-----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, PtZZbnTD4rNObzDxztWRpHaUfOcekLgaM95mQtqHtcSlsxIk9TZ94Gl4s0C0e3Pw mFI2Xl8DaJUnFm45wcws7A== 0000899243-98-001615.txt : 19980817 0000899243-98-001615.hdr.sgml : 19980817 ACCESSION NUMBER: 0000899243-98-001615 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-14439 FILM NUMBER: 98691283 BUSINESS ADDRESS: STREET 1: 1441 PARK TEN BOULEVARD CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 2813988901 MAIL ADDRESS: STREET 1: 1441 PARK TEN BOULEVARD CITY: HOUSTON STATE: TX ZIP: 77084 FORMER COMPANY: FORMER CONFORMED NAME: ERC CORP /DE/ DATE OF NAME CHANGE: 19851103 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File No. 0-14439 ------- ERC INDUSTRIES, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 76-0382879 -------- ---------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 1441 Park Ten Boulevard, Houston, Texas 77084 - --------------------------------------- ------- (Address of principal executive offices) (Zip Code) (281) 398-8901 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 12, 1998 ----- ------------------------------ Common stock, $0.01 par value 27,498,272 shares ERC INDUSTRIES, INC. INDEX PAGE PART I FINANCIAL INFORMATION: Condensed Consolidated Balance Sheet - June 30, 1998 and December 31, 1997............................. 2 Condensed Consolidated Statement of Operations Three and Six Months Ended June 30, 1998 and 1997............... 3 Condensed Consolidated Statement of Shareholders' Equity Six Months Ended June 30, 1998.................................. 4 Condensed Consolidated Statement of Cash Flows Six Months Ended June 30, 1998 and 1997......................... 5 Notes to Condensed Consolidated Financial Statements............... 6 Management's Discussion and Analysis............................... 9 Quantitative and Qualitative Disclosures about Market Risk......... 11 PART II OTHER INFORMATION.................................................... 12 Signature Page..................................................... 14 Part I. FINANCIAL INFORMATION ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except for share amounts) (unaudited)
June 30, December 31, 1998 1997 --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 315 $ - Trade accounts receivable, net of allowance for doubtful accounts of $672 and $681, respectively 24,590 18,689 Inventory 32,372 25,081 Prepaid expenses and other current assets 285 229 Deferred tax asset 2,520 2,520 --------- --------- Total current assets 60,082 46,519 Property, plant and equipment, net 8,788 7,743 Other assets 1,957 1,634 Deferred tax asset-noncurrent 170 170 Excess cost over net assets acquired, net 5,373 4,317 --------- --------- Total assets $ 76,370 $ 60,383 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt and capital leases due within one year $ 23,106 $ 8,156 Accounts payable 10,643 11,587 Other accrued liabilities 3,612 4,761 --------- --------- Total current liabilities 37,361 24,504 --------- --------- Long-term debt 3,907 3,977 Commitments and contingencies - - Shareholders' equity: Preferred stock, par value $1; authorized and unissued - 10,000,000 shares Common stock, par value $0.01; authorized - 30,000,000 shares; 27,498,272 issued and outstanding 275 275 Additional paid-in capital 26,078 24,842 Retained earnings from January 10, 1989 8,721 6,776 Accumulated other comprehensive income 28 9 --------- --------- Total shareholders' equity 35,102 31,902 --------- --------- Total liabilities and stockholders' equity $ 76,370 $ 60,383 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. -2- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except for per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues $ 28,355 $ 17,521 $ 55,981 $ 34,055 Cost of goods sold 20,412 13,504 40,718 26,082 -------- -------- -------- -------- Gross profit 7,943 4,017 15,263 7,973 Selling, general and administrative expenses 6,142 3,416 11,228 6,852 -------- -------- -------- -------- Operating income 1,801 601 4,035 1,121 -------- -------- -------- -------- Other (income) expense: Interest expense 458 190 799 333 Other, net (21) (11) (95) 27 -------- -------- -------- -------- 437 179 704 360 -------- -------- -------- -------- Income before provision for income taxes 1,364 422 3,331 761 Provision for income taxes 619 174 1,386 293 -------- -------- -------- -------- Net income $ 745 $ 248 $ 1,945 $ 468 ======== ======== ======== ======== Basic income per share $ 0.03 $ 0.01 $ 0.07 $ 0.02 ======== ======== ======== ======== Weighted average number of shares outstanding 27,498 21,498 27,498 21,248 ======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL ACCUMULATED ------------------------ PAID-IN RETAINED OTHER COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME ---------- ------------ ----------- ---------- ------------ Balance as of December 31, 1997 27,498 $275 $24,842 $6,776 $ 9 Net income -- -- -- 1,945 -- Foreign currency translation adjustment -- -- -- -- 19 Income tax benefit of pre-quasi- reorganization net operations loss carryforwards -- -- 1,236 -- -- ------ ---- ------- ------ --- Balance as of June 30, 1998 27,498 275 26,078 8,721 28 ====== ==== ======= ====== === The accompanying notes are an integral part of the condensed consolidated financial statements.
