<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 1999
REGISTRATION NUMBER 333-53387
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 5084 76-0509661
(State or other jurisdiction (Primary Standard (I.R.S. Employer Identification No.)
of Industrial
incorporation or organization) Classification Code Number)
</TABLE>
7272 PINEMONT
HOUSTON, TEXAS 77040
713/996-4700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DAVID R. LITTLE
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
DXP ENTERPRISES, INC.
7272 PINEMONT
HOUSTON, TEXAS 77040
713/996-4700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
LAURA J. MCMAHON RANDOLPH H. FIELDS
FULBRIGHT & JAWORSKI L.L.P. GREENBERG TRAURIG, P.A.
1301 MCKINNEY, SUITE 5100 111 NORTH ORANGE AVE., 20TH FLOOR
HOUSTON, TEXAS 77010-3095 ORLANDO, FLORIDA 32801
713/651-5658 407/420-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 8, 1999
1,700,000 UNITS
[DXP ENTERPRISES, INC. LOGO]
(EACH UNIT CONSISTING OF ONE SHARE OF COMMON
STOCK AND ONE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK)
DXP Enterprises, Inc. ("DXP" or the "Company") is offering 1,700,000 Units
(the "Units"), each of which consists of one share of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") and one Warrant entitling
the holder thereof to purchase one share of Common Stock at a purchase price of
$11.00 (the "Warrants"). Each share of Common Stock and Warrant constituting a
Unit will be immediately separately tradeable. The Warrants are subject to
redemption at any time at $.25 per Warrant on not less than 30 days written
notice, provided the last sale price per share of Common Stock, for 30
consecutive trading days ending on the third day prior to the date on which the
Company gives notice of redemption, is at least $15.00, subject to adjustment
for certain events. See "Description of Capital Stock".
Prior to the Offering, there has been no public market for the Warrants. It
is currently anticipated that the initial public offering price per Unit will be
between $9.25 and $11.25. See "Underwriting" for factors to be considered in
determining the initial public offering price of the Units. The Warrants have
been approved for listing on The Nasdaq National Market under the symbol
"DXPEW". The Common Stock is listed on The Nasdaq National Market under the
symbol "DXPE". On February 5, 1999, the last sales price of the Common Stock was
$9 1/2. See "Price Range of Common Stock and Dividend Policy".
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE UNITS OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit........................................ $ $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
Total(4)........................................ $ $ $
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and certain shareholders of the Company (the "Selling
Shareholders") have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(2) See "Underwriting" for a description of additional compensation payable by
the Company to the Underwriters, or their representatives, consisting of (i)
a non-accountable expense allowance equal to 2% of the gross proceeds of the
Offering, or $314,500 ($361,675 if the underwriters' over-allotment option
is exercised in full), of which $25,000 has been paid, (ii) a warrant to
purchase 170,000 Units at $15.2625 per Unit, exercisable during the four
years commencing on the first anniversary of the date of this Prospectus
(the "Underwriters Warrants"), (iii) a 25-month consulting agreement at
$4,000 per month and (iv) a commission payable on exercise of the Warrants
equal to 5% of the per share exercise price, or $.55.
(3) Before deducting expenses payable by the Company, estimated at $963,550,
including the Underwriters' non-accountable expense allowance.
(4) The Company and the Selling Shareholders have granted the several
Underwriters an option for 45 days from the date hereof to purchase up to an
additional 255,000 Units (comprising 255,000 shares of Common Stock owned by
the Selling Shareholders and 255,000 Warrants offered by the Company) solely
to cover over-allotments, if any. If the option is exercised in full, the
total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $ and
$ , respectively. See "Underwriting".
The Units are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Units will be made on or about , 1999 at the offices of
J.P. Turner & Company, L.L.C., 3340 Peachtree Road, Suite 450, Atlanta, Georgia
30326.
---------------------
J.P. TURNER & COMPANY, L.L.C.
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
, 1999
<PAGE> 3
[COMPANY LOGO]
[PHOTOGRAPHS OF SAMPLE COMPANY PRODUCTS]
Fluid Handling Equipment
Bearings & Power Transmission Equipment
Electrical Supplies
General Mill & Safety Supplies
Pipes, Valves & Fittings
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING".
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING".
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise noted, the information
contained in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and has been restated to give effect to a two-to-one
reverse stock split of the Common Stock that was effected May 12, 1997 and
another two-to-one reverse stock split that was effected July 17, 1998.
Prospective investors should consider carefully the information set forth under
the heading "Risk Factors". Unless the context otherwise requires, references in
this Prospectus to the "Company" or "DXP" shall mean DXP Enterprises, Inc.,
together with its subsidiaries.
THE COMPANY
The Company is a leading provider of maintenance, repair and operating
("MRO") products, equipment and integrated services, including engineering
expertise and logistics capabilities, to industrial customers. The Company
provides a wide range of MRO products in the following categories: fluid
handling equipment, bearings and power transmission equipment, general mill and
safety supplies and electrical products. 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 services and 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 integrated services such as system
design, fabrication, installation, repair and maintenance for its customers. The
Company offers a 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
integrated solution is tailored to satisfy the customer's unique needs.
Since current management acquired control of the Company in 1986, the
Company has grown substantially through 14 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
four of the five major product categories. The Company also intends to expand
its product offerings in the fifth product category, pipe, valve and fittings.
The Company currently has 54 distribution centers strategically located in
45 cities in 16 states throughout the Southern and Rocky Mountain regions of the
United States. The Company serves as a first-tier distributor of more than
170,000 stock keeping units ("SKUs") by more than 2,000 original equipment
manufacturers. The Company has a diverse customer base of over 25,000 customers
in various industries throughout the United States served by the sales efforts
of approximately 300 of the Company's 708 employees. The Company also maintains
state-of-the-art management information systems that allow for electronic
communication of orders, processing and distribution.
INDUSTRIAL DISTRIBUTION MARKET
The Company estimates that annual sales in the United States for MRO
products for industrial customers are in excess of $200 billion, of which the
Company estimates over $150 billion are in the five major product categories of
(i) fluid handling equipment, (ii) bearings and power transmission equipment,
(iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v)
electrical products. While growth in the industrial distribution market is
generally related to the expansion of the United States economy, revenues
attributable to the outsourcing of MRO procurement, inventory control and
warehouse management, known as "integrated supply", are expected to grow at an
annualized rate of 40% 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 16% of the total United States market
during 1997. Based on 1997 sales as reported by industry sources, the Company
was the 37th 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 acquisition of Tri-Electric Supply, Ltd. ("Tri-
3
<PAGE> 5
Electric") in February 1998 and the acquisitions of Lucky Electric & Supply,
Inc. ("Lucky") and M.W. Smith Equipment, Inc. ("Smith") in May 1998, the Company
would have been the 30th largest distributor of MRO products in the United
States.
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 Integrated 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.
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 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 and improve operating margin.
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 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 provides as a first-tier distributor a substantial portion
of products in four of the five major MRO product categories, 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 and services 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, electrical
products and fluid
4
<PAGE> 6
handling equipment. 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 as many
product categories as the Company offers. 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.
Integrated Services. The Company's distribution strategy is focused on
building and maintaining long-term relationships by understanding the customers'
operations and providing integrated 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
services 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 also seeks higher volume purchasing
in order to reduce product costs and may continue to consolidate facilities or
branches to optimize efficiencies.
RECENT ACQUISITIONS
The Company completed two strategic acquisitions in 1997, and three
additional acquisitions in the first six months of 1998. These acquisitions were
directed at expanding the Company's product lines and increasing its geographic
presence. Based on information provided to the Company, the five acquired
businesses generated combined revenues of approximately $87.3 million in 1997
(of which $31.7 million appeared in the Company's 1997 consolidated financial
statements). Through the Company's acquisition of SSI, the Company added general
mill and safety supplies to its product offerings and expanded its geographic
presence to include more than 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 acquisition of Pelican expanded
the Company's general mill and safety supplies product lines and added an
additional integrated supply contract with a major refinery in Baton Rouge,
Louisiana. The Company's acquisitions of Tri-Electric and Lucky added electrical
products to its product offerings. The acquisition of Smith expanded the
Company's pump distribution facilities in East Texas.
CORPORATE INFORMATION
The Company is a Texas corporation that was formed in 1996 to effect a
consolidation of SEPCO Industries, Inc. ("SEPCO") and Newman Communications
Corporation (the "Reorganization") pursuant to which DXP became a public
company. The Company's principal executive offices are located at 7272 Pinemont,
Houston, Texas 77040 and its telephone number is 713/996-4700.
5
<PAGE> 7
THE OFFERING
Units offered................... 1,700,000, each consisting of one share of
Common Stock and one Warrant to purchase one
share of Common Stock. See "Description of
Capital Stock".
Common Stock to be outstanding
after the Offering............ 5,864,773 shares(1)
Warrants to be outstanding after
the Offering.................. 1,700,000(2)
Offering Price.................. Between $9.25 and $11.25 per Unit.
Terms of Warrants:
Exercise Price.............. The exercise price is $11.00 per share,
subject to adjustment in certain
circumstances.
Exercise Period............. The Warrants are exerciseable for a period of
three years commencing on January , 1999
and expiring on January , 2002.
Redemption.................. The Warrants are redeemable by the Company at
any time at a redemption price of $.25 per
Warrant on not less than 30 days written
notice, provided that the last sale price per
share of Common Stock, for 30 consecutive
trading days ending on the third business day
prior to the date of redemption notice, is at
least $15.00, subject to adjustment for
certain events. See "Description of Capital
Stock -- Warrants".
Use of proceeds................. All of the proceeds to the Company will be
used to repay an aggregate of approximately
$13.4 million of indebtedness, $11.2 million
of which was incurred in connection with five
acquisitions and $2.2 million of which was
incurred in connection with the acquisition
of real property and other capital
expenditures. See "Use of Proceeds".
Nasdaq National Market symbol
for Common Stock.............. DXPE
Proposed Nasdaq National Market
symbol for Warrants........... DXPEW
- ---------------
(1) Based upon number of shares outstanding as of December 1, 1998. Includes
1,700,000 shares of Common Stock being sold as part of the Units, 9,000
shares issuable to prior holders of Newman Communications Corporation common
stock and 16,800 shares issuable to prior holders of SEPCO common stock in
connection with the Reorganization but which have not been issued. Excludes
1,700,000 shares of Common Stock issuable upon exercise of the Warrants,
340,000 shares of Common Stock issuable upon exercise of the Underwriters
Warrant (and the Warrants issuable upon exercise thereof), 1,598,000 shares
of Common Stock issuable upon exercise of outstanding options at December 1,
1998 and 27,500 additional shares reserved for issuance pursuant to the
Company's Long-Term Incentive Plan, as amended (the "LTIP"). See
"Management -- Benefit Plans".
(2) Excludes 170,000 Warrants issuable upon exercise of the Underwriters
Warrants.
An investment in the Units offered hereby, and the Common Stock and
Warrants included in the Units, involves a high degree of risk. See "Risk
Factors" and "Dilution" for a discussion of certain factors that should be
considered in connection with an investment in the Units offered hereby.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
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 summary historical consolidated financial data of
SEPCO set forth below for the year ended December 31, 1995 has been derived from
the audited consolidated financial statements of SEPCO. The summary 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 the
Reorganization had been effected on the first day of the period presented. The
summary historical consolidated financial data set forth below for the nine
months ended September 30, 1997 and 1998 have been derived from the unaudited
consolidated financial statements of the Company. The summary pro forma
consolidated financial information set forth below assumes that the acquisition
of SSI was completed on the first day of the periods presented, and such
information has been derived from the pro forma financial statements appearing
elsewhere in this Prospectus. The pro forma information does not reflect the
acquisitions of Pelican, Tri-Electric, Lucky and Smith. 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 Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------ NINE MONTHS ENDED
SEPCO DXP DXP SEPTEMBER 30,
-------- -------- -------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------------------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
PRO
CONSOLIDATED STATEMENTS OF EARNINGS DATA: ACTUAL FORMA
-------- --------
Revenues................................ $111,328 $125,208 $169,667 $190,754 $118,277 $153,886
Gross profit(1)......................... 29,157 32,117 44,880 49,797 31,571 40,381
Operating income(1)..................... 4,598 2,785 6,434 5,789 3,929 6,623
Income before provision for income
taxes................................. 3,512 1,635 4,670 3,869 2,950 4,583
Net income.............................. 2,088 890 2,768 2,182 1,880 2,750
Preferred stock dividend................ (23) (119) (103) (103) (109) (69)
Net income attributable to common
shareholders.......................... 2,065 771 2,665 2,079 1,771 2,681
Basic earnings per common share......... $ 0.54 $ 0.19 $ 0.65 $ 0.51 $ 0.44 $ 0.64
Common shares outstanding............... 3,837 3,997 4,082 4,082 4,044 4,168
Dilutive earnings per share............. $ 0.46 $ 0.18 $ 0.49 $ 0.38 $ 0.34 $ 0.49
Common and common equivalent shares
outstanding(2)(3)..................... 4,501 4,857 5,703 5,703 5,596 5,630
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
----------------------
PRO FORMA
AS
ACTUAL ADJUSTED(4)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $39,909 $39,909
Total assets................................................ 83,619 83,619
Long-term debt obligations.................................. 44,327 30,932
Shareholders' equity........................................ 15,527 28,922
</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 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.
(2) 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.
(3) Common stock and earnings per share have been restated to give effect to the
two-to-one reverse split of the Common Stock that became effective May 12,
1997 and another two-to-one reverse stock split that became effective July
17, 1998.
(4) Adjusted to give effect to the sale of the 1,700,000 Units offered by the
Company hereby, at an assumed price to the public of $9.25 per Unit, and the
application of the net proceeds thereof.
7
<PAGE> 9
RISK FACTORS
An investment in the Units offered hereby involves a high degree of risk.
The following factors should be considered carefully, together with the
information provided elsewhere in this Prospectus, in evaluating an investment
in the Units offered hereby. Special Note: Certain statements set forth below
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
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, expenses associated with obsolete inventory of an
acquired company 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 loan agreements
with its bank lender (the "Credit Facility"), 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
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 Credit Facility, all available cash generally is
applied to reduce outstanding borrowings. As of September 30, 1998, the Company
had approximately $4.7 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 INTERNAL 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, Tri-Electric in the first quarter of 1998 and Lucky and Smith
in the second quarter of 1998 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
8
<PAGE> 10
SSI, Pelican, Tri-Electric Lucky and Smith 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.
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 affect 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. Although the Company believes that
it could obtain alternate distribution rights in the event of such a
cancellation, the termination or limitation by any key supplier of its
relationship with the Company could result in a temporary disruption on the
Company's business and, in turn could adversely affect results of operations and
financial condition. See "Business--Suppliers".
CONTROL BY MANAGEMENT
Following the Offering, directors and officers of the Company will own
beneficially an aggregate of approximately 57.5% of the outstanding Common Stock
(52.4% if the Underwriters' overallotment option is exercised in full).
Accordingly, these persons, if they were to act in concert, would have
substantial influence over the affairs of the Company, including the ability to
control the election of directors and other matters requiring shareholder
approval. See "Security Ownership of Management, Principal Shareholders and
Selling Shareholders".
SHARES AVAILABLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE
Sales of substantial amounts of Common Stock in the public market following
completion of the Offering could have an adverse effect on the market price of
the Common Stock. Of the 5,864,773 shares of Common
9
<PAGE> 11
Stock to be outstanding after the Offering, the Company estimates that 3,200,102
shares will be freely tradable without restriction. In addition, the 1,700,000
shares of Common Stock issuable upon exercise of the Warrants will be freely
tradable following the exercise thereof. In connection with the Offering,
officers and directors and certain shareholders of the Company including the
Selling Shareholders, who will hold an aggregate of 2,664,671 shares (2,494,671
if the over-allotment option is exercised in full) of Common Stock and 1,247,500
shares (1,162,500 if the over-allotment option is exercised in full) of Common
Stock issuable upon the exercise of options and 420,000 shares of Common Stock
issuable upon conversion of 15,000 shares of the Company's Series B Convertible
Preferred Stock following the Offering, have entered into lock-up agreements
pursuant to which they have agreed not to sell or otherwise dispose of their
shares of Common Stock, subject to certain exceptions, for a period of two years
after the date of this Prospectus without the prior written consent of J.P.
Turner & Company, L.L.C. on behalf of the Underwriters.
IMMEDIATE AND SUBSTANTIAL DILUTION
Because the offering price will be substantially higher than the book value
per share of the Common Stock, purchasers of Units in the Offering will incur
immediate and substantial dilution of $6.38 per Unit, or 68.9% of the public
offering price. In addition, investors purchasing Units in the Offering will
incur additional dilution to the extent that outstanding stock options are
exercised. See "Dilution".
LIMITATION ON ABILITY TO PAY DIVIDENDS
The Company anticipates that future earnings will be retained to finance
the continuing development of its business. In addition, the Credit Facility
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. See "Price Range of Common Stock and
Dividend Policy".
POTENTIAL ANTI-TAKEOVER EFFECTS
The Company's Restated Articles of Incorporation, as amended, allow the
Board of Directors of the Company to issue shares of preferred stock without
shareholder approval on such terms as the Board of Directors may determine. The
rights of all the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The Company's Restated Articles of Incorporation, as
amended, also do not allow cumulative voting in the election of directors. In
addition, Part Thirteen of the Texas Business Corporation Act imposes a special
voting requirement for the approval of certain business combinations and related
party transactions between public corporations such as the Company and
shareholders who beneficially own 20% or more of the corporation's voting stock
unless the transaction or the acquisition of shares by the affiliated
shareholder is approved by the board of directors of the corporation prior to
the shareholder acquiring such 20% ownership. All of the foregoing could have
the effect of delaying, deferring or preventing a change in control of the
Company and could limit the price that certain investors might be willing to pay
in the future for shares of the Common Stock. See "Description of Capital
Stock".
NO PRIOR PUBLIC MARKET FOR WARRANTS; LIMITED PUBLIC MARKET FOR COMMON STOCK;
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Warrants.
Although the Company intends to apply for listing of the Warrants on the Nasdaq
National Market, there can be no assurance that an active trading market will
develop or continue upon completion of the Offering. The initial public offering
price of the Units will be determined by negotiations between the Company and
representatives of the underwriters and may not be indicative of the market
price of the Units (or the Common Stock and Warrants contained in the Units)
after the Offering.
Although the Common Stock is listed on The Nasdaq National Market, trading
to date has been limited. In addition, factors such as market expansion, the
development of additional services, the Company's competitors, as well as
quarterly variations in the Company's anticipated or actual results of
operations or
10
<PAGE> 12
market conditions generally, may cause the market price of the Common Stock and
the Warrants to fluctuate significantly. Further, the stock market has on
occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
YEAR 2000 ISSUES
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000. The Company relies on its
computer systems and software for financial reporting, customer account
information and inventory management and replenishment. The Company is in the
process of assessing its state of readiness for the Year 2000 and expects its
software to be Year 2000 compliant upon completion of the upgrading of its
software. Additionally, the Company is in the process of communicating with
customers, major vendors and other third parties with whom it has material
relationships to determine if they will be ready for the Year 2000. To the
extent unexpected problems associated with the Year 2000 arise during the
implementation phase of the Company's Year 2000 program or the Company's
customers, vendors and other third parties are not compliant by the Year 2000,
it could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure".
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's financial condition and results of
operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements regarding the Company's
financial position, business strategy, products and services, markets, budgets
and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to the Company, or
persons acting on its behalf, are expressly qualified in their entirety by the
Cautionary Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,700,000 Units
offered by the Company hereby are estimated to be approximately $13.4 million
($13.7 million, if the Underwriters' over-allotment option is exercised in
full), based on an assumed public offering price of $9.25 per Unit and after
deducting the estimated underwriting discount and offering expenses payable by
the Company. In the event the Underwriters exercise the over-allotment option,
the Company will receive only the portion of the proceeds related to the
Warrants ($1.25 per Warrant, based on an assumed public offering price of $9.25
per Unit) from the sale of Units by the Selling Shareholders. The portion of the
proceeds related to the shares of Common Stock
11
<PAGE> 13
($8.00 per share, based on an assumed public offering price of $9.25 per Unit)
from the sale of the Units by the Selling Shareholders will be for the account
of the Selling Shareholders.
The Company anticipates that it will use the net proceeds of the Offering
to repay an aggregate of approximately $13.4 million of indebtedness under the
Credit Facility. The indebtedness under the Credit Facility includes
approximately (i) $5.3 million incurred in May 1997 in connection with the
acquisitions of SSI and Pelican, (ii) $6.2 million incurred in February 1998 in
connection with the acquisition of Tri-Electric, (iii) $5.3 million incurred in
June 1998 in connection with the cash component of the acquisitions of Lucky and
Smith and (iv) $2.2 million incurred in connection with capital expenditures and
the purchase of real property to be used as the Company's corporate
headquarters. Amounts borrowed under the Credit Facility bear interest at an
annual rate ranging from LIBOR plus 1.50% to LIBOR plus 3.0% (approximately
7.64% at September 30, 1998). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
In addition to the net proceeds to be received by the Company in the
Offering and in the event the Underwriters' over-allotment is exercised in full,
Mr. Little, a Selling Shareholder, intends to apply a portion of the net
proceeds from his sale of shares of Common Stock hereunder to repay
approximately $299,000 owed to the Company. See "Security Ownership of
Management, Principal Shareholders and Selling Shareholders" and "Certain
Transactions".
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has traded on The Nasdaq National Market since July 2,
1997, under the symbol "DXPE". From December 27, 1996, through July 1, 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)(1)(2)........ $15 $14
1997
First Quarter(1)(2)....................................... 16 9
Second Quarter(1)(2)...................................... 13 1/2 10 1/2
Third Quarter(2).......................................... 14 12
Fourth Quarter(2)......................................... 12 1/2 10
1998
First Quarter(2).......................................... 12 10
Second Quarter(2)......................................... 10 1/2 8
Third Quarter(2).......................................... 11 7
Fourth Quarter............................................ 8 3/4 6 7/8
1999
First Quarter (through January , 1999).................. 8 1/2 7 7/16
</TABLE>
- ---------------
(1) Restated to give effect to a two-to-one reverse stock split of the Common
Stock that was effected May 12, 1997.
(2) Restated to give effect to a two-to-one reverse stock split of the Common
Stock that was effected July 17, 1998.
On February 4, 1999, the closing sales price of the Common Stock was $9 1/2
per share. On December 1, there were 152 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 Credit Facility
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.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998, and, as adjusted, to reflect the issuance of the 1,700,000
Units offered by the Company hereby and the application of the proceeds
therefrom (assuming an offering price of $9.25 per Unit). This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto appearing elsewhere in this Prospectus. See also "Use of Proceeds".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 3,115 $ 3,115
======= =======
Long-term debt, less current portion........................ $44,327 $30,902
------- -------
Equity subject to redemption................................ 2,075 2,075
Shareholders' equity:
Series A preferred stock.................................... 2 2
Series B convertible preferred stock........................ 18 18
Common Stock, $.01 par value(1)(2).......................... 40 57
Paid-in capital........................................... 908 12,191
Warrants.................................................... -- 2,125
Retained earnings........................................... 15,340 15,340
------- -------
16,308 29,733
Less Treasury stock, 374 shares Series A preferred, 2,700
shares Series B preferred, and 30,436 shares common
stock..................................................... (781) (781)
------- -------
Total shareholders' equity........................... 15,527 28,952
------- -------
Total capitalization.............................. $65,044 $65,044
======= =======
</TABLE>
- ---------------
(1) Assumes no exercise of the Warrants or the Underwriters Warrants.
(2) Excludes 1,443,000 shares of Common Stock issuable upon exercise of
outstanding options and warrants and an additional 42,500 shares reserved
for issuance pursuant to the LTIP as of September 30, 1998. See
"Management -- Benefit Plans".
13
<PAGE> 15
DILUTION
At September 30, 1998, the net tangible book value of the Company
attributable to common shareholders was $4.6 million, or $1.01 per share. The
number of shares used for the per share calculation includes the 4,164,773
shares outstanding prior to the Offering and the common stock equivalent of
15,000 shares of Series B Convertible Preferred Stock convertible into 420,000
shares of common stock. After giving effect to the sale by the Company of
1,700,000 Units offered hereby and the receipt by the Company of an estimated
$13.4 million of net proceeds from the Offering (based on an assumed offering
price of $9.25 per Unit, $8.00 of which is attributable to the Common Stock and
$1.25 of which is attributable to the Warrant included in the Unit, and net of
underwriting discounts and estimated expenses of the Offering), pro forma net
tangible book value of the Company at September 30, 1998 would have been $2.87
per share. This represents an immediate increase in pro forma net tangible book
value of $1.86 per share to the existing shareholders and an immediate dilution
of $6.38 per Unit to the new investors purchasing Units in the Offering. The
following table sets forth the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price(1).................................... $9.25
Book value prior to the Offering.......................... $1.01
Increase attributable to new investors.................... 1.86
-----
Pro Forma net tangible book value after the Offering........ 2.87
-----
Dilution in net tangible book value to new investors........ $6.38
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1998, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and new investors purchasing Units in the Offering (before
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 4,584,773 72.9% $ 4,626,000 22.7% $ 1.01
New investors(1)................ 1,700,000 27.1 15,725,000 77.3% $ 9.25
--------- ----- ----------- -----
Total................. 6,284,773 100.0% $20,351,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of outstanding stock options
granted previously under the Company's LTIP, any non-qualified options
previously granted, Warrants and Underwriters Warrants.
- ---------------
(1) Includes the portion of the purchase price of the Units attributable to the
Warrants ($1.25 per Warrant), but excludes shares of Common Stock issuable
upon exercise of the Warrants and the Underwriters Warrants.
14
<PAGE> 16
SELECTED FINANCIAL DATA
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 the Reorganization had been effected on the first day
of the period presented. The historical consolidated selected financial data set
forth below for the nine months ended September 30, 1997 and 1998 have been
derived from the unaudited consolidated financial statements of the Company.
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 Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------- NINE MONTHS ENDED
SEPCO DXP SEPTEMBER 30,
----------------------------- ------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS DATA:
Revenues...................... $99,353 $102,592 $111,328 $125,208 $169,667 $118,277 $153,886
Gross profit(1)............... 26,792 27,217 29,157 32,117 44,880 31,571 40,381
Operating income(1)........... 3,288 4,150 4,598 2,785 6,434 3,929 6,623
Income before provision for
income taxes, minority
interest and change in
accounting principle........ 2,346 3,038 3,512 1,635 4,670 2,950 4,583
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 1,880 2,750
Preferred stock dividend...... -- -- (23) (119) (103) (109) (69)
Net income attributable to
common shareholders......... 1,843 1,862 2,065 771 2,665 1,771 2,681
Basic earnings per common
share....................... $ 0.38 $ 0.38 $ 0.54 $ 0.19 $ 0.65 $ 0.44 $ 0.64
Common shares
outstanding(5).............. 4,878 4,878 3,837 3,997 4,082 4,044 4,168
Dilutive earnings per share... $ 0.35 $ 0.35 $ 0.46 $ 0.18 $ 0.49 $ 0.34 $ 0.49
Common and common equivalent
shares outstanding(4)(5).... 5,225 5,370 4,501 4,857 5,703 5,596 5,630
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SEPCO DXP SEPTEMBER 30,
----------------------------- ------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $18,402 $ 20,011 $ 23,967 $ 25,612 $ 36,262 $36,262 $39,909
Total assets.................... 38,686 38,163 43,254 45,042 67,636 67,636 83,619
Long-term debt obligations...... 20,766 18,461 21,275 22,300 33,395 33,395 44,327
Shareholders' equity(4)......... 6,453 8,315 9,688 10,459 13,031 13,031 15,527
</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
15
<PAGE> 17
product groups that were subject to shelf-life restrictions. This is a
one-time charge not expected to occur in future years.
(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 that became effective May 12,
1997 and another two-to-one reverse stock split that became effective July
17, 1998.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading provider of MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. The Company provides a wide range of MRO products in the
fluid handling equipment, bearings and power transmission equipment, general
mill and safety supplies and electrical product 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. The
Company offers its customers a single source of integrated services and 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
integrated services such as system design, fabrication, installation, repair and
maintenance for its customers. The Company offers a 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 integrated solution is tailored to satisfy the
customer's unique needs.
The Company's products and services are marketed in 16 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 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, and there can be no
assurance that any such financing 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
17
<PAGE> 19
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 implement the original registration of the Common Stock
under the Exchange Act and increase 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.
