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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-21513
DXP ENTERPRISES, INC.
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A TEXAS IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 76-0509661
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580 WESTLAKE PARK BOULEVARD, SUITE 1100
HOUSTON, TEXAS 77079
TELEPHONE NUMBER (281) 531-4214
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock (Common Stock, Series A
Preferred Stock and Series B Preferred Stock) held by non-affiliates of
registrant as of February 23, 1998 $6,177,500
Number of shares of registrant's Common Stock outstanding as of February
23, 1998 8,336,284
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TABLE OF CONTENTS
DESCRIPTION
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ITEM PAGE
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PART I.............................................................. 1
1. BUSINESS.................................................... 1
2. PROPERTIES.................................................. 9
3. LEGAL PROCEEDINGS........................................... 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10
PART II............................................................. 11
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 11
STOCKHOLDER MATTERS.......................................
6. SELECTED FINANCIAL DATA..................................... 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 13
AND RESULTS OF OPERATIONS.................................
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 19
ABOUT MARKET RISK.........................................
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 37
AND FINANCIAL DISCLOSURE..................................
PART III............................................................ 38
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 38
11. EXECUTIVE COMPENSATION...................................... 40
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 43
MANAGEMENT................................................
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 44
PART IV............................................................. 46
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 46
8-K.......................................................
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PART I
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
DXP Enterprises, Inc.'s actual results could differ materially. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Business", "Business -- Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report on Form 10-K. Unless the context otherwise
requires, references in this Annual Report on Form 10-K to the "Company" or
"DXP" shall mean DXP Enterprises, Inc., a Texas corporation, as the successor to
SEPCO Industries, Inc. ("SEPCO"), together with the Company's subsidiaries.
ITEM 1. BUSINESS
GENERAL
DXP is a leading supplier of maintenance, repair and operating ("MRO")
products, equipment and services to industrial customers. The Company provides a
wide range of MRO products in the following categories: fluid handling
equipment, bearings and power transmission equipment and general mill and safety
supplies. The Company also offers a line of valve and valve automation products
within the pipe, valve and fittings category and is seeking to expand its
presence in this area. The Company offers its customers a single source of
supply on an efficient and competitive basis by being a first-tier distributor
which purchases its products directly from the manufacturer. The Company also
provides value-added services such as system design, fabrication, installation,
repair and maintenance for its customers. The Company offers this wide range of
industrial MRO products, equipment and services through a complete continuum of
customized and efficient MRO solutions, ranging from traditional distribution to
fully integrated supply contracts.
Since current management acquired control of the Company in 1986, the
Company has grown substantially through 11 acquisitions. This growth has been
designed to position and differentiate the Company as a single source,
first-tier distributor of the major product categories in the United States
industrial market. The Company currently provides a wide range of products in
three of the major product categories and is in the process of acquiring the
electrical product distribution assets and operations of Bob Green Electric
("BGE") and Tri-Electric Supply Company ("Tri-Electric") (the "Proposed
Acquisitions"). Upon the completion of the Proposed Acquisitions and with
additional expansion in the pipe, valve and fittings category, the Company will
be able to provide as a first-tier distributor products in the five major
industrial MRO product categories. The Company also intends to further expand
its product offering in the pipe, valve and fitting category.
INDUSTRY OVERVIEW
The Company estimates that annual sales in the United States of MRO
products for industrial customers currently exceeds $200 billion, of which the
Company estimates over $150 billion are in the five major product categories of
(i) bearings and power transmission equipment, (ii) general mill and safety
supplies, (iii) electrical products, (iv) fluid handling equipment and (v) pipe,
valves and fittings. The Company's MRO products include a wide range of products
in the fluid handling equipment, bearings and power transmission equipment and
general mill and safety supplies categories. The Company also offers a line of
valve and valve automation products within the pipe, valve and fittings category
and is seeking to expand its presence in this area. Upon completion of the
Proposed Acquisitions and with additional expansion in the pipe, valve and
fittings category, the Company will be able to provide as a first-tier
distributor products in the five major MRO product categories. Based on 1996
sales as reported by industry sources, the Company was the 40th largest
distributor of MRO products in the United States. On a combined basis after
giving effect to the Company's 1997 acquisitions of Strategic Supply, Inc.
("SSI") and Pelican State Supply Company, Inc. ("Pelican"), the Company would
have been the 30th largest distributor of MRO products in the United States.
While the growth in the industrial distribution market is generally related
to the expansion of the United States economy, revenues attributable to the
outsourcing of MRO supply procurement, inventory control and warehouse
management, known as "integrated supply", are expected to grow at an annualized
rate of 40%
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from $1.8 billion in 1995 to $10 billion in 2000. The industrial distribution
market is highly fragmented, with the 50 largest distributors accounting for
less than 15% of the total United States market during 1996. As a result, most
industrial customers currently purchase their industrial supplies through
numerous local distribution and supply companies. These distributors generally
provide the customer with repair and maintenance services, technical support and
application expertise with respect to one product category. Products typically
are purchased by the distributor for resale directly from the manufacturer and
warehoused at branch distribution facilities of the distributor until sold to
the customer. The customer also typically will purchase an amount of product
inventory for its near term anticipated needs and warehouse those products at
its industrial site until the products are used.
The Company believes that the current distribution system for industrial
products in the United States creates inefficiencies at both the customer and
the distributor level through excess inventory requirements and duplicative cost
structures. To compete more effectively, the Company's customers and other users
of MRO products are seeking ways to enhance efficiencies and lower MRO product
and procurement costs. In response to this customer desire, three primary trends
have emerged in the industrial supply industry:
Industry Consolidation. Industrial customers have reduced the number of
supplier relationships they maintain to lower total purchasing costs, improve
inventory management, assure consistently high levels of customer service and
enhance purchasing power. This focus on fewer suppliers has led to consolidation
within the fragmented industrial distribution industry.
Customized Value-Added Service. As industrial customers focus on their core
manufacturing or other production competencies, they increasingly are demanding
customized distribution services, ranging from value-added traditional
distribution to integrated supply.
Single Source, First-Tier Distribution. As industrial customers continue to
address cost containment, there is a trend toward reducing the number of
suppliers and eliminating multiple tiers of distribution. Therefore, to lower
overall costs to the MRO customer some MRO distributors are expanding their
product coverage to eliminate second-tier distributors and the difficulties
associated with alliances.
Industrial distributors typically provide professional sales expertise,
engineering expertise, inventory availability, fabrication and assembly and
in-house and field service. The Company believes that the acquisition of other
businesses should not materially affect its ability to continue to provide these
services to its customers and the customers of the acquired distributors. In
fact, the Company believes that as a larger and more diverse organization it
should be able to maintain the same or higher level of service to its customers
and the customers of any acquired distributors. The Company also believes that
the level of service provided to the customers of the acquired business may be
enhanced as a result of the availability of a broader range of products, the
elimination of duplicative overhead and DXP's SmartSource and American MRO
integrated supply programs.
BUSINESS STRATEGY
The Company's strategy is focused on addressing current trends in the
industrial distribution market through a combination of acquisitions and
internal growth. The Company seeks acquisitions that will provide the Company
access to additional products lines and customers to enhance its position as a
single source industrial distributor with first-tier distribution capabilities.
Key elements of the Company's internal growth strategy include leveraging
existing customer relationships, expanding product offerings from existing
locations, reducing costs through consolidated purchasing programs and combined
product distribution centers, designing and implementing innovative solutions to
address the procurement and supply needs of the Company's customers and using
the Company's traditional distribution and integrated supply capabilities to
increase sales in each area.
The Company's key strategies are:
Industry Consolidator; Focused Acquisition Strategy. The Company is an
active consolidator in the industrial distribution industry. The Company
believes that significant acquisition opportunities exist in this industry due
in large part to the fragmented nature of the industry and customer desire to
reduce costs and
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improve efficiencies through vendor reduction. The Company's acquisition
strategy is focused on enhancing the Company's position as a single source
industrial distributor with first-tier distribution capabilities for a broad
range of MRO products and improving the Company's ability to deliver value-added
traditional distribution and flexible integrated supply solutions. Although the
Company will be able to provide as a first-tier distributor a substantial
portion of products in four of the five major MRO product categories following
the Proposed Acquisitions, the Company plans to continue to seek acquisitions
that will broaden its product coverage within each of the five major MRO product
categories. The Company also believes that substantial opportunities exist to
expand the Company's customer base and to penetrate geographic markets not
currently served by the Company through selective acquisitions. Acquisitions
also provide the opportunity for the Company to increase its operating margins
by reducing administrative overhead, consolidating distribution locations and
personnel and reducing costs for products through volume purchases and similar
arrangements. The Company further believes that as acquisitions are assimilated,
additional opportunities should arise to increase sales to the customers of the
acquired companies by providing products to these customers that were not
previously offered by the acquired company.
First-Tier Distributor of Extensive Line of MRO Products. The Company has
direct relationships with a substantial number of original equipment
manufacturers and does not rely on other distributors to supply bearings and
power transmission equipment, general mill and safety supplies and fluid
handling equipment. Upon completion of the Proposed Acquisitions, the Company
also will be a first-tier distributor of electrical products. While many of the
Company's competitors offer traditional distribution of a more limited product
range, the Company is not aware of any major competitor, other than direct-mail
distributors, that offers on a non-direct mail basis as many product categories
as the Company will offer following the Proposed Acquisitions. As a first-tier
distributor of an extensive line of MRO products, the Company is able to reduce
substantially the markups paid by the customer to second-tier distributors and
significantly reduce the number of supplier relationships needed by the
customer, without the difficulties associated with alliances.
Value-Added Services. The Company's distribution strategy is focused on
building and maintaining long-term relationships by understanding the customers'
operations and providing value-added services such as product application,
engineering and system design. Because the Company has extensive experience as a
traditional distributor, the Company has built strong knowledge of its
customers' operations and can provide valuable assistance in identifying the
products that will best meet their needs. DXP's role extends beyond procurement
services due to the Company's ability to deliver personal, after-the-sale
service.
Customized Distribution Solutions; Integrated Supply. The Company believes
that the most desirable approach to industrial distribution is to provide the
customer with a complete continuum of supply options, ranging from traditional
distribution to integrated supply. Through the Company's SmartSource program,
the customer is able to select only those products and services needed. For
those customers purchasing a number of products in large quantities, the Company
offers its American MRO program, a "fully integrated supply" program that
permits the customer to outsource all or most of their procurement needs to the
Company.
Cost Efficiencies. As the Company expands into new geographic regions and
further penetrates existing markets, the Company intends to consolidate many
functions such as accounting, management information systems and certain
purchasing arrangements to eliminate duplicative costs that otherwise would be
incurred at the operating level. The Company seeks higher volume purchasing in
order to reduce product costs. The Company may also continue to consolidate
facilities or branches to optimize efficiencies.
RECENT ACQUISITIONS
During 1997, the Company completed two strategic acquisitions with combined
1996 revenues of $64.8 million directed at expanding its product lines and
increasing its geographic presence. Through the Company's acquisition of the
assets of SSI, the Company added general mill and safety supply to its product
offerings and expanded its geographic presence to seven additional states and 24
additional cities throughout the United States. The acquisition of SSI also
enhanced the Company's integrated supply capabilities through SSI's existing
integrated supply contracts and SmartSource program. The Company's May 1997
acquisition of
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Pelican expanded the Company's general mill and safety supply product lines and
added an additional integrated supply contract with a major refinery in Baton
Rouge, Louisiana.
PRODUCTS AND SERVICES
The Company currently serves as a first-tier distributor of more than
170,000 stock keeping units ("SKUs") for use primarily by customers engaged in
the general manufacturing, oil and gas, petrochemical, service and repair and
wood products industries. Other industries served by the Company include mining,
construction, chemical, municipal, food and beverage and pulp and paper. The
Company's MRO products include a wide range of products in the bearings and
power transmission equipment, general mill and safety supplies and fluid
handling equipment categories. The Company also offers a line of valve and valve
automation products within the pipe, valve and fittings category and is seeking
to expand its presence in this area. Upon completion of the Proposed Acquisition
and with additional expansion in the pipe, valve and fittings category, the
Company will be able to provide as a first-tier distributor a substantial
portion of products in the five major MRO product categories. The Company's
products are distributed from 53 distribution centers strategically located
throughout the United States and sold through a sales force of approximately 240
sales representatives who generally are compensated on a commission basis.
Bearings and Power Transmission Equipment
The Company provides a full line of bearings, hoses, seals and power
transmission products. The Company's bearing products include several types of
mounted and unmounted bearings for a variety of applications. Hose products
distributed by the Company include a large selection of industrial fittings and
stainless steel hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as
well as hoses for chemical, petroleum, air and water applications. The Company
distributes seal products for downhole, wellhead, valve and completion equipment
to oilfield service companies. Power transmission products distributed by the
Company include speed reducers, flexible coupling drives, chain drives,
sprockets, gears, conveyors, clutches, brakes and hoses. Sales of bearings,
hoses, seals and power transmission equipment accounted for 35% and 39% of the
Company's revenues for years ended December 31, 1995 and 1996, respectively.
Such sales accounted for 31% of the Company's revenues for the year ended
December 31, 1997, and 27% of such revenues for such year on a pro forma basis
after giving effect to the SSI and Pelican acquisitions.
General Mill and Safety Supplies
The Company, as a result of the acquisitions of SSI and Pelican in May
1997, offers a broad range of general mill and safety supplies, such as
abrasives, tapes and adhesive products, coatings and lubricants, cutting tools,
fasteners, hand tools, janitorial products, pneumatic tools, welding equipment,
eye and face protection products, first aid products, protection products,
hazardous material handling products, instrumentation and respiratory protection
products. Sales of general mill supply and safety products accounted for
approximately 29% of the Company's revenue on a pro forma basis for the year
ended December 31, 1997.
Fluid Handling Equipment
The Company's fluid handling equipment line includes a full line of (i)
centrifugal pumps for transfer and process service applications, such as
petrochemicals, refining and crude oil production, (ii) rotary gear pumps for
low-to medium-pressure service applications, such as pumping lubricating oils
and other viscous liquids, (iii) plunger and piston pumps for high-pressure
service applications such as salt water injection and crude oil pipeline service
and (iv) air-operated diaphragm pumps. The Company also provides various pump
accessories. Sales of pumps and pump accessories accounted for 55% and 53% of
the Company's revenues for the years ended December 31, 1995 and 1996,
respectively. Such sales accounted for 44% of the Company's revenues for the
year ended December 31, 1997, and 39% of such revenues for such year on a pro
forma basis after giving effect to the SSI and Pelican acquisitions.
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Pipe, Valve and Fittings
The Company's valve and valve automation products within this category
include a full line of pneumatic, hydraulic and electric actuators for critical
or high-pressure service applications or remote valve operation applications,
such as refinery, offshore and pipeline applications, as well as for
applications involving large-diameter pipe. The Company also provides a full
line of manual worm gear and bevel gear actuators for low-pressure applications
not requiring remote operation, including tank farms, water lines and municipal
water systems. Sales of valves and valve automation products accounted for 9%,
and 8% of the Company's revenues for the years ended December 31, 1995 and 1996,
respectively. Such sales accounted for 6% of the Company's revenues for the year
ended December 31, 1997, and 5% of such revenues for such year on a pro forma
basis after giving effect to the SSI and Pelican acquisitions.
CUSTOMIZED DISTRIBUTION SERVICES
System Design, Fabrication, Installation and Repair and Maintenance Services
In addition to distributing products, the Company provides complete,
customized pumping, valve automation and power transmission system design and
fabrication services through its engineering personnel and fabrication
facilities. The Company also provides training services with respect to the
installation and basic applications of its products as well as around-the-clock
field repair services supported by a fleet of fully equipped service vehicles.
Integrated Supply
The Company actively markets to its customers through the Company's
SmartSource program, a method whereby the customer may choose from a menu of
options the aspects of integrated supply that it prefers. Additionally, through
its American MRO program, the Company offers a comprehensive outsourcing program
designed to provide all aspects of the maintenance, repair and operating supply
procurement and the inventory management and distribution functions for its
customers at the customer's location. These two programs allow the customer to
tailor a program to meet its specific needs.
CUSTOMERS
The Company provides its products and services to over 25,000 customers in
various industries, principally general manufacturing, oil and gas,
petrochemical, service and repair and wood products. Other industries include
mining, construction, chemical, municipal, food and beverage and pulp and paper.
No one customer represented more than 5% of the Company's sales for the year
ended December 31, 1997.
SALES AND MARKETING
The Company markets its products through its sales force, consisting of
approximately 116 outside sales representatives and 125 direct sales
representatives. The Company has structured compensation to provide incentives
to its sales representatives to increase sales through the use of commissions.
The Company's outside sales representatives focus on building long-term
relationships with customers and, through their product and industry expertise,
providing customers with product application, engineering and after-the-sale
services. The direct sales representatives support the outside sales
representatives and are responsible for entering product orders and providing
technical support with respect to the Company's products. Because the Company
offers a broad range of products, the Company's outside and direct sales
representatives are able to use their existing customer relationships with
respect to one product line to cross-sell the Company's other product lines. In
addition, geographic locations in which certain products are sold also are being
utilized to sell products not historically sold at such locations.
