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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21513
DXP ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0509661
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7272 PINEMONT 77040
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
713/996-4700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common
stock, as of November 14, 2000:
Common Stock: 4,076,618
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................ $ 395 $ 2,991
Trade accounts receivable, net of allowance for
doubtful accounts of $1,850 and $1,535, respectively .............. 22,926 21,268
Inventory ........................................................... 25,208 24,238
Prepaid expenses and other .......................................... 805 644
Deferred income taxes ............................................... 953 900
-------- --------
Total current assets ........................................... $ 50,287 $ 50,041
Property, plant and equipment, net .................................... 11,408 12,931
Goodwill, net ......................................................... 9,785 10,068
Note receivables from officers and employees .......................... 803 770
Other assets .......................................................... 241 156
-------- --------
Total assets ................................................... $ 72,524 $ 73,966
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable .............................................. $ 19,800 $ 15,570
Accrued wages and benefits .......................................... 1,184 1,086
Other accrued liabilities ........................................... 453 220
Current portion of long-term debt ................................... 8,717 3,206
-------- --------
Total current liabilities ...................................... $ 30,154 $ 20,082
Long-term debt, less current portion .................................. 24,257 36,780
Deferred compensation ................................................. 778 778
Deferred income taxes ................................................. 556 561
Equity subject to redemption:
Series A preferred stock-- 1,122 shares ............................. 112 112
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,
and 2,700 shares as treasury stock ............................... 18 18
Common stock, $.01 par value, 100,000,000 shares
Authorized; 4,262,693 and 4,257,760 shares
issued, of which 4,076,618 and 4,071,685 shares are
outstanding, and 186,075 shares are treasury stock ............. 41 41
Paid-in capital ..................................................... 2,251 2,251
Retained earnings ................................................... 16,249 15,235
Treasury stock ...................................................... (1,894) (1,894)
-------- --------
Total shareholders' equity ..................................... 16,667 15,653
-------- --------
Total liabilities and shareholders' equity ..................... $ 72,524 $ 73,966
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales ............................................... $ 44,676 $ 44,158 $ 132,232 $ 139,004
Cost of sales ....................................... 33,089 32,495 98,370 102,890
-------- -------- --------- ---------
Gross profit ........................................ 11,587 11,663 33,862 36,114
Selling, general and administrative expenses ........ 10,638 10,995 32,032 33,954
-------- -------- --------- ---------
Operating income .................................... 949 668 1,830 2,160
Other income ........................................ 344 417 2,933 991
Interest expense .................................... (890) (924) (2,737) (2,789)
-------- -------- --------- ---------
Income(loss) before income taxes .................... 403 161 2,026 362
Provision for income taxes .......................... 196 64 944 406
-------- -------- --------- ---------
Net income (loss) ................................... $ 207 $ 97 $ 1,082 $ (44)
Preferred stock dividend ............................ 23 23 68 68
-------- -------- --------- ---------
Net income (loss) attributable to common
shareholders ...................................... $ 184 $ 74 $ 1,014 $ (112)
======== ======== ========= =========
Basic earnings (loss) per common share .............. $ .05 $ .02 $ .25 $ (.03)
======== ======== ========= =========
Common shares outstanding ........................... 4,077 4,055 4,077 4,085
======== ======== ========= =========
Diluted earnings (loss) per share ................... $ .05 $ .02 $ .23 $ (.03)
======== ======== ========= =========
Common and common equivalent shares outstanding ..... 4,077 4,055 4,622 4,085
======== ======== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) ....................................... $ 1,082 $ (44)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization ....................... 1,444 1,520
Provision (benefit) for deferred income taxes ....... (78) (115)
(Gain)/loss on sale/retirement of property and
equipment ........................................ (1,955) (34)
Changes in operating assets and liabilities:
Trade accounts receivable ........................ (1,658) 1,115
Inventories ...................................... (970) 4,810
Prepaid expenses and other assets ................ (279) (1,126)
Accounts payable and accrued liabilities ......... 4,581 2,959
--------- ---------
Net cash provided by operating activities ........ 2,167 9,085
INVESTING ACTIVITIES:
Purchase of property and equipment ...................... (915) (1,909)
Net proceeds on the sale of assets ...................... 3,231 850
--------- ---------
Net cash provided by/(used in) investing
activities ...................................... 2,316 (1,059)
FINANCING ACTIVITIES:
Proceeds from debt ...................................... 132,804 136,249
Principal payments on revolving line of credit,
long-term and subordinated debt, and notes
payable to bank ....................................... (139,816) (144,110)
Acquisition of treasury stock ........................... -- (914)
Dividends paid .......................................... (68) (68)
--------- ---------
Net cash used in financing activities ............. (7,080) (8,843)
--------- ---------
DECREASE IN CASH ........................................ (2,596) (817)
CASH AT BEGINNING OF PERIOD ............................. 2,991 1,625
========= =========
CASH AT END OF PERIOD ................................... $ 395 $ 808
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. DXP Enterprises, Inc. (the
"Company") believes that the presentations and disclosures herein are adequate
to make the information not misleading. The condensed consolidated financial
statements reflect all elimination entries and adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed
with the Securities and Exchange Commission.
