-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VBhdUq3BZsccNiXhUxvsc9JarE2KnGsEnOaTsugLz0E/N9MmhgNzvy1UGPmKk+26 0+7l7QSBLpbdLqmYkOj80w== 0000899243-97-000562.txt : 19970401 0000899243-97-000562.hdr.sgml : 19970401 ACCESSION NUMBER: 0000899243-97-000562 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERC INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000775477 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 760382879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14439 FILM NUMBER: 97571021 BUSINESS ADDRESS: STREET 1: 2906 HOLMES RD CITY: HOUSTON STATE: TX ZIP: 77051 BUSINESS PHONE: 7137339301 MAIL ADDRESS: STREET 2: 2906 HOLMES RD CITY: HOUSTON STATE: TX ZIP: 77051 FORMER COMPANY: FORMER CONFORMED NAME: ERC CORP /DE/ DATE OF NAME CHANGE: 19851103 10-K 1 FORM 10-K 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, 1996 ------------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-14439 --------------------------------------------------------- ERC INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 76-0382879 - --------------------------------------- ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 15835 Park Ten Place, Suite 115 Houston, Texas 77084 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code (281) 398-8901 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 13, 1997 was $4,345,784. The number of shares outstanding of the registrant's common stock, as of February 28, 1997 was 21,248,272. Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement relating to its 1996 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. ERC INDUSTRIES, INC. TABLE OF CONTENTS PART I
PAGE Item 1. Business................................................ 3 Item 2. Properties.............................................. 8 Item 3. Legal Proceedings....................................... 9 Item 4. Submission of Matters to a Vote of Security Holders..... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... 10 Item 6. Selected Financial Data................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 12 Item 8. Consolidated Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 14 PART III Item 10. Directors and Executive Officers of the Registrant...... 15 Item 11. Executive Compensation.................................. 15 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 15 Item 13. Certain Relationships and Related Transactions.......... 15 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K................................. 16 Signatures.......................................................... 19
PART I ITEM 1. BUSINESS GENERAL ERC Industries, Inc., a Delaware corporation (the "Company"), is an oilfield service company engaged in the manufacture, remanufacture and servicing of oilfield wellhead equipment. In October of 1992, the Company's predecessor, ERC Industries, Inc., a Delaware corporation ("Old ERC") incorporated the Company as a wholly owned subsidiary. Old ERC merged into this wholly owned subsidiary after the stockholders of Old ERC approved the transaction at a special meeting held on April 16, 1993. Effective with the merger, the Company changed its name to ERC Industries, Inc. On December 10, 1992, John Wood Group PLC ("Wood Group"), a corporation registered in Scotland and incorporated under the Companies Act of the United Kingdom, completed the purchase of approximately 47% of the issued and outstanding shares of Common Stock of Old ERC. On November 16, 1993, the Company entered into an agreement with Barton Industries, Inc. ("Barton") of Shawnee, Oklahoma, and three creditors of Barton. The agreement provided for the purchase of Barton's valve business and certain of its assets. On June 6, 1996, 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, 7,384,616 shares of the Company's common stock, par value $0.01 per share. The aggregate purchase price for the shares was $6,000,000, or $0.8125 per share. Following this transaction the Wood Group owns approximately 85% of the Company. On September 27, 1996, the Company acquired 100% of the issued and outstanding capital shares of Seaboard Lloyd Limited ("Seaboard"), a private company incorporated in Scotland under the Companies Acts of the United Kingdom. The business of Seaboard is the manufacture, supply, repair, maintenance and refurbishment of wellheads, xmas 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"). The Business is operated in one facility located in Cumbernauld, Scotland. The Company plans to continue to operate the Business in substantially the same manner as it was operated prior to the acquisition. In January 1997, the Company and all of its subsidiaries began conducting business under the name of Wood Group Pressure Control. - 3 - OPERATIONS The equipment and components offered by the Company are comprised of items manufactured by the Company in its own facilities, consisting principally of wellhead equipment and valves, and items acquired and reconditioned under the Company's wellhead management program and new products acquired from other manufacturers. The services offered by the Company consist of reconditioning out-of-service equipment for others, installations and repairs. The Company also leases certain oilfield equipment to customers. ERC'S ORIGINAL BUSINESS Old ERC's predecessor, Equipment Renewal Company, was founded in 1962 based on the concept of remanufacturing and reemploying used, out-of-service wellhead equipment. Wellhead equipment is designed to support the casing and production pipe on a completed well and includes casing heads, tubing heads and casing and tubing hangers. Valves are assembled with other components into a device known as the "Christmas Tree" which is mounted on the wellhead equipment and is used to control pressure and the flow of oil and gas from producing wells. A substantial portion of the Company's oilfield equipment business is conducted through surplus wellhead equipment management programs. Under these programs, the Company collects out-of-service equipment at the wellhead or accepts delivery from a given customer at a branch location. All equipment is inspected by the Company and classified based upon its condition and degree of obsolescence upon receipt at the Company's service center. If deemed salvageable, the equipment is cleaned and disassembled, and, if needed, heat treated. Components are either replaced or repaired, usually by machining and welding. The equipment is then remachined on the Company's lathes, boring mills, radial drills, milling machines and grinding machines to new equipment standards. The reconditioned equipment may then be reemployed by the customer in accordance with its requirements. Reconditioned equipment is accompanied by a warranty similar to a manufacturer's warranty. The customer is charged for this reconditioning service based on an established price schedule, in addition to charges for receiving, inspecting and classifying the equipment. If the customer so desires, the Company may purchase the customer's used equipment for resale to other customers. The resale price of the equipment is typically based upon a percentage of the current list price of new equipment. The payment for the customer's equipment may be in the form of a merchandise credit to be applied towards future purchases by that customer. The branches, sales and service offices of the Company act, in part, as clearing houses for oilfield operators. If the operator, at a particular location, requires a unique component held by the Company on behalf of another customer, the Company may contact the customer and effect a purchase from the customer that has the equipment and then resell the equipment to the customer that is in need of it. - 4 - In addition to remanufacturing customer equipment, the Company purchases used equipment for its own account from various sources which it then remanufactures for sale. BUSINESS DEVELOPMENT AND ACQUISITIONS The addition of Barton in 1993 and Seaboard in 1996 has expanded the Company's capabilities and it is now able to offer 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 API to distribute its products with the API monogram in accordance with API Specification 6A (wellhead valves), Specification 6D (pipeline valves) and Specification 14D (surface safety valves for offshore use). The use of API monogram is considered by management to be essential to compete successfully in the oil and gas valve market. The Company's manufacturing facilities in Shawnee, Oklahoma and Cumbernauld, Scotland are ISO 9001 registered, as well as API 6A and 14D certified. To manufacture products, the plant purchases major raw material components from foundries, forging houses, and steel suppliers, then machines 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's strategy, with regard to both acquisitions made to date, has been to continue expanding its presence in the domestic market as well as to advance its presence in the international market. ERC now operates in Aberdeen, Cumbernauld, London, Abu Dhabi, Jordan, Saudi Arabia, Germany, Australia and Venezuela. These locations are managed by seasoned industry professionals with many years of international experience. This local presence has generated a high degree of customer interest and a growing backlog. The Company intends to focus on increasing international sales in 1997. As of March 1997, the Company's wellhead and related equipment operations are conducted from 22 domestic locations, 9 international locations, and 2 distributorships. The Company's manufacturing facilities are located in Shawnee, Oklahoma and Cumbernauld, Scotland. ENGINEERING RESEARCH AND DEVELOPMENT The Company is involved in an active R & D program. It expects to file for and receive patents on new products aimed at growth in target geographic and product markets. New wellhead products were launched during 1996 that enable additional market participation. Additionally, value engineering projects focused on a broad range of cost reductions in 1996. - 5 - 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 at various times through 2003. The Company believes that its patents and trademark/service mark are important to its marketing efforts. SALES AND MARKETING The company conducts its operations in the United States from Branch facilities located in most major oil and gas producing areas requiring wellhead equipment. Each Branch maintains inventory for local customer requirements, trained service technicians, and machine shop capability to provide quick delivery. Each Branch 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 maintained in metropolitan areas where customers are typically headquartered or maintain regional offices. The Company's marketing program emphasizes providing complete supply chain management of wellhead and valve requirements for our customers. This program includes repair of customer equipment, sale of re-manufactured equipment, sale of new equipment, maintenance services, and a broad distribution network of Branch locations and sales offices to provide prompt local service and support. COMPETITION Oilfield equipment is sold by many manufacturers, distributors and dealers, including offering used equipment. 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. In offering its programs, the Company emphasizes its ability to provide reconditioned oilfield equipment at favorable prices while at the same time performing services which the customer would otherwise have to perform at a substantial cost and inconvenience. Numerous companies, some of which have substantially greater resources than the Company, are engaged primarily in the manufacturing, installation and maintenance of wellheads, valves and drilling equipment as well as other types of oilfield equipment. In addition, some foreign manufacturers make only valves. Over the past several years, severe price competition has continued to have a substantial impact on profit margins. There is no assurance that these trends will not continue in the future. - 6 - 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 environment. EMPLOYEES As of February 26, 1997, the Company had 456 employees, as compared to 284 employees as of February 23, 1996. No employees of the Company are represented by a union. CUSTOMERS Conoco Incorporated accounted for approximately 10% of the Company's total revenues in 1996. The Company had no customers that comprised 10% or more of its 1995 and 1994 sales. - 7 - ITEM 2. PROPERTIES Set forth below is certain information as of December 31, 1996, regarding the Company's headquarters, manufacturing and other facilities, most of which are located on leased premises. Lease Location Expiration Date -------- --------------- Manufacturing - Shawnee, Oklahoma (Leased)(1) February 28, 1998 Cumbernauld, Scotland (Owned)(2) 7 Branch Offices and Various through Machine Shops (Leased)(3) December 21, 2000 6 Branch Offices and Machine Shops (Owned) 4 Sales Offices Various through (Owned and Leased) January 31, 1997 4 Sales and Service Various through Offices (Leased)(3) October 31, 1997 8 International Sales and Service Various through Offices (Leased)(3) July 14, 1997 - ------------------- (1) The Shawnee, Oklahoma facility is an 89,000 square foot building plus an additional five acres contiguous to the property. The real property lease provides the Company with an option to purchase the real property including the building at any time during the life of the 51-month lease term for $1,320,000 plus a price escalation of 3.25% per year from the consummation date to the date of exercise. (2) The manufacturing facility at Cumbernauld, Scotland is a 31,000 square foot building on a total site of 3 acres. (3) Most of these leases are on a month-to-month basis. The Company does not expect the expiration of any of these leases to have a material adverse effect on its operations. See Note 8 to the Consolidated Financial Statements. - 8 - 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 as 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, 1996. - 9 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is included on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The following table sets forth the high and low reported bid prices for the Company's Common Stock as reported by NASDAQ by fiscal quarter from January 1, 1995 through December 31, 1996. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ----- ----- FISCAL YEAR ENDED DECEMBER 31, 1995 January 1, 1995 - March 31, 1995..... $0.88 $0.81 April 1, 1995 - June 30, 1995........ $0.88 $0.63 July 1, 1995 - September 30, 1995.... $1.00 $0.63 October 1, 1995 - December 31, 1995.. $1.00 $0.69 FISCAL YEAR ENDED DECEMBER 31, 1996.... January 1, 1996 - March 31, 1996..... $1.06 $0.75 April 1, 1996 - June 30, 1996........ $1.06 $0.75 July 1, 1996 - September 30, 1996.... $1.56 $0.63 October 1, 1996 - December 31, 1996.. $2.50 $0.97 As of March 17, 1997, there were 715 holders of record of the Company's Common Stock, as reported by the Company's transfer agent for its Common Stock. As of March 13, 1997, the closing price of the Common Stock as reported on NASDAQ was $1.38 per share. The present policy of the Board of Directors is to retain earnings to provide operating funds for the Company. As a result, the Company has not paid dividends and does not intend to do so in the foreseeable future. The terms of the Company's line of credit also restricts the ability of the Company to pay cash dividends. See Note 5 to the Consolidated Financial Statements. The trading symbol under which the Common Stock trades is "ERCI". During the fourth quarter of 1996, the Company made no unregistered sales of securities. - 10 - ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
Eleven Months Years Ended Ended Year Ended December 31, December 31, January 31, ----------------------------- ------------ ----------- 1996(2)(3) 1995(2) 1994(2) 1993(2) 1993 ------------------------------------------------------- Revenues............................................................. $50,961 $34,840 $32,926 $23,167 $19,656 (Loss) income before provision for income taxes...................... $ 1,588 $(1,048) $ 628 $ 1,157 $ 378 (Benefit) provision for income taxes(1).............................. $ 573 $ (273) $ 264 $ 421 $ 149 Net (loss) income.................................................... $ 1,015 $ (775) $ 364 $ 736 $ 229 Net (loss) income per common share................................... $ .06 $ (.06) $ .03 $ .05 $ .02 Total assets......................................................... $35,309 $20,879 $19,119 $17,375 $12,014 Total long-term debt including a portion classified as a current liability........................................................... $ 5,121 $ 4,602 $ 3,325 $ 2,852 $ 472 Working capital...................................................... $12,099 $ 6,650 $ 7,937 $ 7,641 $ 6,014 Shareholder's equity(1).............................................. $17,621 $ 9,913 $10,683 $10,192 $ 8,647 Capital expenditures................................................. $ 1,420 $ 567 $ 1,024 $ 768 $ 297 Cash dividends per share............................................. none none none none none