-4- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ------------------------------ 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities, net of the effect of acquisitions $ (9,831) $ (6,164) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired of $80 (2,520) - Purchases of property, plant and equipment (1,387) (578) Proceeds from sale of property, plant and equipment 32 6 ---------- ---------- Net cash used in investing activities (3,875) (572) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowings, net 14,558 7,111 Principal payments on long-term debt and capital lease obligations (546) (363) ---------- ---------- Net cash provided by financing activities 14,012 6,748 ---------- ---------- Effect of exchange rate changes on cash 9 (13) ---------- ---------- Net increase (decrease) in cash and cash equivalents 315 (1) Cash and cash equivalents, beginning of period - 1 ---------- ---------- Cash and cash equivalents, end of period $ 315 $ - ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. -5- ERC INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) The information contained herein with respect to June 30, 1998 and the three and six months ended June 30, 1998 and 1997, has not been audited but was prepared in conformity with the accounting principles and policies described in the ERC Industries, Inc. (the "Company") annual report (Form 10-K) for the year ended December 31, 1997. Included are all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial information for the three and six months ended June 30, 1998 and 1997. The results of interim periods are not necessarily indicative of results to be expected for the year. (2) Supplemental Cash Flow Information: The acquisition of Church Oil Tools, Inc. (see Note 3) was partially financed through $4 million of promissory notes to the sellers. (3) Acquisitions: On July 1, 1997, the Company acquired 100% of the issued and outstanding capital shares of Church Oil Tools, Inc. ("Church"), a company incorporated in Texas. The business of Church is the manufacture of oilfield equipment. Church operates from a facility located in Houston, Texas. The Company paid a purchase price of $5 million. The source of the funds for the purchase was approximately $1 million in cash on hand and $4 million of promissory notes to the Sellers. On January 30, 1998, the Company entered into a definitive purchase agreement for the acquisition of Bompet, C.A. ("Bompet"), a Venezuelan company. The acquisition was accomplished by the purchase of 100% of the issued and outstanding capital stock of Bompet. On January 30, 1998, the only remaining condition to completion of the acquisition of Bompet was the wire transfer of funds from the Company's bank to the seller. This condition was met on February 2, 1998, the subsequent business day. Bompet is a Venezuelan based manufacturer of products used in the drilling and production segment of the Oil and Gas Industry. Bompet sells wellheads and gate valves (and related assemblies) along with specialized services to oil and gas producers throughout Latin America. Bompet has a facility in Cuidad Ojeda on the east side of Lake Maracaibo. The Company plans to continue to operate Bompet as a subsidiary of the Company in substantially the same manner as it was operated prior to the acquisition. -6- In connection with the transaction, the Company paid the sole Bompet stockholder, Inversiones Western C.A., a purchase price of $2.6 million. In addition, the Company will pay up to a maximum of $3.4 million in the event that Bompet's earnings exceed certain thresholds during 1998, 1999 and 2000. The acquisition of Bompet was accounted for under the purchase method of accounting and the purchase price was allocated as follows (in thousands):
Cash $ 80 Accounts Receivable 2,556 Inventory 2,086 Property, Plant and Equipment 556 Other Assets 15 Excess Cost Over Net Assets Acquired 911 Accounts Payable (1,438) Accrued Expenses (1,298) Long-Term Debt-Current and Non-Current (868) ------- $ 2,600 =======
The operating results of Bompet and Church are included in operations from January 1, 1998 and July 1, 1997, respectively. The following represents the pro-forma results of operations as if the acquisitions of Bompet and Church had occurred on January 1, 1997 (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, 1997 June 30, 1997 ------------------- ---------------- Revenues 21,125 41,825 Net income 672 2,570 Basic income per share .03 .12
(4) Debt: The Company negotiated a new domestic $15.5 million line of credit with its bank in June 1998. The line has substantially the same terms as the Company's previous line of credit and expires on January 4, 1999. On June 16, 1998, Wood Group Petroleum Services, Inc., a wholly owned subsidiary of Wood Group PLC, granted to the Company a new $5 million line of credit. The line provides for interest at an annual rate of the LIBOR rate plus 1%, which was 6.7% at June 30, 1998. This line of credit is uncollateralized and is due on demand. (5) Recent Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and -7- its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 is effective for the Company in 1998. Comprehensive income was $735,000, $2.0 million, $307,000 and $455,000 for the three and six months ended June 30, 1998 and 1997, respectively. Other comprehensive income consisted of the foreign currency translation adjustment for the three and six months ended June 30, 1998 and 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Industry wide, the average active domestic rig count as reported by Baker Hughes Incorporated, a leading industry observer, was up 2.5% to 915 for the six months ended June 30, 1998, compared with 893 for the six months ended June 30, 1997. The average actual rig count for the six months ended June 30, 1998, as compared to the six months ended December 31, 1997 declined 7.9% from 994 to 915. The average active rig count is an important indicator of activity levels in the market in which the Company operates. The Company's revenues increased by $10.9 million to $28.4 million for the three months ended June 30, 1998, from $17.5 million for the three months ended June 30, 1997. In addition, the Company's six month revenues increased by $21.9 million (64.4%) to $56 million for the six months ended June 30, 1998, from $34.1 million for the six months ended June 30, 1997. The increase in revenues is principally due to increased activity with existing customers as a result of higher drilling activity, additional sales attributable to the acquisition of Church and Bompet and increased international sales volume. The gross profit for the three months ended June 30, 1998 increased by $3.9 million to $7.9 million from $4 million for the same period last year. The gross profit for the six months ended June 30, 1998 increased by $7.3 million to $15.3 million, from $8 million for the same period in 1997. Gross profit as a percentage of sales were 28.0% and 27.3% for the three and six months ended June 30, 1998 as compared with 22.9% and 23.4% for the three and six months ended June 30, 1997, respectively. These increases were primarily due to outsourcing of manufacturing at lower costs and change in product mix largely arising from the acquisitions of Church and Bompet. Selling, general and administrative expenses increased by $2.7 million for the three months ended June 30, 1998 as compared with the same three month period for 1997. The same expenses increased by $4.3 million to $11.2 million for the six months