NOTE 2: THE COMPANY
The Company is a leading supplier of maintenance, repair and operating
("MRO") products, equipment and services to industrial customers. The Company
provides MRO products in the following categories: fluid handling equipment,
bearings and power transmission equipment, general mill and safety supplies and
electrical supplies.
NOTE 3: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 59 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,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........... $ 26,702 $ 25,259
Work in process.......... 1,668 2,208
-------- --------
Inventories at FIFO...... 28,370 27,467
Less -- LIFO allowance .. (3,162) (3,229)
-------- --------
Inventories.............. $ 25,208 $ 24,238
======== ========
</TABLE>
NOTE 4: DIVESTITURES
During the first quarter of 2000, the Company completed a transaction to
sell certain of its fabrication and warehouse properties in Houston, Texas, for
approximately $2.8 million in cash. A gain of approximately $1.7 million was
recorded as other income as a result of the sale. The Company sold additional
warehouse and office space during the second quarter of 2000 for approximately
$0.7 million, resulting in a gain of approximately $0.3 million included in
other income.
NOTE 5: LONG-TERM DEBT
Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, the Company can require the seller to adjust
the purchase price for certain inventory remaining unsold as of July 1, 2000.
The Company has notified the seller that the adjustment of the purchase price
exceeds the $2,050,000 balance of the subordinated note payable by the Company
to the seller. As of July 1, 2000, the Company suspended principal and interest
payments on the note. The seller has notified the Company's bank lender that the
Company is in default on the subordinated note. The Company's bank lender has
notified
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the Company that the default on the subordinated note causes the Company to be
in default on one of its secured lines of credit in the amount of $4.4 million.
However, the Company and the bank lender have entered into a forbearance
agreement whereby the bank lender agreed to forebear through January 31, 2001,
taking any action on defaults under the $4.4 million secured line of credit. The
$4.4 million balance of the secured line of credit and the $2.1 million balance
of the subordinated note have been included in current maturities of long-term
debt on the balance sheet at September 30, 2000.
In management's opinion, should the $4.4 million secured line of credit be
demanded at the end of the forbearance period, the Company would be able to
refinance the obligation or liquidate it through the proceeds from asset sales
or property refinancing. The Company intends to aggressively pursue its claims
against the seller under the provisions of the asset purchase agreement. The
Company's claims exceed the amount of the subordinated note. Therefore, the
Company believes the subordinated note will either be paid off using funds
obtained from the seller in settlement of the Company's claims or the
subordinated note will be offset against the Company's claims. However, there
can be no assurance that the Company will be successful in collecting the funds
due under its claims or in offsetting the subordinated note against its claims.
Effective September 30, 2000, the Company and its lender amended its secured
lines of credit (the "Credit Facility"), except for the $4.4 million secured
line of credit, to modify several of the financial covenants and extend the
maturity date to October 1, 2001. On August 10, 2000, the Company's lines of
credit were amended. This amendment reduced the Company's lines from $44.0
million to $38.0 million, increased the borrowing rate on the term portion
of the Credit Facility to prime plus 1 1/2%.
The Credit Facility provides for borrowings up to an aggregate of the lesser
of (i) a percentage of the collateral value based on a formula set forth therein
or (ii) $38.0 million, and matures on October 1, 2001, except for the $4.4
million secured line of credit which is in default and (subject to the
forbearance agreement discussed above) matures on July 1, 2001. Interest
accrues at prime plus 1 1/2% on the term portion of the Credit Facility, which
was $10.2 million at September 30, 2000, and prime plus 1/2% on the revolving
portion of the Credit Facility, which was $19.5 million at September 30, 2000.
