A Business section article yesterday about ERC International of Fairfax incorrectly reported the company's 1986 net income. It had profits of $337,000. (Published 8/26/87)

ERC International of Fairfax yesterday announced a tentative agreement to buy W.J. Schafer Associates, a defense research and development firm based in Arlington.

Under the terms of the arrangement, ERCI will make an initial payment of $12.5 million in a combination of cash and stock to Schafer stockholders. Additional stock payments of up to $22.5 million will be made contingent upon Schafer's profit performance over the next two years.

ERCI provides professional services and products in defense, energy, the environment and management. Company officials said the acquisition of Schafer will allow ERCI to expand its defense-related activities from applied work on weapons development to innovative research on new weapons.

"Schafer is going to lead us into a lot of major programs," ERCI chairman and CEO Jack Aalseth said. "It's a natural progression for us. We are committed to seeking high technology, longer-term contracts, and better margins in that market." Schafer does technical assessment and research and development in projects ranging from lasers to high-powered microwaves. It's clients include the Strategic Defense Initiative Office, the Defense Advanced Research Project Agency, and the Los Alamos and Lawrence Livermore national laboratories in California and Sandia national laboratory in Albuquerque, N.M. It has a professional staff of 140 scientists and engineers in seven states.

The company is privately owned with much of its stock held by employes. Revenue for 1987 is expected to exceed $22 million dollars, according to Shafer officials.

"WJSA's activities supplement those of ERCI extremely well, adding to the strength of both companies," Walter Schafer, chairman of the firm, said.

Analysts said that it was too early to predict the success of the deal, although Stuart Levine of Gruntal and Co. in New York noted that "for a defense contractor, WJSA has relatively high profit margins."

The two firms have been discussing a possible merger for over a year. Under the conditions of the sale, ERCI will assume ownership of the Arlington firm within the next few months, assuming the deal is approved by the shareholders of both companies. Aalseth and ERCI president John Gray will join the board of Shafer, and the two firms will undertake some joint business development and marketing efforts. Integration of the two management teams will await the final stock swap in two years.

In the past two years, ERCI has made one other acquisition in the defense arena, buying D-K Associates Inc., which provides training and audio-visual support services to the Defense Department, NASA and the FAA. The company has been most aggressive, however, in the field of environmental management. Last year, it bought Westec Services Inc., which services the environment and hazardous waste management markets. In May of this year, it acquired some of the assets of the Virginia-based environmental consulting group Centec Corp., which included a backlog of potential contracts worth $10 million. ERCI also plans next month to complete its acquisition of the Edge Group, a geotechnical engineering firm based in Nashville, with revenue last year of $16 million.

ERCI lost $3.8 million last year on revenue of $95 million.