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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-21513
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DXP ENTERPRISES, INC.
A Texas Corporation 76-0509661
IRS Employer Identification No.
7272 PINEMONT
HOUSTON, TEXAS 77040
Telephone Number (713) 996-4700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the registrant's Common Stock held by
non-affiliates of registrant as of March 26, 1999: $4,126,852.
Number of shares of registrant's Common Stock outstanding as of March 26,
1999: 4,155,773.
Documents incorporated by reference: portion of the definitive proxy
statement for the annual meeting of shareholders to be held in 1999 are
incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
DESCRIPTION
ITEM PAGE
---- ----
PART I.............................................................. 1
1. BUSINESS.................................................... 1
2. PROPERTIES.................................................. 9
3. LEGAL PROCEEDINGS........................................... 9
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9
PART II............................................................. 10
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 10
6. SELECTED FINANCIAL DATA..................................... 10
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 12
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 36
PART III............................................................ 36
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 36
11. EXECUTIVE COMPENSATION...................................... 36
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 36
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 36
PART IV............................................................. 36
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 36
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PART I
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
DXP Enterprises, Inc.'s actual results could differ materially. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Business", "Business -- Cautionary Statements",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Annual Report on Form 10-K. Unless the context
otherwise requires, references in this Annual Report on Form 10-K to the
"Company" or "DXP" shall mean DXP Enterprises, Inc., a Texas corporation,
together with the Company's subsidiaries.
ITEM 1. BUSINESS
GENERAL
The Company is a leading provider of maintenance, repair and operating
("MRO") products, equipment and integrated services, including engineering
expertise and logistics capabilities, to industrial customers. The Company
provides a wide range of MRO products in the following categories: fluid
handling equipment, bearings and power transmission equipment, general mill and
safety supplies and electrical products. The Company also offers a line of valve
and valve automation products within the pipe, valve and fittings category and
is evaluating alternatives designed to expand its presence in this area. The
Company offers its customers a single source of integrated services and supply
on an efficient and competitive basis by being a first-tier distributor which
purchases its products directly from the manufacturer. The Company also provides
integrated services such as system design, fabrication, installation, repair and
maintenance for its customers. The Company offers a wide range of industrial MRO
products, equipment and services through a complete continuum of customized and
efficient MRO solutions, ranging from traditional distribution to fully
integrated supply contracts. The integrated solution is tailored to satisfy the
customer's unique needs.
INDUSTRY OVERVIEW
The Company estimates that annual sales in the United States of MRO
products for industrial customers currently exceeds $200 billion, of which the
Company estimates over $150 billion are in the five major product categories of
(i) fluid handling equipment, (ii) bearings and power transmission equipment,
(iii) general mill and safety supplies, (iv) electrical products and (v) pipe,
valve and fittings. With additional expansion or through an alliance in the
pipe, valve and fittings category, the Company will be able to provide as a
first-tier distributor products in the five major MRO product categories. Based
on 1997 sales as reported by industry sources, the Company was the 37th largest
distributor of MRO products in the United States. On a combined basis after
giving effect to the Company's 1997 acquisitions of Strategic Supply, Inc.
("SSI"), Pelican State Supply Company ("Pelican") and 1998 acquisitions of
Tri-Electric Supply, Ltd. ("Tri-Electric"), Lucky Electric Supply, Inc.
("Lucky") and M.W. Smith Equipment, Inc ("Smith"), the Company would have been
the 30th largest distributor of MRO products in the United States.
While the growth in the industrial distribution market is generally related
to the expansion of the United States economy, revenues attributable to the
outsourcing of MRO supply procurement, inventory control and warehouse
management, known as "integrated supply", are expected to grow at an annualized
rate of 40% from $1.8 billion in 1995 to $10 billion in 2000. The industrial
distribution market is highly fragmented, with the 50 largest distributors
accounting for less than 16% of the total United States market during 1997. As a
result, most industrial customers currently purchase their industrial supplies
through numerous local distribution and supply companies. These distributors
generally provide the customer with repair and maintenance services, technical
support and application expertise with respect to one product category. Products
typically are purchased by the distributor for resale directly from the
manufacturer and warehoused at branch distribution facilities of the distributor
until sold to the customer. The customer also typically will purchase an amount
of product inventory for its near term anticipated needs and warehouse those
products at its industrial site until the products are used.
The Company believes that the current distribution system for industrial
products in the United States creates inefficiencies at both the customer and
the distributor level through excess inventory requirements and
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duplicative cost structures. To compete more effectively, the Company's
customers and other users of MRO products are seeking ways to enhance
efficiencies and lower MRO product and procurement costs. In response to this
customer desire, three primary trends have emerged in the industrial supply
industry:
- Industry Consolidation. Industrial customers have reduced the number of
supplier relationships they maintain to lower total purchasing costs,
improve inventory management, assure consistently high levels of customer
service and enhance purchasing power. This focus on fewer suppliers has
led to consolidation within the fragmented industrial distribution
industry.
- Customized Integrated Service. As industrial customers focus on their
core manufacturing or other production competencies, they increasingly
are demanding customized integration services, ranging from value-added
traditional distribution to integrated supply and system design,
fabrication, installation and repair and maintenance services.
