<PAGE> 1
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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 MARCH 31, 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
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DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7272 PINEMONT
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
</TABLE>
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 May 11, 2000:
Common Stock: 4,072,718
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<PAGE> 2
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 905 $ 2,991
Trade accounts receivable, net of allowance for
doubtful accounts of $1,640 and $1,535,
respectively................................... 22,479 21,268
Inventory......................................... 24,620 24,238
Prepaid expenses and other........................ 908 644
Deferred income taxes............................. 571 900
-------- -------
Total current assets...................... 49,483 50,041
Property, plant and equipment, net.................. 11,958 12,931
Goodwill, net....................................... 9,974 10,068
Note receivables from officers and employees........ 847 770
Other assets........................................ 227 156
-------- -------
Total assets.............................. 72,489 73,966
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable............................ 17,798 15,570
Accrued wages and benefits........................ 1,309 1,086
Other accrued liabilities......................... 286 220
Current portion of long-term debt................. 3,422 3,206
-------- -------
Total current liabilities................. 22,815 20,082
Long-term debt, less current portion................ 31,864 36,780
Deferred compensation............................... 778 778
Deferred income taxes............................... 552 561
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 shares outstanding........... 18 18
Common stock, $.01 par value, 100,000,000 shares
Authorized; 4,258,793 and 4,257,760 shares
issued, of which 4,072,718 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................................. 15,950 15,235
Treasury stock.................................... (1,894) (1,894)
-------- -------
Total shareholders' equity................ 16,368 15,653
-------- -------
Total liabilities and shareholders' equity $ 72,489 $73,966
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
------- -------
(UNAUDITED)
<S> <C> <C>
Sales........................................ $43,757 $48,410
Cost of sales................................ 32,805 35,648
------- -------
Gross Profit................................. 10,952 12,762
Selling, general and administrative expenses. 10,710 11,825
------- -------
Operating income............................. 242 937
Other income................................. 1,990 508
Interest expense............................. (930) (929)
------- --------
Income before income taxes................... 1,302 516
Provision for income taxes................... 565 258
------- -------
Net income................................... $ 737 $ 258
Preferred stock dividend..................... 22 23
------- -------
Net Income attributable to common Shareholders $ 715 $ 235
======= =======
Basic earnings per common share.............. $ .18 $ .06
------- -------
Common shares outstanding.................... 4,073 4,129
------- -------
Diluted earnings per share................... $ .15 $ .05
------- -------
Common and common equivalent shares outstanding 4,867 5,552
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 415 $ (866)
INVESTING ACTIVITIES:
Proceeds on the sale of assets, at cost.......... 2,585 267
Purchase of property and equipment............... (364) (534)
--------- ---------
Net cash provided by (used in) investing activities 2,221 (267)
FINANCING ACTIVITIES:
Proceeds from debt............................... 29,754 48,040
Principal payments on revolving line of credit,
long-term (34,454) (46,796)
and Subordinated debt, and notes payable to bank
Acquisition of common stock...................... -- (714)
Dividends paid................................... (22) (23)
--------- ---------
Net cash provided by (used in) financing
activities....................................... (4,722) 507
---------- ---------
DECREASE IN CASH................................. (2,086) (626)
CASH AT BEGINNING OF PERIOD...................... 2,991 1,625
--------- ---------
CASH AT END OF PERIOD............................ $ 905 $ 999
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
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 10-K Annual Report for the year ended December 31, 1999, 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 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 56 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>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............... $26,397 $ 25,259
Work in process.............. 1,469 2,208
------- --------
Inventories at FIFO.......... 27,866 27,467
Less -- LIFO allowance....... (3,246) (3,229)
------- --------
Inventories.................. $24,620 $ 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. Additionally, the Company sold
additional warehouse and office space during the second quarter of 2000 for
approximately $0.7 million.
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NOTE 5: LONG-TERM DEBT
The Company has secured lines of credit for up to $44.0 million with an
institutional lender (the "Credit Facility"). 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) $44.0 million, and
matures on April 1, 2001. Interest accrues at prime plus 1% on the term portion
of the Credit Facility, which was $11.5 million at March 31, 2000, and prime
plus 1/2% on the revolving portion of the Credit Facility, which was $19.8
million at March 31, 2000. The prime rate at March 31, 2000, was 9.0%. The
Credit Facility is secured by receivables, inventory, 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 available
borrowings under the revolving portion of the Credit Facility at March 31, 2000,
were approximately $4.7 million.
