-----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, ENASHbWiwSYrIq8+BMaFtfWS7PZ+18FjcqSH3ZmRRjdMLslHH/buF8z7QOP/367P dv0QjIOo3R4mUhHuez5gSw== 0000899243-98-002168.txt : 19981123 0000899243-98-002168.hdr.sgml : 19981123 ACCESSION NUMBER: 0000899243-98-002168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERC INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000775477 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98753239 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 UNITED STATES 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 SEPTEMBER 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 November 13, 1998 ----- -------------------------------- Common stock, $0.01 par value 27,498,272 shares ERC INDUSTRIES, INC. INDEX Page PART I FINANCIAL INFORMATION: Condensed Consolidated Balance Sheet September 30, 1998 and December 31, 1997 3 Condensed Consolidated Statement of Operations Three and Nine Months Ended September 30, 1998 and 1997 4 Condensed Consolidated Statement of Shareholders' Equity Nine Months Ended September 30, 1998 5 Condensed Consolidated Statement of Cash Flows Nine Months Ended September 30, 1998 and 1997 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis 10 Quantitative and Qualitative Disclosures about Market Risk 14 PART II OTHER INFORMATION 14 Signature Page 16 Exhibit Index 17 -2- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except for share amounts) (unaudited)
September 30, December 31, 1998 1997 ------------- ------------ Assets Current assets: Cash and cash equivalents $ 457 $ - Trade accounts receivable, net of allowance for doubtful accounts of $795 and $681, respectively 22,319 18,689 Inventory 33,246 25,081 Prepaid expenses and other current assets 718 229 Deferred tax asset 2,520 2,520 ------- ------- Total current assets 59,260 46,519 Property, plant and equipment, net 9,127 7,743 Other assets 2,136 1,634 Deferred tax asset-noncurrent 170 170 Excess cost over net assets acquired, net 5,178 4,317 ------- ------- Total assets $75,871 $60,383 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 5,228 $ 8,156 Line of credit from parent 19,000 - Accounts payable 8,422 11,587 Other accrued liabilities 4,468 4,761 ------- ------- Total current liabilities 37,118 24,504 Long-term debt 2,900 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 26,341 24,842 Retained earnings from January 10, 1989 9,160 6,776 Accumulated other comprehensive income 77 9 ------- ------- Total shareholders' equity 35,853 31,902 ------- ------- Total liabilities and stockholders' equity $75,871 $60,383 ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 ------- ------- ------- ------- Revenues $27,417 $22,208 $83,398 $56,263 Cost of goods sold 19,864 16,724 60,582 42,806 ------- ------- ------- ------- Gross profit 7,553 5,484 22,816 13,457 Selling, general and administrative expenses 6,165 4,088 17,393 10,940 ------- ------- ------- ------- Operating income 1,388 1,396 5,423 2,517 Other (income) expense: Interest expense 584 320 1,383 653 Other, net (15) 17 (110) 44 ------- ------- ------- ------- 569 337 1,273 697 Income before provision for income taxes 819 1,059 4,150 1,820 Provision for income taxes 380 438 1,766 731 ------- ------- ------- ------- Net income $ 439 $ 621 $ 2,384 $ 1,089 ======= ======= ======= ======= Basic income per share $ 0.02 $ 0.03 $ 0.09 $ 0.05 Weighted average number of shares outstanding 27,498 22,811 27,498 21,775 ======= ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- ERC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER PAID-IN RETAINED COMPREHENSIVE COMMON STOCK CAPITAL EARNINGS INCOME ---------------------- ----------- ---------- ------------- SHARES AMOUNT ------ ------ Balance as of December 31, 1997 27,498 $275 $24,842 $6,776 $ 9 Net income - - - 2,384 - Foreign currency translation adjustment - - - - 68 Income tax benefit of pre-quasi-reorganization net operations loss carryforwards - - 1,499 - - ------ ---- ------- ------ --- Balance as of September 30, 1998 27,498 275 26,341 9,160 77 ====== ==== ======= ====== ===
The accompanying notes are an integral part of the condensed consolidated financial statements. -5- ERC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ----------------------------------- 1998 1997 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities, net of the effect of acquisitions $(9,110) $(9,692) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired of $80 in 1998 and $1,152 in 1997 (2,520) 152 Purchases of property, plant and equipment (2,072) (726) Proceeds from sale of property, plant and equipment 32 6 ------- ------- Net cash used in investing activities (4,560) (568) ======= ======= CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and long-term debt 18,668 3,239 Principal payments on long-term debt and capital lease obligations (4,541) (1,994) Net proceeds from issuance of common stock - 9,926 ------- ------- Net cash provided by financing activities 14,127 11,171 ======= ======= Net increase (decrease) in cash and cash equivalents 457 911 Cash and cash equivalents, beginning of period - 1 ------- ------- Cash and cash equivalents, end of period $ 457 $ 912 ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. -6- ERC INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - General The unaudited condensed consolidated financial statements included herein have been prepared by ERC