<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
ON
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): JUNE 2, 1997
DXP ENTERPRISES, INC.
(Exact name of registrant as specified in charter)
TEXAS 0-21513 76-0509661
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
580 WESTLAKE PARK BOULEVARD, SUITE 1100
HOUSTON, TEXAS 77079
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 531-4214
================================================================================
<PAGE> 2
EXPLANATION
As discussed in the Current Report on Form 8-K dated June 2, 1997 (the
"Current Report") of DXP Enterprises, Inc., a Texas corporation (the
"Registrant"), as filed with the Securities and Exchange Commission (the
"Commission") on June 17, 1997, on June 2, 1997, a wholly-owned subsidiary of
the Registrant acquired substantially all of the assets ("the Strategic
Acquisition") of Strategic Supply, Inc., a Delaware corporation ("Strategic"),
pursuant to an Asset Purchase Agreement dated May 27, 1997 (the "Agreement"),
among Strategic, Coulson Technologies, Inc., a Delaware corporation, Strategic
Distribution, Inc., a Delaware corporation, Strategic Acquisition, Inc., a
Nevada corporation and wholly-owned subsidiary of the Registrant, and the
Registrant. The purchase price, which is subject to adjustment, consisted of
approximately $4.1 million in existing cash, assumption of approximately $4.7
million of trade payables and other accrued expenses, $2.8 million in
promissory notes payable to Strategic 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 $3,500,000.
Item 7 of the Current Report is hereby amended and restated in its
entirety as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Strategic.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Year Ended December 31, 1996:
Independent Auditors' Report..................................4
Consolidated Balance Sheets...................................5
Consolidated Statements of Operations and
Retained Earnings (Accumulated Deficit)......................6
Consolidated Statements of Cash Flows.........................7
Notes to Consolidated Financial Statements....................8
Three Months Ended March 31, 1997:
Condensed Consolidated Balance Sheets........................15
Condensed Consolidated Statements of Earnings................16
Condensed Consolidated Statements of Cash Flows..............17
Notes to Condensed Consolidated Financial Statements.........18
</TABLE>
Page 2
<PAGE> 3
(b) Pro Forma Financial Information.
Index to Pro Forma Financial Information
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Pro Forma Combined Balance Sheet as of March 31, 1997........21
Pro Forma Combined Statement of Operations...................22
Pro Forma Adjustments........................................24
</TABLE>
Page 3
<PAGE> 4
Independent Auditors' Report
The Board of Directors
Strategic Supply, Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Supply, Inc., a wholly-owned subsidiary of Strategic Distribution, Inc.
(Parent), and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations and retained earnings (accumulated
deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Strategic Supply,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As described in note 2, on May 27, 1997, the Parent entered into an agreement
to sell the Company. As a result of that transaction, the Company has written
off its goodwill and certain other intangible assets as of December 31, 1996.
KPMG Peat Marwick, LLP
May 27, 1997
Page 4
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Strategic Supply, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
Assets 1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 106,141 $ 0
Accounts receivable, net 6,947,908 6,385,989
Inventories 7,877,020 9,548,536
Prepaid expenses and other current assets 226,614 30,190
------------ ------------
Total current assets 15,157,683 15,964,715
Property and equipment, net 2,300,739 2,401,595
Excess of cost over fair value of assets acquired, net 2,448,164 0
Deferred tax asset 336,000 336,000
Other assets 727,995 66,240
------------ ------------
Total assets $ 20,970,581 $ 18,768,550
============ ============
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued expenses $ 6,261,349 $ 3,824,606
Current portion of long-term debt 138,659 339,470
Due to Parent 7,451,445 13,593,445
------------ ------------
Total current liabilities 13,851,453 17,757,521
Long-term debt 849,671 510,204
------------ ------------
Total liabilities 14,701,124 18,267,725
------------ ------------
Stockholder's Equity:
Common stock, par value $.01 per share,
Authorized: 10,000 shares; issued and
outstanding: 1,000 shares 10 10
Additional paid-in capital 2,399,990 2,399,990
Contribution to capital 896,000 214,000