- Single Source, First-Tier Distribution. As industrial customers continue
to address cost containment, there is a trend toward reducing the number
of suppliers and eliminating multiple tiers of distribution. Therefore,
to lower overall costs to the MRO customer, some MRO distributors are
expanding their product coverage to eliminate second-tier distributors
and the difficulties associated with alliances.
Industrial distributors typically provide professional sales expertise,
engineering expertise, inventory availability, fabrication and assembly and
in-house and field service. The Company believes that its recent acquisition of
other businesses has not materially affected its ability to continue to provide
these services to its customers and the customers of the acquired distributors.
In fact, the Company believes that as a larger and more diverse organization it
should be able to maintain the same or higher level of service to its customers
and the customers of any acquired distributors. The Company also believes that
the level of service provided to the customers of the acquired business may be
enhanced as a result of the availability of a broader range of products, the
elimination of duplicative overhead and DXP's SmartSource and American MRO
integrated supply programs.
RECENT ACQUISITIONS
The Company completed two strategic acquisitions in 1997, and three
additional acquisitions in the first six months of 1998 directed at expanding
its product lines and increasing its geographic presence. Through the Company's
acquisition of SSI, the Company added general mill and safety supply to its
product offerings and expanded its geographic presence to seven additional
states and 24 additional cities throughout the United States. The acquisition of
SSI also enhanced the Company's integrated supply capabilities through SSI's
existing integrated supply contracts and SmartSource program. The Company's May
1997 acquisition of Pelican expanded the Company's general mill and safety
supply product lines and added an additional integrated supply contract with a
major refinery in Baton Rouge, Louisiana. In the first six months of 1998, the
Company completed the acquisitions of the assets of Tri-Electric and Lucky,
thereby adding electrical products to its product offerings. The Company's
acquisition of the assets of Smith in May 1998 expanded its pump distribution
capabilities in East Texas.
PRODUCTS AND SERVICES
The Company currently serves as a first-tier distributor of more than
170,000 stock keeping units ("SKUs") for use primarily by customers engaged in
the general manufacturing, oil and gas, petrochemical, service and repair and
wood products industries. Other industries served by the Company include mining,
construction, chemical, municipal, food and beverage and pulp and paper. The
Company's MRO products include a wide range of products in the fluid handling
equipment, bearings and power transmission equipment, general mill and safety
supplies and electrical products. The Company also offers a line of valve and
valve automation products within the pipe, valve and fittings category and is
seeking to expand its presence in this area. With additional expansion or
through an alliance in the pipe, valve and fittings category, the Company will
be able to provide as a first-tier distributor a substantial portion of products
in the five major MRO product categories. The Company's products are distributed
from 54 distribution centers strategically located
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throughout the United States and sold through the sales efforts of approximately
300 employees who generally are compensated on a commission basis.
Fluid Handling Equipment
The Company's fluid handling equipment line includes a full line of (i)
centrifugal pumps for transfer and process service applications, such as
petrochemicals, refining and crude oil production, (ii) rotary gear pumps for
low- to medium-pressure service applications, such as pumping lubricating oils
and other viscous liquids, (iii) plunger and piston pumps for high-pressure
service applications such as salt water injection and crude oil pipeline service
and (iv) air-operated diaphragm pumps. The Company also provides various pump
accessories. Sales of fluid handling equipment accounted for 53%, 44% and 39% of
the Company's revenues for the years ended December 31, 1996, 1997, 1998,
respectively. Such sales accounted for 37% and 39% of the Company's revenues for
the year ended December 31, 1997 and December 31, 1998, respectively, on a pro
forma basis after giving effect to the SSI, Pelican, Tri-Electric, Lucky and
Smith acquisitions.
Bearings and Power Transmission Equipment
The Company provides a full line of bearings, hoses, seals and power
transmission products. The Company's bearing products include several types of
mounted and unmounted bearings for a variety of applications. Hose products
distributed by the Company include a large selection of industrial fittings and
stainless steel hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as
well as hoses for chemical, petroleum, air and water applications. The Company
distributes seal products for downhole, wellhead, valve and completion equipment
to oilfield service companies. Power transmission products distributed by the
Company include speed reducers, flexible coupling drives, chain drives,
sprockets, gears, conveyors, clutches, brakes and hoses. Sales of bearings,
hoses, seals and power transmission equipment accounted for 39%, 31% and 25% of
the Company's revenues for the years ended December 31, 1996, 1997 and 1998,
respectively. Such sales accounted for 24% of the Company's revenues for the
year ended December 31, 1997 and December 31, 1998, on a pro forma basis after
giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith acquisitions.
General Mill and Safety Supplies
The Company, as a result of the acquisitions of SSI and Pelican in May
1997, offers a broad range of general mill and safety supplies, such as
abrasives, tapes and adhesive products, coatings and lubricants, cutting tools,
fasteners, hand tools, janitorial products, pneumatic tools, welding equipment,
eye and face protection products, first aid products, protection products,
hazardous material handling products, instrumentation and respiratory protection
products. Sales of general mill supply and safety products accounted for
approximately 26% of the Company's revenue on a pro forma basis for the year
ended December 31, 1997 and 25% of the Company's revenue for the year ended
December 31, 1998.
