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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-21513
DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
580 Westlake Park Boulevard, Suite 1100 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
281/531-4214
(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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common stock as
of August 11, 1997:
Common Stock: 7,848,088
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Item 1: Financial Statements
DXP ENTERPRISES, INC. AND SUBSIDIARIES
(CONDENSED CONSOLIDATED BALANCE SHEETS)
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -------
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash $ -- $ 876
Trade accounts receivable, net of allowance for doubtful
accounts of $406,000 and $210,000, respectively 25,701 17,125
Inventory 28,380 17,175
Prepaid expenses and other current assets 423 539
Deferred income taxes 627 511
-------- -------
Total current assets 55,131 36,226
Property and equipment, net 10,679 7,818
Other assets 3,249 998
-------- -------
Total assets $ 69,059 $45,042
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable $ 16,019 $ 6,963
Employee compensation 1,283 1,296
Other accrued liabilities 890 601
Current portion of long-term debt 735 609
Current portion of subordinated debt -- 1,145
-------- -------
Total current liabilities 18,927 10,614
Long-term debt, less current portion 35,031 22,300
Deferred compensation 739 739
Deferred income taxes 399 330
Equity subject to redemption
Series A Preferred stock--1,122 and 1,496 shares 112 150
Series B convertible preferred stock -- 1,800 and
4,500 shares 180 450
Common Stock--280,428 shares 1,963 --
Shareholders' Equity:
Series A preferred stock, 1/10th vote per share;
$1.00 par value; liquidation preference of $100 per share;
1,000,000 shares authorized; 3,366 shares issued and
outstanding: 2 2
Series B convertible preferred stock, 1/10th vote per share;
$1.00 par value; $100 stated value; liquidation preference
of $100 per share; 1,000,000 shares authorized; 19,500 shares
issued and outstanding 18 15
Common stock, $.01 par value, 100,000,000 shares authorized;
7,993,997 shares issued and outstanding (15,987,994
outstanding at December 31, 1996) 80 160
Paid-in capital 673 288
Retained earnings 11,516 9,994
-------- -------
12,289 10,459
Less: treasury stock, 374 shares series A preferred, 2,700 shares
series B preferred, and 60,872 shares common stock (581) --
-------- -------
Total shareholders' equity 11,708 10,459
Total liabilities and shareholders' equity $ 69,059 $45,042
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
(CONDENSED CONSOLIDATED STATEMENTS OF INCOME)
(Unaudited)
(In Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $ 39,341 $ 32,103 $ 69,470 $ 63,021
Cost of sales 28,615 23,958 50,371 46,790
-------- -------- -------- --------
Gross Profit 10,726 8,145 19,099 16,231
Selling, general and administrative expenses 9,304 7,183 16,347 14,806
-------- -------- -------- --------
Operating income 1,422 962 2,752 1,425
Other income 466 146 895 514
Interest expense (628) (535) (1,167) (1,008)
-------- -------- -------- --------
(162) (389) (272) (494)
-------- -------- -------- --------
Income before income taxes 1,260 573 2,480 931
Provision for income taxes 459 232 888 377
-------- -------- -------- --------
Net income $ 801 $ 341 $ 1,592 $ 554
Preferred Stock Dividend 33 22 71 45
-------- -------- -------- --------
Net Income Attributable to Common
Shareholders $ 768 $ 319 $ 1,521 $ 509
======== ======== ======== ========
Primary net income per common and
common equivalent shares $ 0.08 $ 0.04 $ 0.15 $ 0.06
======== ======== ======== ========
Number of shares used to compute primary
net income per common and common
equivalent shares 10,187 8,580 10,187 8,580
======== ======== ======== ========
Fully diluted net income per common and
common equivalent share $ 0.07 $ 0.04 $ 0.14 $ 0.06
======== ======== ======== ========
Number of shares used to compute fully
diluted net income per common and
common equivalent shares 11,098 9,724 11,098 9,724
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
------ -----
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ($ 1,586) $ 704
INVESTING ACTIVITIES
Purchase of Austin Bearing net assets -- (329)
Purchase of Strategic Supply net assets (4,118) --
Purchase of Pelican State Supply common stock (1,070) --
Purchase of property and equipment (469) (481)
-------- --------
Net cash used in investing activities (5,657) (810)
FINANCING ACTIVITIES
Proceeds from debt 73,463 60,483
Principal payments on revolving line of credit, long-term and
subordinated debt, and notes payable to bank (66,444) (61,824)
Acquisition of common stock (581) --
Dividends paid (71) (45)
-------- --------
Net cash used in financing activities 6,367 (1,386)
-------- --------
INCREASE(DECREASE) IN CASH (876) (1,492)
CASH AT BEGINNING OF PERIOD 876 1,492
-------- --------
CASH AT END OF PERIOD $ -- $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
As used herein, references to the "Company" are to DXP Enterprises, Inc. and its
subsidiaries, unless the context indicates otherwise.