Retained earnings (accumulated deficit) 2,973,457 (2,113,175)
------------ ------------
Total stockholder's equity 6,269,457 500,825
------------ ------------
Total liabilities and stockholder's equity $ 20,970,581 $ 18,768,550
============ ============
</TABLE>
See notes to consolidated financial statements
Page 5
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Strategic Supply, Inc. and Subsidiary
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 46,366,524 $ 55,972,220 $ 50,972,098
Cost of sales 34,032,678 41,742,240 38,906,766
------------ ------------ ------------
Gross profit 12,333,846 14,229,980 12,065,332
Selling, general and administrative expenses 10,705,017 12,774,700 13,989,380
Restructuring charge 0 0 877,620
Special charges 0 0 2,836,363
------------ ------------ ------------
Operating income (loss) 1,628,829 1,455,280 (5,638,031)
Interest expense 570,151 120,483 130,601
------------ ------------ ------------
Income (loss) before income taxes 1,058,678 1,334,797 (5,768,632)
Income tax expense (benefit) 465,000 614,000 (682,000)
------------ ------------ ------------
Net income (loss) 593,678 720,797 (5,086,632)
Retained earnings, beginning of year 1,658,982 2,252,660 2,973,457
------------ ------------ ------------
Retained earnings (accumulated deficit), end of year $ 2,252,660 $ 2,973,457 $ (2,113,175)
============ ============ ============
</TABLE>
See notes to consolidated financial statements
Page 6
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Strategic Supply, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 593,678 $ 720,797 $(5,086,632)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 532,473 656,736 652,873
Deferred taxes 163,000 20,000 0
Tax contribution (charge) from Parent 302,000 574,000 (682,000)
Restructuring charge 0 0 877,620
Special charges 0 0 2,836,363
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (1,429,378) (1,598,454) 561,919
Inventories (1,030,776) (1,998) (1,671,516)
Prepaid expenses and other current assets 18,214 (72,995) 196,424
Accounts payable and accrued expenses 337,478 35,019 (2,854,138)
Other, net (55,190) 23,938 15,079
----------- ----------- -----------
Net cash provided by (used in) operating activities (568,501) 357,043 (5,154,008)
----------- ----------- -----------
Cash flows used in investing activities:
Acquisition of businesses, net of cash acquired (2,040,000) (175,000) 0
Additions of property and equipment (338,102) (642,461) (955,477)
----------- ----------- -----------
Net cash used in investing activities (2,378,102) (817,461) (955,477)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of note payable (5,201,211) 0 0
Borrowings from Parent 8,498,018 498,024 6,142,000
Repayment of long-term obligations (408,108) (191,832) (138,656)
----------- ----------- -----------
Net cash provided by financing activities 2,888,699 306,192 6,003,344
----------- ----------- -----------
Decrease in cash and cash equivalents (57,904) (154,226) (106,141)
Cash and cash equivalents, at beginning of the year 318,271 260,367 106,141
----------- ----------- -----------
Cash and cash equivalents, at end of the year $ 260,367 $ 106,141 $ 0
=========== =========== ===========
Supplemental cash flow information:
Taxes paid $ 12,223 $ 78,288 $ 47,766
Interest paid 567,748 92,687 80,339
</TABLE>
See notes to consolidated financial statements
Page 7
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STRATEGIC SUPPLY, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Description of Business
The Company is a leading provider of industrial supply services to
commercial and industrial customers in the western United States. On May 24,
1996, the Company (formerly SafetyMaster Corporation) and Lewis Supply
(Delaware), Inc. ("Lewis") were merged (The "Merger"). The Company was the
surviving corporation of the Merger. The related companies were wholly-owned
subsidiaries of Strategic Distribution, Inc. (the "Parent"). Accordingly, the
Merger has been accounted for on an as if pooling basis in all periods
presented. The Company is a wholly-owned subsidiary of the Parent.
On May 27, 1997, the Parent entered into an agreement to sell the
Company. The purchase price was net tangible assets, as defined therein.
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary Coulson Technologies, Inc. All
significant intercompany accounts and transactions have been eliminated. The
preparation of the consolidated financial statements requires estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
Disclosures About Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments approximate
fair value due to their short maturity and variable interest rate feature.
Inventories
Inventories of finished goods are stated at the lower of cost
(first-in, first-out basis) or market.