Pipe, Valve and Fittings
The Company's valve and valve automation products within this category
include a full line of pneumatic, hydraulic and electric actuators for critical
or high-pressure service applications or remote valve operation applications,
such as refinery, offshore and pipeline applications, as well as for
applications involving large-diameter pipe. The Company also provides a full
line of manual worm gear and bevel gear actuators for low-pressure applications
not requiring remote operation, including tank farms, water lines and municipal
water systems. Sales of valves and valve automation products accounted for 8%,
6% and 5% of the Company's revenues for years ended December 31, 1996, 1997 and
1998, respectively. Such sales accounted for 4% of the Company's revenue for the
years ended December 31, 1997 and 1998, on a pro forma basis after giving effect
to the SSI, Pelican, Tri-Electric, Lucky and Smith acquisitions.
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Electrical Products
The Company offers a broad range of electrical products, such as wire
conduit, wiring devices, electrical fittings and boxes, signaling devices,
heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries,
fans and fuses. Sales of electrical products accounted for 6% of the Company's
revenues for the year ended December 31, 1998. Such sales accounted for 9% of
the Company's revenues for the years ended December 31, 1997 and 1998, on a pro
forma basis after giving effect to the SSI, Pelican, Tri-Electric, Lucky and
Smith acquisitions.
CUSTOMIZED DISTRIBUTION SERVICES
System Design, Fabrication, Installation and Repair and Maintenance Services
In addition to distributing products, the Company provides complete,
customized pumping, valve automation and power transmission system design and
fabrication services through its engineering personnel and fabrication
facilities. The Company also provides training services with respect to the
installation and basic applications of its products as well as around-the-clock
field repair services supported by a leased fleet of fully equipped service
vehicles.
Integrated Supply
SmartSource, the Company's integrated supply program, allows a customer to
choose from a complete continuum of supply options, ranging from traditional
distribution to integrated supply.
CUSTOMERS
The Company provides its products and services to over 25,000 customers in
various industries, principally general manufacturing, oil and gas,
petrochemical, service and repair and wood products. Other industries include
mining, construction, chemical, municipal, food and beverage and pulp and paper.
No one customer represented more than 5% of the Company's sales for the year
ended December 31, 1998.
SALES AND MARKETING
Approximately 297 employees, serving in various capacities ranging from
branch or operations managers (51), outside sales representatives (108) and
direct sales representatives (138) support the Company's marketing and sales
efforts. The Company's branch and operations managers support the sales efforts
through direct customer contact and manage the efforts of the outside and direct
sales representatives. The Company has structured compensation to provide
incentives to its sales representatives to increase sales through the use of
commissions. The Company's outside sales representatives focus on building
long-term relationships with customers and, through their product and industry
expertise, providing customers with product application, engineering and
after-the-sale services. The direct sales representatives support the outside
sales representatives and are responsible for entering product orders and
providing technical support with respect to the Company's products. Because the
Company offers a broad range of products, the Company's outside and direct sales
representatives are able to use their existing customer relationships with
respect to one product line to cross-sell the Company's other product lines. In
addition, geographic locations in which certain products are sold also are being
utilized to sell products not historically sold at such locations. As the
Company expands its product lines and geographical presence, it assesses the
opportunities and appropriate timing of introducing existing products to new
customers and new products to existing customers. Prior to implementing such
cross-selling efforts, the Company must provide appropriate sales training and
product expertise to its sales force.
Unlike many of its competitors, the Company markets its products primarily
as a first-tier distributor, generally procuring products directly from the
manufacturers, rather than from other distributors. As a first-tier distributor,
the Company is able to reduce its customers' costs and improve efficiencies in
the supply chain.
The Company believes it has increased its competitive advantage through its
traditional and integrated supply programs, designed to address the customer's
specific product and procurement needs. The Company
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offers its customers various options for the integration of their supply needs,
ranging from serving as a single source of supply for all or specific lines of
products and product categories to offering a fully integrated supply package in
which the Company assumes the procurement and management functions, including
ownership of inventory, at the customer's location. The Company's unique
approach to integrated supply allows the Company to design a program that best
fits the needs of the customer. For those customers purchasing a number of
products in large quantities, the customer is able to outsource all or most of
those needs to the Company. For customers with smaller supply needs, the Company
is able to combine its traditional distribution capabilities with its broad
product categories and advanced ordering systems to allow the customer to engage
in one-stop shopping without the commitment required under an integrated supply
contract.
SUPPLIERS
The Company acquires its products through numerous original equipment
manufacturers. The Company has distribution agreements with these manufacturers,
some of which give the Company exclusive rights to distribute the manufacturers'
products in a specific geographic area. All of the Company's distribution
agreements are subject to cancellation by the manufacturer upon one year notice
or less. No one manufacturer provides products that account for 10% or more of
the Company's revenues. The Company believes that alternative sources of supply
could be obtained in a timely manner if any distribution agreement were
canceled. Accordingly, the Company does not believe that the loss of any one
distribution agreement would have a material adverse effect on its business,
financial condition or results of operations. Representative manufacturers of
the Company's products include (i) Gould's, G&L, Viking, Wilden and Gaso (fluid
handling products), (ii) SKF, Torrington/Fafnir, Timkin and NTN, Dodge/Reliance,
Falk, Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric
(bearing and power transmission products), (iii) Union Bullerfield, Gulf Coast
Fasteners, Norton Gray Abrasives, Sastech, Inc., and LaCross Rainfair Safety
Products (general mill and safety supply), (iv) Cutler-Hammer, Cooper, Killark,
and Allied and American Insulated Wiring (electrical products) and (v) G.H.