The prime rate at September 30, 2000, was 9.5%. The Credit Facility is secured
by receivables, inventory, real estate and machinery and equipment. An executive
officer of the Company, who is also a 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 executive officer's children
are also pledged to secure the line of credit. The Board of Directors of the
Company has approved the Company making advances upon future bonuses to this
same executive, not to exceed the amount of the monthly principal and interest
payments on a personal $500,000 loan to this executive made by the lender. The
available borrowings under the revolving portion of the Credit Facility at
September 30, 2000, were approximately $2.7 million.
The Credit Facility includes loan covenants that are measured monthly,
which, among other things, require the Company to maintain a certain cash flow
and other financial ratios. The Company from time to time has not been in
compliance with certain covenants under the Credit Facility regarding financial
ratios. At September 30, 2000, the Company was not in compliance with certain of
those covenants. The lender has provided waivers to the Company regarding the
compliance with these covenants, except for the $4.4 million secured line of
credit.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are a leading provider of MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. We provide 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. We offer 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. We also provide integrated services such as system design,
fabrication, installation, repair and maintenance for customers. We offer 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.
We believe that the Internet will have an impact on the supply chain and
will therefore impact distribution as well. Many of the products sold over the
Internet are products that are typically sold in the industrial distribution
market. During the second quarter, we successfully launched our website for
certain of our products (DXPE.com) to take advantage of increased activity in
the business to business e-commerce marketplace.
Our 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 our products generally is subject to changes
in the United States economy and economic trends affecting our 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, we may experience changes in demand within
particular markets and product categories as changes occur in our customers'
respective markets.
Our strategy in the past focused on addressing current trends in the
industrial distribution market through a combination of
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acquisitions and internal growth. Due to current conditions in the industry, we
have curtailed our acquisition efforts. Key elements of our internal growth
strategy include leveraging existing customer relationships, expanding product
offerings to new and existing customers, reducing costs through consolidated
purchasing programs and centralized product distribution centers, centralizing
certain customer service and inside sales functions, reducing costs by
converting selected branches from full warehouse and customer service operations
to sales centers, designing and implementing innovative solutions to address the
procurement and supply needs of our customers and using our traditional
distribution and integrated supply capabilities to increase sales in each area.
Should conditions in the MRO industry improve, we may seek acquisitions that
will provide us access to additional product lines and customers to enhance its
position as a single source industrial distributor with first-tier distribution
capabilities. Future results will be dependent on our success in executing our
internal growth strategy and, to the extent we complete any acquisitions, our
ability to integrate such acquisitions.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 compared to Three Months Ended
September 30, 1999
Revenues for the three months ended September 30, 2000 increased 1.2%, to
$44.7 million, over revenues of $44.2 million for the three months ended
September 30, 1999. Sales of fluid handling equipment decreased 2.2%, or $0.4
million, over the comparable period in 1999, due primarily to reduced sales of
specialty pipe. Sales of bearings and power transmission equipment for the
quarter ended September 30, 2000 increased by 11.0%, or $1.1 million, over the
comparable period in 1999, due to an improvement in the oil and gas markets
served by the Company. During the three months ended September 30, 2000, sales
of general mill products increased 9.8% or approximately $0.4 million, when
compared to the same three months in 1999, primarily as a result of higher sales
from new integrated supply contracts with certain customers that took effect at
the beginning of the current fiscal year. Sales of safety supply products for
the third quarter of 2000 decreased 6.2%, or approximately $0.5 million, when
compared to the same quarter in 1999, and is a result of a Company-initiated
reengineering of selected branches which includes closing the branch warehouse
facility and centralizing the inventory logistics and customer services
functions. Sales of electrical products for the three months ended September 30,
2000, decreased 12.8%, or approximately $0.5 million, from the same period in
1999 which is attributable to the Company's shift in focus toward higher margin
projects which tend to reduce revenues.