(1) The Company's net operating loss carryforwards substantially reduce the federal income taxes paid by the Company. The Company reports these reductions of income taxes paid as an increase to additional paid-in-capital conforming to the current accounting rules for quasi-reorganized companies. (2) Includes effects of the Barton Wood acquisition completed on November 16, 1993. (3) Includes effects of Seaboard Lloyd Limited acquisition completed on September 27, 1996. - 11 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Industry wide, the average active domestic rig count as reported by Baker Hughes Incorporated increased 17.7% to an average of 851 in 1996, as compared to 723 in 1995 and 775 in 1994. The active domestic rig count as of March 7, 1997 was 838. The average active rig count is a clear indicator of the market in which the Company operates, based on prior years' experience. RESULTS OF OPERATIONS (IN THOUSANDS) 1996 AS COMPARED TO 1995 AND 1995 AS COMPARED TO 1994 The Company's revenues increased by 46.3% to $50,961 in 1996 compared with $34,840 in 1995. 1995's revenues increased 5.8% to $34,840 compared with $32,926 for 1994, despite a decrease in the rig count. 1996 revenues increased by $16,121 over 1995 due to an increase in customer activity, market share gains, and sales generated at Seaboard. This acquisition added approximately $2,571 in 1996 revenues. 1995 revenues increased over 1994 due to market share gains and increased sales activity. In connection with revenues over the three year period, cost of goods sold were $38,787 in 1996, $27,399 in 1995, and $25,058 in 1994. The gross profit percentage was 23.9% in 1996, compared with 21.4% in 1995 and 23.9% in 1994. 1996 gross profit increased as compared to 1995 due to process improvements at the manufacturing facility which created cost reductions, as well as fewer repairs and maintenance expenses at the facility. The decrease in 1995 gross profit as compared with 1994 was due to unfavorable manufacturing cost variances at the manufacturing facility and certain relocation and severance expenses. Selling, General and Administrative expenses ("SG&A") increased by $2,043 to $10,159 in 1996 compared with $8,116 in 1995. This increase is due to costs incurred to open additional domestic sales offices, increases in international and domestic sales personnel, and the addition of Seaboard Lloyd in 1996. SG&A, as a percentage of sales, was 19.9% in 1996 and 23.3% in 1995. This decrease was due to sales growth in excess of growth in fixed SG&A costs. SG&A increased to $8,116 in 1995 compared with $7,037 in 1994. Contributing to the increase was additional international sales personnel and the related expenses to advance new business and support continuing business. SG&A, as a percentage of sales, was 23.3% in 1995 and 21.4% in 1994. - 12 - Net income before provision for income tax was $1,588 in 1996, compared to net loss of $1,048 in 1995. The increase in 1996 is primarily due to increased sales at higher gross margins, and reduced interest expense, partially offset by increased SG&A costs incurred to open additional domestic sales offices, and increases in international sales personnel. Loss before provision for income taxes was $1,048 in 1995 compared to net income of $628 in 1994. The decrease in 1995 was primarily due to three factors: (i) increased sales at lower gross margins, (ii) increased SG&A costs incurred to open additional domestic sales offices, increases in international sales personnel, and certain relocation and severance expenses, and (iii) increased interest expenses due to a higher borrowing level to support increased inventory levels. 1996, 1995 and 1994 include provision/(benefit) for income taxes of $573, ($273), and $264, respectively. Of these amounts, $796, $5, and $127, respectively, represent non-cash charges which reflect the income tax benefit of the utilization of the Company's NOL Carryforwards arising prior to a quasi- reorganization, and are included in the respective balance sheets as increases in additional paid-in capital. LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) Working capital increased to $12,099 at December 31, 1996 compared with $6,650 at December 31, 1995. This improvement is primarily the result of increases in accounts receivable and inventory resulting from higher sales activity, that were primarily funded by the proceeds of the stock sold to the Wood Group. The Company amended its domestic line of credit in June 1996, effectively increasing its line of credit to $5 million. The loan facility now provides for maximum borrowings of the lesser of $5 million or eligible trade accounts receivable and inventory (as defined in the line of credit). Interest on outstanding balances are payable monthly at the bank's prime rate minus three quarters of one percent. At December 31, 1996, the bank's prime rate was 8.25%. The loan facility requires the Company to maintain a ratio of total indebtedness to tangible net worth of no greater than 1.2 to 1.0. Additionally, the terms of the agreement restrict the Company from paying cash dividends. The facility is collateralized by trade accounts receivable and inventory. At December 31, 1996, loan amounts outstanding under the agreement were $1.0 million. In addition, the Company had outstanding, against the revolving line of credit, irrevocable letters of credit amounting to $233. At December 31, 1996, the Company's maximum amount available for additional borrowings was $3,767. The Company also has a line of credit overdraft facility in Scotland, which expires in September 1997 and provides a line of credit of three million pounds (approximately $5.1 million at December 31, 1996). The line of credit is used for the purpose of general working capital requirements and provides overdraft, acceptance credit, loan and documentary credit facilities. Interest payable on the overdraft facility is equal to the Bank's Base - 13 - rate plus 1 percent per annum. At December 31, 1996, the bank's base rate was 6.0%. This credit agreement is collateralized by substantially all of the assets of Seaboard and is guaranteed by ERC Industries, Inc. At December 31, 1996, amounts outstanding under the various facilities were: overdraft, $1,712; guarantees and letters of credit, $1,645. At December 31, 1996, the Company's maximum amount available for additional borrowings was $1,776. Pursuant to the Company's long-term debt agreements, $3,295 in principal payments are due over the next twelve months. The Company believes its line of credit facility, combined with cash generated from operations, will be adequate to fund its operations for at least the next twelve months. The Company currently anticipates incurring capital expenditures of $3,500 principally for machinery and equipment, plant improvements and vehicle purchases, through the fiscal year ending December 31, 1997. The Company expects to fund these expenditures from amounts available under the line of credit facility, cash provided by operations and/or capital lease transactions. Numerous companies, some of which have substantially greater resources than the Company, are engaged primarily in the manufacturing, installation and maintenance of wellheads, valves and drilling equipment as well as other types of oilfield equipment. In addition, some foreign manufacturers make only valves. Over the past several years, severe price competition has continued to have a substantial impact on profit margins. There is no assurance that these trends will not continue in the future. CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS Certain information contained herein in Item 1 - "Business" and in Item 7 - "Management's Discussion and Analysis of Financial Conditions and Results of Operations" may be deemed to be forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provision in that enacted legislation. These statements are based on current expectations and involve a number of risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements as a result of various factors including, but not limited to the following: expectations of operating levels at the Company's facilities, expectations of the future customer and product mix, retention of major customers, competition and the Company's position in the market, discussions about future costs, the overall oil and gas market and timing of capital expenditures. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 14 for Index to Consolidated Financial Statements and Schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 14 - 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 1996 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears under the caption "Directors and Executive Officers" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears under the caption "Executive Compensation" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the caption "Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Certain Transactions" in the definitive Proxy Statement, which information is incorporated herein by reference. - 15 - 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, 1996 and 1995.................. F-2 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994.............................................................. F-3 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994........................................... F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994.............................................................. F-5 Notes to Consolidated Financial Statements................................... F-6 Consolidated Financial Statement Schedules: Schedule II - Valuation And Qualifying Accounts.............................. F-16
All other schedules are omitted since the required information is either (a) not present or not present in amounts sufficient to require submission of the schedule, or (b) because the information required is included in the financial statements or notes thereto. 3. Exhibits: 2. (a) Agreement dated July 20, 1993 by and among ERC Industries, Inc., Barton Industries, Inc., American Bank & Trust Company, American National Bank and Trust Company, and Oklahoma Industrial Finance Authority, filed as Exhibit (c)(1) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. - 16 - (b) First Modification Agreement between ERC Industries, Inc. and American Bank & Trust Company, filed as Exhibit (c)(2) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. (c) Real Property Lease Agreement dated November 15, 1993 between American National Bank and Trust Company and ERC Industries, Inc. and Second Modification Agreement dated November 2, 1993, filed as Exhibit (c)(3) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. (d) Equipment Lease Agreement dated November 15, 1993 between Oklahoma Industrial Finance Authority and ERC Industries, Inc. and Third Modification Agreement, filed as Exhibit (c)(4) to the Company's Current Report on Form 8-K dated November 16, 1993 and incorporated herein by reference. 3. (a) Certificate of Incorporation of ERC Industries, Inc.(1) (b) Certificate of Ownership and Merger, dated April 16, 1993, merging ERC Industries, Inc. into ERC Subsidiary, Inc.(1) Bylaws of ERC Industries, Inc.(1) 4. (a) Specimen of Common Stock Certificate of ERC Industries, Inc.(1) 10.1 Stock Purchase Agreement dated October 15, 1992, among Quantum Fund, N.V., Warren H. Haber, Lawrence M. Pohly, John L. Teeger, ERC Industries, Inc. and John Wood Group PLC, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.2 Standstill and Voting Agreement dated October 15, 1992, among Quantum Fund, N.V. and John Wood Group PLC and related irrevocable proxy, filed as Exhibits 2.2 and 2.3 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.3 Agreement dated as of December 4, 1992 between ERC Industries, Inc. and John Wood Group PLC, filed as Exhibit 2.4 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.4 Agreement dated December 4, 1992 by and among ERC Industries, Inc., John Wood Group PLC, Steven J. Gilbert, Gary S. Gladstein, Warren H. Haber, Gerard E. Manolovici and Richard H. Rau filed as Exhibit 2.5 to the Company's Current Report on Form 8-K dated December 4, 1992 and incorporated herein by reference. 10.5 Credit Agreement, as amended, with Texas Commerce Bank, N.A., filed as Exhibit 10.7 to the Company's Registration Statement on Form S-4 (Registration No. 33-57504) as filed with the Securities and Exchange Commission, and incorporated herein by reference. 10.6 Fifth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 28, 1994(1). 10.7 Sixth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 27, 1995(2). - 17 - 10.8 Seventh Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of July 3, 1995(3). 10.9 Eighth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of December 7, 1995(3). 10.10 Ninth Amendment to Credit Agreement with Texas Commerce Bank, N.A. dated as of February 26, 1996(3). 10.11 Tenth Amendment extending expiration date to June 30, 1996.(4) 10.12 Letter Agreement with Texas Commerce Bank National Association dated June 30, 1996.(4) __________________ (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, which are incorporated by reference herein. (2) Filed as Exhibit 10.7 of the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994. (3) Filed as Exhibits of the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995. (4) Filed herewith. (B) REPORTS ON FORM 8-K : During the fourth quarter of the fiscal year ended December 31, 1996, the Company filed the following Forms 8-K regarding the Seaboard acquisition: Form 8-K, dated November 11, 1996 Form 8-K/A, dated December 12, 1996 - 18 - 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 27, 1997 /s/ J. Derek P. Jones --------------------- J. Derek P. Jones Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. Dated: March 27, 1997 /s/ J. Derek P. Jones ---------------------- J. Derek P. Jones Chairman and Director Dated: March 27, 1997 /s/ Wendell R. Brooks --------------------- Wendell R. Brooks President and Director (Principal Executive Officer) Dated: March 27, 1997 /s/ James E. Klima -------------------- James E. Klima Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) - 19 - Dated: March 27, 1997 /s/ Allister G. Langlands -------------------------- Allister G. Langlands Director Dated: March 27, 1997 /s/ George W. Tilley --------------------- George W. Tilley Director Dated:March 27, 1997 /s/ Anthony Howells -------------------- Anthony Howells Director - 20 - REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of ERC Industries, Inc. We have audited the consolidated financial statements and the financial statement schedule of ERC Industries, Inc. and Subsidiary listed in the index on page 16 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ERC Industries, Inc. and Subsidiary as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Houston, Texas February 21, 1997 F-1 ERC INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 1 $ _ Trade accounts receivable, net of allowance for doubtful accounts of $534 and $492, respectively 11,738 6,671 Inventory 15,314 8,599 Prepaid expenses and other current assets 257 60 Deferred tax asset 651 499 ------------ ------------ Total current assets 27,961 15,829 Property, plant and equipment, net 4,932 2,860 Other assets 532 444 Deferred tax asset-non current 170 49 Excess cost over net assets acquired, net 1,714 1,697 ------------ ------------ Total assets $ 35,309 $ 20,879 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt and capital leases due within one year $ 3,295 $ 2,815 Accounts payable 9,655 4,182 Other accrued liabilities 2,912 2,182 ------------ ------------ Total current liabilities 15,862 9,179 ------------ ------------ Long-term debt 1,826 1,787 Commitments and