Bettis (valve and valve automation products).
MANAGEMENT INFORMATION SYSTEM
The Company uses technology to benefit customers and to improve the
Company's productivity and efficiency. In addition to traditional functions of
inventory control, order processing, purchasing, accounts receivable, accounts
payable and general ledger, the Company's computer system has the flexibility to
integrate with the customer's maintenance, accounting and management systems.
The Company's system allows for real-time reporting of industrial products used
by work order, department and individual, as well as on-line stock inquiry and
order-status reports. The Company's system supports advanced functions, such as
EDI, customized billing, end user reporting, facsimile transmission, bar coding
and preventative maintenance. The Company's Smart Source program delivers DXP's
technology to the integrated supply customer, thereby eliminating duplication
and inefficiencies to lower the total acquisition cost of MRO products. This
system links the Company's branches and corporate offices with manufacturers and
customers into one network system.
The Company operates a mainframe system that is supported by the
industry-standard open system environment. The Company has invested significant
resources within the last 18 months to increase the capabilities and networking
opportunities of this system. The Company's system supports a large number of
customer specific databases which tie into the Company's primary database. This
capability allows the Company to provide its customers with a wide variety of
reports that are customized to meet the specific needs of the customer.
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COMPETITION
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, many of which may have greater
financial and other resources than the Company. Many of the Company's
competitors are small enterprises selling to customers in a limited geographic
area. The Company also competes with larger distributors that provide integrated
supply programs and outsourcing services similar to those offered by the Company
through its SmartSource program, some of which may be able to supply their
products in a more efficient and cost-effective manner than the Company. The
Company also competes with direct mail distributors, large warehouse stores and,
to a lesser extent, manufacturers. While many of the Company's competitors offer
traditional distribution of some of the product groupings offered by the
Company, the Company is not aware of any major competitor that offers on a
non-direct mail basis a product grouping as broad as that offered by the
Company. Further, while certain direct-mail distributors provide product
offerings as broad as the Company, these competitors do not offer the product
application, engineering and after-the-sale services provided by the Company.
BACKLOG
Backlog is not material to the Company's business.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. There can be no
assurance that such insurance will be adequate for the risks involved, that
coverage limits will not be exceeded or that such insurance will apply to all
liabilities. The occurrence of an adverse claim in excess of the coverage limits
maintained by the Company could have a material adverse effect on the Company's
financial condition and results of operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations relating to its
business and operations, and various health and safety regulations as
established by the Occupational Safety and Health Administration.
Certain of the Company's operations are subject to federal, state and local
laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although the Company believes
that is has adequate procedures to comply with applicable discharge and other
environmental laws, the risks of accidental contamination or injury from the
discharge of controlled or hazardous materials and chemicals cannot be
eliminated completely. In the event of such an accident, the Company could be
held liable for any damages that result, and any such liability could have a
material adverse effect on the Company. The Company is not currently aware of
any situation or condition that it believes is likely to have a material adverse
effect on its results of operations or financial condition.
EMPLOYEES
At December 31, 1998, the Company had 706 full-time employees. The Company
believes that its relationship with its employees is good.
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 Annual Report on
Form 10-K, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of the Company's realization of such expectations. The
Company's actual results could differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
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Ability to Comply with Financial Covenants of Credit Facility
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 Associated With Acquisition Strategy
Future results for the Company will depend in part on the success of the
Company in implementing its acquisition strategy. This strategy includes taking
advantage of a consolidation trend in the industry and effecting acquisitions of
distributors with complementary or desirable new product lines, strategic
distribution locations and attractive customer bases and manufacturer
relationships. The ability of the Company to implement this strategy will be
dependent on its ability to identify, consummate and successfully assimilate
acquisitions on economically favorable terms. Although the Company is actively
seeking acquisitions that would meet its strategic objectives, there can be no
assurance that the Company will be successful in these efforts. In addition,
acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities, expenses associated with obsolete inventory of an
acquired company and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
or other industrial supply distributors acquired in the future will achieve
anticipated revenues and earnings. In addition, the Company's loan agreements
with its bank lender (the "Credit Facility"), contain certain restrictions that
could adversely affect its ability to implement its acquisition strategy. Such
restrictions include a provision prohibiting the Company from merging or
consolidating with, or acquiring all or a substantial part of the properties or
capital stock of, any other entity without the prior written consent of the
lender. There can be no assurance that the Company will be able to obtain the
lender's consent to any of its proposed acquisitions.