Gross profit margins decreased slightly to 25.9% of sales for the third
quarter of 2000 as compared to 26.4% for the third quarter of 1999; this can be
primarily attributed to lower sales of specialty pipe during the current quarter
than during the same period in 1999. 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 pass on these price increases
to its customers and maintain current gross margins, there can be no assurances
that the Company will be successful in this regard.
Selling, general and administrative expense for the third quarter of 2000
was lower by approximately $0.4 million when compared to the same period in
1999. As a percentage of revenue, the 2000 expense was lower as a percentage of
sales (23.8%) when compared to 1999's expense (24.9%). Management has reduced
selling, general and administrative expenses when appropriate, and plans to
continue to do so. Additionally, the Company is centralizing the inventory
logistics and customer service functions for selected branches contributing to a
reduction in selling, general and administrative expense.
Operating income for the three month period ended September 30, 2000
increased slightly as a percent of revenues by 0.6 of a point to 2.1%, from 1.5%
in the third quarter of 1999, due primarily to the increased sales and lower
selling, general and administration expenses.
Interest expense during the third quarter of 2000 was slightly lower when
compared to the third quarter of 1999. Although the Company's outstanding debt
has decreased approximately $5.9 million from the same period in 1999, the
increased rates paid by the Company as a result of amending the Credit Facility,
and the market increase in interest rates, has resulted in a minimal decrease in
interest expense compared to the prior year.
The Company's provision for income taxes for the three months ended
September 30, 2000, reflects an effective rate of 48.6%. This high effective tax
rate is attributable to no state tax benefit being available for state net
operating losses.
Net income for the three months period ended September 30, 2000, increased
by approximately $0.1 million from the three month period ended September 30,
1999, primarily as a result of the increased sales and lower selling, general
and administrative expenses previously discussed.
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Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Revenues for the nine months ended September 30, 2000 decreased 4.9% to
$132.2 million from revenues of $139.0 million for the nine months ended
September 30, 1999. Sales of fluid handling equipment decreased 5.6%, or $3.3
million, from the same period in 1999 and is due primarily to lower sales of
specialty pipe and softness in the demand for the fluid handling equipment sold
by the Company. Sales of bearings and power transmission equipment for the nine
months ended September 30, 2000 increased 10.2%, or $3.2 million, from the
comparable period in 1999 and can be attributed to an improvement in the oil and
gas markets served by the Company. During the nine months ended September 30,
2000, sales of general mill products increased 9.5%, or approximately $1.0
million, when compared to the same nine months in 1999, primarily as a result of
higher sales from new integrated supply contracts with certain customers that
took effect at the beginning of the current fiscal year. Sales of safety supply
products for the nine months ended September 30, 2000, decreased 10.0%, or
approximately $2.3 million, when compared to the same period in 1999, and is a
result of a Company-initiated reengineering of selected operating locations that
resulted in the closure of several stores and reduced business at other
locations. Sales of electrical products for the nine month period ended
September 30, 2000, decreased 13.5%, or $1.5 million, from the same period in
1999 which is attributable to the Company's shift in focus toward higher margin
projects which tend to be lower in revenue volume. The remaining decline in
sales was due to the sale of the valve and valve automation business during the
third quarter of 1999.
Gross profit margins remained relatively constant for the nine months ended
September 30, 2000, when compared to the same period in 1999. The Company
currently expects some increase in manufacturer prices to continue due to
increased raw material costs. Although the Company intends 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 expense for the nine months ended
September 30, 2000 were lower by approximately $1.9 million when compared to the
same period in 1999; as a percentage of revenue, the 2000 expense was slightly
lower as a percentage of sales (24.2%) when compared to 1999's expense (24.4%).
We have reduced selling, general and administrative expenses when appropriate,
and plan to continue to do so. Additionally, the Company is centralizing the
inventory logistics and customer service functions for selected branches
contributing to a reduction in selling, general and administrative expense.
Operating income for the nine month period ended September 30, 2000
decreased to $1.8 million from $2.2 during the comparable period in 1999, due
primarily to the decrease in revenue during that period.
Other income for the first nine months of 2000 was approximately $2.0
million higher than the comparable period in 1999 due primarily to the sale of
certain fabrication and warehouse properties during the current year for
approximately $3.5 million. Gains on the sale of these properties were
approximately $2.0 million.