On May 2, 2000, the Company amended its Credit Facility as a result of the
sale of certain warehouse properties during the first and second quarter of
2000; the proceeds from these sales were used to reduce the Company's
outstanding Credit Facility indebtedness. The amended Credit Facility enables
the Company to reduce its monthly principal payments on the term portion of the
debt.
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 March 31, 2000, the Company again was not in compliance with certain
of those covenants. The lender has provided waivers to the Company regarding the
compliance with these covenants, although there can be no assurance the lender
will be willing to provide waivers in the future if the Company is unable to
comply with the financial ratio covenants.
ITEM 2: 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 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 Internet will have an impact on the supply chain and will therefore
impact distribution as well. Research predicts that business to business sales
over the Internet will reach $1.3 trillion annually within three years. Many of
the products sold over the Internet are products that are typically sold in the
industrial distribution market. The Company is developing its technology program
to enter the business to business e-commerce marketplace and announced on May 5,
2000, that its website (DXPE.com) was ready to take orders for certain products.
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 in the past focused on addressing current trends in
the industrial distribution market through a combination of acquisitions and
internal growth. Due to current conditions in the industry, the Company has
curtailed its acquisitions efforts. 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
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<PAGE> 7
traditional distribution and integrated supply capabilities to increase sales in
each area. Should conditions in the MRO industry improve, the Company may seek
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. Future results for the Company will
be dependent on the success of the Company in implementing its internal growth
strategy and, to the extent the Company completes any acquisitions, the ability
of the Company to integrate such acquisitions.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 2000
Revenues for the three months ended March 31, 2000 decreased 9.6% to $43.8
million from the three months ended March 31, 1999. Sales of fluid handling
equipment decreased 8.4%, or $1.7 million, over the comparable period in 1999,
due primarily to lower revenue of specialty pipe to the oil and gas industry.
Sales of bearings and power transmission equipment for the quarter ended March
31, 2000 increased slightly by 6.1%, or $0.6 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 March 31, 2000, sales of general mill and safety
supplies decreased 7.4%, or $0.9 million over the comparable period in 1999, due
primarily to a Company-initiated alignment of its operating locations resulting
in the closure of several stores. Sales of electrical products for the first
quarter of 2000 decreased 19.9%, or $0.7 million, from the same period in 1999
and is attributed to a lower sales in certain agriculture regions adversely
affected by dry weather conditions. The remaining decline in sales was due to
the sale of the valve and valve automation business during the third quarter of
1999.
Gross margins decreased to 25.0% of sales for the first quarter of 2000 as
compared to 26.4% for the first quarter of 1999; this is primarily due to a
negotiated price change with a vendor that increased the Company's current
quarter cost of goods sold. This price change is anticipated to have a positive
impact on future gross margins. 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.
Although selling, general and administrative expense for the first quarter
of 2000 was lower in the current year by approximately $1.1 million when
compared to the same period in 1999, as a percentage of revenue, both the 2000
and 1999 expense were similar at approximately 24.5% of sales.
Operating income for the three month period ended March 31, 2000 decreased
as a percent of revenues by 1.4% to 0.5%, from 1.9% in the first quarter of
1999, due primarily to the decrease in revenue volume.
Other income for the first quarter of 2000 was approximately $1.5 million
higher than the comparable period in 1999 due primarily to the sale in the first
quarter of 2000 of 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 recognized as a result of the sale.
Interest expense during the first quarter of 2000 remained constant when
compared to the first quarter of 1999. Although the Company's outstanding debt
has decreased significantly over the past 12 months, the increased rates paid by
the Company as a result of its amending the Credit Facility, has resulted in
interest expense remaining the same as last year.
The Company's current provision for income taxes reflects an effective rate
of 43.4% for the current quarter as compared to 50.0% for the same quarter in
1999; this is primarily due to onetime state taxes included in the 1999
provision.
Net income for the three month period ended March 31, 2000, increased by
approximately $0.5 million from the three month period ended March 31, 1999,
primarily as a result of the gain on the sale of a Company warehouse previously
discussed.
LIQUIDITY AND CAPITAL RESOURCES
General
Under the Company's loan agreements with its bank lender, 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
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cash and cash equivalents and to use borrowings under its line of credit for
working capital. The Company had approximately $4.7 million available for
borrowings under the revolving portion of the Credit Facility at March 31, 2000.
Working capital at March 31, 2000 and December 31, 1999 was $26.7 million and
$30.0 million, respectively. During the first three months of 2000 and 1999, the
Company collected its trade receivables in approximately 47 and 48 days,
respectively, and turned its inventory approximately four times on an annualized
basis.
