shares was $6
million or $0.8125 per share. Following this transaction, the Wood Group owned
approximately 73% of the Company.
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On September 27, 1996, the Company acquired 100% of the issued and outstanding
capital shares of Seaboard Lloyd Limited ("Seaboard"), a private company
incorporated in Scotland under the Companies Acts of the United Kingdom.
Seaboard is currently operated as a wholly-owned subsidiary of the Company under
the name Wood Group Pressure Control Limited ("WGPCL"). The business of WGPCL
is the manufacture, supply, repair, maintenance and refurbishment of wellheads,
Christmas trees, gate valves, choke valves, clamped pipe connectors, actuators,
electric feed through systems for downhole pumps and subsea ball and check
valves, all as used in the oil and gas industry. The business is operated in
one facility located in Cumbernauld, Scotland.
In January 1997, the Company and all of its subsidiaries began conducting
business under the name of Wood Group Pressure Control.
On July 1, 1997, the Company acquired 100% of the issued and outstanding capital
stock of Church Oil Tools, Inc. ("Church"). Church is a Houston, Texas based
manufacturer serving the drilling equipment market. Church is presently doing
business as Wood Group Drilling Products ("WGDP"). WGDP produces,
remanufactures and sells blow-out preventers, high-pressure valves and
specialized engineering services. Its customers include drilling contractors,
rental tool companies and other related oilfield service companies.
On September 8, 1997, the Company and the Wood Group entered into an Investment
Agreement pursuant to which the Company agreed to issue and sell, and Wood Group
agreed to purchase, 6,250,000 shares of the Company's Common Stock. The
aggregate purchase price for the shares was $10 million or $1.60 per share.
Following this transaction, the Wood Group owned approximately 88.5% of the
Company.
On February 2, 1998, the Company completed the acquisition of all of the issued
and outstanding capital stock of Bompet, C.A. ("Bompet"), a Venezuelan company.
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.
On May 14, 1999, the Company, in a privately negotiated transaction (the
"Pressure Control Acquisition"), completed its acquisition from 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 Acts
of the United Kingdom. Prior to the acquisition, WGPCHL was a wholly owned
subsidiary of Wood Group. WGPCHL owned Wood Group Pressure Control and
Engineering Services Limited ("WGPCS") and Wood Group (Middle East) Limited, the
latter of which beneficially owns Wood Group Pressure Control (Arabian) LLC
("Arabian"). 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, 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"). Following this transaction, the Wood
Group owned approximately 89.0% of the outstanding Common Stock of the Company.
On February 22, 2000, the 1,850,000 shares of Series A Preferred Stock were
converted into 1,850,000 shares of Common Stock. Following this transaction, the
Wood Group owns 89.7% of the Company's equity securities.
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WGPCS is based in Peterhead, Scotland, and is engaged in the repair and
refurbishment of valves and wellhead equipment, as well as the surveying of
offshore valve systems. Arabian is based in Abu Dhabi and is engaged in the
manufacture, installation and maintenance of wellhead equipment. This company
provides services to a range of customers in the Middle East.
RECENT DEVELOPMENTS
In November 1999, the Company received a proposal from Wood Group to acquire all
outstanding shares of Common Stock not currently owned by it at a price of $1.50
per share. In response to the Wood Group proposal, the Company's Board of
Directors appointed a special committee comprised of its independent directors
to review and analyze the proposal. The special committee appointed its own
legal and financial advisors and negotiated a per share cash price of $1.60 for
each outstanding share of Common Stock not currently owned by the Wood Group. On
March 29, 2000, the Company, Wood Group and ERC Acquisition, Inc., a Delaware
corporation and a wholly owned subsidiary of the Reporting Person ("Merger
Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement")
providing for the merger (the "Merger") of Merger Sub with and into the Company.
In the Merger, each share of Common Stock of the Company outstanding immediately
prior to the effective time the Merger (other than shares held by the Wood
Group, Merger Sub or any subsidiary of the Wood Group or the Company, or held in
the Company's treasury, which will be canceled, or shares held by stockholders
who have exercised their statutory right under the laws of the state of Delaware
to have such shares appraised and be paid the fair value thereof ("Dissenting
Shares")) will be converted into the right to receive $1.60 in cash, without any
interest thereon (such cash paid for the shares of Common Stock is hereinafter
referred to as the "Merger Consideration"), and each outstanding share of common
stock of Merger Sub will be converted into one share of the common stock of the
Company, as the surviving corporation in the Merger (the "Surviving
Corporation").
The Merger Agreement specifies certain conditions that must be satisfied
prior to the closing of the Merger, including, among other things, (a) the
approval and adoption of the Merger Agreement and the Merger by the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock not
owned by the Wood Group that are voting for or against the matter at the
meeting of stockholders called for such purpose, and (b) the absence of any
court order, decree or injunction that prohibits the consummation of the Merger.
As a result of the Merger, (a) all the outstanding shares of Common Stock
(other than Dissenting Shares and shares held by the Wood Group, Merger Sub or
any subsidiary of the Wood Group or the Company, or held in the Company's
treasury, which will be canceled) will be converted into the right to receive
the Merger Consideration, and the shares of Merger Sub will become the shares of
the Surviving Corporation, (b) the Reporting Person will own 100% of the
outstanding shares of the Surviving Corporation, (c) the Common Stock of the
Company will cease to be authorized to be quoted on the OTC Bulletin Board or on
any other interdealer quotation system of a registered national securities
association, (d) the Common Stock will be removed from registration under the
1934 Act, (e) the directors of Merger Sub will become the directors of the
Surviving Corporation and (f) the officers of the Company will become the
officers of the Surviving Corporation.
OPERATIONS
The Company supplies and services the pressure containment and flow handling
equipment needs of the oil and gas industry worldwide. During recent years it
has continued its transition from a U.S. domestic re-manufacturer of valves and
wellheads into a recognized international supplier of a more advanced range of
new and re-manufactured valves, wellheads and blow-out preventors.
Through surplus wellhead equipment management programs, the Company collects
out-of-service equipment at the wellhead or accepts delivery at branch
locations. If the customer so desires, the Company may purchase the customer's
used equipment for resale to other customers. In this way, the branches, sales
and service offices of the Company act, in part, as clearing houses for oilfield
operators. If the operator, at a particular location, requires a unique
component held by the Company on behalf of another customer, the Company may
contact the customer and effect a purchase from the customer that owned the
equipment and then resell the equipment to the customer that is in need of the
required equipment.
In addition to re-manufacturing customer equipment, the Company purchases used
equipment from various sources, which the Company then re-manufactures for sale.
BUSINESS DEVELOPMENT AND ACQUISITIONS
The acquisitions made since 1993 have expanded the Company's operations to
include a complete line of gate valves and conventional wellhead equipment.
Valves are available in 1-13/16" to 24" sizes for working pressures from
300 p.s.i. to 15,000 p.s.i. and are produced in eight basic material trims and
custom trims to meet individual customer requirements. The facilities are
licensed by the American Petroleum Institute ("API") to distribute its products
with the API monogram in accordance with API Specification 6A (wellhead valves),
Specification 6D (pipeline valves) and Specification 14D (surface safety valves
for offshore use). The use of the API monogram is considered by management to be
essential to compete successfully in the oil and gas valve market. The Company's
manufacturing facilities in Shawnee, Oklahoma; Houston, Texas; Cumbernauld and
Peterhead in Scotland; Cuidad Ojeda, Venezuela; Queensland, Australia and Abu
Dhabi are ISO 9001 registered, as well as certified under a range of API
licenses.
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To manufacture products, each of the Company's plants purchase major raw
material components from foundries, forging houses, and steel suppliers, then
machine such materials into finished products using CNC machines, which are
essentially computer controlled lathes and machine centers, and other
conventional machine tools. Special heat treatment and surface conditioning are
applied as appropriate to individual components to improve product performance
and to meet varying service condition requirements. The Company has not had and
currently does not anticipate having difficulties in obtaining raw materials for
its operations.
The Company's strategy, with regard to all acquisitions made to date, has been
to expand its presence in the domestic and the international markets. The
Company currently operates in the United States, United Kingdom, Middle and Far
East, and Latin America. These locations are managed by seasoned industry
professionals with international experience. In the past, this local presence
has generated a high degree of customer interest and an increase in demand for
the Company's products and services.
The Company's wellhead and related equipment operations are conducted from 20
domestic locations and 13 international locations. The Company's manufacturing
facilities are located in Houston, Texas; Shawnee, Oklahoma; Cumbernauld and
Peterhead in Scotland; Abu Dhabi; Queensland, Australia and Cuidad Ojeda,
Venezuela.
PATENTS AND SERVICE MARKS
The Company holds several patents and trademark/service marks. Many of these
are registered with the United States Patent and Trademark Office and expire on
various dates through 2020. Although the Company considers its patents important
to the operation of its business, and a loss of one or more patents could
adversely affect a particular product, the Company does not believe that any
significant portion of its business is materially dependent upon any single
patent or group of patents or generally upon patent protection.
SALES AND MARKETING
The Company conducts its operations in the United States from branch facilities
located in many major oil and gas producing areas requiring wellhead equipment.
Each branch facility maintains inventory for local customer requirements,
trained service technicians, and machine shop capability to provide quick
delivery. Each branch facility offers a range of products and services
including new equipment, re-manufactured equipment, and inventory management of
customer property.
Internationally, the Company sells its products through a mixture of Company-
operated branch locations, overseas subsidiaries and through independent sales
agents. Sales offices are located in metropolitan areas where customers are
typically headquartered or maintain regional offices.
The Company's marketing program emphasizes providing complete supply chain
management of wellhead and valve requirements for its customers. This program
includes repair of customer equipment, sale of re-manufactured equipment, sale
of new equipment, maintenance services and a broad distribution network of
branch locations and sales offices to provide prompt local service and support.
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OPERATING RISKS AND INSURANCE
The Company's products are used for the exploration and production of oil and
natural gas. Such operations are subject to hazards inherent in the oil and gas
industry, such as fires, explosions, blowouts and oil spills, that can cause
personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations.
Litigation arising from an occurrence at a location where the Company's products
or services are used or provided may in the future result in the Company being
named as a defendant in lawsuits asserting potentially large claims. The
Company maintains insurance coverage that it believes to be customary in the
industry against these hazards.
COMPETITION
The market for used and new oilfield equipment is highly competitive as there
are numerous manufacturers, distributors and dealers; however, the Company
believes that relatively few competitors offer programs involving maintenance,
reconditioning, storage, distribution and management of equipment such as those
offered by the Company. With its programs, the Company emphasizes its ability to
provide reconditioned oilfield equipment at favorable prices while at the same
time performing services in which the customer would otherwise have to perform
at a substantial cost and inconvenience. Numerous companies, some of which have
substantially greater resources than the Company, are engaged primarily in the
manufacturing, installation and maintenance of wellheads, valves and drilling
equipment as well as other types of oilfield equipment. In addition, some
foreign manufacturers make only valves. Over the past several years, severe
price competition has continued to have a substantial impact on profit margins.
There is no assurance that these trends will not continue in the future.
CUSTOMERS
The customers for the Company's products include both domestic and international
oil and natural gas companies. Because the Company's products are designed
primarily for drilling, sales of these products are sensitive to fluctuations in
the price outlook for oil and natural gas and related levels of exploration
activity. During 1998 and for most of 1999, there was a decline in the number
of rigs utilized, which was attributed to a reduction in the price of oil. This
has had an adverse impact on the level of demand for the Company's products, and
the margins that the Company achieves from the services it renders.
GOVERNMENT REGULATION
The exploration, development and production of oil and gas in the United States
is affected by comprehensive federal and state regulations including those
governing allowable rates of production, marketing, environmental matters and
pricing. To date, the Company has operated successfully in this regulatory
environment.
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YEAR 2000 DATE CONVERSION
The Company has experienced little disruption or malfunctions since the turn of
the year arising from its own computer systems or equipment with embedded date-
reliant computer chips. There has also been little disruption from failure of
third party computer systems.
The lack of disruption from the Company's own systems and equipment is
attributed to: (i) the analysis of risks carried out in 1998 and 1999 to
determine the impact of the year 2000 problem on our activities; and (ii) the
consequential modifications to, or replacement of, hardware and software
suspected of harboring the faulty date-reliant software or computer chips that
were carried out during 1998 and the first half of 1999.
The total cost incurred during 1999 to complete modifications to our computer
hardware and software was $0.7 million, a portion of which was for new equipment
and systems enhancements that have been capitalized. The Company does not
anticipate any further costs arising from the year 2000 issue.
FOREIGN OPERATIONS
Operations and sales in foreign markets are subject to substantial competition
from large multinational corporations and government-owned entities and to a
variety of local laws and regulations requiring qualifications, use of local
labor, the provision of financial assurances or other restrictions and
conditions on operations. Foreign operations are also subject to risks
associated with doing business outside the U.S., including risk of war, civil
disturbances and governmental activities that may limit or disrupt markets,
restrict the movement of funds or result in the deprivation of contract rights
or the taking of property without fair compensation. Foreign operations may also
subject the Company to risks relating to fluctuations in currency exchange
rates. However, to date, currency fluctuations have not had a material adverse
impact on the Company.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 567 employees. The
Company considers its relations with its employees to be generally satisfactory.
No employees of the Company are represented by a union.
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ITEM 2. PROPERTIES
Set forth below is certain information as of December 31, 1999, regarding the
Company's headquarters, manufacturing and other facilities, most of which are
located on leased premises.