ended June 30, 1998 from $6.9 million for the six months ended June 30, 1997. The primary reasons for the increase are the addition of Church and Bompet and costs associated with international marketing efforts and additional sales personnel. Selling, general and administrative expenses, as a percentage of sales were 20.1% in the first six months of 1998, compared with 20.1% for the first six months of 1997. These expenses increased as a percentage of sales from 19.5% in the three months ended June 30, 1997 to 21.7% for the three months ended June 30, 1998. This increase is primarily due to increased costs to pursue international acquisitions, manage current international operations and upgrade the Company's management information systems. The Company generated operating income of $1.8 million and $4 million for the three and six months ended June 30, 1998 compared with operating income of $601,000 and $1.1 million for the three and six months ended June 30, 1997. The increase in operating income was due to increased sales volume and resulting gross profit, which was only partially offset by increases in selling, general and administrative expenses. Other (income) expense increased by $258,000 for the three months ended June 30, 1998 over the same period in 1997. Likewise, there was a $344,000 increase for the six month period. This was principally due to an increase in interest expense as a result of higher borrowings from the Company's line of credit to support higher inventory and receivables levels partially offset by favorable currency translation adjustment relating to Bompet. -9- The provision for income taxes for the three and six months ended June 30, 1998 and 1997 resulted in an expense of $619,000, $1.4 million, $174,000 and $293,000, respectively. The effective tax rate increased from 38.5% in 1997 to 41.6% in 1998 primarily because of non-deductible goodwill amortization related to the Company's acquisition of Church Oil Tools and Bompet, C.A. Liquidity and Capital Resources The Company negotiated a new domestic $15.5 million line of credit with its bank in June 1998. The line has substantially the same terms as the Company's previous line of credit and expires on January 4, 1999. On June 16, 1998, Wood Group Petroleum Services, Inc., a wholly owned subsidiary of Wood Group PLC, granted to the Company a new $5 million line of credit. The line provides for interest at an annual rate of the LIBOR rate plus 1%, which was 6.7% at June 30, 1998. This line of credit is uncollateralized and is due on demand. Working capital increased by $706,000 to $22.7 million at June 30, 1998 compared with $22 million at December 31, 1997. This improvement is primarily the result of increases in accounts receivable and inventory resulting from higher sales activity and the acquisition of Bompet, that were only partially offset by increases in debt. Pursuant to the Company's long-term debt agreements, approximately $23.1 million in principal payments are due over the next twelve months. The Company believes its line of credit facility, combined with cash generated from operations, will be adequate to fund its operations for at least the next twelve months. The Company currently anticipates incurring capital expenditures of $3.1 million principally for machinery and equipment, plant improvements and vehicle purchases, through the fiscal year ended December 31, 1998. The Company expects to fund these expenditures from amounts available under the line of credit facilities, cash provided by operations and/or capital lease transactions. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Adoption is not recognized for interim periods in the initial year of application. Adoption of this statement will not have a material impact on the consolidated financial statements of the Company. Acquisition On February 2, 1998, the Company completed the acquisition of all the issued and outstanding capital stock of Bompet, a Venezuelan Company. In connection with the transaction, the Company paid the sole stockholder of Bompet, Inversiones Western, C.A., a purchase price of $2.6 million. In addition, the Company will pay up to a maximum of $3.4 million in the event that Bompet's -10- earnings exceed certain thresholds during 1998, 1999 and 2000. Cautionary Statement for Purposes of Forward-Looking Statements Certain information contained in this Part I may be deemed to be forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provision in that enacted legislation. These statements are based on current expectations and involve a number of risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements as a result of various factors including, but not limited to the following: the effects of acquisitions, expectations of operating levels at the Company's facilities, expectations of the future customer and product mix, retention of major customers, competition and the Company's position in the market, discussions about future costs, the overall oil and gas market and timing of capital expenditures. Year 2000 Compliance The Company has reviewed its computer systems and hardware to locate potential operational problems associated with the year 2000 issue. The Company believes that all year 2000 problems in its internal information processing computer systems will be resolved and will not cause disruption of its operations, or have a material adverse effect on its financial condition or results of operations. The Company is in the process of contacting and receiving verification of year 2000 issue compliance from its vendors, purchasers, suppliers, customers and its financial service providers. At this time, the Company does not anticipate material disruption in its operations as a result of year 2000 compliance issues, but will continue to monitor the situation with third parties. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. -11- Part II - OTHER INFORMATION Item 1. Legal Proceedings. ----------------- The Company is involved in various claims and disputes in the normal course of its business. Management of the Company believes the disposition of all such claims, individually or in the aggregate, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. Item 2. Changes in Securities. --------------------- The Company's line of credit with Chase Bank of Texas, N.A. contains covenants that require the Company to maintain certain financial ratios and prohibit the Company from declaring or paying dividends. During the six months ended June 30, 1998, the Company made no unregistered sales of its equity securities. Item 3. Defaults Upon Senior Securities. ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- At the Company's Annual Meeting of Shareholders held on June 15, 1998, the shareholders of the Company re-elected to the Board of Directors, John Derek Prichard-Jones by a vote of 26,208,846 for and 80,017 withheld, and Anthony Howells by a vote of 26,279,997 shares for and 8,866 withheld. George W. Tilley and Allister G. Langlands continue serving in their capacity as directors. The shareholders also ratified the appointment of PricewaterhouseCoopers LLP as the Company's independent public accountants for the fiscal year ending December 31, 1998 by a vote of 26,137,062 shares in favor, 72,272 against, and 52,385 shares abstaining. Item 5. Other Information. ----------------- None. -12- Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits: 10.1 Letter Agreement with Chase Bank of Texas, N.A. dated as of June 30, 1998/1/. 