contingencies (see Note 8) - - Shareholders' equity: Preferred Stock, par value $1; authorized and unissued - 10,000,000 shares - - Common stock, par value $0.01; authorized - 30,000,000 shares; 21,248,272 and 13,863,656 issued and outstanding as of December 31, 1996 and 1995, respectively 212 139 Additional paid-in capital 11,792 5,237 Retained earnings from January 10, 1989 5,552 4,537 Translation adjustment 65 - ------------ ------------ Total shareholders' equity 17,621 9,913 ------------ ------------ Total liabilities and shareholders' equity $ 35,309 $ 20,879 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-2 ERC INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------- 1996 1995 1994 ----------- ---------- ---------- Revenues $ 50,961 $ 34,840 $ 32,926 Cost of goods sold 38,787 27,399 25,058 ----------- ---------- ---------- Gross profit 12,174 7,441 7,868 Property impairment 203 - - Selling, general and administrative expenses 10,159 8,116 7,037 ----------- ---------- ---------- Operating income (loss) 1,812 (675) 831 ----------- ---------- ---------- Other (income) expense: Interest expense 322 439 326 Other, net (98) (66) (123) ----------- ---------- ---------- 224 373 203 ----------- ---------- ---------- Income (loss) before provision (benefit) for income taxes 1,588 (1,048) 628 Provision (benefit) for income taxes 573 (273) 264 ----------- ---------- ---------- Net income (loss) $ 1,015 $ (775) $ 364 =========== ========== ========== Net income (loss) per share $ 0.06 $ (0.06) $ 0.03 =========== ========== ========== Weighted average number of shares outstanding 18,060 13,864 13,864 =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-3 ERC INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ADDITIONAL PAID-IN RETAINED TRANSLATION COMMON STOCK CAPITAL EARNINGS ADJUSTMENT --------------------- --------- -------- ---------- SHARES AMOUNT --------- ---------- Balance as of January 1, 1994 13,864 $ 139 $ 5,105 $ 4,948 - Net income - - - 364 - Income tax benefit of pre-quasi-reorganization net operating loss tax carryforwards - - 127 - - ------ ------ -------- --------- ------- Balance as of December 31, 1994 13,864 139 5,232 5,312 - Net loss - - - (775) - Income tax benefit of pre-quasi-reorganization net operating loss tax carryforwards - - 5 - - ------ ------ -------- --------- ------- Balance as of December 31, 1995 13,864 139 5,237 4,537 - Net income - - - 1,015 - Sale of common stock 7,384 73 5,759 - - Foreign Currency translation gain - - - - $ 65 Income tax benefit of pre-quasi-reorganization net operating loss tax carryforwards - - 796 - - ------ ------ -------- --------- ------- Balance as of December 31, 1996 21,248 $ 212 $ 11,792 $ 5,552 $ 65 ====== ====== ======== ========= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 ERC INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
------------------------------------- 1996 1995 1994 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,015 $ (775) $ 364 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,212 1,095 1,014 Provision for losses on trade accounts receivable 51 175 143 Deferred income taxes provision (benefit) and non-cash charge for income taxes 523 (238) 237 Gain on sale of property, plant and equipment (16) (5) (7) Property impairment 203 - - (Increase) decrease in cash resulting from changes in: Trade accounts receivable (4,155) (1,182) (1,342) Inventories (5,584) (1,663) (1,779) Prepaid expenses and other assets (375) 163 (105) Accounts Payable 5,564 (505) 1,285 Accrued liabilities (199) 807 (344) ----------- ---------- ---------- Net cash used in operating activities (1,761) (2,128) (534) ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of subsidiary - Seaboard (1,580) - - Purchases of property, plant and equipment (644) (442) (722) Proceeds from sale of property, plant and equipment 30 26 12 ----------- ---------- ---------- Net cash used in investing activities (2,194) (416) (710) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances from line of credit 2,884 2,425 750 Line of credit payments (3,525) (750) - Principal payments on long-term debt and capital lease obligations (554) (523) (506) Increase (decrease) in book overdrafts (660) 1,080 - Payments pursuant to reorganization plan: Payments made on plan obligations - - (24) Net proceeds from issuance of common stock 5,832 - - ----------- ---------- ---------- Net cash provided by financing activities 3,977 2,232 220 ----------- ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (21) - - ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 1 (312) (1,024) Cash and cash equivalents, beginning of year 0 312 1,336 ----------- ---------- ---------- Cash and cash equivalents, end of year $ 1 $ 0 $ 312 =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ERC INDUSTRIES, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS As of December 31, 1996, approximately 85% of the outstanding shares of ERC Industries, Inc.'s (the "Company") common stock was owned by John Wood Group PLC ("Wood Group"), a corporation registered in Scotland and incorporated under the laws of the United Kingdom. The consolidated financial statements include the accounts of ERC Industries, Inc. and its wholly owned subsidiary Wood Group Pressure Control Limited (previously Seaboard Lloyd Limited), which are engaged in the manufacture, remanufacture and servicing of oilfield valves and wellhead equipment. To a lesser extent, the Company also serves the geothermal valve market through its Barton Wood division. 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 and overseas. The Company has expanded sales to international oil and gas producing regions. All intercompany accounts and transactions are eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash equivalents include highly liquid investments purchased with original maturities of three months or less at the date of acquisition. Cash equivalents are stated at cost which approximates market because of their short maturity. INVENTORY Inventory consists primarily of finished and semi-finished goods which are carried at the lower of cost (specific identification or standard cost which approximates FIFO) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets which range from 3 to 25 years. Major renewals and betterments that extend the lives of equipment are capitalized while all other repairs and maintenance are charged to operations F-6 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, 1996 and 1995, amounted to approximately $673,000 and $458,000, respectively. Periodically, the Company's management assesses recorded balances of excess cost over net assets of businesses acquired for impairment in light of historic and projected operating results, trends and profitability, new product development and general economic conditions. ACCOUNTING FOR POTENTIAL IMPAIRMENT OF LONG-LIVED ASSETS The Company regularly evaluates the impairment of long-lived assets, such as property, plant and equipment, identifiable intangibles including patents and trademarks, and excess cost over net assets acquired related to those assets. In connection with such evaluation, the Company estimates the future cash flows resulting from the use of that asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying value of the asset, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset as determined by quoted market prices when available, or the present value of the expected future cash flows. INCOME TAXES The Company records deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. F-7 FOREIGN CURRENCY TRANSLATION The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. The gains or losses resulting from translation are included in shareholders' equity. EARNINGS PER COMMON SHARE Primary earnings per common share is based on the weighted average number of shares outstanding during the year. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains cash deposits with several major banks, which from time-to-time, may exceed federally insured limits. Management periodically assesses the financial condition of these financial institutions and believes that any possible credit risk is minimal. The Company generally sells its products and services to customers in the oil and gas production industry located in the major oil and gas producing regions of the world. Procedures are in effect to monitor the credit worthiness of customers and bad debts have not been significant in relation to the volume of revenues. The Company generally does not obtain collateral for accounts receivable. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include the recoverability of deferred tax assets, reserves for inventory obsolescence, allowance for doubtful accounts receivable and accruals for contingencies. RECLASSIFICATIONS Certain amounts included in the prior year financial statements have been reclassified to conform with current year presentation. F-8 2. ACQUISITIONS 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 in a privately negotiated transaction. The business of Seaboard is the manufacture of oilfield equipment. Seaboard operates from a facility located in Cumbernauld, Scotland. The Company plans to continue to operate Seaboard in substantially the same manner as it was operated prior to the acquisition. The Company paid a purchase price of $1,580,000 cash for the issued share capital of Seaboard. The source of the funds for the purchase was approximately $1,080,000 in cash on hand and $500,000 borrowed under the Company's existing credit facility. The purchase price was allocated as follows (in thousands):
Accounts Receivable $ 963 Inventory 1,131 Property, plant and equipment 1,702 Excess cost over net assets acquired 232 Accounts Payable (569) Accrued Expenses (929) Long-Term Debt- Current and non current (950) ------ $1,580 ======
The operating results of Seaboard are included in operations from the date of acquisition. The following represents the pro- forma results of operations as if the acquisition of Seaboard had occurred on January 1, 1995 (in thousands, except per share data) Year Ended December 31, 1996 1995 ---- ---- (unaudited) (unaudited) Revenues $57,097 $ 41,986 Net income (loss) 908 (1,138) Net income (loss) per share .05 (.08) F-9 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands):
December 31, ---------------- 1996 1995 ------- ------- Land............................................ $ 497 $ 497 Leased property under capital leases............ 1,719 1,328 Machinery and equipment......................... 9,520 5,236 Buildings, improvements and other............... 7,412 4,763 ------- ------- 19,148 11,824 Less accumulated depreciation and amortization.. 14,216 8,964 ------- ------- Net property, plant and equipment............... $ 4,932 $ 2,860 ======= =======
Leased property is primarily composed of automobiles. Accumulated amortization of leased property under capital leases amounted to approximately $1,201,000 and $982,000 as of December 31, 1996 and 1995, respectively. Depreciation and amortization expense was approximately $845,000, $791,000, and $705,000 for the fiscal years ended December 31, 1996, 1995, and 1994, respectively. In March 1996, the Company recognized an impairment loss of approximately $203,000 on certain property owned by the Company. Management had contemplated selling this property and obtained an appraisal. The property was written down to its appraised value less estimated costs to sell. Operations are continuing at the property. The Company continues to evaluate its decision regarding whether or not to sell the property. 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following (in thousands):
December 31, -------------- 1996 1995 ------ ------ Insurance.......................... $ 540 $ 554 Vacation........................... 309 253 Salaries........................... 428 357 Other.............................. 1,635 1,018 ------ ------ $2,912 $2,182 ====== ======
F-10 5. DEBT Long-term debt consisted of the following (in thousands) :
December 31 --------------- 1996 1995 ------ ------- Line of credit due to banks................................ $2,712 $2,425 Note payable to a bank due in quarterly installments of $62,500 plus interest through November 2003.......... 1,748 2,000 Obligations under capital leases and other debt bearing interest at various rates, due in various installments through December 1997................................... 661 177 ------ ------ Total debt................................................. 5,121 4,602 Less current maturities.................................... 3,295 2,815 ------ ------ Long-term debt............................................. $1,826 $1,787 ====== ======
The aggregate maturities of long-term debt, including obligations under capital leases during the five years subsequent to December 31, 1996 are $3,295,000, $492,160, $332,290, $250,000 and $250,000, respectively. Management believes that the carrying value of debt approximates its fair value at December 31, 1996 and 1995 since the substantial majority of debt bears interest at variable rates. In connection with the Barton Wood acquisition, the Company entered into a 10-year $2,500,000 note payable with one of the Barton lenders. At December 31, 1996, the note required 28 remaining quarterly installments of $62,500, plus interest at the bank's prime rate (8.25% at December 31, 1996 and 1995), payable each February, May, August and November 16. The note is collateralized by specified general intangibles and proprietary rights (including certain patents and trademarks). The note also contains certain covenants, the most restrictive of which are contained in the Company's line of credit agreement through the cross-default provisions of this installment note payable. The Company amended its domestic line of credit in June 1996, effectively increasing its line of credit to $5 million. The loan facility now provides for maximum borrowings of the lesser of $5 million or eligible trade accounts receivable and inventory (as defined in the line of credit). Interest on outstanding balances are payable monthly at the bank's prime rate minus three quarters of one percent. At December 31, 1996 and 1995, the bank's prime rate was 8.25%. The loan facility requires the Company to maintain a ratio of total indebtedness to tangible net worth of no greater than 1.2 to 1.0. Additionally, the terms of the agreement restrict the Company from paying cash dividends. The facility is collateralized by trade accounts receivable and inventory and expires in June 1997. At December 31, 1996, loan amounts outstanding under the agreement were $1.0 million. In addition, the Company had outstanding, against the revolving line of credit, irrevocable letters of credit amounting to $233,000. At December 31, 1996, the Company's maximum amount available for additional borrowings was $3,767,000. F-11 The Company also has a line of credit overdraft facility in Scotland, which expires in September 1997 and provides a line of credit of three million pounds (approximately $5.1 million at December 31, 1996). The line of credit is used for the purpose of general working capital requirements and provides overdraft, acceptance credit, loan and documentary credit facilities. Interest payable on the overdraft facility is equal to the bank's base rate from time to time plus 1 percent per annum. At December 31, 1996, the bank's base rate was 6.0%. The credit agreement is collateralized by substantially all of the assets of Seaboard and is guaranteed by the Company. At December 31, 1996, amounts outstanding under the various facilities were approximately $1,712,000. In addition, Seaboard had outstanding, against the line of credit, guarantees and letters of credit in the amount of $1,645,000. At December 31, 1996, the Company's maximum amount available for additional borrowings was approximately $1,776,000. 6. 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 liabilities and assets are as follows (in thousands): December 31, ------------------ 1996 1995 ------ ------ Deferred tax liabilities: Tax over book depreciation $ - $ 48 ------- ------ Total deferred tax liabilities... - 48 ------- ------ Deferred tax assets: Net operating loss............... 8,184 8,991 Tax over book inventory basis.... 232 210 Allowance for doubtful accounts.. 182 167 Other............................ 407 219 Valuation allowance.............. (8,184) (8,991) ------- ------- Total deferred tax assets........ 821 596 ------- ------- Net deferred tax asset....... $ 821 $ 548 ======= ======= F-12 The valuation allowance was reduced during 1996 by $807,000 and was increased by $169,000 during 1995. At December 31, 1996, the Company had federal net operating loss (NOL) carryforwards available to offset future taxable income in the approximate amount of $24.1 million. Of these NOL carryforwards, approximately $21.6 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 future 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. The following is a summary of the provision for income taxes (in thousands):