Location Expiration Dates
Manufacturing -
Houston, Texas (Leased) (1) July 14, 2001
Shawnee, Oklahoma (Owned) (2)
Cumbernauld, Scotland (Owned) (3)
1 Headquarters Office (Leased) Through July 31, 2004
7 Branch Offices and Various through
Machine Shops (Leased) March 31, 2003 (4)
5 Branch Offices and
Machine Shops (Owned)
2 Sales Offices Various through
(Owned and Leased) May 1, 2000 (4)
5 Sales and Service Various through
Offices (Leased) February 9, 2001 (4)
13 International Sales and Service Various through
Offices (Leased) August 28, 2002 (4)
(1) The Church facility in Houston, Texas is a 28,942 square foot building on a
total site of 3 acres.
(2) The Shawnee, Oklahoma facility is an 89,000 square foot building plus an
additional 5 acres contiguous to the property.
(3) The manufacturing facility at Cumbernauld, Scotland is a 31,000 square foot
building on a total site of 3 acres.
(4) Most of these leases are on a month-to-month basis. The Company does not
expect the expiration of any of these leases to have a material adverse
effect on its operations.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to what it believes is routine
litigation and proceedings that may be considered to be part of the ordinary
course of its business. Currently, the Company is not aware of any current or
pending litigation or proceedings that would have a material or adverse effect
on the Company's results of operations, cash flows or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the Company's fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Up until November 5, 1999, the Company's Common Stock was included on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The trading symbol under which the Common Stock trades is "ERCI".
On November 5, 1999, the Company announced that it had received notice from
NASDAQ that its Common Stock would be delisted from the NASDAQ Small Cap Market
effective with the close of business.
The Company's Common Stock commenced trading on the OTC Bulletin Board under the
symbol ERCI effective with the opening of the market on Monday, November 8,
1999.
The following table sets forth the high and low reported bid prices for the
Company's Common Stock as reported by NASDAQ/OTC by fiscal quarter from January
1, 1998 through December 31, 1999. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
High Low
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FISCAL YEAR ENDED DECEMBER 31, 1998
January 1, 1998 - March 31, 1998...... $4.50 $1.88
April 1, 1998 - June 30, 1998......... $3.25 $2.00
July 1, 1998 - September 30, 1998..... $2.38 $1.63
October 1, 1998 - December 31, 1998... $1.75 $0.50
FISCAL YEAR ENDED DECEMBER 31, 1999
January 1, 1999 - March 31, 1999...... $1.47 $0.69
April 1, 1999 - June 30, 1999......... $2.25 $0.69
July 1, 1999 - September 30, 1999..... $1.19 $0.69
October 1, 1999 - December 31, 1999... $1.56 $0.44
As of March 17, 2000, there were 779 holders of record of the Company's Common
Stock, as reported by the Company's transfer agent for its Common Stock. As of
March 17, 2000, the closing price of the Common Stock as reported on OTC was
$1.50 per share.
The present policy of the Board of Directors is to retain earnings to provide
operating funds for the Company. As a result, the Company has not paid
dividends and does not intend to do so in the foreseeable future.
During the fourth quarter of 1999, the Company made no unregistered sales of
its equity securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of the Company and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
elsewhere herein. The following information may not be deemed indicative of
future operating results of the Company.
<TABLE>
<CAPTION>
Years Ended/As of December 31,
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1999 1998 (2)(3)(4)(5)) 1997(3)(4)(5) 1996(4)(5) 1995(5)
$ $ $ $ $
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<S> <C> <C> <C> <C> <C>
Revenues 88,876 117,679 87,897 59,271 41,095
Selling, general and administrative
expenses 21,155 24,018 16,732 11,179 9,253
Operating Income (Loss) (4,214) 2,367 3,354 2,374 (875)
Net Income (Loss) (5,897) (647) 777 1,398 (1,070)
Basic net income (loss) per share (0.20) (0.02) 0.03 0.07 (0.07)
Diluted net income (loss) per share (0.20) (0.02) 0.03 0.07 (0.07)
Total Assets 71,221 77,314 64,771 40,396 24,175
Total Liabilities 44,661 44,547 31,829 21,846 13,809
Working Capital 17,349 21,356 21,434 11,061 5,720
Shareholders' Equity (1) 26,560 32,767 32,942 18,550 10,367
Cash dividends per share N/A N/A N/A N/A N/A
</TABLE>
(1) The Company's net operating loss carryforwards substantially reduce the
federal income taxes paid by the Company. The Company reports these
reductions of income taxes paid as an increase to paid-in-capital
conforming to the accounting rules for quasi-reorganized companies.
(2) Includes effects of Bompet acquisition completed on February 2, 1998.
(3) Includes effects of Church acquisition completed on July 1, 1997.
(4) Includes effects of Seaboard Lloyd Limited acquisition completed on
September 27, 1996.
(5) Includes effects of acquisition of WGPCS and Arabian on May 14, 1999, which
has been accounted for similar to a pooling of interests. The historical
financial statements of the Company for periods prior to the consummation
of the 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is an international manufacturer and supplier of engineered oilfield
tools and equipment. The Company has achieved significant revenue growth in
recent years through a consistent strategy of synergistic acquisitions and
internal development. Acquisitions have focused on the acquisition of name
brand products, the development of complete product lines and savings through
consolidation. Internal development has focused on product development and
geographic expansion.
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated decreased 23.0% to an average of 625 in 1999, as compared to 811 in
1998 and 943 in 1997. The active domestic rig count as of March 17, 2000 was
764. The average active rig count is a clear indicator of the likely demand in
the market in which the Company operates, based on prior years' experience.
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RESULTS OF OPERATIONS - 1999 AS COMPARED TO 1998 AS COMPARED TO 1997
The Company's revenues decreased by 24.5% to $88.9 million in 1999 compared with
$117.7 million in 1998. Revenues for 1999 decreased by $28.8 million over 1998
due to a decrease in customer activity. Revenues for 1998 increased by 33.9% to
$117.7 million compared with $87.9 million in 1997, due to increased customer
activity during the first three quarters of 1998.
In connection with revenues over the period, cost of goods sold were $69.3
million in 1999, as compared to $88.3 million in 1998, and $67.8 million in
1997. The gross profit percentage was 22.0% in 1999, compared with 25.0% in
1998 and 22.9% in 1997. The decrease in gross profit percentage compared to
last year is due primarily to the need to lower prices in order to retain
business during a period of reduced rig activity. The increase in 1998 gross
profit percentage as compared to 1997 is due to changes in product mix, process
improvements at the manufacturing facilities which created cost reductions, as
well as fewer repairs and maintenance expenses at the facilities.
Selling, general and administrative expenses ("SG&A") decreased by $2.8 million
to $21.2 million in 1999 as compared with $24.0 million in 1998. The decrease
arises from reductions in headcount and other administrative costs to reflect
lower levels of activity. SG&A, as a percentage of sales, was 23.8% in 1999 and
20.4% in 1998. The increase as a percentage of sales is due to the reduction in
revenues in the period being proportionately higher than the savings made in
SG&A.
In 1998, SG&A increased by $7.3 million to $24.0 million from $16.7 million in
1997. This increase was due to costs incurred to open additional domestic sales
offices, increases in international and domestic sales personnel, a full year's
activity from Wood Group Drilling Products, and the addition of Bompet in 1998.
While the financial performance of most of the Company's operating units showed
signs of improvement following the increases in US rig count during the fourth
quarter of 1999, Wood Group Drilling Products continued to experience difficult
market conditions. Fluctuations in the level of drilling products business can
be attributed to drilling fleets, which have continued to operate at low
capacities. Due to the continuing uncertainty over future prospects, the
Company decided that its investment in Wood Group Drilling Products was impaired
and accordingly wrote off the remaining goodwill of $2.6 million arising from
the acquisition of the company. This charge has been recorded on the
consolidated statement of operations as an asset impairment.
As a result of the difficult market conditions experienced in the latter part of
1998, the Company conducted a detailed review of the carrying value of its
assets. Following this review, provisions of $1.9 million were made against
certain product lines included within inventory. In addition, the Company
determined that its investment in Bompet was impaired and accordingly wrote off
the goodwill arising from the acquisition of Bompet. These charges have been
recorded on the statement of operations as asset impairment.
In 1999, interest expense reduced by $0.3 million over 1998, and in 1998,
interest expense increased $0.9 million over 1997. These movements are due to
changes in the level of outstanding debt.
Net loss before provision for income tax was $6.0 million in 1999, compared to
income before provision for income tax of $0.3 million in 1998 and $2.3 million
in 1997. The decreases in 1999 and 1998 are primarily due to difficult market
conditions experienced following the reduction in oil and gas prices and its
resultant effect on drilling activity.
11
<PAGE>
Net income for 1999 includes a benefit for income taxes of $0.1 million. Net
income for 1998 and 1997 includes provisions for income taxes of $1.0 million
and $1.5 million, respectively. Of these amounts, $0 million, $1.7 million
and $3.2 million in 1999, 1998 and 1997, respectively, represent non-cash
charges which reflect the income tax benefit of the utilization of the
Company's NOL carry forwards arising prior to a quasi-reorganization; such
amounts are included in the respective balance sheets as increases in additional
paid-in-capital.
Numerous companies, some of which have substantially greater resources than the
Company, are engaged primarily in the manufacturing, installation and
maintenance of wellheads, valves and drilling equipment as well as other types
of oilfield equipment. In addition, some foreign manufacturers make only valves.
Over the past several years, severe price competition has continued to have a
substantial impact on profit margins. The Company believes that the reduction in
demand in the latter part of 1998 and during 1999 for its services was largely
attributable to depressed oil prices. With the increase in oil and gas prices so
far in 2000, the Company has seen an increase in demand for its products.
However, price competition continues to have a negative impact on the Company's
margins, and the Company cannot predict the future level of demand for its
services or future conditions in the oil and gas service industry. Management
believes a complete recovery in the Company's market will require sustained
recovery in the oil and gas industry as a whole.
LIQUIDITY AND CAPITAL RESOURCES
On January 20, 1999, the Company obtained a $2 million unsecured line of credit
with a U.S. bank, which is guaranteed by the Company's principal stockholder,
Wood Group. The line of credit is used for the purpose of general working
capital requirements, and $1.4 million was available for additional borrowings
on the line of credit at December 31, 1999.
On September 2, 1998, the Company obtained a $22 million secured line of credit
with its principal stockholder, Wood Group. The line bears interest at the LIBOR
rate plus 0.85%, which was approximately 6.5% and 5.9% at December 31, 1999 and
1998, respectively. At December 31, 1999, loan amounts outstanding under the
agreement were $12.3 million.
WGPCL and WGPCS have lines of credit with a bank in Scotland provided as part of
a group banking arrangement with Wood Group. The lines of credit are used for
the purpose of general working capital requirements and provide overdraft and
documentary credit facilities. Interest payable on the overdrafts is equal to
the bank's base rate plus 1% per annum. At December 31, 1999, the bank's base
rate was 5.5% (1998: 6.25%). The amounts outstanding under this agreement at
December 31, 1999 and 1998 were $8.3 million and $3.6 million, respectively.
WGPCL has a loan from Wood Group at December 1999 and 1998 amounting to $3.2
million, which is repayable on demand. The loan is used for the purpose of
general working capital requirements. Interest payable on the loan is charged at
base rate plus 0.85% per annum.
The Company's Abu Dhabi subsidiary has a line of credit of up to $0.5 million
with a bank in Scotland provided as part of a group banking arrangement with
Wood Group. The amount outstanding under this agreement at December 31, 1999
was $0.4 million (1998: $0.3 million). Interest is charged at bank base rate
plus 0.5%. At December 31, 1999 the base rate was 7.25% (1998: 6.48%). The
line of credit is used for the purpose of general working capital requirements
and provides overdraft and documentary facilities. In addition, the subsidiary
has a loan of $0.7 million at December 31, 1999 and 1998 from Wood Group.
Interest payable on the loan is charged at 6.7%.
12
<PAGE>
The Company believes it will be able to renew the line of credit and loans with
Wood Group so as to ensure that the Company will have sufficient financial
resources to fund its working capital requirements and operations through 2000.
Working capital at December 31, 1999 and at December 31, 1998 was $17.3 million
and $21.4 million, respectively. The decrease in working capital is due largely
to increases in lines of credit outstanding.
The Company currently anticipates incurring capital expenditures of $1.3 million
through the fiscal year ending December 31, 2000. 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.
Pending Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
items; effects of certain changes in fair value are recorded in Other
Comprehensive Income pending recognition in earnings. SFAS 133 is effective for
the Company starting in 2001. The impact of SFAS 133 on our financial statements
will depend on a variety of factors, including future interpretive guidance from
the FASB, the future level of actual foreign currency transactions, the extent
of our hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. However, the Company does not believe the
effect of adoption will have a material effect on the Company's results of
operations, cash flows or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposures to fluctuations in interest rates and foreign currency
exchange rates. The Company does not use derivative financial instruments to
manage these risks. A 1% increase in interest rates would increase interest
expense by approximately $0.25 million on an annualized basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 for Index to Consolidated Financial Statements and
Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
The information required by Part III of this Form 10-K is to be provided by
incorporating portions of the Company's definitive proxy statement relating to
its 2000 Annual Meeting of Stockholders (The Proxy Statement), which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the end of the fiscal year covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears under the caption "Directors and
Executive Officers" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption "Executive
Compensation" in the definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the definitive Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption "Certain
Transactions" in the definitive Proxy Statement, which information is
incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
PAGE NO.