10.2 Letter Agreement with Wood Group Petroleum Services dated as of June 16,1998/1/. 27 Financial Data Schedule/1/. (b) Reports on Form 8-K: None - --------------------------------------- /1/ Filed herewith. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1998 ERC INDUSTRIES, INC. ----------------------------------------- /s/ Wendell R. Brooks ----------------------------------------- Wendell R. Brooks President, Secretary & Director /s/ James E. Klima ----------------------------------------- James E. Klima Chief Financial Officer -14- EX-10.1 2 LETTER AGREEMENT WITH CHASE BANK EXHIBIT 10.1 THIRD AMENDMENT TO LETTER AGREEMENT THIS THIRD AMENDMENT TO LETTER AGREEMENT (this "Amendment") dated effective as of June 30, 1998 (the "Effective Date"), is by and between ERC INDUSTRIES, INC. ("Borrower"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("Bank"). PRELIMINARY STATEMENT. Bank and Borrower are parties to a Letter Agreement dated as of June 4, 1997, as amended by First Amendment as of January 30, 1998 and a Second Amendment dated as of April 8, 1998 ("Letter Agreement"). All capitalized terms defined in the Letter Agreement and not otherwise defined herein shall have the same meanings herein as in the Letter Agreement. Bank and Borrower have agreed to amend the Letter Agreement to the extent set forth herein in order to extend the maturity date of the Revolving Line of Credit. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, Bank and Borrower hereby agree as follows: 1. Revolving Line of Credit. Section 1.1 of the Letter Agreement is amended by substituting the following for the Section 1.1 of the Letter Agreement: "Section 1.1 REVOLVING LINE OF CREDIT A. Advances: The Bank agrees to make advances (an "Advance" or "Advances") to Borrower, upon request of Borrower from time to time from the Effective Date to but not including January 4, 1999 not to exceed at any one time outstanding the lesser of the Borrowing Base or $15,500,000.00, Borrower having the right to borrow, repay and reborrow. Advances shall be used for the purpose of meeting the working capital requirements and general corporate purposes of Borrower. Advances shall be evidenced by, and made as provided in a promissory note of even date herewith executed by Borrower and delivered to Bank ("Note"), a copy of which is attached hereto as Exhibit "A" and made a part hereof for all purposes (the "Note" as used in this Agreement, shall include without limitation, any and all renewals, extensions, modifications, rearrangements, replacements thereof and substitutions therefor). B. Letters of Credit: The Bank agrees to issue standby and commercial letters of credit (an "L/C" or "L/Cs") from time to time, from the Effective Date to but not including January 4, 1999, 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 January 4, 2000. The Borrower shall reimburse the Bank immediately upon demand for any drawings made under an L/C. Prior to January 4, 1999, the Borrower may request an Advance under the Note, and the Bank is hereby authorized to make such an Advance without notice to the Borrower, to pay any drawing under any L/C. C. Maximum Amount: The maximum amount which will be available to Borrower under the Revolving Line of Credit is the lesser of the Borrowing Base or $15,500,000.00 ("Maximum Amount"), which in determining whether any amounts are available under the Revolving Line of Credit, Bank will deduct from the Maximum Amount, the amount of all unpaid Advances (the outstanding principal balance on the Note) and all L/C Obligations. The term "L/C Obligations" shall mean the face amount of all L/Cs issued and outstanding plus any unreimbursed drawings under the L/Cs plus any other amounts owing to Bank under or in respect of any L/C or Application (as hereinafter defined). Borrower and Bank agree that the following outstanding L/Cs shall be deemed made under and subject to the terms of this Agreement. VALUE EXPIRY NUMBER DATE DATE AMOUNT ---------- -------- -------- ---------- I455643 08/29/95 10/31/97 $ 2,820.00 I464024 08/12/96 05/09/97 10,000.00 I460191 03/05/96 08/30/96 10,000.00 I464760 09/16/96 09/30/98 1,648.00" 2. Section 1.6 of the Letter Agreement is amended by substituting the following for the Section 1.6 of the Letter Agreement: "Section 1.6 MATURITY: The Revolving Line of Credit shall expire: (i) on January 4, 1999; or (ii) such earlier date resulting from acceleration as defined in Section 5. hereof." 3. Exhibit A and Exhibit B of the Letter Agreement are hereby amended by replacing the existing Exhibit A and Exhibit B with the Exhibit A and Exhibit B attached hereto and hereby incorporated into this Amendment and the Letter Agreement for all purposes. 4. Borrower hereby represents and warrants to the Bank that after giving effect to the execution and delivery of this Amendment: (a) the representations and warranties set forth in the Letter Agreement are true and correct on the date hereof as though made on and as of such date; and (b) no Event of Default, or event which with passage of time, the giving of notice or both would become an Event of Default, has occurred and is continuing as of the date hereof. 5. This Amendment shall become effective as of the Effective Date upon its execution and delivery by each of the parties named in the signature lines below, and the term "Agreement" as used in the Letter Agreement shall also refer to the Letter Agreement as amended by this Amendment. Page 1 of 2 Page Third Amendment to Letter Agreement ERC Industries, Inc. June 30, 1998 6. Borrower further acknowledges that each of the other Loan Documents, including the Security Agreement, is in all other respects ratified and confirmed, and all of the rights, powers and privileges created thereby or thereunder are ratified, extended, carried forward and remain in full force and effect except as the Letter Agreement is amended by this Amendment. 7. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 8. This Amendment shall be included within the definition of "Loan Documents" as used in the Agreement. 9. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA. THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the Effective Date. BORROWER: ERC INDUSTRIES, INC. By:______________________________ Name: ___________________________ Title: __________________________ BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, By:______________________________ Name: ___________________________ Title: __________________________ Page 2 of 2 Page EXHIBIT B BORROWING BASE REPORT ACCOUNTS AND INVENTORY BORROWING BASE REPORT FOR PERIOD BEGINNING: ____________________ AND ENDING ____________________ ("CURRENT PERIOD") REQUIRED BY THE LETTER AGREEMENT DATED JUNE 4, 1997 (AS AMENDED, RESTATED, AND SUPPLEMENTED FROM TIME TO TIME, THE "AGREEMENT") BY AND BETWEEN ERC INDUSTRIES, INC. ("BORROWER") AND CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("BANK") THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 30 DAYS OF THE LAST DAY OF EACH CALENDAR MONTH BORROWER MUST PROVIDE ALONG WITH THE BORROWING BASE REPORT: AN ACCOUNTS RECEIVABLE AGINGS AND LISTING. Line 1. Total Accounts as of the end of the Current Period $__________ INELIGIBLE ACCOUNTS AS OF THE END OF THE CURRENT PERIOD: 2. That portion (e.g., invoice) of all of the Accounts of any Account Debtor where the Account is more than 90 days from invoice date $___________ 3. All of the Accounts, not already included in Line 2, of any Account Debtor if 20% of the dollar amount of all of the Accounts of such Account Debtor are more than 90 days from invoice