Industries, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements reflect all material adjustments, consisting of normal recurring adjustments, which the Company considers necessary for the fair presentation of such financial statements for the interim periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to the Company's organization and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted in this Form 10-Q pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The results of operations for the three and nine months ended September 30, 1998 and 1997 are not necessarily indicative of the results expected for the full year. Note 2 - 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. -7- In connection with the transaction, the Company paid the sole Bompet stockholder; Inversiones Western C.A., a purchase price of $2.6 million. In addition, the Company will pay up to a maximum of $3.4 million in the event that Bompet's earnings exceed certain thresholds during 1998, 1999 and 2000. No amount has been accrued for Bompet's 1998 earnings exceeding certain thresholds as of September 30, 1998. 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 Nine Months Ended September 30, 1997 September 30, 1997 Revenues $24,708 $66,533 Net income 1,021 3,591 Basic income per share 0.04 0.16 Note 3 - Debt On September 2, 1998, the Company obtained a $22 million secured line of credit ("the New Line") with its parent, John Wood Group PLC. The line has substantially the same terms as the Company's previous line of credit. The New Line, payable on demand, expires on September 2, 1999 and bears interest at the LIBOR rate plus 0.85%, which was approximately 5.9% at September 30, 1998. On September 11, 1998, the Company repaid its outstanding balance on its previous line of credit. -8- Note 4 - Recent Accounting Pronouncements In September 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ----------- ----------- ------------ ------------ Comprehensive income: Net Income $439 $621 $2,384 $1,089 Cumulative translation adjustment 40 (84) 68 (32) ---- ---- ------ ------ Total comprehensive income $479 $537 $2,452 $1,057 ==== ==== ====== ======
In September 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 required for interim periods in the initial year of application. Management believes that adoption of this statement will not have a material impact on the consolidated financial statements. Note 5 - Commitments and Contingencies 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. Note 6 - Reclassifications Certain reclassifications of prior year balances have been made to conform such amounts to corresponding 1998 classifications. These reclassifications had no impact on net income or shareholders' equity. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q contains projections and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect", "plan", "intend", "project", "forecasts", "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-Q regarding the Company's financial position, business strategy, the markets for the Company's products, future capital expenditures, the Year 2000 compliance issues, and future net cash flows, are forward-looking statements and may contain certain information concerning financial results, economic conditions and trends. Although the Company believes that the expectations reflected in such forward- looking statements are reasonable, no assurance can be given that actual results may not differ materially from those in the forward-looking statements herein for reasons including the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, drilling activity, weather, the legislative environment in the United States and other countries, and the condition of the capital and equity markets. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Business Environment ERC Industries, Inc., a Delaware corporation (the "Company" or "ERC") is an oilfield service company engaged in the manufacture, remanufacture and servicing of oilfield wellhead equipment. The equipment and components offered for sale by the Company are comprised of items manufactured by the Company in its own facilities, consisting principally of wellhead equipment and valves, drilling products, 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, and installing and repairing oilfield equipment. The Company also leases certain oilfield equipment to customers. The business environment for oilfield operations and its corresponding operating results are affected significantly by petroleum industry exploration and production expenditures. These expenditures are influenced strongly by oil company expectations as to energy prices and the supply and demand for crude oil and natural gas. Petroleum supply and demand, and pricing, in turn, are influenced by numerous factors including, but not limited to, the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, drilling activity, weather, the legislative environment in the United States and other countries, and the condition of the capital and equity markets. While the Company anticipates continued long-term growth in the worldwide demand for hydrocarbons will result in increased spending by oil and gas companies for the development of the hydrocarbon supply, in recent years, oil and natural gas prices have reacted to actual and perceived -10- changes in the supply of and demand for oil and natural gas, which has resulted in volatile levels of oil and