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Property and Equipment
Property and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on a straight-line basis over
the shorter of the remaining life of the asset or the lease term. Maintenance
and repairs are charged to expense. Major renewals and improvements are
capitalized and depreciated over the remaining useful life of the asset.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building 20 years
Warehouse and office equipment 5-12 years
Leasehold improvements 5-14 years
Transportation equipment 4-8 years
</TABLE>
Intangible Assets
Excess of cost over fair value of net assets acquired ("Goodwill") is
net of accumulated amortization of $377,000 at December 31, 1995.
On May 27, 1997, the Parent entered into an agreement to sell the
Company. The purchase price was net tangible assets, as defined therein, plus
an earn-out note, payable only upon achievement of certain profitability levels
over the next five years. Due to the uncertainty of achieving these
profitability levels, the Company has written off $2,836,363 of Goodwill and
other intangible assets. This write-off has been recorded in "Special Charges"
in the accompanying Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit).
Income Taxes
The Parent and the Company file consolidated federal and state income
tax returns. Income taxes in these financial statements have been calculated as
if the Company had filed separate tax returns. Accordingly, in some instances,
the amounts recorded may differ from those included in the consolidated tax
returns.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
(3) Accounts Receivable
Accounts receivable is net of an allowance for doubtful accounts of
$71,000 and $171,000 at December 31, 1995 and 1996, respectively.
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(4) Property and Equipment
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Land $ 240,000 $ 240,000
Building and leasehold improvements 921,328 811,304
Warehouse and office equipment 2,067,646 2,067,416
Transportation equipment 249,339 334,947
---------- ----------
3,478,313 3,453,667
Less: accumulated depreciation and amortization 1,177,574 1,052,072
---------- ----------
$2,300,739 $2,401,595
========== ==========
</TABLE>
(5) Related - Party Transactions
The Company has received advances from the Parent. The Company's
results include an allocation from the Parent for interest expense. The
Parent's interest expense is allocated based upon the pro rata share of
intercompany borrowings. The allocated interest expense was $-0-, $20,000 and
$49,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Included in selling, general and administrative expenses are certain
allocated expenses of the Parent of approximately $71,000, $215,000 and
$440,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
These charges are to cover expenses incurred by the Parent to provide primarily
accounting and legal services to the Company. Management believes the
allocations are reasonable. Because of the relationship between the Company and
its Parent, the amount of these transactions reflected in the accompanying
financial statements may not have been the same as they would have been among
unaffiliated parties.
(6) Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Accounts payable $4,896,052 $2,367,550
Accrued expenses 770,470 1,093,564
Payroll and related expenses 594,827 363,492
---------- ----------
$6,261,349 $3,824,606
========== ==========
</TABLE>
(7) Long-Term Debt
Long-term debt consists of several loans with a weighted average
interest rates of 7.5% and 7.6% at December 31, 1995 and 1996, respectively.
Principal payments due on long-term obligations during each of the
next four years are: 1997: $339,470; 1998: $29,950; 1999: $ 18,461 and 2000:
$461,793.
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(8) Acquisition
On June 16, 1994, the Company acquired certain assets of the
Industrial Supplies Division of Lufkin Industries, Inc. ("the Lufkin
Division"). The purchase price consisted of: (i) $2,040,000 in cash and (ii) a
mortgage note in the amount of $600,000. The source of the cash portion of the
purchase price was borrowings under a revolving bank facility.
The method of accounting for this acquisition was the purchase
accounting method. The results of operations of the Lufkin Division are
included in the Company's statements of operations from the date of
acquisition.
(9) Restructuring Charge
In connection with the Merger, the Company recorded a restructuring
charge aggregating $877,620 for employee termination benefits, asset write-offs
and lease payments. The termination benefits were paid and asset write-offs
were recorded in 1996, and lease payments will be made in accordance with their
original terms. As of December 31, 1996, the remaining restructuring liability
was approximately $131,000, which represented unpaid leases.
In addition, the Company incurred approximately $485,000 of one-time
expenses associated with the Merger and branch closings, which amount has been
included in selling, general and administrative expenses.
(10) Retirement Plan
The Company has a qualified defined contribution plan (the "Retirement
Savings Plan") for employees who meet certain eligibility requirements.