Unlike many of its competitors, the Company markets its products primarily
as a first-tier distributor, generally procuring products directly from the
manufacturers, rather than from other distributors. As a first-tier distributor,
the Company is able to reduce its customers' costs and improve efficiencies in
the supply chain.
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The Company has increased its competitive advantage through its traditional
and integrated supply programs, designed to address the customer's specific
product and procurement needs. The Company offers its customers various options
for the integration of their supply needs, ranging from serving as a single
source of supply for all or specific lines of products and product categories to
offering a fully integrated supply package in which the Company assumes the
procurement and management functions, including ownership of inventory, at the
customer's location. The Company's unique approach to integrated supply allows
the Company to design a program that best fits the needs of the customer. For
those customers purchasing a number of products in large quantities, the
customer is able to outsource all or most of those needs to the Company. For
customers with smaller supply needs, the Company is able to combine its
traditional distribution capabilities with its broad product categories and
advanced ordering systems to allow the customer to engage in one-stop shopping
without the commitment required under an integrated supply contract.
The Company also believes it has competitive advantages over other
traditional distributors through its innovative and flexible sales and
procurement programs, such as its SmartSource and American MRO programs. The
Company offers these programs to medium and large customers that desire to
outsource MRO procurement, inventory control and warehouse management to keep
customers on a long-term basis and attract new customers not satisfied with
traditional distribution.
SUPPLIERS
The Company acquires its products through numerous original equipment
manufacturers. The Company has distribution agreements with these manufacturers,
some of which give the Company exclusive rights to distribute the manufacturers'
products in a specific geographic area. All of the Company's distribution
agreements are subject to cancellation by the manufacturer upon one year notice
or less. No one manufacturer provides products that account for 10% or more of
the Company's revenues. The Company believes that alternative sources of supply
could be obtained in a timely manner if any distribution agreement were
canceled. Accordingly, the Company does not believe that the loss of any one
distribution agreement would have a material adverse effect on its business,
financial condition or results of operations. Representative manufacturers of
the Company's products include (i) Gould's, G&L, Viking, Wilden and Gaso (fluid
handling products), (ii) SKF, Torrington/Fafnir, Timkin and NTN, Dodge/Reliance,
Falk, Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric
(bearing and power transmission products), (iii) Union Bullerfield, Gulf Coast
Fasteners, Norton Gray Abrasives, Sastech, Inc., and LaCross Rainfair Safety
Products (general mill and safety supply) and (iv) G.H. Bettis (valve and valve
automation products). Representative manufacturers of the products offered by
BGE and Tri-Electric include Seimens, Toshiba, Teco, Cutler-Hammer and Control
Techniques International.
MANAGEMENT INFORMATION SYSTEM
The Company uses technology to benefit customers and to improve the
Company's productivity and efficiency. In addition to traditional functions of
inventory control, order processing, purchasing, accounts receivable, accounts
payable and general ledger, the Company's computer system has the flexibility to
integrate with the customer's maintenance, accounting and management systems.
The Company's system allows for real-time reporting of industrial products used
by work order, department and individual, as well as on-line stock inquiry and
order-status reports. The Company's system supports advanced functions, such as
EDI, customized billing, end user reporting, facsimile transmission, bar coding
and preventative maintenance. The Company's Smart Source and American MRO
programs deliver DXP's technology to the integrated supply customer, thereby
eliminating duplication and inefficiencies to lower the total acquisition cost
of MRO products. This system links the Company's branches and corporate offices
with manufacturers and customers into one network system.
The Company operates a mainframe system that is supported by the industry
standard open system environment. The Company has invested significant resources
within the last 18 months to increase the capabilities and networking
opportunities of this system. The Company's system supports a large number of
customer specific databases which tie into the Company's primary database. This
capability allows the
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Company to provide its customers with a wide variety of reports that are
customized to meet the specific needs of the customer.
COMPETITION
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, many of which may have greater
financial and other resources than the Company. Many of the Company's
competitors are small enterprises selling to customers in a limited geographic
area. The Company also competes with larger distributors that provide integrated
supply programs and outsourcing services similar to those offered by the Company
through its SmartSource and American MRO programs, some of which may be able to
supply their products in a more efficient and cost-effective manner than the
Company. The Company also competes with direct mail distributors, large
warehouse stores and, to a lesser extent, manufacturers. While many of the
Company's competitors offer traditional distribution of some of the product
groupings offered by the Company, the Company is not aware of any major
competitor that offers on a non-direct mail basis a product grouping as broad as
that which will be offered by the Company following the Proposed Acquisitions.
Further, while certain direct-mail distributors provide product offerings as
broad as the Company, these competitors do not offer the product application,
engineering and after-the-sale services provided by the Company.
BACKLOG
Backlog is not material to the Company's business.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. There can be no
assurance that such insurance will be adequate for the risks involved, that
coverage limits will not be exceeded or that such insurance will apply to all
liabilities. The occurrence of an adverse claim in excess of the coverage limits
maintained by the Company could have a material adverse effect on the Company's
financial condition and results of operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations relating to its
business and operations, and various health and safety regulations as
established by the Occupational Safety and Health Administration.
Certain of the Company's operations are subject to federal, state and local
laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although the Company believes
that is has adequate procedures to comply with applicable discharge and other
environmental laws, the risks of accidental contamination or injury from the
discharge of controlled or hazardous materials and chemicals 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 have a
material adverse effect on the Company. The Company is not currently aware of
any situation or condition that it believes is likely to have a material adverse
effect on its results of operations or financial condition.
EMPLOYEES
At December 31, 1997, the Company had 652 full-time employees. The Company
believes that its relationship with its employees is good.
RISK FACTORS
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 Annual Report on
Form 10-K, 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
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could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below.
Risks Associated With Acquisition Strategy
Future results for the Company will depend in part on the success of the
Company in implementing its acquisition strategy. This strategy includes taking
advantage of a consolidation trend in the industry and effecting acquisitions of
distributors with complementary or desirable new product lines, strategic
distribution locations and attractive customer bases and manufacturer
relationships. The ability of the Company to implement this strategy will be
dependent on its ability to identify, consummate and successfully assimilate
acquisitions on economically favorable terms. Although the Company is actively
seeking acquisitions that would meet its strategic objectives, there can be no
assurance that the Company will be successful in these efforts. In addition,
acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities and amortization of acquired intangible assets, some or
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company or other industrial supply distributors acquired in the future will
achieve anticipated revenues and earnings. In addition, the Company's credit
facilities contain certain restrictions that could adversely affect its ability
to implement its acquisition strategy. Such restrictions include a provision
prohibiting the Company from merging or consolidating with, or acquiring all or
a substantial part of the properties or capital stock of, any other entity
without the prior written consent of the lender. There can be no assurance that
the Company will be able to obtain the lender's consent to any of its proposed
acquisitions.
Risks Related to Acquisition Financing
The Company currently intends to finance acquisitions by using shares of
its Common Stock, par value $.01 per share (the "Common Stock"), for a portion
or all of the consideration to be paid. In the event that the Common Stock does
not maintain a sufficient market value, or potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for the
sale of their businesses, the Company may be required to use more of its cash
resources, if available, to maintain its acquisition program. If the Company
does not have sufficient cash resources, its growth could be limited unless it
is able to obtain additional capital through debt or equity financings. Under
the Company's loan agreements with its bank lender (the "Credit Facility"), all
available cash generally is applied to reduce outstanding borrowings. As of
December 31, 1997, the Company had $4.9 million available under the Credit
Facility, and there can be no assurance that the Company will be able to obtain
additional financing on a timely basis or on terms the Company deems acceptable.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
Risks Related to Growth Strategy
Future results for the Company also will depend in part on the Company's
success in implementing its internal growth strategy, which includes expanding
existing product lines and adding new product lines. The ability of the Company
to implement this strategy will depend on its success in acquiring and
integrating new product lines and marketing integrated forms of supply
arrangements such as those being pursued by the Company through its SmartSource
and American MRO programs. The Company acquired SSI and Pelican in the second
quarter of 1997 and plans to acquire other distributors with complementary or
desirable product lines and customer bases. Although the Company intends to
increase sales and product offerings to the customers of SSI and Pelican and
other acquired companies, reduce costs through consolidating certain
administrative and sales functions and integrate the acquired companies'
management information systems with the Company's system, there can be no
assurance that the Company will be successful in these efforts.
8
<PAGE> 11
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
outsourcing services similar to those that are offered by the Company's
SmartSource and American MRO programs. 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 of Economic Trends
Demand for the Company's products is subject to changes in the United
States economy in general and economic trends affecting the Company's customers
and the industries in which they compete in particular. Many of these
industries, such as the oil and gas industry, are subject to volatility while
others, such as the petrochemical industry, are cyclical and materially affected
by changes in the economy. As a result, the Company may experience changes in
demand for its products as changes occur in the markets of its customers.
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, President 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 the life of 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 effect the Company's financial
condition and results of operations.
Dependence on Supplier Relationships
The Company has distribution rights for certain product lines and depends
on these distribution rights for a substantial portion of its business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. The termination or limitation by
any key supplier of its relationship with the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "-- Suppliers".
Risks Associated With Hazardous Materials
Certain of the Company's operations are subject to federal, state and local
laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although the Company believes
that it has adequate procedures to comply with applicable discharge and other
environmental laws, the risks of accidental contamination or injury from the
discharge of controlled or hazardous materials and chemicals 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 have a
material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company owns or leases 53 branch distribution facilities located in
Alabama, Arizona, Arkansas, Colorado, Idaho, Louisiana, Montana, Nevada, New
Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming. These facilities
average from 2,500 square feet to 138,000 square feet in size. Those facilities
that are not owned by the Company are leased for terms generally ranging from
three to five years. The leases provide for periodic specified rental payments
and certain leases are renewable at the option of the Company.
9
<PAGE> 12
The Company believes that if the leases for any of its facilities were not
renewed, other suitable facilities could be leased with no material adverse
effect on its business, financial condition or results of operations. Certain of
the facilities owned by the Company are pledged to secure indebtedness of the
Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. The Company currently is not 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock has traded on The Nasdaq National Market since July 2,
1997, under the symbol "DXPE." From December 27, 1996, through July 2, 1997, the
Common Stock traded on the Over the Counter Bulletin Board of National
Association of Securities Dealers, Inc. ("OTC Bulletin Board"). The following
table sets forth on a per share basis the high and low sales prices for the
Common Stock as reported on The Nasdaq National Market and the OTC Bulletin
Board, as applicable, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1996
Fourth Quarter (Beginning December 27, 1996).............. $7.50 $7.00
1997
First Quarter............................................. 8.00 4.50
Second Quarter............................................ 6.75 5.25
Third Quarter............................................. 7.00 6.00
Fourth Quarter............................................ 6.25 5.00
1998
First Quarter (through February 20, 1998)................. 6.50 5.00
</TABLE>
On February 20, 1998, the closing sales price of the Common Stock was $5.00
per share. On December 31, 1997, there were 139 holders of record of outstanding
shares of Common Stock.
The Company anticipates that future earnings will be retained to finance
the continuing development of its business. In addition, the Company's loan
agreement with its principal lender prohibits the Company from declaring or
paying any dividends or other distributions on its capital stock except for
limited dividends on its preferred stock. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the success of the Company's business activities, regulatory and capital
requirements, the general financial condition of the Company and general
business conditions.
In August 1997, the Company issued 6,603 shares of Common Stock for an
aggregate consideration of $9,250 to an employee pursuant to the exercise of a
stock option granted under the Company's Long-Term Incentive Plan. The
consideration for such shares was paid in accordance with the "cashless
exercise" provisions of the stock option pursuant to which the Company withheld
approximately 1,397 shares of Common Stock subject to the stock option to pay
the exercise price. The Company considers such securities to have been offered
and sold in a transaction not involving a public offering and, therefore, to be
exempted from registration under Section 4(2) of the Securities Act. The
foregoing transaction did not involve underwriters.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The Company was formed in 1996 to effect a consolidation of SEPCO and
Newman Communications Corporation (the "Reorganization") pursuant to which DXP
became a public Company. Prior to the Reorganization, the Company had no
operations and its only assets consisted of $1,000 cash. The Reorganization has
been accounted for as a recapitalization of SEPCO. The selected historical
consolidated financial data of SEPCO set forth below for each of the years in
the three-year period ended December 31, 1995, have been derived from the
audited consolidated financial statements of SEPCO. The selected historical
consolidated financial data set forth below for each of the years in the
two-year period ended December 31, 1997 have been derived from the audited
consolidated financial statements of the Company, and assume that Reorganization
had been effected on the first day of the period presented. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SEPCO DXP
----------------------------- -------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Revenues................................. $99,353 $102,592 $111,328 $125,208 $169,667
Gross profit(1).......................... 26,792 27,217 29,157 32,117 44,880
Operating income(1)...................... 3,288 4,150 4,598 2,785 6,434
Income before provision for income taxes,
minority interest and change in
accounting principle................... 2,346 3,038 3,512 1,635 4,670
Minority interest in earnings (loss) of a
subsidiary(2).......................... (403) -- -- -- --
Cumulative effect of change in accounting
principle(3)........................... 882 -- -- --
Net income............................... 1,843 1,862 2,088 890 2,768
Preferred stock dividend................. -- -- (23) (119) (103)
Net income attributable to common
shareholders........................... 1,843 1,862 2,065 771 2,665
Basic earnings per common share.......... $ 0.19 $ 0.19 $ 0.27 $ 0.10 $ 0.33
Common shares outstanding................ 9,757 9,757 7,674 7,994 8,163
Dilutive earnings per share.............. $ 0.18 $ 0.17 $ 0.23 $ 0.09 $ 0.24
Common and common equivalent shares
outstanding(4)(5)...................... 10,451 10,741 9,002 9,713 11,405
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SEPCO DXP
----------------------------- -------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $18,402 $ 20,011 $ 23,967 $ 25,612 $ 36,262
Total assets............................. 38,686 38,163 43,254 45,042 67,636
Long-term debt obligations............... 20,766 18,461 21,275 22,300 33,674
Shareholders' equity(4).................. 6,453 8,315 9,688 10,459 13,031
</TABLE>
- ---------------
(1) Year ended December 31, 1996 includes a one-time charge to compensation
expense of $618,000 for the amendment of book value options to fair market
value options and approximately $284,000 in professional costs associated
with the Reorganization. The Company disposed of approximately $1,100,000 of
excess inventory in December 1996 that it had accumulated through prior
acquisitions of product groups that were subject to shelf-life restrictions.
This is a one-time charge not expected to occur in future years.
12
<PAGE> 15
(2) In September 1993, SEPCO acquired the remaining shares of capital stock of
Southern Engine and Pump Company. The acquisition eliminated any need to
account for minority interest in earnings of this subsidiary.
(3) Effective January 1, 1993, SEPCO changed its method of accounting for income
taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the
rules, prior years' financial statements were not restated. The cumulative
effect of adopting Statement 109 as of January 1, 1993 was to increase net
earnings by $882,000.
(4) Number of shares used to compute earnings per share and shareholders' equity
has been restated to reflect the Reorganization as of the first day of the
first period presented.
(5) Common stock and earnings per share have been restated to give effect to the
two-to-one reverse split of the Common Stock which became effective May 12,
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and related notes contained elsewhere in this Annual
Report on Form 10-K.
GENERAL
The Company is a leading supplier of MRO products, equipment and services
to industrial customers. The Company provides a wide range of MRO products in
the fluid handling equipment, bearings and power transmission equipment and
general mill and safety supplies. The Company also offers a line of valve and
valve automation products within the pipe, valve and fittings category and is
seeking to expand its presence in this area. The Company offers its customers a
single source of supply on an efficient and competitive basis by being a
first-tier distributor which purchases its products directly from the
manufacturer. The Company also provides value-added services such as system
design, fabrication, installation, repair and maintenance for its customers. The
Company offers this wide range of industrial MRO products, equipment and
services through a complete continuum of customized and efficient MRO solutions,
ranging from traditional distribution to fully integrated supply contracts.
The Company's products and services are marketed in 14 states to over
25,000 customers that are engaged in a variety of industries, many of which may
be counter cyclical to each other. Demand for the Company's products generally
is subject to changes in the United States economy and economic trends affecting
the Company's customers and the industries in which they compete in particular.
Certain of these industries, such as the oil and gas industry, are subject to
volatility while others, such as the petrochemical industry, are cyclical and
materially affected by changes in the economy. As a result, the Company may
within particular markets and product categories experience changes in demand as
changes occur in the markets of its customers.
The Company's strategy is focused on addressing current trends in the
industrial distribution market through a combination of acquisitions and
internal growth. The Company seeks acquisitions that will provide the Company
access to additional product lines and customers to enhance its position as a
single source industrial distributor with first-tier distribution capabilities.
Key elements of the Company's internal growth strategy include leveraging
existing customer relationships, expanding product offerings from existing
locations, reducing costs through consolidated purchasing programs and combined
product distribution centers, designing and implementing innovative solutions to
address the procurement and supply needs of the Company's customers and using
the Company's traditional distribution and integrated supply capabilities to
increase sales in each area. Future results for the Company will be dependent on
the success of the Company in implementing its acquisition and internal growth
strategy.