Report of Independent Accountants............................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1999 and 1998.. F-2
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997............................ F-3
Consolidated Statement of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997...................... F-4
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997...................... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................ F-6
Notes to Consolidated Financial Statements................... F-7
All schedules are omitted since the required information is either (a) not
present or not present in amounts sufficient to require submission of the
schedule, or (b) because the information required is included in the financial
statements or notes thereto.
Exhibits:
(A) Agreement dated July 20, 1993 by and among ERC Industries, Inc.,
Barton Industries, Inc., American Bank & Trust Company, American
National Bank and Trust Company, and Oklahoma Industrial Finance
Authority, filed as Exhibit (c)(1) to the Company's Current Report
on Form 8-K dated November 16, 1993 and incorporated herein by
reference.
(B) First Modification Agreement between ERC Industries, Inc. and
American Bank & Trust Company, filed as Exhibit (c)(2) to the
Company's Current Report on Form 8-K dated November 16, 1993 and
incorporated herein by reference.
(C) Real Property Lease Agreement dated November 15, 1993 between
American National Bank and Trust Company and ERC Industries, Inc.
and Second Modification Agreement dated November 2, 1993, filed as
Exhibit (c)(3) to the Company's Current Report on Form 8-K dated
November 16, 1993 and incorporated herein by reference.
(D) Equipment Lease Agreement dated November 15, 1993 between Oklahoma
Industrial Finance Authority and ERC Industries, Inc. and Third
Modification Agreement, filed as Exhibit (c)(4) to the Company's
Current Report on Form 8-K dated November 16, 1993 and incorporated
herein by reference.
15
<PAGE>
3. (A) Certificate of Incorporation of ERC Industries, Inc. (1)
(B) Certificate of Ownership and Merger, dated April 16, 1993, merging
ERC Industries, Inc. into ERC Subsidiary, Inc.(1)
(C) Bylaws of ERC Industries, Inc. (1)
4. (A) Specimen of Common Stock Certificate of ERC Industries, Inc. (1)
10.1 Investment Agreement, dated as of June 6, 1996, by and between the
Company and Wood Group, filed as Exhibit 10.1 to the Current Report
of the Company on Form 8-K dated June 6, 1996 and incorporated
herein by reference.
10.2 Registration Rights Agreement, dated as of June 6, 1996, by and
between the Company and Wood Group, filed as Exhibit 10-2 to the
Current Report of the Company on Form 8-K, dated June 6, 1996 and
incorporated herein by reference.
10.3 Purchase Agreement dated September 27, 1996, filed as Exhibit 10-1
to the Company's Current Report on Form 8-K dated September 27, 1996
and incorporated herein by reference.
10.4 Investment Agreement, dated September 8, 1997, by and between the
Company and Wood Group, filed as Exhibit 10.1 to the Current Report
on Form 8-K dated September 8, 1997 and incorporated herein by
reference.
10.5 Registration Rights Agreement, dated September 8, 1997 by and
between the Company and Wood Group filed as Exhibit 10.2 to the
Current Report on Form 8-K dated September 8, 1997 and incorporated
herein by reference.
10.6 Stock Purchase Agreement by and among the Company, Inversiones
Western, C.A. and Jimmy J. Marzoula dated January 30, 1998, filed as
Exhibit 10.1 to the Current Report on Form 8-K dated February 2,
1998 and incorporated herein by reference.
10.7 Letter Agreement with Wood Group regarding Overdraft Facility dated
as of June 16, 1998, filed as Exhibit 10.2 to the Company's
Quarterly report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference.
10.8 $22,000,000 Revolving Line of Credit from Wood Group dated as of
September 2, 1998, filed as Exhibit 10.1 to the Company's Quarterly
report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.9 Promissory Note dated January 20, 1999 with Bank One Oklahoma, N.A.
filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein by
reference.
10.10 Share Sale and Purchase Agreement between the Company and John Wood
Group PLC dated May 14, 1999, filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated May 14, 1999 and incorporated
herein by reference.
10.11 Certificate of Designations of Series A Cumulative Convertible
Preferred Stock dated May 14, 1999, filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated May 14, 1999 and
incorporated herein by reference.
16
<PAGE>
10.12 Registration Rights Agreement between the Company and John Wood
Group PLC dated May 14, 1999, filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated May 14, 1999 and incorporated
herein by reference.
*10.13 Form of Indemnification Agreement by and between the Company and
each of its directors, each dated as of November 24, 1999.
*10.14 Agreement and Plan of Merger dated March 28, 2000 by and among the
Company, Wood Group and Merger Sub.
*27.1 Financial Data Schedule
__________________
(1) Filed as Exhibits 3(a), (b) and (c) and 4(a), respectively, of the
Company's Annual Report on Form 10-K for its fiscal year ended January 31,
1993, and incorporated by reference herein.
* Filed herewith
(B) REPORTS ON FORM 8-K:
No Reports on Form 8-K were filed by the Company during the fourth quarter of
the fiscal year ended December 31, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
ERC INDUSTRIES, INC.
- --------------------
Dated: March 28, 2000 /s/ Wendell R. Brooks
-------------------------
Wendell R. Brooks
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Dated: March 28, 2000 /s/ Wendell R. Brooks
-------------------------
Wendell R. Brooks
Chairman and Director
Dated: March 28, 2000 /s/ J. Derek P. Jones
-------------------------
J. Derek P. Jones
Director
Dated: March 28, 2000 /s/ Alan D. Senn
-------------------------
Alan D. Senn
President and Director
(Principal Executive Officer)
Dated: March 28, 2000 /s/ James E. Klima
----------------------
James E. Klima
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
18
<PAGE>
Dated: March 28, 2000 /s/ Allister G. Langlands
-----------------------------
Allister G. Langlands
Director
Dated: March 28, 2000 /s/ George Tilley
---------------------
George Tilley
Director
Dated: March 28, 2000 /s/ Jorge Estrada
---------------------
Jorge Estrada
Director
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of ERC Industries, Inc:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income, of shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of ERC Industries, Inc. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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, 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.
Houston, Texas
March 28, 2000
F-1
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1999 1998
------------------- --------------
ASSETS (RESTATED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,387 $ 2,246
Accounts receivable, net of allowance for uncollectible
accounts of $1,032 and $825, respectively 21,333 22,634
Inventory 31,970 31,853
Deferred tax asset 3,789 3,814
Other current assets 1,915 2,546
------- -------
TOTAL CURRENT ASSETS 60,394 63,093
Property, plant and equipment, net 9,528 9,990
Excess cost over net assets acquired, net 1,015 4,231
Deferred tax asset, non-current 284 -
------- -------
TOTAL ASSETS $71,221 $77,314
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit from banks 9,734 3,881
Line of credit from parent 16,254 19,509
Current portion of long-term debt 1,000 1,237
Accounts payable 10,920 10,645
Other accrued liabilities 5,137 6,465
------- -------
TOTAL CURRENT LIABILITIES 43,045 41,737
Other liabilities, non-current 105 100
Long-term debt 1,511 2,710
------- -------
TOTAL LIABILITIES 44,661 44,547
------- -------
Commitments and contingencies (see Note 10) - -
Shareholders' equity:
Preferred stock, par value $1; authorized -
10,000,000 shares; 1,850,000 issued and outstanding
as of December 31, 1999 and 1998 1,850 1,850
Common stock, par value $0.01; authorized -
40,000,000 shares; 28,848,272 issued and outstanding
as of December 31, 1999 and 1998 289 289
Additional paid-in-capital 25,663 25,946
Retained earnings (accumulated deficit) from January 10, 1989 (1,226) 4,671
Accumulated other comprehensive income (16) 11
------- -------
TOTAL SHAREHOLDERS' EQUITY 26,560 32,767
------- -------
$71,221 $77,314
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
--------------------------------------------
1999 1998 1997
------- -------- ------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenues $88,876 $117,679 $87,897
Cost of goods sold 69,327 88,284 67,811
------- -------- ---------
Gross profit 19,549 29,395 20,086
Selling, general and administrative expenses 21,155 24,018 16,732
Asset impairment 2,608 3,010 -
------- -------- ---------
Operating income (loss) (4,214) 2,367 3,354
Interest expense 1,745 2,040 1,099
------- -------- ---------
Income (loss) before provision
for income taxes (5,959) 327 2,255
(Benefit from) / provision for income taxes (62) 974 1,478
------- -------- ---------
Net income (loss) $(5,897) $ (647) $ 777
======= ======== =========
Basic net income (loss) per share $ (0.20) $ (0.02) $ 0.03
======= ======== =========
Diluted net income (loss) per share $ (0.20) $ (0.02) $ 0.03
======= ======== =========
Weighted average number of shares
outstanding - Basic 28,848 28,848 24,567
======= ======== =========
Weighted average number of shares
outstanding - Diluted 28,848 28,848 26,417
======= ======== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------
1999 1998 1997
------- ----- -----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Net income (loss) $(5,897) $(647) $ 777
Other comprehensive income (loss) (27) 27 (148)
------- ----- -----
Total comprehensive (loss) income $(5,924) $(620) $ 629
======= ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS ACCUMULATED OTHER
PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE
STOCK STOCK CAPITAL DEFICIT) INCOME
--------- ------ ---------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $1850 $226 $10,474 $5,868 $ 132
Net income - - - 777 -
Issuance of common stock - 63 9,844 - -
Income tax benefit of pre-quasi-reorganization
net operating tax loss carryforwards - - 3,206 - -
Other comprehensive loss - - - - (148)
Goodwill arising in year - - 60 - -
Contribution from related party - - 672 - -
Distribution to related party - - - (82) -
--------------------------------------------------------------------------------
Balance as of December 31, 1997 1850 289 24,256 6,563 (16)
Net loss - - - (647) -
Income tax benefit of pre-quasi-reorganization
net operating tax loss carryforwards - - 1,690 - -
Other comprehensive income - - - - 27
Distribution to related party - - - (1,245) -
--------------------------------------------------------------------------------
Balance as of December 31, 1998 1850 289 25,946 4,671 11
Net Loss - - - (5,897) -
Other - - (283) - -
Other comprehensive loss - - - - (27)
--------------------------------------------------------------------------------
Balance as of December 31, 1999 $1,850 $289 $25,663 $(1,226) $(16)
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------
1999 1998 1997
------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: (restated) (restated)
<S> <C> <C> <C>
Net income (loss) $ (5,897) $ (647) $ 777
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 2,748 2,787 2,239
Provision for losses on trade accounts receivable 471 92 170
Provision for inventory obsolescence 531 1,157 392
Deferred income tax (benefit) provision and non-cash charge
for income taxes (259) 561 1,237
Gain on sale of property, plant and equipment (72) (84) (61)
Asset impairment 2,608 3,010 -
INCREASE (DECREASE) IN CASH RESULTING FROM
CHANGES IN ASSETS AND LIABILITIES
(EXCLUDING EFFECTS OF ACQUISITIONS)
Trade accounts receivable 830 322 (5,799)
Inventories (648) (7,335) (9,760)
Prepaid expenses and other assets 631 (2,180) (1,288)
Non-current assets - 1,634 -
Accounts payable 275 (3,598) 327
Accrued liabilities (1,633) (852) 1,708
-------- -------- --------
Net cash used in operating activities (415) (5,133) (10,058)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (net of cash acquired of $80 in 1998 and $1,152 in - (2,520) 152
1997)
Purchases of property, plant and equipment (1,854) (2,553) (2,592)
Proceeds from sale of property, plant and equipment 248 582 114
-------- -------- --------
Net cash used in investing activities (1,606) (4,491) (2,326)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment on note related to acquisition (1,000) (1,000) -
Line of credit borrowings from parent - 22,328 -
Line of credit payments to parent (3,255) (3,500) -
Line of credit borrowings from bank 41,014 22,901 20,757
Line of credit payments to bank (35,161) (26,121) (16,600)
Principal payments on capital leases and other debt (436) (1,267) (2,454)
Decrease in book overdrafts - (305) (115)
Contribution from related party - - 672
Net proceeds from issuances of common stock - - 9,907
Distribution to related party - (1,245) (82)
-------- -------- --------
Net cash provided by financing activities 1,162 11,791 12,085
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (859) 2,167 (299)
Cash and cash equivalents, beginning of year 2,246 79 378
-------- -------- --------
Cash and cash equivalents, end of year $ 1,387 $ 2,246 $ 79
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
As of December 31, 1999, approximately 89% of the outstanding shares of ERC
Industries, Inc.'s (the "Company's") common stock was owned by John Wood
Group PLC ("Wood Group"), a corporation registered in Scotland and
incorporated under the laws of the United Kingdom.
The consolidated financial statements include the accounts of ERC
Industries, Inc. and its following wholly owned subsidiaries: Wood Group
Pressure Control Holdings Limited, Wood Group Pressure Control Limited
(previously Seaboard Lloyd Limited), Wood Group Pressure Control and
Engineering Services Limited, Wood Group (Middle East) Limited, Wood Group
Pressure Control (Arabian) LLC, Wood Group Pressure Control Venezuela
(previously Bompet), Church Oil Tools, Inc., Wood Group Pressure Control
Mexico S.A., and Wood Group Pressure Control (Australia) Pty. The Company
engages in the manufacture, remanufacture and servicing of oilfield valves
and wellhead equipment and drilling products. The Company primarily sells
its products to customers in the oil and gas production industry located in
the major oil and gas producing regions of the United States. The Company
has expanded sales to international oil and gas producing regions such as
the United Kingdom, Middle and Far East, and Latin America. All
intercompany accounts and transactions are eliminated on consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments purchased with original
maturities of three months or less at the date of acquisition. Cash
equivalents are stated at cost, which approximates market because of their
short maturity.