RESULTS OF OPERATIONS
The Company currently distributes a substantial number of products in four
of the five major product categories within the industrial distribution market
and also provides products in the fifth category, pipe, valve and fittings.
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 and
the fifth category, electrical products, was added in February 1998 with the
acquisition of Tri-Electric.
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, NINE MONTHS
-------------------------------- ENDED
SEPCO DXP SEPTEMBER 30,
-------------------- -------- -------------
1995 1996 1997 1998
-------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Fluid handling equipment.................... $ 61,630 $ 65,709 $ 75,472 $ 57,934
Bearings and power transmission equipment... 39,500 49,144 53,180 40,651
General mill and safety supplies(1)......... -- -- 31,660 38,120
Pipe, valve and fittings.................... 10,198 10,355 9,355 7,104
Electrical products(2)...................... -- -- -- 10,078
-------- -------- -------- --------
Total revenues.................... $111,328 $125,208 $169,667 $153,886
Percent of Revenues:
Cost of sales............................... 73.8% 74.3% 73.5% 73.8%
Gross profit................................ 26.2 25.7 26.5 26.2
Selling, general and administrative
expense................................... 22.1 23.5 22.7 21.9
Operating income............................ 4.1 2.2 3.8 4.3
Other income................................ .8 .8 .5 .5
Interest expense, net....................... 1.8 1.7 1.6 1.8
Income before taxes......................... 3.2 1.3 2.7 3.0
Income tax expense.......................... 1.3 .6 1.1 1.2
Net income.................................. 1.9% 0.7% 1.6% 1.8%
======== ======== ======== ========
</TABLE>
- ---------------
(1) Product category added in connection with the acquisitions of SSI and
Pelican in the second quarter of 1997.
(2) Product category added in connection with the acquisitions of Tri-Electric
and Lucky in the first six months of 1998.
18
<PAGE> 20
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues for the nine months ended September 30, 1998 increased 30.1% to
$153.9 million from the nine months ended September 30, 1997. The Company's
acquisitions, which included general mill and safety supply and electrical
supply companies, during the period accounted for $32.8 million of the $35.6
million increase in revenues. Sales of bearings and power transmission equipment
for the nine months ended September 30, 1998 increased 3.5%, or $1.4 million
over the comparable period in 1997, accounting for 1.2% of the revenue increase.
Sales of valve and valve automation equipment increased 15.2%, or $.9 million
over the comparable period in 1997, accounting for .8% of the revenue increase.
During the nine months ended September 30, 1998, sales of fluid handling
equipment remained consistent over the comparable period in 1997. A comparison
of general mill and safety supplies and electrical supplies is not presented due
to the fact that the product categories did not exist during the entire
comparative prior period.
Gross margins remained relatively consistent in the first nine months of
1998 as compared to 1997. The Company currently expects some increase in
manufacturers prices to continue due to increased raw material costs and market
conditions. Although the Company intends to attempt to pass on these price
increases to its customers to maintain current gross margins, there can be no
assurances that the Company will be successful in this regard.
Selling, general and administrative expenses decreased as a percentage of
revenues by 1.4% for the first nine months of 1998 as compared to the first nine
months of 1997, due primarily to an effort to maintain or reduce operating
expenses where possible.
Operating income for the nine month period ended September 30, 1998
increased 68.6% from the corresponding period in 1997, from $3.9 million to $6.6
million, due to the various factors discussed above.
Interest expense during the first nine months of 1998 increased by $.78
million to $2.7 million as compared to the first nine months of 1997. The
increase was primarily due to greater interest expense resulting from the
financing of two acquisitions during the second quarter of 1997, a third during
the first quarter of 1998, two acquisitions during the second quarter of 1998
and the purchase of real property to be used as the Company's corporate
headquarters. Average interest rates were slightly lower during the nine months
ended September 30, 1998 as compared to the same period in 1997.
The Company's provision for income taxes for the nine months ended
September 30, 1998 increased by $.76 million compared to the same period of
1997, as a result of the increase in profits.
Net income for the nine month period ended September 30, 1998, increased
$.87 million from the nine month period ended September 30, 1997 due to the
increase in revenue volume and the decrease in selling, general and
administrative expenses as a percentage of revenue.
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
19
<PAGE> 21
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.
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
20
<PAGE> 22
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.
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
General
Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, 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 the Credit Facility for working capital. The Company had
$4.7 million available for borrowings under the working capital component of the
Credit Facility at September 30, 1998. Working capital at September 30, 1998 and
December 31, 1997 was $39.9 million and $36.3 million, respectively. During the
first nine months of 1998 and the year ended December 31, 1997, the Company
collected its trade receivables in approximately 50 and 46 days, respectively,
and turned its inventory approximately four times on an annualized basis.
In the second and again in the fourth quarter of 1998, the Company amended
the Credit Facility, which currently provides for borrowings up to an aggregate
of $50.0 million. Additionally, the amendments increased borrowings under the
term loan component of the Credit Facility from $4.9 million to $12.4 million
upon conversion of $5.0 million of the amounts outstanding under the revolving
loan component to the term loan and added an additional $2.5 million term loan
to be used for the purchase and renovation of real property to serve as the
Company's corporate headquarters. To date, $1.7 million has been advanced under
the real property term loan component. The Credit Facility, as amended, provides
for a $15.0 million acquisition term loan to be used for acquisitions provided
certain customary provisions related to combined cash flows and acquisition
pricing are met and lender approval is obtained. To date, $3.5 million has been
advanced under the acquisition term loan component. Additionally, interest rates
range from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of
the Company's debt to cash flow and financial covenants tied to debt service
levels and cash flow. At September 30, 1998, the Company had borrowings under
the Credit Facility of $20.1 million at LIBOR plus 2.00 (approximately 7.64% at
September 30, 1998). The remainder of the Company's borrowings under the Credit
Facility bear interest at prime (8.25% at September 30, 1998) for a weighted
average interest rate of 7.95%. Borrowings under the Credit Facility are secured
by receivables, inventory, and machinery and equipment and mature January 2000.
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.
The Company generated cash from operating activities of $4.9 million in the
first nine months of 1998 as compared to $2.1 million utilized during the first
nine months of 1997, due primarily to increased earnings and a decrease in the
Company's trade accounts receivable balance.
21
<PAGE> 23
The Company had capital expenditures of approximately $2.5 million in the
first nine months of 1998 as compared to $.65 million during the same period of
1997. Capital expenditures in the first nine months of 1998 were primarily
related to the purchase of real property ($1.7 million) to be used as the
corporate headquarters for the Company's management and administrative group as
well as other office, computer and communication equipment. Capital expenditures
for the first nine months of 1997 were predominantly for the expansion of a
facility in LaPorte, Texas ($.14 million) and computers and related equipment
($.13 million).
During the first nine months of 1998, in three separate transactions, the
Company completed the acquisition of substantially all of the assets of three
unaffiliated businesses for an aggregate consideration consisting of
approximately $11.9 million in cash, $2.3 million of assumed trade payables and
other accrued expenses, $.7 million in a promissory note and up to approximately
$.28 million in a deferred payment (based on the earnings before interest, taxes
and depreciation of one of the acquired businesses). The cash portion of the
consideration was financed through the acquisition term loan under the Credit
Facility. An aggregate of $7.2 million of goodwill was recorded in connection
with these acquisitions, which may be adjusted based on any adjustments to the
purchase prices. The Company believes that any such adjustments would be
minimal.
The Company believes that cash generated from operations and available
under its Credit Facility, together with the proceeds of the Offering, will meet
its future ongoing operational and liquidity needs and capital requirements.
Funding of the Company's acquisition program and integrated supply strategy will
require capital in the form of the issuance of additional equity or debt
financing. There can be no assurance that future funding will be available to
the Company or, if available, as to the terms and conditions thereof.
Year 2000 Readiness Disclosure
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. The Year 2000 issue is the
risk that systems, products and equipment utilizing date-sensitive software or
computer chips with two-digit date fields will fail to properly recognize the
Year 2000. Such failures by the Company's software or hardware or that of
government entities, customers, major vendors and other third parties with whom
the Company has material relationships could result in interruptions of the
Company's business which could have a material adverse effect on the Company.
In response to the Year 2000 issue, the Company has implemented a
company-wide Year 2000 program designed to identify, assess and address
significant Year 2000 issues in the Company's key business operations, including
products and services, business applications, information technology systems and
facilities and to identify the Company's customers, major vendors and other
third parties with whom the Company has material relationships that may have
Year 2000 issues.
The Company's Year 2000 program is a comprehensive, integrated, multi-phase
process covering information technology systems and hardware as well as
equipment and products with embedded computer chips technology. The primary
phases of the program are (1) inventorying existing equipment and systems; (2)
analyzing equipment and systems to identify those which are not Year 2000 ready
and to prioritize critical items; (3) communicating with customers, major
vendors and other third parties with whom the Company has material relationships
regarding their Year 2000 readiness; (4) remediating, repairing or replacing
equipment and systems that are not Year 2000 ready; and (5) testing to verify
that Year 2000 readiness has been achieved for the Company's equipment and
systems.
Phases (1) and (2) of the Company's Year 2000 program have been completed.
The Company is in the process of developing a questionnaire to implement phase
(3) of its Year 2000 program. The Company will continue communicating with
customers, major vendors and other third parties with whom the Company has
material relationships to determine if they will be ready for the Year 2000 by
the end of 1999. To the extent the Company's customers, vendors and other third
parties are not compliant by the Year 2000, it could have a material adverse
effect upon the Company's results of operations and financial condition. With
respect to phase (4), the Company currently expects that its software will be
Year 2000 compliant by the end of the first quarter of 1999. The upgrading of
the Company's software to address Year 2000 issues is being handled through new
releases of current software. The Company will continue to analyze systems and
services that
22
<PAGE> 24
utilize date embedded codes that may experience operational problems when the
Year 2000 is reached. The Company expects to begin phase (5) in the second
quarter of 1999. All costs associated with Year 2000 issues will be included as
part of normal software upgrades or operating costs, as appropriate.
The foregoing statements of this subsection are intended to be and are
hereby designated "Year 2000 Readiness Disclosure" statements within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
ACCOUNTING PRONOUNCEMENTS
During 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.
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 stated earnings per share data in this Prospectus. 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 this statement is not
expected to materially impact the Company. The Company plans to adopt this
statement for the year ending December 31, 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.
23
<PAGE> 25
BUSINESS
GENERAL
The Company is a leading provider of MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. The Company provides a wide range of MRO products in the
following categories: fluid handling equipment, bearings and power transmission
equipment, general mill and safety supplies and electrical products. 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 integrated services and 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
integrated services such as system design, fabrication, installation, repair and
maintenance for its customers. The Company offers a 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 integrated solution is tailored to satisfy the
customer's unique needs.
Since current management acquired control of the Company in 1986, the
Company has grown substantially through 14 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
four of the five major product categories. The Company also intends to expand
its product offering in the fifth product category, pipe, valve and fittings.
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) fluid handling equipment, (ii) bearings and power transmission equipment,
(iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v)
electrical products. The Company's MRO products include a wide range of products
in the fluid handling equipment, bearings and power transmission equipment,
general mill and safety supplies and electrical product 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. 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 1997 sales as reported by industry sources, the
Company was the 37th largest distributor of MRO products in the United States.
On a combined basis after giving effect to the Company's 1997 acquisitions of
SSI and Pelican and 1998 acquisitions of Tri-Electric, Lucky and Smith, 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% 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 16% of the total United States market during 1997. 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
24
<PAGE> 26
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 Integrated Service. As industrial customers focus on their core
manufacturing or other production competencies, they increasingly are demanding
customized integration services, ranging from value-added traditional
distribution to integrated supply and system design, fabrication, installation
and repair and maintenance services.
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 and operating margin.
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 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 provides as a first-tier distributor a substantial portion
of products in four of the five major MRO product categories, 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
25
<PAGE> 27
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, electrical
products and fluid handling equipment. 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
offers. 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.
Integrated Services. The Company's distribution strategy is focused on
building and maintaining long-term relationships by understanding the customers'
operations and providing integrated 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
services 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 also seeks higher volume purchasing
in order to reduce product costs and may continue to consolidate facilities or
branches to optimize efficiencies.
RECENT ACQUISITIONS
The Company completed two strategic acquisitions in 1997, and three
additional acquisitions in the first six months of 1998 with combined 1997
revenues of approximately $87.3 million (of which $31.7 million appeared in the
Company's 1997 consolidated financial statements) directed at expanding its
product lines and increasing its geographic presence. Through the Company's
acquisition 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 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. In the first six months of 1998, the
Company completed the acquisitions of the assets of Tri-Electric and Lucky,
thereby adding electrical products to its product offerings. The Company's
acquisition of the assets of Smith in May 1998 expanded its pump distribution
capabilities in East Texas.
PRODUCTS AND SERVICES
The Company currently serves as a first-tier distributor of more than
170,000 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 fluid handling equipment,
bearings and power transmission equipment, general mill and safety
26
<PAGE> 28
supplies and electrical products. 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. 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 54 distribution
centers strategically located throughout the United States and sold through the
sales efforts of approximately 300 employees who generally are compensated on a
commission basis.
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 fluid handling equipment accounted for 55%, 53%, 44% and
38% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and the nine months ended September 30, 1998, respectively. Such sales accounted
for 37% and 38% of the Company's revenues for the year ended December 31, 1997
and the nine months ended, September 30, 1998, respectively, on a pro forma
basis after giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith
acquisitions.
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%, 39%, 31% and
26% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and the nine months ended September 30, 1998, respectively. Such sales accounted
for 24% and 25% of the Company's revenues for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively, on a pro forma basis
after giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith
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 26% of the Company's revenue on a pro forma basis for the year
ended December 31, 1997 and 24% of the Company's revenue for the nine months
ended September 30, 1998.
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%,
8%, 6% and 5% of the Company's revenues for years ended December 31, 1995, 1996,
1997 and the nine months ended September 30, 1998, respectively. Such sales
accounted for 4% of the Company's revenue for the year ended December 31, 1997
and the nine months ended September 30, 1998, on a pro forma basis after giving
effect to the SSI, Pelican, Tri-Electric, Lucky and Smith acquisitions.
27
<PAGE> 29
Electrical Products
The Company offers a broad range of electrical products, such as wire
conduit, wiring devices, electrical fittings and boxes, signaling devices,
heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries,
fans and fuses. Sales of electrical products accounted for 7% of the Company's
revenues for the nine months ended September 30, 1998. Such sales accounted for
9% of the Company's revenues for the year ended December 31, 1997 and the nine
months ended September 30, 1998, on a pro forma basis after giving effect to the
SSI, Pelican, Tri-Electric, Lucky and Smith 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 leased 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 revenues for the year
ended December 31, 1997.
SALES AND MARKETING
Approximately 300 employees, serving in various capacities ranging from
branch or operations managers (46), outside sales representatives (92) and
direct sales representatives (162) support the Company's marketing and sales
efforts. The Company's branch and operations managers support the sales efforts
through direct customer contact and manage the efforts of the outside and 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. As the
Company expands its product lines and geographical presence, it assesses the
opportunities and appropriate timing of introducing existing products to new
customers and new products to existing customers. Prior to implementing such
cross-selling efforts, the Company must provide appropriate sales training and
product expertise to its sales force.
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.
28
<PAGE> 30
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.
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), (iv) Cutler-Hammer, Cooper, Killark,
and Allied and American Insulated Wiring (electrical products) and (v) G.H.
Bettis (valve and valve automation products).
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 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
29
<PAGE> 31
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 offered by the Company. 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 September 30, 1998, the Company had 708 full-time employees. The Company
believes that its relationship with its employees is good.
FACILITIES AND OPERATIONS
The Company owns or leases 54 branch distribution facilities located in
Alabama, Arizona, Arkansas, Colorado, Georgia, Idaho, Louisiana, Montana,
Nevada, New Mexico, North Dakota, Oklahoma, Tennessee, Texas, Utah and Wyoming.
These facilities range 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. 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.
LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of its business. The Company believes that the
outcome of any of these proceedings will not have a material adverse effect on
its business, financial condition or results of operations.
30
<PAGE> 32
MANAGEMENT
The following table sets forth certain information as of November 30, 1998,
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.
<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................... 46 Senior Vice President/Finance and Chief Financial
Officer
Richard A. Fortune................ 51 Senior Vice President/Information Technology
Jerry J. Jones.................... 60 Senior Vice President/Operations and Director
Dan L. Rice....................... 40 Senior Vice President/Marketing
Bryan H. Wimberly................. 59 Senior Vice President/Corporate Development
Cletus Davis...................... 68 Director
Kenneth H. Miller................. 59 Director
Thomas V. Orr..................... 48 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.
Richard A. Fortune was elected Senior Vice President/Information Technology
in October 1998. Mr. Fortune served as project manager for Wang Global Systems,
Inc., a high technology services company, from March 1993 to October 1998.
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 Energy Partners, Inc./Perry
Oceanographics, a renewable energy development company and offshore underwater
equipment manufacturer, from November 1989 to December 1992.
Dan L. Rice was elected Senior Vice President/Marketing in September 1998
after having served as the head of DXP's marketing since July 1998. From June
1996 through June 1998, Mr. Rice served as general manager of Rockwell
Automation de Mexico, S.A. de C.V., a diversified electronics manufacturing
company. Prior to that, from March 1992 to May 1996, he was global account
director for Rockwell Automation, Inc., U.S.A., a diversified electronics
manufacturing company.
Bryan H. Wimberly has served 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.
From July 1996 to July 1998, Mr. Wimberly was a Director of the Company. Mr.
Wimberly has also served as a Director of SEPCO since 1987 and the President and
Chief
31
<PAGE> 33
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.
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, 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.
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 for the first
committee or board meeting attended in person on a given day and $500 for each
additional meeting attended in person on the same day. In 1997, Mr. Davis
received $4,000 and Messrs. Orr and Miller received $3,000 for attendance at
Board of Directors or Committee meetings.
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 acts as the administrative committee for
any stock-based plan of the Company.
32
<PAGE> 34
COMPENSATION OF EXECUTIVE OFFICERS
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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
--------------------------- ---- ------- ------- ------------ ------------
<S> <C> <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 -- 800,000
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) 359,200
Bryan H. Wimberly, 1997 142,567 94,227 -- --
Senior Vice President/Corporate 1996 136,031 65,620 -- --
Development 1995 121,967 92,589 -- 48,800
Gary A. Allcorn, 1997 123,066 30,023 -- --
Senior Vice President/Finance and 1996 114,161 10,741 -- 20,000
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 OPTIONS VALUE OF UNEXERCISED
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............................. 800,000 -- 7,760,000 --
Jerry J. Jones.............................. 359,200 -- 3,541,712 --
Bryan H. Wimberly........................... 48,800 -- 488,790 --
Gary A. Allcorn............................. 20,000 -- 183,750 --
</TABLE>
- ---------------
(1) Based on a price per share of $11.50, the closing sales price of the Common
Stock on December 31, 1997 (as adjusted to reflect the two-to-one reverse
stock split that was effected on July 17, 1998).
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the "Little Employment
Agreement"), effective July 1, 1996, as amended, with Mr. Little. The Little
Employment Agreement is for a term of three years. 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 (up to an aggregate annual amount not to
exceed twice the annual base salary paid to Mr. Little under the Little
Employment
33
<PAGE> 35
Agreement) and other perquisites in accordance with 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 or distribution made
to him. As amended on May 21, 1998, the Little Employment Agreement will
terminate June 30, 2001.
The Company also has entered into employment agreements (each Employment
Agreement hereinafter referred to as an "Employment Agreement" and the three
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. 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 one-half of one percent of the monthly profit before tax of the
Company, 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. The Employment Agreements were amended on May 21, 1998 to provide that
the aggregate of the monthly bonuses in any one year may not exceed twice the
annual base salary paid to the Employee.
In the event an Employee terminates his employment for "Good Reason" (as
defined therein), or is terminated by the Company for other than "Cause" (as
defined therein), the Employee would receive (i) 12 monthly payments each equal
to one month of the Salary, (ii) a termination bonus equal to the previous 12
monthly bonuses and (iii) any other payments due through the date of
termination. In the event an Employee dies, become disabled, terminates the
Employment Agreement with notice or the Employment Agreement is terminated by
the Company for Cause, the Employee or the 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 December 31, 1997, 1996 and
1995. 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
34
<PAGE> 36
certain key employees of the Company and its subsidiaries. The LTIP is
administered by the Compensation Committee.
At December 1, 1998, 27,500 shares of Common Stock (approximately 1% of the
currently outstanding shares of Common Stock) were available for issuance under
the LTIP, and options granted under the LTIP to purchase 172,500 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). The consummation of the Offering will result in an increase of
85,000 shares of Common Stock available under the LTIP, which may be used for
grants other than stock options under the LTIP.
CERTAIN 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 September 30,
1998, 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 has made non-interest bearing advances to Mr.
Little that as of November 30, 1998 totaled approximately $420,439. The Company
and Mr. Little have agreed that subsequent to the consummation of the Offering,
the amount of non-interest bearing advances made to Mr. Little will not exceed
the amount outstanding at December 31, 1997, which was $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. If the Underwriters
over-allotment option is exercised in full, Mr. Little, a Selling Shareholder,
will sell 85,000 shares of Common Stock in the Offering and intends to apply a
portion of the net proceeds therefrom to repay approximately $299,000 owed to
the Company.
In November 1998, the Company loaned Gary Allcorn, Senior Vice
President/Finance and Chief Financial Officer, $17,500. This loan bears interest
at an annual rate equal to 8% and matures in November 1999.
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.
35
<PAGE> 37
SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL SHAREHOLDERS
AND SELLING SHAREHOLDERS
The following table sets forth information as of November 30, 1998, 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 or Series A
Preferred Stock, (ii) named executive officers and directors of the Company,
(iii) all executive officers and directors of the Company as a group and (iv)
certain information regarding the Selling Shareholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2)
-------------------------------------------------------------------
COMMON STOCK COMMON STOCK
PRIOR TO SUBSEQUENT TO
SERIES A THE OFFERING NUMBER THE OFFERING
PREFERRED ---------------- OF SHARES ----------------
BENEFICIAL OWNER(1) STOCK % NUMBER % TO BE SOLD NUMBER %
------------------- --------- ---- --------- ---- ---------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gary A. Allcorn(3)............................ -- -- 2,247,686 48.8 2,247,686 35.6
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
David R. Little(4)............................ -- -- 1,065,338 21.5 -- 1,065,338 16.0
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Bryan H. Wimberly(5).......................... -- -- 418,885 9.9 -- 418,885 7.1
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Jerry J. Jones(6)............................. -- -- 360,348 8.0 -- 360,348 5.8
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
SEPCO Industries, Inc......................... 1,870 62.5 938,021 22.5 -- 938,021 16.0
Employee Stock Ownership Plan
c/o River Oaks Trust Company, Trustee
2001 Kirby
Houston, Texas 77210
J. Michael Wappler(7)......................... -- -- 220,414 5.3 -- 220,414 3.8
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Donald E. Tefertiller(8)...................... 374 12.5 46,765 1.1 -- 46,765 *
4425 Congressional Drive
Corpus Christi, Texas 78413
Norman O. Schenk(9)........................... 374 12.5 40,217 * -- 40,217 *
4415 Waynesboro
Houston, Texas 77035
Charles E. Jacob(10).......................... 187 6.3 24,103 * -- 24,103 *
P. O. Box 57
Maypearl, Texas 76064
Ernest E. Herbert(11)......................... 187 6.3 23,857 * -- 23,857 *
57 Coronado Avenue
Kenner, Louisiana
Thomas V. Orr, Director(12)................... -- -- 6,500 * -- 6,500 *
Kenneth H. Miller, Director(13)............... -- -- 6,500 * -- 6,500 *
Cletus Davis, Director(14).................... -- -- 6,500 * -- 6,500 *
All executive officers and directors as a
group (10 persons)(15)...................... -- -- 4,332,171 74.3 4,332,171 57.5
</TABLE>
- ---------------
* Less than 1%.
36
<PAGE> 38
(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.
(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 and Series A Preferred Stock beneficially owned by
them.
(3) Includes 1,712,796 shares of Common Stock and 420,000 shares of Common
Stock issuable upon conversion of 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. Also includes 20,000 shares of Common Stock issuable
upon exercise of an option and 7,690 shares of Common Stock held of record
by the ESOP for Mr. Allcorn's account.
(4) Includes 800,000 shares of Common Stock issuable to Mr. Little upon
exercise of an option and 41,313 shares of Common Stock held of record by
the ESOP for Mr. Little's account. If the Underwriters' over-allotment
option is exercised in full, Mr. Little will sell 85,000 shares of Common
Stock, in which event the "Number" and "%" of "Common Stock Subsequent to
Offering" would be 980,338 and 14.0%, respectively.
(5) Includes 50,400 shares of Common Stock owned of record by a trust of which
Mr. Wimberly is one-third beneficiary and 48,800 shares of Common Stock
issuable upon exercise of an option granted to Mr. Wimberly. Also includes
9,285 shares of Common Stock held by the ESOP for Mr. Wimberly's account.
If the Underwriters' over-allotment option is exercised in full, Mr.
Wimberly will sell 85,000 shares of Common Stock, in which event the
"Number" and "%" of "Common Stock Subsequent to Offering" would be 333,885
and 5.3%, respectively.
(6) Includes 359,200 shares of Common Stock issuable upon exercise of an option
granted to Mr. Jones and 1,148 shares of Common Stock held by the ESOP for
Mr. Jones's account. If the Underwriters' over-allotment option is
exercised in full, Mr. Jones will sell 85,000 shares of Common Stock, in
which event the "Number" and "%" of "Common Stock Subsequent to Offering"
would be 275,348 and 4.2%, respectively.
(7) Includes 8,064 shares of Common Stock held of record by the ESOP for Mr.
Wappler's account.
(8) Includes 4,000 shares of Common Stock issuable upon exercise of an option
and 11,965 shares of Common Stock held of record by the ESOP for Mr.
Tefertiller's account.
(9) Includes 9,417 shares of Common Stock held of record by the ESOP for Mr.
Schenk's account.
(10) Includes 8,503 shares of Common Stock held of record by the ESOP for Mr.
Jacob's account.
(11) Includes 12,107 shares of Common Stock held of record by the ESOP for Mr.
Herbert's account.
(12) Includes 6,500 shares of Common Stock issuable upon exercise of an option.
(13) Includes 6,500 shares of Common Stock issuable upon exercise of an option.
(14) Includes 6,500 shares of Common Stock issuable upon exercise of an option.
(15) See notes (3) through (6) and (12) through (14).
INFORMATION REGARDING SELLING SHAREHOLDERS
David R. Little has served as President and a Director of the Company since
July 1996 and as Chairman of the Board and Chief Executive Officer since August
1996. Mr. Little also has held these positions with SEPCO since he acquired a
controlling interest of the Company in 1986. The Company has from time to time
made certain loans to Mr. Little which aggregated approximately $420,439 as of
November 30, 1998. Mr. Little also has personally guaranteed up to $500,000 of
the obligations of the Company under one of its credit facilities. See
"Management" and "Certain Transactions".
37
<PAGE> 39
Jerry J. Jones has been a Director of the Company since July 1996 and has
served as Senior Vice President/Operations since September 1997. From August
1996 to September 1997, Mr. Jones was Senior Vice President/Corporate
Development. Mr. Jones also has serviced 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 a subsidiary of
SEPCO. See "Management".
Bryan H. Wimberly has served as Senior Vice President/Corporate Development
since September 1997. From August 1996 to September 1997, Mr. Wimberly was the
Senior Vice President/Pump, Bearing, Power Transmission and Valve Automation
Group. From July 1996 to July 1998, Mr. Wimberly was a Director of the Company.
Mr. Wimberly also has served as a Director of SEPCO since 1987 and as 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. See "Management".
38
<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the capital stock of DXP
does not purport to be complete and is subject to, and qualified in its entirety
by the Restated Articles of Incorporation, as amended, and the Bylaws of the
Company which are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
GENERAL
The Company has authorized capital stock of 110,000,000 shares, consisting
of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock,
of which 1,000,000 shares have been designated Series A Preferred Stock, and
1,000,000 shares have been designated Series B Convertible Preferred Stock. As
of November 30, 1998, there were 4,164,773 shares of Common Stock, 2,992 shares
of Series A Preferred Stock and 15,000 shares of Series B Convertible Preferred
Stock outstanding. As of such date, there were 149 holders of record of Common
Stock.