Risks Related to Acquisition Financing
The Company currently intends to finance acquisitions by using shares of
Common Stock for a portion or all of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to use more of its cash resources, if available, to maintain its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. Under the Credit Facility, all available cash generally is
applied to reduce outstanding borrowings. As of December 31, 1998, the Company
had approximately $4.3 million available under the Credit Facility, and there
can be no assurance that the Company will be able to obtain additional financing
on a timely basis or on terms the Company deems acceptable. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Risks Related to Internal Growth Strategy
Future results for the Company also will depend in part on the Company's
success in implementing its internal growth strategy, which includes expanding
existing product lines and adding new product lines. The
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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 program. The Company acquired SSI and Pelican in the second quarter
of 1997, Tri-Electric in the first quarter of 1998 and Lucky and Smith in the
second quarter of 1998 and plans to acquire other distributors with
complementary or desirable product lines and customer bases. Although the
Company intends to increase sales and product offerings to the customers of SSI,
Pelican, Tri-Electric, Lucky and Smith and other acquired companies, reduce
costs through consolidating certain administrative and sales functions and
integrate the acquired companies' management information systems with the
Company's system, there can be no assurance that the Company will be successful
in these efforts.
Substantial Competition
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger distributors
that provide integrated supply programs such as those offered through
outsourcing services similar to those that are offered by the Company's
SmartSource 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. See "Business -- Suppliers".
Year 2000 Issues
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result,
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such systems and applications could fail or create erroneous results unless
corrected so that they can process data related to the Year 2000. The Company
relies on its computer systems and software for financial reporting, customer
account information and inventory management and replenishment. The Company is
in the process of assessing its state of readiness for the Year 2000 and expects
its software to be Year 2000 compliant by the end of the third quarter of 1999
upon completion of the upgrading of its software. Additionally, the Company has
developed and implemented a web-based questionnaire along with a standard
questionnaire in order to communicate with customers, major vendors and other
third parties with whom it has material relationships to determine if they will
be ready for the Year 2000. To the extent unexpected problems associated with
the Year 2000 arise during the implementation phase of the Company's Year 2000
program or due to the fact that the Company's customers, vendors and other third
parties are not compliant by the Year 2000, it could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Readiness Disclosure".
Risks Associated With Hazardous Materials
Certain of the Company's operations are subject to federal, state and local
laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although the Company believes
that it has adequate procedures to comply with applicable discharge and other
environmental laws, the risks of accidental contamination or injury from the
discharge of controlled or hazardous materials and chemicals cannot be
eliminated completely. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could have a
material adverse effect on the Company's financial condition and results of
operations.
ITEM 2. PROPERTIES
The Company owns its headquarters facility in Houston, Texas which has
45,000 square feet of Office Space. It also owns or leases 48 branch
distribution facilities located in Alabama, Arizona, Arkansas, Colorado,
Georgia, Idaho, Louisiana, Montana, Nevada, New Mexico, North Dakota, Oklahoma,
Tennessee, Texas, Utah and Wyoming. These facilities range from 2,500 square
feet to 138,000 square feet in size. Those facilities that are not owned by the
Company are leased for terms generally ranging from three to five years. The
leases provide for periodic specified rental payments and certain leases are
renewable at the option of the Company. The Company believes that if the leases
for any of its facilities were not renewed, other suitable facilities could be
leased with no material adverse effect on its business, financial condition or
results of operations. Certain of the facilities owned by the Company are
pledged to secure indebtedness of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of its business. The Company believes that the
outcome of any of these proceedings will not have a material adverse effect on
its business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has traded on The Nasdaq National Market since July 2,
1997, under the symbol "DXPE." From December 27, 1996, through July 2, 1997, the
Common Stock traded on the Over the Counter Bulletin Board of National
Association of Securities Dealers, Inc. ("OTC Bulletin Board"). The following
table sets forth on a per share basis the high and low sales prices for the
Common Stock as reported on The Nasdaq National Market and the OTC Bulletin
Board, as applicable, for the periods indicated.
HIGH LOW
---- ---
1997
First Quarter(1)(2)....................................... 16 9
Second Quarter(1)(2)...................................... 13 1/2 10 1/2
Third Quarter(2).......................................... 14 12
Fourth Quarter(2)......................................... 12 1/2 10
1998
First Quarter(2).......................................... 12 10
Second Quarter(2)......................................... 11 7/8 8
Third Quarter(2).......................................... 11 7
Fourth Quarter............................................ 8 3/4 6 3/4
1999
First Quarter (through March 26, 1999).................... 10 6
- ---------------
(1) Restated to give effect to a two-to-one reverse stock split of the Common
Stock that was effected May 12, 1997.
(2) Restated to give effect to a two-to-one reverse stock split of the Common
Stock that was effected July 17, 1998.
On March 26, 1999, the closing sales price of the Common Stock was $7.125 per
share. On March 26, 1998 there were 149 holders of record of outstanding shares
of Common Stock.
The Company anticipates that future earnings will be retained to finance
the continuing development of its business. In addition, the Credit Facility
prohibits the Company from declaring or paying any dividends or other
distributions on its capital stock except for limited dividends on its preferred
stock. Accordingly, the Company does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, the success of the Company's business
activities, regulatory and capital requirements, the general financial condition
of the Company and general business conditions.
In July 1998, the Company issued 21,200 shares of Common Stock for an
aggregate consideration of $15,953 to an employee pursuant to the exercise of a
stock option granted under the Company's Long-Term Incentive Plan. The Company
considers such securities to have been offered and sold in a transaction not
involving a public offering and, therefore, to be exempted from registration
under Section 4(2) of the Securities Act. The foregoing transaction did not
involve underwriters.