INVENTORY
Inventory consists primarily of finished goods, semi-finished goods and raw
materials which are carried at the lower of cost (specific identification
or standard cost which approximates FIFO) or market.
F-7
<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 years for leased property
under capital leases, 5 to 10 years for machinery and equipment, and 3 to
31.5 years for buildings, improvements and other. Major renewals and
betterments which extend the lives of equipment are capitalized while all
other repairs and maintenance are charged to operations as incurred.
Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations.
EXCESS COST OVER NET ASSETS ACQUIRED
Excess cost over net assets acquired is carried at cost and is amortized
using the straight-line method over the estimated useful life of 10 years.
Accumulated amortization, as of December 31, 1999 and 1998, amounted to
approximately $6.5 million and $3.3 million, respectively. Periodically,
the Company's management assesses recorded balances of excess cost over net
assets of businesses acquired for impairment in light of historical and
projected operating results, trends and profitability, new product
development and general economic conditions.
ACCOUNTING FOR POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates the impairment of long-lived assets, such
as property, plant and equipment, identifiable intangibles including
patents and trademarks, and excess cost over net assets acquired related to
those assets. In connection with such evaluation, the Company estimates
the future cash flows resulting from the use of that asset and its eventual
disposition. If the sum of the expected future cash flows is less than the
carrying value of the asset, an impairment loss is recognized. The
impairment loss is measured as the amount by which the carrying amount
exceeds the fair value of the asset as determined by quoted market prices
when available, or the present value of the expected future cash flows.
INCOME TAXES
The Company records deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
EARNINGS PER COMMON SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted
average number of common and dilutive potential common shares outstanding.
During the years ended December 31, 1999 and 1998, 1,850,000 potential
common shares were excluded from weighted average diluted shares
outstanding because their effect was anti-dilutive.
F-8
<PAGE>
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is the
local currency, except for those operations that exist in highly
inflationary economies, for which the U.S. dollar is the functional
currency. The translation of foreign currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using an
average exchange rate for the period. Adjustments resulting from
translation are included in shareholders' equity. For subsidiaries
operating in highly inflationary economies, adjustments resulting from
translation are included in results of operations.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable. The Company maintains cash
deposits with several major banks, which from time-to-time may exceed
federally insured limits. Management periodically assesses the financial
condition of these financial institutions and believes that any possible
credit risk is minimal. The Company generally sells its products and
services to customers in the oil and gas production industry located in the
major oil and gas producing regions of the world. Procedures are in effect
to monitor the credit worthiness of customers, and bad debts have not been
significant in relation to the volume of revenues. The Company generally
does not obtain collateral for accounts receivable.
CERTAIN SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by management include the
recoverability of deferred tax assets, reserves for inventory obsolescence,
allowance for doubtful accounts receivable and accruals for contingencies.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources and includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. For all periods presented, other comprehensive
income and accumulated comprehensive income consisted of foreign currency
translation adjustments.
F-9
<PAGE>
RECLASSIFICATIONS
Certain amounts included in the prior year financial statements have been
reclassified to conform to current year presentation.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that,
upon adoption, all derivative instruments (including certain derivative
instruments embedded in other contracts) be recognized in the balance sheet
at fair value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in the values
of derivatives that meet these hedging criteria will ultimately offset
related earnings effects of the hedged items; effects of certain changes in
fair value are recorded in Other Comprehensive Income pending recognition
in earnings. SFAS 133 is effective for the company in 2001. The impact
of SFAS 133 on our financial statements will depend on a variety of
factors, including future interpretive guidance from the FASB, the future
level of actual foreign currency transactions, the extent of our hedging
activities, the types of hedging instruments used and the effectiveness
of such instruments. However, the Company does not believe the effect of
adoption will have a material effect on the Company's results of
operations, cash flows or financial position.
2. ACQUISITIONS
On May 14, 1999, the Company, in a privately negotiated transaction (the
"Pressure Control Acquisition"), completed its acquisition from 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 Acts of the United Kingdom. Prior to the acquisition, WGPCHL was
a wholly owned subsidiary of John Wood Group PLC ("Wood Group"). WGPCHL
owned Wood Group Pressure Control and Engineering Services Limited and Wood
Group (Middle East) Limited, the latter of which beneficially owns Wood
Group Pressure Control (Arabian) LLC (collectively, the "Group Companies").
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. At the Company annual meeting in September
1999 the Company's stockholders approved such conversion, which took
effect in February 2000.
On July 1, 1997, the Company acquired 100% of the issued and outstanding
capital shares of Church, a company incorporated in 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. In addition, the Company will pay up to an additional
$1 million in the event that Church's average earnings in 1999 and 2000
exceed certain thresholds.
The acquisition was accounted for under the purchase method of accounting
and the purchase price was allocated as follows (in thousands):
Cash $ 1,152
Accounts Receivable 939
Inventory 566
Property, Plant and Equipment 772
Excess Cost Over Net Assets Acquired 3,536
Accounts Payable (809)
Accrued Expenses (597)
Deferred Tax Liability (100)
Long-Term Debt-Current and Non-Current (459)
----------
$ 5,000
==========
F-10
<PAGE>
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
a pooling of interests. The historical financial statements of the Company
for periods prior to the consummation of the 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 February 2, 1998, the Company entered into a definitive purchase
agreement for the acquisition of Bompet, a Venezuelan company. The
acquisition was accomplished by the purchase of 100% of the issued and
outstanding capital stock of Bompet. In connection with the transaction,
the Company paid the sole Bompet stockholder; Inversiones Western C.A., a
purchase price of $2.6 million. In addition, the Company will pay up to a
maximum of $3.4 million in the event that Bompet's earnings exceed certain
thresholds during 1998, 1999 and 2000. No amount has been accrued or paid
in respect of this commitment as of December 31, 1999.
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 1,784
Property, Plant and Equipment 556
Other Assets 15
Excess Cost Over Net Assets Acquired 1,213
Accounts Payable (1,438)
Accrued Expenses (1,298)
Long-Term Debt-Current and Non-Current (868)
-------
$ 2,600
=======
The pro-forma impact of the Bompet acquisition on the Company's 1998
results of operations is not material.
3. ASSET IMPAIRMENT
As a result of difficult market conditions the Company conducted
detailed reviews of the carrying value of its assets. The following
provisions were made following this review (in thousands):
1999 1998 1997
------ ------ -----
Inventory $ - $1,910 $ -
Goodwill 2,608 1,100 -
------ ------ -----
$2,608 $3,010 $ -
====== ====== =====
F-11
<PAGE>
While the financial performance of most of the Company's operating units
showed signs of improvement following the increases in US rig count during
the fourth quarter of 1999, Wood Group Drilling Products continued to
experience difficult trading conditions. Fluctuations in the level of
drilling products business can be attributed to drilling fleets, which have
continued to operate at low capacities. Due to the continuing uncertainty
over future prospects, the Company decided that its investment in Wood
Group Drilling Products was impaired and accordingly wrote off the
unamoritized goodwill arising from the acquisition of Church.
During 1998, provisions of $1.9 million were made against certain product
lines included within inventory to cover product lines which management
believe have limited or no potential to earn future revenues.
During the final quarter in 1998, Bompet was advised that it had lost its
contract with its major customer. As a result of the loss of this
contract, the Company determined that its investment in Bompet was impaired
and accordingly wrote off the goodwill arising from the acquisition of
Bompet.
4. INVENTORY
Inventory consisted of the following (in thousands):
December 31,
--------------------
1999 1998
------- ----------
(restated)
Raw Materials $ 4,941 $ 4,185
Work-In-Progress 2,833 2,535
Finished Goods 24,196 25,133
------- -------
Total Inventory $31,970 $31,853
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
December 31,
--------------------
1999 1998
------- ----------
(restated)
Land $ 700 $ 703
Leased property under capital leases 1,813 1,837
Machinery and equipment 20,863 20,854
Buildings, improvements and other 5,553 5,614
------- -------
28,929 29,008
Less accumulated depreciation and
amortization 19,401 19,018
------- -------
Net property, plant and equipment $ 9,528 $ 9,990
======= =======
F-12
<PAGE>
Depreciation and amortization expense was approximately $2.1 million, $2.0
million, and $1.6 million for the years ended December 31, 1999, 1998 and
1997, respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following (in thousands):
December 31,
-------------------
1999 1998
------ ----------
(restated)
Insurance.................................... $ 514 $ 682
Payroll related.............................. 1,960 1,812
Warranty..................................... 940 780
Other........................................ 1,723 3,191
------- ------
$ 5,137 $6,465
======= ======
7. DEBT
Debt consisted of the following (in thousands):
December 31,
--------------------
1999 1998
---------- -------
(restated)
Lines of credit with parent company............. $16,254 $19,509
Line of credit due to banks..................... 9,734 3,881
------- -------
Long-term debt:
Notes payable related to acquisition of Church,
bearing interest at 8%, due in annual
installments of $1 million commencing
July 1, 1998................................. 2,000 3,000
Obligations under capital leases and other debt
bearing interest at various rates, due in
various installments......................... 511 947
------- -------
Total debt...................................... 2,511 3,947
Less current maturities......................... 1,000 1,237
------- -------
Long-term debt.................................. $ 1,511 $ 2,710
======= =======
The aggregate maturities of long-term debt, including obligations under
capital leases during the five years subsequent to December 31, 1999 are (in
thousands):
December 31
-----------
2000 $ 1,000
2001 1,130
2002 130
2003 130
2004 and thereafter 121
-----
Total $2,511
======
F-13
<PAGE>
Management believes that the carrying value of debt approximates its fair
value at December 31, 1999 and 1998 since the lines of credit bear interest
at variable rates and the various fixed rates on notes payable and capital
leases are not materially different from current market rates.
On January 20, 1999, the Company obtained a $2 million unsecured line of
credit with a U.S. bank, which is guaranteed by the Company's principal
stockholder, Wood Group. The line of credit is used for the purpose of
general working capital requirements, and $1.4 million was available for
additional borrowings on the line of credit at December 31, 1999.
On September 2, 1998, the Company obtained a $22 million secured line of
credit with its principal stockholder, Wood Group. The line bears interest
at the LIBOR rate plus 0.85%, which was approximately 6.5% and 5.9% at
December 31, 1999 and December 31, 1998, respectively. At December 31, 1999
and 1998 loan amounts outstanding under the agreement were $12.3 million and
$15.5 million respectively.
WGPCL and WGPCS have lines of credit with a bank in Scotland provided as part
of a group banking arrangement with Wood Group. The lines of credit are used
for the purpose of general working capital requirements and provide overdraft
and documentary credit facilities. Interest payable on the overdrafts is
equal to the bank's base rate plus 1% per annum. At December 31, 1999 and
1998 the bank's base rate was 5.5% and 6.25% respectively. The amounts
outstanding under this agreement at December 31, 1999 and 1998 were $8.3
million and $3.6 million respectively.
WGPCL has a loan at December 31, 1999 and 1998 from Wood Group amounting to
$3.2 million which is repayable on demand. The loan is used for the purpose
of general working capital requirements. Interest payable on the loan is
charged at base rate plus 0.85% per annum.
The Company's Abu Dhabi subsidiary has a line of credit of up to $0.5 million
with a bank in Scotland provided as part of a group banking arrangement with
Wood Group. The amount outstanding under this agreement at December 31, 1999
and 1998 was $0.4 million and $0.3 million respectively. Interest is charged
at bank base rate plus 0.5%. At December 31, 1999 and 1998 the base rate was
7.25% and 6.48% respectively. The line of credit is used for the purpose of
general working capital requirements and provides overdraft and documentary
facilities. In addition, the subsidiary has a loan of $0.7 million from Wood
Group at December 31, 1999 and 1998. Interest payable on the loan is charged
at 6.7%.
The Company believes it will be able to renew the line of credit and loan
with Wood Group so as to ensure that the Company will have sufficient
financial resources to fund its working capital requirements through 2000.
F-14
<PAGE>
8. INCOME TAXES
The Company records deferred income tax liabilities or assets for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets
are as follows (in thousands):
December 31,
-----------------
1999 1998
------ --------
Deferred tax assets:
Net operating loss................ $5,415 $ 3,930
AMT credit carryforwards.......... 537 565
Tax over book inventory basis..... 2,866 2,981
Allowance for doubtful accounts... 198 269
Accruals.......................... 550 298
Other............................. 459 266
Valuation allowance............... (5,952) (4,495)
------ -------
Total deferred tax assets......... $4,073 $ 3,814
====== =======
The valuation allowance was increased during 1999 by approximately $1.5
million. At December 31, 1999, the Company had federal net operating loss
(NOL) carryforwards available to offset future taxable income in the
approximate amount of $11.0 million and foreign operating loss carryforwards
available to offset taxable income in the approximate amount of $4.9 million.