Interest expense for the nine months ended September 30, 2000, remained
constant when compared to the same period in 1999. Although the Company's
outstanding debt has decreased by approximately $5.9 million over the past 12
months, the increased rates paid by the Company as a result of amending the
Credit Facility and the market increase in interest rates, has resulted in
interest expense remaining relatively constant when compared to the prior year.
The Company's provision for income taxes for the nine months ended September
30, 2000, reflects an effective rate of 46.7%. This high effective rate is
attributable to no state tax benefit being available for state operating losses.
Net income for the nine month period ended September 30, 2000, increased
approximately $1.1 million from the nine month period ended September 30, 1999,
primarily due to gain on the sale of its fabrication and warehouse properties.
LIQUIDITY AND CAPITAL RESOURCES
General
As a distributor of MRO products, we require significant amounts of working
capital to fund inventories and accounts receivable. Additional cash is required
for capital items such as information technology and warehouse equipment. We
also require cash to pay our lease obligations and to service our debt.
Under the loan agreements with our bank lender, all available cash is
generally applied to reduce outstanding borrowings, with operations funded
through borrowings under the Credit Facility. Our policy is to maintain low
levels of cash and cash equivalents and
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to use borrowings under our line of credit for working capital. We had
approximately $2.7 million available for borrowings under the revolving portion
of the Credit Facility at September 30, 2000. Working capital at September 30,
2000 and December 31, 1999 was approximately $20.1 million and $30.0 million,
respectively. During the first nine months of 2000 and 1999, we collected trade
receivables in approximately 46 and 49 days, respectively. For the nine months
ended September 30, 2000 and 1999, we turned our inventory approximately four
times on an annualized basis.
Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
have notified the seller that the adjustment of the purchase price exceeds the
$2,050,000 balance of the subordinated note payable by us to the seller. As of
July 1, 2000, we suspended principal and interest payments on the note. The
seller has notified our bank lender that we are in default on the subordinated
note. Our bank lender has notified us that the default on the subordinated note
causes us to be in default on one of our secured lines of credit in the amount
of $4.4 million. However, we and the bank lender have entered into a forbearance
agreement whereby the bank lender agreed to forebear through January 31, 2001,
taking any action on defaults under the $4.4 million secured line of credit. The
$4.4 million balance of the secured line of credit and the $2.1 million balance
of the subordinated note have been included in current maturities of long-term
debt on the balance sheet at September 30, 2000.
In our opinion, should the $4.4 million secured line of credit be demanded
at the end of the forebearance period, we would be able to refinance the
obligation or liquidate it through the proceeds from asset sales or property
refinancing. We intend to aggressively pursue our claims against the seller
under the provisions of the asset purchase agreement. Our claims exceed the
amount of the subordinated note. Therefore, we believe the subordinated note
will either be paid off using funds obtained from the seller in settlement of
our claims or the subordinated note will be offset against our claims. However,
there can be no assurance that we will be successful in collecting the funds due
under our claims or in offsetting the subordinated note against our claims.
In the fourth quarter of 2000, we and the bank amended the Credit Facility
effective September 30, 2000, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $38.0 million, and matures on October 1, 2001,
except for the $4.4 million secured line of credit which is in default and
(subject to the forebearance agreement discussed above) matures on July 1,
2001. Interest accrues at prime plus 1 1/2% on the term portion of the Credit
Facility and prime plus 1/2% on the revolving portion of the Credit Facility.
The prime rate at September 30, 2000, was 9.5%. The line of credit is secured by
receivables, inventory, real estate and machinery and equipment. The Credit
Facility contains customary affirmative and negative covenants as well as
financial covenants that are measured monthly and require the Company to
maintain a certain cash flow and other financial ratios.
From time to time we have not been in compliance with certain covenants
under the Credit Facility regarding financial ratios. At September 30, 2000, we
were not in compliance with certain of those covenants. The lender has provided
waivers to us regarding the compliance with these covenants, except for the $4.4
million secured line of credit.
As described above, all but $4.4 million of our Credit Facility matures on
October 1, 2001. Therefore, to keep amounts borrowed under the Credit Facility
classified in our balance sheet as long-term, we must renew and extend or
replace the Credit Facility as of December 31, 2000. However, we may not be able
to renew and extend or replace the Credit Facility. Any extended or replacement
facility may have higher interest costs, less borrowing capacity, more
restrictive conditions and could involve equity dilution. Our ability to obtain
a satisfactory credit facility may depend, in part, upon the level of our asset
base for collateral purposes, our future financial performance and our ability
to obtain additional equity.