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) $44.0 million, and matures on April 1, 2001. Interest accrues at prime
plus 1% 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 March 31, 2000, was
9.0%. The line of credit is secured by receivables, inventory, 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.
On May 2, 2000, the Company amended its Credit Facility as a result of the
sale of certain warehouse properties during the first and second quarters of
2000; the proceeds from these sales were used to reduce the Company's
outstanding Credit Facility indebtedness. The amended Credit Facility enables
the Company to reduce its monthly principal payments on the term portion of the
debt.
The Company from time to time has not been in compliance with certain
covenants under the Credit Facility regarding financial ratios. At March 31,
2000, the Company again was not in compliance with certain of those covenants.
The lender has provided waivers to the Company regarding the compliance with
these covenants, although there can be no assurance the lender will be willing
to provide waivers in the future if the Company is unable to comply with the
financial ratio covenants.
The Company generated cash through operating activities of approximately
$0.4 million in the first three months of 2000 as compared to $0.9 million in
cash used during the first three months of 1999.
The Company generated cash through investing activities of approximately
$2.2 million in the first three months of 2000 as compared to $0.3 million in
cash used during the first three months of 2000. This increase was primarily
attributed to the March sale of certain of its fabrication and warehouse
properties in Houston, Texas, for approximately $2.8 million in cash. The
Company also had capital expenditures of approximately $0.4 million for the
first three months of 1999 as compared to $0.5 million during the same period of
1999. Capital expenditures during the first three months of 2000 were related
primarily to computer equipment and its developing e-commerce website. Capital
expenditures in the first three months of 1999 were primarily related to
computer hardware ($0.3 million) and furniture and fixtures ($0.2 million).
The Company believes that cash generated from operations and available under
its Credit Facility will meet its future ongoing operational and liquidity needs
and capital requirements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not utilize financial instruments for trading purposes
and holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's exposure to market risk for changes in
interest rates relates primarily to its Credit Facility. At March 31, 2000, the
term portion of the Credit Facility (at an interest rate of prime plus 1%) was
at $11.5 million while the revolving portion of the Credit Facility (at an
interest rate of prime plus 1/2%) was at $19.8 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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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 (the "Credit
Facility") requires 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, when necessary, 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.
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 capability through its developing website and reduce costs through
consolidating certain administrative 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.
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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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C>
10.1 -- Letter amendment dated May 2, 2000, between SEPCO Industries, Inc., Bayou Pump
Pumps, Inc., American MRO, Inc. and Fleet Capital Corporation
10.2 -- Letter amendment dated May 2, 2000 between 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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DXP ENTERPRISES, INC.
Date: May 11, 2000
By: /s/ GARY A. ALLCORN
----------------------------------
Gary A. Allcorn
Senior Vice President/Finance and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 -- Letter amendment dated May 2, 2000, between SEPCO Industries, Inc., Bayou Pump
Pumps, Inc., American MRO, Inc. and Fleet Capital Corporation
10.2 -- Letter amendment dated May 2, 2000 between 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>
12
<PAGE> 1
EXHIBIT 10.1
May 2, 2000
Sepco Industries, Inc.
Bayou Pumps, Inc.
American MRO, Inc.
7272 Pinemont
Houston, Texas 77040
Attention: Chief Financial Officer
Re: Second Amended and Restated Loan and Security Agreement with Fleet
Capital Corporation -- Application of Proceeds from Sale of Brittmoore
Property and LaBranch Property -- Adjustment of Reserves and Term Loan
Amortization
Gentlemen:
Reference is hereby made to that certain Second Amended and Restated Loan
and Security Agreement, dated as of April 1, 1994, executed by Sepco Industries,
Inc. ("Sepco") and Barclays Business Credit, Inc. (as amended from time to time,
the "Loan Agreement"). Unless otherwise indicated, all terms used herein shall
have the same meanings as in the Loan Agreement. Sepco, Bayou Pumps, Inc.
("Bayou"), and American MRO, Inc. ("American") (Sepco, Bayou and American are
hereinafter collectively referred to as the "Borrower") and Fleet Capital
Corporation (successor-in-interest to Barclays Business Credit, Inc. and being
hereinafter referred to as the "Lender") are the present parties to the Loan
Agreement.
Lender and Borrower agree as follows:
1) Sepco sold on March 15, 2000 the Brittmoore, Houston, Texas real
property (the "Brittmoore Property"), $1,000,594.80 of the proceeds from the
sale of the Brittmoore Property was paid by Sepco to Lender and applied to the
Acquisition Term Loan (the "Brittmoore Property Proceeds").