date $___________ 4. That portion of all of the Accounts of any Account Debtor which exceeds 10% of the dollar amount of the total of all Accounts for all Account Debtors for the Current Period (Line 1) $___________ 5. Intercompany and Affiliate Accounts $___________ 6. Government Accounts [GOVERNMENT ACCOUNTS MEANS RECEIVABLES OWED BY THE U.S. GOVERNMENT OR BY THE GOVERNMENT OF ANY STATE, COUNTY, MUNICIPALITY, OR OTHER POLITICAL SUBDIVISION AS TO WHICH BANK'S SECURITY INTEREST OR ABILITY TO OBTAIN DIRECT PAYMENT OF THE PROCEEDS IS GOVERNED BY ANY FEDERAL OR STATE STATUTORY REQUIREMENTS OTHER THAN THOSE OF THE UNIFORM COMMERCIAL CODE, INCLUDING, WITHOUT LIMITATION, THE FEDERAL ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED.] $__________ 7. Foreign Accounts (unless secured by a letter of credit issued by a bank satisfactory to the Bank, covered by Eximbank insurance or otherwise approved by Bank) $__________ 8. Accounts subject to any dispute or setoff or contra account $__________ 9. Other Ineligible Accounts $__________ 10. Total Ineligible Accounts for the Current Period $__________ (Add Lines 2 through 9) 11. Total Eligible Accounts for the Current Period $__________ (Line 1 - Line 10) 12. Multiplied by: Accounts Advance Factor 80% 13. Equals: ACCOUNTS COMPONENT OF BORROWING BASE $__________ 14. Total Inventory as of the end of the Current Period $__________ INELIGIBLE INVENTORY AS OF THE END OF THE CURRENT PERIOD: 15. Work in Process $__________ 16. Private label $__________ 17. Obsolete $__________ 18. Returned/damaged $__________ 19. Consigned/unowned $__________ 20. Subject to Purchase Money Security Interest $__________ 21. Slow moving $__________ 22. Other Ineligible Inventory $__________ 23. Total Ineligible Inventory as of the end of the Current Period (Lines 15 + 16 + 17 + 18 + 19 + 20 + 21 + 22) $__________ 24. Total Eligible Inventory as of the end of the Current Period (Line 14 - Line 23) $__________ 25. Multiplied by: Inventory Advance Factor 50% 26. Equals: INVENTORY COMPONENT OF BORROWING BASE $__________ (Not to exceed 50% of the Borrowing Base) 27. Total BORROWING BASE (not to exceed $15,500,000.00) as of the end of the Current Period (Line 13 + Line 26) $_________ 28. Less: Aggregate principal amount outstanding under the Note as of the end of the Current Period $__________ 29. Less: Outstanding L/C Obligations as of the end of the Current Period $__________ 30. Total Outstandings (Line 28 + Line 29) $_________ 31. Equals: Amount available for borrowing subject to the terms of the Agreement, if positive; or amount due, if negative $__________
The terms "ACCOUNTS" and "INVENTORY" have the respective meanings as set forth in the Texas Business and Commerce Code in effect as of the date of the Agreement. Inventory shall be valued at the lesser of: (a) market value; and (b) cost. "OTHER INELIGIBLE ACCOUNTS" mean all such Accounts of Borrower that are not subject to a first and prior Lien in favor of Bank, those Accounts that are subject to any Lien not in favor of Bank and those Accounts of Borrower as shall be deemed from time to time to be, in the sole judgment of Bank, ineligible for purposes of determining the Borrowing Base. "OTHER INELIGIBLE INVENTORY" means that Inventory of Borrower that is not subject to a first and prior Lien in favor of Bank, that Inventory that is subject to any Lien not in favor of Bank and that Inventory of Borrower as shall be deemed from time to time to be in the sole judgment of Bank, ineligible for purposes of determining the Borrowing Base. All other terms not defined herein shall have the respective meanings as in the Agreement. Borrower certifies that the above information and computations are true, correct, complete and not misleading as of the date hereof. Borrower: ERC INDUSTRIES, INC. By:_____________________________________________________________________________ Name:___________________________________________________________________________ Title:__________________________________________________________________________ Address:________________________________________________________________________ Date:___________________________________________________________________________ Page 3 of 2 Page PROMISSORY NOTE (this "Note") U.S. $15,500,000.00 June 30, 1998 ("Date") FOR VALUE RECEIVED, ERC INDUSTRIES, INC., a Delaware corporation ("Borrower"), promises to pay to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, formerly known as Texas Commerce Bank National Association ("Bank") on or before January 4, 1999, (the "Termination Date"), at its banking house at 712 Main Street, Houston, Harris County, Texas, or at such other location as Bank may designate, in lawful money of the United States of America, the lesser of: (i) the principal sum of FIFTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100THS UNITED STATES DOLLARS (U.S. $15,500,000.00); or (ii) the aggregate unpaid principal amount of all loans made by Bank (each such loan being a "Loan"), which may be outstanding on the Termination Date. Each Loan shall be due and payable on the maturity date agreed to by Bank and Borrower with respect to such Loan (the "Maturity Date"). In no event shall any Maturity Date fall on a date after the Termination Date. Subject to the terms and conditions of this Note and the Letter Agreement, Borrower may borrow, repay and reborrow all or any part of the credit provided for herein at any time before the Termination Date, there being no limitation on the number of Loans made so long as the total unpaid principal amount at any time outstanding does not exceed the Maximum Loan Total. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Letter Agreement. "Adjusted LIBOR Rate" means a per annum interest rate determined by Bank by dividing: (i) the LIBOR Rate by (ii) Statutory Reserves provided that Statutory Reserves is greater than zero, otherwise Adjusted LIBOR Rate means a per annum interest rate equal to the LIBOR Rate. "LIBOR Rate" means with respect to any LIBOR Loan for any Interest Period the interest rate determined by Bank by reference to the British Bankers' Association Interest Settlement Rates (as set forth by any service selected by Bank which has been nominated by the British Bankers' Association as an authorized information vender for the purpose of displaying such rates including but not limited to Bloomberg, Reuters or Telerate) to be the rate at approximately 11:00 a.m. London time, two Business Days prior to the commencement of such Interest Period for dollar deposits in an amount comparable to such LIBOR Loan with a maturity comparable to such Interest Period. "Board" means the Board of Governors of the Federal Reserve System of the United States. "Borrowing Date" means any Business Day on which Bank shall make or continue a Loan hereunder. "Business Day" means a day: (i) on which Bank and commercial banks in New York City are generally open for business; and (ii) with respect to LIBOR Loans, on which dealings in United States Dollar deposits are carried out in the London interbank market. "Highest Lawful Rate" means the maximum nonusurious rate of interest from time to time permitted by applicable law. If Texas law determines the Highest Lawful Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas Credit Code or any successor statute. Bank may from time to time, as to current and future balances, elect and implement any other ceiling under such Code and/or revise the index, formula or provisions of law used to compute the rate on this open-end account