ITEM 6. SELECTED FINANCIAL DATA
The Company is a Texas corporation that was formed in 1996 to effect a
consolidation of SEPCO Industries, Inc. ("SEPCO") and Newman Communications
Corporation (the "Reorganization") pursuant to which DXP became a public
company. Prior to the Reorganization, the Company had no operations and its only
assets consisted of $1,000 cash. The Reorganization has been accounted for as a
recapitalization of SEPCO. The selected historical consolidated financial data
of SEPCO set forth below for each of the years in the two-year period ended
December 31, 1995, have been derived from the audited consolidated financial
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statements of SEPCO. The selected historical consolidated financial data set
forth below for each of the years in the three-year period ended December 31,
1998 have been derived from the audited consolidated financial statements of the
Company, and assume that the Reorganization had been effected on the first day
of the period presented. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
SEPCO DXP
------------------- ------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
CONSOLIDATED STATEMENTS OF EARNINGS
DATA:
Revenues................................ $102,592 $111,328 $125,208 $169,667 $203,443
Gross profit(1)......................... 27,217 29,157 32,117 44,880 54,020
Operating income(1)(2).................. 4,150 4,598 2,785 6,434 7,450
Income before provision for income
taxes................................. 3,038 3,512 1,635 4,670 5,004
Net income.............................. 1,862 2,088 890 2,768 2,874
Preferred stock dividend................ -- (23) (119) (103) (90)
Net income attributable to common
Shareholders.......................... 1,862 2,065 771 2,665 2,784
Basic earnings per common share......... $ 0.38 $ 0.54 $ 0.19 $ 0.65 $ 0.67
Common shares outstanding(4)............ 4,878 3,837 3,997 4,082 4,159
Dilutive earnings per share............. $ 0.35 0.46 0.18 0.49 0.51
Common and common equivalent shares
Outstanding(3)(4)..................... 5,370 4,501 4,857 5,703 5,596
YEAR ENDED DECEMBER 31,
-----------------------------------------------
SEPCO DXP
----------------- ---------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................. $20,011 $23,967 $25,612 $36,262 $37,085
Total assets................................. 38,163 43,254 45,042 67,636 81,332
Long-term debt obligations................... 18,461 21,275 22,300 33,395 42,910
Shareholders' equity(3)...................... 8,315 9,688 10,459 13,031 15,607
- ---------------
(1) Year ended December 31, 1996 includes a one-time charge to compensation
expense of $618,000 for the amendment of book value options to fair market
value options and approximately $284,000 in professional costs associated
with the Reorganization. The Company disposed of approximately $1,100,000 of
excess inventory in December 1996 that it had accumulated through prior
acquisitions of product groups that were subject to shelf-life restrictions.
This is a one-time charge not expected to occur in future years.
(2) Year ended December 31, 1998 includes a one-time charge to professional fees
and travel costs of $474,000 associated with the Company's decision to
discontinue the offering of additional common stock.
(3) Number of shares used to compute earnings per share and shareholders' equity
has been restated to reflect the Reorganization as of the first day of the
first period presented.
(4) Common stock and earnings per share have been restated to give effect to the
two-to-one reverse split of the Common Stock which became effective May 12,
1997 and another two-to-one reverse stock split that became effective July
17, 1998.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and related notes contained elsewhere in this Annual
Report on Form 10-K.
GENERAL
The Company is a leading provider of MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. The Company provides a wide range of MRO products in the
fluid handling equipment, bearings and power transmission equipment, general
mill and safety supplies and electrical product categories. The Company also
offers a line of valve and valve automation products within the pipe, valve and
fittings category and is seeking to expand its presence in this area. The
Company offers its customers a single source of integrated services and supply
on an efficient and competitive basis by being a first-tier distributor which
purchases its products directly from the manufacturer. The Company also provides
integrated services such as system design, fabrication, installation, repair and
maintenance for its customers. The Company offers a wide range of industrial MRO
products, equipment and services through a complete continuum of customized and
efficient MRO solutions, ranging from traditional distribution to fully
integrated supply contracts. The integrated solution is tailored to satisfy the
customer's unique needs.
The Company's products and services are marketed in 16 states to over
25,000 customers that are engaged in a variety of industries, many of which may
be counter cyclical to each other. Demand for the Company's products generally
is subject to changes in the United States economy and economic trends affecting
the Company's customers and the industries in which they compete in particular.
Certain of these industries, such as the oil and gas industry, are subject to
volatility while others, such as the petrochemical industry, are cyclical and
materially affected by changes in the economy. As a result, the Company may
within particular markets and product categories experience changes in demand as
changes occur in the markets of its customers.
The Company's strategy is focused on addressing current trends in the
industrial distribution market through a combination of acquisitions and
internal growth. The Company seeks acquisitions that will provide the Company
access to additional product lines and customers to enhance its position as a
single source industrial distributor with first-tier distribution capabilities.
Key elements of the Company's internal growth strategy include leveraging
existing customer relationships, expanding product offerings from existing
locations, reducing costs through consolidated purchasing programs and combined
product distribution centers, designing and implementing innovative solutions to
address the procurement and supply needs of the Company's customers and using
the Company's traditional distribution and integrated supply capabilities to
increase sales in each area. Future results for the Company will be dependent on
the success of the Company in implementing its acquisition and internal growth
strategy.