2) Sepco sold in April of 2000 the LaBranch, Houston, Texas real property
(the "LaBranch Property"). The net proceeds from the sale of the LaBranch
Property (the "LaBranch Property Proceeds") were applied to the
Obligations in the following order:
a) The amount of the LaBranch Property Proceeds necessary so that
when combined with the Brittmoore Property Proceeds the aggregate amount equaled
$1,500,000 was applied to the Acquisition Term Loan; and
b) the remaining amount of the LaBranch Property Proceeds was applied
to the Revolving Credit Loans.
<PAGE> 2
May 2, 2000
Page 2
3) Effective upon the closing of the sale of the LaBranch Property, a
$600,000 reserve was established by Lender against otherwise available
Revolving Credit Loans to account for the anticipated taxes to be paid by Sepco
in connection with the sale of the Brittmoore Property and the LaBranch
Property (the "Tax Reserve"). The Tax Reserve shall be eliminated at such time
that Borrower produces evidence satisfactory to Lender that Sepco has paid all
taxes to be paid by Sepco in connection with the sale of the Brittmoore
Property and the LaBranch Property.
4) Provided that (i) the David Little Loan has been restructured in a
manner and pursuant to executed documentation in form and substance
satisfactory to Lender, in its sole discretion, and (ii) no Default or Event of
Default has occurred and is continuing, Borrower and Lender agree, beginning
with the monthly principal amortization payment due on the Term Loan and the
Acquisition Term Loan on June 1, 2000, to decrease the aggregate monthly
principal amortization payments on the Term Loan and the Acquisition Term Loan
to the aggregate amount of $131,000 and to execute such documentation as shall
be required by Lender and to effectuate such a reduction in the monthly
principal amortization on the Acquisition Term Loan and the Term Loan, such
documentation to be in form and substance satisfactory to Borrower and Lender.
The Borrower and Lender hereby further agree that the provisions of this
letter (i) shall not constitute a waiver of any past, present or future
violation or violations of any provision of the Loan Agreement or any of the
Other Agreements, and (ii) shall not directly or indirectly in any way
whatsoever either: (a) impair, prejudice or otherwise adversely affect Lender's
right at any time to exercise any right, privilege, or remedy in connection
with the Loan Agreement, any Other Agreement, or any other contract or
instrument, or (b) amend or alter any provision of the Loan Agreement, any
Other Agreement, or any other contract or instrument, or (c) constitute any
course of dealing or other basis for altering any obligation of Borrower or
any right, privilege, or remedy of Lender under the Loan Agreement, any Other
Agreement, or any other contract or instrument.
Except as expressly set forth herein, all of the other terms, provisions
and conditions of the Loan Agreement and the Other Agreements shall remain and
continue in full force and effect.
Lender reserves all of its rights, privileges and remedies under the Loan
Agreement, each Other Agreement and any other contracts or instruments executed
by Borrower and/or for the benefit of Lender. In order to induce Lender to
execute this letter, Borrower accepts and agrees to each provision of this
letter.
Notwithstanding any provision of this letter to the contrary, this letter
shall not be directly or indirectly effective against Lender for any purpose
unless and until Lender receives a copy of this letter which has been duly
signed by the Borrower.
<PAGE> 3
May 2, 2000
Page 3
Yours very truly,
FLEET CAPITAL CORPORATION
By: /s/ H. MICHAEL WILLIS
----------------------
Its: Sr. Vice President
AGREED AND ACCEPTED:
SEPCO INDUSTRIES, INC.
By: /s/ GARY A. ALLCORN
---------------------
Its: VP Finance
BAYOU PUMPS, INC.
By: /s/ GARY A. ALLCORN
---------------------
Its: VP Finance
AMERICAN MRO, INC.
By: /s/ GARY A. ALLCORN
---------------------
Its: VP Finance
<PAGE> 1
EXHIBIT 10.2
May 2, 2000
DXP Acquisition, Inc. d/b/a
Strategic Acquisition, Inc.
7272 Pinemont
Houston, Texas 77040
Attention: Chief Financial Officer
Re: Loan and Security Agreement with Fleet Capital Corporation --
Reserve Relating to Landlord Consents
Gentlemen:
Reference is hereby made to that certain Loan and Security Agreement,
dated June 16, 1997, executed by Fleet Capital Corporation, A Rhode Island
corporation ("Lender") and DXP Acquisition, Inc. d/b/a Strategic Acquisition,
Inc., a Nevada corporation ("Borrower") (as amended from time to time, the
"Loan Agreement"). Unless otherwise indicated, all terms used herein shall have
the same meanings as in the Loan Agreement.