by notice to Borrower, if and to the extent permitted by, and in the manner provided in such Code. "Interest Period" means the period commencing on the Borrowing Date and ending on the Maturity Date, consistent with the following provisions. The duration of each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of up to the Termination Date unless any portion thereof is converted to a LIBOR Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two, three or six months; in each case as selected by Borrower and agreed to by Bank. Borrower's choice of Interest Period is subject to the following limitations: (i) No Interest Period shall end on a date after the Termination Date; and (ii) If the last day of an Interest Period would be a day other than a Business Day, the Interest Period shall end on the next succeeding Business Day (unless the Interest Period relates to a LIBOR Loan and the next succeeding Business Day is in a different calendar month than the day on which the Interest Period would otherwise end, in which case the Interest Period shall end on the next preceding Business Day). "Letter Agreement" means the Letter Agreement dated June 4, 1997 executed by the Borrower and the Bank, as amended by a First Amendment dated January 30, 1998, a Second Amendment dated as of April 8, 1998, and a Third Amendment dated as of June 30, 1998 and as further amended from time to time. "LIBOR Loan" means a Loan which bears interest at a rate determined by reference to the Adjusted LIBOR Rate. "Loan Documents" means this Note, the Letter Agreement and any document or instrument evidencing, securing, guaranteeing or given in connection with this Note. "Maximum Loan Total" means (a) the lesser of (i) $15,500,000.00 or (ii) the Borrowing Base less (b) L/C Obligations. "Obligations" means all principal, interest and other amounts which are or become owing under this Note or any other Loan Document. "Obligor" means Borrower and any guarantor, surety, co-signer, general partner or other person who may now or hereafter be obligated to pay all or any part of the Obligations. "Prime Rate" means the rate determined from time to time by Bank as its prime rate. The Prime Rate shall change automatically from time to time without notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE BANK'S LOWEST RATE. "Prime Rate Loan" means a Loan which bears interest at a rate determined by reference to the Prime Rate. "Statutory Reserves" means the difference (expressed as a decimal) of the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency, or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. LIBOR Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to any bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay interest on the unpaid principal amount of each Prime Rate Loan at a rate per annum equal to the lesser of: (i) the Prime Rate in effect from time to time minus three-quarters of one percent (3/4%) (the "Effective Prime Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and payable on October 4, 1998, on the date of any conversion to a LIBOR Loan and on the Termination Date. Borrower shall pay interest on the unpaid principal amount of each LIBOR Loan for the Interest Period with respect thereto at a rate per annum equal to the lesser of: (i) the Adjusted LIBOR Rate plus one percent (1%) (the "Effective LIBOR Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each LIBOR Loan is due on the last day of each Interest Period applicable thereto, and in the case of an Interest Period in excess of three months, on each day which occurs every three months after the initial date of such Interest Period, and on any prepayment (on the amount prepaid). If at any time the effective rate of interest which would otherwise be payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the rate of interest to accrue on the unpaid principal balance of such Loan during all such times shall be limited to the Highest Lawful Rate, but any subsequent reductions in such interest rate shall not become effective to reduce such interest rate below the Highest Lawful Rate until the total amount of interest accrued on the unpaid principal balance of such Loan equals the total amount of interest which would have accrued if the Effective Prime Rate, or Effective LIBOR Rate, whichever is applicable, had at all times been in effect. Each LIBOR Loan shall be in an amount not less than $150,000.00 and an integral multiple of $50,000.00 in excess thereof. Each Prime Rate Loan shall be in an amount not less than $50,000.00 and an integral multiple of $50,000.00 in excess thereof. Interest with respect to Prime Rate Loans shall be computed on the basis of the actual number of days elapsed and a year comprised of: 365 (or 366 as the case may be) days. Interest with respect to LIBOR Loans shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 or 366 day year, as the case may be. The unpaid principal balance of this Note at any time will be the total amounts advanced by Bank, less the amount of all payments or prepayments of principal. Absent manifest error, the records of Bank will be conclusive as to amounts owed. Loans shall be made on Borrower's irrevocable notice to Bank, given not later than 10:00 A.M. (Houston time) on, in the case of LIBOR Loans, the third Business Day prior to the proposed Borrowing Date or, in the case of Prime Rate Loans, the first Business Day prior to the proposed Borrowing Date. Each notice of a requested borrowing (a "Notice of Requested Borrowing") under this paragraph may be oral or written, and shall specify: (i) the requested amount; (ii) proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime Rate Loan or LIBOR Loan; and (iv) Interest Page 1 of 3 Pages Promissory Note ERC INDUSTRIES, INC. June 30, 1998 ("Date") Period for the LIBOR Loan. If any Notice of Requested Borrowing shall be oral, Borrower shall deliver to Bank prior to the Borrowing Date a confirmatory written Notice of Requested Borrowing. Borrower may on any Business Day prepay the outstanding principal amount of any Prime Rate Loan, in whole or in part. Partial prepayments shall be in an aggregate principal amount of $50,000.00 or a greater integral multiple of $50,000.00. Borrower shall have no right to prepay any LIBOR Loan. Provided that no Event of Default has occurred and is continuing, Borrower may elect to continue all or any part of any LIBOR Loan beyond the expiration of the then current Interest Period relating thereto by providing Bank at least three Business Day's written or telecopy notice of such election, specifying the Loan or portion thereof to be continued and the Interest Period therefor and whether it is to be a Prime Rate Loan or LIBOR Loan provided that any continuation as a LIBOR Loan shall not be less than $150,000.00 and shall be in an integral multiple of $50,000.00. If an Event of Default shall have occurred and be continuing, the Borrower shall not have the option to elect to continue any such LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans. Provided that no Event of Default has occurred and is continuing, Borrower may elect to convert any Prime Rate Loan at any time or from time to time to a LIBOR Loan by providing Bank at least three Business Day's written or telecopy notice of such election, specifying each Interest Period therefor. Any conversion of Prime Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than $150,000.00 and in integral multiples of $50,000.00. If at any time Bank determines in good faith (which determination shall be conclusive) that