Contributions to the Retirement Savings Plan are at the discretion of the Board
of Directors and are limited to the amount deductible for Federal income tax
purposes. The expense for the Retirement Savings Plan was $23,848, $31,671 and
$24,580 for the years ended December 31, 1994, 1995 and 1996, respectively.
(11) Income Taxes
The income tax expense(benefit) in the Consolidated Statements of
Operations and Retained Earnings (Accumulated Deficit) is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Current
Federal $234,000 $ 460,000 $(682,000)
State 68,000 134,000 --
Deferred
Federal 138,000 16,000 --
State 25,000 4,000 --
-------- --------- ---------
$465,000 $ 614,000 $(682,000)
======== ========= =========
</TABLE>
A reconciliation of the expected Federal income tax expense at the statutory
rate to the Company's income tax expense follows:
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<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax expense $ 360,000 $ 454,000 $(1,961,000)
Increase (reduction) in tax expense
resulting from:
State taxes 61,000 91,000
Valuation allowance, federal 260,000
Goodwill and other special charges 25,000 36,000 1,006,000
Other 19,000 33,000 13,000
----------- ----------- -----------
$ 465,000 $ 614,000 $ (682,000)
=========== =========== ===========
</TABLE>
In 1994, 1995 and 1996, the Parent had no federal or state
consolidated tax liabilities allocable to the Company, therefore no taxes are
due to or from the Parent under a tax sharing provision. Accordingly, the 1994
and 1995 current expenses of $302,000 and $574,000, respectively, have been
reported as contribution to capital in 1994 and 1995 and the 1996 tax benefit
of $682,000 has been reported as a reduction to contributed capital.
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The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward (expires during
the period ending 2011) $ -- $ 122,000
Accounts receivable 27,000 60,000
Inventories 362,000 354,000
Accrued expenses 156,000 245,000
Vacation accrual 57,000 99,000
Other 11,000 34,000
Valuation allowances -- (280,000)
----------- -----------
Total deferred tax asset 613,000 634,000
----------- -----------
Deferred tax liabilities:
Property and equipment 141,000 153,000
Other assets 123,000 132,000
Goodwill 13,000 13,000
----------- -----------
Total deferred tax liability 277,000 298,000
=========== ===========
Net deferred tax asset $ 336,000 $ 336,000
=========== ===========
</TABLE>
At December 31, 1995 and 1996, valuation allowances were established,
when necessary to reduce deferred tax assets to amounts that are more likely
than not to be realized.
(12) Stockholder's Equity
The Parent's credit facility is collateralized by substantially all of
the Company's asset and a pledge of all of the Company's capital stock.
(13) Lease Commitments
The Company leases equipment and real estate for initial terms of five
to eight years. The minimum future rental payments for operating leases with
initial noncancelable lease terms in excess of one year as of December 31, 1996
are as follows:
<TABLE>
<S> <C> <C>
1997 $ 462,000
1998 363,000
1999 225,000
2000 137,000
2001 98,000
Thereafter 65,000
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996
was $576,509, $644,765, and $639,840, respectively.
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(14) Supplemental Cash Flow Information
In conjunction with acquisition of the Lufkin Division in 1994,
liabilities assumed and refinanced were:
<TABLE>
<S> <C>
Fair value of assets acquired $3,539,810
Net cash 2,040,000
----------
Liabilities assumed $1,499,810
==========
</TABLE>
In 1995, there was a $175,000 adjustment to the purchase price in
connection with the acquisition of Lewis.