gas exploration and drilling activity. This price volatility has caused some market uncertainties. Historically, crude oil prices, natural gas prices and the number of rotary rigs in operation have been a significant factor in determining the amount of worldwide exploration and production expenditures. Lower oil prices have resulted in a reduction in the rig count and related drilling activity in the United States, and reductions in the exploration and development budgets of producers. As prices for oil have continued to decline and remain depressed, the Company and others in the industry continue to experience a softening in demand for their products and services, in particular products associated with exploration activity. A significant or prolonged decline in future oil and natural gas prices would likely result in reduced exploration and development of oil and gas and a decline in the demand for the Company's products. Results of Operations The Company's consolidated revenues increased by $5.2 million to $27.4 million for the three months ended September 30, 1998, from $22.2 million for the three months ended September 30, 1997. In addition, the Company's nine month revenues increased by $27.1 million to $83.4 million for the nine months ended September 30, 1998, from $56.3 million for the nine months ended September 30, 1997. The increase in revenues is principally due to additional sales attributable to the acquisitions of Church and Bompet and increased domestic and international sales volume. The Company's consolidated gross profit for the three months ended September 30, 1998 increased by $2.1 million to $7.6 million from $5.5 million for the same period in 1997. The gross profit for the nine months ended September 30, 1998 increased by $9.3 million to $22.8 million, from $13.5 million for the same period in 1997. The Company's gross margins were 27.6% and 27.4% for the three and nine months ended September 30, 1998, respectively, as compared with 24.7% and 23.9% for the three and nine months ended September 30, 1997, respectively. The increase was primarily due to outsourcing certain manufacturing processes at lower costs and a change in product mix arising from the acquisitions of Church and Bompet. Selling, general and administrative expenses increased by $2.1 million, or 51% for the three months ended September 30, 1998 as compared with the same three month period for 1997. The same expenses increased by $6.5 million, or 59% for the nine month period ended September 30, 1998 as compared to the same period in 1997. Selling, general and administrative expenses, as a percentage of sales was 22.5% for the three months ended September 30, 1998 as compared to 18.4% for the same period in 1997. These same expenses as a percentage of sales for the nine months ended September 30, 1998 was 20.9% compared with 19.4% for the first nine months of 1997. The increases are primarily due to increased administrative costs to pursue international acquisitions, additional expenses associated with acquisitions of and management of Church and Bompet, and the upgrade of the Company's management information systems. The Company generated consolidated operating income of $1.4 million and $5.4 million for the three and nine months ended September 30, 1998, respectively, compared with operating income of $1.4 and $2.5 million for the three and nine months ended September 30, 1997, respectively. The increase in operating income for the nine months ended September 30, 1998 is principally due to additional sales attributable to the acquisitions of Church and Bompet and increased domestic and international sales volume which was only partially offset by increases in selling, general and administrative expenses. -11- Other (income) expense increased by $232,000 for the three months ended September 30, 1998 as compared to the same period in 1997. Other (income) expense increased by $576,000 for the nine month period ended September 30, 1998 as compared to the same period in 1997. This increase 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 and debt incurred in the acquisitions of Church and Bompet, partially offset by favorable currency translation adjustment relating to Bompet. The effective tax rate increased from 40.2% to 42.6% in 1998 primarily because of non-deductible goodwill amortization related to the Company's acquisition of Church and Bompet. CAPITAL RESOURCES AND LIQUIDITY On September 2, 1998, the Company obtained a $22 million secured line of credit with its parent, John Wood Group PLC. The line has substantially the same terms as the Company's previous line of credit. The new line, payable on demand, expires on September 2, 1999 and bears interest at the LIBOR rate plus 0.85%, which was approximately 5.9% at September 30, 1998. On September 11, 1998, the Company repaid its outstanding balance on its previous line of credit. Working capital remained constant at $22 million at September 30, 1998, as compared to working capital at December 31, 1997. Pursuant to the Company's long-term debt and capital lease agreements, approximately $24.2 million in principal payments are due over the next twelve months. The Company believes its line of credit facility will be adequate to fund its operations for at least the next twelve months. The Company currently anticipates incurring additional capital expenditures of $500,000 principally for machinery and