Year Ended December 31, ------------------------ 1996 1995 1994 ------- ------ ----- Current - (due to alternative minimum tax) $ 50 $ (35) $ 7 Non-cash charge in lieu of income taxes 796 5 127 Deferred tax (benefit) provision (273) (243) 130 ----- ----- ----- Provision (benefit) for income taxes $ 573 $(273) $ 264 ===== ===== =====
The non-cash charges in lieu of income taxes represents the amount of income taxes the Company would pay absent the NOL carryforward which was generated before the Company affected a quasi-reorganization. Such charges are offset within shareholders' equity by an increase in additional paid-in capital. The reconciliation between the actual (benefit)/provision recorded for income taxes and the (benefit)/provision for income taxes at the United States federal statutory rate for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ----- ------- ----- U.S. federal statutory rate 34.0% (34.0%) 34.0% Meals and Entertainment Expenses Not Deductible for Income Taxes 4.3% 4.3% 8.0% Other (2.2%) 3.6% ---- ----- ---- Effective Tax Rate 36.1% (26.1%) 42.0% ==== ===== ====
F-13 7. RELATED PARTY TRANSACTIONS The Company and Wood Group have agreed to an annual provision for administrative and financial services fees in amounts to be determined on an annual basis. The Company paid or accrued approximately $188,000, $173,000 and $155,000 for the years ended December 31, 1996, 1995 and 1994, respectively. On June 6, 1996, the Company and Wood Group entered into an Investment Agreement pursuant to which the Company agreed to issue and sell, and Wood Group agreed to purchase, 7,384,616 shares of the Company's common stock, par value $0.01 per share. The aggregate purchase price for the shares was $6,000,000, or $0.8125 per share. 8. COMMITMENTS AND CONTINGENCIES The Company leases office space and various equipment under noncancellable operating leases expiring through 2001. The leases provide for minimum monthly payments, plus in certain instances, payment for taxes, insurance and maintenance. Certain leases also contain renewal options. The Company is liable under noncancellable leases for minimum lease commitment amounts during the five years subsequent to December 31, 1996 as follows: $419,000, $211,000, $155,000, $124,000 and $27,000, respectively. Rental expense for the years ended December 31, 1996, 1995 and 1994 were approximately $424,000, $447,000, and $405,000, respectively. In connection with the Barton Wood acquisition in late 1993, the Company leased, and has an option to purchase certain real property from the Barton lenders ("lessors") at any time during the term of the lease, which extends through February, 1998. In the event the Company does not exercise its option, it will be required to pay $150,000 to the lessors of the real property. This obligation is collateralized by a commercial bank letter of credit issued for the benefit of the lessors, which is renewed annually. 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 1996, 1995 and 1994. F-14 9. PROFIT SHARING AND 401(K) PLANS The Company has a defined contribution 401(k) profit sharing plan. The plan covers substantially all employees subject to certain length of service requirements. Contributions are made at the discretion of the Board of Directors. The Company paid $49,000 during 1994 for contributions accrued at December 31, 1993. The Company paid $27,000 during 1995 for contributions accrued at December 31, 1994. No contributions were paid or accrued for the year ended December 31, 1995. In June 1996, the Company began matching employee's contributions up to 6% of their eligible compensation at a rate of 25% of employee contributions. The Company matching contributions totaled approximately $53,000 in 1996. 10. SALES TO SIGNIFICANT CUSTOMERS The Company had one customer in 1996 that accounted for approximately 10% of its sales. There were no customers during 1995 or 1994 with sales of 10% or more. 11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Year Ended Year Ended Year Ended December 31, 1996 December 31, 1995 December 31, 1994 ----------------- ----------------- ----------------- (in thousands) Cash paid for: Interest $324 $418 $302 ==== ==== ==== Income taxes $ 0 $ 9 $ 30 ==== ==== ====
The Company entered into capital lease obligations of $426,000, $125,000, and $302,000, during the periods ended December 31, 1996, 1995, and 1994, respectively. During the year ended December 31, 1996 the Company purchased $350,000 of property, plant and equipment by issuing a note payable to seller. Under the Company's cash management system, checks issued but not presented to bank frequently result in overdraft balances for accounting purposes and are classified as "Accounts Payable" in the balance sheet and as "Increases (Decreases) in Bank Overdrafts" in the statement of cash flows. F-15 ERC INDUSTRIES, INC.AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
Additions Balance -------------------------- at charged to Balance beginning costs and charged to at end of period expenses other accounts Deductions of period - ---------------------------------- --------- ---------- -------------- ---------- ---------- Allowance for Doubtful Accounts: - -------------------------------- December 31, 1994................. $433 $143 $ 64(a) $512 ========= ========== ======== ========= ======= December 31, 1995................. $512 $175 $195(a) $492 ========= ========== ======== ========= ======= December 31, 1996................. $492 $ 51 $9(a) $534 ========= ========== ======== ========= ======= Inventory Obsolescence Reserve: - ------------------------------- December 31, 1994................. $2,226 $238(b) $366(c) $2,098 ========= ========== ========= ========= ======= December 31, 1995................. $2,098 $414(b) $486(c) $2,026 ========= ========== ========= ========= ======= December 31, 1996................. $2,026 $310(b) $264(c) $2,072 ========= ========== ========= ========= =======
(a) Uncollectible accounts written-off. (b) Valuation adjustments. (c) Inventory written-off. F-16 EX-10.11 2 TENTH AMENDMENT EXHIBIT 10.11 TENTH AMENDMENT TO CREDIT AGREEMENT THIS TENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment" or "Tenth Amendment") dated as of April 1, 1996, ("Effective Date") is between ERC INDUSTRIES, INC. ("Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association ("Bank"). PRELIMINARY STATEMENT. Bank and Borrower have entered into a Credit Agreement (Borrowing Base), dated February 25, 1991, amended by a First Amendment dated August 31, 1991, Second Amendment dated January 3, 1992, Third Amendment dated May 31, 1992, Fourth Amendment dated December 30, 1992, Fifth Amendment dated February 28, 1994, Sixth Amendment dated February 27, 1995, Seventh Amendment dated July 3, 1995, Eighth Amendment dated December 7, 1995 and Ninth Amendment dated February 26, 1996 (as amended, "Credit Agreement" or "Agreement). All defined terms and section, exhibit and annex references shall refer to the Credit Agreement as amended. The Bank and the Borrower have agreed to amend the Credit Agreement to the extent set forth herein, and in order to, among other things, renew, extend and modify the Commitment and the Commitment 2. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Bank and the Borrower hereby agree as follows: 1. Subsection 1.1.A is amended to read as follows: "REVOLVING CREDIT NOTE 1.1.A. Subject to the terms and conditions hereof, Bank agrees to make loans to Borrower from time to time before the Termination Date, not to exceed at any one time outstanding the lesser of the Borrowing Base or $3,000,000.00 ("Commitment"). Loans shall take the form of advances under the Note (as hereinafter defined) (each a "Loan"), or issuances by Bank of commercial letters of credit ("Commercial L/Cs") and/or standby letters of credit ("Standby L/Cs") (collectively, "Letters of Credit"). Borrower shall have the right to borrow, repay and reborrow under the Note. Bank and Borrower agree that Chapter 15 of the Texas Credit Code shall not apply to this Agreement, the Note, or any Loan. Loans shall be evidenced by and shall bear interest and be payable as provided in Borrower's $3,000,000.00 promissory note dated the Tenth Amendment Effective Date (together with any and all renewals, extensions, modifications replacements, and rearrangements thereof and substitutions therefor, "Note"), given in renewal and modification of Borrower's $3,000,000.00 promissory note dated February 26, 1996 (including all prior notes of which said note represents a renewal, extension, modification, increase, decrease, substitution, rearrangement or replacement thereof, a "Renewed Note"). As of March 27, 1996 there was an outstanding principal balance of $2,800,000.00 under the Commitment, and an aggregate of $178,682.08 in L/C Obligations (representing Letter of Credit numbers I460191, I451961, I444134, I455643 and I456977 issued and outstanding as of such date) for a total outstanding against the Commitment of $2,978,682.08; leaving $21,317.92 available under the Commitment on such date for additional Loans and issuances of Letters of Credit subject to the terms and conditions of this Agreement. Loans and Letters of Credit under the Commitment shall be for the purpose of providing working capital and letters of credit for Borrower's regular business operations." 2. Subsection 1.1.C is amended to read as follows: "REVOLVING CREDIT NOTE-2 1.1.C. Subject to the terms and conditions hereof the Bank agrees to make loans ("Loans 2") to the Borrower from time to time before June 30, 1996 not to exceed at any one time outstanding the lesser of the Borrowing Base or $1,000,000.00 ("Commitment 2"), Borrower having the right to borrow, repay and reborrow. Bank and Borrower agree that Chapter 15 of the Texas Credit Code shall not apply to this Agreement, Note 2 (as hereinafter defined) or any Loan 2. Loans 2 shall be evidenced by and shall bear interest and be payable as provided in Borrower's $1,000,000.00 promissory note dated the Tenth Amendment Effective Date (together with any and all renewals, extensions, modifications and replacements thereof and substitutions therefor, the "Note 2"), given in renewal and modification of Borrower's $1,000,000.00 promissory note dated July 3, 1995 (including all prior notes of which said note represents a renewal, extension, modification, increase, decrease, substitution, rearrangement or replacement thereof, a "Renewed Note"). As of March 27, 1996 there was an outstanding principal balance of $300,000.00 under the Commitment-2, leaving $700,000.00 available under Commitment-2 for additional Loans 2 subject to the terms and conditions of this Agreement. Loans 2 shall be for the purpose of providing working capital for Borrower's regular business operations." 3. Section 8. The definition of Termination Date is amended by substituting "June 30, 1996" in place of "April 1, 1996", where the latter appears. 4. Exhibit A is replaced with Exhibit A attached hereto. 5. Borrower confirms and ratifies each of the liens, security interests and other interests granted to Bank in each and all security agreements executed in connection with, related to, or securing each Renewed Note, L/C Obligation and Note as extending to and securing all Loans, L/C Obligations, and Notes, including but not limited to, each of those interests and liens described in the following listed Security Agreements. Borrower further agrees and acknowledges that "indebtedness secured hereby", "secured indebtedness", "Obligation" and any similar reference in any Security Agreement includes each and all of the Loans, Loans 2, Note, Note 2, L/C Obligations, Applications and all other indebtedness evidenced or provided for in the Credit Agreement and Loan Documents. "Security Agreement" includes the following as executed and delivered by Borrower in favor of Bank: Security Agreement - (Accounts, Inventory, Equipment, Fixtures, General Intangibles, Other) dated February 26, 1991; Agreement and First Amendment to Security Agreement effective as of February 26, 1991; and any other security agreement previously executed by Borrower and delivered to Bank and not released by Bank which by its terms (general or specific) secure indebtedness provided for in the Credit Agreement; and all security agreements executed as of or on or about the Tenth Amendment Effective Date. 6. Each of the other Loan Documents are in all respects ratified and confirmed, and all of the rights, powers and privileges created thereby or thereunder are ratified, confirmed, extended, carried forward and remain in full force and effect except as the Credit Agreement is amended by this Amendment. Borrower hereby represents and warrants to the Bank that after giving effect to the execution and delivery of this Amendment: (a) the representations and warranties set forth in the Credit Agreement are true and correct on the date hereof as though made on and as of such date; and (b) no Event of Default, or event which with passage of time, the giving of notice or both would become an Event of Default, has occurred and is continuing as of the date hereof. 7. This Amendment shall become effective as of its Effective Date upon its execution and delivery by each of the parties named in the signature lines below and receipt of additional documents in Proper Form as Bank may require in connection with this Amendment. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. This Amendment and the Credit Agreement as amended by this Amendment shall be included within the definition of "Loan Documents" as used in the Credit Agreement and "Agreement", as used in the Credit Agreement, shall mean the Credit Agreement as amended by this Amendment. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA. THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the Effective Date. BORROWER: ERC INDUSTRIES, INC. BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: By: Name: Name: Title: Title: PROMISSORY NOTE (this "Note") U.S. $1,000,000.00 April 1, 1996 ("Date") FOR VALUE RECEIVED, ERC INDUSTRIES, INC. (the "Maker"), a Delaware corporation, promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the "Bank") on or before June 30, 1996 (the "Termination Date"), at its banking house at 712 Main Street, Houston, Harris County, Texas, or at such other location as the Bank may designate, in lawful money of the United States of America, the lesser of: (i) the principal sum of ONE MILLION AND NO/100THS DOLLARS (U.S. $1,000,000.00) (the "Maximum Loan Total"); or (ii) the aggregate unpaid principal amount of all loans made by the Bank hereunder (each such loan being a "Loan"), which may be outstanding on the Termination Date. Each Loan shall be due and payable on the maturity date agreed to by the Bank and the Maker with respect to such Loan (the "Maturity Date"). In no event shall any Maturity Date fall on a date after the Termination Date. Subject to the limitations set forth herein, Maker may borrow, repay and reborrow hereunder and there is no limitation on the number of Loans made hereunder so long as the total unpaid principal amount at anytime outstanding does not exceed the Maximum Loan Total. The Loans may be either Prime Rate Loans (as hereinafter defined) or Eurodollar Loans (as hereinafter defined). The Maker shall pay interest on each Prime Rate Loan for the Interest Period (as hereinafter defined) with respect thereto at a rate per annum equal to the lesser of: (i) the Prime Rate (as hereinafter defined) in effect from time to time minus one half of one percent (1/2%) (the "Effective Prime Rate"); or (ii) the Highest Lawful Rate (as hereinafter defined), which interest shall be due and payable on the last day of each calendar quarter and on the last day of each Interest Period. The Maker shall pay interest on each Eurodollar Loan for the Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the lesser of: (i) the Eurodollar Rate (as hereinafter defined) plus two percent (2%) (the "Effective Eurodollar Rate"); or (ii) the Highest Lawful Rate, which interest shall be due and payable on the last day of each such Interest Period. Any amount not paid when due with respect to principal (whether at Maturity Date, by acceleration or otherwise), costs, expenses, and to the extent permitted by applicable law, interest, shall bear interest at a rate per annum equal to the lesser of: (i) the Prime Rate in effect from time to time plus five percent (5%); or (ii) the Highest Lawful Rate, which interest shall be due and payable on demand. The principal of any Loan shall be deemed past due if not paid on or before the Maturity Date or any earlier maturity date resulting from acceleration in accordance with the terms of this Note or as provided by law or otherwise. Interest accrued and unpaid with respect to any Loan shall be deemed past due if not paid on or before the applicable interest payment due date as provided for herein. Notwithstanding the foregoing, if at any time the effective rate of interest which would otherwise be payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid principal balance of such Loan during all such times shall be limited to the Highest Lawful Rate, but any subsequent reductions in such interest rate shall not become effective to reduce such interest rate below the Highest Lawful Rate until the total amount of interest accrued on the unpaid principal balance of such Loan equals the total amount of interest which would have accrued if the Effective Prime Rate, or Effective Eurodollar Rate, whichever is applicable, had at all times been in effect. Each Loan shall be in an amount not less than $100,000.00 and an integral multiple of $100,000.00. Interest with respect to Prime Rate Loans and Eurodollar Loans shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 day or 366 day year, as the case may be. The following terms shall have the respective meanings indicated: "Borrowing Date" means any Business Day on which the Bank shall make a Loan hereunder. "Business Day" means a day: (i) on which the Bank and commercial banks in New York City are generally open for business; and (ii) with respect to Eurodollar Loans, on which dealings in United States Dollar deposits are carried out in the Eurodollar interbank markets. "Eurodollar Lending Office" means the office of the Bank located at 712 Main Street, Houston, Texas, or such other office of the Bank as the Bank may from time to time specify to the Maker. "Eurodollar Loan" means a Loan which bears interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Rate" means, for each Eurodollar Loan, an interest rate per annum determined by the Bank by dividing: (i) the rate per annum determined by the Bank at or before 10:00 a.m. (Houston time) (or as soon thereafter as practicable) two Business Days before the first day of such Interest Period to be the rate per annum at which deposits of dollars are offered to the Bank by prime banks in whatever Eurodollar interbank market may be selected by the Bank in its sole discretion, acting in good faith, at the time of determination and in accordance with the usual practice in such market for delivery on the first day of such Interest Period in immediately available funds and for a period equal to such Interest Period and in an amount substantially equal to the amount of the Bank's Eurodollar Loan during such Interest Period; by (ii) Statutory Reserves. "Highest Lawful Rate" as used herein shall mean the maximum nonusurious interest rate permitted from time to time to be contracted for, taken, reserved, charged or received on any Loan under applicable federal or Texas laws, whichever permits the higher lawful rate; provided, however, that in the event: (i) such maximum nonusurious interest rate shall, at any time or times during the term of a Loan evidenced hereby, be reduced to a rate less than the maximum nonusurious rate in effect on the date of such Loan; and (ii) applicable law permits contracting for, taking, reserving, charging, and receiving on such Loan throughout the duration thereof the maximum nonusurious rate in effect on the date such Loan was made, then and at all such times the Highest Lawful Rate shall be the maximum nonusurious rate permitted to be contracted for, taken, reserved, charged or received on such Loan under applicable law in effect on the date of such Loan. At all such times, if any, as Texas law shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Tex. Rev. Civ. Stat. art. 5069-1.04) from time to time in effect. "Interest Period" means, with respect to any Loan, the period commencing on the Borrowing Date and ending on the Maturity Date, consistent with the following provisions. The duration of each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of up to the Termination Date; and (b) in the case of a Eurodollar Loan, 1, 2, or 3 months; in each case as selected by the Maker and agreed to by the Bank. The Maker's choice of Interest Period is also subject to the following limitations: (i) No Interest Period shall end on a date after the Termination Date; and (ii) If the last day of an Interest Period would be a day other than a Business Day, the Interest Period shall end on the next succeeding Business Day (unless the Interest Period relates to a Eurodollar Loan and the next succeeding Business Day is in a different calendar month than the day on which the Interest Period would otherwise end, in which case the Interest Period shall end on the next preceding Business Day). "Prime Rate" shall mean the rate of interest per annum determined from time to time by the Bank as its prime rate in effect at its principal office in Houston, Texas and thereafter entered in the minutes of its Loan and Discount Committee; each change in the Prime Rate shall be effective on the date such change is determined; without special notice to the Maker or any other person or entity. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE ACTUALLY CHARGED TO ANY CUSTOMER AND ANY STATEMENT, REPRESENTATION OR WARRANTY IN THAT REGARD OR TO THAT EFFECT IS EXPRESSLY DISCLAIMED BY BANK. BANK MAY MAKE LOANS AT RATES OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE. "Prime Rate Loan" means a loan which bears interest at a rate determined by reference to the Prime Rate "Statutory Reserves" shall mean the difference (expressed as a decimal) of the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Bank is subject: (a) with respect to the CD Rate, for new negotiable time deposits in dollars of over $100,000 with maturities approximately equal to the applicable Interest Period; and (b) with respect to the Eurodollar Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. The unpaid principal balance of this Note at any time shall be the total of all Loans made by the Bank to or for the benefit of the Maker, less the amount of all payments of principal made hereon by or for the account of the Maker. The Bank's records shall serve as presumptive evidence of any and all amounts outstanding hereunder. Any Loan which the Bank agrees to make hereunder shall be made on the Maker's irrevocable notice, given not later than 10:00 A.M. (Houston time) on, in the case of Eurodollar Loans, the third Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date, from the Maker to the Bank. Each such notice of a requested borrowing (a "Notice of Requested Borrowing") under this paragraph may be oral or written, and shall specify: (i) the requested amount of such Loan; (ii) the proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime Rate Loan, or Eurodollar Loan; and (iv) the Interest Period for such Loan. If any Notice of Requested Borrowing shall be oral, the Maker shall deliver to the Bank prior to the Borrowing Date a confirmatory written Notice of Requested Borrowing. If at any time the Bank determines in good faith (which determination shall be conclusive) that any change in any applicable law, rule or regulation or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Bank or its foreign branch or branches to maintain or fund any Loan by means of dollar deposits obtained in any Eurodollar interbank market (any of the above being described as a "Eurodollar Event"), then, at the option of the Bank, the aggregate principal amount of the Bank's Eurodollar Loans then outstanding, which Loans are directly affected by such Eurodollar Event, shall be prepaid by the Maker. Upon the occurrence of any Eurodollar Event, and at any time thereafter so long as such Eurodollar Event shall continue, the Bank may exercise its aforesaid option by giving written notice thereof to the Maker. Any prepayment of any Eurodollar Loan which is required under the preceding paragraph shall be made, together with accrued and unpaid interest and all other amounts payable to the Bank under this Note with respect to such prepaid Eurodollar Loan on the date stated in the notice to the Maker referred to above, which date ("required prepayment date") shall be not less than 15 days from the date of such notice. If any Eurodollar Loan is required to be prepaid under the preceding paragraph, the Bank shall make on the required prepayment date an Alternate Base Rate Loan in the same principal amount and with an Interest Period ending on the same day as the Eurodollar Loan so prepaid. If any domestic or foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D of the Board of Governors of the Federal Reserve System) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) changes, imposes, modifies, applies or deems applicable any reserve, special deposit or similar requirements in respect of any such Loan (excluding those for which the Bank is fully compensated pursuant to adjustments made in the definition of the CD Rate) or against assets of, deposits with or for the account of, or credit extended or committed by, the Bank; or (b) imposes on the Bank or the interbank eurocurrency deposit and transfer market or the market for domestic bank certificates of deposit any other condition affecting any such Loan; and the result of any of the foregoing is to impose a cost to the Bank of agreeing to make, funding or maintaining any such Loan or to reduce the amount of any sum receivable by the Bank in respect of any such Loan, then the Bank may notify the Maker in writing of the happening of such event and Maker shall upon demand pay to the Bank such additional amounts as will compensate the Bank for such costs. Without prejudice to the survival of any other agreement of the Maker under this Note, the obligations of the Maker under this paragraph shall survive the termination of this Note. The Maker may on any Business Day prepay the outstanding principal amount of any Prime Rate Loan, in whole or in part, together with accrued interest to the date of such prepayment on the principal amount prepaid. Partial prepayments shall be in an aggregate principal amount of $100,000.00 or a greater integral multiple of $100,000.00. Except as specified in this paragraph, the Maker shall have no right to prepay any Loan. The Maker will indemnify the Bank against, and reimburse the Bank on demand for, any loss, cost or expense incurred or sustained by the Bank (including without limitation any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain Loans bearing interest at the Eurodollar Rate) as a result of: (a) any payment or prepayment (whether permitted by the Bank or required hereunder or otherwise) of all or a portion of any Eurodollar Loan on a day other than Maturity Date of such Loan; (b) any payment or prepayment, whether required hereunder or otherwise, of any Eurodollar Loan made after the delivery of a Notice of Requested Borrowing but before the applicable Borrowing Date if such payment or prepayment prevents the proposed Loan from becoming fully effective; or (c) the failure of any Eurodollar Loan to be made by the Bank due to any action or inaction of the Maker. For purposes of this paragraph, funding losses arising by reason of liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain Loans bearing interest at the Eurodollar Rate shall be calculated as the remainder obtained by subtracting: (i) the yield (reflecting both stated interest rate and discount, if any) to maturity of obligations of the United States Treasury in an amount equal or comparable to such Loan for the period of time commencing on the date of the payment, prepayment or change of rate as provided above and ending on the last day of the subject Interest Period; from (ii) the interest payable at the Eurodollar Rate for the period commencing on the date of such payment, prepayment or change of rate and ending on the last day of such Interest Period. Such funding losses and other costs and expenses shall be calculated and billed by the Bank and such bill shall, as to the costs incurred, be conclusive absent manifest error. If after the date of this Note, the Bank shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of making any Loans hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank in good faith to be material, then from time to time, the Maker shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. A certificate of the Bank setting forth such amount or amounts as shall be necessary to compensate the Bank as specified in the immediately preceding paragraphs above shall be delivered as soon as practicable to the Maker and shall be conclusive and binding, absent manifest error. The Maker shall pay the Bank the amount shown as due on any such certificate within 15 days after Bank delivers such certificate. In preparing such certificate, the Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. If any payment of interest or principal herein provided for is not paid when due, or if the holder or owner of this Note shall deem itself insecure, then the owner or holder of this Note may at its option, by notice to the Maker, declare the unpaid principal balance of all Loans, all accrued and unpaid interest thereon and all other amounts payable under this Note to be forthwith due and payable, whereupon the Loans, all such interest and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest, notice of intent to accelerate, notice of actual acceleration or further notice of any kind, all of which are hereby expressly waived by the Maker. If default is made in the payment of this Note and it is placed in the hands of an attorney for collection, or collected through probate or bankruptcy proceedings, or if suit is brought on the same, the Maker agrees to pay attorneys' fees and all costs and expenses. This Note is issued by the Maker to evidence Loans outstanding from time to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a $1,000,000.00 line of credit (the "Line of Credit") extended by the Bank to the Maker. This Note is a renewal and modification of the promissory note of Maker delivered to Bank dated July 3, 1995, in the principal amount of $1,000,000.00 and is the "Note 2" as defined in and subject to the terms and conditions of a Credit Agreement dated as of February 25, 1991, as duly amended through the date hereof (the "Credit Agreement"). This Note, the Credit Agreement, and all other agreements, documents, instruments, certificates or other writings executed or delivered in connection with or pursuant to the terms of any of the foregoing are herein referred to as the "Loan Documents"). The Maker warrants and represents to the Bank, and to all other owners and/or holders of any indebtedness evidenced hereby, that all Loans evidenced by this Note are for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter One of the Texas Credit Code, Tex. Rev. Civ. Stat. arts. 5069-1.01 et. seq. The Maker warrants and represents to the Bank and to all other owners or holders of this Note that no Loans shall be used for the purchase or carrying of any "margin stock" within the meaning of Regulation "U" of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect on the date hereof. Except as otherwise specified in this Note, the Maker and any and all co-makers, endorsers, guarantors and sureties hereby severally waive grace, presentment, demand, notice of default, notice of intent to accelerate, notice of acceleration, and all other demands and notices of any nature or type whatsoever, in connection with the delivery, acceptance, performance, default, dishonor or enforcement of, or entry of judgment in connection with this Note, and further waive the filing of suit hereon for the purpose of fixing liability. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE SHALL BE PERFORMABLE FOR ALL PURPOSES IN THE COUNTY OF THE BANK'S PRINCIPAL OFFICE IN TEXAS, AND THE MAKER AND THE BANK AGREE THAT THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY THE MAKER OR THE BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST THE MAKER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY. THE MAKER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. THE MAKER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. NOTHING HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS SHALL AFFECT THE RIGHT OF THE BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE MAKER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS OR VENUES. The Maker and the Bank expressly agree, pursuant to Article 15.10(b) of Chapter 15 ("Chapter 15") of the Texas Credit Code, that Chapter 15 shall not apply to this Note or to any Loan and that this Note and all such Loans shall not be governed by or subject to the provisions of Chapter 15 in any manner whatsoever. It is the intention of Maker and Bank to comply with usury laws in force in the State of Texas and in the United States of America as applicable. Anything in this Note to the contrary notwithstanding, the Maker shall never be required to pay unearned interest on this Note and shall never be required to pay interest on this Note at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest which would otherwise be payable under this Note would exceed the Highest Lawful Rate, or if the holder of the Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable under this Note to a rate in excess of the Highest Lawful Rate, then: (i) the amount of interest which would otherwise be payable under this Note shall be reduced to the amount allowed under applicable law; and (ii) any unearned interest paid by the Maker or any interest paid by the Maker in excess of the Highest Lawful Rate shall, at the option of the holder of this Note, be either refunded to the Maker or credited on the principal of this Note. It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received by the Bank or any holder of this Note that are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate shall be made, to the extent permitted by usury laws applicable to the Bank (now or hereafter enacted), by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Loans evidenced by this Note all interest at any time contracted for, charged or received by the Bank in connection therewith. The Bank reserves the right in its sole discretion without notice to Maker, to sell participations or assign its interest, or both in all or part of the Loans, the Note, or the Line of Credit. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the Maker has executed this Note effective the Date first aforesaid. MAKER: ERC INDUSTRIES, INC. By: Name: Title: Acknowledged for purposes of notice pursuant to the above cited statute by: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: Name: Title: EX-10.12 3 LETTER AGREEMENT EXHIBIT 10.12 June 30, 1996 (Effective Date") ERC Industries, Inc. 16920 Park Row Houston, Texas 77084 RE: $5,000,000.00 Revolving Line of Credit from Texas Commerce Bank National Association ("Bank") to ERC Industries, Inc., ("Borrower") Gentlemen: Bank is pleased to extend to Borrower a revolving line of credit in the amount of $5,000,000.00 (the "Revolving Line of Credit") for loans and the issuance of commercial and standby letters of credit, subject to the terms and conditions stated herein (as the same may be amended, renewed, extended, supplemented or restated from time to time, this "Agreement"). NOW THEREFORE, in consideration of the above stated premises, Bank and Borrower hereby agree as follows: T E R M S A N D C O N D I T I O N S ------------------------------------- SECTION 1 - THE LINE OF CREDIT --------- ------------------ Section 1.1 REVOLVING LINE OF CREDIT A. Advances: The Bank agrees to make advances (an "Advance" or "Advances") to Borrower, upon request of Borrower from time to time from the Effective Date to but not including June 30, 1997 not to exceed at any one time outstanding the lesser of the Borrowing Base or $5,000,000.00, Borrower having the right to borrow, repay and reborrow. Advances shall be used for the purpose of meeting the working capital requirements and general corporate purposes of Borrower. Advances shall be evidenced by, and made as provided in a promissory note of even date herewith executed by Borrower and delivered to Bank ("Note"), a copy of which is attached hereto as Exhibit "A" and made a part hereof for all purposes (the "Note" as used in this Agreement, shall include without limitation, any and all renewals, extensions, modifications, rearrangements, replacements thereof and substitutions therefor). B. Letters of Credit: The Bank agrees to issue standby and commercial letters of credit (an "L/C" or "L/Cs") from time to time, from the Effective Date to but not including June 30, 1997, for the account of Borrower and in favor of such person or persons as may be designated by Borrower. Each L/C shall have an expiration date of no later than June 30, 1998. The Borrower shall reimburse the Bank immediately upon demand for any drawings made under an L/C. Prior to June 30, 1997, the Borrower may request an Advance under the Note, and the Bank is hereby authorized to make such an Advance without notice to the Borrower, to pay any drawing under any L/C. C. Maximum Amount: The maximum amount which will be available to Borrower under the Revolving Line of Credit is the lesser of the Borrowing Base or $5,000,000.00 ("Maximum Amount"), which in determining whether any amounts are available under the Revolving Line of Credit, Bank will deduct from the Maximum Amount, the amount of all unpaid Advances (the outstanding principal balance on the Note) and all L/C Obligations. The term "L/C Obligations" shall mean the face amount of all L/Cs issued and outstanding plus any unreimbursed drawings under the L/Cs plus any other amounts owing to Bank under or in respect of any L/C or Application (as hereinafter defined). Borrower and Bank agree that the following outstanding L/Cs shall be deemed made under and subject to the terms of this Agreement. VALUE EXPIR. NUMBER DATE DATE AMOUNT ------------ -------- -------- ---------- I444134 03/09/94 03/01/95 7,662.08 I451961 03/22/95 02/15/97 150,000.00 I455643 08/29/95 10/31/97 2,820.00 I456977 11/02/95 08/19/96 8,200.00 I460191 03/05/96 08/30/96 10,000.00 I460864 03/29/96 08/28/96 8,200.00 I461290 04/17/96 07/24/96 10,000.00 I461292 04/17/96 07/24/96 10,000.00 I461946 05/16/96 10/25/96 10,000.00 I461964 05/17/96 11/25/96 27,600.00 I462469 06/10/96 09/11/96 9,929.03 I463156 07/09/96 12/08/96 9,000.00 Section 1.2 BORROWING BASE REPORT. Within 30 days after the end of every calendar month Borrower shall furnish the Bank a Borrowing Base Report substantially in the form of Exhibit B, together with an accounts receivable aging and listing. Section 1.3 BORROWING BASE. The Borrowing Base shall be the amount available for borrowing on each Borrowing Base Report, subject to verification by the Bank. If the Bank upon such verification does not agree with the Borrowing Base Report submitted, within 5 days after written notice by Bank to Borrower, Borrower shall correct such Borrowing Base Report and paydown the Note in accordance with the corrected Borrowing Base Report. If no Borrowing Base Report is received within the time specified, the Bank may in its sole discretion set the Borrowing Base at any amount it deems appropriate. Section 1.4 REQUIRED PAYDOWNS. If the outstanding principal balance of the Note plus all L/C obligations at any time exceeds the Borrowing Base then in effect, Borrower shall make a paydown on the Note in an amount sufficient to reduce the unpaid balance on the Note to an amount that when added to all L/C Obligations is no greater than the Borrowing Base. Such paydown shall be accompanied by: (a) all accrued and unpaid interest on the amount prepaid; and (b) any prepayment charge required by the Note and shall be due concurrently with the Borrowing Base Report. Section 1.5 INTEREST RATE, TERMS AND FEES: A. The Note: Advances under the Note shall bear interest at the rates of interest as determined in accordance with the terms of the Note. Principal and interest on each Advance shall be made as more particularly described in the Note. B. Letter of Credit Fees: In consideration for the issuance of any L/C, Borrower agrees to pay to Bank a letter of credit issuance fee ("Fee") in respect of such L/C in an amount equal to: (1) in the case of commercial L/Cs, one quarter of one percent (1/4%) per quarter or fraction thereof on the face amount of such L/C; and (2) in the case of standby L/Cs one percent (1%) per annum on the face amount of such L/C. The Fee shall be paid to Bank at its offices at 712 Main Street, Third Floor, Houston, Texas 77002 to the attention of the Manager, Documentary Services Division, or such other address designated by the Bank, in advance of the date of issuance of such L/C. The Fee in respect of each L/C shall be calculated from the date of issuance of the L/C to and including the date of expiration of such L/C calculated in accordance with the then current fee schedule of Bank. Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on June 30, 1997; or (ii) such earlier date resulting from acceleration as defined in Section 5 hereof. Section 1.7 COLLATERAL: Borrower ratifies and confirms that its obligations under the Revolving Line of Credit, the Note, L/Cs and Applications are secured by a security interest of first priority in Borrower's accounts receivables and inventory as evidenced by a Security Agreement dated February 25, 1991 executed by Borrower and Bank as amended by a First Amendment dated as of February 25, 1991 (as further amended, supplemented or replaced from time to time, the "Security Agreement"). References to the Credit Agreement and Note in the Security Agreement shall mean this Agreement and the Note referenced herein. The Agreement, the Security Agreement, the Note, the Applications, the L/Cs and each and every other written document, instrument, agreement related to the Revolving Line of Credit (together with any and all renewals, extensions, modifications, supplements, amendments and replacements thereof) that may be required to be executed and delivered by Borrower to Bank shall hereinafter be called the "Loan Documents". Section 1.8 NEGATIVE PLEDGE: Borrower will not create or permit to exist any lien upon any of its property now owned or hereafter acquired, or acquire any property upon any conditional sale or other title retention device or arrangement or any purchase money security agreement; or in any manner directly or indirectly sell, assign, pledge or otherwise transfer any of its accounts or other property, except: (a) liens, not for borrowed money, arising in the ordinary course of business; (b) liens for taxes not delinquent or being contested in good faith by appropriate proceedings; (c) liens in effect on the date hereof and disclosed to Bank in writing, so long as neither the indebtedness secured thereby nor the property covered thereby increases; (d) liens in favor of Bank, or otherwise approved in writing by Bank; (e) liens resulting from the leasing of equipment; and (f) purchase money liens not to exceed $300,000.00 in the aggregate per year, arising in the ordinary course of business. Notwithstanding anything to the contrary herein, Borrower will not permit any Lien on any accounts receivable or inventory that secures the Loans unless Bank shall provide Borrower with Bank's prior written consent. SECTION 2 - CONDITIONS PRECEDENT --------- -------------------- Section 2.1 CONDITIONS PRECEDENT: The Bank shall be under no obligation to make any Advance or issue any L/C, until the Borrower has executed and delivered, in form and substance satisfactory to Bank, the following documents: (i) this Agreement; (ii) the Note; (iii) an application substantially in the form of, in the case of each commercial L/C, Exhibit "C-1" attached hereto, and in the case of each standby L/C, Exhibit "C-2" attached hereto, in each case, duly completed and executed by Borrower to the complete satisfaction of Bank ("Application" or "Applications") not less than two Business Days prior to the date on which the L/C is requested to be issued; and (iv) any other document, instrument, certificate or instrument that Bank may reasonably require to consider the request. SECTION 3 - REPRESENTATION AND WARRANTIES --------- ----------------------------- To induce Bank to enter into this Agreement and to make Advances and issue L/Cs, Borrower represents and warrants that on the date hereof and on the date of each request for an Advance and submission of each Application, and on the date of making an Advance and the date of issuance of any L/C, and at all times during the term of this Agreement: Section 3.1 ORGANIZATION, DUE EXECUTION, AND ENFORCEABILITY: Borrower is and shall remain duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; has all the power and authority to conduct its business as presently conducted, and is duly qualified to do business and in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification desirable; the execution of the Loan Documents by Borrower has been duly authorized and does not contravene the articles of incorporation or, by-laws of Borrower, and will not result in the breach of, or constitute a default under any agreement, judgment, order or decree binding upon Borrower, and the Loan Documents executed by Borrower are legally binding obligations of Borrower, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency and other similar laws; Section 3.2 ACCURATE INFORMATION: The information in the financial statements and other information provided, or to be provided to Bank by Borrower is true, correct and accurate in all material respects as of the date provided and shall be true and correct in all material respects on the date that any Advance or L/C is requested to be funded or issued; Section 3.3 NO DEFAULTS: No Event of Default (as defined hereinafter) or default exists under this Agreement or under any of the other Loan Documents and no default exists under any other agreement material to the financial condition of Borrower or is continuing; Section 3.4 NO LITIGATION, ETC.: Borrower is not subject to any order, judgment, or litigation which could materially and adversely affect its respective financial condition, business affairs or operations; Section 3.5 PAYMENT OF TAXES: Borrower has paid all its taxes due and owing including without limitation employment taxes, except for those for which extensions have been obtained and those being contested in good faith and for which adequate reserves have been established; Section 3.6 COMPLIANCE, GOVERNMENTAL REQUIREMENTS AND PERMITS: Borrower is not subject to any governmental order, any administrative or judicial order or judgment that could materially and adversely affect its financial condition, business affairs or operations of its business. Borrower has no material contingent liability with respect to compliance with laws, rules and regulations applicable to Borrower; and Section 3.7 REGULATION U: None of the proceeds of any Advance shall be used for the purpose of purchasing or carrying directly or indirectly, any margin stock or for any other purpose which would make any credit provided by Bank to Borrower hereunder a purpose credit within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. SECTION 4 - COVENANTS --------- --------- Borrower covenants and agrees that so long as any amounts remain unpaid under the Note or any L/C is outstanding or any amounts are owing under the other Loan Documents it shall: Section 4.1 FINANCIAL STATEMENTS AND FINANCIAL COVENANTS: ensure that financial statements and financial covenants comply with the financial covenants and other covenants described, and calculated as set forth, in Exhibit "D". Unless otherwise provided on Exhibit "D", all such amounts and ratios will be calculated: (a) on the basis of United States GAAP for the Borrower; and (b) on a consolidated basis. Compliance with the requirements of Exhibit "D" will be determined as of the dates of the financial statements to be provided to Bank; Section 4.2 REPRESENTATION AND WARRANTIES: ensure that each of the representations