Of these NOL carryforwards, approximately $7.7 million were generated before
the Company affected a quasi-reorganization and expire between the years 2001
and 2003. The balance of the NOL carryforwards were generated after the
quasi-reorganization and expire in 2009 and 2010. Special limitations exist
under the law, which may restrict the utilization of the net loss
carryforwards, including the alternative minimum tax.
Realization of deferred tax assets is dependent on generating sufficient
taxable income in the future to offset these tax deductions and NOL
carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets in excess of the
valuation allowance recorded will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced. Alternatively, if the
Company can maintain the current levels of taxable income into the future,
then the deferred tax asset considered realizable could be increased in the
near term.
F-15
<PAGE>
The following is a summary of the provision for income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C>
Current - U.S. $ 176 $ 155 $ 97
Current - foreign provision 13 253 144
Non-cash charge in lieu
of income taxes - 1,690 3,206
Deferred tax (benefit) - U.S. (259) (1,124) (1,969)
Deferred tax charge - foreign 8 - -
----- ------- -------
(Benefit from) provision for
income taxes $ (62) $ 974 $ 1,478
===== ======= =======
</TABLE>
The non-cash charges in lieu of income taxes represent the amount of income
taxes the Company would pay absent the NOL carryforward which was generated
before the Company affected a quasi-reorganization. Such charges are offset
within shareholders' equity by an increase in additional paid-in-capital.
The reconciliation between the actual (benefit)/provision recorded for income
taxes and the (benefit)/provision for income taxes at the United States
federal statutory rate for the years ended December 31, 1999, 1998 and 1997
is as follows:
1999 1998 1997
--------- ---------- ---------
(restated) (restated)
U.S. federal statutory rate (34.0)% 34.0% 34.0%
Current foreign losses with no
future tax benefits 13.6% 30.0% 1.6%
Difference in overseas tax rates 4.0% (25.4)% 8.8%
Write-off of Bompet goodwill - 113.8% -
Write-off of Drilling Products
goodwill 14.9% - -
Non-deductible Expenses 2.5% 157.8% 15.2%
State Taxes 0.9% 4.6% 5.2%
Other (2.9)% - -
------- ------ ------
Effective Tax Rate (1.0)% 297.8% 64.7%
======= ====== ======
The Company incurred losses in its United Kingdom and Venezuelan operations,
which management believes may not provide future tax benefits to the Company.
The impact of these losses and the provision for income taxes was recorded
throughout 1999 and in the fourth quarter of 1998.
F-16
<PAGE>
9. RELATED PARTY TRANSACTIONS
The Company and Wood Group have agreed to an annual provision for
administrative and financial service fees in amounts to be determined on an
annual basis. The Company was charged approximately $667,000, $898,000 and
$389,000 for the years ended December 31, 1999, 1998 and 1997 respectively.
On May 14, 1999, the Company, in a privately negotiated transaction (the
"Pressure Control Acquisition"), completed its acquisition from Wood Group of
all of the outstanding capital stock of WGPCHL. 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").
Following this transaction, the Wood Group owned approximately 89% of the
Company.
On February 22, 2000, the 1,850,000 shares of Series A Cumulative Convertible
Preferred Stock were converted into 1,850,000 shares of Common Stock.
Following this transaction, the Wood Group owns 89.7% of the Company.
On September 8, 1997, the Company agreed to issue and sell to the Wood Group
6,250,000 shares of the Company's common stock, par value $0.01 per share.
The aggregate purchase price for the shares was $10 million, or $1.60 per
share.
During 1997 and 1998, WGPCS paid distributions of $82,000 and $1,245,000
respectively to Wood Group Engineering and Operations Support Limited, a
fellow Wood Group subsidiary who were then the immediate parent of WGPCS.
During 1997, Wood Group made a capital contribution of $672,000 to WGPCS.
The Company and certain of its subsidiaries have various debt agreements with
Wood Group. See Note 7 for further details.
F-17
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various equipment under non-cancellable
operating leases. The leases provide for minimum monthly payments, plus in
certain instances, payment for taxes, insurance and maintenance. Certain
leases also contain renewal options. The Company is liable under non-
cancellable leases for minimum lease commitment amounts during the five years
subsequent to December 31, 1999 as follows (in thousands):
December 31
-----------
2000 $1,962
2001 1,091
2002 650
2003 415
2004 and thereafter 1,507
------
Total $5,625
======
Rental expenses for the years ended December 31, 1999, 1998 and 1997 were
approximately $1.8 million, $1.3 million and $1.4 million, respectively.
Pursuant to the agreement to acquire Church, the Company will pay up to an
additional $1.0 million in the event that Church's average earnings in 1999
and 2000 exceed certain thresholds.
Pursuant to the agreement to acquire Bompet, the Company will pay up to a
maximum of $3.4 million in the event that Bompet's earnings exceed certain
thresholds during 1998, 1999 and 2000.
The Company has authorized a long-term incentive program for its key
employees. Incentive payments are based on the improvement in pre-tax
earnings per share over a stated amount. No amounts have been earned during
1999, 1998 and 1997.
11. PROFIT SHARING AND 401(k) PLANS
The Company has a defined contribution 401(k) profit sharing plan. The plan
covers substantially all employees subject to certain length of service
requirements. Contributions are made at the discretion of the Board of
Directors. The Company matches employee's contributions up to 6% of their
eligible compensation at a rate of 50% of employee contributions. The
Company's matching contributions totaled approximately $282,000, $389,000 and
$130,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
F-18
<PAGE>
12. SUPPLEMENTAL CASH FLOW DISCLOSURES
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
(in thousands) (in thousands) (in thousands)
(restated) (restated)
Cash paid for:
Interest $1,752 $2,043 $1,023
====== ====== ======
Income taxes $ 248 $ 420 $ 136
====== ====== ======
The Company entered into capital lease obligations of $160,000 during the
period ended December 31, 1997. During the year ended December 31, 1997, the
company purchased $785,000 of property, plant and equipment by issuing a note
payable to the seller.
13. SEGMENT AND RELATED INFORMATION
Summarized financial information of the Company's reportable segments for the
years ended December 31, 1999, 1998 and 1997 is shown in the following table
based on how the Company is managed:
<TABLE>
<CAPTION>
U.S. Eastern
Operations(2) Hemisphere(2) Other(2) Total
------------ ------------ -------- -----
<S> <C> <C> <C> <C>
1999
----
Revenues from external customers $52,544 $31,249 $ 5,083 $ 88,876
Depreciation and amortization 1,918 547 283 2,748
EBIT (1) (1,715) (2,129) (370) (4,214)
Total Assets $52,872 $12,394 $ 5,955 $ 71,221
1998 (restated)
---------------
Revenues from external customers $82,143 $27,885 $ 7,651 $117,679
Depreciation and amortization 2,130 450 207 2,787
EBIT (1) 1,149 693 525 2,367
Total Assets $52,436 $18,739 $ 6,139 $ 77,314
1997 (restated)
---------------
Revenues from external customers $65,855 $22,042 $ - $ 87,897
Depreciation and amortization 1,682 557 - 2,239
EBIT (1) 3,410 (56) - 3,354
Total Assets $52,344 $12,326 $ - $ 64,670
</TABLE>
(1) EBIT represents earnings before other (income) expense and taxes.
(2) U.S. operations comprises ERC Industries, Inc. and Wood Group Drilling
Products. Other relates to Wood Group Pressure Control Venezuela.
Eastern Hemisphere comprises all remaining subsidiaries.
F-19
<PAGE>
The following table is a reconciliation of reportable segment EBIT to the
Company's consolidated totals:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C>
Total EBIT for reportable segments $(4,214) $ 2,367 $ 3,354
Other income / (expense) (1,745) (2,040) (1,099)
------- -------- -------
Total consolidated income / (loss)
before taxes $(5,959) $ 327 $ 2,255
======= ======== =======
</TABLE>
The following table presents revenues based on the location of the service
provided:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
(restated) (restated)
<S> <C> <C> <C>
U.S.A. $51,751 $ 81,138 $64,153
United Kingdom 12,587 11,285 12,296
Venezuela 5,083 7,651 275
United Arab Emirates 15,359 12,142 9,103
Other 4,096 5,463 2,070
------- -------- -------
Total Revenues $88,876 $117,679 $87,897
======= ======== =======
</TABLE>
The Company has one customer who accounted for 11%, 15% and 10% of its
revenues in 1999, 1998 and 1997, respectively.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1999 (MARCH 31 RESTATED)
- ---------------
Revenues................................. $22,666 $18,711 $22,083 $25,416
Gross profit............................. 5,024 4,211 5,016 5,298
Net income (loss)........................ (759) (1,615) (689) (2,832)
Basic net income (loss) per share........ $ (0.03) $ (0.06) $ (0.02) $ (0.09)
Diluted net income (loss) per share...... $ (0.03) $ (0.06) $ (0.02) $ (0.09)
1998 (RESTATED)
- ---------------
Revenues................................. $29,457 $31,468 $30,439 $26,315
Gross profit............................. 7,866 8,427 8,197 4,905
Net income (loss)........................ 1,264 966 589 (3,466)
Basic net income (loss) per share........ $ 0.04 $ 0.03 $ 0.02 $ (0.12)
Diluted net income (loss) per share...... $ 0.04 $ 0.03 $ 0.02 $ (0.12)
</TABLE>
15. SUBSEQUENT EVENT
On March 29, 2000, the Company has entered into a merger agreement with Wood
Group PLC, pursuant to which the Wood Group would acquire all outstanding shares
of the Company's common stock not currently owned by it for a cash price of
$1.60 per share. The merger agreement specifies certain conditions that must
be satisfied prior to the closing of the merger. As a result of the merger, the
Wood Group would own 100% of the outstanding shares of the surviving
corporation, and the common stock of the Company would cease to be authorized to
be quoted on the OTC Bulletin Board or on any other interdealer quotation system
of a registered national securities association.
F-20
<PAGE>
INDEMNIFICATION AGREEMENT
This AGREEMENT is made and entered into as of the 24/th/ day of November,
1999, by and between ERC Industries, Inc., a Delaware corporation (the
"Company"), and ________________. ("Indemnitee").
WHEREAS, it is essential to the Company and its mission to retain and
attract as directors the most capable persons available;
WHEREAS, Indemnitee is a director of the Company;
WHEREAS, both the Company and Indemnitee recognize the omnipresent
risk of litigation and other claims that are routinely asserted against
directors of companies operating in the public arena in today's environment, and
the attendant costs of defending even wholly frivolous claims;
WHEREAS, it has become increasingly difficult to obtain insurance
against the risk of personal liability of directors on terms providing
reasonable protection to the individual at reasonable cost to the companies;
WHEREAS, the Bylaws of the Company provide certain indemnification
rights to the directors of the Company, and its directors have relied on this
assurance of indemnification, as provided by Delaware law;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the increasing difficulty in
obtaining and maintaining satisfactory insurance coverage, and Indemnitee's
reliance on assurance of indemnification, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the fullest extent permitted by law (whether partial or complete) and as set
forth in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies;
NOW THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained herein and Indemnitee's continuing to serve as a
director of the Company, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Section 13(d) and 14(d) of the Securities
<PAGE>
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under such Act), directly or indirectly, of securities of the Company
representing 20% or more of the total voting power represented by the
Company's then outstanding Voting Securities (other than any such person or
any affiliate thereof that is such a 20% beneficial owner as of the date
hereof), or (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of Directors
of nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of
transactions) all or substantially all of the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, whether instituted by the Company or any other party, or any
inquiry or investigation that Indemnitee in good faith believes might lead
to the institution of any such action, suit or proceeding, whether civil
(including intentional or unintentional tort claims), criminal,
administrative, investigative or other.
(c) Expenses: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating
to any Indemnifiable Event.
<PAGE>
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by Indemnitee
in any such capacity.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall not have
otherwise performed services for the Company or Indemnitee within the last
five years (other than with respect to matters concerning the rights of
Indemnitee under this Agreement, or of other indemnities under similar
indemnification agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person
or body appointed by the Company's Board of Directors who is not a party to
the particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. BASIC INDEMNIFICATION ARRANGEMENT.
(a) In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness
or other participant in, a Claim by reason of (or arising in part out of)
an Indemnifiable Event, the Company shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no
later than thirty days after written demand is presented to the Company,
against any and all Expenses, judgments, fines, penalties and amounts paid
in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments,
fines, penalties or amounts paid in settlement) of such Claim. If so
requested by Indemnitee, the Company shall advance (within two business
days of such request) any and all Expenses to Indemnitee (an "Expense
Advance") upon compliance by Indemnitee with Section 145(e) of the Delaware
General Corporation Law.
<PAGE>
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which
the Independent Legal Counsel referred to in Section 3 hereof is involved)
that Indemnitee would not be permitted to be indemnified under applicable
law, and (ii) the obligation of the Company to make an Expense Advance
pursuant to Section 2(a) shall be subject to the condition that, if, when
and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding, and
Indemnitee shall not be required to reimburse the Company for any Expense
Advance until a final judicial determination is made with respect thereto
(as to which all rights of appeal therefrom have been exhausted or lapsed).
If there has not been a Change in Control, the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change of
Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 3 hereof. If there has
been no determination by the Reviewing Party or if the Reviewing Party
determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have
the right to commence litigation in any court in Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and agrees
to appear in any such proceedings. Any determination by the Reviewing
Party otherwise shall be conclusive and binding on the Company and
Indemnitee.