Notes to Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. The condensed consolidated financial statements
reflect all elimination entries and adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
amended by Amendment No. 1 to Form 10-K on Form 10-K/A.
Note 2: The Company
The Company was incorporated on July 26, 1996 in the State of Texas. The Company
was formed to facilitate a proposed reorganization transaction whereby
subsequent to July 31, 1996 the Company became a public holding company and
acquired 100% of the outstanding capital stock of SEPCO Industries, Inc.
("SEPCO"), a private distribution company with revenues of approximately $125
million, and Newman Communications Corporation ("Newman"), an inactive public
entity with nominal net tangible assets.
The Company filed a registration statement on Form S-4 with the Securities and
Exchange Commission to register 18,584,400 shares of its Common Stock, 19,500
shares of its Series B Convertible Preferred Stock and 3,366 shares of its
Series A Preferred Stock. This registration statement became effective November
12, 1996. Because the Company (prior to the reorganization) and Newman were
non-operating entities with nominal tangible net assets, the transaction was
accounted for as a recapitalization of SEPCO into the Company and an issuance of
shares for the net tangible assets of Newman. Accordingly, the historical
financial statements for the Company prior to December 4, 1996 are those of
SEPCO.
Note 3. Per Share Amounts
Net income per common and common equivalent share has been computed for the
three- and six-month periods ended June 30, 1996, as if the reorganization had
occurred between the Company and SEPCO on January 1, 1996. These amounts were
determined by dividing net income applicable to common stock by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. To the extent they are dilutive, options to
purchase common stock issued by the Company within the 12 months preceding the
filing of the registration statement referenced above have been included in the
calculation of common equivalent shares outstanding (using the treasury stock
method) as if they were outstanding for all periods presented. The computation
of fully diluted net income per common and common equivalent share assumes the
Class A convertible preferred stock was converted as of the beginning of the
period.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Under SFAS No. 128, primary earnings per share ("Primary EPS") will be replaced
by basic earnings per share ("Basic EPS"), and fully diluted earnings per share
("Fully Diluted EPS") will be replaced with diluted earnings per share
("Diluted EPS"). Basic EPS differs from Primary EPS in that it only includes
the weighted average impact of outstanding shares of the
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Company's Common Stock (i.e., it excludes common stock equivalents and the
dilutive effect of options, etc.). Diluted EPS is substantially similar to
Fully Diluted EPS as previously reported. The provisions of SFAS No. 128 will
result in the retroactive restatement of previously reported Primary EPS and
Fully Diluted EPS figures, but SFAS No. 128 prohibits such restatement prior to
December 31, 1997. Based on the Company's computations, the adoption of SFAS
128 is not expected to impact earnings per share amounts reported during the
current quarter or any recent prior period.