The ability of the Company to implement its acquisition and internal growth
strategy will be dependent on its ability to identify, consummate and assimilate
acquisitions on economically favorable terms, to acquire and successfully
integrate new product lines and to successfully market alternate forms of supply
arrangements
13
<PAGE> 16
through the Company's SmartSource and American MRO programs. 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 be dependent on its obtaining financing for its
planned acquisitions and expansions, which there can be no assurance will be
available. The Company plans to examine appropriate methods of financing any
such acquisitions, including issuance of additional capital stock, debt or other
securities or a combination thereof. If the Company were to issue shares of its
capital stock in any acquisition, such issuance could be dilutive to existing
shareholders.
The Reorganization
The Company was incorporated on July 26, 1996, to facilitate the
Reorganization. On December 4, 1996, the Reorganization was effected through (i)
a merger of a wholly owned subsidiary of the Company with and into SEPCO and
(ii) a merger of a wholly owned subsidiary of the Company with and into Newman
Communications Corporation ("Newman").
Prior to the Reorganization, the Company had no operations and its only
assets consisted of $1,000 cash. The Reorganization has been accounted for as a
recapitalization of SEPCO. Prior to the Company's acquisition of Newman, Newman
was a non-operating entity with nominal assets. The merger with Newman was
effected as a means to implementing the original registration of the Common
Stock under the Securities Exchange Act of 1934, as amended, and increasing the
Company's shareholder base. The Reorganization resulted in approximately
$900,000 in one-time costs, which included a $618,000 charge for additional
compensation expense for the conversion of outstanding book-value options into
market-based options and approximately $284,000 in professional costs associated
with the Reorganization.
In December 1996, the Company disposed of $1.1 million of excess inventory
which it had accumulated through prior acquisitions of product groups that were
subject to shelf-life restrictions. This is a one-time charge not expected to
occur in future years.
Unless the context otherwise requires, references to the Company with
respect to operations prior to December 4, 1996 shall mean SEPCO and references
to the Company with respect to operations on and after December 4, 1996 shall
mean the Company.
RESULTS OF OPERATIONS
The Company currently distributes products in four of the five major
product categories within the industrial distribution market. Three of those
product categories, fluid handling equipment, bearings and transmission
equipment and pipe, valve and fittings have been provided by the Company for a
number of years. The fourth product category, general mill and safety supplies,
was added in 1997 with the acquisitions of SSI and Pelican. The Company
currently is pursuing acquisitions that would add electrical products to the
Company's distribution capabilities.
14
<PAGE> 17
The following table sets forth the revenues generated from the sales of
major products and services distributed by the Company and the percentage of
revenues of various items.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
SEPCO DXP
-------------------- --------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Fluid handling equipment................................. $ 61,630 $ 65,709 $ 75,472
Bearings and power transmission equipment................ 39,500 49,144 53,180
General mill and safety supplies(1)...................... -- -- 31,660
Pipe, valve and fittings................................. 10,198 10,355 9,355
-------- -------- --------
Total revenues................................. $111,328 $125,208 $169,667
Percent of Revenues:
Cost of sales............................................ 73.8% 74.3% 73.5%
Gross profit............................................. 26.2 25.7 26.5
Selling, general and administrative expense.............. 22.1 23.5 22.7
Operating income......................................... 4.1 2.2 3.8
Other income............................................. .8 .8 .5
Interest expense, net.................................... 1.8 1.7 1.6
Income before taxes...................................... 3.2 1.3 2.7
Income tax expense....................................... 1.3 .6 1.1
Net income............................................... 1.9% 0.7% 1.6%
======== ======== ========
</TABLE>
- ---------------
(1) Product category added in connection with the acquisitions of SSI and
Pelican in the second quarter 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for 1997 increased 35.5% to $169.7 million from 1996. This revenue
growth resulted from a combination of acquisitions and internal growth. The SSI
and Pelican acquisitions added $31.6 million in revenues during 1997 while
revenues at existing branches in 1997 increased $12.8 million, or 10.2% from
1996. This internal growth was driven by increased demand from existing
customers and the Company's focus on cross selling product categories. Sales of
fluid handling equipment increased 14.9% in 1997, or $9.8 million, over 1996.
Sales of bearings and power transmission equipment for 1997 increased 8.2%, or
$4.0 million, over 1996. Sales of pipe, valve and fittings decreased $1.0
million in 1997 over 1996 due primarily to increased competition.
Gross margin increased $12.8 million, or 39.7% for 1997 as compared to
1996. Gross margin as a percentage of sales increased from 25.7% to 26.5% in
1997 as compared to the same period in 1996. The increase in 1997 gross margin
was primarily attributable to the $1.1 million inventory write down in 1996. The
Company also realized increases in its gross margins for sales of its fluid
handling equipment, bearings and transmission equipment and pipe valve and
fittings. These increases in the profit margins for sales in the Company's
historical product lines were offset by the lower average margins associated
with sales of general mill and safety supplies.
Selling, general and administrative expenses were 22.7% of revenues for
1997 compared to 23.5% for 1996. This decrease was attributable to the
incurrence of various one-time expenses during 1996 aggregating $900,000,
including a one-time expense of $618,000 for additional compensation associated
with converting book value stock options to market value options and
approximately $284,000 in professional fees associated with the Reorganization.
Operating income for 1997 increased 131% over 1996, from $2.8 million to
$6.4 million. As a percentage of revenues, operating income increased from 2.2%
of sales to 3.8% of sales in 1997 as compared to the same period in 1996, due to
the various factors discussed above.
15
<PAGE> 18
Interest expense for 1997 increased by $553,000, or 26.3%, from 1996 as a
result of increased debt levels associated with the Company's acquisitions
during 1997 and increased working capital requirements during the period.
Average interest rates were slightly lower during the year ended December 31,
1997 as compared to 1996.
The Company's provision for income taxes for 1997 increased by $1.2 million
compared to 1996 as a result of an increase of approximately $3.0 million in
pre-tax income. Included in the 1996 income tax provision was a $135,000 reserve
for an Internal Revenue Service ("IRS") examination, which was resolved in 1997
by the Company making a payment of $69,100 to the IRS.
Net income for 1997 increased $1.9 million, or 210%, compared to 1996.
Increased net income for 1997 as compared to 1996 can be primarily attributed to
an increase in gross margin and a decrease in selling general and administrative
costs as of percent of sales.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues for 1996 increased 12.5% to $125.2 million from $111.3 million for
1995 primarily due to sales of bearings and power transmission products at
locations where fluid handling equipment was sold previously ($4.6 million),
revenue attributable to the two companies acquired in December 1995 and February
1996 ($4.1 million) and from other internal revenue growth ($5.2 million).
During 1996, sales of fluid handling equipment, increased 6.7% as compared to
1995, while sales of pipe valve and fittings increased 1.6% in 1996 as compared
to 1995. Sales of bearings and power transmission equipment increased 24.5% in
1996 as compared to 1995.
Gross profit as a percentage of revenues decreased .5% in 1996 compared to
1995. Included in cost of sales is a one time charge of $1.1 million related to
the disposal of excess inventory in December 1996 that was accumulated through
prior acquisitions of product groups subject to shelf-life restrictions. The
disposal of the inventory reduced the Company's tax liability resulting in an
increase in the Company's 1996 cash flow. In 1996, the Company installed a new
management information system designed to manage inventory effectively and
significantly minimize any future accumulation of inventory not salable in the
ordinary course of business. Excluding the one-time charge related to the
disposal of inventory, gross margins in 1996 would have remained consistent with
the previous year.
Selling, general and administrative expense increased as a percentage of
revenues by 1.4% for 1996 as compared to 1995, due primarily to a one-time
charge of $618,000 for additional compensation expense associated with the
amendment of certain book value stock options into market-based stock options,
costs associated with the Company's expansion of bearing and power transmission
operations into locations where only fluid handling equipment was sold
previously, training and education expenses related to the Company's software
conversion and professional fees associated with the Reorganization. Excluding
the effect of the amendments to the stock options and the other non-recurring
expenses identified above, selling, general and administrative expenses as a
percentage of revenues remained relatively consistent from period to period.
Operating income for 1996 as a percentage of revenues declined to 2.2% from
4.1% in 1995, due primarily to the compensation expense recorded in connection
with the stock option amendments, interest and other costs associated with
SEPCO's expansion of operations and software conversion, increased professional
fees related to the Reorganization, expenses related to the Company's expansion
of bearing and power transmission equipment into locations where only pumps were
sold previously and the inventory disposal. Excluding the effect of the
amendments to the stock options and the other non-recurring expenses identified
above, operating income for 1996 as a percentage of revenues would have been
3.8%.
Interest expense during 1996 increased slightly compared to 1995, due to
average debt increasing during the period as a result of increased working
capital required to support sales. Average interest rates were slightly lower
during 1996 as compared to 1995.
The Company's provision for income taxes for 1996 decreased by $679,000
compared to 1995 due to lower operating income.
16
<PAGE> 19
Net income for 1996 declined by approximately $1.2 million from 1995 due
primarily to the effects of the disposition of inventory ($1.1 million),
additional compensation associated with amendments to Company's stock options
($618,000), costs associated with the software conversion ($350,000), increased
professional fees associated with the Reorganization ($284,000), expenses
related to the Company's expansion of bearing and power transmission equipment
into locations where only pumps were sold previously and a provision for the
pending IRS examination ($135,000).
LIQUIDITY AND CAPITAL RESOURCES
All available cash generally is applied to reduce outstanding borrowings
under the Credit Facility, with operations funded through borrowings under the
Credit Facility. 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 $4.9 million available for borrowings under the working capital
component of the Credit Facility at December 31, 1997. Working capital at
December 31, 1997 and December 31, 1996 was $36.3 million and $25.6 million,
respectively. During 1997 and 1996, the Company collected its trade receivables
in approximately 46 and 48 days, respectively, and turned its inventory
approximately six and five times, respectively, on an annualized basis.
The Company currently has $40.0 million in secured lines of credit under
the Credit Facility. The lines of credit provided for interest rates ranging
from LIBOR plus 2.25% to prime plus .5% (8.5% at December 31, 1997). The amounts
borrowed under the Credit Facility are secured by receivables, inventory and
machinery and equipment and mature in January 1999. The Credit Facility contains
customary affirmative and negative covenants as well as financial covenants that
require the Company to maintain a positive cash flow and other financial ratios,
such as aggregate indebtedness to tangible net worth less than five to one and
current assets to current liabilities greater than two to one.
The Company generated net cash from operating activities of $124,000 for
1997 as compared to generating net cash from operating activities of $453,000
during 1996. This decline was due primarily to a greater investment in net
working capital.
The Company had capital expenditures of approximately $825,000 for 1997 as
compared to $2.3 million for 1996. Capital expenditures in 1997 included
$148,000 for the expansion of a facility in Laporte, Texas, $287,000 for
computers and related equipment, $68,000 for shop equipment, $290,000 for office
furniture and equipment and $32,000 for telephone equipment.
In the second quarter of 1997, the Company acquired the common stock of
Pelican, 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 SSI for cash of approximately $4.1 million. The Company may be required to
make periodic earn-out payments over the next five years, up to a maximum
aggregate of $3.5 million, based on the amount by which earnings before taxes of
SSI exceed 3% of SSI's net sales during the applicable period.
In September 1997 the Company reached a settlement with 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 claims related primarily to a challenge by the IRS of the
Company's use of the LIFO method of accounting for inventory. The September 1997
settlement with the IRS resulted in a payment by the Company of approximately
$52,000 in additional tax expense plus interest of approximately $17,000. The
Company had fully accrued for this expense at December 31, 1996.
The Company expects that its software will be year 2000 compatible by the
end of the first quarter of 1998. The upgrading of the Company's software to
address year 2000 issues is being handled through new releases of current
software. All costs associated with year 2000 issues will be included as part of
normal software upgrades or operating costs, as appropriate. The Company does
not believe that any of the costs associated with year 2000 issues will be
material to its financial condition or results of operations.
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
17
<PAGE> 20
equity or debt financing. There can be no assurance that such financing will be
available to the Company or as to the terms thereof.
ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities". In February 1997, the FASB issued Statements
Nos. 128 and 129 "Earnings per Share" and "Disclosure of Information about
Capital Structure", respectively, and in June 1997, issued Statements Nos. 130
and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information", respectively. The major provisions of these
statements and their impact on the Company are discussed below.
Statement No. 125 established criteria for recognition of a sale in
conjunction with the transfer of financial assets, under which sales may be
recognized only when the transferor has surrendered control of the assets. This
statement currently is not anticipated to have any impact on the Company as the
Company does not currently enter into transactions which fall under the scope of
this statement.
Statement No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrant. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company adopted this statement in 1997, as required, and has restated all
previously stated earnings per share data. The difference between fully diluted
earnings per share and diluted earnings per share was not material.
SFAS No. 129 requires additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, conversion and
exercise prices, etc. The Company has adopted this statement as of and for the
period ended December 31, 1997.
In June 1997, the FASB issued Statement No. 130, which requires additional
disclosure of information about an entity's capital structure, including
information about dividend and liquidation preferences, voting rights, contracts
to issue additional shares, conversion and exercise prices, etc. The Company
plans to adopt this statement in December 1997.
In June 1997, the FASB adopted Statement No. 131, which requires the
presentation of comprehensive income in an entity's financial statements.
Comprehensive income represents all changes in equity of an entity during the
reporting period, including net income and charges directly to equity which are
excluded from net income. The adoption of this statement is not anticipated to
have an impact on the Company as the Company currently does not enter into any
transactions that result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities).
Statement No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a Company-wide basis; therefore, the adoption of the statement is not
expected to materially impact the Company. The Company plans to adopt this
statement in 1998.
INFLATION
The Company does not believe the effects of inflation have any material
adverse effect on its results of operations or financial condition and attempts
to minimize inflationary trends by passing manufacturer price increases on to
the customer whenever practicable.