UNITS
The Units comprise one share of Common Stock and one Warrant and will be
immediately separately tradeable.
COMMON STOCK
Dividends. The holders of shares of Series B Convertible Preferred Stock
are entitled to dividends before the payment of any dividends to holders of
shares of Common Stock. The holders of shares of Common Stock have no right or
preference to the holders of shares of any other class of capital stock of the
Company in respect of the declaration or payment of any dividends or
distributions by the Company. The holders of shares of Common Stock shall be
entitled to equally receive any dividends or distributions, if and when declared
by the Board of Directors out of any funds legally available for that purpose.
Liquidation, Dissolution or Winding Up. Subject to the required cash
payments to the Series A Preferred Stock and the Series B Convertible Preferred
Stock, the remainder of the assets of the Company, if any, shall be divided and
distributed ratably among the holders of the Series B Convertible Preferred
Stock and the Common Stock.
Redemption. No shares of Common Stock are callable or redeemable by the
Company.
Conversion. No holder of Common Stock have the right to convert or exchange
any such shares with or into any other shares of capital stock of the Company.
Voting. Each share of Common Stock entitles the holder thereof to one vote,
in person or by proxy, at any and all meetings of the shareholders of the
Company on all propositions presented to the shareholders generally.
WARRANTS
Each Warrant entitles its holder to purchase one share of Common Stock at
an exercise price of $11.00 per share, subject to adjustment in certain
circumstances, for a period of three years commencing on the date of this
Prospectus.
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Representative and American Stock Transfer &
Trust Company, the warrant agent, and will be evidenced by warrant certificates
in registered form.
The exercise price of the Warrants and the number and kind of Common Stock
or other securities and property issuable upon the exercise of the Warrants are
subject to adjustment in certain circumstances, including a stock split of,
stock dividend on, or a subdivision or combination of the Common Stock and for
certain issuances of Common Stock for less than the lesser of the market price
of a share of Common Stock or the exercise price of the Warrants. Additionally,
an adjustment will be made upon the sale of all or substantially all of the
assets of the Company in order to enable holders of Warrants to purchase the
kind and
39
<PAGE> 41
number of shares or other securities or property (including cash) receivable in
such event by a holder of the number of shares of Common Stock that might
otherwise have been purchased upon exercise of the Warrants.
The Warrants do not confer upon the holder any voting or other rights of a
shareholder of the Company. Upon notice to the holders of the Warrants, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Warrants may be exercised upon surrender of the warrant certificate
evidencing those Warrants on or prior to the respective expiration date (or
earlier redemption date) of the Warrants at the offices of the warrant agent,
with the form of "Election to Purchase" on the reverse side of the warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified check payable to the order of the warrant
agent) for the number of the Warrants being exercised.
No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
Common Stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The Company has undertaken to use
commercially reasonable efforts to maintain a current prospectus relating to the
issuance of shares of Common Stock upon the exercise of the Warrants until the
expiration of the Warrants, subject to the terms of the Warrant Agreement. While
it is the Company's intention to maintain a current prospectus, there is no
assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants and no
scrip or cash will be payable in lieu of fractional interests.
The Warrants are redeemable by the Company at any time at a redemption
price of $0.25 per Warrant on not less than 30 days written notice, provided
that the last sale price per share of Common Stock, for 30 consecutive trading
days ending on the third business day prior to the date of redemption notice, is
at least $15.00, subject to adjustment for certain events. The Warrants shall be
exercisable until the close of the business day preceding the date fixed for
redemption. In addition, subject to the rules of the NASD, the Company has
agreed to engage the Representative as its exclusive warrant solicitation agent,
in connection with which the Representative would be entitled to a 5% fee upon
exercise of the Warrants (or $.055 per Warrant). See "Underwriting."
PREFERRED STOCK
Dividends. The holders of shares of Series A Preferred Stock are not as a
matter of right entitled to be paid or receive or have declared or set apart for
such Series A Preferred Stock, any dividends or distributions of the Company.
The holders of shares of Series B Convertible Preferred Stock receive dividends
out of any funds legally available for that purpose at the annual rate of 6% per
annum of the par value and no more. These dividends are payable in cash monthly
on the last day of each month. The dividends accrue from the date the Series B
Convertible Preferred Stock is issued and is considered to accrue from day to
day, whether or not earned or declared. The dividends are payable before any
dividends are paid, declared or set apart for any other capital stock of the
Company. The dividends are cumulative so that if for any dividend period the
dividends on the outstanding Series B Convertible Preferred Stock are not paid
or declared and set apart, the deficiency shall be fully paid or declared and
set apart for payment, without interest, before any distribution (by dividend or
otherwise) is paid on, declared, or set apart for any other capital stock of the
Company. The holders of shares of Series B Convertible Preferred Stock are not
be entitled to receive any other dividends or distributions.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of
outstanding shares of Series A Preferred Stock are entitled to receive $100.00
in cash for each share of Series A Preferred Stock, before any distribution of
the assets of the Company shall be made to the holders of the outstanding shares
of Series B Convertible Preferred Stock,
40
<PAGE> 42
unless funds necessary for such payment shall have been set aside in trust for
the account of the holders of outstanding shares of Series A Preferred Stock so
as to be and continue to be available therefor. After the $100.00 distribution
per share of the Series A Preferred Stock, the holders of outstanding shares of
Series B Convertible Preferred Stock are entitled to receive $100.00 in cash for
each share, before any distribution of the assets of the Company shall be made
to the holders of the outstanding shares of any other capital stock of the
Company, unless funds necessary for such payment shall have been set aside in
trust for the account of the holders of outstanding shares of Series B
Convertible Preferred Stock so as to be and continue to be available therefor.
Redemption. No shares of Series A Preferred Stock shall be callable or
redeemable by the Company. The Company, at the option of its Board of Directors,
may at any time five years from the date of issuance redeem the whole or any
part of the outstanding Series B Convertible Preferred Stock shares by paying in
cash $110.00 per share plus all dividends accrued, unpaid, and accumulated
through and including the redemption date. If only a part of the outstanding
Series B Convertible Preferred Stock shares is redeemed, redemption will be pro
rata. No Series B Convertible Preferred Stock shares may be redeemed unless all
accrued dividends on the Series B Convertible Preferred Stock have been paid for
all past dividend periods and full dividends for the current period, except
those to be redeemed, have been paid or declared and set apart for payment.
The holders of any shares of the Series B Convertible Preferred Stock
called for redemption are entitled to convert each such share into 28 shares of
Common Stock. The holders are entitled to exercise the conversion right at any
time after a redemption notice is given and before the close of business on the
fifth day before the redemption date stated in the notice. The right to receive
the conversion shares is at the shareholder's option and requires delivery to
the Company of the shareholder's written notice stating the number of shares the
shareholder is electing to convert. The exercise of the right also requires the
shareholder, on or before the redemption date, to surrender to the Company or
its transfer agent the certificate or certificates for the shares to be
converted, duly endorsed to the Company.
Conversion. No holder of Series A Preferred Stock has the right to convert
or exchange shares with or into any other shares of capital stock of the
Company. The holders of shares of Series B Convertible Preferred Stock shall
have the right to convert each share of Series B Convertible Preferred Stock
into 28 shares of Common Stock at any time. The right to receive the conversion
shares requires delivery to the Company's office or its transfer agent of the
shareholder's written notice stating the number of shares the shareholder is
electing to convert. Such notice must be accompanied by the surrender of the
Series B Convertible Preferred Stock certificate or certificates, duly endorsed
to the Company. The date of conversion shall be the date of receipt by the
Company or its transfer agent of the notice and the duly endorsed certificates.
Voting. Each share of Series A Preferred Stock and each share of Series B
Convertible Preferred Stock entitles the holder thereof to 1/10th of a vote, in
person or by proxy, at any and all meetings of shareholders of the Company on
all propositions presented to shareholders generally.
CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CHARTER,
BYLAWS AND THE TEXAS BUSINESS CORPORATION ACT
The Company's Restated Articles of Incorporation, as amended, and Bylaws
contain certain provisions that could make more difficult the acquisition of the
Company by means of a tender or exchange offer, a proxy contest or otherwise.
The description of such provisions set forth below is intended only as a summary
and is qualified in its entirety by reference to the Restated Articles of
Incorporation, as amended, and Bylaws, each of which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. See "Risk
Factors -- Possible Anti-Takeover Effects".
Preferred Stock. The Restated Articles of Incorporation, as amended,
authorizes the Board of Directors to establish one or more series of preferred
stock and to determine, with respect to any series of preferred stock, the terms
and rights of such series. The Company believes that the ability of the Board of
Directors to issue one or more series of preferred stock will provide the
Company with flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that may arise. The authorized
shares
41
<PAGE> 43
of preferred stock, as well as shares of Common Stock, will be available for
issuance without further action by the Company's shareholders, unless such
action is required by the Restated Articles of Incorporation, as amended,
applicable laws or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of
doing so, it could issue a series of preferred stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the Company
and its shareholders. The Board of Directors, in so acting, could issue
preferred stock having terms that could discourage an acquisition attempt
through which an acquiror otherwise may be able to change the composition of the
Board of Directors, including a tender or exchange offer or other transaction
that some, or a majority, of the Company's shareholders might believe to be in
their best interests or in which shareholders might receive a premium for their
stock over the then current market price of such stock.
Special Meeting of Shareholders. The Bylaws provide that special meetings
of shareholders may be called only by the President or the Board of Directors.
Such provisions, together with the other anti-takeover provisions described
herein, also could have the effect of discouraging a third party from initiating
a proxy contest, making a tender or exchange offer or otherwise attempting to
obtain control of the Company.
Texas Anti-Takeover Law. Part Thirteen ("Part Thirteen") of the Texas
Business Corporation Act (the "TBCA") imposes a special voting requirement for
the approval of certain business combinations and related party transactions
between public corporations and affiliated shareholders unless the transaction
or the acquisition of shares by the affiliated shareholder is approved by the
board of directors of the corporation prior to the affiliated shareholder
becoming an affiliated shareholder. Part Thirteen prohibits certain mergers,
sales of assets, reclassifications and other transactions (defined as business
combinations) between shareholders beneficially owning 20% or more of the
outstanding stock of a Texas public corporation (such shareholders being defined
as an affiliated shareholder) for a period of three years following the date the
shareholder acquired the shares representing 20% or more of the corporation's
voting power unless two-thirds of the unaffiliated shareholders approve the
transaction at a meeting held no earlier than six months after the shareholder
acquires that ownership. The provisions requiring such a vote of shareholders do
not apply to any transaction with an affiliated shareholder if the transaction
or the purchase of shares by the affiliated shareholder is approved by the board
of directors before the affiliated shareholder acquires beneficial ownership of
20% of the shares or if the affiliated shareholder was an affiliated shareholder
prior to December 31, 1996, and continued as such through the date of the
transaction. Part Thirteen could have the effect of delaying, deferring or
preventing a change in control of the Company.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York ("AST"). The Company has appointed
AST as warrant agent for the Warrants.
42
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Shareholders and
the Underwriters named below (the "Underwriters"), for whom J.P. Turner &
Company, L.L.C., Millennium Financial Group, Inc. and HD Brous & Co., Inc. are
acting as representatives (the "Representatives"), the Underwriters have
severally agreed to purchase from the Company, and the Company has agreed to
sell to the Underwriters, on a firm commitment basis, the respective number of
Units set forth below opposite each such Underwriter's name:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
<S> <C>
J.P. Turner & Company, L.L.C................................
Millennium Financial Group, Inc.............................
HD Brous & Co., Inc.........................................
---------
Total....................................................... 1,700,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering prices set forth on the cover page of
this Prospectus and that they may allow to selected dealers who are members of
the NASD, concessions of not in excess of $ per Unit, of which not more
than $ per Unit may be reallowed to certain other dealers who are members
of the NASD. After the initial public offering, the public offering prices,
concessions and reallowances may be changed.
The following table sets forth the amount of the underwriting discount to
be paid to the Underwriters by the Company and the Selling Shareholders:
<TABLE>
<CAPTION>
TOTAL WITH NO TOTAL WITH FULL
EXERCISE OF THE EXERCISE OF THE
DISCOUNT OVER-ALLOTMENT OVER-ALLOTMENT
PER UNIT OPTION(1) OPTION(1)
-------- --------------- ---------------
<S> <C> <C> <C>
DXP Enterprises, Inc.......................... $.78625 $1,336,625 $1,363,719
Selling Shareholders.......................... $ .68(2) -- $ 173,400
</TABLE>
- ---------------
(1) Assumes a public offering price of $9.25 per Unit ($8.00 of which is
allocated to the Common Stock and $1.25 of which is allocated to the
Warrant)
(2) This discount applies only to the Common Stock component of the Units to be
sold by the Selling Shareholders if the Underwriters' over-allotment option
is exercised.
The following table sets forth the amount and nature of other forms of
compensation to be paid to the Representatives by the Company in connection with
the Offering:
<TABLE>
<CAPTION>
TYPE OF COMPENSATION PER UNIT AMOUNT TOTAL AMOUNT
-------------------- -------------------------------- --------------------------------
<S> <C> <C>
Non-Accountable Expense
Allowance..................... 2% of the gross proceeds of the $314,500 ($361,675 if the
Offering Underwriters' over-allotment
option is exercised in full)
Underwriters Warrant............ Warrant to purchase 170,000 Depends on the market price of
Units at $15.2625 per Unit Common Stock and Warrants at
the time of exercise
25-Month Consulting
Agreement(1).................. $4,000 per month $100,000 payable upon
consummation of the Offering
</TABLE>
- ---------------
(1) Twenty-five month consulting agreement is between the Company and J.P.
Turner & Company, L.L.C.
The Company and the Selling Shareholders have granted to the Underwriters
an option exercisable for a period of 45 days after the Closing, to purchase up
to an aggregate 255,000 additional Units (up to 15% of the Units being offered
hereby) at the public offering price, less underwriting discounts and
commissions, solely to cover over-allotments, if any. The Units to be offered
pursuant to the over-allotment option consist of shares of Common Stock owned by
the Selling Shareholders and Warrants being offered by the Company.
The Underwriting Agreement provides that the Representatives will receive a
non-accountable expense allowance of 2% of the aggregate public offering price
of the Units sold hereunder (including any Units sold
43
<PAGE> 45
pursuant to the over-allotment option), which allowance amounts to $314,500 (or
$361,675 if the over-allotment option is exercised in full), of which $25,000
has been paid to date.
The Company has agreed to sell to the Representatives, for nominal
consideration, the Underwriters Warrant to purchase up to 170,000 shares of
Common Stock and up to 170,000 Warrants. The Underwriters Warrant will be
nonexercisable for one year after the date of this Prospectus. Thereafter, for a
period of four years, the Underwriters Warrant will be exercisable to purchase
170,000 shares of Common Stock at a per share exercise price of $13.20 and
170,000 Warrants at a per Warrant exercise price of $2.0625 (or a total of
$15.2625, 165% of the initial public offering price per Unit). The Warrants
issuable upon the exercise of the Underwriters Warrants will be exercisable to
purchase Common Stock at $11.00 per share. The Underwriters Warrants will be
restricted from sale, transfer, assignment, pledge or hypothecation for a period
of one year from the effective date of the Offering except to officers and
partners (not members of the board of directors) of the Underwriters and members
of the selling group. The Company has agreed to file, during the four year
period beginning one year from the Effective Date of this Prospectus, on one
occasion at the Company's cost, at the request of the holders of at least 80% of
the Underwriters' Warrants and the underlying securities, and to use
commercially reasonable efforts to cause to become effective, a post-effective
amendment to the Registration Statement or a new registration statement under
the Securities Act, as required, to permit the public sale of the Common Stock
and Warrants issued or issuable upon exercise of the Underwriters Warrants, or
the Common Stock issuable upon the exercise of the Warrants issuable upon
exercise of the Underwriters Warrants. In addition, the Company has agreed to
give advance notice to holders of the Underwriters Warrants of its intention to
file certain registration statements commencing one year and ending five years
after the Effective Date and, in such case, holders of such Underwriters
Warrants or underlying Warrants or shares of Common Stock shall have the right
to require the Company to include all or part of such Warrants or shares of
Common Stock underlying such Underwriters Warrants in such registration
statement at the Company's expense.
For the life of the Underwriters Warrant, the holders thereof are given, at
nominal costs, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
shareholders. Further, the holders may be expected to exercise the Underwriters
Warrants at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriters
Warrants.
The Company has agreed to retain J.P. Turner & Company, L.L.C. as a
financial consultant for a period of 25 months to commence on the closing of
this Offering, at a monthly fee of $4,000, or an aggregate of $100,000, all of
which shall be payable in advance on the closing of the Offering. Pursuant to
this agreement, J.P. Turner & Company, L.L.C. shall provide advisory services
related to merger and acquisition activity, corporate finance and other matters.
Commencing one year after the date of this Prospectus, the Company will pay
the Representatives a fee of 5% of the exercise price of each Warrant exercised,
provided (i) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (ii) the
exercise of the Warrant was solicited by a member of the NASD; (iii) the Warrant
was not held in a discretionary account; (iv) the disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Warrant; (v) the solicitation of the exercise of the Warrant was
not a violation of Regulation M promulgated under the Exchange Act; (vi) the
Underwriters provide bona fide services in connection with solicitation of the
Warrant and (vii) the Warrant holder designates in writing which broker-dealer
made the solicitation. The Underwriters and any other soliciting broker-dealers
may be prohibited from engaging in any market-making activities or solicited
brokerage activities with regard to the Company's securities during the periods
prescribed by Regulation M, five business days (or other applicable period as
Regulation M may provide) before the solicitation of the exercise of any Warrant
until the later of the termination of such solicitation activity or the
termination of any right the Representatives and any other soliciting
broker/dealer may have to receive a fee for the solicitation of the exercise of
the Warrants.
44
<PAGE> 46
Other estimated expenses to be paid by the Company in connection with the
Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 13,225
NASD Filing Fee............................................. 5,257
Nasdaq National Market Listing Fee.......................... 51,250
Legal Fees and Expenses..................................... 175,000
Accounting Fees and Expenses................................ 150,000
Printing Expenses........................................... 150,000
Transfer Agent, Warrant Agent and Registrar Fees............ 3,500
Miscellaneous............................................... 415,318
--------
TOTAL............................................. $963,550
========
</TABLE>
The Company has agreed to engage at least one firm which is acceptable to
J.P. Turner & Company, L.L.C. to provide industry research and investor
relations advice to the Company.
The public offering price of the Units offered hereby will be determined by
negotiation between the Company and the Representatives. Factors considered in
determining the offering price of the Units offered hereby will include the
current market price of the Company's Common Stock as quoted on the Nasdaq
National Market, the spread between the bid and ask prices of such Common Stock,
the business in which the Company is engaged, the Company's financial condition,
an assessment of the Company's management, the general condition of the
securities markets and the demand for similar securities of comparable
companies.
The Company has agreed, for a period of two years from the date of this
Prospectus, not to issue any shares of Common Stock, Warrants or any options or
other rights to purchase Common Stock without the prior written consent of the
Representative. Notwithstanding the foregoing, the Company may issue shares of
Common Stock upon exercise or conversion of any options under the LTIP whether
or not currently outstanding and may issue shares of Common Stock pursuant to an
acquisition of another Company's stock or assets. In addition, each of the
Company's shareholders who is an officer or director has agreed not to sell or
otherwise dispose of any of their Common Stock, subject to certain exceptions,
for a period of two years following the Effective Date without the consent of
the Representative, which consent would be subject to the nature of the
Company's securities, the volume and price of the Common Stock, and the
operations and financial condition of the Company.
In connection with the Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Units. Such transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Units for
the purpose of stabilizing their respective market prices. The Underwriters also
may create a short position for the account of the Underwriters by selling more
Units in connection with the Offering than they are committed to purchase from
the Company, and in such case may purchase Units in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position by
exercising the over-allotment option. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Units at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken they may be discontinued at any time.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock on the
Nasdaq National Market until such time, if any, when a stabilizing bid for each
such securities has been made. Rule 103 generally provides that (i) a passive
market maker's net daily purchases of the Units may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (ii) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
45
<PAGE> 47
highest independent bid for the Common Stock by persons who are not passive
market makers and (iii) bids made by passive market makers must be identified as
such.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
J.P. Turner & Company, L.L.C., the Representative, was organized,
registered as a broker-dealer and operating as of August 12, 1997. The principal
business function of J.P. Turner & Company, L.L.C. in the Offering is to
purchase the Units pursuant to the Underwriting Agreement and to resell such
Units. Since August 12, 1997, J.P. Turner & Company, L.L.C. has co-managed four
public offerings of equity securities and has served as a sales agent in
connection with a self-underwritten offering. J.P. Turner & Company, L.L.C. has
no material relationship with the Company or its controlling persons, except
with respect to its contractual relationship pursuant to the Underwriting
Agreement.
The foregoing is a summary of the material terms of the Underwriting
Agreement, the Underwriters Warrant and the consulting agreement. Reference is
made to the copies of the Underwriting Agreement, the Underwriters Warrant and
the consulting agreement, which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
CERTAIN U.S. TAX CONSEQUENCES TO NON-UNITED STATES PERSONS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock by a person that, for United States federal income tax purposes, is
not a U.S. person. For purposes of this section, a U.S. person means a citizen
or resident of the United States (including certain former citizens and former
long-term residents), a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
of the United States, an estate the income of which is subject to United States
federal income taxation regardless of its source or a trust if (1) a United
States court is able to exercise primary supervision over the trust's
administration and (2) one or more U.S. persons have the authority to control
all of the trust's substantial decisions. The discussion does not consider
specific facts and circumstances that may be relevant to a particular non-U.S.
person's tax position. Accordingly, each non-U.S. person is urged to consult its
own tax advisor with respect to the United States tax consequences of the
ownership and disposition of the Common Stock, as well as any tax consequences
that may arise under the laws of any state, municipality, foreign country or
other taxing jurisdiction.
DIVIDENDS
Dividends paid to a holder of the Common Stock who is not a U.S. person
ordinarily will be subject to withholding of United States federal income tax at
a 30 percent rate, or at a lower rate under an applicable income tax treaty that
provides for a reduced rate of withholding. However, if the dividends are
effectively connected with the conduct by the non-U.S. holder of a trade or
business within the United States, then the dividends will be exempt from the
withholding tax described above, provided the appropriate certification is
provided to the payor, and instead will be subject to United States federal
income tax on a net income basis.
GAIN ON DISPOSITION OF COMMON STOCK
A holder who is not a U.S. person generally will not be subject to United
States federal income tax in respect of gain realized on a disposition of the
Common Stock, provided that (a) the gain is not effectively connected with a
trade or business conducted by the non-U.S. person in the United States, (b) in
the case of a non-U.S. person who is an individual and who holds the Common
Stock as a capital asset, such holder is present in the United States for less
than 183 days in the taxable year of the sale and other conditions are met., and
(c) the Company is not at the time of disposition, and has not been during
certain periods preceding the disposition, a "U.S. real property holding
corporation" for U.S. federal income tax purposes.
46
<PAGE> 48
FEDERAL ESTATE TAX
Common Stock owned or treated as being owned by a non-U.S. person at the
time of death will be included in such holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
United States information reporting requirements and backup withholding tax
generally will not apply to dividends paid on the Common Stock to a non-U.S.
person at an address outside the United States, except that with regard to
payments made after December 31, 1999, a non-U.S. person will be entitled to
such an exemption only if it provides a Form W-8, satisfies certain documentary
evidence requirements for establishing that it is a non-U.S. person or otherwise
establishes an exemption. As a general matter, information reporting and backup
withholding also will not apply to a payment of the proceeds of a sale of the
Common Stock effected outside the United States by a foreign office of a foreign
broker. However, information reporting requirements, but not backup withholding,
will apply to a payment of the proceeds of a sale of the Common Stock effected
outside the United States by a foreign office of a broker if the broker: (i) is
a U.S. person, (ii) derives 50 percent or more of its gross income for certain
periods from the conduct of a trade or business in the United States, (iii) is a
"controlled foreign corporation" as to the United States, or (iv) is a foreign
partnership that, at any time during its taxable year is 50 percent or more
owned by U.S. persons or is engaged in the conduct of a United States trade or
business, unless the broker has documentary evidence in its records that the
holder is a non-U.S. person and certain conditions are met, or the holder
otherwise establishes an exemption. Payment by a United States office of a
broker of the proceeds of a sale of the Common Stock will be subject to both
backup withholding tax at a rate of 31 percent and information reporting unless
the holder certifies its non-U.S. person status under penalties of perjury or
otherwise establishes an exemption.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Fulbright & Jaworski L.L.P., Houston, Texas. Certain legal matters
for the Underwriters will be passed upon by Greenberg Traurig, P.A., Orlando,
Florida.
EXPERTS
The audited consolidated financial statements of the Company included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of SSI as of December 31, 1995 and
1996, and for each of the years in the three-year period ended December 31,
1996, have been included in this Prospectus in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
47
<PAGE> 49
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1, as amended (the "Registration Statement"), under the Securities Act with
respect to the Units offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information contained in the Registration Statement and in the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Units offered by this Prospectus, reference is made to the
Registration Statement, including the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement are not necessarily complete, and in each
instance reference is hereby made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference.
The Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, and copies may be obtained at prescribed rates at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Northwestern Atrium Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information can be obtained at the address as
set forth above.
48
<PAGE> 50
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DXP ENTERPRISES AND SUBSIDIARIES:
Pro Forma Combined Statement of Operations.................. F-2
Report of Independent Public Accounts....................... F-4
Audited Consolidated Financial Statements --
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Earnings....................... F-6
Consolidated Statements of Shareholders' Equity........... F-7
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-9
Unaudited Condensed Consolidated Financial Statements --
Condensed Consolidated Balance Sheets..................... F-20
Condensed Consolidated Statements of Income............... F-21
Condensed Consolidated Statements of Cash Flows........... F-22
Notes to Condensed Consolidated Financial Statements...... F-23
STRATEGIC SUPPLY, INC.:
Independent Auditors' Report................................ F-26
Audited Financial Statements --
Consolidated Balance Sheets............................... F-27
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit)......................... F-28
Consolidated Statements of Cash Flows..................... F-29
Notes to Consolidated Financial Statements................ F-30
</TABLE>
F-1
<PAGE> 51
DXP ENTERPRISES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
STRATEGIC
DXP SUPPLY PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................................ $169,667 $21,087 -- $190,754
Costs and expenses:
Cost of sales................................. 124,787 16,170 -- 140,957
Selling, general and administrative........... 38,446 5,562 -- 44,008
-------- ------- ----- --------
Operating income (loss)......................... 6,434 (645) -- 5,789
Other income (expense)
Other income.................................. 890 -- -- 890
Interest expense.............................. (2,654) (35) (121)(1) (2,810)
-------- ------- ----- --------
Earnings (loss) before income taxes............. 4,670 (680) (121) 3,869
Provision for income taxes...................... 1,902 25 (240)(2) 1,687
-------- ------- ----- --------
Net income...................................... 2,768 (705) 119 2,182
Preferred stock dividend........................ (103) -- -- (103)
-------- ------- ----- --------
Net income attributable to common
shareholders.................................. $ 2,665 $ (705) $ 119 $ 2,079
======== ======= ===== ========
Basic earnings per share........................ $ .65 $ .51
======== ========
Common shares outstanding....................... 4,082 4,082
======== ========
Dilutive earnings per share..................... $ .49 $ .38
======== ========
Common and common equivalent shares
outstanding................................... 5,703 5,703
======== ========
</TABLE>
F-2
<PAGE> 52
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited pro forma combined statement of operations for the year ended
December 31, 1997 gives effect to the acquisition by a wholly owned subsidiary
of the Company of substantially all of the assets of Strategic Supply, Inc.
("SSI") on June 2, 1997. The unaudited pro forma combined statement of
operations assumes all such transactions occurred at the beginning of the period
presented.
The unaudited pro forma combined statement of operations may not be
indicative of the results that would have occurred if the combination had been
in effect on the date indicated or which may occur in the future. The unaudited
pro forma combined financial statements should be read in conjunction with the
financial statements of SSI, which are included elsewhere in this Prospectus.
The pro forma adjustments do not reflect projected cost savings of $626,000
for the year ended December 31, 1997 relating to the elimination of duplicative
personnel and intercompany charges reflected in SSI's results.
PRO FORMA ADJUSTMENTS
(1) To adjust interest expense for the debt incurred in the acquisition of
the net assets of Strategic Supply, Inc.