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STRATEGIC SUPPLY, INC. AND SUBSIDIARY
(CONDENSED CONSOLIDATED BALANCE SHEETS)
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash $ 131 $ --
Trade accounts receivable, net of allowance for doubtful 6,121 6,386
accounts of $301,000 and $210,000, respectively
Inventory 9,300 9,549
Prepaid expenses and other current assets 79 30
Deferred income taxes -- --
----------- -----------
Total current assets 15,631 15,965
Property and equipment, net 2,328 2,401
Other assets 404 402
----------- -----------
Total assets $ 18,363 $ 18,768
=========== ===========
Liabilities and Stockholders' Equity Current liabilities:
Trade accounts payable and accrued expenses $ 4,334 $ 3,824
Employee compensation -- --
Other accrued liabilities -- --
Current portion of long-term debt 392 339
Due to parent 12,794 13,593
----------- -----------
Total current liabilities 17,520 17,756
Long-term debt, less current portion 450 510
Deferred compensation -- --
Deferred income taxes -- --
Equity subject to redemption
Series A Preferred Stock--1,496 shares -- --
Series B Convertible Preferred Stock -- 4,500 shares -- --
Stockholders' Equity:
Common stock, par value $.01 per share, 10,000 shares 1 1
authorized, 1,000 shares issued and outstanding
Contribution to capital 214 214
Paid-in capital 2,400 2,400
Retained earnings (2,222) (2,113)
----------- -----------
Total stockholders' equity 393 502
Total liabilities and stockholders' equity $ 18,363 $ 18,768
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 15
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STRATEGIC SUPPLY, INC. AND SUBSIDIARY
(CONDENSED CONSOLIDATED STATEMENTS OF INCOME)
(Unaudited)
(In Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Sales $ 12,372 $ 14,139
Cost of sales 9,281 10,538
----------- -----------
Gross Profit 3,091 3,601
Selling, general and administrative expenses 3,163 3,431
----------- -----------
Operating income (72) 170
Interest expense (22) (266)
----------- -----------
Income before income taxes (94) (96)
Provision for income taxes 15 --
----------- -----------
Net income $ (109) $ (96)
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 16
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STRATEGIC SUPPLY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 220 $ 431
INVESTING ACTIVITIES
Purchase of property and equipment (36) (110)
--------- ---------
Net cash used in investing activities (36) (110)
FINANCING ACTIVITIES
Repayment to parent (46) (290)
Repayment of long-term obligations (7) (12)
--------- ---------
Net cash used in financing activities (53) (302)
--------- ---------
INCREASE(DECREASE) IN CASH 131 19
CASH AT BEGINNING OF PERIOD -- 106
--------- ---------
CASH AT END OF PERIOD $ 131 $ 125
========= =========
</TABLE>
See notes to condensed consolidated financial statements
Page 17
<PAGE> 18
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
March 31, 1997
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. Strategic
Supply, Inc., a Delaware corporation (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 were part of the financial
statements of Strategic Distribution, Inc., a reporting company (the "Parent"),
and should be read in conjunction with the Parent's audited consolidated
financial statements included in the Parent's Annual Report on Form 10-K for
the year ended December 31, 1996.
Note 2: The Company
The Company is a leading provider of industrial supply services to commercial
and industrial customers in the western United States. On May 24, 1996, the
Company (formerly SafetyMaster Corporation) and Lewis Supply (Delaware), Inc.
("Lewis") were merged (the "Merger"). The Company was the surviving corporation
of the Merger. The related companies were wholly-owned subsidiaries of the
Parent. Accordingly, the Merger has been accounted for on an as if pooling
basis in all periods presented. The Company was a wholly owned subsidiary of
the Parent until May 30, 1997 when substantially all of the assets and
operations of the Company were acquired by DXP Enterprises, Inc., a Texas
corporation (the "Registrant").
Note 3: Inventory
Inventories of finished goods are stated at the lower of cost (first-in,
first-put basis) or market.
Note 4: Long-Term Debt
Long-term debt consists of several loans with a weighted average interest rates
of 7.5% at March 31, 1997 and December 31, 1996. The maturity of long term
obligations during the next four years are:
1997: $339,470; 1998: $29,950; 1999: $18,461 and 2000; $461,793.
Note 5: Subsequent Events
On June 2, 1997, substantially all of the assets of the Company were acquired
by a wholly owned subsidiary of the Registrant. The acquisition was pursuant to
an Asset Purchase Agreement dated May 27, 1997, among the Company, Coulson
Technologies, Inc., a Delaware corporation, the Parent, Strategic Acquisition,
Inc. a Nevada corporation and wholly owned subsidiary of the Registrant, and
the Registrant. The purchase price, which is subject to adjustment, consisted
of approximately $4.1 million
Page 18
<PAGE> 19
in existing cash, assumption of approximately $4.7 million of trade payables
and other accrued expenses, $2.8 million in promissory notes payable to the
Company and earn-out payments based on the earnings before interest and taxes
of the Company to be paid over a period of approximately six years, which
earn-out payments shall not exceed $3.5 million.