We generated cash through operating activities of approximately $2.2 million
in the first nine months of 2000 as compared to $9.1 million in cash provided
during the comparable nine months of 1999. This decrease is primarily
attributable to increases in accounts receivable and inventory balances for the
nine months ended September 30, 2000, compared to decreases in inventory and
accounts receivable balances for the same period in 1999.
We generated cash through investing activities of approximately $2.3 million
in the first nine months of 2000 as compared to $1.1 million in cash used during
the comparable nine months of 1999. This increase was primarily attributed to
the sales of certain of our fabrication and warehouse properties in Houston,
Texas, for approximately $3.5 million in cash. We also had capital expenditures
of approximately $0.9 million for the nine months ended September 30, 2000, as
compared to $1.9 million during the same period of 1999. Capital expenditures
during the first nine months of 2000 were related primarily to computer
equipment and its developing e-commerce website. Capital expenditures in the
first nine months of 1999 were primarily related to the purchase of furniture
and fixtures and a telephone system ($.9 million) for our corporate headquarters
as well as the purchase of computer equipment and software ($.8 million).
Our internal cash flow projections indicate our cash generated from
operations and available under our Credit Facility will meet
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<PAGE> 10
our normal working capital needs. However, we will require additional debt or
equity financing to meet our future debt service obligations, which may include
additional bank debt or the public or private sale of equity or debt securities.
In connection with this financing, we may be required to issue securities that
substantially dilute the interest of our shareholders.
We will require additional capital to fund any future acquisitions. At this
time, we do not plan to grow through acquisitions in the near term unless the
market price of our common stock rises to levels that will make acquisition
accretive to our earnings or we generate excess cash flow. We also may pursue
additional equity or debt financing to fund future acquisitions, although we may
not be able to obtain additional financing on attractive terms.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities (an amendment of FASB Statement no.
133)". The statement is effective for fiscal years beginning after June 15,
2000.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 is generally effective for transactions
occurring after July 1, 2000, but applies to option repricings and certain other
transactions after December 15, 1998.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The implementation of SAB 101 will be effective for December 31, 2000
year-end financial statements.
We believe adoption of the accounting standards will not have a material
effect on our financial position or results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments that could expose us to significant market
risk. Our exposure to market risk for changes in interest rates relates
primarily to our Credit Facility. At September 30, 2000, the term portion of the
Credit Facility (at an interest rate of prime plus 1 1/2%) was $10.2 million
while the revolving portion of the Credit Facility (at an interest rate of prime
plus 1/2%) was $19.5 million.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
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<PAGE> 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
have notified the seller that the adjustment of the purchase price exceeds the
$2,050,000 balance of the subordinated note payable by us to the seller. As of
July 1, 2000 we suspended principal and interest payments on the note. The
seller has notified our bank lender that we are in default on the subordinated
note. Our bank lender has notified us that the default on the subordinated note
causes us to be in default on one of our secured lines of credit in the amount
of $4.4 million. However, we and the bank lender have entered into a forbearance
agreement whereby the bank lender agreed to forebear through January 31, 2001,
taking any action on defaults under the $4.4 million secured line of credit. The
$4.4 million balance of the secured line of credit and the $2.1 million balance
of the subordinated note have been included in current maturities of long-term
debt on the balance sheet at September 30, 2000.
In our opinion, should the $4.4 million secured line of credit be demanded
at the end of the forbearance period, we would be able to refinance the
obligation or liquidate it through the proceeds from asset sales or property
refinancing. We intend to aggressively pursue our claims against the seller
under the provisions of the asset purchase agreement. Our claims exceed the
amount of the subordinated note. Therefore, we believe the subordinated note
will either be paid off using funds obtained from the seller in settlement of
our claims or the subordinated note will be offset against our claims. However,
there can be no assurance that we will be successful in collecting the funds due
under our claims or in offsetting the subordinated note against our claims.
In the fourth quarter of 2000, we and the bank amended the Credit Facility
effective September 30, 2000, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $38.0 million, and matures on October 1, 2001,
except for the $4.4 million secured line of credit which is in default and
(subject to the forbearance agreement discussed above) matures on July 1, 2001.