18
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DXP ENTERPRISES AND SUBSIDIARIES:
Report of Independent Public Accounts....................... 21
Audited Consolidated Financial Statements --
Consolidated Balance Sheets............................... 22
Consolidated Statements of Earnings....................... 23
Consolidated Statements of Shareholders' Equity........... 24
Consolidated Statements of Cash Flows..................... 25
Notes to Consolidated Financial Statements................ 26
</TABLE>
20
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DXP
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DXP
Enterprises, Inc., and subsidiaries at December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Houston, Texas
January 30, 1998
21
<PAGE> 24
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Current assets:
Cash...................................................... $ 876 $ 736
Trade accounts receivable, net of allowance for doubtful
accounts of $210 in 1996 and $476 in 1997.............. 17,125 25,707
Inventories............................................... 17,175 26,018
Prepaid expenses and other................................ 539 996
Deferred income taxes..................................... 511 722
------- -------
Total current assets.............................. 36,226 54,179
------- -------
Property, plant and equipment, net.......................... 7,818 10,403
Other assets:
Intangible assets, net of accumulated amortization of
$1,607 in 1996 and $1,817 in 1997...................... 673 2,682
Receivable from officers and employees.................... 205 200
Other..................................................... 120 172
------- -------
998 3,054
------- -------
Total assets...................................... $45,042 $67,636
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 6,963 $14,368
Accrued wages and benefits................................ 1,296 1,384
Other accrued liabilities................................. 601 704
Current portion of long-term debt......................... 609 1,461
Current portion of subordinated debt...................... 1,145 --
------- -------
Total current liabilities......................... 10,614 17,917
Long-term debt, less current portion........................ 22,300 33,395
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 330 479
Equity subject to redemption:
Series A preferred stock, 1,496 shares and 1,122 shares,
respectively........................................... 150 112
Series B convertible preferred stock, 4,500 shares and no
shares, respectively................................... 450 --
Common stock, 280,428 shares.............................. -- 1,963
Commitments and contingencies
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, 2,992 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, 17,700 shares issued and 15,000
outstanding............................................ 15 18
Common stock, $.01 par value, 50,000,000 shares
authorized; 8,375,594 shares issued, of which 8,034,294
shares are outstanding, 280,428 shares are equity
subject to redemption, and 60,872 shares are treasury
stock.................................................. 80 80
Paid-in capital........................................... 368 852
Retained earnings......................................... 9,994 12,659
Treasury stock............................................ -- (580)
------- -------
Total shareholders' equity........................ 10,459 13,031
------- -------
Total liabilities and shareholders' equity........ $45,042 $67,636
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 25
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Sales...................................................... $111,328 $125,208 $169,667
Cost of sales.............................................. 82,171 93,091 124,787
-------- -------- --------
Gross profit..................................... 29,157 32,117 44,880
Selling, general and administrative expenses............... 24,559 29,332 38,446
-------- -------- --------
Operating income................................. 4,598 2,785 6,434
Other income............................................... 867 951 890
Interest expense........................................... (1,953) (2,101) (2,654)
-------- -------- --------
Income before income taxes................................. 3,512 1,635 4,670
Provision for income taxes................................. 1,424 745 1,902
-------- -------- --------
Net income................................................. 2,088 890 2,768
Preferred stock dividend................................... (23) (119) (103)
-------- -------- --------
Net income attributable to common shareholders............. $ 2,065 $ 771 $ 2,665
======== ======== ========
Basic earnings per common share............................ $ .27 $ .10 $ .33
======== ======== ========
Common shares outstanding.................................. 7,674 7,994 8,163
======== ======== ========
Diluted earnings per share................................. $ .23 $ .09 $ .24
======== ======== ========
Common and common equivalent shares outstanding............ 9,002 9,713 11,405
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 26
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE
SERIES A SERIES B COMMON COMMON PAID-IN TREASURY RETAINED
PREFERRED PREFERRED STOCK STOCK CAPITAL STOCK EARNINGS TOTAL
--------- --------- ---------- ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ $ 2 $-- $ -- $ 90 $ 1,065 $ -- $ 7,158 $ 8,315
Issuance of 718,400 shares of common
stock............................... -- -- -- 7 225 -- -- 232
Issuance of 4,500 shares of Series B
convertible preferred stock......... -- 5 -- -- 445 -- -- 450
Conversion of 1,680,000 shares of
common stock to 15,000 shares of
Series B preferred stock............ -- 15 -- (17) 2 -- -- --
Acquisition and retirement of
1,121,608 shares of common stock and
2,431 shares of Series A preferred
stock............................... -- -- -- -- (1,167) -- -- (1,167)
Increase in paid-in capital due to
reduction of equity subject to
redemption as a result of acquiring
2,431 shares of Series A preferred
stock............................... -- -- -- -- 243 -- -- 243
Reduction in paid-in capital due to
increase in equity subject to
redemption as a result of issuing
4,500 shares of Series B convertible
preferred stock..................... -- (5) -- -- (445) -- -- (450)
Dividends paid........................ -- -- -- -- -- -- (23) (23)
Net income............................ -- -- -- -- -- -- 2,088 2,088
--- --- ------ ---- ------- ----- ------- -------
Balance at December 31, 1995............ 2 -- 80 368 -- 9,223 9,688
Dividends paid........................ -- -- -- -- -- -- (119) (119)
Net income............................ -- -- -- -- -- -- 890 890
--- --- ------ ---- ------- ----- ------- -------
Balance at December 31, 1996............ 2 15 -- 80 368 -- 9,994 10,459
Dividends paid........................ -- -- -- -- -- -- (103) (103)
Increase in paid-in capital due to
reduction of equity subject to
redemption as a result of acquiring
374 shares of Series A preferred
stock............................... -- -- -- -- 37 (37) -- --
Increase in paid-in capital due to
reduction of equity subject to
redemption as a result of acquiring
2,700 shares of Series B preferred
stock............................... -- 3 -- -- 268 (271) -- --
Increase in paid-in capital due to
reduction of equity subject to
redemption as a result of converting
1,800 shares of Series B preferred
stock to 100,800 shares of common
stock............................... -- -- -- 1 179 -- -- 180
Acquisition of 60,872 shares of common
stock............................... -- -- -- (1) -- (272) -- (273)
Issuance of 280,428 shares of common
stock............................... -- -- 1,963 -- -- -- -- 1,963
Net income............................ -- -- -- -- -- -- 2,768 2,768
--- --- ------ ---- ------- ----- ------- -------
Balance at December 31, 1997............ $ 2 $18 $1,963 $ 80 $ 852 $(580) $12,659 $14,994
=== === ====== ==== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 27
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,088 $ 890 $ 2,768
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization....................... 965 964 1,341
Deferred compensation on stock option plans......... 87 359 --
Provision (benefit) for deferred income taxes....... 109 (216) (62)
Loss (gain) on sale of property and equipment....... (11) 7 (103)
Changes in operating assets and liabilities --
Trade accounts receivable......................... (1,915) (1,233) (7,971)
Inventories....................................... (1,288) (469) 2,899
Prepaid expenses and other........................ (88) 274 (640)
Trade accounts payable and other accrued
liabilities.................................... (6) (123) 1,892
--------- --------- ---------
Net cash provided by (used in) operating
activities................................... (59) 453 124
--------- --------- ---------
Cash flows from investing activities:
Purchase of Bayou Pumps common stock, net of cash
received............................................ 38 -- --
Purchase of Austin Bearings net assets................. -- (329) --
Purchase of Strategic Supply net assets................ -- -- (4,118)
Purchase of Pelican Supply common stock................ -- -- (1,070)
Purchase of property and equipment..................... (739) (2,271) (825)
Proceeds from sale of property and equipment........... 177 8 --
Payments received on notes receivable from officers.... 172 435
Other.................................................. -- (120) --
--------- --------- ---------
Net cash used in investing activities.......... (352) (2,277) (6,013)
--------- --------- ---------
Cash flows from financing activities:
Borrowings from debt................................... 123,261 129,379 183,715
Principal payments on revolving line of credit,
long-term and subordinated debt and notes payable to
bank................................................ (121,867) (128,052) (177,395)
Proceeds on sale of Corpus Christi facility............ -- -- 112
Issuance of common stock............................... 232 -- --
Acquisition of preferred and common stock.............. (589) -- (580)
Dividends paid in cash................................. (23) (119) (103)
--------- --------- ---------
Net cash provided by financing activities...... 1,014 1,208 5,749
--------- --------- ---------
Increase (decrease) in cash.............................. 603 (616) (140)
Cash at beginning of year................................ 889 1,492 876
--------- --------- ---------
Cash at end of year...................................... $ 1,492 $ 876 $ 736
========= ========= =========
Supplemental disclosures of noncash investing and
financing activities:
Cash paid for --
Interest............................................ $ 1,901 $ 2,172 $ 2,654
========= ========= =========
Income taxes........................................ $ 1,500 $ 1,040 $ 1,551
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 28
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
DXP Enterprises, Inc. (DXP or the Company), a Texas corporation, was
incorporated on July 26, 1996, to facilitate a reorganization of SEPCO
Industries, Inc. (SEPCO), a Texas corporation, in anticipation of an acquisition
by DXP as the successor to SEPCO of Newman Communications Corporation (Newman),
a New Mexico corporation. On December 4, 1996, the reorganization of SEPCO (the
SEPCO Reorganization) was effected through a merger of a wholly owned subsidiary
of the Company with and into SEPCO pursuant to which the Company acquired all of
the outstanding shares of SEPCO in exchange for shares of the Company.
Immediately following the SEPCO Reorganization, the Company acquired Newman
through a merger of a wholly owned subsidiary of the Company with and into
Newman (the Newman Merger). Prior to the SEPCO Reorganization, the Company had
no operations and its only assets consisted of $1,000 cash. Prior to the
Company's acquisition of Newman, Newman was a nonoperating entity with nominal
assets. The Newman Merger was effected as a means to increase the Company's
shareholder base.
On or about April 30, 1997, a proxy 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 and change the name of the Company from
Index, Inc., to DXP Enterprises, Inc. The shareholders approved the two-to-one
reverse stock split and name change, which became effective after the close of
market on May 12, 1997. Common stock and earnings per share have been restated
to give effect to a two-for-one reverse stock split.
SEPCO Reorganization Accounting Treatment
The SEPCO Reorganization was treated as a recapitalization of SEPCO into
the Company (with respect to the SEPCO merger) and the issuance of the Company's
capital stock for the underlying tangible net assets of Newman (with respect to
the Newman Merger) for accounting and financial statement purposes because,
among other factors, the Company is a recently formed holding company with
nominal net assets, Newman is a nonoperating public shell company with cash as
its primary asset, and the SEPCO shareholders will control the Company after the
SEPCO Reorganization. Accordingly, the historical pre-SEPCO Reorganization
financial statements of the combined Company after the closing will be those of
SEPCO. The retained earnings of SEPCO will be carried forward after the SEPCO
Reorganization and the historical shareholders' equity of SEPCO prior to the
SEPCO Reorganization is retroactively restated for the equivalent number of
shares received in the SEPCO Reorganization.
Unless the context otherwise requires, references to the Company with
respect to historical operations shall mean the Company and SEPCO.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company sells rotating equipment to a diversified customer base in the
north and southwestern regions of the United States. The Company believes no
significant concentration of credit risk exists. The Company continually
evaluates the creditworthiness of its customers' financial positions and
monitors accounts on a periodic basis, but does not require collateral.
26
<PAGE> 29
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory consists principally of finished goods and is priced at lower of
cost or market, cost being determined using both the first-in, first-out (FIFO)
and the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Assets are carried on the basis of cost. Provisions for depreciation are
computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation and amortization of property,
plant and equipment is computed using principally the straight-line method for
financial reporting purposes. Useful lives assigned to property, plant and
equipment range from three to 20 years. Maintenance and repairs of depreciable
assets are charged against earnings as incurred. Additions and improvements are
capitalized. When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and gains or losses are
credited or charged to earnings.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 in
the first quarter of 1996, and the effect of adoption was not material.
Intangibles
Intangibles consist of noncompete and licensing agreements and goodwill.
The noncompete and licensing agreements are amortized over five years, and
goodwill is amortized over five to 30 years. All amortization of intangibles is
computed using the straight-line method.
Federal Income Taxes
The Company utilizes the liability method in accounting for income taxes.
Under this method, deferred taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted marginal tax rates and laws that will be in effect when the
differences reverse.
Fair Value of Financial Instruments
A summary of the carrying value and the fair value of financial instruments
at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 736 $ 736
Notes receivable from officers and employees................ 200 200
Long-term debt, including current portion................... 34,856 34,856
</TABLE>
The carrying value of the long-term debt and subordinated debt approximates
fair value based upon the current rates and terms available to the Company for
instruments with similar remaining maturities. The carrying value of the notes
receivable from officers approximates fair value because the interest rate of
the notes (9 percent) is consistent with the interest rate of the Company's
revolving debt and with rates currently available in the market for similar
instruments.
27
<PAGE> 30
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue as products are shipped to the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS:
During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." During
February 1997, the FASB issued SFAS Nos. 128 and 129, "Earnings per Share," and
"Disclosure of Information about Capital Structure," respectively, and in June
1997 issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income," and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. The major provisions of these statements and their impact on the
Company are discussed below.
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options, warrants, etc. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. As
required, the Company adopted this statement in 1997 and has restated all
previously reported earnings per share data. The difference between previously
reported fully diluted earnings per share and the now required diluted earnings
per share was insignificant.
SFAS No. 129 requires additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, conversion and
exercise prices, etc. The Company has adopted this statement as of and for the
period ended December 31, 1997.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. The adoption of
this statement in 1998 is not anticipated to have any impact as the Company
currently does not enter into any transactions which result in charges (or
credits) directly to equity (such as additional minimum pension liability
changes, currency translation adjustments and unrealized gains and losses on
available-for-sale securities, etc.)
SFAS No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a company-wide basis; therefore, the adoption of the statement is not
expected to materially impact the Company. The Company plans to adopt this
statement in 1998.
28
<PAGE> 31
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS:
Effective December 31, 1995, SEPCO acquired 100 percent of the outstanding
common stock of Bayou Pumps, Inc. The purchase price totaled $500,000 and
consisted of (a) issuance of $450,000 of the Company's Class A convertible
preferred stock and (b) cash of $50,000. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, results of operations of
the acquired company are included in the consolidated results of operations from
the acquisition date. Goodwill of $356,000 was recorded on the acquisition. Pro
forma disclosures of operating results are omitted because the acquired
company's operations were not significant.
Effective February 2, 1996, SEPCO acquired the net assets of Austin Bearing
Corporation. The purchase price totaled approximately $578,000 and consisted of
(a) a $249,000 note, bearing interest at 9 percent, payable monthly over five
years, and (b) cash of $329,000. The acquisition has been accounted for using
the purchase method of accounting. Accordingly, results of operations of the
acquired company are included in the consolidated results of operations from the
date of acquisition. Goodwill of $84,000 was recorded in connection with the
acquisition. Pro forma disclosures of operating results are omitted because the
acquired company's operations were not significant.
Effective May 30, 1997, the Company acquired 100 percent of the outstanding
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. Accordingly, results of
operations of the acquired company are included in the consolidated results of
operations from the date of acquisition. Goodwill of approximately $2.0 million
was recorded in connection with the acquisition. Pro forma disclosures of
operating results are omitted because the acquired Company's operations were not
significant.
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 cash, assumption of $4.7 million of trade payables and other accrued
expenses, $2.8 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, up to a maximum of $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.
The following table presents selected unaudited consolidated financial
information for the Company on a pro forma basis assuming the Strategic
acquisition had occurred on January 1, 1996. The pro forma information set forth
below is not necessarily indicative of the results that actually would have been
achieved had such transaction been consummated as of January 1, 1996, or that
may be achieved in the future.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $176,180 $190,754
Net income.................................................. (4,197) 2,182
Basic earnings per share.................................... (.53) .26
Dilutive earnings per share................................. (.43) .19
</TABLE>
The pro forma results for 1996 include the effect of a one-time special
charge of $2.8 million recognized by Strategic for the write-off of certain
goodwill and intangible assets.
29
<PAGE> 32
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORY:
The Company uses the LIFO method of inventory valuation for approximately
43 percent of its inventories. Remaining inventories are accounted for using the
FIFO method. The reconciliation of FIFO inventory to LIFO basis is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $18,215 $27,280
Work in process............................................. 2,405 2,276
------- -------
Inventories at FIFO......................................... 20,620 29,556
Less -- LIFO allowance...................................... (3,445) (3,538)
------- -------
Inventories................................................. $17,175 $26,018
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,421 $ 1,411
Buildings and leasehold improvements........................ 6,298 6,457
Furniture, fixtures and equipment........................... 8,143 11,660
------- -------
15,862 19,528
Less -- Allowances for depreciation and amortization........ (8,044) (9,125)
------- -------
$ 7,818 $10,403
======= =======
</TABLE>
30
<PAGE> 33
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM AND SUBORDINATED DEBT:
Long-term and subordinated notes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt --
Revolving credit agreement................................ $18,680 $27,520
Note payable to insurance company, 10.125%, collateralized
by real property, payable in monthly installments
through December 2006.................................. 1,699 1,596
Notes payable to credit corporation, 2.25% above prime
( % at December 31, 1997), collateralized by
computer equipment, payable in monthly installments.... 1,459 1,174
Promissory note payable, 7.0%, payable in monthly
installments through June 2002......................... -- 2,660
Other..................................................... 1,071 1,907
------- -------
22,909 34,856
Less -- Current portion..................................... 609 1,461
------- -------
$22,300 $33,395
======= =======
Subordinated debt --
Notes payable to former shareholders, 12%, unsecured,
payable in varying installments through January 1997... $ 1,145 $ --
======= =======
</TABLE>
The Company has a secured lines of credit for up to $40 million with an
institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent
to prime plus .50 percent (9.00 percent at December 31, 1997). The line of
credit is secured by receivables, inventory, and machinery and equipment and
matures January 1999. An officer shareholder has personally guaranteed up to
$500,000 of the obligations of the Company under the line of credit.
Additionally, certain shares held in trust for this shareholder's children
discussed in footnote 8 are also pledged to secure this line of credit. As of
December 31, 1997, the unused line is approximately $4.9 million.
The facility includes loan covenants which, among other things, require the
Company to maintain a positive cash flow and other financial ratios, which are
measured monthly. The maturities of long-term and subordinated debt for the next
five years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,461
1999........................................................ 28,714
2000........................................................ 1,382
2001........................................................ 1,385
2002........................................................ 947
Thereafter.................................................. 967
-------
$34,856
=======
</TABLE>
31
<PAGE> 34
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current --
Federal................................................ $1,172 $ 829 $1,652
State.................................................. 143 132 312
------ ----- ------
1,315 961 1,964
Deferred --
Federal................................................ 107 (216) (62)
State.................................................. 2 -- --
------ ----- ------
$1,424 $ 745 $1,902
====== ===== ======
</TABLE>
The difference between income taxes computed at the federal statutory
income tax rate and the provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996 1997
------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at federal statutory income tax
rate.................................................... $1,194 $556 $1,588
State income taxes, net of federal benefit................ 96 68 206
Nondeductible goodwill amortization....................... 51 43 63
Other..................................................... 83 78 45
------ ---- ------
$1,424 $745 $1,902
====== ==== ======
</TABLE>
The net current and noncurrent components of deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Net current assets.......................................... $ 511 $ 722
Net noncurrent liabilities.................................. 330 479
----- -----
Net liability (asset)....................................... $(181) $(243)
===== =====
</TABLE>
32
<PAGE> 35
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability --
Difference between financial and tax depreciation of
assets acquired........................................ $ 330 $ 479
----- -----
Deferred tax assets --
Amortization of goodwill.................................. 3 5
Unamortized rent reduction................................ 42 32
Allowance for doubtful accounts........................... 71 162
Section 263A inventory costs.............................. 139 206
Deferred compensation on stock options.................... 251 251
Other..................................................... 5 66
----- -----
Total deferred tax assets......................... 511 722
----- -----
Net deferred tax liability (asset)................ $(181) $(243)
===== =====
</TABLE>
8. SHAREHOLDERS' EQUITY:
The equity capitalization of the Company consists of 8,375,594 shares of
common stock, 2,992 shares of Series A preferred stock and 17,700 shares of
Series B convertible preferred stock. The holders of Series A preferred stock
are entitled to one-tenth of a vote per share on all matters presented to a vote
of shareholders generally, voting as a class with the holders of common stock,
and are not entitled to any dividends or distributions other than in the event
of a liquidation of the Company, in which case the holders of the Series A
preferred stock are entitled to a $100 liquidation preference per share. Each
share of the Series B convertible preferred stock is convertible into 56 shares
of common stock and a monthly dividend per share of $0.50. The holders of the
Series B convertible stock are also entitled to a $100 liquidation preference
per share after payment of the distributions to the holders of the Series A
preferred stock and to one-tenth of a vote per share on all matters presented to
a vote of shareholders generally, voting as a class with the holders of the
common stock.