On or about April 30, 1997, a consent statement was furnished to the holders of
the Company's Common Stock, Series A Preferred Stock and Series B Preferred
Stock, in connection with a solicitation of consents by the Board of Directors
of the Company for the adoption of an amendment to the Restated Articles of
Incorporation of the Company, to effect a two-to-one reverse split of the
issued and outstanding shares of Common Stock. The shareholders approved the
two-to-one reverse stock split which became effective after the close of market
on May 12, 1997.
The shareholders equity section and earnings per share have been restated to
give effect to the two-to-one reverse stock split.
Note 4: Inventory
The Company uses the last-in, first-out ("LIFO") method of inventory valuation
for approximately 53% of its inventories. Remaining inventories are accounted
for using the first-in, first-out ("FIFO") method. An actual valuation of
inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Because these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO basis is
as follows:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
(in thousands)
<S> <C> <C>
Finished goods $ 18,215 $ 29,180
Work in process 2,405 2,645
-------- --------
Inventories at FIFO 20,620 31,825
Less - LIFO allowance (3,445) (3,445)
-------- --------
Inventories $ 17,175 $ 28,380
======== ========
</TABLE>
Note 5: Acquisition
Effective February 2, 1996, the Company acquired the net assets of Austin
Bearing Corporation. The purchase price totaled approximately $578,000 and
consisted of (i) issuance of a $249,000 note, bearing interest at 9%, payable
monthly over five years and (ii) cash of $329,000. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of $84,000 was
recorded in connection with the acquisition.
Effective May 30, 1997, the Company acquired 100% of the outstanding common
stock of Pelican State Supply Company ("Pelican"). The purchase price totaled
approximately $3.0 million and consisted of 280,428 shares of the Company's
Common Stock and cash of approximately $1.0 million. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of approximately
$2.0 million was recorded in connection with the acquisition.
On June 2, 1997, a wholly owned subsidiary of the Company acquired
substantially all the assets of Strategic Supply, Inc. ("Strategic"). The
purchase price, which is subject to adjustments, consisted of approximately
$4.1 million in existing cash, assumption of $4.7 million of trade payables and
other accrued expenses, $2.8
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million in promissory notes payable to the seller and earn-out payments (based
on the earnings before interest and taxes of Strategic) to be paid over a
period of approximately six years, which earn-out payments shall not exceed
$3.5 million. The acquisition has been accounted for using the purchase method
of accounting. Goodwill of $50,000 was recorded in connection with the
acquisition. Goodwill may be adjusted based upon the final purchase price;
however, it is anticipated that such adjustment will be minor.
The acquisitions discussed above were accounted for using the purchase method
of accounting. The results of operations of the companies acquired are included
in the consolidated statements of income from the date of acquisition of such
companies. The Company is continuing its evaluation of the acquisitions of
Pelican and Strategic as it relates to the purchase price allocations. The
allocation of the respective purchase prices are based on the best estimates of
the Company using information currently available. Certain adjustments relating
to these acquisitions are subject to change based upon the final determination
of the fair values of the net assets acquired.
Note 6: Commitments and Contingencies
The Company is currently undergoing an examination of its tax returns by the
Internal Revenue Service ("IRS") which had asserted claims against one of the
Company's subsidiaries for additional taxes and penalties of approximately $1
million plus interest of approximately $328,000. The claim relates primarily to
a challenge by the IRS of the Company's use of the LIFO method of accounting
for inventory. In June 1997, the Company reached a tentative agreement for this
claim, subject to final IRS approval, resulting in a payment of approximately
$70,000. The Company had accrued sufficiently for this expense at December 31,
1996, and therefore the payment will have no impact on current period earnings.
Note 7: Stock Options
Prior to and during 1995, the Company issued non-qualified, book value plan
stock options to certain officers of the Company to purchase shares of its Class
A common stock, which had exercise prices equal to the book value of the common
stock on the date of the grant. The option agreement allowed the employee to put
the stock acquired back to the Company at the book value at that time. The
Company recognized compensation expense for increases in the book value of the
stock while the options were outstanding.