Page 19
<PAGE> 20
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheets as of March 31, 1997 and
unaudited pro forma combined statements of earnings for the three months ended
March 31, 1997 and the year ended December 31, 1996 give effect to the
acquisition by a wholly-owned subsidiary of the Registrant of substantially all
of the assets of Strategic on June 2, 1997. The unaudited pro forma combined
statements of earnings assume all such transactions occurred at the beginning
of the periods presented. The unaudited pro forma combined balance sheets
assume all such transactions occurred at the end of the periods presented.
The unaudited pro forma combined financial statements may not be indicative
of the results that would have occurred if the combination had been in effect
on the dates indicated or which may occur in the future. The unaudited pro
forma condensed combined financial statements should be read in conjunction
with the financial statements of Strategic, which are included elsewhere in
this Current Report.
Page 20
<PAGE> 21
DXP ENTERPRISES, INC.
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------------
Strategic
DXP Supply Pro Forma Pro Forma
Historical Historical Adjustments Combined
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 979 $ 131 $ (131)(1) $ 979
Trade accounts receivable, net 19,899 6,121 (6,121)(1) 19,899
Inventories 16,665 9,300 -- 25,965
Prepaid Expenses and other current assets 266 79 -- 345
Deferred income taxes 569 -- -- 569
----------- ----------- ----------- -----------
Total current assets 38,378 15,631 (6,252) 47,757
Property, plant and equipment, net 7,792 2,328 -- 10,120
Other assets 953 404 (336)(1) 1,021
----------- ----------- ----------- -----------
Total assets $ 47,123 $ 18,363 $ (6,588) $ 58,898
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 8,944 $ 4,334 $ -- $ 13,278
Employee compensation 884 -- -- 884
Other accrued liabilities 965 -- -- 965
Current portion of long-term debt 623 81 (52)(2) 652
Current portion of subordinated debt -- -- 125 (2) 125
Due to parent -- 12,794 (12,794)(1) --
----------- ----------- ----------- -----------
Total current liabilities 11,416 17,207 (12,721) 15,904
Suspense -- -- 6,598 (1) --
-- -- (6,598)(2) --
Long term debt, less current portion 22,792 762 4,150 (2) 27,704
Subordinated debt -- -- 2,375 (2) 2,375
Deferred compensation 739 -- -- 739
Deferred income taxes 364 -- -- 364
----------- ----------- ----------- -----------
Total liabilities 35,311 17,971 (6,196) 47,086
Equity Subject to Redemption:
Series A Preferred Stock 150 -- -- 150
Series B Convertible Preferred Stock 450 -- -- 450
Shareholders' Equity:
Series A Preferred Stock 2 -- -- 2
Series B Preferred Stock 15 -- -- 15
Common Stock 160 1 (1)(1) 160
Paid-in capital 288 2,614 (2,614)(1) 288
Retained earnings 10,747 (2,222) 2,222 (1) 10,747
----------- ----------- ----------- -----------
Total shareholders' equity 11,212 393 (393) 11,212
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 47,123 $ 18,363 $ (6,588) $ 58,898
=========== =========== =========== ===========
</TABLE>
Page 21
<PAGE> 22
DXP Enterprises, Inc.
Pro Forma Combined Statement of Operations
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
-----------------------------------------------------------
Strategic
DXP Supply Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 30,129 $ 12,372 $ -- $ 42,501
Costs and Expenses:
Cost of Sales 21,756 9,281 -- 31,037
Selling, general and
administrative 7,043 3,163 (414)(3) 9,792
----------- ----------- ----------- -----------
Operating income (loss) 1,330 (72) 414 1,672
Other income (expense)
Other income 429 -- -- 429
Interest expense (539) (22) (121)(4) (682)
----------- ----------- ----------- -----------
Earnings (loss) before
income taxes 1,220 (94) 293 1,419
Provision for income taxes 429 15 110 (5) 554
----------- ----------- ----------- -----------
Net income 791 (109) 183 865
Preferred stock dividend 38 -- -- 38
----------- ----------- ----------- -----------
Net income attributable to
common shareholders $ 753 $ (109) $ 183 $ 827
=========== =========== =========== ===========
Net income per share $ 0.08 $ 0.08
=========== ===========
Weighted average shares
outstanding 9,892 9,892
=========== ===========
</TABLE>
Page 22
<PAGE> 23
DXP Enterprises, Inc.