Prior to the SEPCO Reorganization, as more fully described in Note 1, SEPCO
had agreements with certain holders of common, Series A preferred and Series B
convertible preferred stock that, upon termination of employment, the
shareholders had an obligation to sell and SEPCO had the first opportunity to
buy the stock. SEPCO also had the opportunity to match a higher offer obtained
by the shareholder from another party. The selling price of the stock was at a
price per share equal to the equity per share for the common stock and $100 per
share for the Series A preferred and Series B convertible preferred stock.
Payment may be in the form of cash or a promissory note bearing interest at 10
percent and payable in five equal installments beginning on the first
anniversary date of the note. During 1995, SEPCO purchased 1,121,608 shares of
common stock and 2,431 shares of Series A preferred stock in exchange for a note
payable of $578,000 to a shareholder upon his retirement. Upon the exchange of
SEPCO shares for DXP Enterprises shares pursuant to the plan of reorganization,
the above agreements were terminated.
An officer shareholder of the Company is the trustee of three trusts for
the benefit of another officer shareholder's children, each of which hold
1,141,864 shares of common stock and 5,000 shares of Series B convertible
preferred stock. It is anticipated that in connection with the public offering
discussed below that the Series B convertible preferred shares will be converted
to common stock. The trustee has sole voting control of these shares.
The 280,428 shares of common stock issued pursuant to the purchase of
Pelican are subject to a put option whereby any time between November 30, 1998
and November 30, 2000 the Company may be required
33
<PAGE> 36
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to purchase all or part of such shares at a price of $7.00 per share. The shares
issued for the purchase of Pelican are subject to certain rights of offset
pursuant to terms of the purchase agreement.
The Company is considering a public offering of 4,700,000 shares of common
stock and up to 1,000,000 additional shares may be sold by current shareholders.
Stock Options
Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its
common stock, which had exercise prices equal to the book value of the common
stock at the date of grant. The option agreement allows 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
above-mentioned book value options were converted to fair market value options
once the put option was eliminated. A one-time charge to compensation of
$618,000 was made during the first quarter of 1996. In 1996, the Company issued
nonqualified fair market value stock options to certain directors of the Company
to purchase shares of its common stock which had exercise prices equal to the
fair market value of the Company's common stock at the date of grant.
Additionally, the Company issued options to certain officers and employees
pursuant to the terms of the Company's long-term incentive plan. Compensation
expense related to these option agreements of $87,000, $618,000 and $-- was
recorded in 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997,
a deferred compensation liability of $739,000 and $739,000, respectively, has
been recorded in conjunction with these option agreements. Activity during 1997
with respect to the stock options follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED-AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding and Exercisable at December
31, 1994................................ 760,800 $.34 -- $.82 $ .80
Granted................................. 2,416,000 $.74 -- $.90 $ .87
Exercised............................... (718,400) $.34 $ .34
Canceled or expired..................... -- --
---------
Outstanding and Exercisable at December
31, 1995................................ 2,458,400 $.34 -- $.90 $ 1.86
Granted................................. 241,000 $1.56-$8.00
Exercised............................... 8,000 $1.56 $ 1.56
Canceled or expired..................... (8,000) $1.56 $ 1.56
---------
Outstanding and Exercisable at December
31, 1996................................ 2,699,400 $.74 -- $1.16 $ .75
Granted................................. -- -- --
Exercised............................... -- -- --
Canceled or expired..................... -- -- --
---------
Outstanding and Exercisable at December
31, 1997................................ 2,699,400 $.74 -- $1.16 $ .75
=========
</TABLE>
The outstanding options at December 31, 1997, expire between March 31,
1999, and October 24, 2005, or 90 days after termination of full-time
employment. The weighted-average remaining contractual life was 6.9 years, 6.9
years and 5.9 years at December 31, 1995, 1996 and 1997, respectively. During
1995, the Company purchased 718,400 shares acquired by an officer upon exercise
of his options at $0.41 per share.
34
<PAGE> 37
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options under the fair value method as provided therein. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options issued in 1995, 1996 and 1997: risk-free interest
rates of 6.5 percent for 1995 and 6 percent for 1996 and 1997; expected lives of
five years; 18.4 percent assumed volatility; and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Set forth
below is a summary of the Company's net income and earnings per share as
reported and pro forma as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The pro forma information is not meant to be
representative of the effects on reported net income for future years because,
as provided by SFAS No. 123, only the effects of awards granted after January 1,
1995, are considered in the pro forma calculation. As such, the pro forma impact
is likely to increase in future years as additional options are granted and
amortized ratably over the vesting period. Certain compensation expense related
to the Company's book value stock option plans was recognized in 1996. The
effect of such expense ($618,000) has been excluded from the pro forma
disclosure for 1996, as the related options are assumed to be accounted for
using the fair market-based method of accounting as defined in SFAS No. 123. The
effect of applying the fair market-based method, versus the exclusion of the
book value-based method expense actually recognized, resulted in a pro forma
increase in net income attributable to common shareholders in 1996.
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net income attributable
to common
shareholders (in
thousands)........... $2,065 $2,049 $771 $1,132 $2,665 $1,893
Basic earnings per
common share......... .27 .27 .10 .14 .33 .23
Dilutive earnings per
share................ .23 .23 .09 .12 .24 .17
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company leases equipment, automobiles and office facilities under
various operating leases. The future minimum rental commitments as of December
31, 1997, for noncancelable leases are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,551
1999........................................................ 1,083
2000........................................................ 718
2001........................................................ 310
2002........................................................ 142
Thereafter.................................................. --
------
$3,804
======
</TABLE>
Rental expense for operating leases was $1,338,000, $1,417,000 and
$1,681,675 for the years ended December 31, 1995, 1996 and 1997, respectively.
35
<PAGE> 38
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RETIREMENT PLANS:
SEPCO provides an employee stock ownership plan (ESOP) which is eligible to
employees having 1,000 hours of service in 12 consecutive months of employment.
Employer contributions are at the discretion of the board of directors. The ESOP
held 1,912,597 shares of the Company's common stock at December 31, 1997 (see
Note 1). The Company contributed and expensed $150,000 in 1995, 1996 and 1997.
The Company also offers a 401(k) profit-sharing plan for employees having 1,000
hours of service in 12 consecutive months of employment. The Company matches
contributions at a rate of 10 percent. The Company contributed $56,000, $62,000
and $81,000 in the years ended December 31, 1995, 1996 and 1997, respectively.
11. RELATED PARTY TRANSACTIONS:
In December 1989, the Company restructured certain loans previously made by
the Company to an officer of the Company, pursuant to which the officer executed
two promissory notes in the amounts of $149,910 and $58,737, respectively, each
bearing interest at 9% per annum. The outstanding balances of such loans were
$127,814 and $50,080 at December 31, 1996 and 1997, respectively.
Additionally, the Company from time to time has made non-interest bearing
advances to this officer. As of December 31, 1996 and 1997, these advances
amounted to $330,439 and $340,439, respectively.
12. SUBSEQUENT EVENTS:
In January 1998, the Company signed a nonbinding letter of intent to
purchase a distribution company located in the central Texas area. Pursuant to
the proposed acquisition, the Company would acquire the net assets of $5.4
million payable in cash and a to-be-determined amount of common stock shares.
The consummation of the acquisition is subject to customary conditions,
including the negotiation and execution of mutually satisfactory definitive
documentation and the completion of a satisfactory due-diligence review by the
Company. There can be no assurance, however, that the Company will consummate
the acquisition of the central Texas distribution company or, if consummated,
that the terms will be as described above.
In January 1998, the Company signed a nonbinding letter of intent to
purchase a distribution company located in Utah. Pursuant to the proposed
acquisition, the Company would acquire the net assets for $1.0 million payable
in cash and shares of common stock. The consummation of the acquisition is
subject to customary conditions, including the negotiation and execution of
mutually satisfactory definitive documentation and the completion of a
satisfactory due-diligence review by the Company. There can be no assurance,
however, that the Company will consummate the acquisition of the Utah
distribution company or, if consummated, that the terms will be as described
above.
On January 8, 1998, the Company's board of directors resolved to increase
the Company's common stock issuable to the Company's long-term incentive plan by
260,000 shares, from 400,000 shares to 660,000 shares. In conjunction, the
Company's board of directors, pursuant to the Company's long-term incentive
plan, granted certain employees an aggregate of 260,000 stock options at a per
share exercise price of $6.00 with all options vesting 20 percent per year
expiring on January 8, 2006.
36
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31, 1997,
about the executive officers and directors of the Company. All directors of the
Company hold office until the next annual meeting of shareholders or until their
respective successors have been elected and qualified. Executive officers are
elected by the Company's Board of Directors to hold office until their
respective successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
David R. Little................... 46 Chairman of the Board, President and Chief
Executive Officer
Gary A. Allcorn................... 45 Senior Vice President/Finance and Chief Financial
Officer
Jerry J. Jones.................... 59 Senior Vice President/Operations and Director
Bryan H. Wimberly................. 59 Senior Vice President/Corporate Development and
Director
Cletus Davis...................... 67 Director
Kenneth H. Miller................. 58 Director
Thomas V. Orr..................... 47 Director
</TABLE>
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
David R. Little has served as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its organization in 1996 and
has also held these positions with SEPCO since he acquired a controlling
interest in the Company in 1986. Mr. Little has been employed by SEPCO since
1975 in various capacities, including Staff Accountant, Controller, Vice
President/Finance and President.
Gary A. Allcorn has served as Senior Vice President/Finance of the Company
since August 1996 and was appointed Chief Financial Officer in November 1997.
Mr. Allcorn also has held these positions with SEPCO since June 1995. Mr.
Allcorn has been employed by SEPCO since 1985 in various capacities, including
Vice President/Finance and Chief Financial Officer.
Jerry J. Jones has served as a Director since July 1996 and as Senior Vice
President/Operations since September 1997. From August 1996 to September 1997,
Mr. Jones served as Senior Vice President/ Corporate Development. Mr. Jones has
also served as a Director of SEPCO since 1986 and as Senior Vice
President/Corporate Marketing of SEPCO since June 1995. From February 1993 to
June 1995, Mr. Jones served as President of T.L. Walker Bearing Group, a
subsidiary of SEPCO. Prior to his employment with SEPCO, Mr. Jones served as
President and Chief Executive Officer of the Energy Partners, Inc./Perry
Oceanographics, a renewable energy development company and offshore underwater
equipment manufacturer, from November 1989 to December 1992.
Bryan H. Wimberly has served as a Director since July 1996 and as Senior
Vice President/Corporate Development since September 1997. From August 1996 to
September 1997, he served as Senior Vice President/Pump, Bearing, Power
Transmission and Valve Automation Group. Mr. Wimberly has also served as a
Director of SEPCO since 1987 and the President and Chief Operating Officer of
SEPCO since October 1995. Mr. Wimberly has been employed by SEPCO since 1987 in
various capacities, including Senior Vice President/Operations.
Cletus Davis has served as a Director of the Company since August 1996. Mr.
Davis has also served as a Director of SEPCO since May 1996. Mr. Davis is an
attorney practicing in the areas of commercial real estate, banking, corporate,
estate planning and general litigation and is also a trained mediator. From May
1988 to February 1992, Mr. Davis was a member of the law firm of Wood,
Lucksinger & Epstein. Since March 1992, Mr. Davis has practiced law with the law
firm of Cletus Davis, P.C.
38
<PAGE> 41
Kenneth H. Miller has served as a Director of the Company since August
1996. Mr. Miller has also served as a Director of SEPCO since April 1989. Mr.
Miller is a Certified Public Accountant and has been a solo practitioner since
1983.
Thomas V. Orr has served as a Director of the Company since August 1996.
Mr. Orr has also served as a Director of SEPCO since May 1996. Mr. Orr has been
Executive Managing Director of Morgan Keegan & Company, Inc. ("Morgan Keegan"),
an investment banking firm and one of the underwriters, since August 1997. From
February 1995 to July 1997 he was a Senior Vice President and Divisional Manager
of Morgan Keegan. From June 1990 to January 1995, Mr. Orr served as Divisional
Sales Manager for two years and Branch Officer Manager for three years for
PaineWebber, Inc., an investment banking firm.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least three independent directors.
The Audit Committee, composed of Messrs. Davis, Miller and Orr, makes
recommendations to the Board of Directors on matters regarding the independent
public accountants of the Company and the annual audit of the Company's
financial statements and accounts. The Compensation Committee, composed of
Messrs. Davis, Miller and Orr, makes recommendations to the Board of Directors
regarding compensation for the Company's executive officers, directors,
employees consultants and agents, and will act as the administrative committee
for any stock-based plan of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)")
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file statements on Form
3, Form 4, and Form 5 of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, directors and greater than 10% stockholders
are required by the regulation to furnish the Company with copies of all Section
16(a) reports which they file.
Based solely on a review of reports on Form 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, reports on Form 5
and amendments thereto furnished to the Company with respect to its most recent
fiscal year and written representations from reporting persons that no report on
Form 5 was required, the Company believes that, no person who, at any time
during 1997, was subject to the reporting requirements of Section 16(a) with
respect to the Company failed to meet such requirements on a timely basis.
39
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION
Set forth in the following table is certain compensation information
concerning the Chief Executive Officer and each of the Company's most highly
compensated executive officers as to whom the total annual salary and bonus for
the fiscal year ended December 31, 1997, exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
----------------------------------
ANNUAL COMPENSATION
----------------------------------
OTHER
ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
--------------------------- ---- ------- ------- ------------
<S> <C> <C> <C> <C>
David R. Little, 1997 279,277 112,849 --
President and Chief Executive Officer 1996 263,714 93,454 --
1995 222,567 131,888 --
Jerry J. Jones, Senior Vice President/ 1997 131,672 75,035 --
Operations 1996 116,264 62,516 --
1995 113,330 67,503 357,216(1)
Bryan H. Wimberly, 1997 142,567 94,227 --
Senior Vice President/Corporate 1996 136,031 65,620 --
Development 1995 121,967 92,589 --
Gary A. Allcorn, 1997 123,066 30,023 --
Senior Vice President/Finance and 1996 114,161 10,741 --
Chief Financial Officer 1995 103,707 9,059 --
</TABLE>
- ---------------
(1) Represents payments to Mr. Jones in respect of the repurchase by the Company
of shares acquired by Mr. Jones on exercise of options held by him.
The following table sets forth information concerning the value of
unexercised options held by each of the executive officers named in the Summary
Compensation Table at December 31, 1997. None of such executive officers
exercised any stock options during the year ended December 31, 1997.
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, 1997 IN-THE-MONEY OPTIONS AT
(# SHARES) DECEMBER 31, 1997($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David R. Little............................. 1,600,000 -- 7,760,000 --
Jerry J. Jones.............................. 718,400 -- 3,541,712 --
Bryan H. Wimberly........................... 97,600 -- 488,790 --
Gary A. Allcorn............................. 40,000 -- 183,750 --
</TABLE>
- ---------------
(1) Based on a price per share of $5.75, the closing sales price of the Common
Stock on December 31, 1997.
BOARD OF DIRECTORS' COMPENSATION
The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting. The Company pays each non-employee director $1,000 per committee or
board meeting not to exceed $1,500 in the event two meetings occur on the same
day. In 1997, Mr. David received $4,000 and Messrs. Orr and Miller received
$3,000 for attendance at Board of Directors meetings.
40
<PAGE> 43
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Little
Employment Agreement"), effective July 1, 1996, with Mr. Little. The Little
Employment Agreement is for a term of three years, renewable annually for a term
to extend three years from such renewal date. The Little Employment Agreement
provides for compensation in a minimum amount of $260,000 per annum, to be
reviewed at least annually for possible increases, monthly bonuses equal to 3%
of the profit before tax of the Company as shown on the books and records of the
Company at the end of each month and other perquisites in accordance with the
Company policy. In the event Mr. Little terminates his employment for "Good
Reason" (as defined therein), or is terminated by the Company for other than
"Good Cause" (as defined therein), Mr. Little is entitled to receive a cash lump
sum payment equal to the sum of (i) the base salary for the remainder of the
employment period under the Little Employment Agreement, (ii) an amount equal to
the sum of the most recent 12 months of bonuses paid to him, (iii) two times the
sum of his current annual base salary plus the total of the most recent 12
months of bonuses, (iv) all compensation previously deferred and any accrued
interest thereon and any accrued vacation pay not yet paid by the Company and
(v) continuation of benefits under the Company's benefit plans for the current
employment period. Mr. Little is also entitled under the Little Employment
Agreement to certain gross-up payments if an excise tax is imposed pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended, which imposes an
excise tax on certain severance payments in excess of three times an annualized
compensation amount following certain changes in control or any payment of
distribution made to him.