Effective March 31, 1996, the stock option agreements were amended to become
non-qualified, market value plan stock options. Under the amended agreement, the
employees can no longer put the acquired stock back to the Company. In
connection with these changes, the Company recognized approximately $618,000 of
compensation expense in the three months ended March 31, 1996.
Note 8: Long-Term Debt
In September 1996, the Company amended its credit facility which increased the
existing balance of the term loan from $123,898 to $5.0 million upon conversion
of approximately $4.9 million of the amounts outstanding under the revolving
loan to the term loan. In May 1997, the Company amended its credit facility
from $20 million to $25 million.
Also in May 1997, the Company secured two additional lines of credit from its
existing lender in amounts of $3.0 million and $12.0 million for the purpose of
financing two acquisitions and providing for working capital needs of the newly
acquired companies. The two new subsidiaries are the borrowers under these
lines of credit and the Company has guaranteed the indebtedness thereunder. The
interest rate on the new lines of credit range from LIBOR plus 2.25% to prime
plus .50%. Each line of credit is secured by accounts receivable, inventory,
machinery and equipment and real estate of the respective subsidiary and
matures January 1999.
The borrowings available under the Company's credit facilities at June 30, 1997
approximated $3.3 million.
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues for the three months ended June 30, 1997 increased 22.5% to $39.3
million from the three months ended June 30, 1996. The Company's acquisitions
during the period accounted for $4.6 million of the increase in revenues. Sales
of bearings and power transmission equipment for the quarter ended June 30,
1997 increased 12.1%, or $1.5 million over the comparable period in 1996,
accounting for $4.6% of the revenue increase. Sales of valve and valve
automation equipment declined by $450,000 over the comparable period in 1996
due primarily to increased competition. During the three months ended June 30,
1997, sales of pumps and pump products increased 9.3%, or $1.6 million, over
the comparable period in 1996, accounting for 5.0% of the revenue increase.
Gross margins increased 1.9% for the second quarter of 1997 as compared to the
second quarter of 1996, from 25.4% of sales to 27.3%. The increase in gross
margin is attributable to the Company's avoidance of low-margin sales, ability
to pass on manufacturer price increases and reductions in cost-of-sales
overhead expenses. The Company currently expects some increase in
manufacturers' prices to continue due to increased raw material costs and
strong market conditions. Although the Company intends to attempt to pass on
these price increases to its customers to maintain current gross margins, there
can be no assurance that the Company will be successful in this regard.
Selling, general and administrative expense increased as a percentage of
revenues by 1.3% for the second quarter of 1997 as compared to the second
quarter of 1996, due primarily to increased administrative costs related to the
Company's expansion of its administrative personnel in an effort to provide
expanded services to its customers.
Operating income for the three month period ended June 30, 1997 increased as a
percentage of revenues from 3.0% to 3.6%, due to the various factors discussed
above.
Interest expense during the second quarter of 1997 increased by $93,000 to
$628,000 compared to the second quarter of 1996. Long-term debt at June 30,
1997 increased by $11.2 million as a result of the financing of two
acquisitions during the second quarter of 1997, resulting in greater interest
costs. Excluding the increased debt incurred in connection with these
acquisitions, long-term debt levels were substantially unchanged. Average
interest rates were slightly lower during the three months ended June 30, 1997
as compared to 1996.
The Company's provision for income taxes for the three months ended June 30,
1997 increased by $227,000 compared to the same period of 1996, as a result of
a $687,000 increase in pre-tax income.