Interest accrues at prime plus 1 1/2% on the term portion of the Credit Facility
and prime plus 1/2% on the revolving portion of the Credit Facility. The prime
rate at September 30, 2000, was 9.5%. The line of credit is secured by
receivables, inventory, real estate and machinery and equipment. The Credit
Facility contains customary affirmative and negative covenants as well as
financial covenants that are measured monthly and require the Company to
maintain a certain cash flow and other financial ratios.
From time to time we have not been in compliance with certain covenants
under the Credit Facility regarding financial ratios. At September 30, 2000, we
were not in compliance with certain of those covenants. The lender has provided
waivers to us regarding the compliance with these covenants, except for the $4.4
million secured line of credit.
As described above, all but $4.4 million of our Credit Facility matures on
October 1, 2001. Therefore, to keep amounts borrowed under the Credit Facility
classified in our balance sheet as long-term, we must renew and extend or
replace the Credit Facility as of December 31, 2000. However, we may not be able
to renew and extend or replace the Credit Facility. Any extended or replacement
facility may have higher interest costs, less borrowing capacity, more
restrictive conditions and could involve equity dilution. Our ability to obtain
a satisfactory credit facility may depend, in part, upon the level of our asset
base for collateral purposes, our future financial performance and our ability
to obtain additional equity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CAUTIONARY STATEMENTS
The Company's expectations with respect to future results of operations that
may be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of the Company's realization of such expectations. The
Company's actual results could differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
Ability to Comply with Financial Covenants of Credit Facility
The Company's loan agreements with its bank lender require the Company to
comply with certain specified covenants, restrictions, financial ratios and
other financial and operating tests. The Company's ability to comply with any of
the foregoing restrictions will depend on its future performance, which will be
subject to prevailing economic conditions and other factors, including factors
beyond the Company's control. A failure to comply with any of these obligations
could result in an event of default under the Credit Facility, which could
permit acceleration of the Company's indebtedness under the Credit Facility. The
Company from time to time has been unable to comply with some of the financial
covenants contained in the Credit Facility (relating to, among other things, the
maintenance of prescribed financial ratios) and has obtained waivers or
amendments to the covenants from its lender. Although the Company expects to be
able to comply with the covenants, including the financial covenants, of the
Credit Facility, there can be no assurance that in the future the Company will
be able to do so or that its lender will be willing to waive such compliance or
further amend such covenants.
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<PAGE> 12
Risks Related to Internal Growth Strategy
Future results for the Company 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(R) program. Although
the Company intends to increase sales and product offerings to existing
customers, increase business to business e-commerce through developing its
website and reduce costs through consolidating certain administrative, inventory
logistics and sales functions, 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(R) program. 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.
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.
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<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 -- August 2000 Amendment to Second Amended
and Restated Loan and Security Agreement
and Modification to Other Agreements
Dated August 10, 2000, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc.,
American MRO, Inc. and Fleet Capital
Corporation.
10.2 -- August 2000 Amendment to Loan and
Security Agreement dated August 10, 2000,
by and among Pelican State Supply
Company, Inc., and Fleet Capital
Corporation.
10.3 -- August 2000 Amendment to Loan and
Security Agreement dated August 10, 2000,
by and among DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet
Capital Corporation.
11.1 -- Statement re: Computation of Per Share
Earnings.
27.1 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
13
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DXP Enterprises, Inc.
By: /s/ HUGH H. McCONNELL
------------------------------
Hugh H. McConnell
Senior Vice President/Finance and
Chief Financial Officer
Duly authorized officer and
principal financial officer)
Date: November 14, 2000
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 -- August 2000 Amendment to Second Amended
and Restated Loan and Security Agreement
and Modification to Other Agreements
Dated August 10, 2000, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc.,
American MRO, Inc. and Fleet Capital
Corporation.
10.2 -- August 2000 Amendment to Loan and
Security Agreement dated August 10, 2000,
by and among Pelican State Supply
Company, Inc., and Fleet Capital
Corporation.
10.3 -- August 2000 Amendment to Loan and
Security Agreement dated August 10, 2000,
by and among DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet
Capital Corporation.
11.1 -- Statement re: Computation of Per Share
Earnings.
27.1 -- Financial Data Schedule.
</TABLE>
15