and warranties of Borrower contained herein shall be true and correct when given and when deemed given hereunder and notify Bank immediately should any representation or warranty become untrue or misleading; Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify Bank in writing at least 30 days prior to any date that Borrower changes its name or the location of its principal place of business or the location of its books and records, and notify Bank immediately if Borrower becomes a party to any merger or consolidation, or if there is a change or modification to its business or legal structure; and Section 4.4 COMPLIANCE: at all times comply with applicable laws, rules, regulations, ordinances and Executive Orders. SECTION 5 - EVENTS OF DEFAULT AND REMEDIES --------- ------------------------------ If any of the following events ("Events of Default") shall occur, then Bank may do any or all of the following: (1) declare the Note to be, and thereupon the principal balance of the Note shall forthwith become, immediately due and payable, together with all accrued and unpaid interest thereon and all fees and all other obligations and indebtedness of Borrower under the Loan Documents, without notice of acceleration or of intention to accelerate, presentment and demand or protest, all of which are hereby expressly waived; (2) without notice to Borrower, terminate the Revolving Line of Credit and refuse to consider requests for Advances and issuances of L/Cs; (3) set off, in any order, against the indebtedness of Borrower under the Loan Documents any debt owing by Bank to Borrower, including, but not limited to, any deposit account, which right is hereby granted by Borrower to Bank; and (4) exercise any and all other rights pursuant to the Loan Documents, at law, in equity or otherwise: (a) Borrower shall fail to pay any principal of or interest on the Note or any other obligation under any Application or under any other Loan Document as and when due; or (b) Borrower shall fail to pay at maturity, or within any applicable period of grace, any principal of or interest on any other borrowed money obligation or shall fail to observe or perform any term, covenant or agreement contained in any agreement or obligation by which it is bound; or (c) Any representation or warranty made in connection with any Loan Document shall prove to have been incorrect, false or misleading; or (d) Default shall occur in the punctual and complete performance of any covenant contained in any Loan Document; or (e) Final judgment for the payment of money shall be rendered against Borrower and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed; or (f) Any order shall be entered in any proceeding against Borrower decreeing the dissolution, liquidation or split-up thereof, and such order shall remain in effect for 30 days; or (g) Borrower shall make a general assignment for the benefit of creditors or shall petition or apply to any tribunal for the appointment of a trustee, custodian, receiver or liquidator of all or any substantial part of its business, estate or assets or shall commence any proceeding under any bankruptcy, insolvency, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect; or any such petition or application shall be filed or any such proceeding shall be commenced against Borrower and Borrower, by act or omission shall indicate approval thereof, consent thereto or acquiescence therein, or an order shall be entered appointing a trustee, custodian, receiver or liquidator of all or any substantial part of the assets of Borrower or granting relief to Borrower or approving the petition in any such proceeding, and such order shall remain in effect for more than 30 days; or Borrower shall fail generally to pay its debts as they become due or suffer any writ of attachment or execution or any similar process to be issued or levied against it or any substantial part of its property which is not released, stayed, bonded or vacated within 30 days after its issue or levy; or (h) Borrower shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or (i) Any change shall occur in the ownership of Borrower, such that John Wood Group P.L.C. shall not remain directly or indirectly, the majority owner of Borrower. SECTION 6 - MISCELLANEOUS --------- ------------- Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the part of Bank in exercising any power or right in connection herewith or under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other power or right. No course of dealing between Borrower and Bank shall operate as a waiver of any provision of this Agreement or any other Loan Document nor any consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by the person against whom enforcement thereof is to be sought, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 6.2 EXPENSES: Any provision to the contrary notwithstanding, and whether or not the transactions contemplated by this Agreement shall be consummated, Borrower agrees to pay on demand all reasonable out-of-pocket expenses (including, without limitation, the fees and expenses of counsel for Bank) in connection with the negotiation, preparation, execution, filing, recording, modification, supplementing and waiver of the Loan Documents and the making, servicing and collection of any of the indebtedness evidenced by the Note and any Application. The obligations of Borrower under this and the following section shall survive the termination of this Agreement. Section 6.3 USURY: It is the intent of Borrower and of Bank in the execution and performance of this Agreement and any other Loan Document to contract in strict compliance with the usury laws of the State of Texas and as applicable, the United States of America. Borrower and Bank agree that none of the terms and provisions contained in this Agreement or any other Loan Document shall ever be construed to create a contract to pay for the use, forbearance or detention of money with interest at a rate in excess of the maximum nonusurious rate of interest permitted to be charged by applicable Federal or Texas law (whichever shall permit the higher lawful rate) from time to time in effect ("Highest Lawful Rate"). At all times, if any, that Chapter One of the Texas Credit Code shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" as defined in that Chapter. The provisions of this paragraph shall control over all other provisions of this Agreement and all other Loan Documents which may be in apparent conflict herewith. In the event Bank shall collect moneys which are deemed to constitute interest in excess of the legal rate, such moneys shall be immediately returned to the payor thereof (or, at the option of Bank, credited against the unpaid principal of the Note) upon such determination. Section 6.4 SURVIVAL: All representations, warranties, covenants and agreements made by or on behalf of Borrower in connection with the Loan Documents shall survive the execution and delivery of the Loan Documents; shall not be affected by any investigation made by Bank, and shall bind Borrower and successors, trustees, receivers and assigns of Borrower and inure to the benefit of the successors and assigns of Bank; provided that the undertaking of Bank hereunder to consider making Advances to and for issuances of L/Cs upon the application of Borrower shall not inure to the benefit of any successor or assign of Borrower. Except as otherwise provided herein, the term of this Agreement shall be until the final maturity of the Note and the full and final payment of all amounts due under the Note and any Application and the Loan Documents. Section 6.5 DOCUMENTARY MATTERS: This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. The headings and captions appearing in the Loan Documents have been included solely for convenience and shall not be considered in construing the Loan Documents. The Loan Documents embody the entire agreement between Borrower and Bank and supersede all prior proposals, agreements and understandings. If any provision of any Loan Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. Section 6.6 PRIOR CREDIT AGREEMENT: This Agreement supersedes that Credit Agreement (Borrowing Base), dated February 25, 1991 executed by Borrower and Bank, as amended by a First Amendment dated August 31, 1991, Second Amendment dated January 3 1992, Third Amendment dated May 31, 1992, Fourth Amendment dated December 30, 1992, Fifth Amendment dated February 28, 1994, Sixth Amendment dated February 27, 1995, Seventh Amendment dated July 3, 1995, Eighth Amendment dated December 7, 1995, Ninth Amendment dated February 26, 1996 and Tenth Amendment dated April 1, 1996. Section 6.7 GOVERNING LAW: THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE THE LAWS OF THE UNITED STATES OF AMERICA. Section 6.8 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Sincerely Yours, TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: Name: Title: Acknowledged and agreed to this _____ day of ____________, 1996, but effective as of the Effective Date, by: "BORROWER" ERC INDUSTRIES, INC. By: Name: Title: EXHIBITS: A Promissory Note B Borrowing Base Report C-1 Application for Commercial Letters of Credit C-2 Application for Standby Letters of Credit D Financial Covenants And Compliance Certificate EXHIBIT A PROMISSORY NOTE (this "Note") U.S. $5,000,000.00 June 30, 1996 ("Date") FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation (the "Maker"), promises to pay to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the "Bank") on or before June 30, 1997 (the "Termination Date"), at its banking house at 712 Main Street, Houston, Harris County, Texas, or at such other location as the Bank may designate, in lawful money of the United States of America, the lesser of: (i) the principal sum of FIVE MILLION AND NO/100THS UNITED STATES DOLLARS (U.S. $5,000,000.00) (the "Maximum Loan Total"); or (ii) the aggregate unpaid principal amount of all loans made by the Bank hereunder (each such loan being a "Loan"), which may be outstanding on the Termination Date. Each Loan shall be due and payable on the maturity date agreed to by the Bank and the Maker with respect to such Loan (the "Maturity Date"). In no event shall any Maturity Date fall on a date after the Termination Date. Subject to the limitations set forth herein, Maker may borrow, repay and reborrow hereunder and there is no limitation on the number of Loans made hereunder so long as the total unpaid principal amount at any time outstanding does not exceed the Maximum Loan Total. The Loans may be either Prime Rate Loans (as hereinafter defined) or Eurodollar Loans (as hereinafter defined). The Maker shall pay interest on each Prime Rate Loan for the Interest Period (as hereinafter defined) with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the lesser of: (i) the Prime Rate (as hereinafter defined) in effect from time to time minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii) the Highest Lawful Rate (as hereinafter defined), which interest shall be due and payable on the last day of each calendar quarter and on the last day of each Interest Period. The Maker shall pay interest on each Eurodollar Loan for the Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the lesser of: (i) the Eurodollar Rate (as hereinafter defined) plus one and one-quarter of one percent (1 1/4%) (the "Effective Eurodollar Rate"); or (ii) the Highest Lawful Rate, which interest shall be due and payable on the last day of each such Interest Period, and if such Interest Period has a duration exceeding three months, on the last day of each third month during such Interest Period. Any amount not paid when due with respect to principal (whether at Maturity Date, by acceleration or otherwise), costs, expenses, and to the extent permitted by applicable law, interest, shall bear interest at a rate per annum equal to the lesser of: (i) the Prime Rate in effect from time to time plus five percent (5.00%); or (ii) the Highest Lawful Rate, which interest shall be due and payable on demand. The principal of any Loan shall be deemed past due if not paid on or before the Maturity Date or any earlier maturity date resulting from acceleration in accordance with the terms of this Note or as provided by law or otherwise. Interest accrued and unpaid with respect to any Loan shall be deemed past due if not paid on or before the applicable interest payment due date as provided for herein. Notwithstanding the foregoing, if at any time the effective rate of interest which would otherwise be payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid principal balance of such Loan during all such times shall be limited to the Highest Lawful Rate, but any subsequent reductions in such interest rate shall not become effective to reduce such interest rate below the Highest Lawful Rate until the total amount of interest accrued on the unpaid principal balance of such Loan equals the total amount of interest which would have accrued if the Effective Prime Rate or Effective Eurodollar Rate, whichever is applicable, had at all times been in effect. Each Prime Rate Loan shall be in an amount not less than $50,000.00 or an integral multiple of $50,000.00 in excess thereof; and each Eurodollar Loan shall be in an amount not less than $150,000.00 or an integral multiple of $50,000.00 in excess thereof. Interest with respect to Prime Rate Loans shall be calculated on the basis of a 365 day year or 366 day year, as the case may be, for the actual number of days elapsed. Interest with respect to Eurodollar Loans shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 day or 366 day year, as the case may be. The following terms shall have the respective meanings indicated: "Borrowing Date" means any Business Day on which the Bank shall make a Loan hereunder. "Business Day" means a day: (i) on which the Bank and commercial banks in New York City are generally open for business; and (ii) with respect to Eurodollar Loans, on which dealings in United States Dollar deposits are carried out in the Eurodollar interbank markets. "Eurodollar Lending Office" means the office of the Bank located at 712 Main Street, Houston, Texas, or such other office of the Bank as the Bank may from time to time specify to the Maker. "Eurodollar Loan" means a Loan which bears interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Rate" means, for each Eurodollar Loan, an interest rate per annum determined by the Bank by dividing: (i) the rate per annum determined by the Bank at or before 10:00 a.m. (Houston time) (or as soon thereafter as practicable) two Business Days before the first day of such Interest Period to be the rate per annum at which deposits of dollars are offered to the Bank by prime banks in whatever Eurodollar interbank market may be selected by the Bank in its sole discretion, acting in good faith, at the time of determination and in accordance with the usual practice in such market for delivery on the first day of such Interest Period in immediately available funds and for a period equal to such Interest Period and in an amount substantially equal to the amount of the Bank's Eurodollar Loan during such Interest Period; by (ii) Statutory Reserves. "Highest Lawful Rate" as used herein shall mean the maximum nonusurious interest rate permitted from time to time to be contracted for, taken, reserved, charged or received on any Loan under applicable federal or Texas laws, whichever permits the higher lawful rate; provided, however, that in the event: (i) such maximum nonusurious interest rate shall, at any time or times during the term of a Loan evidenced hereby, be reduced to a rate less than the maximum nonusurious rate in effect on the date of such Loan; and (ii) applicable law permits contracting for, taking, reserving, charging, and receiving on such Loan throughout the duration thereof the maximum nonusurious rate in effect on the date such Loan was made, then and at all such times the Highest Lawful Rate shall be the maximum nonusurious rate permitted to be contracted for, taken, reserved, charged or received on such Loan under applicable law in effect on the date of such Loan. At all such times, if any, as Texas law shall establish the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Tex. Rev. Civ. Stat. art. 5069-1.04) from time to time in effect. "Interest Period" means, with respect to any Loan, the period commencing on the Borrowing Date and ending on the Maturity Date, consistent with the following provisions. The duration of each Interest Period shall be: (a) in the case of an Prime Rate Loan, a period of up to the Termination Date; and (b) in the case of a Eurodollar Loan, 1, 2, 3 or 6 months; in each case as selected by the Maker and agreed to by the Bank. The Maker's choice of Interest Period is also subject to the following limitations: (i) No Interest Period shall end on a date after the Termination Date; and (ii) If the last day of an Interest Period would be a day other than a Business Day, the Interest Period shall end on the next succeeding Business Day (unless the Interest Period relates to a Eurodollar Loan and the next succeeding Business Day is in a different calendar month than the day on which the Interest Period would otherwise end, in which case the Interest Period shall end on the next preceding Business Day). "Prime Rate" shall mean the rate of interest per annum determined from time to time by the Bank as its prime rate in effect at its principal office in Houston, Texas and thereafter entered in the minutes of its Loan and Discount Committee; each change in the Prime Rate shall be effective on the date such change is determined; without special notice to the Maker or any other person or entity. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE ACTUALLY CHARGED TO ANY CUSTOMER AND ANY STATEMENT, REPRESENTATION OR WARRANTY IN THAT REGARD OR TO THAT EFFECT IS EXPRESSLY DISCLAIMED BY BANK. BANK MAY MAKE LOANS AT RATES OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE. "Prime Rate Loan" means a Loan which bears interest at a rate determined by reference to the Prime Rate. "Statutory Reserves" shall mean the difference (expressed as a decimal) of the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Bank is subject with respect to the Eurodollar Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. The unpaid principal balance of this Note at any time shall be the total of all Loans made by the Bank to or for the benefit of the Maker, less the amount of all payments of principal made hereon by or for the account of the Maker. The Bank's records shall serve as presumptive evidence of any and all amounts outstanding hereunder. Each Loan shall be made on the Maker's irrevocable notice, given not later than 10:00 A.M. (Houston time) on, in the case of Eurodollar Loans, the second Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate Loans, the proposed Borrowing Date, from the Maker to the Bank. Each such notice of a requested borrowing (a "Notice of Requested Borrowing") under this paragraph may be oral or written, and shall specify: (i) the requested amount of such Loan; (ii) the proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime Rate Loan or Eurodollar Loan; and (iv) the Interest Period for such Loan. If any Notice of Requested Borrowing shall be oral, the Maker shall deliver to the Bank prior to the Borrowing Date a confirmatory written Notice of Requested Borrowing. If at any time the Bank determines in good faith (which determination shall be conclusive) that any change in any applicable law, rule or regulation or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Bank or its foreign branch or branches to maintain or fund any Loan by means of dollar deposits obtained in any Eurodollar interbank market (any of the above being described as a "Eurodollar Event"), then, at the option of the Bank, the aggregate principal amount of the Bank's Eurodollar Loans then outstanding, which Loans are directly affected by such Eurodollar Event, shall be prepaid by the Maker. Upon the occurrence of any Eurodollar Event, and at any time thereafter so long as such Eurodollar Event shall continue, the Bank may exercise its aforesaid option by giving written notice thereof to the Maker. Any prepayment of any Eurodollar Loan which is required under the preceding paragraph shall be made, together with accrued and unpaid interest and all other amounts payable to the Bank under this Note with respect to such prepaid Eurodollar Loan on the date stated in the notice to the Maker referred to above, which date ("required prepayment date") shall be not less than 15 days from the date of such notice. If any Eurodollar Loan is required to be prepaid under the preceding paragraph, the Bank shall make on the required prepayment date a Prime Rate Loan in the same principal amount and with an Interest Period ending on the same day as the Eurodollar Loan so prepaid. If any domestic or foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D of the Board of Governors of the Federal Reserve System) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) changes, imposes, modifies, applies or deems applicable any reserve, special deposit or similar requirements in respect of any such Loan or against assets of, deposits with or for the account of, or credit extended or committed by, the Bank; or (b) imposes on the Bank or the interbank eurocurrency deposit and transfer market or the market for domestic bank certificates of deposit any other condition affecting any such Loan; and the result of any of the foregoing is to impose a cost to the Bank of agreeing to make, funding or maintaining any such Loan or to reduce the amount of any sum receivable by the Bank in respect of any such Loan, then the Bank may notify the Maker in writing of the happening of such event and Maker shall upon demand pay to the Bank such additional amounts as will compensate the Bank for such costs. Without prejudice to the survival of any other agreement of the Maker under this Note, the obligations of the Maker under this paragraph shall survive the termination of this Note. The Maker may on any Business Day prepay the outstanding principal amount of any Prime Rate Loan, in whole or in part, together with accrued interest to the date of such prepayment on the principal amount prepaid. Partial prepayments shall be in an aggregate principal amount of $50,000.00 or a greater integral multiple of $50,000.00. Except as specified in this paragraph, the Maker shall have no right to prepay any Loan. The Maker will indemnify the Bank against, and reimburse the Bank on demand for, any loss, cost or expense incurred or sustained by the Bank (including without limitation any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain Loans bearing interest at the Eurodollar Rate) as a result of: (a) any payment or prepayment (whether permitted by the Bank or required hereunder or otherwise) of all or a portion of any Eurodollar Loan on a day other than Maturity Date of such Loan; (b) any payment or prepayment, whether required hereunder or otherwise, of any Eurodollar Loan made after the delivery of a Notice of Requested Borrowing but before the applicable Borrowing Date if such payment or prepayment prevents the proposed Loan from becoming fully effective; or (c) the failure of any Eurodollar Loan to be made by the Bank due to any action or inaction of the Maker. For purposes of this paragraph, funding losses arising by reason of liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain Loans bearing interest at the Eurodollar Rate shall be calculated as the remainder obtained by subtracting: (i) the yield (reflecting both stated interest rate and discount, if any) to maturity of obligations of the United States Treasury in an amount equal or comparable to such Loan for the period of time commencing on the date of the payment, prepayment or change of rate as provided above and ending on the last day of the subject Interest Period; from (ii) the interest payable at the Eurodollar Rate for the period commencing on the date of such payment, prepayment or change of rate and ending on the last day of such Interest Period. Such funding losses and other costs and expenses shall be calculated and billed by the Bank and such bill shall, as to the costs incurred, be conclusive absent manifest error. If after the date of this Note, the Bank shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of making any Loans hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank in good faith to be material, then from time to time, the Maker shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. A certificate of the Bank setting forth such amount or amounts as shall be necessary to compensate the Bank as specified in the immediately preceding paragraphs above shall be delivered as soon as practicable to the Maker and shall be conclusive and binding, absent manifest error. The Maker shall pay the Bank the amount shown as due on any such certificate within 15 days after Bank delivers such certificate. In preparing such certificate, the Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. Any and all payments by the Maker hereunder shall be made free and clear of and without deduction for any and all deductions, charges or withholdings, and (if Maker is not a citizen of the United States domiciled in the United States) all present and future taxes and tax withholdings, and all liabilities with respect thereto, excluding taxes imposed on the Bank's income (including penalties and interest payable in respect thereof) (all such non-excluded taxes, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Maker shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Bank: (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this paragraph) the Bank receives an amount equal to the sum it would have received had no such deductions been made; and (ii) the Maker shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. In addition, the Maker agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Note (hereinafter referred to as "Other Taxes"). The Maker will indemnify the Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this paragraph) paid by the Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Bank makes written demand therefor; provided, however, to the extent that the Bank is reimbursed for any Taxes or Other Taxes that were incorrectly or illegally asserted, the Bank shall return to the Maker the amount of such reimbursement, together with any interest that may have been paid with respect thereto, to the extent the Maker has actually indemnified the Bank with respect thereto. Within 30 days after the date of any payment of Taxes, the Maker will furnish to the Bank the original or a certified copy of a receipt evidencing payment thereof. Without prejudice to the survival of any other agreement of the Maker hereunder, the agreement and obligations of the Maker contained in this paragraph shall survive the payment in full of principal and interest under this Note. If any payment of interest or principal herein provided for is not paid when due, or if an Event of Default occurs under the terms of the Letter Agreement (as defined below), then the owner or holder of this Note may at its option, by notice to the Maker, declare the unpaid principal balance of all Loans, all accrued and unpaid interest thereon and all other amounts payable under this Note to be forthwith due and payable, whereupon the Loans, all such interest and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest, notice of intent to accelerate, notice of actual acceleration or further notice of any kind, all of which are hereby expressly waived by the Maker. If default is made in the payment of this Note and it is placed in the hands of an attorney for collection, or collected through probate or bankruptcy proceedings, or if suit is brought on the same, the Maker agrees to pay reasonable attorneys' fees and all costs and expenses. This Note is issued by the Maker to evidence Loans outstanding from time to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a $5,000,000.00 revolving line of credit (the "Revolving Line of Credit") extended by the Bank to the Maker pursuant to that certain Letter Agreement of even date herewith, as amended from time to time (the "Letter Agreement"). It is given in renewal, increase and modification of two (2) promissory notes dated April 1, 1996 executed by Maker and payable to the order of the Bank on or before June 30, 1996 in the principal amounts of $3,000,000.00 and $1,000,000.00 respectively. The Maker warrants and represents to the Bank, and to all other owners and/or holders of any indebtedness evidenced hereby, that all Loans evidenced by this Note are for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter One of the Texas Credit Code, Tex. Rev. Civ. Stat. arts. 5069- 1.01 et. seq. The Maker warrants and represents to the Bank and to all other owners or holders of this Note that no Loans shall be used for the purchase or carrying of any "margin stock" within the meaning of Regulation "U" of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect on the date hereof. Except as otherwise specified in this Note, the Maker and any and all co-makers, endorsers, guarantors and sureties hereby severally waive grace, presentment, demand, notice of default, notice of intent to accelerate, notice of acceleration, and all other demands and notices of any nature or type whatsoever, in connection with the delivery, acceptance, performance, default, dishonor or enforcement of, or entry of judgment in connection with this Note, and further waive the filing of suit hereon for the purpose of fixing liability. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE SHALL BE PERFORMABLE FOR ALL PURPOSES IN THE COUNTY OF THE BANK'S PRINCIPAL OFFICE IN TEXAS, AND THE MAKER AND THE BANK AGREE THAT THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY THE MAKER OR THE BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST THE MAKER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY. THE MAKER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. THE MAKER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. NOTHING HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS SHALL AFFECT THE RIGHT OF THE BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE MAKER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS OR VENUES. The Maker and the Bank expressly agree, pursuant to Article 15.10(b) of Chapter 15 ("Chapter 15") of the Texas Credit Code, that Chapter 15 shall not apply to this Note or to any Loan and that this Note and all such Loans shall not be governed by or subject to the provisions of Chapter 15 in any manner whatsoever. It is the intention of Maker and Bank to comply with usury laws in force in the State of Texas and in the United States of America as applicable. Anything in this Note to the contrary notwithstanding, the Maker shall never be required to pay unearned interest on this Note and shall never be required to pay interest on this Note at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest which would otherwise be payable under this Note would exceed the Highest Lawful Rate, or if the holder of the Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable under this Note to a rate in excess of the Highest Lawful Rate, then: (i) the amount of interest which would otherwise be payable under this Note shall be reduced to the amount allowed under applicable law; and (ii) any unearned interest paid by the Maker or any interest paid by the Maker in excess of the Highest Lawful Rate shall, at the option of the holder of this Note, be either refunded to the Maker or credited on the principal of this Note. It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received by the Bank or any holder of this Note that are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate shall be made, to the extent permitted by usury laws applicable to the Bank (now or hereafter enacted), by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Loans evidenced by this Note all interest at any time contracted for, charged or received by the Bank in connection therewith. The Bank reserves the right in its sole discretion without notice to Maker, to sell participations or assign its interest, or both in all or part of the Loans, the Note, or the Line of Credit. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the Maker has executed this Note effective the day, month and year first aforesaid. "MAKER" ERC INDUSTRIES, INC. By: Name: Title: Acknowledged for purposes of notice pursuant to the above cited statute by: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: Name: Title: EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 0 12,272 534 15,314 27,961 19,148 14,216 35,309 15,862 0 0 0 213 17,408 35,309 50,961 50,961 38,787 10,514 (98) 51 322 1,588 (573) 1,015 0 0 0 1,015 .06 .06
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