Net income for the three month period ended June 30, 1997 increased $460,000,
or 135%, from the three month period ended June 30, 1996, due primarily to the
gross margin percentage, which increased gross profits by approximately
$745,000. The increase in gross profits was slightly offset by increased
administrative costs associated with the Company's increases in its corporate
administrative expenses, expenses associated with its expansion program and
higher interest costs.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues for the six months ended June 30, 1997 increased 10.2% to $69.5
million from the six months ended June 30, 1996. The Company's acquisitions
during the period accounted for 7.3% of this increase in
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revenues. Sales of bearings and power transmission equipment for the six months
ended June 30, 1997 increased 5.9%, or $1.4 million over the comparable period
in 1996 accounting for 2.3% of the overall revenue increase. Sales of valve and
valve automation equipment declined by $1.4 million over the comparable period
in 1996 due primarily to increased competition. During the six months ended
June 30, 1997, sales of pumps and pump products increased 5.5%, or $1.8 million
over the comparable period in 1996, accounting for 2.9% of the overall revenue
increase.
Gross margin increased $2.9 million, or 17.7% in the first six months of 1997 as
compared to the same period in 1996, from 25.8% of sales to 27.5%. The increase
in gross margin is attributable to the Company's avoidance of low-margin sales,
the ability to pass on manufacturer price increases and reductions in
cost-of-sales overhead expenses.
Selling, general and administrative expenses as a percentage of revenues
remained consistent at 23.5% in the first six months of 1997 compared to the
same period in 1996. However, both six month periods experienced substantial
expenditures unique to each period. For the six month period ending June 30,
1996, the Company recognized $618,000 in compensation expense as a result of
amending its stock option agreements from being book value to market value
options. For the six month period ending June 30, 1997, selling, general, and
administrative costs were increased by administrative costs related to the
Company's expansion of its administrative personnel in an effort to provide
expanded services to its customers.
Operating income for the six month period ended June 30, 1997 increased 93.1%
from the corresponding period in 1996, from $1.4 million to $2.8 million. As a
percentage of revenues, operating income increased from 2.3% of sales to 4.0%,
due to the various factors discussed above.
Interest expense for the first six months of 1997 increased by $159,000, or
15.8%, from the first six months of 1996 as a result of increased debt levels
associated with the Company's acquisitions during 1997, and due to greater
investments in working capital components during the period. Average interest
rates were slightly lower during the six months ended June 30, 1997 as compared
to 1996.
The Company's provision for income taxes for the six months ended June 30, 1997
increased by $511,000 compared to the same period of 1996 as a result of a
$1,549,000 increase in pre-tax income. Results attributable to the Company's
acquisitions during the first six months of 1997 did not significantly impact
either pre-tax income or the Company's provision for income taxes.
Net income for the six month period ended June 30, 1997 increased $1,038,000,
or 187%, from the six month period ended June 30, 1996. Increased net income
for the first six months of 1997 versus 1996 can be primarily attributed to a
1.7 percentage point increase in the Company's gross margin percentage, which
increased gross profits by approximately $1,207,000. These increases in gross
profits were slightly offset by increased administrative costs associated with
the Company's expansion of its corporate administrative expenses, expenses
associated with its expansion program, and higher interest costs.
Liquidity and Capital Resources
Under the Company's credit facilities, all available cash is generally applied
to reduce outstanding borrowings, with operations funded through borrowings
under the credit facilities. The Company's policy is to maintain low levels of
cash and cash equivalents and to use borrowings under its lines of credit for
working capital. The Company had $3.3 million available for borrowings under
its working capital line of credit at June 30, 1997. Working capital at June
30, 1997 and December 31, 1996 was $36 million and $26 million, respectively.
During the first six months of 1997 and the year 1996, the Company collected
its trade receivables in approximately 55 and 48 days, respectively, and turned
its inventory approximately five times on an annualized basis.
The Company currently has $40.0 million in secured lines of credit with an
institutional lender. The lines of credit provided for interest rates ranging
from LIBOR plus 2.25% to prime plus .5% (9.0% at June 30, 1997). The lines of
credit are secured by receivables, inventory and machinery and equipment and
mature in January 1999. The facilities contain customary affirmative and
negative covenants as well as financial
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covenants that require the Company to maintain a positive cash flow and other
financial ratios, such as aggregate indebtedness to tangible net worth greater
than five to one and current assets to current liabilities greater than two to
one. The Company currently expects to renew the lines of credit at their
maturity.