3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning
<PAGE>
the rights of Indemnitee to indemnity payments and Expense Advances under this
Agreement or any other agreement or Company Bylaw now or hereafter in effect
relating to Claims for Indemnifiable Events, the Company shall seek legal advice
only from Independent Legal Counsel selected by Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and Indemnitee as
to whether or to what extent Indemnitee would be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
4. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee (whether pursuant to Section 17
of this Agreement or otherwise) for (i) indemnification or advance payment of
Expenses by the Company under this Agreement or any other agreement or Company
Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events or
(ii) recovery under any directors' and officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be.
5. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against all Expenses incurred in
connection therewith.
6. BURDEN OF PROOF. In connection with any determination by the
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
7. NO PRESUMPTIONS. For purposes of this Agreement, the termination of
any claim, action, suit or proceeding, by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its
<PAGE>
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard or conduct or had any
particular belief, or an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that the
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. NONEXCLUSIVITY; SUBSEQUENT CHANGE IN LAW. The rights of the
Indemnitee hereunder shall be in addition to any other rights Indemnitee may
have under the Company's Bylaws or under Delaware law, or otherwise. To the
extent that a change in Delaware law (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded currently
under the Company's Bylaws and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change.
9. LIABILITY INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. AMENDMENTS, WAIVER. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
<PAGE>
13. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets
of the Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as a director of the Company or of any other
enterprise at the Company's request.
14. SEVERABILITY. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) is held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such provision in every other respect and
of the remaining provision hereof shall not be in any way impaired and shall
remain enforceable to the fullest extent permitted by law.
15. EFFECTIVE DATE. This Agreement shall be effective as of the date
hereof and shall apply to any claim for indemnification by the Indemnitee on or
after such date.
16. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
17. INJUNCTIVE RELIEF. The parties hereto agree that Indemnitee may
enforce this Agreement by seeking specific performance hereof, without any
necessity of showing irreparable harm or posting a bond, which requirements are
hereby waived, and that by seeking specific performance, Indemnitee shall not be
precluded from seeking or obtaining any other relief to which he may be
entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
ERC INDUSTRIES, INC.
By:
-------------------------
Title:
----------------------
-------------------------
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
JOHN WOOD GROUP PLC,
ERC ACQUISITION, INC.
and
ERC INDUSTRIES, INC.
Dated as of March 29, 2000
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
THE MERGER
Section 1.1 The Merger.......................................... 1
Section 1.2 The Closing......................................... 1
Section 1.3 Effective Time...................................... 2
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation....................... 2
Section 2.2 Bylaws............................................. 2
ARTICLE 3
DIRECTORS AND OFFICERS OF THE
SURVIVING CORPORATION
Section 3.1 Directors of Surviving Corporation................. 2
Section 3.2 Officers of Surviving Corporation.................. 2
ARTICLE 4
EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS
Section 4.1 Effect of Merger on Capital Stock.................. 3
Section 4.2 Exchange of Certificates Representing Company
Common Stock..................................... 3
Section 4.3 Dissenting Shares.................................. 5
Section 4.4 Adjustment of Consideration........................ 5
Section 4.5 Treatment of Units................................. 6
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 Existence; Good Standing; Corporate Authority...... 6
Section 5.2 Authorization, Validity and Effect of Agreements... 6
Section 5.3 Capitalization..................................... 6
Section 5.4 No Conflict........................................ 7
Section 5.5 SEC Documents...................................... 7
Section 5.6 No Brokers......................................... 8
i
<PAGE>
Section 5.7 Vote Required...................................... 8
Section 5.8 Opinion of Financial Advisor....................... 8
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Section 6.1 Existence; Good Standing; Corporate Authority...... 9
Section 6.2 Authorization, Validity and Effect of Agreements... 9
Section 6.3 No Brokers......................................... 9
Section 6.4 No Conflict........................................ 9
Section 6.5 Merger Sub......................................... 10
Section 6.6 Financing.......................................... 10
ARTICLE 7
COVENANTS
Section 7.1 Conduct of Businesses.............................. 10
Section 7.2 Meetings of Stockholders........................... 11
Section 7.3 Proxy Statement.................................... 12
Section 7.4 Expenses........................................... 12
Section 7.5 Consents........................................... 12
Section 7.6 Publicity.......................................... 13
Section 7.7 Indemnification; Insurance......................... 13
ARTICLE 8
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to
Effect the Merger................................ 14
Section 8.2 Conditions to Obligation of the Company to
Effect the Merger................................ 14
Section 8.3 Conditions to Obligation of Parent and Merger Sub
to Effect the Merger............................. 15
ARTICLE 9
TERMINATION
Section 9.1 Termination by Mutual Consent...................... 15
Section 9.2 Termination by Parent or the Company............... 15
Section 9.3 Termination by the Company......................... 16
Section 9.4 Termination by Parent.............................. 16
Section 9.5 Effect of Termination.............................. 16
Section 9.6 Extension; Waiver.................................. 17
ii
<PAGE>
ARTICLE 10
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations, Warranties
and Agreements................................... 17
Section 10.2 Notices............................................ 17
Section 10.3 Assignment; Binding Effect; Benefit................ 18
Section 10.4 Entire Agreement................................... 18
Section 10.5 Amendments......................................... 18
Section 10.6 Governing Law...................................... 19
Section 10.7 Counterparts....................................... 19
Section 10.8 Headings........................................... 19
Section 10.9 Interpretation..................................... 19
Section 10.10 Waivers............................................ 20
Section 10.11 Severability....................................... 20
Section 10.12 Obligation of Parent............................... 20
Section 10.13 Subsidiaries....................................... 20
Section 10.14 Action by the Company.............................. 20
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of March
29, 2000 is among John Wood Group PLC, a company incorporated in the United
Kingdom and registered in Scotland ("Parent"), ERC Acquisition, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and ERC
Industries, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, as of the date hereof, Parent owns 89.7% of the outstanding
shares of common stock, par value $0.01 per share, of the Company ("Company
Common Stock");
WHEREAS, the parties hereto desire to merge Merger Sub with and into
the Company (the "Merger"), with the Company surviving as a wholly owned
subsidiary of Parent, pursuant to which each share of the Company Common Stock
not owned by Parent will be converted into the right to receive $1.60 in cash;
WHEREAS, the respective Boards of Directors of Merger Sub and the
Company have determined the Merger, in the manner contemplated herein, to be
advisable and in the best interests of their respective corporations and
stockholders and to be consistent with, and in furtherance of, their respective
business strategies and goals, and, by resolutions duly adopted, have approved
and adopted this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
be merged with and into the Company in accordance with this Agreement, and the
separate corporate existence of Merger Sub shall thereupon cease. The Company
shall be the surviving corporation in the Merger (sometimes hereinafter referred
to as the "Surviving Corporation"). The Merger shall have the effects specified
in the General Corporation Law of the State of Delaware (the "DGCL").
Section 1.2 The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at the
offices of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas,
at 9:00 a.m., local time, on the first business day on which the last to be
fulfilled or waived of the conditions set forth in Article 8 shall be fulfilled
1
<PAGE>
or waived in accordance herewith or (b) at such other time, date or place as
Parent and the Company may agree. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
Section 1.3 Effective Time. If all the conditions to the Merger set
forth in Article 8 shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated as provided in Article 9,
Parent, Merger Sub and the Company shall cause a certificate of merger (the
"Certificate of Merger") meeting the requirements of section 251 of the DGCL to
be properly executed and filed in accordance with such section on the Closing
Date. The Merger shall become effective at the time of filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the DGCL, or at such later time that the parties hereto shall
have agreed upon and designated in such filing as the effective time of the
Merger (the "Effective Time").
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The certificate of
incorporation of the Company in effect immediately prior to the Effective Time
shall be the certificate of incorporation of the Surviving Corporation, until
duly amended in accordance with applicable law.
Section 2.2 Bylaws. The bylaws of the Company in effect immediately
prior to the Effective Time shall be the bylaws of the Surviving Corporation,
until duly amended in accordance with applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE
SURVIVING CORPORATION
Section 3.1 Directors of Surviving Corporation. The directors of
Merger Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation as of the Effective Time.
Section 3.2 Officers of Surviving Corporation. The officers of the
Company immediately prior to the Effective Time shall be the officers of the
Surviving Corporation as of the Effective Time.
2
<PAGE>
ARTICLE 4
EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS
Section 4.1 Effect of Merger on Capital Stock.
(a) At the Effective Time, each share of the common stock, par value
$0.01 per share, of Merger Sub outstanding immediately prior to the Effective
Time shall be converted into and become one fully paid and non-assessable share
of Common Stock, par value $0.01 per share, of the Surviving Corporation.
(b) At the Effective Time, each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other than (i)
Dissenting Shares (as defined in Section 4.3) and (ii) shares of Company Common
Stock (x) held in the Company's treasury or (y) owned by Parent, Merger Sub or
any other wholly owned Subsidiary (as defined in Section 10.13) of Parent or the
Company) shall, by virtue of the Merger and without any action on the part of
the holder thereof, be converted into the right to receive $1.60 in cash (the
"Consideration"), subject to adjustment as provided in Section 4.4.
(c) As a result of the Merger and without any action on the part of
the holder thereof, each share of Company Common Stock shall cease to be
outstanding and shall be canceled and retired and shall cease to exist, and each
holder of a certificate (a "Certificate") representing any shares of Company
Common Stock (other than (i) Dissenting Shares and (ii) shares of Company Common
Stock (x) held in the Company's treasury or (y) owned by Parent, Merger Sub or
any other wholly owned Subsidiary of Parent or the Company) shall thereafter
cease to have any rights with respect to such shares, except the right to
receive, without interest, the Consideration in accordance with Section 4.2(b)
upon the surrender of such Certificate.
(d) Each share of Company Common Stock and all other shares of capital
stock of the Company that are held in the Company's treasury, and each share of
Company Common Stock and all other shares of capital stock of the Company that
are owned by Parent, Merger Sub or any other wholly owned Subsidiary of Parent
or the Company, shall, at the Effective Time and by virtue of the Merger, cease
to be outstanding, be canceled and retired and cease to exist without payment of
any consideration therefor, and no stock of Parent or other consideration shall
be delivered in exchange therefor.
Section 4.2 Exchange of Certificates Representing
Company Common Stock.
(a) As of the Effective Time, Parent shall deposit, or shall cause to
be deposited, with an exchange agent selected by Parent (the "Exchange Agent"),
for the benefit of the holders of shares of Company Common Stock (other than
Dissenting Shares), for exchange in accordance with this Article 4, cash in an
amount equal to the total aggregate Consideration (such cash being
3
<PAGE>
hereinafter referred to as the "Exchange Fund") to be paid pursuant to Section
4.1(b) in exchange for outstanding shares of Company Common Stock.
(b) As soon as reasonably practicable after the Effective Time, Parent
shall cause the Exchange Agent to mail to each holder of record of one or more
Certificates (other than to (i) holders of Dissenting Shares and (ii) holders of
Company Common Stock that, pursuant to Section 4.1(d), are canceled without
payment of any consideration therefor): (A) a letter of transmittal (the "Letter
of Transmittal") which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify and (B) instructions for use in
effecting the surrender of the Certificates in exchange for the Consideration.
Upon surrender of a Certificate for cancellation to the Exchange Agent, together
with such Letter of Transmittal, duly executed and completed in accordance with
the instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange for each share of Company Common Stock represented by such
Certificate cash in an amount equal to the Consideration, after giving effect to
any required withholding tax, and the Certificate so surrendered shall forthwith
be canceled. No interest will be paid or accrued on the cash payable to holders
of Certificates. In the event of a transfer of ownership of Company Common
Stock which is not registered in the transfer records of the Company, the
Consideration shall be paid to such a transferee if the Certificate representing
such Company Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
(c) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent, the presented Certificates shall be canceled and exchanged for
cash in an amount equal to the Consideration deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in this
Article 4.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the former stockholders of the
Company one year after the Effective Time shall be delivered to Parent. Any
former stockholders of the Company who have not theretofore complied with this
Article 4 shall thereafter look only to Parent for payment of the Consideration
deliverable in respect of each Certificate such former stockholder holds as
determined pursuant to this Agreement.
(e) None of Parent, the Surviving Corporation, the Exchange Agent or
any other person shall be liable to any former holder of shares of Company
Common Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
4
<PAGE>
(f) Parent and the Exchange Agent shall be entitled to deduct and
withhold from the Consideration otherwise payable pursuant to this Agreement to
any holder of shares of Company Common Stock such amounts as Parent or the
Exchange Agent reasonably determines is required to be deducted and withheld
with respect to the making of such payment under the United States Internal
Revenue Code of 1986, as amended, or any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by Parent or the Exchange
Agent, such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the holder of the shares of Company Common Stock in
respect of which such deduction and withholding was made by Parent or the
Exchange Agent.
(g) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate cash in an
amount equal to the Consideration deliverable in respect thereof pursuant to
this Agreement.