equipment, plant improvements and vehicle purchases, during the quarter ended December 31, 1998. The Company expects to fund these expenditures from amounts available under the line of credit facilities and/or capital lease transactions. Recent Accounting Pronouncements In September 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 required for interim periods in the initial year of application. Management believes adoption of this statement will not have a material impact on the consolidated financial statements. -12- Acquisitions 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 earnings exceed certain thresholds during 1998, 1999 and 2000. No amount has been accrued for Bompet's 1998 earnings exceeding certain thresholds as of September 30, 1998. Year 2000 Compliance The Year 2000 issue is the result of computer programs that use only two digits to identify a year rather than four. If not corrected, computer applications could fail or create erroneous results before, during and after the Year 2000. The Company is currently assessing the cost and uncertainties related to the Year 2000 issue using internal and external resources. Based on preliminary information, the Company currently believes that with certain modification, upgrades and, in some instances, converting to new software, the Company will have substantially addressed the Year 2000 issues with respect to its software hardware and products without significant impact on its operations. The Company estimates that its Year 2000 project will be completed by the second quarter of fiscal year 1999. The estimated costs for the Company to substantially address these Year 2000 issues are not expected to be material to the Company's financial position, results of operations or cash flows. There is inherent uncertainty in the Year 2000 problem due to the possibility of unanticipated failures by third party customers and suppliers. Accordingly, the Company is unable, at this time, to assess the extent and resulting materiality of the impact of possible Year 2000 failures on its operations, liquidity or financial position. The Company has designated personnel responsible to identify and respond to these issues and once all identifications and reviews are completed, a contingency plan will be developed to mitigate the risk of business interruption. -13- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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. --------------------- During the nine months ended September 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. --------------------------------------------------- None. Item 5. Other Information. ----------------- None. -14- Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits: 10.1 Revolving Line of Credit from John Wood Group PLC to ERC Industries, Inc.* 27.1 Financial Data Schedule* * filed herewith (b) Reports on Form 8-K: During the quarter ended September 30, 1998, the Registrant filed no reports on Form 8-K. -15- 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. ERC INDUSTRIES, INC. (Registrant) Date: November 13, 1998 By: /s/ Wendell R. Brooks President (Principal Executive Officer) By /s/ James E. Klima Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer) -16- Exhibit Index 10.1 Revolving Line of Credit from John Wood Group PLC to ERC Industries, Inc.* 27.1 Financial Data Schedule* * Filed herewith -17- EX-10.1 2 REVOLVING CREDIT EXHIBIT 10.1 September 2, 1998 ("Effective Date") ERC Industries, Inc. 1441 Park Ten Blvd. Houston, Texas 77084 RE: $22,000,000.00 Revolving Line of Credit from John Wood Group PLC ("PLC") to ERC Industries, Inc., ("Borrower") Gentlemen: PLC is pleased to make available a $22,000,000.00 revolving line of credit (the "Revolving Line of Credit") for loans subject to the terms and conditions stated herein (as the same may be amended, renewed, extended, supplemented or restated from time to time, this "Letter Agreement" or "Agreement"). NOW THEREFORE, in consideration of the above stated premises, PLC and Borrower hereby agree as follows: TERMS AND CONDITIONS SECTION 1 - THE LINE OF CREDIT Section 1.l REVOLVING LINE OF CREDIT A. Advances: PLC 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 September 2, 1999 not to exceed at any one time outstanding $22,000,000.00, 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 PLC ("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. MAXIMUM AMOUNT: The maximum amount which will be available to Borrower under the Revolving Line of Credit is $22,000,000.00 ("Maximum Amount"), which in determining whether any amounts are available under the Revolving Line of Credit, PLC will deduct from the Maximum Amount, the amount of all unpaid Advances (the outstanding principal balance on the Note). Section 1.2 REQUIRED PAYDOWNS. If the outstanding principal balance of the Note at any time exceeds the Maximum Amount 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 is not greater than the Maximum Amount. 