The Company utilized cash from operating activities of $1.6 million in the
first six months of 1997 as compared to generating cash from operating
activities of $700,000 during the first six months of 1996, due primarily to a
greater investment in the net working capital components for the first six
months of 1997 as compared to the first six months of 1996.
The Company had capital expenditures of approximately $469,000 for the first
six months of 1997 as compared to $481,000 during the same period of 1996.
Capital expenditures in the first six months of 1997 were predominantly for the
expansion of a facility in Laporte, Texas ($144,000), and for computers and
related equipment($131,000). Capital expenditures for 1996 were primarily for
office and shop equipment and computer automation.
During the first quarter of 1996, the Company expended approximately $329,000
for the acquisition of the assets of Austin Bearing Corporation. In the second
quarter of 1997, the Company acquired the common stock of Pelican State Supply,
with the cash portion of the purchase price totaling approximately $1.1
million. Also in the second quarter of 1997, the Company acquired certain
assets of Strategic for cash of approximately $4.2 million.
The Company is currently undergoing an examination of its tax returns by the
Internal Revenue Service ("IRS") which had asserted claims against one of the
Company's subsidiaries for additional taxes and penalties of approximately $1
million plus interest of approximately $328,000. The claim relates primarily to
a challenge by the IRS of the subsidiary's use of the LIFO method of accounting
for inventory. In June 1997, the Company reached a tentative agreement for this
claim, subject to final IRS approval, resulting in a payment of approximately
$70,000. The Company had accrued sufficiently for this expense at December 31,
1996, and therefore it will have no impact on current period earnings.
The Company believes that cash generated from operations and available under
its credit facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of the Company's acquisition program
and integrated supply strategy will require capital in the form of the issuance
of additional equity or debt financing. There can be no assurance that such
financing will be available to the Company or as to the terms thereof.
Item 3: Quantitative and Qualitative Disclosures About Market Price
Not Applicable
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently undergoing an examination of its tax returns by the
IRS which had asserted claims against one of the Company's subsidiaries for
additional taxes and penalties of approximately $1 million plus interest of
approximately $328,000. The claim relates primarily to a challenge by the IRS of
the subsidiary's use of the LIFO method of accounting for inventory. In June
1997, the Company reached a tentative agreement for this claim, subject to final
IRS approval, resulting in a payment of approximately $70,000. The Company had
accrued sufficiently for this expense at December 31, 1996, and therefore it
will have no impact on current period earnings.
From time to time, the Company is a party to legal proceedings arising in the
ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company.
Item 2. Changes in Securities
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On May 30, 1997, the Company acquired the common stock of Pelican State Supply
Company. The Company is in the process of issuing 280,428 shares of Common Stock
to the seller as part of the purchase price for the acquisition. The shares of
Common Stock issued pursuant to the purchase are subject to a put option whereby
any time between November 30, 1998 and November 30, 2000 the Company may be
required to purchase all or part of the shares referenced above at a price of
$7.00 per share. The shares issued for the purchase of Pelican State Supply
Company are subject to certain rights of offset pursuant to terms of the
purchase documents. The Company considers these securities to have been issued
in a transaction not involving a public offering and, therefore, to be exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended.
The foregoing issuance did not involve an underwriter.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On or about April 30, 1997, a consent statement was furnished to the holders of
Common Stock, Series A Preferred Stock and Series B Preferred Stock, in
connection with a solicitation of consents by the Board of Directors of the
Company for the adoption of amendments to the Restated Articles of Incorporation
of the Company, to effect (1) a change in the Company's name to DXP Enterprises,
Inc. and (2) a two-to-one reverse split of the issued and outstanding shares of
Common Stock. As of May 6, 1997, the Company had received consents to the
adoption of the amendments to effect the name change and the reverse stock split
from the holders of at least 8,139,884 shares (representing 8,126,384 votes) of
the Common Stock, Series A Preferred Stock and Series B Preferred Stock, voting
together as a class, representing the requisite consents for adoption of such
amendments. The name change and two-to-one reverse stock split became effective
after the close of market on May 12, 1997.