(2) To adjust federal income tax expense for the tax effect of the
adjustments made to operations and interest expense.
F-3
<PAGE> 53
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.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998, (except with respect to
the matter discussed in Note 13 as to which
the date is May 20, 1998)
F-4
<PAGE> 54
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, 140,214 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, 25,000,000 shares
authorized; 4,187,797 shares issued, of which 4,017,147
shares are outstanding 140,214 shares are equity
subject to redemption, and 30,436 shares are treasury
stock.................................................. 40 40
Paid-in capital........................................... 408 892
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.
F-5
<PAGE> 55
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............................ $ .54 $ .19 $ .65
======== ======== ========
Common shares outstanding.................................. 3,837 3,997 4,082
Diluted earnings per share................................. $ .46 $ .18 $ .49
======== ======== ========
Common and common equivalent shares outstanding............ 4,501 4,857 5,703
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 56
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 $-- $ -- $ 45 $ 1,110 $ -- $ 7,158 $ 8,315
Issuance of 359,200 shares of common
stock............................... -- -- -- 4 228 -- -- 232
Issuance of 4,500 shares of Series B
convertible preferred stock......... -- 5 -- -- 445 -- -- 450
Conversion of 840,000 shares of common
stock to 15,000 shares of Series B
preferred stock..................... -- 15 -- (9) (6) -- -- --
Acquisition and retirement of 560,804
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 15 -- 40 408 -- 9,223 9,688
Dividends paid........................ -- -- -- -- -- -- (119) (119)
Net income............................ -- -- -- -- -- -- 890 890
--- --- ------ ---- ------- ----- ------- -------
Balance at December 31, 1996............ 2 15 -- 40 408 -- 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 50,400 shares of common
stock............................... -- -- -- 1 179 -- -- 180
Acquisition of 30,436 shares of common
stock............................... -- -- -- (1) -- (272) -- (273)
Issuance of 140,214 shares of common
stock............................... -- -- 1,963 -- -- -- -- 1,963
Net income............................ -- -- -- -- -- -- 2,768 2,768
--- --- ------ ---- ------- ----- ------- -------
Balance at December 31, 1997............ $ 2 $18 $1,963 $ 40 $ 892 $(580) $12,659 $14,994
=== === ====== ==== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 57
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.
F-8
<PAGE> 58
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 control the Company after the
SEPCO Reorganization. Accordingly, the historical pre-SEPCO Reorganization
financial statements of the combined Company after the closing are those of
SEPCO. The retained earnings of SEPCO were 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.
F-9
<PAGE> 59
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.
F-10
<PAGE> 60
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 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.
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
F-11
<PAGE> 61
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 140,214 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.................................... (1.06) .52
Dilutive earnings per share................................. (.86) .38
</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.
F-12
<PAGE> 62
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>
F-13
<PAGE> 63
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
(8.5% 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 1,906
------- -------
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 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>
F-14
<PAGE> 64
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>
F-15
<PAGE> 65
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 4,187,797 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 28 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 560,804 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
570,932 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 140,214 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
F-16
<PAGE> 66
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to purchase all or part of such shares at a price of $14.00 per share. The
shares issued for the purchase of Pelican are subject to certain rights of
offset pursuant to terms of the purchase agreement.
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.............................. 380,400 $.68 -- $1.64 $ 1.60
Granted............................... 1,208,000 $1.48 -- $1.80 $ 1.74
Exercised............................. (359,200) $.68 $ .68
Canceled or expired................... -- --
---------
Outstanding and Exercisable at December
31, 1995.............................. 1,229,200 $.64 -- $1.80 $ 1.79
Granted............................... 120,500 $3.12 -- $16.00 $ 3.20
Exercised............................. 4,000 $3.12 $ 3.12
Canceled or expired................... (4,000) $3.12 $ 3.12
---------
Outstanding and Exercisable at December
31, 1996.............................. 1,349,700 $1.46 -- $2.32 $ 1.50
Granted............................... -- -- $ --
Exercised............................. -- -- --
Canceled or expired................... -- -- --
---------
Outstanding and Exercisable at December
31, 1997.............................. 1,349,700 $1.48 -- $2.32 $ 1.50
=========
</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 359,200 shares acquired by an officer upon exercise
of his options at $0.82 per share.
F-17
<PAGE> 67
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
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
) (In thousands, except per share amounts
Net income attributable
to common
shareholders (in
thousands)........... $2,065 $2,049 $771 $1,132 $2,665 $1,893
Basic earnings per
common share......... .54 .54 .20 .28 .66 .66
Dilutive earnings per
share................ .46 .46 .18 .24 .48 .34
</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.
F-18
<PAGE> 68
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 956,298 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.
13. EVENTS OCCURRING SUBSEQUENT TO AUDIT REPORT DATE
On May 20, 1998, the Company's board of directors declared a two-for-one
stock split on the Company's common stock. Common stock, Paid-in capital and per
share amounts have been restated to reflect this reverse split.
On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Tri-Electric Supply, Ltd. ("Tri-Electric"). The
purchase price consisted of $6.2 million in cash, assumption of $1.6 million of
trade payables and other accrued expenses and a deferred payment of up to a
maximum of $275,000, based on the earnings before interest, taxes and
depreciation of the acquired company, to be paid on March 31, 1999, if earned.
The results of operations of Tri-Electric are included in the consolidated
statements of income of the Company from the date of acquisition. The
acquisition has been accounted for using the purchase method of accounting.
Goodwill of $3.9 million was recorded in connection with the acquisition.
Goodwill may be adjusted based upon the final purchase price; however, it is
anticipated that any such adjustment will be minimal.
F-19
<PAGE> 69
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,102 $ 736
Trade accounts receivable, net of allowance for doubtful
accounts of $1,208 and $476, respectively.............. 26,651 25,707
Inventory 28,957 26,018
Prepaid expenses and other current assets................. 1,624 996
Deferred income taxes..................................... 966 722
------- -------
Total current assets.............................. $60,300 $54,179
Property, plant and equipment, net.......................... 12,139 10,403
Goodwill.................................................... 10,714 2,623
Other assets................................................ 466 431
------- -------
Total assets...................................... $83,619 $67,636
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $15,588 $14,368
Employee compensation..................................... 1,648 1,384
Other accrued liabilities................................. 40 704
Current portion of long-term debt......................... 3,115 1,461
------- -------
Total current liabilities......................... $20,391 $17,917
Long-term debt, less current portion........................ 44,327 33,395
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 560 479
Equity subject to redemption:
Series A preferred stock--1,122 shares.................... 112 112
Common stock, 140,214 shares.............................. 1,963 1,963
Shareholders' equity:
Series A preferred stock, 1/10th vote per share; $1.00 par
value; liquidation preference of $100 per share;
1,000,000 shares authorized; 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............................................ 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,210,762 shares issued, of which 4,018,612
shares are outstanding, 140,214 shares are equity
subject to redemption, and 51,936 shares are treasury
stock.................................................. 40 40
Paid-in capital........................................... 908 892
Retained earnings......................................... 15,340 12,659
Treasury stock............................................ (781) (580)
------- -------
Total shareholders' equity........................ 15,527 13,031
------- -------
Total liabilities and shareholders' equity........ $83,619 $67,636
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE> 70
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................ $52,296 $48,806 $153,886 $118,277
Cost of sales........................................ 38,247 36,334 113,505 86,706
------- ------- -------- --------
Gross profit......................................... 14,049 12,472 40,381 31,571
Selling, general and administrative expenses......... 11,940 11,295 33,758 27,642
------- ------- -------- --------
Operating income..................................... 2,109 1,177 6,623 3,929
Other income......................................... 177 86 695 981
Interest expense..................................... (1,041) (793) (2,735) (1,960)
------- ------- -------- --------
Income before income taxes........................... 1,245 470 4,583 2,950
Provision for income taxes........................... 498 182 1,833 1,070
------- ------- -------- --------
Net income........................................... $ 747 $ 288 $ 2,750 $ 1,880
Preferred stock dividend............................. (25) (38) (69) (109)
------- ------- -------- --------
Net income attributable to common shareholders....... $ 722 $ 250 $ 2,681 $ 1,771
======= ======= ======== ========
Basic earnings per common share...................... $ .17 $ .06 $ .64 $ .44
======= ======= ======== ========
Common shares outstanding............................ 4,173 4,044 4,168 4,044
======= ======= ======== ========
Diluted earnings per share........................... $ .13 $ .05 $ .49 $ .34
======= ======= ======== ========
Common and common equivalents shares outstanding..... 5,635 5,596 5,630 5,596
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE> 71
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided(used) by operating activities........... $ 4,918 ($ 2,081)
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply, Ltd. net assets.......... (6,208) --
Purchase of Lucky Electric Supply, Inc. net assets........ (2,206) --
Purchase of Mark W. Smith Equipment, Inc. net assets...... (4,206) --
Purchase of Strategic Supply net assets................... -- (4,118)
Purchase of Pelican State Supply common stock............. (839) (1,070)
Purchase of property and equipment........................ (2,451) (648)
Proceeds from sale of property and equipment.............. 26 --
-------- --------
Net cash used in investing activities..................... (15,884) (5,836)
FINANCING ACTIVITIES:
Proceeds from debt........................................ 168,044 133,488
Principal payments on revolving line of credit, long-term
and Subordinated debt, and notes payable to bank....... (155,458) (125,314)
Proceeds from sales of Corpus Christi facility............ -- 112
Issuance of common stock.................................. 16 --
Acquisition of common stock............................... (201) (580)
Dividends paid............................................ (69) (109)
-------- --------
Net cash provided by financing activities................. 12,332 7,597
-------- --------
INCREASE(DECREASE) IN CASH.................................. 1,366 (320)
CASH AT BEGINNING OF PERIOD................................. 736 876
-------- --------
CASH AT END OF PERIOD....................................... $ 2,102 $ 556
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 72
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 20, 1998, the Board of Directors of DXP Enterprises, Inc., a Texas
corporation ("DXP" or the "Company"), approved an amendment to the Company's
Restated Articles of Incorporation providing for a two-to-one reverse split of
the Company's Common Stock. On July 6, 1998, the Company's shareholders approved
the reverse stock split, which was effected on July 17, 1998. Unless otherwise
noted, the information in this Report has been restated to give effect to the
reverse stock split.
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The condensed consolidated financial statements reflect all
elimination entries and adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.
NOTE 2: THE COMPANY
The Company was incorporated on July 26, 1996 in the State of Texas. The
Company is a leading provider of maintenance, repair and operating ("MRO")
products, equipment and services, including engineering expertise and logistics
capabilities, to industrial customers. The Company provides a wide range of MRO
products in the following categories: fluid handling equipment, bearings and
power transmission equipment, general mill and safety supplies and electrical
products. The Company also offers a line of valve and valve automation products
to its customers.
NOTE 3: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 60 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.......................................... $29,609 $27,280
Work in process......................................... 3,136 2,276
------- -------
Inventories at FIFO..................................... 32,745 29,556
Less -- LIFO allowance.................................. (3,788) (3,538)
------- -------
Inventories............................................. $28,957 $26,018
======= =======
</TABLE>
F-23
<PAGE> 73
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: ACQUISITIONS
On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Tri-Electric Supply, Ltd. ("Tri-Electric"). The
purchase price consisted of $6.2 million in cash, assumption of $1.6 million of
trade payables and other accrued expenses and a deferred payment of up to a
maximum of $275,000, based on the earnings before interest, taxes and
depreciation of the acquired company, to be paid on March 31, 1999, if earned.
The results of operations of Tri-Electric are included in the consolidated
statements of income of the Company from the date of acquisition. The
acquisition has been accounted for using the purchase method of accounting.
Goodwill of $3.9 million was recorded in connection with the acquisition.
Goodwill may be adjusted based upon the final purchase price; however, it is
anticipated that any such adjustment will be minimal.
On May 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Lucky Electric & Supply, Inc. ("Lucky
Electric"). The purchase price consisted of approximately $1.5 million in cash,
a $735,000 promissory note and the assumption of $149,000 of trade payables and
other accrued expenses. The results of operations of Lucky Electric are included
in the consolidated statements of income of the Company from the date of
acquisition. The acquisition has been accounted for using the purchase method of
accounting. Goodwill of $0.6 million was recorded in connection with the
acquisition. Goodwill may be adjusted based upon the final purchase price;
however, it is anticipated that any such adjustment will be minimal.
Effective as of May 31, 1998, a wholly-owned subsidiary of the Company
acquired substantially all the assets of M.W. Smith Equipment, Inc. ("Smith
Equipment"). The purchase price consisted of approximately $4.2 million in cash
and the assumption of $618,000 of trade payables and other accrued expenses. The
results of operations of Smith Equipment are included in the consolidated
statements of income of the Company from the date of acquisition. The
acquisition has been accounted for using the purchase method of accounting.
Goodwill of $2.7 million was recorded in connection with the acquisition.
Goodwill may be adjusted based upon the final purchase price; however, it is
anticipated that any such adjustment will be minimal.
The Company is continuing its evaluation of the acquisitions described in
this Note 4 as they relate to the purchase price allocation. The allocation of
the purchase price is based on the best estimates of the Company using
information currently available. Certain adjustments relating to these
acquisitions are subject to change based upon the final determination of the
fair values of the net assets acquired.
NOTE 5: LONG-TERM DEBT
The Company currently has a combined line of credit for $50.0 million with
a bank lender (the "Credit Facility"). In the second and again in the fourth
quarter of 1998, the Company and its lender amended the Credit Facility. The
amendments increased the borrowings under the term loan component of the Credit
Facility from approximately $4.9 million to approximately $12.4 million upon
conversion of $5.0 million of the amounts outstanding under the revolving loan
component to the term loan and added an additional $2.5 million term loan
component to be used for the purchase and renovation of real property to serve
as the Company's corporate headquarters. To date, $1.7 million has been advanced
under the real property term loan component. The Credit Facility, as amended,
provides for a $15.0 million acquisition term loan to be used for acquisitions
provided certain customary provisions related to combined cash flows and
acquisition pricing are met and the Company obtains lender approval. To date,
$3.5 million has been advanced under the acquisition term loan. Interest rates
range from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of
the Company's debt to cash flow and financial covenants tied to debt service
levels and cash flow. At September 30, 1998, the Company had borrowings under
the Credit Facility of $20.1 million at LIBOR plus 2.00 (approximately 7.64% at
September 30, 1998). The remainder of the Company's borrowings under the Credit
Facility bear interest at prime (8.25% at September 30, 1998) for a weighted
average interest rate of 7.95%.
F-24
<PAGE> 74
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the Credit Facility are secured by receivables, inventory,
and machinery and equipment and mature January 2000. An executive officer of the
Company, who is also a shareholder and director of the Company, has personally
guaranteed up to $500,000 of the obligations of the Company under the Credit
Facility. Additionally, certain shares held in trust for this executive
officer's children are pledged to secure borrowings under the Credit Facility.
The borrowings available under the Credit Facility at September 30, 1998 were
approximately $4.7 million. 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.
NOTE 6: SUBSEQUENT EVENTS
On May 20, 1998, the Company's board of directors approved an amendment to
the Company's Restated Articles of Incorporation providing for a two-to-one
reverse stock split of the Company's Common Stock. Common stock, Paid-in-capital
and Per share amounts have been restated to reflect the reverse split. On July
6, 1998, the Company's shareholders approved the reverse split. The reverse
split was effected on July 17, 1998.
The Company recently entered into a letter of intent to acquire the
electrical product distribution assets and operations of Texas Electrical Supply
Company ("TESCO") (the "Proposed Acquisition") for a total consideration of
approximately $2.7 million in cash. Based on information provided to the
Company, TESCO had $14.0 million in revenues in 1997. The Proposed Acquisition
will expand the Company's electrical distribution capabilities.
On July 17, 1998, the Company entered into an agreement with one of its
shareholders to purchase 43,000 shares of Common Stock from the shareholder for
$401,000, payable in two installments of $200,500 each. The first installment is
due on or before September 1, 1998 and the second installment is due at any time
after January 1, 1999 and before June 1, 1999.
F-25
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Strategic Supply, Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Supply, Inc., a wholly-owned subsidiary of Strategic Distribution, Inc.
(Parent), and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations and retained earnings (accumulated
deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in note 2, on May 27, 1997, the Parent entered into an
agreement to sell the Company. As a result of that transaction, the Company has
written off its goodwill and certain other intangible assets as of December 31,
1996.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Strategic
Supply, Inc. and subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
El Paso, Texas
May 27, 1997
F-26
<PAGE> 76
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 106,141 $ 0
Accounts receivable, net.................................. 6,947,908 6,385,989
Inventories............................................... 7,877,020 9,548,536
Prepaid expenses and other current assets................. 226,614 30,190
----------- -----------
Total current assets.............................. 15,157,683 15,964,715
Property and equipment, net................................. 2,300,739 2,401,595
Excess of cost over fair value of assets acquired, net...... 2,448,164 0
Deferred tax asset.......................................... 336,000 336,000
Other assets................................................ 727,995 66,240
----------- -----------
Total assets...................................... $20,970,581 $18,768,550
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 6,261,349 $ 3,824,606
Current portion of long-term debt......................... 138,659 339,470
Due to Parent............................................. 7,451,445 13,593,445
----------- -----------
Total current liabilities......................... 13,851,453 17,757,521
Long-term debt.............................................. 849,671 510,204
----------- -----------
Total liabilities................................. 14,701,124 18,267,725
----------- -----------
Stockholder's Equity:
Common stock, par value $.01 per share, Authorized: 10,000
shares; issued and outstanding: 1,000 shares........... 10 10
Additional paid-in capital................................ 2,399,990 2,399,990
Contribution to capital................................... 896,000 214,000
Retained earnings (accumulated deficit)................... 2,973,457 (2,113,175)
----------- -----------
Total stockholder's equity........................ 6,269,457 500,825
----------- -----------
Total liabilities and stockholder's equity........ $20,970,581 $18,768,550
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-27
<PAGE> 77
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $46,366,524 $55,972,220 $50,972,098
Cost of sales....................................... 34,032,678 41,742,240 38,906,766
----------- ----------- -----------
Gross profit.............................. 12,333,846 14,229,980 12,065,332
Selling, general and administrative expenses........ 10,705,017 12,774,700 13,989,380
Restructuring charge................................ 0 0 877,620
Special charges..................................... 0 0 2,836,363
----------- ----------- -----------
Operating income (loss)................... 1,628,829 1,455,280 (5,638,031)
Interest expense.................................. 570,151 120,483 130,601
----------- ----------- -----------
Income (loss) before income taxes......... 1,058,678 1,334,797 (5,768,632)
Income tax expense (benefit)........................ 465,000 614,000 (682,000)
----------- ----------- -----------
Net income (loss)......................... 593,678 720,797 (5,086,632)
Retained earnings, beginning of year................ 1,658,982 2,252,660 2,973,457
----------- ----------- -----------
Retained earnings (accumulated deficit), end of
year.............................................. $ 2,252,660 $ 2,973,457 $(2,113,175)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 78
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 593,678 $ 720,797 $(5,086,632)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 532,473 656,736 652,873
Deferred taxes................................... 163,000 20,000 0
Tax contribution (charge) from Parent............ 302,000 574,000 (682,000)
Restructuring charge............................. 0 0 877,620
Special charges.................................. 0 0 2,836,363
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable............................ (1,429,378) (1,598,454) 561,919
Inventories.................................... (1,030,776) (1,998) (1,671,516)
Prepaid expenses and other current assets...... 18,214 (72,995) 196,424
Accounts payable and accrued expenses.......... 337,478 35,019 (2,854,138)
Other, net....................................... (55,190) 23,938 15,079
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................ (568,501) 357,043 (5,154,008)
----------- ----------- -----------
Cash flows used in investing activities:
Acquisition of businesses, net of cash acquired..... (2,040,000) (175,000) 0
Additions of property and equipment................. (338,102) (642,461) (955,477)
----------- ----------- -----------
Net cash used in investing activities....... (2,378,102) (817,461) (955,477)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of note payable........................... (5,201,211) 0 0
Borrowings from Parent.............................. 8,498,018 498,024 6,142,000
Repayment of long-term obligations.................. (408,108) (191,832) (138,656)
----------- ----------- -----------
Net cash provided by financing activities... 2,888,699 306,192 6,003,344
----------- ----------- -----------
Decrease in cash and cash equivalents....... (57,904) (154,226) (106,141)
Cash and cash equivalents, at beginning of the year... 318,271 260,367 106,141
----------- ----------- -----------
Cash and cash equivalents, at end of the year......... $ 260,367 $ 106,141 $ 0
=========== =========== ===========
Supplemental cash flow information:
Taxes paid.......................................... $ 12,223 $ 78,288 $ 47,766
Interest paid....................................... 567,748 92,687 80,339
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE> 79
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
The Company is a leading provider of industrial supply services to
commercial and industrial customers in the western United States. On May 24,
1996, the Company (formerly SafetyMaster Corporation) and Lewis Supply
(Delaware), Inc. ("Lewis") were merged (the "Merger"). The Company was the
surviving corporation of the Merger. The related companies were wholly-owned
subsidiaries of Strategic Distribution, Inc. (the "Parent"). Accordingly, the
Merger has been accounted for on an as if pooling basis in all periods
presented. The Company is a wholly-owned subsidiary of the Parent.
On May 27, 1997, the Parent entered into an agreement to sell the Company.
The purchase price was net tangible assets, as defined therein.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Coulson Technologies, Inc. All significant
intercompany accounts and transactions have been eliminated. The preparation of
the consolidated financial statements requires estimates and assumptions that
affect amounts reported and disclosed in the financial statements and related
notes. Actual results could differ from these estimates.
Disclosures About Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments approximate fair
value due to their short maturity and variable interest rate feature.
Inventories
Inventories of finished goods are stated at the lower of cost (first-in,
first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the remaining life of the asset or the lease term. Maintenance and repairs
are charged to expense. Major renewals and improvements are capitalized and
depreciated over the remaining useful life of the asset. Estimated useful lives
are as follows:
<TABLE>
<S> <C>
Building................................................. 20 years
Warehouse and office equipment........................... 5-12 years
Leasehold improvements................................... 5-14 years
Transportation equipment................................. 4-8 years
</TABLE>
Intangible Assets
Excess of cost over fair value of net assets acquired ("Goodwill") is net
of accumulated amortization of $377,000 at December 31, 1995.
On May 27, 1997, the Parent entered into an agreement to sell the Company.
The purchase price was net tangible assets, as defined therein, plus an earn-out
note, payable only upon achievement of certain profitability levels over the
next five years. Due to the uncertainty of achieving these profitability levels,
the Company has written off $2,836,363 of Goodwill and other intangible assets.
This write-off has been recorded
F-30
<PAGE> 80
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in "Special Charges" in the accompanying Consolidated Statements of Operations
and Retained Earnings (Accumulated Deficit).
Income Taxes
The Parent and the Company file consolidated federal and state income tax
returns. Income taxes in these financial statements have been calculated as if
the Company had filed separate tax returns. Accordingly, in some instances, the
amounts recorded may differ from those included in the consolidated tax returns.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
(3) ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $71,000
and $171,000 at December 31, 1995 and 1996, respectively.
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Land........................................................ $ 240,000 $ 240,000
Building and leasehold improvements......................... 921,328 811,304
Warehouse and office equipment.............................. 2,067,646 2,067,416
Transportation equipment.................................... 249,339 334,947
---------- ----------
3,478,313 3,453,667
Less: accumulated depreciation and amortization............. 1,177,574 1,052,072
---------- ----------
$2,300,739 $2,401,595
========== ==========
</TABLE>
(5) RELATED-PARTY TRANSACTIONS
The Company has received advances from the Parent. The Company's results
include an allocation from the Parent for interest expense. The Parent's
interest expense is allocated based upon the pro rata share of intercompany
borrowings. The allocated interest expense was $-0-, $20,000 and $49,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Included in selling, general and administrative expenses are certain
allocated expenses of the Parent of approximately $71,000, $215,000 and $440,000
for the years ended December 31, 1994, 1995 and 1996, respectively. These
charges are to cover expenses incurred by the Parent to provide primarily
accounting and legal services to the Company. Management believes the
allocations are reasonable.
Because of the relationship between the Company and its Parent, the amount
of these transactions reflected in the accompanying financial statements may not
have been the same as they would have been among unaffiliated parties.
F-31
<PAGE> 81
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Accounts payable............................................ $4,896,052 $2,367,550
Accrued expenses............................................ 770,470 1,093,564
Payroll and related expenses................................ 594,827 363,492
---------- ----------
$6,261,349 $3,824,606
========== ==========
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of several loans with a weighted average interest
rates of 7.5% and 7.6% at December 31, 1995 and 1996, respectively.
Principal payments due on long-term obligations during each of the next
four years are: 1997: $339,470; 1998: $29,950; 1999: $18,461 and 2000: $461,793.
(8) ACQUISITION
On June 16, 1994, the Company acquired certain assets of the Industrial
Supplies Division of Lufkin Industries, Inc. (the "Lufkin Division"). The
purchase price consisted of: (i) $2,040,000 in cash and (ii) a mortgage note in
the amount of $600,000. The source of the cash portion of the purchase price was
borrowings under a revolving bank facility.
The method of accounting for this acquisition was the purchase accounting
method. The results of operations of the Lufkin Division are included in the
Company's statements of operations from the date of acquisition.
(9) RESTRUCTURING CHARGE
In connection with the Merger, the Company recorded a restructuring charge
aggregating $877,620 for employee termination benefits, asset write-offs and
lease payments. The termination benefits were paid and asset write-offs were
recorded in 1996, and lease payments will be made in accordance with their
original terms. As of December 31, 1996, the remaining restructuring liability
was approximately $131,000, which represented unpaid leases.
In addition, the Company incurred approximately $485,000 of one-time
expenses associated with the Merger and branch closings, which amount has been
included in selling, general and administrative expenses.
(10) RETIREMENT PLAN
The Company has a qualified defined contribution plan (the "Retirement
Savings Plan") for employees who meet certain eligibility requirements.
Contributions to the Retirement Savings Plan are at the discretion of the Board
of Directors and are limited to the amount deductible for Federal income tax
purposes. The expense for the Retirement Savings Plan was $23,848, $31,671 and
$24,580 for the years ended December 31, 1994, 1995 and 1996, respectively.
F-32
<PAGE> 82
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
The income tax expense (benefit) in the Consolidated Statements of
Operations and Retained Earnings (Accumulated Deficit) is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Current
Federal........................................... $234,000 $460,000 $(682,000)
State............................................. 68,000 134,000 --
Deferred
Federal........................................... 138,000 16,000 --
State............................................. 25,000 4,000 --
-------- -------- ---------
$465,000 $614,000 $(682,000)
======== ======== =========
</TABLE>
A reconciliation of the expected Federal income tax expense at the
statutory rate to the Company's income tax expense follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Expected tax expense............................. $360,000 $454,000 $(1,961,000)
Increase (reduction) in tax expense resulting
from:
State taxes.................................... 61,000 91,000 --
Valuation allowance, federal................... -- -- 260,000
Goodwill and other special charges............. 25,000 36,000 1,006,000
Other.......................................... 19,000 33,000 13,000
-------- -------- -----------
$465,000 $614,000 $ (682,000)
======== ======== ===========
</TABLE>
In 1994, 1995 and 1996, the Parent had no federal or state consolidated tax
liabilities allocable to the Company, therefore no taxes are due to or from the
Parent under a tax sharing provision. Accordingly, the 1994 and 1995 current
expenses of $302,000 and $594,000, respectively, have been reported as
contribution to capital in 1994 and 1995 and the 1996 tax benefit of $682,000
has been reported as a reduction to contributed capital.
F-33
<PAGE> 83
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward (expires during the period
ending 2011)........................................... $ -- $ 122,000
Accounts receivable....................................... 27,000 60,000
Inventories............................................... 362,000 354,000
Accrued expenses.......................................... 156,000 245,000
Vacation accrual.......................................... 57,000 99,000
Other..................................................... 11,000 34,000
Valuation allowances...................................... -- (280,000)
-------- ---------
Total deferred tax asset.......................... 613,000 634,000
-------- ---------
Deferred tax liabilities:
Property and equipment.................................... 141,000 153,000
Other assets.............................................. 123,000 132,000
Goodwill.................................................. 13,000 13,000
-------- ---------
Total deferred tax liability...................... 277,000 298,000
-------- ---------
Net deferred tax asset...................................... $336,000 $ 336,000
======== =========
</TABLE>
At December 31, 1996, a valuation allowance was established to reduce
deferred tax assets to amounts that are more likely than not to be realized.