The Company also has entered into employment agreements (each Employment
Agreement hereinafter referred to as an "Employment Agreement" and the four
Employment Agreements hereinafter collectively referred to as the "Employment
Agreements"), effective as of July 1, 1996, with Messrs. Jerry J. Jones, Bryan
H. Wimberly and Gary A. Allcorn, (each hereinafter referred to as "Employee").
Each Employment Agreement is for a term of one year, renewable automatically for
a one-year term. The Employment Agreements provide for (i) annual salary
("Salary") in the amounts of $130,001 for Mr. Jones, $130,000 for Mr. Wimberly
and $113,100 for Mr. Allcorn and (ii) other perquisites in accordance with
Company policy. The Employment Agreements provide for bonuses as follows: (i)
Mr. Jones is entitled to a monthly bonus of two percent of the monthly profit
before tax of the Company, excluding sales of fixed assets and extraordinary
items; (ii) Mr. Wimberly is entitled to a monthly bonus of two percent of the
monthly profit before tax of SEPCO, excluding sales of fixed assets and
extraordinary items; and (iii) Mr. Allcorn is entitled to a monthly bonus of one
percent of the monthly profit before tax of the Company, excluding sales of
fixed assets and extraordinary items.
In the event Employee terminates his employment for "Good Reason" (as
defined therein), or is terminated by the Company for other than "Cause" (as
defined therein), each Employee would receive (i) 12 monthly payments each equal
to one month of the Salary, in the case of Messrs. Jones, Wimberly and Allcorn,
and six monthly payments each equal to one month of Salary, in the case of Mr.
Evans, (ii) a termination bonus equal to the previous 12 monthly bonuses, in the
case of Messrs. Jones, Allcorn, and Wimberly and (iii) any other payments due
through the date of termination. In the event Employee dies, become disabled,
terminates the Employment Agreement with notice or the Employment Agreement is
terminated by the Company for Cause, Employee or Employee's estate, as
applicable, would receive all payments then due him under the Employment
Agreement through the date of termination.
BENEFIT PLANS
Employee Stock Ownership Plan
The Company maintains an employee stock ownership plan (the "ESOP") for the
benefit of eligible employees pursuant to which annual contributions may be
made. The amount and form of the annual contribution is within the discretion of
the Company's Board of Directors. Such contributions are limited to a maximum of
15% of the total compensation paid to all participants eligible to receive an
allocation during the fiscal year. The Company (or its predecessor, SEPCO)
contributed $150,000 for each of the years ended
41
<PAGE> 44
December 31, 1996, 1995 and 1994. The ESOP currently is administered by the
Company's Compensation Committee.
Long-Term Incentive Plan
In August 1996, the Company established the LTIP, which provides for the
grant of stock options (which may be non-qualified stock options or incentive
stock options for tax purposes), stock appreciation rights issued independent of
or in tandem with such options, restricted stock awards and performance awards
to certain key employees of the Company and its subsidiaries. The LTIP is
administered by the Compensation Committee.
At December 31, 1997, 183,000 shares of Common Stock were available for
issuance under the LTIP, and options granted under the LTIP to purchase 217,000
shares of Common Stock were outstanding. In addition, as of January 1 of each
year the LTIP is in effect, if the total number of shares of Common Stock issued
and outstanding, not including any shares issued under the LTIP, exceeds the
total number of shares of Common Stock issued and outstanding as of January 1 of
the preceding year, the number of shares available will be increased by an
amount such that the total number of shares available for issuance under the
LTIP equals 5% of the total number of shares of Common Stock outstanding, not
including any shares issued under the LTIP. Lapsed, forfeited or canceled awards
will not count against these limits. Cash exercises of SARs and cash settlement
of other awards will also not be counted against these limits but the total
number of SARs and other awards settled in cash shall not exceed the total
number of shares authorized for issuance under the LTIP (without reduction for
issuances).
42
<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1997, with
respect to (i) persons known to the Company to be beneficial holders of five
percent or more of either the outstanding shares of Common Stock, Series A
Preferred Stock and Series B Convertible Preferred Stock, (ii) named executive
officers and directors of the Company and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2)
--------------------------------------------------------------
SERIES B
CONVERTIBLE
COMMON STOCK SERIES A PREFERRED STOCK
NAME AND ADDRESS OF ---------------- PREFERRED ------------------------
BENEFICIAL OWNER(1) NUMBER % STOCK % NUMBER %
------------------- --------- ---- --------- ---- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Gary A. Allcorn(3)................................ 4,494,839 48.8 -- -- 15,000 100.0
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
David R. Little(4)................................ 2,160,139 21.8 -- -- -- --
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Bryan H. Wimberly(5).............................. 837,125 10.0 -- -- -- --
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Jerry J. Jones(6)................................. 719,286 8.0 -- -- -- --
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
SEPCO Industries, Inc............................. 1,876,042 22.6 1,870 62.5 -- --
Employee Stock Ownership Plan
c/o River Oaks Trust Company, Trustee
2001 Kirby
Houston, Texas 77210
J. Michael Wappler(7)............................. 440,320 5.3 -- -- -- --
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Donald E. Tefertiller(8).......................... 93,298 1.1 374 12.5 -- --
4425 Congressional Drive
Corpus Christi, Texas 78413
Norman O. Schenk(9)............................... 80,225 1.0 374 12.5 -- --
4415 Waynesboro
Houston, Texas 77035
Charles E. Jacob(10).............................. 48,034 * 187 6.3 -- --
P. O. Box 57
Maypearl, Texas 76064
Ernest E. Herbert(11)............................. 47,377 * 187 6.3 -- --
57 Coronado Avenue
Kenner, Louisiana
Thomas V. Orr, Director(12)....................... 8,000 * -- -- -- --
Kenneth H. Miller, Director(13)................... 8,000 * -- -- -- --
Cletus Davis, Director(14)........................ 8,000 * -- -- -- --
All executive officers, directors and nominees as
a group (7 persons)(15)......................... 8,675,709 74.6 -- -- 15,000 100.0
</TABLE>
- ---------------
* Less than 1%.
(1) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants and other convertible securities that are held by such
person (but not those held by any other person) and that are exercisable or
convertible within 60 days have been exercised or converted.
43
<PAGE> 46
(2) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to all
shares of Common Stock, Series A Preferred Stock and Series B Convertible
Preferred Stock beneficially owned by them.
(3) Includes 3,425,592 shares of Common Stock and 15,000 shares of Series B
Convertible Preferred Stock owned by the Kacey Joyce, Andrea Rae and
Nicholas David Little 1988 Trusts (the "Trusts") for which Mr. Allcorn
serves as trustee. Because of this relationship, Mr. Allcorn may be deemed
to the beneficial owner of such shares and the 840,000 shares of Common
Stock issuable upon conversion of the 15,000 shares of Series B Preferred
Stock held by the Trusts. Also includes 40,000 shares of Common Stock
issuable upon exercise of an option and 14,847 shares of Common Stock held
of record by the ESOP for Mr. Allcorn's account.
(4) Includes 1,600,000 shares of Common Stock issuable to Mr. Little upon
exercise of an option and 81,689 shares of Common Stock held of record by
the ESOP for Mr. Little's account.
(5) Includes 100,800 shares of Common Stock owned of record by a trust of which
Mr. Wimberly is one-third beneficiary and 97,600 shares of Common Stock
issuable upon exercise of an option granted to Mr. Wimberly. Also includes
17,925 shares of Common Stock held by the ESOP for Mr. Wimberly's account.
(6) Includes 718,400 shares of Common Stock issuable upon exercise of an option
granted to Mr. Jones and 886 shares of Common Stock held by the ESOP for
Mr. Jones's account.
(7) Includes 31,239 shares of Common Stock held of record by the ESOP for Mr.
Wappler's account.
(8) Includes 8,000 shares of Common Stock issuable upon exercise of an option
and 46,968 shares of Common Stock held of record by the ESOP for Mr.
Tefertiller's account.
(9) Includes 18,625 shares of Common Stock held of record by the ESOP for Mr.
Schenk's account.
(10) Includes 16,834 shares of Common Stock held of record by the ESOP for Mr.
Jacob's account.
(11) Includes 23,877 shares of Common Stock held of record by the ESOP for Mr.
Herbert's account.
(12) Includes 8,000 shares of Common Stock issuable upon exercise of an option.
(13) Includes 8,000 shares of Common Stock issuable upon exercise of an option.
(14) Includes 8,000 shares of Common Stock issuable upon exercise of an option.
(15) See notes (3) through (6) and (12) through (14).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1989, the Company restructured certain loans previously made by
the Company to David R. Little, Chairman of the Board, President and Chief
Executive Officer of the Company, pursuant to which Mr. Little executed two
promissory notes in the amounts of $149,910 and $58,737, respectively, each
bearing interest at 9% per annum. The notes require monthly payments of $1,349
and $528, respectively. The outstanding balances of such loans at December 31,
1997, were $127,814 and $50,080, respectively.
In December 1993, the Company loaned Mr. Little approximately $210,940 to
purchase 59,800 shares of SEPCO's Class A Common Stock. The loan bore interest
at 6% per annum and provided for annual interest payments and one principal
payment upon sale of the stock which secured such loan. The loan was repaid on
August 5, 1996. The Company from time to time also has made non-interest bearing
advances to Mr. Little that as of December 31, 1997 totaled approximately
$340,439. The largest aggregate amount of Mr. Little's indebtedness outstanding
to the Company during the year ended December 31, 1997 was approximately
$638,152.
Mr. Allcorn, Senior Vice President/Finance and Chief Financial Officer of
the Company, is the trustee of three trusts for the benefit of Mr. Little's
children, each of which holds 1,141,864 shares of Common Stock and 5,000 shares
of Series B Convertible Preferred Stock. Mr. Allcorn exercises sole voting and
investment power over the shares held by such trusts.
44
<PAGE> 47
Mr. Little personally guaranteed up to $500,000 of the obligations of the
Company under the Credit Facility. In addition, all of the shares of Common
Stock and Series B Convertible Preferred Stock held in trust for Mr. Little's
children have been pledged to such lender to secure the obligations of the
Company under the Credit Facility.
45
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DXP ENTERPRISES AND SUBSIDIARIES:
Report of Independent Public Accounts....................... 21
Audited Consolidated Financial Statements --
Consolidated Balance Sheets............................... 22
Consolidated Statements of Earnings....................... 23
Consolidated Statements of Shareholders' Equity........... 24
Consolidated Statements of Cash Flows..................... 25
Notes to Consolidated Financial Statements................ 26
</TABLE>
(b) REPORTS ON FORM 8-K:
None.
(c) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 14.
46
<PAGE> 49
The Company undertakes to furnish to any stockholder so requesting a copy
of any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, filed with the
Commission on May 15, 1997).
3.2 -- Bylaws (incorporated by reference Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+*10.1 -- Index, Inc. Long Term Incentive Plan, as amended.
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended
(incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
+10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bob Evans (incorporated by
reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on October 1, 1996).
+10.12 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.13 -- Second Amended and Restated Loan and Security Agreement
dated effective as of April 1, 1994, by and between
Barclays Business Credit, Inc. and SEPCO Industries,
Inc., as amended by First Amendment to Second Amended and
Restated Loan and Security Agreement and Secured
Promissory Note dated May , 1995, by and between SEPCO
Industries, Inc. and Shawmut Capital Corporation,
successor-in-interest by assignment to Barclays Business
Credit, Inc., as amended by Second Amendment to Second
Amended and Restated Loan and Security Agreement dated
April 3, 1996, by and between SEPCO Industries, Inc. and
Fleet Capital Corporation, formerly known as Shawmut
Capital Corporation, as amended by Third Amendment to
Second Amended and Restated Loan and Security Agreement
dated September 9, 1996, by and between SEPCO Industries,
Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation,
as amended by Fourth Amendment to Second Amended and
Restated Loan and Security Agreement dated October 24,
1996, by and between SEPCO Industries, Inc. American MRO,
Inc. and Fleet Capital Corporation and as amended by
Letter Agreement dated November 4, 1996, from Fleet
Capital Corporation to SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. (incorporated by
reference to Amendment No. 4 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on November 6, 1996).
10.14 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.15 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.17 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
+10.18 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 13,
1996).
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among Sepco
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.20 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.29 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.30 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Sepco Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.37 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
+*10.38 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan.
+*10.39 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan.
*11.1 -- Statement re Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*27.1 -- Financial Data Schedule.
</TABLE>
51
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ DAVID R. LITTLE
-------------------------------------
David R. Little
Chairman of the Board,
President and Chief Executive Officer
Dated: February 26, 1998.
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID R. LITTLE Chairman of the Board, President, February 26, 1998
- ----------------------------------------------------- Chief Executive Officer and
David R. Little Director (Principal Executive
Officer)
/s/ JERRY J. JONES Director February 26, 1998
- -----------------------------------------------------
Jerry J. Jones
/s/ GARY A. ALLCORN Senior Vice President/Finance and February 26, 1998
- ----------------------------------------------------- Chief Financial Officer
Gary A. Allcorn (Principal Financial and
Accounting Officer)
/s/ BRYAN H. WIMBERLY Director February 26, 1998
- -----------------------------------------------------
Bryan H. Wimberly
/s/ CLETUS DAVIS Director February 26, 1998
- -----------------------------------------------------
Cletus Davis
/s/ KENNETH H. MILLER Director February 26, 1998
- -----------------------------------------------------
Kenneth H. Miller
/s/ THOMAS V. ORR Director February 26, 1998
- -----------------------------------------------------
Thomas V. Orr
</TABLE>
52
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, filed with the
Commission on May 15, 1997).
3.2 -- Bylaws (incorporated by reference Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+*10.1 -- Index, Inc. Long Term Incentive Plan, as amended.
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended
(incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
+10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bob Evans (incorporated by
reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on October 1, 1996).
+10.12 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.13 -- Second Amended and Restated Loan and Security Agreement
dated effective as of April 1, 1994, by and between
Barclays Business Credit, Inc. and SEPCO Industries,
Inc., as amended by First Amendment to Second Amended and
Restated Loan and Security Agreement and Secured
Promissory Note dated May , 1995, by and between SEPCO
Industries, Inc. and Shawmut Capital Corporation,
successor-in-interest by assignment to Barclays Business
Credit, Inc., as amended by Second Amendment to Second
Amended and Restated Loan and Security Agreement dated
April 3, 1996, by and between SEPCO Industries, Inc. and
Fleet Capital Corporation, formerly known as Shawmut
Capital Corporation, as amended by Third Amendment to
Second Amended and Restated Loan and Security Agreement
dated September 9, 1996, by and between SEPCO Industries,
Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation,
as amended by Fourth Amendment to Second Amended and
Restated Loan and Security Agreement dated October 24,
1996, by and between SEPCO Industries, Inc. American MRO,
Inc. and Fleet Capital Corporation and as amended by
Letter Agreement dated November 4, 1996, from Fleet
Capital Corporation to SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. (incorporated by
reference to Amendment No. 4 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on November 6, 1996).
10.14 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.15 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.17 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
+10.18 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 13,
1996).
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among Sepco
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.20 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.29 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.30 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Sepco Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.37 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
+*10.38 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan.
+*10.39 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan.
*11.1 -- Statement re Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
INDEX, INC.
LONG-TERM INCENTIVE PLAN
ARTICLE I: GENERAL
SECTION 1.1 Purpose of the Plan. The Long-Term Incentive Plan (the
"Plan") of Index, Inc. (the "Company") is intended to advance the best
interests of the Company, its subsidiaries and its shareholders in order to
attract, retain and motivate key employees by providing them with additional
incentives through (i) the grant of options ("Options") to purchase shares of
Common Stock, par value $.01 per share, of the Company ("Common Stock"), (ii)
the grant of stock appreciation rights ("Stock Appreciation Rights"), (iii) the
award of shares of restricted Common Stock ("Restricted Stock") and (iv) the
award of units payable in cash or shares of Common Stock based on performance
("Performance Awards"), thereby increasing the personal stake of such key
employees in the continued success and growth of the Company.
SECTION 1.2 Administration of the Plan. (a) The Plan shall be
administered by the Board of Directors of the Company or the compensation
committee of the Board of Directors or other designated committee of the Board
of Directors of the Company (the "Board of Directors") which shall consist of
at least two Outside Directors (the Board of Directors or such committee being
hereinafter referred to as the "Committee"). The Committee shall have
authority to interpret conclusively the provisions of the Plan, to adopt such
rules and regulations for carrying out the Plan as it may deem advisable, to
decide conclusively all questions of fact arising in the application of the
Plan, to establish performance criteria in respect of Awards (as defined
herein) under the Plan, to certify that Plan requirements have been met for any
participant in the Plan, to submit such matters as it may deem advisable to the
Company's shareholders for their approval, and to make all other determinations
and take all other actions necessary or desirable for the administration of the
Plan. The Committee is expressly authorized to adopt rules and regulations
limiting or eliminating its discretion in respect of certain matters as it may
deem advisable to comply with or obtain preferential treatment under any
applicable tax or other law rule, or regulation. All decisions and acts of the
Committee shall be final and binding upon all affected Plan participants.