On June 17, 1997, at the Company's annual meeting of shareholders, the
individuals listed below were elected directors by the holders of Common Stock,
Series A Preferred Stock and Series B Preferred Stock, voting together as a
class. Set forth opposite each director's name is the tabulation of votes cast.
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Withheld Broker Non-Votes
- ------------------------- ------------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
David R. Little 11,836,569.2 375 0 0
Jerry J. Jones 11,836,569.2 375 0 0
Bryan H. Wimberly 11,836,569.2 375 0 0
Cletus Davis 11,836,569.2 375 0 0
Thomas V. Orr 11,836,569.2 375 0 0
Kenneth H. Miller 11,836,569.2 375 0 0
</TABLE>
11
<PAGE> 12
Item 5. Other Information
CAUTIONARY STATEMENTS
The Company's expectations with respect to future results of operations that
may be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of the Company's realization of such expectations.
The Company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below.
Substantial Competition
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger
distributors that provide integrated supply programs such as those offered
through the iPower Consortium and outsourcing services similar to those that
are being offered by American MRO, Inc. ("AMRO"), a wholly-owned subsidiary of
the Company. Some of these large distributors may be able to supply their
products in a more timely and cost-efficient manner than the Company. The
Company's competitors include direct mail suppliers, large warehouse stores
and, to a lesser extent, certain manufacturers.
Risks Associated with Implementation of Corporate Strategy
Future results for the Company also will be dependent on the success of the
Company in implementing its acquisition and growth strategy. This strategy
includes taking advantage of a consolidation in the industry and effecting
acquisitions of distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations. The Company's strategy also includes expanding its product lines,
adding new product lines and establishing alliances and joint ventures with
other suppliers in order to provide the Company's customers with a source of
integrated supply. The ability of the Company to implement this strategy will
depend on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as that being pursued by AMRO. Although the Company is actively seeking
acquisitions and integrated supply arrangements that would meet its strategic
objectives, there can be no assurance that the Company will be successful in
these efforts. Further, the ability of the Company to effect its strategic
plans will depend on obtaining financing for its planned expansions and
acquisitions. There can be no assurance that such financing will be available
on a timely basis or on terms satisfactory to the Company. The Company plans to
examine appropriate methods of financing any such acquisition, including
issuance of additional capital stock, debt or other securities or a combination
of both. If the Company were to issue shares of its capital stock in any
acquisition, such issuance could be dilutive to existing shareholders.
Dependence on Key Personnel
The Company will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, its Chairman of the Board and Chief
Executive Officer. The loss of the services of Mr. Little or any other
executive officer of the Company could have a material adverse effect on the
Company's financial condition and results of operations. The Company does not
maintain key-man life insurance on Mr. Little or on the lives of its other
executive officers. In addition, the Company's ability to grow successfully
will be dependent upon its ability to attract and retain qualified management
and technical and operational personnel. The failure to attract and retain such
persons could materially adversely affect the Company's financial condition and
results of operation.
Risks Associated with Hazardous Materials
Certain of the Company's activities involve the controlled use of hazardous
materials and chemicals. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards
12
<PAGE> 13
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.
Limitations on Ability to Pay Dividends
The Company anticipates that future earnings, except for dividends payable on
the Series B Convertible Preferred Stock, will be retained to finance the
continuing development of its business. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement dated May 27, 1997, among
Strategic Supply, Inc., Coulson Technologies, Inc.,
Strategic Distribution, Inc., DXP Acquisition, Inc.
(d/b/a Strategic Acquisition, Inc.) and DXP
Enterprises, Inc. (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K dated June 2, 1997, filed with the Commission on
June 17, 1997.)