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 immediately on the outstanding principal balance exceeding the Maximum Amount. Section 1.3 INTEREST RATE, TERMS AND FEES: 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. Section 1.4 MATURITY: The Revolving Line of Credit shall expire: (i) on September 2, 1999; or (ii) such earlier date resulting from acceleration as defined in Section 5 hereof. Section 1.5 COLLATERAL: Borrower ratifies and confirms that its obligations under the Revolving Line of Credit, the Note, are secured by a security interest of first priority in Borrower's accounts receivables and inventory as evidenced by a Security Agreement dated February 26, 1991 executed by Borrower and Chase Bank of Texas, National Association as amended by First Amendment dated as of February 26, 1991 and as subsequently assigned to PLC (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 and the Note and each and every other written document, instrument and 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 PLC shall hereinafter be called the "Loan Documents". Section 1.6 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 PLC in writing, so long as neither the indebtedness secured thereby nor the property covered thereby increases; (d) liens in favor of PLC, or otherwise approved in writing by PLC; (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 PLC shall provide Borrower with PLC's prior written consent. SECTION 2 - CONDITIONS PRECEDENT Section 2.1 CONDITIONS PRECEDENT: PLC shall be under no obligation to make any Advance until the Borrower has executed and delivered, in form and substance satisfactory to PLC, the following documents: (i) this Agreement; (ii) the Note, (iii) the Security Agreement and (iv) any document, certificate or instrument that PLC may reasonably require to consider the request. SECTION 3 - REPRESENTATION AND WARRANTIES To induce PLC to enter into this Agreement and to made Advances, Borrower represents and warrants that on the date hereof and on the date of each request for an Advance and on the date of making an Advance 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 PLC 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 is made; 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 PLC 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 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 "B". Unless otherwise provided on Exhibit "B", 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 "B" will be determined as of the dates of the financial statements to be provided to PLC; 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 PLC immediately should any representation or warranty become untrue or misleading; Section 4.3 NOTIFICATION OF CORPORATE AND OTHER CHANGES: notify PLC 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 PLC 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 PLC 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, (3) set off, in any order, against the indebtedness of Borrower under the Loan Documents any debt owing by PLC to Borrower; 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 or interest on any other borrowed money obligation or shall fail to observe or perform any material 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 to any material extent; 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 60 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 60 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 60 days; or process to be issued or levied against it or any substantial part of its property which is not released, stayed, bonded or vacated within 60 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. SECTION 6 - MISCELLANEOUS Section 6.1 AMENDMENTS AND WAIVERS: No failure to exercise and no delay on the part of PLC 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 or further exercise thereof or the exercise of any other power or right. No course of dealing between Borrower and PLC 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 expenses in connection with recording, modification, supplementing and waiver of the Loan Documents and the making, servicing and collection of any of the indebtedness evidenced by the Note. 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 PLC 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 PLC agree that none of the terms and provisions contained in the 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 the 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 PLC 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 PLC, 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 PLC, and shall bind Borrower and successors, trustee, receivers and assigns of Borrower and inure to the benefit of the successors and assigns of PLC; provided that the undertaking of PLC hereunder to consider making Advances to 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 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 PLC 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 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 6.7 NO ORAL AGREEMENTS: THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.01(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, JOHN WOOD GROUP PLC By: ------------------------- Name: ----------------------- Title: ---------------------- Acknowledged and agreed to this day of November, 1998 but effective as of the Effective Date, by: "BORROWER" ERC INDUSTRIES, INC. By: ---------------------------- Name: -------------------------- Title: ------------------------- EXHIBITS: A Promissory Note B Financial Covenants and Compliance Certificate EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 457 0 23,114 795 33,246 59,260 26,063 16,936 75,871 37,118 0 0 0 275 35,578 75,871 83,398 83,398 60,582 17,393 (110) 0 1,383 4,150 1,766 2,384 0 0 0 2,384 0.09 0.09
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