As Borrower knows, at the time of the establishment of the credit facility
described in the Loan Agreement, lender implemented against the otherwise
available Revolving Credit Loans a reserve of $425,000 because of the lack of
satisfactory landlord consents at several of Borrower's locations (the "Landlord
Consent Reserve").
Provided that no Default or Event of Default at such time has occurred and
is continuing, Lender agrees to eliminate the Landlord Consent Reserve at such
time as the term loan by Lender to David R. Little has been restructured in a
manner and pursuant to executed documentation in form and substance
satisfactory to Lender, in its sole discretion.
Borrower agrees that if the Landlord Consent Reserve is eliminated,
Borrower shall use its best faith efforts to obtain executed landlord consents
in form and substance satisfactory to Lender, in Lender's sole discretion, for
each of Borrower's locations, and Borrower further agrees that if it does not
supply such landlord consents to Lender within 90 days after the elimination of
the Landlord Consent Reserve, Lender shall thereafter have the right to
establish reserves against the otherwise available Revolving Credit Loans in
such amounts as Lender shall deem appropriate, in Lender's sole discretion.
Lender and Borrower hereby further agree that (i) the provisions of this
letter shall not constitute a waiver of any past, present or future violation
or violations of any provision of the Loan Agreement or any Other Agreement,
and (ii) the provisions of this letter shall not directly or indirectly in any
way whatsoever either: (a) impair, prejudice or otherwise adversely affect
Lender's right at any time to exercise any right, privilege, or remedy in
connection with the Loan Agreement, any Other Agreement, or any other contract
or instrument, or (b) amend or alter any provision of the Loan Agreement, any
Other
<PAGE> 2
DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc.
May 2, 2000
Page 2
Agreement, or any other contract or instrument, or (c) constitute any course of
dealing or other basis for altering any obligation of Borrower or any right,
privilege, or remedy of Lender under the Loan Agreement, any Other Agreement, or
any other contract or instrument.
Except as expressly set forth herein, all of the other terms, provisions
and conditions of the Loan Agreement and the Other Agreements shall remain and
continue in full force and effect.
Lender reserves all of its rights, privileges and remedies under the Loan
Agreement, each Other Agreement and any other contracts or instruments executed
by Borrower and/or for the benefit of Lender. In order to induce Lender to
execute this letter, Borrower accepts and agrees to each provision of this
letter.
Notwithstanding any provision of this letter to the contrary, this letter
shall not be directly or indirectly effective against Lender for any purpose
unless and until Lender receives a copy of this letter which has been duly
signed by the Borrower.
Yours very truly,
FLEET CAPITAL CORPORATION
By: /s/ H. MICHAEL WILLIS
-----------------------
Its: Sr. Vice President
AGREED AND ACCEPTED:
DXP ACQUISITION, INC., d/b/a
STRATEGIC ACQUISITION, INC.
By: /s/ Gary A. Allcorn
--------------------
Its: VP Finance
<PAGE> 1
EXHIBIT 11.1
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Basic:
Average shares outstanding 4,072,718 4,129,097
Net Income $ 715,000 $ 235,000
Per share amount $ .1756 $ .0569
Dilutive:
Average shares outstanding 4,072,718 4,129,097
Net effect of dilutive stock options --
based on the treasure stock method using
period-end market price, if higher than
average market price 374,375 1,003,277
Assumed conversion of Class A convertible
Preferred Stock 420,000 420,000
Total 4,867,093 5,552,374
Net Income $ 737,000 $ 258,000
Per share amount $ .1514 $ .0465
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS OF DXP ENTERPRISES, INC. AS OF MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 905
<SECURITIES> 0
<RECEIVABLES> 22,479
<ALLOWANCES> 0
<INVENTORY> 24,620
<CURRENT-ASSETS> 49,483
<PP&E> 21,760
<DEPRECIATION> 9,802
<TOTAL-ASSETS> 72,489
<CURRENT-LIABILITIES> 22,815
<BONDS> 0
112
0
<COMMON> 41
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 72,489
<SALES> 43,757
<TOTAL-REVENUES> 43,757
<CGS> 32,805
<TOTAL-COSTS> 32,805
<OTHER-EXPENSES> 8,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 930
<INCOME-PRETAX> 1,302
<INCOME-TAX> 565
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-BASIC> .18
<EPS-DILUTED> .15
</TABLE>