any change in any applicable law, rule or regulation or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for Bank or its foreign branch or branches to maintain any LIBOR Loan by means of dollar deposits obtained in the London interbank market (any of the above being described as a "LIBOR Event"), then, at the option of Bank, the aggregate principal amount of all LIBOR Loans outstanding shall be prepaid; however the prepayment may be made at the sole option of the Bank with a Prime Rate Loan. Upon the occurrence of any LIBOR Event, and at any time thereafter so long as such LIBOR Event shall continue, the Bank may exercise its aforesaid option by giving written notice thereof to Borrower. If Bank determines after the date of this Note that any change in applicable laws, rules or regulations regarding capital adequacy, or any change in the interpretation or administration thereof by any appropriate governmental agency, or compliance with any request or directive to Bank regarding capital adequacy (whether or not having the force of law) of any such agency, increases the capital required to be maintained with respect to any Loan and therefore reduces the rate of return on Bank's capital below the level Bank could have achieved but for such change or compliance (taking into consideration Bank's policies with respect to capital adequacy), then Borrower will pay to Bank from time to time, within 15 days of Bank's request, any additional amount required to compensate Bank for such reduction. Bank will request any additional amount by delivering to Borrower a certificate of Bank setting forth the amount necessary to compensate Bank. The certificate will be conclusive and binding, absent manifest error. Bank may make any assumptions, and may use any allocations of costs and expenses and any averaging and attribution methods, which Bank in good faith finds reasonable. If any domestic or foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D of the Board) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) changes, imposes, modifies, applies or deems applicable any reserve, special deposit or similar requirements in respect of any Loan or against assets of, deposits with or for the account of, or credit extended or committed by, Bank; or (b) imposes on Bank or the interbank eurocurrency deposit and transfer market or the market for domestic bank certificates or deposit any other condition affecting any such Loan; and the result of any of the foregoing is to impose a cost to Bank of agreeing to make, funding or maintaining any such Loan or to reduce the amount of any sum receivable by Bank in respect of any such Loan, then Bank may notify Borrower in writing of the happening of such event and Borrower shall upon demand pay to Bank such additional amounts as will compensate Bank for such costs as determined by Bank. Without prejudice to the survival of any other agreement of Borrower under this Note, the obligations of Borrower under this paragraph shall survive the termination of this Note. Borrower will indemnify Bank against, and reimburse Bank on demand for, any loss, cost or expense incurred or sustained by Bank (including without limitation any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain LIBOR Loans) as a result of: (a) any payment or prepayment (whether permitted by Bank or required hereunder or otherwise) of all or a portion of any LIBOR Loan on a day other than the Maturity Date of such Loan; (b) any payment or prepayment, whether required hereunder or otherwise, of any LIBOR Loan made after the delivery of a Notice of Requested Borrowing but before the applicable Borrowing Date if such payment or prepayment prevents the proposed Loan from becoming fully effective; or (c) the failure of any LIBOR Loan to be made by Bank due to any action or inaction of Borrower. Such funding losses and other costs and expenses shall be calculated and billed by Bank and such bill shall, as to the costs incurred, be conclusive absent manifest error. All past-due principal and interest on this Note, will, at Bank's option, bear interest at the Highest Lawful Rate, or if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to the Prime Rate plus five percent (5%). In addition to all principal and accrued interest on this Note, Borrower agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all owners and holders of this Note in collecting this Note through probate, reorganization, bankruptcy or any other proceeding; and (b) reasonable attorney's fees if and when this Note is placed in the hands of an attorney for collection. Borrower and Bank intend to conform strictly to applicable usury laws. Therefore, the total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Bank contracts for, charges or receives any excess interest, it will be deemed a mistake. Bank will automatically reform the contract or charge to conform to applicable law, and if excess interest has been received, Bank will either refund the excess to Borrower or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. If any payment of interest or principal herein provided for is not paid when due, or if any Event of Default occurs under the terms of the Letter Agreement, then Bank may do any or all of the following: (i) cease making Loans hereunder; (ii) declare the Obligations to be immediately due and payable, without notice of acceleration or of intention to accelerate, presentment and demand or protest or notice of any kind, all of which are hereby expressly waived; (iii) set off, in any order, against the Obligations any debt owing by Bank to any Obligor, including, but not limited to, any deposit account, which right is hereby granted by each Obligor to Bank; and (iv) exercise any and all other rights under the Loan Documents, at law, in equity or otherwise. No waiver of any default is a waiver of any other default. Bank's delay in exercising any right or power under any Loan Document is not a waiver of such right or power. Each Obligor severally waives notice, demand, presentment for payment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, protest, notice of protest, and the filing of suit and diligence in collecting this Note and all other demands and notices, and consents and agrees that its liabilities and obligations will not be released or discharged by any or all of the following, whether with or without notice to it or any other Obligor, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure, if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that acceptance of any partial payment will not constitute a waiver and that waiver of any default will not constitute waiver of any prior or subsequent default. Where appropriate the neuter gender includes the feminine and the masculine and the singular number includes the plural number. Borrower represents and agrees that: all Loans evidenced by this Note are and will be for business, commercial, investment or other similar purpose and not primarily for personal, family, or household use as such terms are used in Chapter One of the Texas Credit Code. Chapter 346 of the Texas Finance Code shall not apply to this Note or to any Loan evidenced by this Note. This Note is issued by the Borrower to evidence Loans outstanding from time to time not to exceed the Maximum Loan Total in the aggregate, pursuant to a $15,500,000.00 revolving line of credit (the "Revolving Line of Credit") extended by the Bank to the Borrower pursuant to the Letter Agreement. It is given in renewal and modification of that certain promissory