Section 4.3 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, no share of Company Common Stock, the holder of which
shall not have voted shares in favor of the Merger and shall have properly
complied with the provisions of Section 262 of the DGCL as to appraisal rights
(a "Dissenting Share"), shall be deemed converted into and to represent the
right to receive the Consideration hereunder; and the holders of Dissenting
Shares, if any, shall be entitled to payment, solely from the Surviving
Corporation, of the appraised value of such Dissenting Shares to the extent
permitted by and in accordance with the provisions of Section 262 of the DGCL;
provided, however, that (i) if any holder of Dissenting Shares shall, under the
circumstances permitted by the DGCL, subsequently deliver a written withdrawal
of his or her demand for appraisal of such Dissenting Shares, (ii) if any holder
fails to establish his or her entitlement to rights to payment as provided in
such Section 262 or (iii) if neither any holder of Dissenting Shares nor the
Surviving Corporation has filed a petition demanding a determination of the
value of all Dissenting Shares within the time provided in such Section 262,
such holder or holders (as the case may be) shall forfeit such right to payment
for such Dissenting Shares pursuant to such Section 262 and each such Dissenting
Share shall thereupon be deemed to be converted into the right to receive the
Consideration.
Section 4.4 Adjustment of Consideration. In the event that, subsequent
to the date of this Agreement but prior to the Effective Time, the Company
changes the number of shares of Company Common Stock issued and outstanding as a
result of a stock split, reverse stock split, stock dividend, recapitalization
or other similar transaction without receipt of consideration with respect to
Company Common Stock, the Consideration shall be appropriately adjusted.
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Section 4.5 Treatment of Units. All units outstanding as of the
Effective Time under the Company's long-term incentive plan (the "LTIP") shall
continue in full force and effect and shall not be affected in any manner as a
result of the Merger.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent that:
Section 5.1 Existence; Good Standing; Corporate Authority. The Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation. The Company has all requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted. The copies of the Company's certificate
of incorporation and bylaws previously made available to Parent are true and
correct and contain all amendments as of the date hereof.
Section 5.2 Authorization, Validity and Effect of Agreements. The
Company has the requisite corporate power and authority to execute and deliver
this Agreement and all other agreements and documents contemplated hereby. This
Agreement and the consummation by the Company of the Merger and the other
transactions contemplated hereby has been duly authorized and approved by a
unanimous vote of a special committee of the Board of Directors of the Company
consisting solely of directors who are not affiliated with Parent (the "Special
Committee") and by all other requisite corporate action, other than, with
respect to the Merger, the approval and adoption of this Agreement by the
Company's stockholders. This Agreement constitutes the valid and legally
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
Section 5.3 Capitalization. The authorized capital stock of the
Company consists of 40,000,000 shares of Company Common Stock and 10,000,000
shares of serial preferred stock, par value $1.00 per share, of the Company
("Company Preferred Stock"). As of March 29, 2000, (i) 30,698,272 shares of
Company Common Stock and no shares of Company Preferred Stock were issued and
outstanding and (ii) no shares of Company Common Stock or Company Preferred
Stock were reserved for issuance. All such issued and outstanding shares of
Company Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. There are no outstanding shares of
capital stock and there are no options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments that obligate
the Company or any of its Subsidiaries to issue, transfer or sell any shares of
capital stock or other voting securities of the Company or any of its
Subsidiaries. The Company has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the stockholders of the Company on any matter.
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Section 5.4 No Conflict.
(a) Neither the execution and delivery by the Company of this
Agreement nor the consummation by the Company of the transactions contemplated
hereby in accordance with the terms hereof will: (i) conflict with or result in
a breach of any provisions of the certificate of incorporation or bylaws of the
Company; (ii) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or give rise to a right of purchase
under, or accelerate the performance required by, or result in the creation of
any lien upon any of the properties of the Company or its Subsidiaries under, or
result in being declared void, voidable, or without further binding effect, or
otherwise result in a detriment to the Company or any of its Subsidiaries under,
any of the terms, conditions or provisions of, any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, lease, contract,
agreement, joint venture or other instrument or obligation to which the Company
or any of its Subsidiaries is a party, or by which the Company or any of its
Subsidiaries or any of their properties is bound or affected; or (iii)
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, order or decree binding upon or applicable to
the Company or any of its Subsidiaries, except, in the case of matters described
in clause (ii) or (iii), as would not have, individually or in the aggregate, a
Company Material Adverse Effect.
(b) Neither the execution and delivery by the Company of this
Agreement nor the consummation by the Company of the transactions contemplated
hereby in accordance with the terms hereof will require any consent, approval or
authorization of, or filing or registration with, any governmental or regulatory
authority, other than (i) the filings provided for in Article 1 and (ii) filings
required the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
with respect to the meeting of the stockholders of the Company to approve and
adopt this Agreement and the transactions contemplated hereby (collectively, the
"Filings"), except for any consent, approval or authorization the failure of
which to obtain and for any filing or registration the failure of which to make
would not have a Company Material Adverse Effect.
Section 5.5 SEC Documents. The Company has made available to Parent
each registration statement, report, schedule, proxy statement or information
statement (other than preliminary materials) filed by the Company with the
Securities and Exchange Commission (the "SEC") since January 1, 1998, each in
the form (including exhibits and any amendments thereto) filed with the SEC
(collectively, the "Company Reports"). As of their respective dates, the
Company Reports (i) were prepared in all material respects in accordance with
the applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act and the rules and regulations promulgated
thereunder and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading, except for such statements, if any, as have been
modified by subsequent filings with the SEC prior to the date hereof. Each of
the consolidated balance sheets included in or incorporated by reference into
the
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Company Reports (including the related notes and schedules) fairly presents in
all material respects the consolidated financial position of the Company and its
Subsidiaries as of its date and each of the consolidated statements of income,
cash flows and changes in stockholders' equity of the Company included in or
incorporated by reference into the Company Reports (including any related notes
and schedules) fairly presents in all material respects the results of
operations, cash flows or changes in stockholders' equity, as the case may be,
of the Company and its Subsidiaries for the periods set forth therein (subject,
in the case of unaudited statements, to (x) such exceptions as may be permitted
by Form 10-Q of the SEC and (y) normal year-end audit adjustments), in each case
in accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein. Except as and to
the extent set forth on the consolidated balance sheet of the Company and its
Subsidiaries at December 31, 1998, including all notes thereto, as of such date,
neither the Company nor any of its Subsidiaries had any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on, or reserved against in, a balance
sheet of the Company or in the notes thereto prepared in accordance with
generally accepted accounting principles consistently applied, other than
liabilities or obligations which would not have, individually or in the
aggregate, a Company Material Adverse Effect.
Section 5.6 No Brokers. The Company has not entered into any contract,
arrangement or understanding with any person or firm that may result in the
obligation of the Company or Parent to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby, except that the Special Committee has retained Schroder & Co. Inc. as
its financial advisor, the arrangements with which have been disclosed in
writing to Parent prior to the date hereof.
Section 5.7 Vote Required. The affirmative vote of the holders of at
least a majority of the outstanding shares of Company Common Stock, together
with the vote contemplated by Section 8.1(a)(ii), is the only vote of the
holders of any class or series of Company capital stock necessary to approve and
adopt this Agreement and the transactions contemplated hereby.
Section 5.8 Opinion of Financial Advisor. The Special Committee has
received the opinion dated March 28, 2000 (the "Fairness Opinion") of Schroder &
Co. Inc. to the effect that, as of the date thereof, the Consideration is fair,
from a financial point of view, to the holders of the Company Common Stock other
than Parent.
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ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant to
the Company that:
Section 6.1 Existence; Good Standing; Corporate Authority. Parent and
Merger Sub are corporations duly incorporated, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation.
Parent has all requisite corporate power and authority to own, operate and lease
its properties and to carry on its business as now conducted. The copies of
Parent's certificate of incorporation and bylaws previously made available to
the Company are true and correct and contain all amendments as of the date
hereof.
Section 6.2 Authorization, Validity and Effect of Agreements. Each of
Parent and Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement and all other agreements and documents contemplated
hereby to which it is a party. This Agreement and the consummation by Parent and
Merger Sub of the transactions contemplated hereby has been duly authorized by
all requisite corporate action on the part of Parent and Merger Sub. This
Agreement constitutes the valid and legally binding obligation of each of Parent
and Merger Sub, enforceable against Parent and Merger Sub in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
Section 6.3 No Brokers. Parent has not entered into any contract,
arrangement or understanding with any person or firm that may result in the
obligation of the Company or Parent to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
Section 6.4 No Conflict.
(a) Neither the execution and delivery by Parent and Merger Sub of
this Agreement nor the consummation by Parent and Merger Sub of the transactions
contemplated hereby in accordance with the terms hereof will: (i) conflict with
or result in a breach of any provisions of the certificate of incorporation or
bylaws of Parent or Merger Sub; (ii) violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or in a right of termination or cancellation of, or give rise to
a right of purchase under, or accelerate the performance required by, or result
in the creation of any lien upon any of the properties of Parent or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, or otherwise result in a detriment to Parent or any of
its Subsidiaries under, any of the terms, conditions
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or provisions of, any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, lease, contract, agreement, joint venture or other instrument
or obligation to which Parent or any of its Subsidiaries is a party, or by which
Parent or any of its Subsidiaries or any of their properties is bound or
affected; or (iii) contravene or conflict with or constitute a violation of any
provision of any law, rule, regulation, judgment, order or decree binding upon
or applicable to Parent or any of its Subsidiaries, except, in the case of
matters described in clause (ii) or (iii), as would not have, individually or in
the aggregate, a Parent Material Adverse Effect.
(b) Neither the execution and delivery by Parent or Merger Sub of this
Agreement nor the consummation by Parent or Merger Sub of the transactions
contemplated hereby in accordance with the terms hereof will require any
consent, approval or authorization of, or filing or registration with, any
governmental or regulatory authority, other than the Filings, except for any
consent, approval or authorization the failure of which to obtain and for any
filing or registration the failure of which to make would not have a Parent
Material Adverse Effect.
Section 6.5 Merger Sub. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement and has not
engaged in any activities other than in connection with or as contemplated by
this Agreement.
Section 6.6 Financing. Parent has the financial resources to
consummate the transactions contemplated by this Agreement and to pay the total
aggregate Consideration.
ARTICLE 7
COVENANTS
Section 7.1 Conduct of Businesses. Prior to the Effective Time, except
as expressly contemplated by any other provision of this Agreement or as
required by applicable law, unless Parent has consented in writing thereto, the
Company:
(a) shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(b) shall use its reasonable best efforts, and shall cause each of
its Subsidiaries to use its reasonable best efforts, to preserve intact
their business organizations and goodwill, keep available the services of
their respective officers and employees and maintain satisfactory
relationships with those persons having business relationships with them;
(c) shall not amend its certificate of incorporation or bylaws;
(d) shall promptly deliver to Parent true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
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(e) shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof, issue any shares of its capital stock, effect any stock split
or otherwise change its capitalization as it existed on the date hereof;
(ii) grant, confer or award any option, warrant, conversion right or other
right not existing on the date hereof to acquire any shares of its capital
stock; (iii) increase any compensation or benefits, except in the ordinary
course of business consistent with past practice, or enter into or amend
any employment agreement with any of its present or future officers or
directors, except with new employees consistent with past practice; or (iv)
adopt any new employee benefit plan (including any stock option, stock
benefit or stock purchase plan) or amend (except as required by law) any
existing employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans;
(f) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or (ii) redeem, purchase or otherwise acquire any shares of its
capital stock or capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(g) shall not, and shall not permit any of its Subsidiaries to, sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) that are material to the Company, individually or in the
aggregate, except in the ordinary course of business;
(h) shall not, nor shall it permit any of its Subsidiaries to, agree
in writing or otherwise to take any of the foregoing actions; and
(i) shall not take any action that is likely to delay materially or
adversely affect the ability of any of the parties hereto (i) to obtain any
consent, authorization, order or approval of any governmental commission,
board or other regulatory body or (ii) to consummate the Merger.
Section 7.2 Meetings of Stockholders.
(a) The Company will take all action necessary in accordance with
applicable law and its certificate of incorporation and bylaws to convene a
meeting of its stockholders as promptly as practicable to consider and vote upon
the approval and adoption of this Agreement and the Merger.
(b) The Company, through the Special Committee, shall recommend
approval of such matters subject to the determination by the Board of Directors
of the Company after consultation with counsel that recommending approval of
such matters would not be inconsistent with its fiduciary obligations.
Additionally, the Special Committee may at any time prior to the Effective Time
withdraw, modify, or change any recommendation and declaration regarding this
Agreement or the Merger if in the opinion of the Special Committee after
consultation with its
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counsel the failure to so withdraw, modify, or change its recommendation and
declaration would be inconsistent with its fiduciary obligations.
Section 7.3 Proxy Statement.
(a) Each of Parent and the Company shall cooperate and promptly
prepare and the Company shall file as soon as practicable with the SEC under the
Exchange Act a proxy statement with respect to the meeting of the stockholders
of the Company to approve and adopt this Agreement and the transactions
contemplated hereby (the "Proxy Statement"). The respective parties will cause
the Proxy Statement to comply as to form in all material respects with the
applicable provisions of the Exchange Act and the rules and regulations
promulgated thereunder, including Rule 13e-3. The Company will advise Parent,
promptly after it receives notice thereof, of any request by the SEC for
amendment of the Proxy Statement or comments thereon and responses thereto or
requests by the SEC for additional information.
(b) The Company will use its reasonable best efforts to cause the
Proxy Statement to be mailed to its stockholders as promptly as practicable
after the date hereof.
(c) Each of Parent and the Company agrees that the information
provided by it for inclusion in the Proxy Statement and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the
meeting of stockholders of the Company, (i) will not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) will comply
as to form in all material respects with the provisions of the Exchange Act.
(d) As soon as practicable after the date of this Agreement, Parent,
Merger Sub and the Company shall file with the SEC a Rule 13E-3 Transaction
Statement on Schedule 13E-3 ("Schedule 13E-3"), with respect to the Merger.