For purposes of this Plan, "Outside Director" shall mean a nonemployee
director of the Company who is a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(b) The Committee shall designate the eligible employees, if any,
to be granted Awards and the type and amount of such Awards and the time when
Awards will be granted. All Awards granted under the Plan shall be on the
terms and subject to the conditions determined by the Committee consistent with
the Plan.
SECTION 1.3 Eligible Participants. Key employees, including
officers, of the Company and its subsidiaries (all such subsidiaries being
referred to as "Subsidiaries") shall be eligible for Awards under the Plan.
SECTION 1.4 Awards Under the Plan. Awards to key employees may be in
the form of (i) Options, (ii) Stock Appreciation Rights, which may be issued
independent of or in tandem
<PAGE> 2
with Options, (iii) shares of Restricted Stock, (iv) Performance Awards, or (v)
any combination of the foregoing (collectively, "Awards").
SECTION 1.5 Shares Subject to the Plan. Initially, the aggregate
number of shares of Common Stock that may be issued under the Plan shall be
800,000. In addition, as of January 1 of each year the Plan is in effect, if
the total number of shares of Common Stock issued and outstanding, not
including any shares issued under the Plan, exceeds the total number of shares
of Common Stock issued and outstanding as of January 1 of the preceding year
(or, for 1996, as of the effective date of the merger (the "Effective Date") of
a wholly owned subsidiary of the Company with SEPCO Industries, Inc. (the
"Sepco Merger") assuming all shares issued pursuant to the Sepco Merger and the
proposed merger of a subsidiary of the Company with and into Newman
Communications, Inc are issued), the number of shares available will be
increased by an amount such that the total number of shares that may be issued
under the Plan shall be increased by an amount such that the total number of
shares of Common Stock available for issuance under the Plan equals 5% of the
total number of shares of Common Stock outstanding, not including any shares
issued under the Plan. Shares distributed pursuant to the Plan may consist of
authorized but unissued shares or treasury shares of the Company, as shall be
determined from time to time by the Board of Directors.
If any Award under the Plan shall expire, terminate or be cancelled
(including cancellation upon an Option holder's exercise of a related Stock
Appreciation Right) for any reason without having been exercised in full, or if
any Award shall be forfeited to the Company, the unexercised or forfeited Award
shall not count against the above limits and shall again become available for
Awards under the Plan (unless the holder of such Award received dividends or
other economic benefits with respect to such Award, which dividends or other
economic benefits are not forfeited, in which case the Award shall count
against the above limits). Shares of Common Stock equal in number to the
shares surrendered in payment of the option price, and shares of Common Stock
which are withheld in order to satisfy Federal, state or local tax liability,
shall count against the above limits. Only the number of shares of Common
Stock actually issued upon exercise of a Stock Appreciation Right shall count
against the above limits, and any shares which were estimated to be used for
such purposes and were not in fact so used shall again become available for
Awards under the Plan. Cash exercises of Stock Appreciation Rights and cash
settlement of other Awards will not count against the above limits.
The aggregate number of shares of Common Stock subject to Options or
Stock Appreciation Rights that may be granted to any one participant in any one
year under the Plan shall be 400,000. The aggregate number of shares of Common
Stock that may be granted to any one participant in any one year in respect of
Restricted Stock shall be 400,000. The aggregate number of shares of Common
Stock that may be received by any one participant in any one year in respect of
a Performance Award shall be 400,000 and the aggregate amount of cash that may
be received by any one participant in any one year in respect to a Performance
Award shall be $500,000.
The total number of Awards (or portions thereof) settled in cash under
the Plan, based on the number of shares covered by such Awards (e.g., 100
shares for a Stock Appreciation Right with respect to 100 shares), shall not
exceed a number equal to (i) the number of shares initially available for
issuance under the Plan plus (ii) the number of shares that have become
available for issuance under the Plan pursuant to the first paragraph of this
Section 1.5.
-2-
<PAGE> 3
The aggregate number of shares of Common Stock that are available
under the Plan for Options granted in accordance with Section 2.4(i) ("ISOs")
is 800,000, subject to adjustments as provided in Section 5.2 of the Plan.
SECTION 1.6 Other Compensation Programs. Nothing contained in the
Plan shall be construed to preempt or limit the authority of the Board of
Directors to exercise its corporate rights and powers, including, but not by
way of limitation, the right of the Board of Directors (i) to grant incentive
awards for proper corporate purposes otherwise than under the Plan to any
employee, officer, director or other person or entity or (ii) to grant
incentive awards to, or assume incentive awards of, any person or entity in
connection with the acquisition (whether by purchase, lease, merger,
consolidation or otherwise) of the business or assets (in whole or in part) of
any person or entity.
ARTICLE II: STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
SECTION 2.1 Terms and Conditions of Options. Subject to the
following provisions, all Options granted under the Plan to employees of the
Company and its Subsidiaries shall be in such form and shall have such terms
and conditions as the Committee, in its discretion, may from time to time
determine consistent with the Plan.
(a) Option Price. The option price per share shall be determined
by the Committee, except that in the case of an Option granted in accordance
with Section 2.4(i) the option price per share shall not be less than the fair
market value of a share of Common Stock (as determined by the Committee) on the
date the Option is granted (other than in the case of substitute or assumed
Options to the extent required to qualify such Options for preferential tax
treatment under the Code as in effect at the time of such grant).
(b) Term of Option. The term of an Option shall be determined by
the Committee, except that in the case of an ISO the term of the Option shall
not exceed ten years from the date of grant, and, notwithstanding any other
provision of this Plan, no Option shall be exercised after the expiration of
its term.
(c) Exercise of Options. Options shall be exercisable at such
time or times and subject to such terms and conditions as the Committee shall
specify in the Option grant. Unless the Option grant specifies otherwise, the
Committee shall have discretion at any time to accelerate such time or times
and otherwise waive or amend any conditions in respect of all or any portion of
the Options held by any optionee. An Option may be exercised in accordance
with its terms as to any or all shares purchasable thereunder.
(d) Payment for Shares. The Committee may authorize payment for
shares as to which an Option is exercised to be made in cash, shares of Common
Stock, a combination thereof, by "cashless exercise" or in such other manner as
the Committee in its discretion may provide.
(e) Shareholder Rights. The holder of an Option shall, as such,
have none of the rights of a shareholder.
(f) Termination of Employment. The Committee shall have
discretion to specify in the Option grant, or, with the consent of the
optionee, an amendment thereof, provisions
-3-
<PAGE> 4
with respect to the period, not extending beyond the term of the Option, during
which the Option may be exercised following the optionee's termination of
employment.
SECTION 2.2 Stock Appreciation Rights in Tandem with Options. (a)
The Committee may, either at the time of grant of an Option or at any time
during the term of the Option, grant Stock Appreciation Rights ("Tandem SARs")
with respect to all or any portion of the shares of Common Stock covered by
such Option. A Tandem SAR may be exercised at any time the Option to which it
relates is then exercisable, but only to the extent the Option to which it
relates is exercisable, and shall be subject to the conditions applicable to
such Option. When a Tandem SAR is exercised, the Option to which it relates
shall cease to be exercisable to the extent of the number of shares with
respect to which the Tandem SAR is exercised. Similarly, when an Option is
exercised, the Tandem SARs relating to the shares covered by such Option
exercise shall terminate. Any Tandem SAR which is outstanding on the last day
of the term of the related Option (as determined pursuant to Section 2.1(b))
shall be automatically exercised on such date for cash without any action by
the optionee.
(b) Upon exercise of a Tandem SAR, the holder shall receive, for
each share with respect to which the Tandem SAR is exercised, an amount (the
"Appreciation") equal to the difference between the option price per share of
the Option to which the Tandem SAR relates and the fair market value (as
determined by the Committee) of a share of Common Stock on the date of exercise
of the Tandem SAR. The Appreciation shall be payable in cash, Common Stock, or
a combination of both, at the option of the Committee, and shall be paid within
30 days of the exercise of the Tandem SAR.
SECTION 2.3 Stock Appreciation Rights Independent of Options.
Subject to the following provisions, all Stock Appreciation Rights granted
independent of Options ("Independent SARs") under the Plan to employees of the
Company and its Subsidiaries shall be in such form and shall have such terms
and conditions as the Committee, in its discretion, may from time to time
determine consistent with the Plan.
(a) Exercise Price. The exercise price per share shall be
determined by the Committee on the date the Independent SAR is granted.
(b) Term of Independent SAR. The term of an Independent SAR shall
be determined by the Committee, and, notwithstanding any other provision of
this Plan, no Independent SAR shall be exercised after the expiration of its
term.
(c) Exercise of Independent SARs. Independent SARs shall be
exercisable at such time or times and subject to such terms and conditions as
the Committee shall specify in the Independent SAR grant. Unless the
Independent SAR grant specifies otherwise, the Committee shall have discretion
at any time to accelerate such time or times and otherwise waive or amend any
conditions in respect of all or any portion of the Independent SARs held by any
participant. Upon exercise of an Independent SAR, the holder shall receive,
for each share specified in the Independent SAR grant, an amount (the
"Appreciation") equal to the difference between the exercise price per share
specified in the Independent SAR grant and the fair market value (as determined
by the Committee) of a share of Common Stock on the date of exercise of the
Independent SAR. The Appreciation shall be payable in cash, Common Stock, or a
combination of both, at the option of the Committee, and shall be paid within
30 days of the exercise of the Independent SAR.
-4-
<PAGE> 5
(d) Shareholder Rights. The holder of an Independent SAR shall,
as such, have none of the rights of a shareholder.
(e) Termination of Employment. The Committee shall have
discretion to specify in the Independent SAR grant, or, with the consent of the
holder, an amendment thereof, provisions with respect to the period, not
extending beyond the term of the Independent SAR, during which the Independent
SAR may be exercised following the holder's termination of employment.
SECTION 2.4 Statutory Options. Subject to the limitations on Option
terms set forth in Section 2.1, the Committee shall have the authority to grant
(i) ISOs within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and (ii) Options containing such terms and
conditions as shall be required to qualify such Options for preferential tax
treatment under the Code as in effect at the time of such grant, including, if
then applicable, limits with respect to minimum exercise price, duration and
amounts and special limitations applicable to any individual who, at the time
the Option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any affiliate.
Options granted pursuant to this Section 2.4 may contain such other terms and
conditions permitted by Article II of this Plan as the Committee, in its
discretion, may from time to time determine (including, without limitation,
provision for Stock Appreciation Rights), to the extent that such terms and
conditions do not cause the Options to lose their preferential tax treatment.
If an Option intended to be an ISO ceases or is otherwise not eligible to be an
ISO, such Option (or portion thereof necessary to maintain the status of the
remaining portion of the Option as an ISO) shall remain valid but be treated as
an Option other than an ISO.
SECTION 2.5 Change of Control. Notwithstanding the exercisability
schedule governing any Option or Stock Appreciation Right, upon the occurrence
of a Change of Control (as defined in Section 5.9) all Options and Stock
Appreciation Rights outstanding at the time of such Change of Control and held
by participants who are employees of the Company or its subsidiaries at the
time of such Change of Control shall (unless specifically provided otherwise in
the grant thereof) become immediately exercisable and, unless the participant
agrees otherwise in writing, remain exercisable for three years (but not beyond
the term of the Option or Stock Appreciation Right) after the employee's
termination of employment for any reason other than termination by the Company
or a subsidiary of the Company for dishonesty, conviction of a felony, wilful
unauthorized disclosure of confidential information or wilful refusal to
perform the duties of such employee's position or positions with the Company or
such subsidiary (termination for "cause"); provided that this Section 2.5 shall
not apply to Awards granted to a participant if, in connection with a Change of
Control pursuant to clause (1) of Section 5.9, such participant is the Person
or forms part of the Person specified in such clause (1).
ARTICLE III: RESTRICTED STOCK
SECTION 3.1 Terms and Conditions of Restricted Stock Awards. Subject
to the following provisions, all Awards of Restricted Stock under the Plan to
employees of the Company and its Subsidiaries shall be in such form and shall
have such terms and conditions as the Committee, in its discretion, may from
time to time determine consistent with the Plan.
-5-
<PAGE> 6
(a) Restricted Stock Award. The Restricted Stock Award shall
specify the number of shares of Restricted Stock to be awarded, the price, if
any, to be paid by the recipient of the Restricted Stock, and the date or dates
on which the Restricted Stock will vest. The vesting and number of shares of
Restricted Stock may be conditioned upon the completion of a specified period
of service with the Company or its Subsidiaries, upon the attainment of
specified performance objectives, or upon such other criteria as the Committee
may determine in accordance with the provisions hereof. Performance objectives
will be based on increases in share prices, operating income, margin, sales
increases on a Company wide, division, product line or other basis, net income
before or after taxes or before or after extraordinary charges, completions of
successful acquisitions, implementation of strategic expansions, net income or
cash flow thresholds, return on common equity or any combination of the
foregoing.
(b) Restrictions on Transfer. Stock certificates representing the
Restricted Stock granted to an employee may be registered in the employee's
name or held by the Company prior to the achievement of certain criteria. Such
certificates shall either be held by the Company on behalf of the employee, or
delivered to the employee bearing a legend to restrict transfer of the
certificate until the Restricted Stock has vested, as determined by the
Committee. The Committee shall determine whether the employee shall have the
right to vote and/or receive dividends on the Restricted Stock before it has
vested. No share of Restricted Stock may be sold, transferred, assigned, or
pledged by the employee until such share has vested in accordance with the
terms of the Restricted Stock Award. Unless the grant of a Restricted Stock
Award specifies otherwise, in the event of an employee's termination of
employment before all the employee's Restricted Stock has vested, or in the
event other conditions to the vesting of Restricted Stock have not been
satisfied prior to any deadline for the satisfaction of such conditions set
forth in the Award, the shares of Restricted Stock that have not vested shall
be forfeited and any purchase price paid by the employee shall be returned to
the employee. At the time Restricted Stock vests (and, if the employee has
been issued legended certificates of Restricted Stock, upon the return of such
certificates to the Company), a certificate for such vested shares shall be
delivered to the employee or the employee's estate, free of all restrictions.
(c) Accelerated Vesting. Notwithstanding the vesting conditions
set forth in the Restricted Stock Award, (i) unless the Restricted Stock grant
specifies otherwise, the Committee may in its discretion at any time accelerate
the vesting of Restricted Stock or otherwise waive or amend any conditions of a
grant of Restricted Stock, and (ii) all shares of Restricted Stock shall vest
upon a Change of Control of the Company; provided that clause (ii) above shall
not apply to Awards granted to a participant if, in connection with a Change of
Control pursuant to clause (1) of Section 5.9, such participant is the Person
or forms part of the Person specified in such clause (1).
ARTICLE IV: PERFORMANCE AWARDS
SECTION 4.1 Terms and Conditions of Performance Awards. The
Committee shall be authorized to grant Performance Awards, which are payable in
stock, cash or a combination thereof, at the discretion of the Committee.
(a) Performance Period. The Committee shall establish with
respect to each Performance Award a performance period over which the
performance goal of such Performance Award shall be measured. The performance
period for a Performance Award shall
-6-
<PAGE> 7
be established prior to the time such Performance Award is granted and may
overlap with performance periods relating to other Performance Awards granted
hereunder to the same employee.
(b) Performance Objectives. The Committee shall establish a
minimum level of acceptable achievement for the holder at the time of each
Award. Each Performance Award shall be contingent upon future performances and
achievement of objectives described either in terms of Company-wide performance
or in terms that are related to performance of the employee or of the division,
subsidiary, department or function within the Company in which the employee is
employed. The Committee shall have the authority to establish the specific
performance objectives and measures applicable to such objectives. Such
objectives, however, shall be based on increases in share prices, operating
income, margin, sales increases on a Company wide, division, product line or
other basis, net income before or after taxes or before or after extraordinary
charges, completions of successful acquisitions, implementation of strategic
expansions, net income or cash flow thresholds, return on common equity or any
combination of the foregoing.
(c) Size, Frequency and Vesting. The Committee shall have the
authority to determine at the time of the Award the maximum value of a
Performance Award, the frequency of Awards and the date or dates when Awards
vest.