(12) STOCKHOLDER'S EQUITY
The Parent's credit facility is collateralized by substantially all of the
Company's assets and a pledge of all of the Company's capital stock.
(13) LEASE COMMITMENTS
The Company leases equipment and real estate for initial terms of five to
eight years. The minimum future rental payments for operating leases with
initial noncancelable lease terms in excess of one year as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
1997.............................................. $462,000
1998.............................................. 363,000
1999.............................................. 225,000
2000.............................................. 137,000
2001.............................................. 98,000
Thereafter........................................ 65,000
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$576,509, $644,765, and $639,840, respectively.
F-34
<PAGE> 84
STRATEGIC SUPPLY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
In conjunction with acquisition of the Lufkin Division in 1994, liabilities
assumed and refinanced were:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $3,539,810
Net cash.................................................... 2,040,000
----------
Liabilities assumed......................................... $1,499,810
==========
</TABLE>
In 1995, there was a $175,000 adjustment to the purchase price in
connection with the acquisition of Lewis.
F-35
<PAGE> 85
[MAP OF THE UNITED STATES IDENTIFYING
HEADQUARTERS AND BRANCH LOCATIONS]
DXP Enterprises, Inc. provides maintenance, repair and operating products,
equipment and services to industrial customers throughout the Southern and Rocky
Mountain regions of the United States.
<PAGE> 86
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
ON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
Special Note Regarding Forward-Looking
Statements........................... 11
Use of Proceeds........................ 11
Price Range of Common Stock and
Dividend Policy...................... 12
Capitalization......................... 13
Dilution............................... 14
Selected Financial Data................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 24
Management............................. 31
Certain Transactions................... 35
Security Ownership of Management,
Principal Shareholders and Selling
Shareholders......................... 36
Description of Capital Stock........... 39
Underwriting........................... 43
Certain U.S. Tax Consequences to Non-
United States Persons................ 46
Legal Matters.......................... 47
Experts................................ 47
Available Information.................. 48
Financial Statements................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,700,000 UNITS
[DXP ENTERPRISES, INC. LOGO]
---------------------
PROSPECTUS
---------------------
J.P. TURNER & COMPANY, L.L.C.
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 13,225
NASD Filing Fee............................................. 5,257
Nasdaq National Market Listing Fee.......................... 51,250
Legal Fees and Expenses..................................... 175,000
Accounting Fees and Expenses................................ 150,000
Printing Expenses........................................... 150,000
Transfer Agent, Warrant Agent and Registrar Fees............ 3,500
Miscellaneous............................................... 415,318
--------
TOTAL............................................. $963,550
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.01-1 of the Texas Business Corporation Act ("TBCA") provides that
a corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests
or (b) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification and
a written undertaking by or on behalf of the director or officer to repay the
amount if it is ultimately determined that the director or officer is not
entitled to indemnification by the corporation. Texas law requires a corporation
to indemnify an officer or director against reasonable expenses incurred in
connection with a proceeding in which he is named a defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1 of the TBCA.
The Company's Restated Articles of Incorporation, as amended, and Bylaws
provide for indemnification of its officers and directors, and the advancement
to them of expenses in connection with proceedings and claims, to the fullest
extent permitted under the TBCA. Such indemnification may be made even though
directors and officers would not otherwise be entitled to indemnification under
other provisions of the Company's Bylaws.
The above discussion of the TBCA and the Company's Restated Articles of
Incorporation, as amended and Bylaws is not intended to be exhaustive and is
qualified in its entirety by such statute, the Restated Articles of
Incorporation and Bylaws, respectively.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
II-1
<PAGE> 88
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In July 1996, David R. Little, Chairman of the Board, President and Chief
Executive Officer of the Company, purchased 100 shares of Common Stock for an
aggregate consideration of $1,000.
In December 1996, pursuant to the SEPCO Reorganization and the Newman
Merger, Halter Financial Group, Inc., a consulting firm ("Halter"), and certain
transferees of Halter received an aggregate of 347,391 shares of Common Stock in
exchange for shares of common stock, no par value, of Newman ("Newman Common
Stock"). The shares of Common Stock that Newman and its transferees received in
such exchange were not registered in connection with the SEPCO Reorganization
and the Newman Merger. The shares of Newman Common Stock were issued to Halter
in connection with consulting and related services provided by Halter in the
SEPCO Reorganization and the Newman Merger.
In June 1997, in connection with its acquisition of Pelican, the Company
issued 280,428 shares of Common Stock to the seller of Pelican as part of the
purchase price for the acquisition.
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.
In May 1998, the Company issued 1,537 shares of Common Stock for an
aggregate consideration of $4,625 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 462 shares of Common Stock subject to the stock option to pay the
exercise price.
In May 1998, the Company issued 42,400 shares of Common Stock for an
aggregate consideration of $15,953 to an employee pursuant to the exercise of a
stock option.
The Company considers all of such securities to have been offered and sold
or exchanged, as the case may be, in transactions not involving a public
offering and, therefore, to be exempted from registration under Section 4(2) of
the Securities Act. None of the foregoing transactions involved underwriters.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
3.2 -- Bylaws (incorporated by reference to 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).
4.1 -- Form of Common Stock certificate (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
the Commission on August 20, 1998).
4.2 -- Form of Warrant Certificate.
4.3 -- Form of Warrant Agreement.
4.4 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.5 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<C> <S>
10.1 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to Exhibit 10.2 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 Exhibit 10.3 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 Exhibit 10.4 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
Exhibit 10.5 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
Exhibit 10.6 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
Exhibit 10.7 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, as
amended by Amendment to Employment Agreement dated
effective May 21, 1998.
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 1998).
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
</TABLE>
II-3
<PAGE> 90
<TABLE>
<C> <S>
10.12 -- 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 Exhibit 10.13 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).
10.13 -- 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).
10.14 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by and among SEPCO Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
SEPCO Industries, Inc., Bayon Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eight Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998 by and among
SEPCO Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed with the Commission on November
13, 1998).
10.17 -- 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 Exhibit 10.14 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.18 -- 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 Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
</TABLE>
II-4
<PAGE> 91
<TABLE>
<C> <S>
10.19 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.20 -- 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 Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.21 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.18 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).
10.22 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.23 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.24 -- 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).
10.25 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.27 -- 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).
10.28 -- 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).
10.29 -- 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).
</TABLE>
II-5
<PAGE> 92
<TABLE>
<C> <S>
10.30 -- 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).
10.31 -- 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).
10.32 -- 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).
10.33 -- 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).
10.34 -- 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).
10.35 -- 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).
10.36 -- 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).
10.37 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.38 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between Pelican State Supply
Company, Inc. and Fleet Capital Corporation (incorporated
by reference to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
</TABLE>
II-6
<PAGE> 93
<TABLE>
<C> <S>
10.39 -- 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).
10.40 -- 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).
10.41 -- 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).
10.42 -- 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).
10.43 -- 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).
10.44 -- 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).
10.45 -- 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).
10.46 -- Secured Promissory Note dated April 29, 1998, payable by SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998, filed with the Commission on May 14, 1998).
10.47 -- Form of Underwriters Warrant.
10.48 -- Form of Consulting Agreement between the Registrant and J. P. Turner & Company, L.L.C.
+11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Company.
</TABLE>
II-7
<PAGE> 94
<TABLE>
<C> <S>
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG LLP.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5.1).
+24.1 -- Powers of Attorney.
</TABLE>
- ---------------
+ Previously filed.
As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed
with this Registration Statement certain instruments defining the rights of
holders of long-term debt of the Company, if any, because the total amount of
securities authorized under any of such instruments does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis. The
Company agrees to furnish a copy of any such agreements to the Securities and
Exchange Commission upon request.
(b) Financial Statement Schedules: None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
II-8
<PAGE> 95
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as a part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-9
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on the 5th day of February, 1999.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ DAVID R. LITTLE
----------------------------------
David R. Little
Chairman of the Board, President
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID R. LITTLE Chairman of the Board, February 5, 1999
- ----------------------------------------------------- President, Chief Executive
David R. Little Officer and Director
(Principal Executive
Officer)
* Director February 5, 1999
- -----------------------------------------------------
Jerry J. Jones
/s/ GARY A. ALLCORN Senior Vice February 5, 1999
- ----------------------------------------------------- President/Finance and
Gary A. Allcorn Chief Financial Officer
(Principal Financial and
Accounting Officer)
* Director February 5, 1999
- -----------------------------------------------------
Cletus Davis
* Director February 5, 1999
- -----------------------------------------------------
Kenneth H. Miller
* Director February 5, 1999
- -----------------------------------------------------
Thomas V. Orr
*By: /s/ GARY A. ALLCORN February 5, 1999
-----------------------------------------------
Gary A. Allcorn
Attorney-in-Fact for each
of the persons indicated
</TABLE>
II-10
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
3.2 -- Bylaws (incorporated by reference to 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).
4.1 -- Form of Common Stock certificate (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
the Commission on August 20, 1998).
4.2 -- Form of Warrant Certificate.
4.3 -- Form of Warrant Agreement.
4.4 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.5 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
5.1 -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to Exhibit 10.2 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 Exhibit 10.3 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 Exhibit 10.4 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
Exhibit 10.5 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
Exhibit 10.6 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
Exhibit 10.7 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, as
amended by Amendment to Employment Agreement dated
effective May 21, 1998.
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
</TABLE>
<PAGE> 98
<TABLE>
<C> <S>
10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 1998).
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
10.12 -- 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 Exhibit 10.13 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).
10.13 -- 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).
10.14 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by and among SEPCO Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
SEPCO Industries, Inc., Bayon Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eight Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998 by and among
SEPCO Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed with the Commission on November
13, 1998).
</TABLE>
<PAGE> 99
<TABLE>
<C> <S>
10.17 -- 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 Exhibit 10.14 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.18 -- 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 Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.19 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.20 -- 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 Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.21 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.18 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).
10.22 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.23 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.24 -- 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).
10.25 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.27 -- 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).
</TABLE>
<PAGE> 100
<TABLE>
<C> <S>
10.28 -- 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).
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
10.32 -- 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).
10.33 -- 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).
10.34 -- 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).
10.35 -- 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).
10.36 -- 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).
</TABLE>
<PAGE> 101
<TABLE>
<C> <S>
10.37 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.38 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between Pelican State Supply
Company, Inc. and Fleet Capital Corporation (incorporated
by reference to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.39 -- 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).
10.40 -- 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).
10.41 -- 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).
10.42 -- 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).
10.43 -- 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).
10.44 -- 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).
10.45 -- 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).
</TABLE>
<PAGE> 102
<TABLE>
<C> <S>
10.46 -- Secured Promissory Note dated April 29, 1998, payable by SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998, filed with the Commission on May 14, 1998).
10.47 -- Form of Underwriters Warrant.
10.48 -- Form of Consulting Agreement between the Registrant and J.P. Turner & Company, L.L.C.
+11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG LLP.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5.1).
+24.1 -- Powers of Attorney.
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
FOR THE OFFERING OF
1,700,000 UNITS OF
DXP ENTERPRISES, INC.
EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
WITH
J.P. TURNER & COMPANY, L.L.C.
MILLENNIUM FINANCIAL GROUP, INC.
AND
HD BROUS & CO., INC.
DATED: FEBRUARY __, 1999
<PAGE> 2
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
UNDERWRITING AGREEMENT
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. DESCRIPTION OF THE SECURITIES..............................................1
(a) THE WARRANTS...........................................................2
(b) THE UNDERWRITERS' SECURITIES...........................................2
2. REGISTRATION STATEMENT AND PROSPECTUS......................................2
3. AGREEMENTS TO SELL AND PURCHASE............................................3
4. TERMS OF PUBLIC OFFERING...................................................4
5. DELIVERY OF THE COMMON STOCK AND WARRANTS AND PAYMENT THEREFOR.............4
6. AGREEMENTS OF THE COMPANY..................................................5
7. AGREEMENTS OF THE SELLING SHAREHOLDERS.....................................9
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................10
9. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS................15
10. INDEMNIFICATION AND CONTRIBUTION.........................................16
11. CONDITIONS OF UNDERWRITERS' OBLIGATIONS..................................20
12. EXPENSES.................................................................22
13. EFFECTIVE DATE OF AGREEMENT..............................................23
14. TERMINATION OF AGREEMENT.................................................24
15. INFORMATION FURNISHED BY THE UNDERWRITERS................................25
16. MISCELLANEOUS............................................................25
17. APPLICABLE LAW; COUNTERPARTS.............................................25
SCHEDULE I - UNDERWRITERS.....................................................i
SCHEDULE II - SELLING SHAREHOLDERS...........................................ii
</TABLE>
ii
<PAGE> 3
1,700,000 UNITS
OF
DXP ENTERPRISES, INC.
UNDERWRITING AGREEMENT
FEBRUARY ____, 1999
J.P. TURNER & COMPANY, L.L.C.
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
As Representatives of the Several Underwriters
c/o J.P. Turner & Company, L.L.C.
3340 Peachtree Road
Suite 450
Atlanta, GA 30326
Dear Sirs:
DXP Enterprises, Inc., a Texas corporation (the "Company"), and the
Selling Shareholders (as hereinafter defined), hereby confirm their agreement
with J.P. Turner & Company, L.L.C., Millennium Financial Group, Inc. and HD
Brous & Co., Inc. (collectively the "Representatives") and the other several
Underwriters (as hereinafter defined) on whose behalf the Representatives are
acting, in connection with the several purchases of the Units by the
Underwriters. J.P. Turner & Company, L.L.C. may be referred to hereinafter as
the "Managing Representative".
1. DESCRIPTION OF THE SECURITIES.
The Company proposes to issue and sell (the "Offering") an aggregate of
1,700,000 units (the "Units"), each of which shall consist of one share of its
common stock, par value $0.01 per share (the "Common Stock"), and one redeemable
warrant entitling the holder thereof to purchase one share of the Company's
Common Stock at a purchase price of $11.00 (the "Warrants"), to the several
Underwriters named in Schedule I hereto (the "Underwriters"). The Units will not
be listed on any exchange and will never trade. The components of the Units,
i.e. the Common Stock and the Warrants, are issuable separately and will be
separately tradable immediately upon issuance. The Units to be issued and sold
to the Underwriters by the Company are hereinafter referred to as the "Firm
Units." The Company also proposes to sell to the Underwriters, upon the
1
<PAGE> 4
terms and conditions set forth in Section 3 hereof, up to an additional 255,000
Units (the "Additional Units"), if any, for the purpose of covering
over-allotments in the sale of the Firm Units. The persons named in Schedule II
hereto (the "Selling Shareholders") propose to sell to the several Underwriters
an aggregate of 255,000 shares of Common Stock of the Company (the "Additional
Unit Shares") that shall underlie the Units if and to the extent that the
Underwriters exercise the over-allotment option. The Company and the Selling
Shareholders are hereinafter sometimes referred to as the "Sellers." The Firm
Units and the Additional Units (excluding the Additional Unit Shares to be sold
by the Selling Shareholders) are hereinafter collectively referred to as the
"Company Securities." The Firm Units and the Additional Units (including the
Additional Unit Shares) are hereinafter collectively referred to as the "Units."
The shares of Common Stock issuable upon the exercise of the Warrants are
hereinafter referred to as the "Warrant Shares."
(a) The Warrants.
The terms of the Warrants are set forth in the Warrant Agreement
between the Company and American Stock Transfer & Trust Company, the form of
which is attached hereto as Exhibit A and incorporated herein by this reference.
(b) The Underwriters' Securities.
The Company will sell to the Representatives, for $10.00, a warrant to
purchase an amount equal to ten percent 10% of the Firm Units sold in this
Offering (a maximum of 170,000 shares of Common Stock and 170,000 Warrants,
which together comprise 170,000 Units) (the "Underwriters' Warrants," and
collectively with the securities underlying the Underwriters' Warrants together
with any adjustments as provided by their terms, the "Underwriters'
Securities"). The form of the Underwriters' Warrants setting forth the terms
thereof is attached hereto as Exhibit B and incorporated herein by this
reference.
2. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-53387) under the Act
(the "registration statement"), including a prospectus subject to completion
relating to the Units. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the Registration Statement will be filed and must be
declared effective before the offering of the Units may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Act and such
information is included in a prospectus filed with the Commission
2
<PAGE> 5
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
3. AGREEMENTS TO SELL AND PURCHASE. Subject to such adjustments as
you may determine in order to avoid fractional Units, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Shareholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $9.25 per Unit (allocated between the share of Common Stock and the
Warrant in the amount of $8.00 and $1.25, respectively) (the "purchase price per
Unit"), less an underwriting discount of eight and one half percent (8.5%), the
number of Firm Units which bears the same proportion to the aggregate number of
Firm Units to be issued and sold by the Company as the number of Firm Units set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
of Firm Units increased as set forth in Section 13 hereof) bears to the
aggregate number of Firm Units to be sold by the Company.
The Company and each of the Selling Shareholders also agree, subject to
all the terms and conditions set forth herein, to sell to the Underwriters, and,
upon the basis of the representations, warranties and agreements of the Company
and the Selling Shareholders and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from the Company
and each of the Selling Shareholders pursuant to an option (the "over-allotment
option") which may be exercised at any time and from time to time prior to 9:00
P.M., New York City time, on the 45th day after the date of the Prospectus (or,
if such 45th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading),
up to an aggregate of 255,000 Warrants and 255,000 Additional Unit Shares (which
together shall constitute the Additional Units) from the Company and each of the
Selling Shareholders, respectively. Additional Units may be purchased only for
the purpose of covering over-allotments made in connection with the offering of
the Firm Units. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each of the Selling Shareholders the number of Warrants and shares of Common
Stock, respectively, (subject to such adjustments as you may determine in order
to avoid fractional Warrants or shares of Common Stock) allocated to them in the
sole and exclusive discretion of the Managing Representative. Such allocation
shall not exceed the same proportion when taken as a Unit to the number of
Additional Units to be sold by the Company and each of the Selling Shareholders
as the number of Firm Units set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Units increased as set forth in
Section 13 hereof) bears to the aggregate number of Firm Units increased as set
forth in Section 13 hereof) bears to the aggregate number of Firm Units to be
sold by the Company.
3
<PAGE> 6
Certificates in transferable form for the Additional Unit Shares
underlying the Additional Units which each of the Selling Shareholders agrees to
sell pursuant to this Agreement have been placed in custody with American Stock
Transfer & Trust Company (the "Custodian") for delivery under this Agreement
pursuant to a Custody Agreement and Power of Attorney (the "Custody Agreement")
executed by each of the Selling Shareholders appointing David R. Little or Gary
A. Allcorn as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each
Selling Shareholder agrees that: (i) the Additional Unit Shares represented by
the certificates held in custody pursuant to the Custody Agreement are subject
to the interests of the Underwriters, the Company and each other Selling
Shareholder; (ii) the arrangements made by the Selling Shareholders for such
custody are, except as specifically provided in the Custody Agreement,
irrevocable; and (iii) the obligations of the Selling Shareholders hereunder and
under the Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, except as specifically provided in the
Custody Agreement. The Attorneys-in-Fact agree to perform their duties under the
Custody Agreement.
4. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Units as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Units upon the terms set forth in the Prospectus.
5. DELIVERY OF THE COMMON STOCK AND WARRANTS AND PAYMENT THEREFOR.
Delivery to the Underwriters of and payment for the Firm Units shall be made at
the office of J.P. Turner & Company, L.L.C., 3340 Peachtree Road, Suite 450,
Atlanta, Georgia 30326, at 10:00 A.M., New York City time, on _______, 1999 (the
"Closing Date"). The place of closing for the Firm Units and the Closing Date
may be varied by agreement among you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Units to
be purchased by the Underwriters shall be made at the aforementioned office of
J.P. Turner & Company, L.L.C. at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company and the Attorneys-in-Fact of the Underwriters' determination to purchase
a number, specified in such notice, of Additional Units. The place of closing
for any Additional Units and the Option Closing Date for such Units may be
varied by agreement among you, the Company and the Attorneys-in-Fact.
Certificates for the Common Stock and Warrants comprising the Firm
Units and for any Additional Units (including for the Additional Unit Shares) to
be purchased hereunder shall be registered in such names and in such
denominations as you shall request prior to 9:30 A.M., New York City time, on
the second business day preceding the Closing Date or any Option Closing Date,
as the case may be. Such certificates shall be made available to you in New York
City, New York for inspection and packaging not later than 9:30 A.M., New York
City time, on the business day next preceding the Closing Date or the Option
Closing Date, as the case may be. The certificates evidencing the Common Stock
and Warrants comprising the Firm Units and any
4
<PAGE> 7
Additional Units to be purchased hereunder shall be delivered to you on the
Closing Date or the Option Closing Date, as the case may be, against payment of
the purchase price therefor in immediately available funds to the order of the
Company and the Attorneys-in-Fact. If the Representatives so elect, delivery of
the Common Stock and Warrants comprising the Firm Units and for any Additional
Units (including for the Additional Unit Shares) may be made by credit through
full fast transfer to the accounts at The Depository Trust Company designated by
the Representative.
6. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Units may commence,
the Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing, when
the Registration Statement or such post-effective amendment has become
effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Units for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein in
light of the circumstances under which they were made not misleading, or of the
necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge: (i) four
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits to the registration statement; and (ii) such number of conformed copies
of the registration statement as originally filed and of each amendment thereto,
but without exhibits, as you may request.
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus, of which you
shall not previously have
5
<PAGE> 8
been advised or to which, after you shall have received a copy of the document
proposed to be filed, you shall reasonably object.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you and to others designated by you, without charge, in
such quantities as you have requested, copies of each form of the Prepricing
Prospectus. The Company consents to the use, in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Units are offered by the several Underwriters and by dealers, prior to
the date of the Prospectus, of each Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time after the Closing of the Offering
for such period as in the opinion of counsel for the Underwriters a prospectus
is required by the Act to be delivered in connection with sales by any
Underwriter or dealer, the Company will expeditiously deliver to each
Underwriter, each dealer or each of their respective designees, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the Units
are offered by the several Underwriters and by all dealers to whom the Units may
be sold, both in connection with the offering and sale of the Units and for such
period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, or if it is necessary to supplement or amend the
Prospectus in order to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto (or to such
document), and will expeditiously furnish to the Underwriters and dealers or
each of their respective designees a reasonable number of copies thereof.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Units
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Units, in any jurisdiction where it is not now so
subject.
(h) During the period of five years hereafter, the Company will
furnish to you: (i) as soon as available, a copy of each report of the Company
mailed to shareholders or filed publicly with the Commission; (ii) as soon as
available, a copy of each press release issued by the
6
<PAGE> 9
Company; and (iii) from time to time such other information concerning the
Company as you may reasonably request.
(i) The Company will apply the net proceeds from the sale of the
Company Securities to be sold by it hereunder substantially in accordance with
the description set forth in the Prospectus.
(j) If Rule 430A of the Act is employed, the Company will timely
file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(k) Except as provided in this Agreement, for a period of two
years the Company will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, except for: (i) the sale of shares of Common Stock and Warrants
underlying the Units to the Underwriters pursuant to this Agreement and the
shares of Common Stock issuable upon exercise of the Warrants; (ii) the grant of
options and the issuance of shares of Common Stock pursuant to the Company's
existing Long-Term Incentive Plan and options outstanding on the date hereof and
the surrender of shares of Common Stock in payment of the exercise price of
stock options after the date of the Prospectus; (iii) the issuance of shares of
Common Stock pursuant to an acquisition of another company's stock or assets;
and (iv) the issuance of the Underwriters' Securities.
(l) xcept as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Units, the
Common Stock or the Warrants to facilitate the sale or resale of the Units or
their components.
(m) The Company will use its best efforts to have the shares of
Common Stock and Warrants which it agrees to sell under this Agreement and the
Additional Unit Shares listed, subject to notice of issuance, on the Nasdaq
National Market on or before the Closing Date.
(n) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and issuable upon exercise of the
Underwriters' Warrants (including the underlying securities) outstanding from
time to time.
(o) Following the Effective Date and from time to time thereafter,
so long as the Warrants or the Underwriters' Warrants are outstanding, the
Company will timely prepare and file at its sole cost and expense one or more
post-effective amendments to the Registration Statement or a new registration
statement as required by law as will permit holders of Warrants and
Underwriters' Warrants to be furnished with a current prospectus in the event
Warrants or Underwriters' Warrants are exercised, and to use its reasonable
efforts and due diligence to have same be declared effective. The Company will
deliver a draft of each such post-effective
7
<PAGE> 10
amendment or new registration statement to the Underwriter at least ten days
prior to the filing of such post-effective amendment or registration statement.
(p) Following the Effective Date and from time to time
thereafter so long as any of the Warrants or Underwriters' Warrants remain
outstanding, the Company will timely deliver and supply to its Warrant Agent
sufficient copies of the Company's current Prospectus, as will enable such
Warrant Agent to deliver a copy of such Prospectus to any Warrant or other
holder where such Prospectus delivery is by law required to be made.
(q) So long as any of the Warrants or Underwriters' Warrants
remain outstanding, the Company shall continue to employ the services of a
nationally recognized firm of independent certified public accountants in
connection with the preparation of the financial statements to be included in
any registration statement to be filed by the Company hereunder, or any
amendment or supplement thereto.
(r) So long as any of the Warrants or Underwriters' Warrants
remain outstanding, the Company shall continue to appoint a Warrant Agent for
the Warrants.
(s) Following the Effective Date and for a period of five years
thereafter, the Company shall maintain a Board of Directors of not less than
five members, a majority of which shall be outside and independent members.
(t) The Company agrees to designate the Representatives as its
exclusive warrant solicitation agents and to pay the Representatives a fee of
five percent (5%) of the aggregate exercise price of the Warrants if: (i) the
market price of the Common Stock is greater than the exercise price of the
Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited
by a member of the NASD; (iii) the Warrants are not held in a discretionary
account; (iv) the disclosure of compensation arrangements was made both at the
time of the Offering and at the time of the exercise of the Warrant; and (v) the
solicitation of the Warrant is not in violation of Regulation M promulgated
under the Exchange Act. The Company agrees not to solicit the exercise of any
Warrants other than through the Representatives and will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Representatives which will not be unreasonably withheld. The Warrant
solicitation fee will not be paid in a non-solicited transaction. No Warrant
solicitation by the Representatives will occur for a period of 12 months from
the Effective Date.
(u) The Company shall, no later than thirty-five business days
after the Closing, engage at least one additional firm which is acceptable to
the Managing Representative to provide industry research and/or investor
relations and advice to the Company for a period of one year. If the Company
does not engage such firm within the prescribed time period, it hereby
authorizes the Managing Representative on its behalf, to engage and enter into
such agreements as are customary and appropriate for the retention of such firm.
(v) Subject to the limitations set forth in Section 12(a)(vi),
the Company shall place, at its expense, a tombstone advertisement (the
"Tombstone") relating to the Offering in the
8
<PAGE> 11
Wall Street Journal on such date and as requested by and in such form as may be
reasonably acceptable to, the Managing Representative.
7. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the Selling
Shareholders agrees with the several Underwriters as follows:
(a) Such Selling Shareholder will cooperate to the extent
necessary to cause the Registration Statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(b) Such Selling Shareholder will pay all federal and other
taxes, if any, on the transfer or sale of the Additional Unit Shares being sold
by the Selling Shareholder to the Underwriters.
(c) Such Selling Shareholder will do or perform all things
required to be done or performed by the Selling Shareholder prior to the Closing
Date or any Option Closing Date, as the case may be, to satisfy all conditions
precedent to the delivery of the Additional Unit Shares pursuant to this
Agreement.
(d) Such Selling Shareholder has executed or will execute a
"lock-up" letter as provided in Section 11(n) below no later than the Closing
Date.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Shareholder will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Units or
the underlying Common Stock or Warrants to facilitate the sale or resale of the
Units, or its components.
(f) Such Selling Shareholder will advise you promptly and,
if requested by you, will confirm such advice in writing, within the period of
time referred to in Section 6(f) hereof, of any change in the information
relating to such Selling Shareholder that suggests that any statement made in
the Registration Statement or the Prospectus (as then amended or supplemented,
if amended or supplemented) is or may be untrue in any material respect or that
the Registration Statement or Prospectus (as then amended or supplemented, if
amended or supplemented) omits or may omit to state a material fact or a fact
necessary to be stated therein in order to make the statements therein (in the
case of the Prospectus, in light of the circumstances under which they were
made) not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) When the Registration Statement becomes effective and at
all times subsequent thereto up to and including the Closing Date and the Option
Closing Date, the
9
<PAGE> 12
Registration Statement and any amendments thereto will comply in all material
respects with the provisions of the Act and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Prospectus and any supplements thereto will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Commission has not issued any order preventing or
suspending the use of any Prepricing Prospectus.