Each of the parties hereto agrees to use its reasonable best efforts to
cooperate and to provide each other with such information as any of such parties
may reasonably request in connection with the preparation of the Schedule 13E-3.
Each party hereto agrees promptly to supplement, update and correct any
information provided by it for use in the Schedule 13E-3 if and to the extent
that it is or shall have become incomplete, false or misleading.
Section 7.4 Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses.
Section 7.5 Consents. Each of the Company and Parent shall cooperate,
and use its reasonable best efforts, to make all filings and obtain all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of governmental authorities and other third parties necessary to
consummate the transactions contemplated by this Agreement.
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Section 7.6 Publicity. The parties will consult with each other and
will mutually agree upon any press releases or public announcements pertaining
to this Agreement or the transactions contemplated hereby and shall not issue
any such press releases or make any such public announcements prior to such
consultation and agreement, except as may be required by applicable law or by
obligations pursuant to any listing agreement with any national securities
exchange, in which case the party proposing to issue such press release or make
such public announcement shall use its best efforts to consult in good faith
with the other party before issuing any such press releases or making any such
public announcements.
Section 7.7 Indemnification; Insurance.
(a) From and after the Effective Time, Parent shall cause the
Surviving Corporation to indemnify, defend and hold harmless to the fullest
extent permitted under applicable law each person who is now, or has been at any
time prior to the date hereof, an officer or director of the Company or any
Subsidiary thereof (individually, an "Indemnified Party" and, collectively, the
"Indemnified Parties") against all losses, claims, damages, liabilities, costs
or expenses (including reasonable attorneys' fees), judgments, fines, penalties
and amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to acts or omissions,
or alleged acts or omissions, with respect to matters occurring through the
Effective Time, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Time. In the event of any such claim,
action, suit, proceeding or investigation (an "Action"), (i) Parent shall cause
the Surviving Corporation to pay, as incurred, the reasonable fees and expenses
of counsel selected by the Indemnified Party, which counsel shall be reasonably
acceptable to the Surviving Corporation, in advance of the final disposition of
any such Action to the fullest extent permitted by applicable law, upon receipt
of any undertaking required by applicable law, and (ii) Parent shall cause the
Surviving Corporation to cooperate in the defense of any such matter; provided,
however, the Surviving Corporation shall not be liable for any settlement
effected without its written consent, and provided further that the Surviving
Corporation shall not be obligated pursuant to this Section 7.7 to pay the fees
and disbursements of more than one counsel for all Indemnified Parties in any
single Action, unless, in the opinion of counsel for any of the Indemnified
Parties, there is a conflict of interests between two or more of such
Indemnified Parties.
(b) The parties agree that the rights to indemnification, including
provisions relating to advances of expenses incurred in defense of any action or
suit, in the certificate of incorporation and bylaws of the Company with respect
to matters occurring through the Effective Time, shall survive the Merger and
shall continue in full force and effect for a period of six years from the
Effective Time; provided, however, that all rights to indemnification in respect
of any Action pending or asserted within such period shall continue until the
disposition of such Action.
(c) For a period of six years after the Effective Time, Parent shall
cause to be maintained officers' and directors' liability insurance covering the
Indemnified Parties who are currently covered, in their capacities as officers
and directors, by Parent's existing officers' and directors' liability insurance
policies on terms substantially no less advantageous to the Indemnified
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Parties than such existing insurance, with respect to matters occurring through
the Effective Time; provided that Parent shall not be required to pay annual
premiums in excess of the last annual premium paid by Parent prior to the date
hereof, but in such case shall purchase as much coverage as reasonably
practicable for such amount.
(d) The rights of each Indemnified Party hereunder shall be in
addition to any other rights such Indemnified Party may have under the
certificate of incorporation or bylaws of the Company, under the DGCL, under
indemnity agreements with the Company existing on the date hereof or otherwise.
The provisions of this Section 7.7 shall survive the consummation of the Merger
and expressly are intended to benefit each of the Indemnified Parties.
ARTICLE 8
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) This Agreement and the Merger shall have been adopted and
approved by the affirmative vote of (i) holders of a majority of the issued
and outstanding shares of Company Common Stock entitled to vote thereon and
(ii) holders of a majority of the issued and outstanding shares of Company
Common Stock not owned, directly or indirectly, by Parent that are entitled
to vote thereon and that are voting for or against the matter in person or
by proxy at the meeting of stockholders of the Company called for such
purpose.
(b) None of the parties hereto shall be subject to any decree, order
or injunction of a court of competent jurisdiction, U.S. or foreign, which
prohibits the consummation of the Merger; provided, however, that prior to
invoking this condition each party agrees to use its reasonable best
efforts to have any such decree, order or injunction lifted or vacated; and
no statute, rule or regulation shall have been enacted by any governmental
authority which prohibits or makes unlawful the consummation of the Merger.
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) Parent shall have performed in all material respects its
covenants and agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of Parent and Merger Sub contained in this Agreement and in any
document delivered in connection herewith shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date (except for representations and warranties made as of a specified
date, which need be true and correct in all material respects only as of
the specified date), and the Company shall have received
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a certificate of the Parent, executed on its behalf by its President or a
Vice President of Parent, dated the Closing Date, certifying to such
effect.
(b) At any time after the date of this Agreement, there shall not
have been any event or occurrence that has had or is likely to have a
Parent Material Adverse Effect.
(c) At the time of the mailing of the Proxy Statement to the
stockholders of the Company and at the Effective Time, Schroder & Co. Inc.
shall not have withdrawn the Fairness Opinion.
Section 8.3 Conditions to Obligation of Parent and Merger Sub to
Effect the Merger. The obligations of Parent and Merger Sub to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions:
(a) The Company shall have performed in all material respects its
covenants and agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of the Company contained in this Agreement and in any document
delivered in connection herewith shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date
(except for representations and warranties made as of a specified date,
which need be true and correct in all material respects only as of the
specified date), and Parent shall have received a certificate of the
Company, executed on its behalf by its President or a Vice President of the
Company, dated the Closing Date, certifying to such effect.
(b) At any time after the date of this Agreement, there shall not
have been any event or occurrence that has had or is likely to have a
Company Material Adverse Effect.
ARTICLE 9
TERMINATION
Section 9.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Effective Time by the mutual written consent
of the Company and Parent.
Section 9.2 Termination by Parent or the Company. This Agreement may
be terminated by Parent or the Company if:
(a) a meeting (including adjournments and postponements) of the
Company's stockholders for the purpose of obtaining the approvals required
by Section 8.1(a) shall have been held and such stockholder approvals shall
not have been obtained; or
(b) a court of competent jurisdiction (U.S. or foreign) or a U.S. or
foreign governmental, regulatory or administrative agency or commission
shall have issued an order,
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decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
provided, however, that the party seeking to terminate this Agreement
pursuant to this clause (b) shall have used its reasonable best efforts to
remove such injunction, order or decree.
Section 9.4 Termination by the Company. This Agreement may be
terminated prior to the Effective Time, by action of the Board of Directors of
the Company, if (i) there has been a breach by Parent or Merger Sub of any
representation, warranty, covenant or agreement set forth in this Agreement or
if any representation or warranty of Parent or Merger Sub shall have become
untrue, in either case such that the conditions set forth in Section 8.2(a)
would not be satisfied and (ii) such breach is not curable, or, if curable, is
not cured within 30 days after written notice of such breach is given to Parent
by the Company; provided, however, that the right to terminate this Agreement
pursuant to this Section 9.3 shall not be available to the Company if it, at
such time, is in material breach of any representation, warranty, covenant or
agreement set forth in this Agreement such that the condition set forth in
Section 8.3(a) shall not be satisfied.
Section 9.4 Termination by Parent. This Agreement may be terminated at
any time prior to the Effective Time, by action of the Board of Directors of
Parent, if:
(a) (i) there has been a breach by the Company of any representation,
warranty covenant or agreement set forth in this Agreement or if any
representation or warranty of the Company shall have become untrue, in
either case such that the conditions set forth in Section 8.3(a) would not
be satisfied and (ii) such breach is not curable, or, if curable, is not
cured within 30 days after written notice of such breach is given by Parent
to the Company; provided, however, that the right to terminate this
Agreement pursuant to this Section 9.4(a) shall not be available to Parent
if it, at such time, is in material breach of any representation, warranty,
covenant or agreement set forth in this Agreement such that the conditions
set forth in Section 8.2(a) shall not be satisfied; or
(b) the Board of Directors of the Company or the Special Committee
shall have withdrawn or materially modified, in a manner adverse to Parent,
its approval or recommendation of the Merger, or resolved to do so.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement and the abandonment of the Merger pursuant to this Article 9, all
obligations of the parties hereto shall terminate, except the obligations of the
parties pursuant to this Section 9.5 and Section 7.4 and except for the
provisions of Sections 10.3, 10.4, 10.6, 10.8, 10.9, 10.11 and 10.12, provided
that nothing herein shall relieve any party from any liability for any willful
and material breach by such party of any of its covenants or agreements set
forth in this Agreement and all rights and remedies of such nonbreaching party
under this Agreement in the case of such a willful and material breach, at law
or in equity, shall be preserved.
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Section 9.6 Extension; Waiver. At any time prior to the Effective
Time, each party may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 10
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations, Warranties and
Agreements. All representations, warranties and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall not survive the
Merger; provided, however, that the agreements contained in Article 4, in
Sections 7.4 and 7.7 and this Article 10 shall survive the Merger.
Section 10.2 Notices. Any notice required to be given hereunder shall
be sufficient if in writing, and sent by facsimile transmission or by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(a) if to Parent or Merger Sub:
John Wood Group PLC
John Wood House
East Tullos
Greenwell Road
Aberdeen, Scotland
AB12 3AX
Attention: General Counsel
Facsimile: 011-44-1-224-851-110
with a copy to:
J. David Kirkland, Jr., Esq.
Baker Botts L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Facsimile: (713) 229-1522
17
<PAGE>
(b) if to the Company:
ERC Industries, Inc.
1441 Park Ten Boulevard
Houston, Texas 77084
Attention: President
Facsimile: (281) 398-8086
with a copy to:
Bryce D. Linsenmayer
Haynes and Boone, LLP
1000 Louisiana, Suite 4300
Houston, Texas 77002-5012
Facsimile: (713) 547-2600
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 10.3 Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
of Article 4 and Section 7.7, nothing in this Agreement, expressed or implied,
is intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Article 4 and Section 7.7 may be enforced by the beneficiaries
thereof.
Section 10.4 Entire Agreement. This Agreement and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
Section 10.5 Amendments. This Agreement may be amended by the parties
hereto (in the case of the Company, only if authorized by the Special
Committee), at any time before or after approval of matters presented in
connection with the Merger by the stockholders of the Company, but after any
such stockholder approval, no amendment shall be made which by law requires the
further approval of stockholders without obtaining such further approval. This
18
<PAGE>
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 10.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws. Each of the Company and Parent hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the State of Delaware and of the United States of America
located in the State of Delaware (the "Delaware Courts") for any litigation
arising out of or relating to this Agreement and the transactions contemplated
hereby (and agrees not to commence any litigation relating thereto except in
such courts), waives any objection to the laying of venue of any such litigation
in the Delaware Courts and agrees not to plead or claim in any Delaware Court
that such litigation brought therein has been brought in an inconvenient forum.
Section 10.7 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all of the
parties hereto.
Section 10.8 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretative effect whatsoever.
Section 10.9 Interpretation.
In this Agreement:
(a) Unless the context otherwise requires, words describing the
singular number shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa.
(b) The phrase "to the knowledge of" and similar phrases relating to
knowledge of the Company or Parent, as the case may be, shall mean the actual
knowledge of its executive officers.
(c) "Company Material Adverse Effect" shall mean a material adverse
effect or change on (a) the business or financial condition of the Company and
its Subsidiaries on a consolidated basis, except for such changes or effects in
general economic, capital market, regulatory or political conditions or changes
that affect generally the energy services industry, or (b) the ability of the
Company to consummate the transactions contemplated by this Agreement or fulfill
the conditions to Closing.
19
<PAGE>
(d) "Parent Material Adverse Effect" shall mean a material adverse
effect or change on the ability of Parent to consummate the transactions
contemplated by this Agreement or fulfill the conditions to Closing.
Section 10.10 Waivers. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
Section 10.11 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broadly as is enforceable.
Section 10.12 Obligation of Parent. Whenever this Agreement requires
Merger Sub (or its successors) to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause Merger Sub to
take such action and a guarantee of the performance thereof.
Section 10.13 Subsidiaries. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner; provided, however, that for purposes of this Agreement,
prior to the Effective Time, neither the Company nor any of its Subsidiaries
shall be deemed a Subsidiary of Parent.
Section 10.14 Action by the Company. Any action permitted to be
taken by the Company pursuant to Article VIII or IX shall be taken only if
authorized by the Special Committee prior thereto.
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day and year first
written above.
JOHN WOOD GROUP PLC
By: /s/ Wendell Brooks
--------------------------------------
Name: Wendell Brooks
Title: Director
ERC ACQUISITION, INC.
By: /s/ Wendell Brooks
--------------------------------------
Name: Wendell Brooks
Title: President
ERC INDUSTRIES, INC.
By: /s/ Alan Senn
--------------------------------------
Name: Alan Senn
Title: President
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