The ability of the Company to implement its acquisition and internal growth
strategy will be dependent on its ability to identify, consummate and assimilate
acquisitions on economically favorable terms, to acquire and successfully
integrate new product lines and to successfully market alternate forms of supply
arrangements through the Company's SmartSource program. Although the Company is
actively seeking acquisitions and integrated supply arrangements that would meet
its strategic objectives, there can be no assurance that the Company will be
successful in these efforts. Further, the ability of the Company to effect its
strategic plans will be dependent on its obtaining financing for its planned
acquisitions and expansions, and there can be no assurance that any such
financing will be available. The Company plans to examine appropriate methods of
financing any such acquisitions, including issuance of additional capital stock,
debt or other securities or a combination thereof. If the Company were to issue
shares of its capital stock in any acquisition, such issuance could be dilutive
to existing shareholders.
The Reorganization
The Company was incorporated on July 26, 1996, to facilitate the
Reorganization. On December 4, 1996, the Reorganization was effected through (i)
a merger of a wholly owned subsidiary of the Company with and
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into SEPCO and (ii) a merger of a wholly owned subsidiary of the Company with
and into Newman Communications Corporation ("Newman").
Prior to the Reorganization, the Company had no operations and its only
assets consisted of $1,000 cash. The Reorganization has been accounted for as a
recapitalization of SEPCO. Prior to the Company's acquisition of Newman, Newman
was a non-operating entity with nominal assets. The merger with Newman was
effected as a means to implement the original registration of the Common Stock
under the Securities and Exchange Act of 1934 and increase the Company's
shareholder base. The Reorganization resulted in approximately $900,000 in
one-time costs, which included a $618,000 charge for additional compensation
expense for the conversion of outstanding book-value options into market-based
options and approximately $284,000 in professional costs associated with the
Reorganization.
In December 1996, the Company disposed of $1.1 million of excess inventory
which it had accumulated through prior acquisitions of product groups that were
subject to shelf-life restrictions. This is a one-time charge not expected to
occur in future years.
RESULTS OF OPERATIONS
The Company currently distributes a substantial number of products in four
of the five major product categories within the industrial distribution market
and also provides products in the fifth category, pipe, valve and fittings. The
Company has provided three of those product categories, fluid handling
equipment, bearings and transmission equipment and pipe, valve and fittings for
a number of years. The fourth product category, general mill and safety
supplies, was added in 1997 with the acquisitions of SSI and Pelican and the
fifth category, electrical products, was added in February 1998 with the
acquisition of Tri-Electric.
The following table sets forth the revenues generated from the sales of
major products and services distributed by the Company and the percentage of
revenues of various items.
YEAR ENDED DECEMBER 31,
------------------------------
SEPCO DXP
-------- -------------------
1996 1997 1998
-------- -------- --------
REVENUES:
Fluid handling equipment............................. $ 65,709 $ 75,472 $ 79,299
Bearings and power transmission equipment............ 49,144 53,180 50,840
General mill and safety supplies(1).................. -- 31,660 49,992
Pipe, valve and fittings............................. 10,355 9,355 9,539
Electrical Products(2)............................... -- -- 13,773
-------- -------- --------
Total revenues............................. $125,208 $169,667 $203,443
PERCENT OF REVENUES:
Cost of sales........................................ 74.3% 73.5% 73.4%
Gross profit......................................... 25.7 26.5 26.6
Selling, general and administrative expenses......... 23.5 22.7 22.9
Operating income..................................... 2.2 3.8 3.7
Other income......................................... .8 .5 .6
Interest expense, net................................ 1.7 1.6 1.8
Income before taxes.................................. 1.3 2.7 2.5
Income tax expense................................... .6 1.1 1.0
Net income........................................... 0.7% 1.6% 1.4%
======== ======== ========
- ---------------
(1) Product category added in connection with the acquisitions of SSI and
Pelican in the second quarter 1997.
(2) Product category added in connection with the acquisitions of Tri-Electric
and Lucky in the first six months of 1998.
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for 1998 increased 19.9% to $203.4 million from 1997. The
Company's acquisitions during 1998 and 1997, which included general mill and
safety supply, pump supply and electrical supply companies, accounted for the
$33.8 million increase in revenues. Sales of fluid handling equipment increased
by 5.1%, or $3.8 million in 1998 over the comparable period in 1997. This was
due to the $4.8 million in revenues generated by Smith, the pump company
acquired in May 1998. Sales of bearings and power transmission equipment for
1998 decreased 4.4%, or $2.3 million over the comparable period in 1997, due
primarily to the effects of lower oil prices and its affects on the oil
industry. Sales of valve and valve automation equipment increased 2.0%, or $.2
million over the comparable period in 1997. A comparison of general mill and
safety supplies and electrical supplies is not presented due to the fact that
the product categories did not exist during the entire comparative prior period.
Gross margins remained relatively consistent in 1998 as compared to 1997.
The Company currently expects some increase in manufacturers prices to continue
due to increased raw material costs and market conditions. Although the Company
intends to attempt to pass on these price increases to its customers to maintain
current gross margins, there can be no assurances that the Company will be
successful in this regard.