(b) The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-1 under the Act. The
Registration Statement in the form in which it became or becomes effective and
also in such form as it may be when any post-effective amendment thereto shall
become effective and the Prospectus and any supplement or amendment thereto when
filed with the Commission under Rule 424(b) under the Act, complied or will
comply in all material respects with the provisions of the Act and will not at
any such times contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in light of the
circumstances under which they were made), except that this representation and
warranty does not apply to statements in or omissions from the Registration
Statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company
have been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Company Securities and the
Underwriters' Securities, to be issued and sold by the Company have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the Registration
Statement and the Prospectus.
(d) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Texas with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole.
(e) All the Company's subsidiaries that are "significant
subsidiaries" as defined in Rule 1-02 of Regulation S-X (collectively, the
"Subsidiaries") are listed in an exhibit to the Registration Statement. Each
Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to
10
<PAGE> 13
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of such Subsidiary; all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company directly, or indirectly through one
of the other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance except the pledge thereof, as disclosed in
the Registration Statement, to secure the loans of the Company and its
subsidiaries with their bank lender.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement that
are not described or filed as required by the Act or the Exchange Act.
(g) Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound.
(h) Neither the issuance and sale of the Company Securities,
nor the Underwriters' Securities to be sold by the Company, the execution,
delivery or performance of this Agreement by the Company, nor the consummation
by the Company of the transactions contemplated hereby: (i) requires any
consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration of
the Company Securities and the Underwriters' Agreement, under the Act and the
Exchange Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries; or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any material agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound,
11
<PAGE> 14
or violates or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of the Subsidiaries
or any of their respective properties, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries pursuant to the terms of any agreement or
instrument to which any of them is a party or by which any of them may be bound
or to which any of the property or assets of any of them is subject.
(i) The accountants, Arthur Andersen, L.L.P. and KPMG, L.L.P. who
have certified or shall certify the financial statements included or
incorporated by reference in the Registration Statement and the Prospectus (or
any amendment or supplement thereto) are independent public accountants as
required by the Act.
(j) The consolidated historical and pro forma financial
statements, together with related schedules and notes, set forth in the
Prospectus and the Registration Statement comply as to form in all material
respects with the requirements of the Act. Such historical financial statements
fairly present the consolidated financial position of the Company and the
Subsidiaries at the respective dates indicated and the results of their
operations and their cash flows for the respective periods indicated, in
accordance with generally accepted accounting principles ("GAAP") consistently
applied throughout such periods. Such pro forma financial statements have been
prepared on a basis consistent with such historical statements, except for the
pro forma adjustments specified therein, and give effect to assumptions made on
a reasonable basis and present fairly the historical and proposed transactions
contemplated by the Prospectus and this Agreement. The other financial and
statistical information and data included in the Prospectus and in the
Registration Statement, both historical and pro forma, are, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(k) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws affecting
creditors' rights generally, (b) that the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought, and (c) as such enforceability may be subject to limitations on
rights to indemnity or contribution or both by the federal or state securities
laws or the public policies underlying such laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not
12
<PAGE> 15
been any change in the capital stock, or material increase in the short-term
debt or long-term debt, of the Company or any of the Subsidiaries, or any
material adverse change, or any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), business, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
(m) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Registration Statement or Prospectus as being owned by it, free and clear of all
liens, claims, security interests or other encumbrances, except such as are
described in the Registration Statement and the Prospectus or in a document
filed as an exhibit to the Registration Statement, and all the property
described in the Prospectus as being held under lease by each of the Company and
the Subsidiaries is held by it under valid and enforceable leases.
(n) The Company has not distributed and, prior to the later to
occur of: (i) the Closing Date; and (ii) the completion of the distribution of
the Units, will not distribute any offering material in connection with the
offering and sale of the Units other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(o) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("Permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such Permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such Permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such Permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(p) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) To the Company's knowledge, neither the Company nor any of
its Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
13
<PAGE> 16
(r) The Company and each of the Subsidiaries have filed all tax
returns required to be filed, which returns are complete and correct, and
neither the Company nor any Subsidiary is in default in the payment of any taxes
which were payable pursuant to said returns or any assessments with respect
thereto.
(s) No holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company because of the filing of the Registration Statement or consummation of
the transactions contemplated by this Agreement.
(t) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registration, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not aware of
any claim to the contrary or any challenge by any other person to the rights of
the Company and the Subsidiaries with respect to the foregoing.
(u) Each of the Company and the Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
United States Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with respect to each "plan"
(as defined in ERISA and such regulations and published interpretations) in
which employees of the Company and the Subsidiaries are eligible to participate
and each such plan is in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and published
interpretations, and has not incurred any unpaid liability to the Pension
Benefit Guaranty Corporation (other than for the payment of premiums in the
ordinary course) or to any such plan under Title IV of ERISA.
9. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder represents and warrants to each Underwriter that:
(a) Such Selling Shareholder on the Closing Date will have,
valid title to the Additional Unit Shares to be sold by such Selling
Shareholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date
will have, full legal right, power and authorization, and any approval required
by law, to sell, assign transfer and deliver such Additional Unit Shares in the
manner provided in this Agreement, and upon delivery of and payment for such
Additional Unit Shares hereunder, the several Underwriters will acquire valid
title to such shares of Common Stock free and clear of any lien, claim, security
interest or other encumbrance.
(c) This Agreement and the Custody Agreement have been duly
authorized, executed and delivered by or on behalf of such Selling Shareholder
and are the valid and binding agreements of such Selling Shareholder enforceable
against such Selling Shareholder in
14
<PAGE> 17
accordance with their terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws affecting creditors' rights generally, (b) that the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought, and (c) as such enforceability may
be subject to limitations on rights to indemnity or contribution or both by the
federal or state securities laws or the public policies underlying such laws.
(d) Neither the execution and delivery of this Agreement or the
Custody Agreement by or on behalf of such Selling Shareholder nor the
consummation of the transactions herein or therein contemplated by or on behalf
of such Selling Shareholder requires any consent, approval, authorization or
order of, or filing or registration with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required under the Act and the Exchange Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the shares of Common Stock or such as has been obtained) or
conflicts or will conflict with or constitutes or will constitute a breach of,
or default under, or violates or will violate, any agreement, indenture or other
instrument to which such Selling Shareholder is a party or by which such Selling
Shareholder is or may be bound or to which any of such Selling Shareholder's
property or assets is subject, or any statute, law, rule, regulation, ruling,
judgment, injunction, order or decree applicable to such Selling Shareholder or
to any property or assets of such Selling Shareholder.
(e) The Registration Statement and the Prospectus, insofar as
they relate to such Selling Shareholder, do not and on the Closing Date will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading (as to the Prospectus, in light of the circumstances under which
they were made).
(f) Such Selling Shareholder does not have any knowledge or any
reason to believe that the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading (as to the Prospectus,
in light of the circumstances under which they were made).
(g) The representations and warranties of such Selling
Shareholder in the Custody Agreement are, and on the Closing Date will be, true
and correct.
(h) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Additional Unit Shares, except for the
lock-up arrangements described in the Prospectus.
15
<PAGE> 18
10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and each of David R. Little, Jerry J. Jones and
Bryan H. Wimberly (Messrs. Little, Jones and Wimberly for purposes of this
Section 10 are collectively referred to as "Indemnifying Selling Shareholders"),
jointly and severally, agree to indemnify and hold harmless each of you and each
other Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act from
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Prepricing Prospectus or in the Registration Statement or the Prospectus or in
any amendment or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading (as to
the Prospectus or any supplement or amendment thereto, in light of the
circumstances in which they were made), except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to such Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Company Securities and the Additional Unit Shares
by such Underwriter to any person if a copy of the Prospectus shall not have
been delivered or sent to such person within the time required by the Act and
the regulations thereunder, and the untrue statement or alleged untrue statement
or omission or alleged omission of a material fact contained in such Prepricing
Prospectus was corrected in the Prospectus, provided that the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. Notwithstanding anything to the
contrary set forth in this Subsection (a), the Indemnifying Selling Shareholders
indemnification obligations hereunder shall not apply to any claims related to
information concerning the Company for which they did not have actual knowledge
and shall be limited to the aggregate proceeds received by such Selling
Shareholder in the Offering. The foregoing indemnity agreement shall be in
addition to any liability which the Company or any Selling Shareholder may
otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or any Selling Shareholder, such
Underwriter or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless: (i) the indemnifying parties have agreed in
writing to pay such fees and expenses; (ii) the indemnifying parties have failed
to assume the defense and employ counsel; or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling
16
<PAGE> 19
person and the indemnifying parties and such Underwriter or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and any indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by the Managing Representative, and
that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Underwriter, to the extent provided in the preceding
paragraph, and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, each Selling Shareholder, and any person who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company and the Selling Shareholders to each Underwriter, but only with
respect to information relating to such Underwriter furnished in writing by or
on behalf of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, any Selling Shareholder,
or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (c), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
such Underwriter's expense), and the Company, its directors, any such officer,
the Selling Shareholders, and any such controlling person shall have the rights
and duties given to the Underwriters by paragraph (b) above.
(d) If the indemnification provided for in this Section 10 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses: (i) in
such proportion as is
17
<PAGE> 20
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other hand from
the offering of the Units; or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Shareholders on the one
hand and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions and other compensation received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus,
including the notes thereto; provided that, in the event that the Underwriters
shall have purchased any Additional Unit Shares hereunder, any determination of
the relative benefits received by the Company, the Selling Shareholders or the
Underwriters from the offering of the Units shall include the net proceeds
(before deducting expenses) received by the Company and the Selling
Shareholders, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Shareholders on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 10 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (d) above. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, liabilities and expenses referred
to in paragraph (d) above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 10, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price of the Units underwritten by it and
other compensation received by the Underwriter in connection with the Offering
and distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. Notwithstanding the
provisions of this Section 10, no Selling Shareholder shall be required to
contribute any amount in excess of the amount by which the total price of the
Additional Shares received by such Selling Shareholder exceeds the amount of
any damages that such Selling Shareholder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission in connection with the information on the Company provided in the
Prospectus. No person guilty of fraudulent
18
<PAGE> 21
misrepresentation (within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 10 are several in proportion to the respective numbers of Firm Units set
forth opposite their names in Schedule II hereto (or such numbers of Firm Units
increased as set forth in Section 13 hereof) and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution
under this Section 10 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and contribution agreements contained in this Section
10 and the representations and warranties of the Company and the Selling
Shareholders set forth in this Agreement shall remain operative and in full
force and effect until the later to occur of the fourth anniversary of the date
hereof or the expiration of all applicable statutes of limitations, regardless
of: (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or the
Selling Shareholders or any person controlling the Company; (ii) acceptance of
any Units and payment therefor hereunder; and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 10.
11. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase the Firm Units hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Units may commence,
the Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred: (i) any change, or any development involving a
prospective change, in or affecting the
19
<PAGE> 22
condition (financial or other), business, properties, net worth, or results of
operations of the Company or the Subsidiaries, taken as a whole, not
contemplated by the Prospectus, which in your opinion, as Representatives of the
several Underwriters, would materially adversely affect the market for the
Units; or (ii) any event or development relating to or involving the Company or
any officer or director of the Company or any Selling Shareholder which makes
any material statement made in the Prospectus untrue or which, in the opinion of
the Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Units.
(c) You shall have received an opinion, dated on the Closing
Date, of Fulbright & Jaworski, L.L.P., counsel for the Company reasonably
satisfactory to you in form and substance.
(d) You s shall have received an opinion, dated on the Closing
Date, of Fulbright & Jaworski, L.L.P., special counsel to the Selling
Shareholders, reasonably satisfactory to you in form and substance.
(e) You shall have received on the Closing Date an opinion of
Greenberg Traurig, P.A., counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, in form
and substance reasonably satisfactory to you.
(f) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Arthur Anderson LLP independent certified public accountant,
substantially in the forms heretofore approved by you.
(g) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 11(g) and in Section 11(h) hereof.
(h) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its obligations or agreements
herein contained and required to be performed or complied with by it hereunder
at or prior to the Closing Date.
(i) All the representations and warranties of the Selling
Shareholders contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by or on behalf of the Selling Shareholders to the effect set forth
in this Section 11(i) and in Section 11(j) hereof.
20
<PAGE> 23
(j) The Selling Shareholders shall not have failed at or prior
to the Closing Date to have performed or complied with any of their obligations
or agreements herein contained and required to be performed or complied with by
them hereunder at or prior to the Closing Date.
(k) Prior to the Closing Date the shares of Common Stock and
Warrants which the Company agrees to sell pursuant to this Agreement shall have
been listed, subject to notice of issuance, on the Nasdaq National Market.
(l) The Sellers shall have furnished or caused to be furnished
to you such further certificates and documents as you shall have requested.
(m) You shall have received "lock-up" letters, in form and
substance satisfactory to you, signed by each of the Company's current officers
and each of the Selling Shareholders.
(n) The Company shall have executed and delivered a Consulting
Agreement, in form and substance satisfactory to you.
(o) The Company shall have delivered to you the Underwriters'
Warrants in the form attached hereto as Exhibit B.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company
or any Attorneys-in-Fact or any Selling Shareholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty by the Company, the Selling Shareholders
or the particular Selling Shareholder, as the case may be, to each Underwriter
as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Units hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 11, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (h) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Units.
12. EXPENSES.
(a) The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by them of their
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the
21
<PAGE> 24
Prospectus, and each amendment or supplement to any of them; (ii) the printing
(or reproduction) and delivery (including postage, air freight charges and
charges for counting and packaging) of such copies of the Registration
Statement, each Prepricing Prospectus, the Prospectus and all amendments or
supplements to any of them, as may be reasonably requested for use in connection
with the offering and sale of the Units; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Common Stock and
the Warrants, including any stamp taxes in connection with the original issuance
and sale of the Company Securities; (iv) the printing (or reproduction) and
delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda
and all other agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Units; (v) all costs and expenses up to
$10,000 for the placement of the Tombstone pursuant to Section 6(v), the
preparation, printing, purchase and delivery of such number of lucite mementos
as the Managing Representative shall determine and the preparation, printing,
binding, copying and delivery of a number of bound volumes of closing documents
as the Managing Representative shall determine; (vi) the listing of the Common
Stock and Warrants on the Nasdaq National Market; (vii) the registration or
qualification of the Company Securities and the Additional Unit Shares, for
offer and sale under the securities or Blue Sky laws of the several states as
provided in Section 6(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the Underwriters relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental Blue
Sky Memoranda and such registration and qualification); (viii) the filing fees
and the fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities Dealers,
Inc.; (ix) the transportation, lodging and other expenses incurred by or on
behalf of Company representatives and the Representatives in connection with
presentations to prospective purchasers of the Units; and (x) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company and the Selling
Shareholders.
(b) In addition to the expenses to be paid and borne by the
Company referred to in Section 12(a) above, the Company shall reimburse you at
closing for expenses incurred by you in connection with the Offering (for which
you need not make any accounting), in the amount of 2% of the price to the
public of the Firm Units and Additional Units sold in the Offering (the
"Non-Accountable Expense Allowance"). The Non-Accountable Expense Allowance
shall cover, among other things, the fees of your legal counsel, but shall not
include any expenses for which the Company is responsible under Section 12(a)
above, including the reasonable fees and disbursements of your legal counsel
with respect to Blue Sky and NASD matters. As of the date hereof, $25,000 has
been advanced by the Company to the Underwriters with respect to such
Non-Accountable Expense Allowance.
(c) In the event that the Company does not or cannot, for any
reason whatsoever other than a default by the Underwriters, expeditiously
proceed with the Offering, or if any of the representations, warranties or
covenants contained in this Agreement are not materially correct or cannot be
complied with by the Company, or business prospects or obligations of the
Company are adversely affected and the Company does not commence or continue
with the Offering at any time, or terminates the proposed transaction prior to
the Closing Date, or the Representatives terminate this Agreement because of any
failure or refusal on the
22
<PAGE> 25
part of the Company or the Selling Shareholders to comply with the terms or
fulfill any of the conditions of this Agreement, the Company shall reimburse the
Underwriters on an accountable basis for all out-of-pocket expenses actually
incurred in connection with the Underwriting, this Agreement and all of the
transactions hereby contemplated, including, without limitation, your legal fees
and expenses. Out-of-pocket expenses shall include, without limitation, time
spent by the Representatives' employees and agents, calculated at the following
hourly rates: (i) Principals, $300 per hour; (ii) Directors, $200 per hour;
(iii) Analysts, $150 per hour; and (iv) Administrative Personnel, $75 per hour.
13. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Units may commence, when
notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company and the Selling Shareholders.
If any one or more of the Underwriters shall fail or refuse to purchase
Units which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Units which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Units which the Underwriters are obligated
to purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Units set forth
opposite its name in Schedule I hereto bears to the aggregate number of Firm
Units set forth opposite the names of all non-defaulting Underwriters or in such
other proportion as you may specify in accordance with the Agreement Among
Underwriters, to purchase the Units which such defaulting Underwriter or
Underwriters are obligated, but fail or refuse, to purchase. If any one or more
of the Underwriters shall fail or refuse to purchase Units which it or they are
obligated to purchase on the Closing Date and the aggregate number of Units with
respect to which such default occurs is more than one-tenth of the aggregate
number of Units which the Underwriters are obligated to purchase on the Closing
Date and arrangements satisfactory to you and the Company for the purchase of
such Units by one or more non-defaulting Underwriters or other party or parties
approved by you and the Company are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case which does not
result in termination of this Agreement, either you or the Company shall have
the right to postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any such default of any such Underwriter under this
Agreement. The term "Underwriter" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule I hereto who, with
your approval and the approval of the Company, purchases Units which a
defaulting Underwriter is obligated, but fails or refuses, to purchase.
23
<PAGE> 26
Any notice under this Section 13 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
14. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Shareholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Additional Units), as the case may be: (i)
trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market shall have been suspended or
materially limited; (ii) a general moratorium on commercial banking activities
in New York or Texas shall have been declared by either federal or state
authorities; or (iii) there shall have occurred any outbreak or escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Units
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Units by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
15. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization and market
making legends on the inside cover page, and the statements in the first,
second, third, fifteenth, sixteenth and penultimate paragraphs under the caption
"Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute
the only information furnished by or on behalf of the Underwriters through you
as such information is referred to in Sections 8(b) and 10 hereof. The first
paragraph under the caption "Underwriting" will contain the names and
participations of the underwriters; the third paragraph will contain the selling
concession and the reallowance.
16. MISCELLANEOUS. Except as otherwise provided in Sections 6, 13 and
14 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered: (i) if to the Company, at the office of the
Company at 7272 Pinemont, Houston, Texas 77040, Attention: David R. Little,
Chairman of the Board, Chief Executive Officer and President; or (ii) if to the
Selling Shareholders, c/o Gary A. Allcorn or David R. Little, Attorneys-in-Fact,
7272 Pinemont, Houston, Texas 77040; or (iii) if to each of you, as the
Representatives and the several Underwriters, then to J.P. Turner & Company,
L.L.C., 3340 Peachtree Road, Suite 450, Atlanta, GA 30326, Attention: Director
of Investment Banking, Millennium Financial Group, Inc., 235 West 56th Street,
Suite 37E, New York, New York 10019, Attention: President, and HD Brous & Co.,
Inc., 40 Cuttermill Road, Suite 500, Great Neck, New York 11020, Attention:
President.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Selling Shareholders, the Company, its directors and
officers, and the other controlling persons referred to in Section 10 hereof and
their respective successors and assigns, to the extent provided herein, and no
other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns" as
used in this
24
<PAGE> 27
Agreement shall include a purchaser from any Underwriter of any of the Units in
his status as such purchaser.
17. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed exclusively in accordance with the laws of the State of New
York applicable to contracts made and to be performed within the State of New
York. Each party hereto agrees to submit to the personal jurisdiction and venue
of the State and/or federal courts located in New York, New York, for resolution
of all disputes arising out of, in connection with, or by reason of the
interpretation, construction, and enforcement of this agreement, and hereby
waives the claim or defense therein that such courts constitute an inconvenient
forum.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
DXP ENTERPRISES, INC.
By:
-------------------------------------
David R. Little
Chairman of the Board,
Chief Executive Officer
and President
Each of the Selling Shareholders
named in Schedule I hereto
By:
-------------------------------------
David R. Little,
Attorney-in-Fact
By:
-------------------------------------
Gary A. Allcorn,
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
25
<PAGE> 28
J.P. TURNER & COMPANY, L.L.C.
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
As Representatives of the Several Underwriters
J.P. TURNER & COMPANY, L.L.C. MILLENNIUM FINANCIAL GROUP, INC.
By: By:
---------------------------------- ----------------------------------
William Mello, President
As Its:
------------------------------
HD BROUS & CO., INC.
By:
----------------------------------
As Its:
-------------------------------
26
<PAGE> 29
SCHEDULE I
UNDERWRITERS.
DXP ENTERPRISES, INC.
<TABLE>
<CAPTION>
NAME OF
UNDERWRITER FIRM UNITS
----------- ----------
<S> <C>
J.P. Turner & Company, L.L.C.
Millennium Financial Group, Inc.
HD Brous & Co., Inc.
-------------
TOTAL 1,700,000
=============
</TABLE>
i
<PAGE> 30
SCHEDULE II
SELLING SHAREHOLDERS
DXP ENTERPRISES, INC.
<TABLE>
<CAPTION>
NUMBER OF
SELLING SHAREHOLDERS ADDITIONAL SHARES
-------------------- -----------------
<S> <C>
David R. Little 85,000
Jerry J. Jones 85,000
Bryan H. Wimberly 85,000
-------
TOTAL 255,000
=======
</TABLE>
ii
<PAGE> 1
EXHIBIT 4.2
No. W ___ VOID AFTER 5:00 P.M. FEBRUARY , 2002
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
DXP ENTERPRISES, INC.
CUSIP 233377 11 8
THIS CERTIFIES THAT, FOR VALUE RECEIVED or registered assigns
is the registered holder (the "Registered Holder") of the number of Redeemable
Warrants (the "Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Warrant Certificate and the Warrant Agreement (as hereinafter defined), one
fully paid and nonassessable share of Common Stock, $.01 par value per share, of
DXP Enterprises, Inc., a Texas corporation (the "Company"), at the purchase
price (the "Purchase Price") of $11.00 per share at any time prior to the
Expiration Date (as hereinafter defined) upon the presentation and surrender of
this Warrant Certificate with the Subscription Form on the reverse hereof duly
executed with signatures guaranteed by a bank, broker or qualified financial
institution, at the corporate office of American Stock Transfer & Trust Company,
as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment
in full of the Purchase Price, plus transfer taxes, if any. Payment of the
Purchase Price shall be made in lawful money of the United States of America in,
at the option of the Registered Holder, cash or by bank or cashier's check made
payable to the order of the Company.
This Warrant Certificate and each Warrant represented hereby is issued
pursuant to and is subject in all respects to the terms and conditions set forth
in the Warrant Agreement (the "Warrant Agreement"), dated February , 1999, by
and between the Company and the Warrant Agent, as such agreement may be amended
from time to time, to all of which terms and provisions the Registered Holder
consents by acceptance hereof. Each capitalized term used herein but otherwise
not defined herein shall have the meaning assigned to it in the Warrant
Agreement.
Upon the happening of certain events provided for in the Warrant Agreement,
the Purchase Price and the number of shares of Common Stock issuable upon the
exercise of each Warrant represented hereby are subject to modification or
adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but the Company shall not be obligated to issue any
fractional share interests or fractional warrant interests upon the exercise of
any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in
lieu of fractional interests. Any fractional interest shall be eliminated. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates in
respect of the Warrants not exercised.
The term "Warrant Expiration Date" shall mean 5:00 P.M., New York, New York
time on the earlier to occur of February , 2002 and the date immediately
preceding the Redemption Date.
The Company shall not be obligated to deliver any shares of Common Stock
pursuant to the exercise of this Warrant unless the sale of the shares of Common
Stock issuable upon exercise of the Warrants has been registered under the
Securities Act of 1933, as amended (the "Act"), or such other actions as may be
required by federal or state law relating to the issuance or distribution of
securities shall have been taken. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
Prior to the Warrant Expiration Date, subject to the foregoing and to the
provisions of the Warrant Agreement, the Registered Holder shall be entitled to
exchange this Warrant Certificate with or without other
<PAGE> 2
Warrant Certificates for another Warrant Certificate or Warrant Certificates for
the same aggregate number of Warrants, upon surrender of this Warrant
Certificate at the office maintained for such purpose by the Warrant Agent. Upon
due presentment for registration or transfer of this Warrant Certificate at such
office, and payment of any tax or other charge imposed in connection therewith
or incident thereto, a new Warrant Certificate or Warrant Certificates
representing the same aggregate number of Warrants will be issued to the
transferee in exchange therefor, subject to the provisions of the Warrant
Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any of the rights of a shareholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to attend or receive
any notice of meetings of shareholders or any other proceedings of the Company.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company on thirty days prior written notice, at a
redemption price of $0.25 per Warrant, at any time commencing on the Initial
Warrant Redemption Date, provided that the average of the (i) closing bid price
for the Common Stock in the over-the-counter market as reported by the NASD
Automated Quotation System or (ii) closing sale price on the primary exchange on
which the Common Stock is traded, if the Common Stock is traded on a national
securities exchange, or (iii) closing sale price in the over-the-counter market
as furnished by The National Quotation Bureau, Inc., or NASD historical research
department, if the Common Stock is not listed or admitted for trading on any
national securities exchange, and is not reported by the Nasdaq Stock Market,
for thirty consecutive trading days shall have exceeded $15.00 per share of
Common Stock (subject to adjustment in the event of any stock splits, stock
dividends or reclassifications). Notice of redemption (the "Notice of
Redemption") shall be given within fifteen calendar days of the aforementioned
thirty consecutive trading days and at least thirty but not more than
thirty-five calendar days before the date fixed for redemption to the Registered
Holders at their last address as shall appear on the records of the Warrant
Agent, all as provided in the Warrant Agreement. On and after the date fixed for
redemption, the Registered Holder shall have no rights with respect to this
Warrant except to receive the $.25 per Warrant upon surrender of this
Certificate.
Under certain circumstances, J.P. Turner & Company, L.L.C., Millennium
Financial Group, Inc., HD Brous & Co., Inc. and each of their successors and
assigns shall be entitled to receive an aggregate of five percent (5%) of the
Purchase Price of the Warrants represented hereby.
Prior to due presentment for registration or transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
This Warrant Certificate is not valid for any purpose until it is
countersigned by the Warrant Agent.
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed as of the date first above written, manually or in facsimile by
two of its officers thereunto duly authorized and a facsimile of its corporate
seal to be imprinted hereon.
DXP ENTERPRISES, INC.
SEAL
By:
----------------------------------
David R. Little
President
By:
----------------------------------
Gary A. Allcorn
Secretary
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent
By:
------------------------------------
Authorized Officer
<PAGE> 4
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
Common Stock of DXP Enterprises, Inc., or its successors, issuable upon the
exercise of such Warrants, and requests that certificates for such securities
shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(please print or type name and address)
and be delivered to
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
<PAGE> 5
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
<TABLE>
<S> <C> <C>
1. The exercise of this Warrant was solicited by:
A. J.P. Turner Company, L.L.C. [ ]
B. Millennium Financial Group, Inc. [ ]
C. HD Brous & Co., Inc. [ ]
2. The exercise of this Warrant was solicited by . [ ]
3. If the exercise of this Warrant was not solicited, please
check the following box. [ ]
</TABLE>
<TABLE>
<S> <C>
Dated: X
- --------------------------------------------- ---------------------------------------------
---------------------------------------------
Address
---------------------------------------------
Social Security or Taxpayer
Identification Number
---------------------------------------------
Signature Guaranteed
---------------------------------------------
</TABLE>
<PAGE> 6
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, , hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints Attorney to transfer this
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
Dated:
- ---------------------------------------------- X
- ---------------------------------------------------
------------------------------------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE MEDALLION
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE, WHO IS A MEMBER OF THE
MEDALLION PROGRAM.