note dated April 8, 1998 executed by Borrower and payable to the order of the Bank on or before June 30, 1998 in the principal amount of $15,500,000.00. Page 2 of 3 Pages Promissory Note ERC INDUSTRIES, INC. June 30, 1998 ("Date") This Note is governed by Texas law. If any provision of this Note is illegal or unenforceable, that illegality or unenforceability will not affect the remaining provisions of this Note. BORROWER AND BANK AGREE THAT THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED IN TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER OR BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. BANK MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER PROPER JURISDICTIONS OR VENUES. For purposes of this Note, any assignee or subsequent holder of this Note will be considered the "Bank," and each successor to Borrower will be considered the "Borrower." Borrower represents that if it conducts business under an assumed business or professional name it has properly filed Assumed Name Certificate(s) in the office(s) required by Chapter 36 of the Texas Business and Commerce Code. NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Borrower has executed this Note effective the day, month and year first aforesaid. BORROWER: ERC INDUSTRIES, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- (Bank's signature is provided as its acknowledgment of the above as the final written agreement between the parties.) CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, formerly known as TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Page 3 of 3 EX-10.2 3 LETTER AGREEMENT WITH WOOD GROUP EXHIBIT 10.2 [LETTERHEAD OF WOOD GROUP PETROLEUM SERVICES APPEARS HERE] June 16, 1998 ERC Industries, Inc. 1441 Park Ten Boulevard Houston, Texas 77084 RE: $5 MILLION OVERDRAFT FACILITY Dear Sirs: This letter sets out the terms and conditions on which we agree to grant to you an overdraft facility in the amount of FIVE MILLION ($5,000,000) UNITED STATES DOLLARS (the "Facility"), to be used solely for the purposes of providing working capital for your company. The Facility will be unsecured. The Facility is subject to an overriding right on our part to demand repayment of all or any part of the Facility at any time. This right is exercisable at our absolute discretion and without any requirement for us to show cause or breach of this Facility Letter. Interest shall be charged on the unpaid principal amount of the Facility at an annual rate of the LIBOR Rate plus one percent (1%). The "LIBOR Rate" means the interest rate determined by us by reference to the British Bankers' Association Interest Settlement Rate (as set forth by any service selected by us which has been nominated by the British Bankers' Association as an authorized information vendor for the purpose of displaying such Rate (including but not limited to, Bloomberg, Rueters, or Telerate) to be the Rate at approximately 11:00 a.m., London time, two Business Days prior to the Letter to ERC Industries, Inc. June 16, 1998 Page 2 commencement of any Borrowing Period for dollar deposits in an amount comparable to the Facility with maturity comparable to the period of the Borrowing Period. Interest shall be calculated on the basis of a 360 day year for the actual days elapsed, unless such calculation would result in a usurious interest rate, in which case such interest shall be calculated on the basis of a 365 or 366 day year, as the case may be. Each Borrowing Period (other than the first Borrowing Period) shall be three calendar months. The first Borrowing Period shall commence on June 16, 1998 and end on September 30, 1998. Interest shall be payable on the last day of each Borrowing Period. If any Borrowing Period is shortened due to a demand for repayment being made by us, interest shall be payable up to the date of repayment. You may repay the Facility at the end of any Borrowing Period. With our consent you may elect to repay the Facility prior to the end of any Borrowing Period. In the event that you do so a sum equivalent to the interest due to the end of such Borrowing Period shall be payable at the time of the repayment of the Facility as if the Facility had not been repaid prior to the end of the Borrowing Period. In the event that the percentage rate above the Adjusted LIBOR Rate which you are currently paying to Chase Bank of Texas, National Association, on LIBOR Loans, in terms of a Promissory Note dated April 8, 1998 (as the terms Adjusted LIBOR Rate and LIBOR Loan are defined in the said Promissory Note) changes from one percent (1%) to some other percentage, the interest rate above the LIBOR Rate referred to above in Letter to ERC Industries, Inc. June 16, 1998 Page 3 respect of this Facility will be adjusted from the date on which Chase Bank of Texas, National Association Rate changes to be an equivalent rate. All payments to be made by you under this Facility Letter shall be made in United States Dollars in immediately available funds. All payments shall be made without set off or counterclaim, and free and clear of, and without deduction for, any taxes, levies, inposts, duties, charges, fees, deductions, withholdings, restrictions, or conditions of any description. If you are required at any time by any applicable law to make any such deduction from any payment, the sum due from you in respect of such payment shall be increased by such amount as will result, notwithstanding the making of such deduction, in our receipt on the due date for payment of each amount of a net sum equal to the sum which we would have received had no such deduction been required to be made. There will be no commitment fee or facility fee charged in respect of the Facility and each party shall bear their own expenses in connection with the preparation, execution and management of the Facility, unless you default in making any repayment immediately on a demand for repayment having been made, in which case you will be liable for all proper and reasonable fees, expenses, charges and other outlays incurred in connection with the enforcement of our right of repayment together with interest at the Highest Lawful Rate (as defined in the Chase Bank of Texas, National Association, Promissory Note dated April 8, 1998) from the date of such default until payment. Without prejudice to our right to demand repayment of the Facility at any time, the terms and conditions of this Facility Letter and its continuation shall be reviewed on a three- Letter to ERC Industries, Inc. June 16, 1998 Page 4 monthly basis from the end of the first Borrowing Period. The terms and conditions of this Facility Letter and its continuation are matters which we may decide in our absolute discretion. This Facility Letter will be governed by the Laws of the State of Texas. Please indicate your acceptance by signing the docket below. Yours sincerely, __________________________________________ Alan Semple, Chief Financial Officer, for and on behalf of Wood Group Petroleum Services, Inc WE HEREBY ACCEPT YOUR OFFER OF THE FACILITY ON THE TERMS AND SUBJECT TO THE CONDITIONS IN THE FACILITY LETTER SET OUT ABOVE. __________________________________________________ ________________________ Director For and On Behalf of ERC Industries, Inc. Date EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-31-1998 JUN-30-1998 315 0 25,262 672 32,372 60,082 25,362 16,574 76,370 37,361 0 0 0 275 34,827 76,370 55,981 55,981 40,718 11,228 (95) 0 799 3,331 1,386 1,945 0 0 0 1,945 .07 .07
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