Pro Forma Combined Statement of Operations
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------------
Strategic
DXP Supply Pro Forma Pro Forma
Historical Historical Adjustments Combined
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 125,208 $ 50,972 $ -- $ 176,180
Costs and Expenses:
Cost of Sales 93,091 38,907 -- 131,998
Selling, general and
administrative 29,332 13,989 (1,643)(6) 41,678
Restructuring charge -- 878 (878)(7) 0
Special charges -- 2,836 (2,836)(8) 0
----------- ----------- ----------- -----------
Operating income (loss) 2,785 (5,638) 5,357 2,504
Other income (expense)
Other income 951 -- -- 951
Interest expense (2,101) (131) (439)(4) (2,671)
----------- ----------- ----------- -----------
Earnings (loss) before
income taxes 1,635 (5,769) 4,918 784
Provision for income taxes 745 (682) 204 (5) 267
----------- ----------- ----------- -----------
Net income 890 (5,087) 4,714 517
Preferred stock dividend 119 -- -- 119
----------- ----------- ----------- -----------
Net income attributable to
common shareholders $ 771 $ (5,087) $ 4,714 $ 398
=========== =========== =========== ===========
Net income per share $ 0.09 $ 0.05
=========== ===========
Weighted average shares
outstanding 8,621 8,621
=========== ===========
</TABLE>
Page 23
<PAGE> 24
Pro Forma Adjustments
1. To remove the assets, liabilities and equity not included in the purchase by
the Registrant and place in suspense the net assets purchased by the Registrant
pursuant to the Agreement.
2. To record the debt incurred by the Registrant for the acquisition of the net
assets of the Company.
3. To reduce selling, general and administrative expenses for projected
reduction of expenses as a result of the acquisition. Compensation and related
expenses for those employees not hired approximated $171,000 and the
elimination of corporate overhead by the Company's parent company approximated
$243,000.
4. To adjust interest expense of the debt incurred for the acquisition of the
net assets of the Company.
5. To adjust federal income tax expense for the tax effect of the adjustments
made to operations and interest expense.
6. To adjust selling, general and administrative expenses for expenses related
to employees not hired by the Registrant ($575,000), eliminate intercompany
charges by the Company's parent company ($440,000), eliminate one time expenses
associated with a prior mergers and branch closings ($485,000) and eliminate
amortization of goodwill associated with prior acquisitions completed by the
Company that were not purchased by the Registrant ($143,000).
7. To eliminate the Company's restructuring charge.
8. To eliminate special charges not expected to be incurred by the combined
entities.
Page 24
<PAGE> 25
(c) 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.
23.1 - Consent of KPMG Peat Marwick, LLP.
*99.1 - Press Release of the Registrant dated June 5, 1997,
announcing the closing of the Strategic Acquisition.
- -------------------
* Previously filed.
Page 25
<PAGE> 26
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 hereunto duly authorized.
DXP ENTERPRISES, INC.
Dated: July 25, 1997 By: /s/ DAVID R. LITTLE
---------------------------------------
David R. Little
President and Chief Executive Officer
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<S> <C>
*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.
23.1 Consent of KPMG Peat Marwick, LLP.
*99.1 Press Release of the Registrant dated June 5, 1997,
announcing the closing of the Strategic Acquisition.
</TABLE>
- ------------------
* Previously filed.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Strategic Supply, Inc.:
We consent to the inclusion of our report dated May 27, 1997 with respect to
the consolidated balance sheets of Strategic Supply, Inc. and subsidiary as of
December 31, 1996, and 1995, and the related consolidated statements of
operations and retained earnings (accumulated deficit) and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in amendment number 1 to the current report on Form 8-K/A of
DXP Enterprises, Inc. dated June 2, 1997.
KPMG Peat Marwick LLP
El Paso, Texas
July 21, 1997