<PAGE> 1
EXHIBIT 4.3
WARRANT AGREEMENT
THIS AGREEMENT, dated this ____ day of February, 1999 by and between
DXP ENTERPRISES, INC., a Texas corporation (the "Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of up to
1,700,000 units (the "Units"), each consisting of one share of the Company's
common stock, $.01 par value per share ("Common Stock"), and one redeemable
warrant, entitling the holder to purchase one share of Common Stock ("Redeemable
Warrants") (collectively referred to as the "Securities"), (ii) the
over-allotment option to purchase up to 255,000 additional Units (the
"Over-allotment Option"), and (iii) the sale to J.P. Turner & Company, L.L.C.,
its successors and assigns ("JPT") of warrants (the "Underwriter's Warrants") to
purchase up to 170,000 shares of Common Stock and 170,000 Redeemable Warrants,
such Redeemable Warrants, except as otherwise set forth herein, being identical
to the Redeemable Warrants being sold to the public (the Redeemable Warrants
issuable upon the exercise of the Underwriter's Warrants are referred to as the
"Common Stock Warrants"), the Company will issue up to 1,955,000 Redeemable
Warrants and may issue up to 170,000 Common Stock Warrants (subject to increase
as provided in the Underwriter's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Redeemable Warrants and the Common Stock Warrants
(collectively, the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Underwriter, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. AS USED HEREIN, THE FOLLOWING TERMS SHALL HAVE THE
FOLLOWING MEANINGS, UNLESS THE CONTEXT SHALL OTHERWISE REQUIRE:
(a) "Common Stock" shall mean the common stock of the Company, par
value $.01 per share.
<PAGE> 2
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located on the date hereof at 40 Wall Street, New
York, New York.
(c) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder thereof with such
Registered Holder's signature guaranteed, and (ii) payment in cash or by bank or
cashier's check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" for the Warrants shall mean
February ___, 1999.
(e) "Initial Warrant Redemption Date" shall mean February ___, 1999.
(f) "Purchase Price" shall mean, subject to modification and adjustment
as provided in Section 8, $11.00 per share of Common Stock.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Representatives" shall mean JPT, Millennium Financial Group, Inc.
and HD Brous & Co., Inc.
(i) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any other class or classes of such corporation shall
have or may have voting power by reason of the happening of any contingency) is
at the time directly or indirectly owned by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
(j) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, or its authorized successor.
(k) "Underwriting Agreement" shall mean the underwriting agreement
dated February ___, 1999 among the Company and the Representatives on behalf of
the Underwriters named therein relating to the purchase and sale of the Units.
(l) "Underwriter's Warrant Agreement" shall mean the agreement dated as
of January ___, 1999 between the Company and JPT relating to and governing the
terms and provisions of the Underwriter's Warrants.
2
<PAGE> 3
(m) "Warrant Certificate" shall mean a certificate representing each of
the Warrants substantially in the form annexed hereto as Exhibit A.
(n) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (Eastern
time) on February ___, 2002.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) One Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Purchase Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement and payment of the applicable sum,
Warrant Certificates representing 1,700,000 Redeemable Warrants to purchase up
to an aggregate of 1,700,000 shares of Common Stock (subject to modification and
adjustment as provided in Section 8) shall be executed by the Company and
delivered to the Warrant Agent.
(c) Upon exercise of the Over-allotment Option, in whole or in part,
and payment of the applicable sums, Warrant Certificates representing up to
255,000 Redeemable Warrants to purchase up to an aggregate of 255,000 shares of
Common Stock (subject to modification and adjustment as provided in Section 8)
shall be executed by the Company and delivered to the Warrant Agent.
(d) Upon exercise of the Underwriter's Warrants as provided therein,
and payment of the applicable exercise price, Warrant Certificates representing
up to 170,000 Common Stock Warrants to purchase up to an aggregate of 170,000
shares of Common Stock (subject to modification and adjustment as provided in
Section 8 hereof and in the Underwriter's Warrant Agreement), shall be executed
by the Company and delivered to the Warrant Agent.
(e) From time to time, up to the Warrant Expiration Date, as the case
may be, the Warrant Agent shall countersign and deliver Warrant Certificates in
required denominations of one or whole number multiplies thereof to the person
entitled thereto in connection with any transfer or exchange permitted under
this Agreement. Except as provided in Section 7 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder, (ii)
Warrant Certificates issued upon any transfer or exchange of Warrants, (iii)
Warrant Certificates issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant Certificates
issued upon exercise of the Underwriter's Warrant Agreement (including Common
Stock Warrants in excess of 170,000 Underwriter's Warrants issued as a result of
the antidilution provisions contained in the Underwriter's Warrant Agreement),
and (v) at the option of the Company, Warrant Certificates in such form as may
be approved by its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of shares of Common Stock purchasable upon
exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 8 hereof.
3
<PAGE> 4
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein) and
may have such letters, numbers or other marks of identification or designation
and such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen or destroyed Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, President or any Vice President and by its Treasurer
or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual
signatures or by facsimile signatures printed thereon, and shall have imprinted
thereon a facsimile of the Company's seal. Warrant Certificates shall be
manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
SECTION 4. EXERCISE.
(a) Warrants may be exercised commencing at any time on or after the
Initial Warrant Exercise Date, but not after the earlier to occur of the date
fixed for redemption pursuant to Section 9 hereof and the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof with such Registered
Holder's signature guaranteed, together with payment in cash or by bank or
cashier's check made payable to the order of the Company, of an amount in lawful
money of the United States of America equal to the applicable Purchase Price has
been received in good funds by the Warrant Agent. The person entitled to receive
the securities deliverable upon such exercise shall be treated for all purposes
as the holder of such securities as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date and in any event
within five business days after such date, upon due exercise of Warrants, the
Warrant Agent on behalf of the Company shall cause to be issued to the person or
persons entitled to receive the same a Common Stock certificate or certificates
for the shares of Common Stock deliverable upon such exercise, and the Warrant
Agent shall deliver the same to the person or persons entitled thereto. Upon the
exercise of any two or more even whole number multiples of Warrants, the Warrant
Agent shall promptly notify the Company in writing of such
4
<PAGE> 5
fact and of the number of securities delivered upon such exercise and, subject
to subsection (b) below, shall cause all payments of an amount in cash or by
check made payable to the order of the Company, equal to the Purchase Price, to
be deposited promptly in the Company's bank account.
(b) At any time after February__, 2000, upon the exercise of Warrants,
(i) the last closing price of the Company's Common Stock on the Exercise Date,
as reported by the Nasdaq National Market, is equal to or greater than the
Purchase Price, (ii) the exercise of the Warrant is solicited by a
Representative at such time that such Representative is a member of the National
Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held
in a discretionary account, (iv) disclosure of the compensation arrangement is
made in documents provided to the holders of the Warrants, (v) the solicitation
of the exercise of the Warrant is not in violation of Regulation M promulgated
under the Securities Exchange Act of 1934, as amended, (vi) the Representatives
provide bona fide services in connection with solicitation of the exercise of
the Warrants and (vii) the Warrant holder designates in writing which
broker-dealer made the solicitation, then such Representative shall be entitled
to receive from the Company upon exercise of each of the Warrants so exercised,
a fee of five percent (5%) of the Purchase Price paid to the Company in respect
of the Warrants so exercised (the "Exercise Fee"). Within five (5) business days
after the end of each month, commencing in February 2000, the Warrant Agent will
notify the Representatives of each Warrant Certificate that has been properly
completed for exercise by holders of Warrants during the last month. The Warrant
Agent will provide the Representatives with such information, in connection with
the exercise of each Warrant, as the Representatives shall reasonably request.
The Company will deliver to the Representatives the Exercise Fee promptly after
receipt by the Warrant Agent of the Purchase Price in respect of any Warrants so
exercised. In the event that an Exercise Fee is paid to the Representatives with
respect to a Warrant that was not properly completed for exercise or in respect
of which the Representatives are not entitled to an Exercise Fee, the
Representatives will return such Exercise Fee to the Company. JPT and the
Company may at any time after __________, 19___, and during business hours,
examine the records of the Warrant Agent, including its ledger of original
Warrant Certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of this Section
4(b) may not be modified, amended or deleted without the prior consent of JPT
and the Company.
(c) The Company shall not be obligated to issue any fractional share
interests or fractional warrant interests upon the exercise of any Warrant or
Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fractional interest shall be eliminated.
(d) Anything in this Section 4 notwithstanding, no Warrant will be
exercisable unless at the time of exercise a registration statement covering the
issuance of the shares of Common Stock issuable upon exercise of such Warrant is
effective and contains a prospectus meeting the requirements of Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act").
5
<PAGE> 6
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issuance
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issuance thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that, so long as any unexpired Warrants
remain outstanding, the Company will use commercially reasonable efforts to file
such post-effective amendments to the registration statement (Form S-1,
Registration No. 333-53387) (the "Registration Statement") filed pursuant to the
Act with respect to the Common Stock issuable upon exercise of the Warrants (or
other appropriate registration statements or post-effective amendment or
supplements) as may be necessary to permit it to deliver to each person
exercising a Warrant, a prospectus meeting the requirements of Section 10(a)(3)
of the Act and otherwise complying therewith, and will deliver such a prospectus
to each such person. To the extent that during any period it is not reasonably
likely that the Warrants will be exercised, due to market price or otherwise,
the Company need not file such a post-effective amendment or other registration
statement or post-effective amendments or supplements during such period. The
Company will use its reasonable efforts to obtain appropriate approvals or
registrations under state "blue sky" securities laws, if any. With respect to
any such securities, however, Warrants may not be exercised by, and shares of
Common Stock may not be issued to, any Registered Holder in any state in which
such exercise would be unlawful, or if a prospectus meeting the requirements of
Section 10(a)(3) of the Act is not available for delivery in connection
therewith.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
6
<PAGE> 7
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant's Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for registration
of transfer, or for exchange or exercise, the subscription or exercise form, as
the case may be, on the reverse thereof shall be duly endorsed or be accompanied
by a written instrument or instruments of transfer and subscription, in form
satisfactory to the Company and the Warrant Agent, duly executed by the
Registered Holder thereof with such Registered Holder's signature guaranteed.
(d) A $10 service charge may be imposed for any exchange, registration
or transfer of Warrant Certificates. However, the Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(f) All Warrant Certificates surrendered for exercise or for exchange
shall be promptly canceled by the Warrant Agent.
(g) Prior to due presentment for registration or transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. LOSS OR MUTILATION.
(a) Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Warrant
Agent shall countersign and deliver in lieu thereof a new Warrant Certificate
representing an equal aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall also
7
<PAGE> 8
comply with such other reasonable regulations and pay such other reasonable fees
as the Warrant Agent shall establish.
SECTION 8. ADJUSTMENT OF EXERCISE PRICE.
(a) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof, sell any shares of Common
Stock for a consideration per share less than the lower of (i) the last sale
price of the Common Stock as reported on the Nasdaq National Market on the
trading date immediately preceding such sale (the "Market Price"), or (ii) the
Purchase Price then in effect, or issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine the outstanding
shares of Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision or combination being herein called a "Change of Shares"),
then, and thereafter immediately before the date of or the record date for, as
the case may be, such Change of Shares, the Purchase Price in effect immediately
prior to such Change of Shares shall be changed to a price determined by
dividing (1) the product of (a) the Purchase Price in effect immediately before
such Change of Shares and (b) the sum of (i) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, and (ii)
the number of shares determined by dividing (A) the aggregate consideration, if
any, received by the Company upon such sale, issuance, subdivision or
combination, by the lesser of (x) the Market Price, and (y) the Purchase Price,
in effect immediately prior to such Change of Shares; by (2) the total number of
shares of Common Stock outstanding immediately after such Change of Shares, and
then rounding such price to the nearest $.01.
(b) For the purposes of any adjustment to be made in accordance with
Section 8(a) the following provisions shall be applicable:
(i)
(A) In case of the issuance or sale of shares of Common
Stock (or of other securities deemed hereunder to involve the issuance or sale
of shares of Common Stock) for a consideration part or all of which shall be
cash, the amount of the cash portion of the consideration therefor deemed to
have been received by the Company shall be (i) the subscription price (before
deducting any commissions or any expenses incurred in connection therewith), if
shares of Common Stock are offered by the Company for subscription, or (ii) the
public offering price (before deducting therefrom any compensation paid or
discount allowed in the sale, underwriting or purchase thereof by underwriters
or dealers or others performing similar services, or any expenses incurred in
connection therewith), if such securities are sold to underwriters or dealers
for public offering without a subscription offering, or (iii) the gross amount
of cash actually received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
8
<PAGE> 9
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this Section 8(b).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of then outstanding options, rights or warrants and upon the conversion
or exchange of then outstanding convertible or exchangeable securities.
(ii) Upon each adjustment of the Purchase Price pursuant to
this Section 8, the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be the number derived by multiplying the number
of shares of Common Stock purchasable immediately prior to such adjustment by
the Purchase Price in effect prior to such adjustment and dividing the product
so obtained by the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the date hereof
issue options, rights or warrants to subscribe for shares of Common Stock, or
issue any securities convertible into or exchangeable for shares of Common
Stock, for a consideration per share (determined as provided in Section 8(a) and
as provided below) less than the lower of (i) the Market Price, or (ii) Purchase
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Purchase Price in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Section 8(a) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock,
as the case may be, issuable or that may become issuable under such options,
rights or warrants (assuming exercise in full even if not then currently
exercisable or currently exercisable in full) shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, for a
consideration equal to the minimum exercise price per share provided for in such
9
<PAGE> 10
options, rights or warrants at the time of issuance, plus the consideration, if
any, received by the Company for such options, rights or warrants; provided,
however, that upon the expiration or other termination of such options, rights
or warrants, if any thereof shall not have been exercised, the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(A) (and for the purposes of subsection (E) of Section 8(b) hereof) shall be
reduced by the number of shares as to which options, warrants and/or rights
shall have expired, and such number of shares shall no longer be deemed to be
issued and outstanding, and the Purchase Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued plus
the shares remaining issuable upon the exercise of those options, rights or
warrants as to which the exercise rights shall not have expired or terminated
unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (B) (and for the purposes of subsection
(E) of Section 8(b) hereof) shall be reduced by the number of shares as to which
the conversion or exchange rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange rights shall not
have expired or terminated unexercised.
(C) If any change shall occur in the exercise price per
share provided for in any of the options, rights or warrants referred to in
subsection (A) of this section 8(c), or in the price per share or ratio at which
the securities referred to in subsection (B) of this Section 8(c) are
convertible or exchangeable, such options, rights or warrants or conversion or
exchange rights, as the case may be, to the extent not theretofore exercised,
shall be deemed to have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company shall be deemed to
have issued upon such date new options, rights or warrants or convertible or
exchangeable securities.
(d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than
10
<PAGE> 11
a merger with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the Registered Holder of each Warrant then outstanding shall have the
right thereafter to receive on exercise of such Warrant the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Warrant Agent a statement signed
by its President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8(a)
and (b). The above provisions of this Section 8(d) shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the Warrants,
the Warrant Certificates theretofore and thereafter issued shall, unless the
Company shall exercise its option to issue new Warrant Certificates pursuant to
the terms hereof, continue to express Purchase Price per share and the number of
shares purchasable thereunder as the Purchase Price per share and the number of
shares purchasable thereunder were expressed in the Warrant Certificates when
the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(g) No adjustment of the Purchase Price or the number of shares of
Common Stock issuable upon exercise of each Warrant shall be made as a result of
or in connection with (i) the issuance or sale of the Units, the Over-Allotment
Option or the Underwriter's Warrants or the securities underlying any such
securities, (ii) the issuance or sale of shares of Common Stock
11
<PAGE> 12
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof, options to
be granted under the Company's Long-Term Incentive Plan or any management,
employee, consultant or director award or plan approved by the Board of
Directors of the Company or a committee hereof, (iii) any securities issued in
connection with the Company's acquisition of substantially all the stock or
assets of another business, (iv) any securities issued pursuant to an
underwritten public offering or (v) the issuance or sale of shares of Common
Stock if the amount of said adjustment shall be less than $.02 for one share of
Common Stock, provided, however, that in such case, any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment that shall
amount, together with any adjustment so carried forward, to at least $.02 for
one share of Common Stock. In addition, Registered Holders shall not be entitled
to cash dividends paid by the Company prior to the exercise of any Warrant held
by them.
SECTION 9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the Company may,
on thirty days prior written notice, redeem all of the Warrants at $.25 per
Warrant, provided, however, that before any such call for redemption of Warrants
may take place, the average (i) closing bid price for the Common Stock in the
over-the-counter market as reported by the NASD Automated Quotation System or
(ii) closing sale price on the primary exchange on which the Common Stock is
traded, if the Common Stock is traded on a national securities exchange, or
(iii) closing sale price in the over-the-counter market as furnished by The
National Quotation Bureau, Inc., or NASD historical research department, if the
Common Stock is not listed or admitted for trading on any national securities
exchange, and is not reported by the Nasdaq Stock Market, for thirty consecutive
trading days shall have exceeded $15.00 per share of Common Stock (subject to
adjustment in the event of any stock splits, stock dividends or
reclassifications).
(b) In the event the Company exercises its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants, by mailing to such Registered Holders a notice of redemption,
first class, postage prepaid, within fifteen calendar days of the aforementioned
thirty consecutive trading days and at least thirty but not more than
thirty-five calendar days before the date fixed for redemption, at their last
address as shall appear on the records of the Warrant Agent. Any notice mailed
in the manner provided herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice. At the time of
the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to JPT a similar
notice telephonically and confirmed in writing together with a list of the
Registered Holders (including their respective addresses and number of Warrants
beneficially owned) to whom such notice of redemption has been or will be given.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, and (iv)
that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York
time) on the business day (any day that is not a federal holiday or a day
12
<PAGE> 13
when the banks in the State of New York are authorized to be closed) immediately
preceding the date fixed for redemption. The date fixed for the redemption of
the Warrants shall be the Redemption Date. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for such redemption except as to a Registered Holder (a) to whom
notice was not mailed or (b) whose notice was defective. An affidavit of the
Warrant Agent or the Secretary or Assistant Secretary of the Company that notice
of redemption has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New
York time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
SECTION 10. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and the Representatives, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not be (i) liable for any
recital or statement of fact contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) liable for
any act or omission in connection with this Agreement except for its own gross
negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel satisfactory
to it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, President, Senior Vice-President or
Secretary of the Company (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
13
<PAGE> 14
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; the Company further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own gross negligence or willful misconduct), after giving
30 days prior written notice to the Company. At least 15 days prior to the date
such resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation the Company shall
appoint in writing a new warrant agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company doing business in New
York, New York. After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named herein as the warrant agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though
14
<PAGE> 15
it were not the Warrant Agent. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise,
marked to indicate its cancellation thereof in accordance with Section 6(e)
hereof.
SECTION 11. MODIFICATION OF AGREEMENT.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement without the approval of any holders
of Warrants (i) that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; (ii) that they may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Warrant Certificates; or
(iii) which may be required by law; provided, however, that this Agreement shall
not otherwise be modified, supplemented or altered in any respect except with
the consent in writing of the Registered Holders representing not less than 50%
of the Warrants then outstanding; provided, further, that no change in the
number of the securities purchasable upon the exercise of any Warrant, or the
Purchase Price therefor, shall be made without the consent in writing of the
Registered Holder of the Warrant Certificate, other than such changes as are
specifically permitted or prescribed by this Agreement as originally executed.
In addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Representatives, other than (i) to cure any
ambiguity or to correct any provision which is inconsistent or which is a
manifest mistake or error; (ii) to make any such change that is necessary or
desirable and which shall not adversely affect the interests of the
Representatives; or (iii) except as may be required by law.
SECTION 12. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or five
days after mailed first-class postage prepaid, or upon receipt when sent by
facsimile, with confirmation received, if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company at 580 Westlake Park
Boulevard, Suite 1100, Houston, Texas 77079 Attention: President, or at such
other address as may have been furnished to the Warrant Agent in writing by the
Company; and if to the Warrant Agent, at its Corporate Office. Copies of any
notice delivered pursuant to this Agreement shall be delivered to the
Representatives at the following addresses, or at such other addresses as may
have been furnished to the Company and the Warrant Agent in writing; (i) JPT at
3340 Peachtree Road, Suite 450, Atlanta, Georgia 30326, Attention: President,
(ii) Millennium Financial Group, Inc. at 235 West 56th Street, Suite 37E, New
York, New York 10019, Attention: President, and (iii) HD Brous & Co., Inc. at 40
Cuttermill Road, Great Neck, New York 11021, Attention: President.
15
<PAGE> 16
SECTION 13. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation. The Representatives are, and
shall at all times irrevocably be deemed to be, a third-party beneficiary of
this Agreement, with full power, authority and standing to enforce the rights
granted to it hereunder. In the event of any conflict relating to the
Underwriter's Warrant between the terms hereof and the terms of the
Underwriter's Warrant Agreement, the terms of the Underwriter's Warrant
Agreement shall prevail.
SECTION 15. COUNTERPARTS.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
[SEAL]
DXP ENTERPRISES, INC. AMERICAN STOCK TRANSFER & TRUST COMPANY
By: By:
------------------------------------ ------------------------------------
David R. Little, Herbert J. Lemmer
Chairman of the Board, President and President
Chief Executive Officer
16
<PAGE> 1
EXHIBIT 5.1
FULBRIGHT & JAWORSKI L.L.P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP
1301 McKINNEY, SUITE 5100 HOUSTON
HOUSTON, TEXAS 77010-3095 WASHINGTON, D.C.
AUSTIN
SAN ANTONIO
TELEPHONE: 713/651-5131 DALLAS
FACSIMILE: 713/651-5246 NEW YORK
LOS ANGELES
LONDON
HONG KONG
February 8, 1999
DXP Enterprises, Inc.
7272 Pinemont
Houston, Texas 77040
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1, as amended
(Registration No. 333-53387) (the "Registration Statement"), filed by DXP
Enterprises, Inc., a Texas corporation (the "Company"), with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
(i) the offer by the Company of 1,700,000 Units (the "Units"), each such Unit
comprising one share of the Company's common stock, $.01 par value per share
(the "Common Stock"), and one redeemable warrant entitling the holder thereof to
purchase one share of the Company's Common Stock at a purchase price of $11.00
(the "Warrants"), and up to 255,000 additional Warrants that may be sold by the
Company in the event the underwriters for the offering elect to exercise their
option to purchase an additional 255,000 Units to cover over-allotments and (ii)
the offer by the selling shareholders of the Company listed in the Registration
Statement (the "Selling Shareholders") of up to 255,000 shares of the Common
Stock in the event that the underwriters for the offering elect to exercise
their over-allotment option.
As counsel to the Company, we have examined such corporate records,
documents and questions of law as we have deemed necessary or appropriate for
the purposes of this opinion. In such examinations, we have assumed the
genuineness of signatures and the conformity to the originals of the documents
supplied to us as copies. As to various questions of fact material to this
opinion, we have relied upon statements and certificates of officers and
representatives of the Company.
Upon the basis of such examination, we are of the opinion that:
(i) The 1,700,000 shares of Common Stock included in the Units
offered by the Company, when sold in accordance with the terms set
forth in the Underwriting Agreement filed as Exhibit 1.1 to the
Registration Statement, will be legally issued, fully paid and
nonassessable.
(ii) The 1,700,000 Warrants included in the Units offered by
the Company, when sold in accordance with the terms set forth in the
Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement, will be legally issued, fully paid and nonassessable.
<PAGE> 2
DXP Enterprises, Inc.
February 8, 1999
Page 2
(iii) The 1,700,000 shares of Common Stock issuable by the
Company upon exercise of the Warrants, upon exercise thereof in
accordance with their terms, will be legally issued, fully paid
and nonassessable.
(iv) The 255,000 shares of Common Stock offered by the Selling
Shareholders included in the Units subject to the Underwriters'
over-allotment option have been legally issued and are fully paid and
nonassessable.
(v) The 255,000 Warrants offered by the Company included in the
Units subject to the Underwriters' over-allotment option, when sold in
accordance with the terms agreed upon in the Underwriting Agreement
filed as Exhibit 1.1 to the Registration Statement, will be legally
issued, fully paid and nonassessable.
(vi) The 255,000 shares of Common Stock issuable by the Company
upon exercise of the Warrants included in the Units subject to the
Underwriters' over-allotment option, upon exercise thereof in
accordance with their terms, will be legally issued, fully paid and
nonassessable.
(vii) The warrant to purchase 170,000 Units offered by the
Company to the Underwriters (the "Underwriters Warrant"), when sold in
accordance with the terms set forth in the Underwriting Agreement filed
as Exhibit 1.1 to the Registration Statement, will be legally issued,
fully paid and nonassessable.
(viii) The 170,000 shares of Common Stock issuable by the
Company upon exercise of the Underwriters Warrant, upon exercise
thereof in accordance with their terms, will be legally issued, fully
paid and nonassessable.
(ix) The 170,000 Warrants issuable by the Company upon exercise
of the Underwriters Warrant, upon exercise thereof in accordance with
their terms, will be legally issued, fully paid and nonassessable.
(x) The 170,000 shares of Common Stock issuable by the Company
upon exercise of the Warrants issuable by the Company upon exercise of
the Underwriters Warrant, upon exercise thereof in accordance with
their terms, will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus contained therein.
<PAGE> 3
DXP Enterprises, Inc.
February 8, 1999
Page 3
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Securities Act of 1933, as amended.
Very truly yours,
/s/ FULBRIGHT & JAWORSKI L.L.P.
Fulbright & Jaworski L.L.P.
<PAGE> 1
EXHIBIT 10.47
Dated: February ____, 1999 170,000 UNDERWRITERS' WARRANTS
UNDERWRITERS' WARRANT
THIS CERTIFIES THAT J.P. Turner & Company, L.L.C., Millenium Financial
Group, Inc. And HD Brous & Co., Inc. (referred to hereinafter as either the
"Holders" or the "Representatives") are entitled to purchase from DXP
ENTERPRISES, INC., a Texas corporation (the "Company"), (a) up to 170,000 shares
of the Company's common stock, $.01 par value per share (the "Shares"), at a
purchase price of $13.20 per Share (the "Share Exercise Price") and (b) up to
170,000 Common Stock purchase warrants, in the form attached hereto as Exhibit A
(the "Public Warrant(s)") at a purchase price of $2.0625 per Public Warrant (the
"Public Warrant Price," collectively, with the Share Exercise Price, the
"Exercise Prices") (the aforesaid right to purchase Shares and Public Warrants
being referred to herein as "Underwriters' Warrant"), subject to adjustment as
provided in Section 7 hereof. The Shares and the Public Warrants are referred to
collectively herein as the "Securities." This Underwriters' Warrant is
exercisable in whole or in part beginning at 8:00 a.m., Central Time on February
___, 2000 and at any time thereafter until 5:00 p.m., Central Time on February
___, 2004 (the "Expiration Date"). This Underwriters' Warrant is issued in
consideration of $10.00 received by the Company pursuant to an Underwriting
Agreement dated February ____, 1999, among the Company, the Representatives and
certain Selling Shareholders named therein, in connection with a public offering
of 1,700,000 units (the "Units"). Each Unit consists of one share of Common
Stock and one Public Warrant, each as described in the Underwriting Agreement.
Up to an additional 255,000 Units (the "Option Securities") are covered by an
over-allotment option granted by the Company and the aforementioned Selling
Shareholders to the Underwriters. The Units, together with their underlying
securities may be hereinafter referred to together with the Option Securities,
as the "Public Securities." The Shares and Public Warrants issuable pursuant to
the Underwriters' Warrant shall have same terms and conditions as the shares of
Common Stock and Public Warrants making up the Public Securities, as described
under the caption "Description of Capital Stock" in the Company's Registration
Statement on Form S-1, File No. 333-53387, as amended (the "Registration
Statement"), except that the Holder shall have registration rights under the
Securities Act of 1933, as amended, (the "Act"), for the Shares, the Public
Warrants, and the Shares issuable on the exercise of the Public Warrants as set
forth in Section 3 hereof. After the Expiration Date, the Holder shall have no
right to purchase any Securities hereunder.