(d) Payment. Following the end of each performance period, the
holder of each Performance Award will be entitled to receive payment of an
amount, not exceeding the maximum value of the Performance Award, based on the
achievement of the performance measures for such performance period, as
determined by the Committee. If at the end of the performance period the
specified objectives have been attained, the employee shall be deemed to have
fully earned the Performance Award. If the employee exceeds the specified
minimum level of acceptable achievement but does not fully attain such
objectives, the employee shall be deemed to have partly earned the Performance
Award, and shall become entitled to receive a portion of the total Award, as
determined by the Committee. If a Performance Award is granted after the start
of a performance period, the Award shall be reduced to reflect the portion of
the performance period during which the Award was in effect. Unless the Award
specifies otherwise, including restrictions in order to satisfy the conditions
under Section 162(m) of the Code, the Committee may adjust the payment of
Awards or the performance objectives if events occur or circumstances arise
which would cause a particular payment or set of performance objectives to be
inappropriate, as determined by the Committee.
(e) Termination of Employment. A recipient of a Performance Award
who, by reason of death, disability or retirement, terminates employment before
the end of the applicable performance period shall be entitled to receive, to
the extent earned, a portion of the Award which is proportional to the portion
of the performance period during which the employee was employed. A recipient
of a Performance Award who terminates employment for any other reason shall not
be entitled to any part of the Award unless the Committee determines otherwise;
however, the Committee may in no event pay the employee more than that portion
of the Award which is proportional to his or her period of actual service.
(f) Accelerated Vesting. Notwithstanding the vesting conditions
set forth in a Performance Award, (i) unless the Award specifies otherwise, the
Committee may in its discretion at any time accelerate vesting of the Award or
otherwise waive or amend any conditions (including but not limited to
performance objectives) in respect of a Performance
-7-
<PAGE> 8
Award, and (ii) all Performance Awards shall vest upon a Change of Control of
the Company. In addition, each participant in the Plan shall receive the
maximum Performance Award he or she could have earned for the proportionate
part of the performance period prior to the Change of Control, and shall retain
the right to earn any additional portion of his or her Award if he or she
remains in the Company's employ. However, clause (ii) above shall not apply to
Awards granted to a participant if, in connection with a Change of Control
pursuant to clause (1) of Section 5.9, such participant is the Person or forms
part of the Person specified in such clause (1).
(g) Shareholder Rights. The holder of a Performance Award shall,
as such, have none of the rights of a shareholder.
ARTICLE V: ADDITIONAL PROVISIONS
SECTION 5.1 General Restrictions. Each Award under the Plan shall be
subject to the requirement that, if at any time the Committee shall determine
that (i) the listing, registration or qualification of the shares of Common
Stock subject or related thereto upon any securities exchange or under any
state or Federal law, or (ii) the consent or approval of any government
regulatory body, or (iii) an agreement by the recipient of an Award with
respect to the disposition of shares of Common Stock, is necessary or desirable
(in connection with any requirement or interpretation of any Federal or state
securities law, rule or regulation) as a condition of, or in connection with,
the granting of such Award or the issuance, purchase or delivery of shares of
Common Stock thereunder, such Award may not be consummated in whole or in part
unless such listing, registration, qualification, consent, approval or
agreement shall have been effected or obtained free of any conditions not
acceptable to the Committee.
SECTION 5.2 Adjustments for Changes in Capitalization. In the event
of any stock dividends, stock splits, recapitalizations, combinations,
exchanges of shares, mergers, consolidation, liquidations, split-ups,
split-offs, spin- offs, or other similar changes in capitalization, or any
distribution to shareholders, including a rights offering, other than regular
cash dividends, changes in the outstanding stock of the Company by reason of
any increase or decrease in the number of issued shares of Common Stock
resulting from a split-up or consolidation of shares or any similar capital
adjustment or the payment of any stock dividend, any share repurchase at a
price in excess of the market price of the Common Stock at the time such
repurchase is announced or other increase or decrease in the number of such
shares, the Committee shall make appropriate adjustment in the number and kind
of shares authorized by the Plan (including shares available for ISOs), in the
number, price or kind of shares covered by the Awards and in any outstanding
Awards under the Plan; provided, however, that no such adjustment shall
increase the aggregate value of any outstanding Award.
In the event of any adjustment in the number of shares covered by any
Award, any fractional shares resulting from such adjustment shall be
disregarded and each such Award shall cover only the number of full shares
resulting from such adjustment.
SECTION 5.3 Amendments. (a) The Board of Directors may at any time
and from time to time and in any respect amend or modify the Plan.
(b) The Committee shall have the authority to amend any Award to
include any provision which, at the time of such amendment, is authorized under
the terms of the Plan;
-8-
<PAGE> 9
however, no outstanding Award may be revoked or altered in a manner unfavorable
to the holder without the written consent of the holder.
SECTION 5.4 Cancellation of Awards. Any Award granted under the Plan
may be cancelled at any time with the consent of the holder and a new Award may
be granted to such holder in lieu thereof, which Award may, in the discretion
of the Committee, be on more favorable terms and conditions than the cancelled
Award.
SECTION 5.5 Withholding. Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the
Company shall have the right to require the holder to pay an amount in cash or
to retain or sell without notice, or demand surrender of, shares of Common
Stock in value sufficient to satisfy any Federal, state or local withholding
tax liability ("Withholding Tax") prior to the delivery of any certificate for
such shares (or remainder of shares if Common Stock is retained to satisfy such
tax liability). Whenever under the Plan payments are to be made in cash, such
payments shall be net of an amount sufficient to satisfy any Federal, state or
local withholding tax liability.
Whenever Common Stock is so retained or surrendered to satisfy
Withholding Tax, the value of shares of Common Stock so retained or surrendered
shall be determined by the Committee, and the value of shares of Common Stock
so sold shall be the net proceeds (after deduction of commissions) received by
the Company from such sale, as determined by the Committee.
SECTION 5.6 Non-assignability. Except as expressly provided in the
Plan, no Award under the Plan shall be assignable or transferable by the holder
thereof except by will or by the laws of descent and distribution. During the
life of the holder, Awards under the Plan shall be exercisable only by such
holder or by the guardian or legal representative of such holder.
SECTION 5.7 Non-uniform Determinations. Determinations by the
Committee under the Plan (including, without limitation, determinations of the
persons to receive Awards; the form, amount and timing of such Awards; the
terms and provisions of such Awards and the agreements evidencing same; and
provisions with respect to termination of employment) need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, Awards under the Plan, whether or not such persons are similarly
situated.
SECTION 5.8 No Guarantee of Employment. The grant of an Award under
the Plan shall not constitute an assurance of continued employment for any
period or any obligation of the Board of Directors to nominate any director for
reelection by the Company's shareholders.
SECTION 5.9 Change of Control. A "Change of Control" shall be deemed
to have occurred if:
(1) any Person (as defined below), other than a
Designated Person, is or becomes the Beneficial Owner (as defined
below) of securities of the Company representing 35% or more of the
Voting Power (as defined below);
(2) there shall occur a change in the composition of a
majority of the Board of Directors within any period of four
consecutive years which change shall not have
-9-
<PAGE> 10
been approved by a majority of the Board of Directors as constituted
immediately prior to the commencement of such period;
(3) at any meeting of the shareholders of the Company
called for the purpose of electing directors, more than one of the
persons nominated by the Board of Directors for election as directors
shall fail to be elected; or
(4) the shareholders of the Company approve a merger,
consolidation, sale of substantially all assets or other
reorganization of the Company, other than a reincorporation, in which
the Company does not survive.
For purposes of this Section 5.9, (i) "Person" shall have the meaning
set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as in effect on August 15, 1996, (ii) "Beneficial Owner" shall have the
meaning set forth in Rules 13d-3 and 13d-5 promulgated under the Exchange Act
on August 15, 1996; (iii) "Voting Power" shall mean the voting power of the
outstanding securities of the Company having the right under ordinary
circumstances to vote at an election of the Board of Directors; and (iv)
"Designated Person" shall mean any Person who at the Effective Date is a
Beneficial Owner of 10% or more of the Common Stock or whose Beneficial
Ownership of securities is solely the result of such Person acquiring
securities as an underwriter in an underwritten public offering of such
securities.
SECTION 5.10 Duration and Termination. (a) The Plan shall be of
unlimited duration. Notwithstanding the foregoing, no ISO (within the meaning
of Section 422 of the Code) shall be granted under the Plan ten (10) years
after the effective date of the Plan, but Awards granted prior to such date may
extend beyond such date, and the terms of this Plan shall continue to apply to
all Awards granted hereunder.
(b) The Board of Directors may suspend, discontinue or terminate
the Plan at any time. Such action shall not impair any of the rights of any
holder of any Award outstanding on the date of the Plan's suspension,
discontinuance or termination without the holder's written consent.
SECTION 5.11 Effective Date. The Plan shall be effective as of
August 12, 1996, subject to the consummation of the Sepco Merger.
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<PAGE> 11
AMENDMENT
TO
INDEX, INC.
LONG-TERM INCENTIVE PLAN
ADOPTED BY THE COMPENSATION COMMITTEE MAY 12, 1997
Section 1.5 of the Index, Inc. Long-Term Incentive Plan is hereby
amended and restated in its entirety as follows:
SECTION 1.5 Shares Subject to the Plan. Initially, the
aggregate number of shares of Common Stock that may be issued under
the Plan shall be 400,000. In addition, as of January 1 of each year
the Plan is in effect, if the total number of shares of Common Stock
issued and outstanding, not including any shares issued under the
Plan, exceeds the total number of shares of Common Stock issued and
outstanding as of January 1 of the preceding year (or, for 1996, as of
the effective date of the merger (the "Effective Date") of a wholly
owned subsidiary of the Company with SEPCO Industries, Inc. (the
"Sepco Merger") assuming all shares issued pursuant to the Sepco
Merger and the proposed merger of a subsidiary of the Company with and
into Newman Communications, Inc are issued), the number of shares
available will be increased by an amount such that the total number of
shares that may be issued under the Plan shall be increased by an
amount such that the total number of shares of Common Stock available
for issuance under the Plan equals 5% of the total number of shares of
Common Stock outstanding, not including any shares issued under the
Plan. Shares distributed pursuant to the Plan may consist of
authorized but unissued shares or treasury shares of the Company, as
shall be determined from time to time by the Board of Directors.
If any Award under the Plan shall expire, terminate or be
cancelled (including cancellation upon an Option holder's exercise of
a related Stock Appreciation Right) for any reason without having been
exercised in full, or if any Award shall be forfeited to the Company,
the unexercised or forfeited Award shall not count against the above
limits and shall again become available for Awards under the Plan
(unless the holder of such Award received dividends or other economic
benefits with respect to such Award, which dividends or other economic
benefits are not forfeited, in which case the Award shall count
against the above limits). Shares of Common Stock equal in number to
the shares surrendered in payment of the option price, and shares of
Common Stock which are withheld in order to satisfy Federal, state or
local tax liability, shall count against the above limits. Only the
number of shares of Common Stock actually issued upon exercise of a
Stock Appreciation Right shall count against the above limits, and any
shares which were estimated to be used for such purposes and were not
in fact so used shall again become available for Awards under the
Plan. Cash exercises of Stock Appreciation Rights and cash settlement
of other Awards will not count against the above limits.
The aggregate number of shares of Common Stock subject to
Options or Stock Appreciation Rights that may be granted to any one
participant in any one year under the Plan shall be 200,000. The
aggregate number of shares of
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<PAGE> 12
Common Stock that may be granted to any one participant in any one
year in respect of Restricted Stock shall be 200,000. The aggregate
number of shares of Common Stock that may be received by any one
participant in any one year in respect of a Performance Award shall be
200,000 and the aggregate amount of cash that may be received by any
one participant in any one year in respect to a Performance Award
shall be $500,000.
The total number of Awards (or portions thereof) settled in
cash under the Plan, based on the number of shares covered by such
Awards (e.g., 100 shares for a Stock Appreciation Right with respect
to 100 shares), shall not exceed a number equal to (i) the number of
shares initially available for issuance under the Plan plus (ii) the
number of shares that have become available for issuance under the
Plan pursuant to the first paragraph of this Section 1.5.
The aggregate number of shares of Common Stock that are
available under the Plan for Options granted in accordance with
Section 2.4(i) ("ISOs") is 400,000, subject to adjustments as provided
in Section 5.2 of the Plan.
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<PAGE> 13
AMENDMENT
TO
INDEX, INC.
LONG-TERM INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS JANUARY 8, 1998
The first sentence of Section 1.5 of the Index, Inc. Long-Term
Incentive Plan is hereby replaced and amended to read as follows:
SECTION 1.5 Shares Subject to the Plan. The aggregate number
of shares of Common Stock that may be issued under the Plan shall be
660,000, of which 260,000 shares may not be issued pursuant to stock
options intended to qualify as incentive stock options within the
meaning of Section 422(b) of the Internal Revenue Code of 1986, as
amended, or pursuant to awards granted to executive officers of the
Company.
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<PAGE> 1
EXHIBIT 10.38
AMENDMENT NUMBER TWO
TO
SEPCO INDUSTRIES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By this Agreement,SEPCO INDUSTRIES, INC. Employee Stock Ownership Plan
(herein referred to as the "Plan") is amended as follows, effective as of
January 1, 1996:
Section 3.1 is deleted in its entirety and is replaced by the following:
Any Eligible Employee shall be eligible to participate hereunder on
the date of his employment with the Employer. However, any Employee who was a
Participant in the Plan prior to the effective date of this amendment and
restatement shall continue to participate in the Plan. The Employer shall give
each prospective Eligible Employee written notice of his eligibility to
participate in the Plan prior to the close of the Plan Year in which he first
becomes an Eligible Employee.
Section 8.11, "Transfer of Interest," is deleted in its entirety. The Plan
Trustee shall not accept funds transferred from another Trust forming part of a
pension, profit sharing, or stock bonus plan or a "conduit" Individual
Retirement Account for the account of a Participant under the Plan.
SEPCO INDUSTRIES, INC.
By: /s/ GARY A. ALLCORN
-----------------------------------
Title: Sr. VP Finance
--------------------------------
Date: 1-31-96
---------------------------------
<PAGE> 1
EXHIBIT 10.39
AMENDMENT NUMBER THREE
TO
SEPCO INDUSTRIES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By this Agreement,SEPCO INDUSTRIES, INC. Employee Stock Ownership Plan
(herein referred to as the "Plan") is amended as follows, effective as of
June 1, 1997:
Notwithstanding any other provision in the Plan to the contrary, the
Plan name shall be DXP Enterprises, Inc. Employee Stock Ownership Plan and the
name of the Plan Sponsor shall be DXP Enterprises, Inc.
DXP ENTERPRISES, INC. SEPCO INDUSTRIES, INC.
By: /s/ GARY A. ALLCORN By: /s/ GARY A. ALLCORN
--------------------------------- ------------------------------------
Gary A. Allcorn, Secretary Gary A. Allcorn, Secretary
BAYOU PUMPS, INC. DXP ACQUISITION, INC.
By: /s/ GARY A. ALLCORN By: /s/ GARY A. ALLCORN
--------------------------------- ------------------------------------
Gary A. Allcorn, Secretary Gary A. Allcorn, Secretary
PELICAN STATE SUPPLY CO., INC.
By: /s/ GARY A. ALLCORN
---------------------------------
Gary A. Allcorn, Secretary
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<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
1995 1996 1997
Basic:
Average shares outstanding 7,674,189 7,993,947 8,162,510
Net income $2,065,000 $ 771,000 $2,665,000
Per share amount $0.27 $0.10 $0.33
Dilutive:
Average shares outstanding 7,674,169 7,993,947 8,162,510
Net effect of dilutive stock
options --
based on the treasure stock method
using period-end market price, if
higher than average market price 496,080 627,115 2,276,642
Adjustment to give effect to shares
optioned to key employees within
12 months of the beginning of each
period presented based on treasury
stock method using estimated
market price upon offering 467,760
Assumed conversion of Class A convertible
Preferred Stock 364,000 1,092,000 965,707
Total 9,002,029 9,713,062 11,404,859
Net income $2,088,000 $890,000 $2,768,000
Per share amount $0.23 $0.09 $0.24
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
SEPCO Industries, Inc., a Texas corporation
American MRO, Inc., a Texas corporation and wholly owned subsidiary of
SEPCO Industries, Inc.
Bayou Pumps, Inc., a Texas corporation and wholly owned subsidiary of
SEPCO Industries, Inc.
Pelican States Supply Company, Inc., a Nevada corporation
DXP Acquisition, Inc., a Nevada corporation (doing business as Strategic
Supply, Inc.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED INCOME STATEMENTS OF DXP ENTERPRISES, INC. AS OF DECEMBER
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 736
<SECURITIES> 0
<RECEIVABLES> 26,183
<ALLOWANCES> 476
<INVENTORY> 26,018
<CURRENT-ASSETS> 54,179
<PP&E> 19,528
<DEPRECIATION> 9,125
<TOTAL-ASSETS> 67,636
<CURRENT-LIABILITIES> 17,917
<BONDS> 33,395
112
20
<COMMON> 80
<OTHER-SE> 12,931
<TOTAL-LIABILITY-AND-EQUITY> 67,636
<SALES> 169,667
<TOTAL-REVENUES> 169,667
<CGS> 124,787
<TOTAL-COSTS> 124,787
<OTHER-EXPENSES> 37,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,654
<INCOME-PRETAX> 4,670
<INCOME-TAX> 1,902
<INCOME-CONTINUING> 2,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,768
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.24
</TABLE>