3.1 Restated Articles of Incorporation, as amended, of the
Company (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997, filed with the Commission
on May 15, 1997.)
4.1 Form of Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1997, filed with the Commission on May 15, 1997.)
4.2 See Exhibit 3.1 for provisions of the Company's
Restated Articles of Incorporation, as amended,
defining the rights of the holders of Common Stock.
11.1* Statement re: Computation of Per Share Earnings
27.1* Financial Data Schedule
-------------------
*Filed herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated June 2, 1997, as amended by
Amendment No. 1 to Current Report on Form 8-K on Form 8-K/A,
reporting the acquisition by the Company of Strategic Supply,
Inc., the audited historical financial statements of Strategic
Supply, Inc. and the pro forma financial statements of the
Company including Strategic Supply, Inc.
14
<PAGE> 15
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 hereunto duly authorized.
DXP Enterprises, Inc.
Date: August 14, 1997 By: /s/ GARY A. ALLCORN
------------------------------
Gary A. Allcorn
Senior Vice President/Finance
(Duly authorized officer and
principal financial officer)
15
<PAGE> 16
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Asset Purchase Agreement dated May 27, 1997, among
Strategic Supply, Inc., Coulson Technologies, Inc.,
Strategic Distribution, Inc., DXP Acquisition, Inc.
(d/b/a Strategic Acquisition, Inc.) and DXP
Enterprises, Inc. (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K dated June 2, 1997, filed with the Commission on
June 17, 1997.)
3.1 Restated Articles of Incorporation, as amended, of the
Company (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997, filed with the Commission
on May 15, 1997.)
4.1 Form of Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1997, filed with the Commission on May 15, 1997.)
4.2 See Exhibit 3.1 for provisions of the Company's
Restated Articles of Incorporation, as amended,
defining the rights of the holders of Common Stock.
11.1* Statement re: Computation of Per Share Earnings
27.1* Financial Data Schedule
-------------------
*Filed herewith
<PAGE> 1
Exhibit 11.1: Statement re: Computation of Per Share Earnings.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 8,024,153 7,993,947 8,024,153 7,993,947
Net effect of dilutive stock options -- based
on the treasury stock method using
average market price 2,163,222 586,232 2,163,222 586,232
Total common and common stock
equivalents 10,187,375 8,580,179 10,187,375 8,580,179
Net income attributable to common
shareholders $ 768,000 $ 319,000 $ 1,521,000 $ 509,000
Per share amount $ .0754 $ .0372 $ 0.1493 $ 0.0593
Fully diluted
Average shares outstanding 8,024,153 7,993,947 8,024,153 7,993,947
Net effect of dilutive stock options --
based on the treasure stock method using
period-end market price, if higher than
average market price 2,163,222 637,840 2,163,222 637,840
Assumed conversion of Class A convertible
Preferred Stock 940,800 1,092,000 940,800 1,092,000
Total 11,128,175 9,723,787 11,128,175 9,723,787
Net Income $ 801,000 $ 341,000 $ 1,592,000 $ 554,000
Per share amount $ .0720 $ .0351 $ .1431 $ .0569
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF DXP
ENTERPRISES, INC. AS OF JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 26,107
<ALLOWANCES> 406
<INVENTORY> 28,380
<CURRENT-ASSETS> 55,131
<PP&E> 19,232
<DEPRECIATION> 8,553
<TOTAL-ASSETS> 69,059
<CURRENT-LIABILITIES> 18,927
<BONDS> 0
2,255
20
<COMMON> 80
<OTHER-SE> 12,189
<TOTAL-LIABILITY-AND-EQUITY> 69,059
<SALES> 69,470
<TOTAL-REVENUES> 69,470
<CGS> 50,371
<TOTAL-COSTS> 50,371
<OTHER-EXPENSES> 16,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,008
<INCOME-PRETAX> 2,480
<INCOME-TAX> 888
<INCOME-CONTINUING> 1,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,592
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