1. (a) The rights represented by this Underwriters' Warrant may be
exercised at any time within the periods above specified, in whole or in part,
by (i) the surrender of the Underwriters' Warrant (with the purchase form at the
end hereof properly executed) at the principal executive office of the Company
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Company); and (ii) payment to the Company of
<PAGE> 2
the Exercise Price then in effect for the number of Securities specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any. This Underwriters' Warrant shall be deemed to have been exercised, in whole
or in part to the extent specified, immediately prior to the close of business
on the date this Underwriters' Warrant is surrendered and payment is made in
accordance with the foregoing provisions of this Section 1, and the person or
persons in whose name or names the certificates for Shares and/or Public
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Shares and Public Warrants at that time and Public Warrants so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) business days, after the rights represented by this
Underwriters' Warrant shall have been so exercised.
2. The Underwriters' Warrant shall not be transferred, sold, assigned,
or hypothecated (other than by will or pursuant to the laws of descent and
distribution) for a period of one year commencing February ____, 1999, except
that it may be transferred to successors of the Holder, and may be assigned in
whole or in part, subject to compliance with federal and state securities laws,
to any person who is an officer or director of the Holder or to any Underwriter
and/or the officers or shareholders or members or partners thereof during such
period. Any such assignment shall be effected by the Holder by (i) executing the
form of assignment at the end hereof and (ii) surrendering the Underwriters'
Warrant for cancellation at the office or agency of the Company referred to in
Section 1 hereof, accompanied by a certificate (signed by an officer of the
Holder if the Holder is a corporation), stating that each transferee is a
permitted transferee under this Section 2; whereupon the Company shall issue, in
the name or names specified by the Holder (including the Holder) a new
Underwriters' Warrant or Warrants of like tenor and representing in the
aggregate rights to purchase the same number of Securities as are purchasable
hereunder.
3. The Company covenants and agrees that all shares of Common Stock
which may be purchased hereunder or upon exercise of the Public Warrants will,
upon issuance against payment of the purchase price therefor, be duly and
validly issued, fully paid and nonassessable, and no personal liability will
attach to the holder thereof. The Company further covenants and agrees that,
during the periods within which the Underwriters' Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of its Common Stock to provide for the exercise of the Underwriters'
Warrant and the Public Warrants.
4. The Underwriters' Warrant shall not entitle the Holder to any voting
rights or other rights as shareholders of the Company.
5. (a)(i) Piggyback Registration. If, at any time commencing one year
from the date hereof and expiring four (4) years thereafter, the Company
proposes to register any of its securities under the Act, for its own account or
for the account of others, (other than in connection with a merger or pursuant
to Form S-8, S-4 or other comparable registration statement) it will give
written notice by registered mail, at least twenty (20) business days prior to
the filing of each such registration statement, to all the Holders of the
Underwriters' Warrants and/or the underlying Securities of its intention to do
so. If a Holder of the Underwriters' Warrants and/or the underlying Securities
notifies the Company within twenty (20)
2
<PAGE> 3
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement (the "Registerable
Securities"), the Company shall afford each of the Holders of the Underwriters'
Warrants and/or the underlying Securities the opportunity to have any such
Securities registered under such registration statement. In addition, if the
managing underwriter of such an offering determines that a limitation of the
number of Registerable Securities to be underwritten is required, the managing
underwriter may exclude some or all of the Registerable Securities from such
registration; provided, however, that no other securities of the Company shall
be included in such registration statement for an account of any person other
than the Company and the Holders, unless and until all the Registerable
Securities requested by the Holders to be included in such registration
statement are included.
(ii) Notwithstanding the provisions of this Section, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file any
such proposed registration statement, or to withdraw the same after the filing
but prior to the effective date thereof.
(b) Demand Registration.
(i) At any time commencing one year from the date hereof and
expiring five (5) years thereafter, the Holders of "80 Percent" (as hereinafter
defined) of the Underwriters' Warrants and the underlying Securities (assuming
the exercise of all of the Underwriters' Warrants) shall have the right (which
right is in addition to the registration rights under Section 5(a)(i) hereof),
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), on one
occasion, a registration statement, and such other documents, including a
prospectus, as may be necessary in the opinion of counsel for the Holders to
comply with the provisions of the Act, so as to permit a public offering and
sale of their respective Securities by such Holders and any other holders of the
Underwriters' Warrants and/or the underlying Securities who notify the Company
within twenty (20) business days after receiving notice from the Company of such
request.
(ii) The Company covenants and agrees to give written notice of
any registration request under this Section 5(b) by any Holder to all other
registered Holders of the Underwriters' Warrants and the underlying Securities
within ten (10) business days from the date of the receipt of any such
registration request.
(iii) The Company shall include such Underwriters' Warrants and
the underlying Securities in the Registration Statement relating to this
offering and
3
<PAGE> 4
shall keep such Registration Statement current at least until the expiration of
the Public Warrants.
(iv) For purposes of this Agreement, the term "80 Percent" shall
mean not less than that number of Holders of the Underwriters' Warrants who hold
not less than 80% of the Common Stock issued or issuable by the Company upon
exercise of the Underwriters= Warrants, assuming such exercise also included an
exercise of the Public Warrants issuable upon the exercise of the Underwriters'
Warrant.
(v) Covenants of the Company and Other Agreements of the Parties
With Respect to Registration. In connection with any registration under Section
5(a) or (b) hereof, the Company covenants and agrees as follows:
(A) The Company shall use its best efforts to file a
registration statement within twenty (20) business days of receipt of any demand
therefor, shall use its best efforts to have any registration statement declared
effective at the earliest possible time, and shall furnish each Holder desiring
to sell Securities such number of prospectuses as shall reasonably be requested.
(B) The Company shall pay all costs (excluding fees and
expenses of Holder=s counsel and any underwriting or selling commissions), fees
and expenses in connection with all registration statements filed pursuant to
Sections (a) and (b) hereof including, without limitation, the Company's legal
and accounting fees, printing expenses, blue sky fees and expenses. If the
Company shall fail to comply with the provisions of Section (b)(v)(A), the
Company shall, in addition to any other equitable or other relief available to
the Holder(s), postpone the Expiration Date by such number of days as shall
equal the delay caused by the Company's failure.
(C) The Company will take all necessary action which may be
required in qualifying or registering the Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(D) The Company shall furnish to each underwriter, if any, a
signed counterpart, addressed to such underwriter, of (x) an opinion of counsel
to the Company, dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, an opinion dated the
date of the closing under the underwriting agreement), and (y) a "cold comfort"
letter dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
4
<PAGE> 5
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(E) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(F) The Company shall deliver promptly to the managing
underwriters, if any, copies of all correspondence between the Commission, on
the one hand, and the Company, its counsel or auditors, on the other, with
respect to the registration statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. ("NASD"). Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder or underwriter shall reasonably request.
(G) The Company shall enter into an underwriting agreement
with the managing underwriters of such an offering. Such agreement shall be
satisfactory in form and substance to the Company, and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Securities
and may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of such Holders. Such
Holders shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
(H) Notwithstanding the foregoing, if the Company shall
furnish to each holder planning to participate in an offering a certificate
signed by the President of the Company stating that in the good faith judgement
of the Board of Directors of the Company it would be detrimental to the Company
or its shareholders for a registration statement to be filed in the near future
containing the disclosure of material information required to be included
therein by reason of the federal securities laws, then the Company's obligation
to use its best efforts to file a registration statement under Section 5(b)
shall be deferred for a period during which such disclosure would be
5
<PAGE> 6
detrimental, provided that his period will not exceed 120 days and provided
further, that the Company shall not defer its obligation in this matter more
than once in any 12 month period.
(c) For so long as the Holders can sell the Registerable
Securities pursuant to Rule 144, without limitations as to the volume or any
other Rule 144 restrictions, or under the Registration Statement, as may be
amended, then the piggy back and demand registration rights of the Holders under
the provisions of Section 5 will not be available to the Holders.
6. (a) The Company will indemnify and hold harmless each Holder of the
securities covered by the Registration Statement, and any amendment or
supplement thereto, (such Holder being hereinafter called the "Distributing
Holder"), and each person, if any, who controls (within the meaning of Section
15 of the Act) the Distributing Holder, and each underwriter (within the meaning
of the Act) of such securities and each person, if any, who controls (within the
meaning of Section 15 of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities, or actions in respect thereof, arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or final prospectus constituting a part thereof
or any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein (with respect to a
prospectus, in light of the circumstances under which they were made) not
misleading and will reimburse the Distributing Holder or such controlling person
or underwriter for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnification contained in
this paragraph (a) with respect to any prospectus shall not inure to the benefit
of any Distributing Holder (or the benefit of any person controlling such
Distributing Holder) on account of any such loss, claim, damage or liability
arising from the sale of the securities covered by such registration statement
by such Distributing Holder if a copy of a later-dated prospectus shall not have
been delivered or sent to such person within the time required by the Act, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such prospectus was corrected in the later-dated
prospectus, provided that the Company had delivered the later-dated prospectus
to the Distributing Holder in requisite quantity on a timely basis to permit
such delivery or sending; and provided, further, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder or any other Distributing Holder for use in the
preparation thereof.
6
<PAGE> 7
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
Registration Statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of Section 15 of
the Act) against any losses, claims, damages or liabilities, joint, or several,
to which the Company or any such director, officer or controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities, or actions in respect thereof, arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
said registration statement, said prospectus, or said amendment or supplement,
or arises out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 6.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent that it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(e) In order to provide for just equitable contribution under
the Act in any case in which (i) any person entitled to indemnification under
this Section 6 makes claim for indemnification pursuant hereto but it is
judicially determined (by entry of a final judgment or decree by a court of
competent jurisdiction an the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 6 provides for
7
<PAGE> 8
indemnification in such case, or (ii) contribution under the Act may be required
on the part of any such person in circumstances for which indemnification is
provided under this Section 6, then, and in each such case, the Company and each
Holder shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after any contribution from others) in such
proportion taking into consideration the relative benefits received by each
party from the offering covered by the Prospectus (taking into account the
portion of the proceeds of the offering realized by each), the parties' relative
knowledge and access to information concerning the matter with respect to which
the claim was assessed, the opportunity to correct and prevent any statement or
omission and other equitable considerations appropriate under the circumstances;
and provided, that, in any such case, no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit or proceeding, such party will, if a claim for contribution in respect
thereof is to be made against another party (the "contribution party"), notify
the contributing party of the commencement thereof, but the omission so to
notify the contributing party will not relieve it from any liability which it
may have to any other party other than for contribution hereunder. In case any
such action, suit or proceeding is brought against any party, and such party
notifies a contributing party or his or its representative of the commencement
thereof within the aforesaid fifteen (15) days, the contributing party will be
entitled to participate therein with the notifying party and any other
contributing party similarly notified. Any such contributing party shall not be
liable to any party seeking contribution on account of any settlement of any
claim, action or proceeding effected by such party seeking contribution without
the written consent of such contributing party. The provisions contained in this
Section 6 are in addition to any other rights or remedies which either party
hereto may have with respect to the other or hereunder.
7. Adjustment of Exercise Price
(a) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof, sell any shares
of Common Stock for a consideration per share less than the lower of (i) the
last sale price of the Common Stock as reported on the Nasdaq National Market on
the trading date immediately preceding such sale (the "Market Price"), or (ii)
the Share Exercise Price then in effect, or issue any shares of Common Stock as
a stock dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such sale, issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter immediately before the date of such
sale or the record date for each Change of Shares, the Share Exercise Price for
the Common Stock included in this Underwriters' Warrants (whether or not the
same shall be issued and outstanding) in effect immediately prior to such Change
of Shares shall be changed to a price (including any applicable fraction of a
cent to the nearest cent) determined by
8
<PAGE> 9
dividing (1) the product of (a) the Share Exercise Price in effect immediately
before such Change of Shares and (b) the sum (i) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, and (ii)
the number of shares determined by dividing (A) the aggregate consideration, if
any, received by the Company upon such sale, issuance, subdivision or
combination, by (B) the lesser of (x) the Market Price, and (y) the Share
Exercise Price, in effect immediately prior to such Change of Shares; by (2) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares.
(b) For the purposes of any adjustment to be made in accordance
with this Section 7(a) the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common
Stock (or of other securities deemed hereunder to involve the issuance or sale
of shares of Common Stock) for a consideration part or all of which shall be
cash, the amount of the cash portion of the consideration therefor deemed to
have been received by the Company shall be (x) the subscription price (before
deducting any commissions or any expenses incurred in connection therewith), if
shares of Common Stock are offered by the Company for subscription, or (y) the
public offering price (before deducting therefrom any compensation paid or
discount allowed in the sale, underwriting or purchase thereof by underwriters
or dealers or others performing similar services, or any expenses incurred in
connection therewith), if such securities are sold to underwriters or dealers
for public offering without a subscription offering, or (z) the gross amount of
cash actually received by the Company for such securities, in any other case.
(ii) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company.
(iii) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of the Company
other than shares of Common Stock into securities including shares of Common
Stock shall be deemed to involve the issuance of such shares of Common Stock for
a consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive
such shares, and the value of
9
<PAGE> 10
the consideration allocable to such shares of Common Stock shall be determined
as provided in subsection (ii) of this Section 7(a).
(v) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(c) Upon each adjustment of the Exercise Price pursuant to this
Section 7, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Exercise Price.
(d) In case the Company shall at any time after the date hereof
issue options, rights or warrants to subscribe for shares of Common Stock, or
issue any securities convertible into or exchangeable for shares of Common
Stock, for a consideration per share (determined as provided in Section 7(a) and
as provided below) less than the lower of (i) the Market Price, or (ii) Share
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Exercise Price for the Common Stock included in this
Underwriters' Warrants (whether or not the same shall be issued and outstanding)
in effect immediately prior to the issuance of such options, rights or warrants,
or such convertible or exchangeable securities, as the case may be, shall be
reduced to a price determined by making the computation in accordance with the
provisions of Section 7(a) hereof, provided that:
(i) The aggregate maximum number of shares of Common Stock,
as the case may be, issuable or that may become issuable under such options,
rights or warrants (assuming exercise in full even if not then currently
exercisable or currently exercisable in full) shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, for a
consideration equal to the minimum Exercise Price per share provided for in such
options, rights or warrants at the time of issuance, plus the consideration, if
any, received by the Company for such options, rights or warrants; provided,
however, that upon the expiration or other termination of such options, rights
or warrants, if any thereof shall not have been exercised, the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(i) (and for the purposes of subsection (v) of Section 7(b) hereof) shall be
reduced by the number of shares as to which options, warrants and/or rights
shall have expired, and such number of shares shall no longer be deemed to be
issued and outstanding, and the Exercise Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the
10
<PAGE> 11
shares actually issued plus the shares remaining issuable upon the exercise
of those options, rights or warrants as to which the exercise rights shall not
have expired or terminated unexercised.
(ii) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (ii) (and for the purposes of subsection
(v) of Section 7(b) hereof) shall be reduced by the number of shares as to which
the conversion or exchange rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Exercise Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange rights shall not
have expired or terminated unexercised.
(iii) If any change shall occur in the exercise price per
share provided for in any of the options, rights or warrants referred to in
subsection (i) of this Section 7(d), or in the price per share or ratio at which
the securities referred to in subsection (ii) of this Section 7(d) are
convertible or exchangeable, such options, rights or warrants or conversion or
exchange rights, as the case may be, to the extent not theretofore exercised,
shall be deemed to have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company shall be deemed to
have issued upon such date new options, rights or warrants or convertible or
exchangeable securities.
(e) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of subdivision or combination), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale
11
<PAGE> 12
or conveyance, the Company, or such successor or purchasing corporation, as the
case may be, shall make lawful and adequate provision whereby the Registered
Holder of each Underwriters' Warrant then outstanding shall have the right
thereafter to receive on exercise of such Underwriters' Warrant the kind and
amount of securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Warrant Agent a statement signed
by its President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 7(a)
and (b). The above provisions of Section 7(c) shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(f) Irrespective of any adjustments or changes in the Share
Exercise Price or the number of shares of Common Stock purchasable upon exercise
of the Underwriters' Warrants, the Warrant Certificates theretofore and
thereafter issued shall, unless the Company shall exercise its option to issue
new Warrant Certificates pursuant hereto, continue to express the Share Exercise
Price per share and the number of shares purchasable thereunder as the Share
Exercise Price per share and the number of shares purchasable thereunder were
expressed in the Warrant Certificates when the same were originally issued.
(g) After each adjustment of the Share Exercise Price pursuant to
this Section 7, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Exercise Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(h) No adjustment of the Share Exercise Price or the number of
shares issuable upon exercise of this Underwriters' Warrant shall be made as a
result of or in connection with (A) the issuance or sale of the Units, the
Over-Allotment Option, the Underwriters' Warrants or the securities underlying
such Securities, (B) the issuance or
12
<PAGE> 13
sale of shares of Common Stock pursuant to options, warrants, stock purchase
agreements and convertible or exchangeable securities outstanding or in effect
on the date hereof, options to be granted under the Company's Long-Term
Incentive Plan or any management, employee, consultant or director award or plan
approved by the board of directors of the Company or a committee thereof, (C)
any securities issued in connection with the Company's acquisition of
substantially all the stocks or assets of another business, (D) any securities
issued pursuant to an underwritten public offering, or (E) the issuance or sale
of shares of Common Stock if the amount of said adjustment shall be less than
$.02 for one share of Common Stock, provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.02 for one share of Common Stock. In addition, any Holder shall
not be entitled to cash dividends paid by the Company prior to the exercise of
any Underwriters' Warrant held by them.
8. This Agreement shall be governed by and in accordance with the
laws of the State of New York. Each party hereto agrees to submit to the
personal jurisdiction and venue of the state and/or federal courts located in
New York City, New York, for resolution of all disputes arising out of, in
connection with, or by reason of the interpretation, construction, and
enforcement of this Agreement, and hereby waives the claim or defense therein
that such courts constitute an inconvenient forum.
IN WITNESS WHEREOF, DXP ENTERPRISES, INC., has caused this
Underwriters' Warrant to be signed by its duly authorized officers, and this
Underwriters' Warrant to be dated as of the date first above written.
DXP ENTERPRISES, INC.
By:
----------------------------------------
Name: David R. Little
Title: Chairman of the Board, Chief
Executive Officer and President
13
<PAGE> 14
PURCHASE FORM
(To be signed only upon exercise of Underwriters' Warrant)
The undersigned, the holder of the foregoing Underwriters' Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, ______ Shares of DXP ENTERPRISES, INC.
$0.01 per share, and/or Redeemable Common Stock Purchase Warrants to purchase
one (1) share of Common Stock, and herewith makes payment of $____ therefor (or
hereby surrenders and delivers that portion of the Underwriters' Warrant having
equivalent value (as determined in accordance with the provisions of Section 1
of the Underwriters' Warrant)), and requests that the certificates for shares of
Common Stock and/or Warrants be issued in the name(s) of, and delivered to whose
addressees) is (are):
------------------------------------------
Dated: , 19
------------------ ----
Signature:
-------------------------------------------------
(Print name under signature)
(Signature must conform in all respects to the
name of holder as specified on the face of the
Underwriters' Warrant).
- ---------------------------------------------------------------------
(Insert Social Security or Other Identifying Number of Holder)
14
<PAGE> 15
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Warrant)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please
print name and address of transferee) this Warrant, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
Attorney, to transfer the within Warrant on the books DXP ENTERPRISES, INC. with
full power of substitution.
Dated: , 19
------------------- -----
Signature:
----------------------------------------------------------
(Print name under signature)
(Signature must conform in all respects to the
name of holder as specified on the face of the
Underwriter's Warrant.
- ------------------------------------------------------------------------
(Insert Social Security or Other Identifying Number of Holder)
<PAGE> 1
EXHIBIT 10.48
CONSULTING AGREEMENT
February __, 1999
DXP Enterprises, Inc.
7272 Pinemont
Houston, Texas 77040
Attention: David R. Little,
Chairman of the Board, President
and Chief Executive Officer
Gentlemen:
This will confirm the arrangements, terms and conditions pursuant to
which J.P. Turner & Company, L.L.C. (referred to hereafter as either "J.P.
Turner" or as the "Consultant") has been retained to serve as a consultant and
advisor to DXP Enterprises, Inc., a Texas corporation (the "Company"), on a
non-exclusive basis for the term set forth in Section 2 below. The undersigned
hereby agree to the following terms and conditions:
1. Duties of Consultant.
(a) CONSULTING SERVICES. Consultant will provide such
financial consulting services and advice pertaining to the Company's business
affairs as the Company may from time to time reasonably request. Without
limiting the generality of the foregoing, Consultant will assist the Company in
developing, studying and evaluating financing, merger and acquisition proposals,
prepare reports and studies thereon when advisable, and assist in negotiations
and discussions pertaining thereto.
(b) FINANCING. Consultant will assist and represent the
Company in obtaining both short and long-term financing, when so requested by
the Company. The Consultant will be entitled to additional compensation under
such terms as may be agreed to by the parties.
(c) WALL STREET LIAISON. Consultant will, when appropriate,
arrange meetings between representatives of the Company and individuals and
financial institutions in the investment community, such as security analysts,
portfolio managers and market makers.
The services described in this Section 1 shall be rendered by
Consultant without any direct supervision by the Company and at such time and
place and in such manner (whether by conference, telephone, letter or otherwise)
as Consultant may reasonably determine.
<PAGE> 2
2. Term.
The term (the "Term") of this Agreement shall commence on the date
first written above and shall expire on March ___, 2000.
3. Compensation.
(a) As compensation for Consultant's services hereunder, the
Company shall pay to Consultant the sum of $100,000 (an aggregate of four
thousand ($4,000) dollars per month during the Term), all of which shall be due
and payable as of the date hereof.
(b) The Company shall also pay all reasonable expenses
incurred by the Consultant related to the services performed hereunder; provided
that Consultant shall have received the Company's authorization prior to
incurring any such expense in excess of $500. Such expenses shall be paid by the
Company within thirty calendar days of receiving a written invoice for such
expenses from the Consultant. Consultant shall have no obligation to extended
credit or to pay any expenses on behalf of the Company without first receiving
an advance from the Company to cover such expense.
(c) In the event that, at the Company's request, Consultant
(i) introduces, negotiates (all or any portion of) or arranges on the Company's
behalf a non-public equity financing, or (ii) arranges on the Company's behalf a
non-public debt financing, or (iii) arranges for or assists (in any manner) the
Company, at the Company's request, with the purchase or sale of assets, or for a
merger acquisition or joint venture for the Company, then the Company will
compensate the Consultant (based on the Transaction Value, as defined below) for
such services in an amount equal to:
5% on the first $1,000,000 of the Transaction Value;
4% on the amount from $1,000,001 to $2,000,000;
3% on the amount from $2,000,001 to $3,000,000;
2% on the amount from $3,000,000 to $4,000,000;
1% on the amount from $4,000,000 to $5,000, 000, and
1% on the amount in excess of $5,000,000.
Provided however, that if the Company identifies and negotiates its own
financings or acquisitions without the assistance of the Consultant, the
Consultant will not be entitled to the compensation set forth in this Subsection
(c).
"Transaction Value" shall mean the aggregate value of all cash, securities and
other property (I) paid to the Company, its affiliates or their shareholders in
connection with any transaction referred to in this paragraph (c) involving any
investment in or acquisition of the Company or any affiliates (e.g., an entity
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Company) (or the assets of
either), (II) paid by the Company or any affiliate in any such transaction
involving an investment in or acquisition of another party or its equity
holdings by the
2
<PAGE> 3
Company or any affiliate, or (III) paid or contributed by the Company or an
affiliate and by the other party or parties in the event of any such transaction
involving a merger, consolidation joint venture or similar joint enterprise or
undertaking. The value of any such securities shall be the fair market value
thereof, as determined in good faith by the Company's Board of Directors and set
forth in the relevant acquisition, financing or other applicable agreement.
4. Relationship. Nothing herein shall constitute Consultant as an
employee or agent of the Company, except to such extent as might hereinafter be
agreed upon for a particular purpose. Except as might hereinafter be expressly
agreed, Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever.
5. Confidentiality.
(a) CONFIDENTIAL INFORMATION. In connection with Consultant's
performance of its duties hereunder, it will receive from or on behalf of the
Company certain confidential information (the "Confidential Information"). The
term "Confidential Information" shall not include information that (i) was not
identified as confidential, in writing, at the time it was provided to
Consultant, (ii) has been received by Consultant from a source independent of
the Company who is not known to the Consultant to be bound by a confidentiality
agreement with, or other contractual, legal or fiduciary obligation of
confidentiality to, the Company concerning the information, (iii) prior to or
after the date hereof became or becomes generally known to the public other than
by reason of Consultant's breach or deemed breach of the foregoing
confidentiality undertakings, (iv) is independently developed, discovered or
arrived at by Consultant without using any of the information provided by the
Company, or (v) is disclosed by Consultant pursuant to a requirement of law,
provided that Consultant shall have complied with the requirements of Section
5(b).
(b) NON-DISCLOSURE. Consultant hereby agrees that the
Confidential Information learned as a result of performing its duties under this
Agreement will be used solely for the purpose of performing the services under
this Agreement and will not be disclosed but will be kept confidential by
Consultant and will not be used in any way detrimental or disadvantageous to the
Company; provided, however, that (a) any of such Confidential Information may be
disclosed to Consultant's representatives who need to know such information for
the purpose of Consultant performing the services hereunder and who shall be
informed by Consultant to keep such information confidential and the names of
whom shall be recorded by Consultant and identified to the Company upon its
request and (b) any such information may be disclosed if required by applicable
law, if and to the extent Consultant is required to make such disclosure
pursuant to any such law, provided that prior to any such disclosure pursuant to
this clause (b), Consultant shall first give the Company a reasonable
opportunity to review the proposed disclosure and to comment thereon. In the
event that Consultant or its representatives is required by law or receive a
request to disclose all or any part of the Confidential
3
<PAGE> 4
Information under the terms of a subpoena or order issued by a court or by a
governmental body or by deposition, interrogatory, request for documents,
subpoena, civil investigation demand or similar process, Consultant agrees to
(y) promptly notify the Company of the existence, terms and circumstances
surrounding such a request, so that the Company may seek an appropriate
protective order or waive Consultant's compliance with the provisions of this
Agreement (and, if the Company seeks such an order, to provide such cooperation
as the Company shall reasonably request) or both and (z) if disclosure of such
Confidential Information is required, exercise Consultant's reasonable efforts
to obtain assurance that confidential treatment will be accorded to such of the
Confidential Information that the Company so designates.
(c) EXPENSES OF CONSULTANT. The Company shall pay all fees,
costs and expenses incurred by the Consultant in connection with any actions
taken by Consultant pursuant to or in furtherance of the last sentence of
Section 5(b), including without limitation, the attorneys fees and costs, and
the expenses of the Consultant (as set forth in Section 12(c) of the
Underwriting Agreement) for the time its employees and agents spend in
connection with any actions taken pursuant to this Section 5.
6. Assignment and Termination. This Agreement shall not be assignable
by any party except to successors to all or substantially all of the business of
either party for any reason whatsoever without the prior written consent of the
other party, which consent may be arbitrarily withheld by the party whose
consent is required.
7. Governing Law and Choice of Venue. This Consulting Agreement shall
be governed and construed exclusively in accordance with the laws of the State
of New York without giving effect to the choice of law or conflicts of law
principals thereof. Each party hereto agrees to submit to the personal
jurisdiction and venue of the state and/or federal courts located in New York
City, New York, for resolution of all disputes arising out of, in connection
with, or by reason of the interpretation, construction, and enforcement of this
Agreement, and hereby waives the claim or defense therein that such courts
constitute an inconvenient forum.
Very truly yours,
J.P. Turner & Company, L.L.C.
By:
-----------------------------------
Tim McAfee,
Chief Executive Officer
AGREED AND ACCEPTED:
DXP Enterprises, Inc.
By:
----------------------------------------
David R. Little, Chairman of
the Board, President and Chief
Executive Officer
4
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
SEPCO Industries, Inc., a Texas corporation
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.)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated January 30, 1998 (except with respect
to the matter discussed in Note 13 as to which the date is May 20, 1998) for the
year ended December 31, 1997 and to all references to our Firm included in the
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
February 5, 1999
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
DXP Enterprises, Inc.
We consent to the use of our report dated May 27, 1997 with respect to the
consolidated balance sheets of Strategic Supply, Inc. and subsidiary as of
December 31, 1995 and 1996, and the related consolidated statements of
operations and retained earnings (accumulated deficit) and cash flows for each
of the years in the three-year period ended December 31, 1996 included herein
and to the reference to our firm under the heading "Experts" in the prospectus.
KPMG LLP
El Paso, Texas
February 4, 1999