Selling, general and administrative expenses remained relatively consistent
as a percentage of revenue in 1998 as compared to 1997. The Company recorded a
one-time charge of $474,000 in 1998 related to professional fees and travel
costs associated with a proposed offering of common stock which the Company
decided to abandon. The Company is continuing its efforts to contain or reduce
operating expenses where possible.
Operating income for 1998 increased 15.8% from the corresponding period in
1997, from $6.4 million to $7.5 million, due to the various factors discussed
above.
Interest expense during 1998 increased by $1.0 million to $3.7 million as
compared to 1997. The increase was primarily due to greater interest expense
resulting from additional borrowings incurred to finance two acquisitions during
the second quarter of 1997, a third during the first quarter of 1998, two
acquisitions during the second quarter of 1998 and the purchase of real property
used as the Company's corporate headquarters. Average interest rates were
slightly lower during 1998 as compared to 1997.
The Company's provision for income taxes for 1998 increased by $.2 million
compared to 1997, as a result of a marginal increase in profits.
Net income for 1998 was consistent with that generated in 1997, due
primarily to the higher interest expense incurred from the financing of five
acquisitions over the prior eighteen month period together with the purchase of
the real property for the Company's corporate headquarters and the one-time
charge associated with the Company's decision to discontinue the proposed
offering of common stock.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for 1997 increased 35.5% to $169.7 million from 1996. This revenue
growth resulted from a combination of acquisitions and internal growth. The SSI
and Pelican acquisitions added $31.6 million in revenues during 1997 while
revenues at existing branches in 1997 increased $12.8 million, or 10.2% from
1996. This internal growth was driven by increased demand from existing
customers and the Company's focus on cross selling product categories. Sales of
fluid handling equipment increased 14.9% in 1997, or $9.8 million, over 1996.
Sales of bearings and power transmission equipment for 1997 increased 8.2%, or
$4.0 million, over 1996. Sales of pipe, valve and fittings decreased $1.0
million in 1997 over 1996 due primarily to increased competition.
Gross margin increased $12.8 million, or 39.7% for 1997 as compared to
1996. Gross margin as a percentage of sales increased from 25.7% to 26.5% in
1997 as compared to the same period in 1996. The increase in 1997 gross margin
was primarily attributable to the $1.1 million inventory write down in 1996. The
Company also realized increases in its gross margins for sales of its fluid
handling equipment, bearings and transmission equipment and pipe valve and
fittings. These increases in the profit margins for sales in the
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Company's historical product lines were offset by the lower average margins
associated with sales of general mill and safety supplies.
Selling, general and administrative expenses were 22.7% of revenues for
1997 compared to 23.5% for 1996. This decrease was attributable to the
occurrence of various one-time expenses during 1996 aggregating $900,000,
including a one-time expense of $618,000 for additional compensation associated
with converting book value stock options to market value options and
approximately $284,000 in professional fees associated with the Reorganization.
Operating income for 1997 increased 131% over 1996, from $2.8 million to
$6.4 million. As a percentage of revenues, operating income increased from 2.2%
of sales to 3.8% of sales in 1997 as compared to the same period in 1996, due to
the various factors discussed above.
Interest expense for 1997 increased by $553,000, or 26.3%, from 1996 as a
result of increased debt levels associated with the Company's acquisitions
during 1997 and increased working capital requirements during the period.
Average interest rates were slightly lower during the year ended December 31,
1997 as compared to 1996.
The Company's provision for income taxes for 1997 increased by $1.2 million
compared to 1996 as a result of an increase of approximately $3.0 million in
pre-tax income. Included in the 1996 income tax provision was a $135,000 reserve
for an Internal Revenue Service ("IRS") examination, which was resolved in 1997
by the Company making a payment of $69,100 to the IRS.
Net income for 1997 increased $1.9 million, or 210%, compared to 1996.
Increased net income for 1997 as compared to 1996 can be primarily attributed to
an increase in gross margin and a decrease in selling, general and
administrative costs as of percent of sales.
LIQUIDITY AND CAPITAL RESOURCES
General
Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the Credit Facility.
The Credit Facility contains customary affirmative and negative covenants as
well as financial covenants that require the Company to maintain a positive cash
flow and other financial ratios. The Company's policy is to maintain low levels
of cash and cash equivalents and to use borrowings under the Credit Facility for
working capital. The Company had $4.3 million available for borrowings under the
working capital component of the Credit Facility at December 31, 1998. The
Company had no availability under the acquisition term loan component of the
Credit Facility at December 31, 1998. Working capital at December 31, 1997 and
December 31, 1998 was $36.3 million, and $37.1 million, respectively. During
1997 and 1998, the Company collected its trade receivables in approximately 46
and 49 days, respectively, and turned its inventory approximately five and four
times respectively, on an annualized basis.
In the second and again in the fourth quarter of 1998, the Company amended
the Credit Facility that provided for borrowings up to an aggregate of the
lesser of (i) a percentage of the collateral value based on a formula set forth
therein and (ii) $50.0 million. Additionally, the amendments increased
borrowings under the term loan component of the Credit Facility from $4.9
million to $12.4 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan component to the term loan and added an
additional $2.5 million term loan which has been used for the purchase and
renovation of real property to serve as the Company's corporate headquarters.
As of December 31, 1998, interest rates ranged from LIBOR plus 1.50 to
LIBOR plus 3.00 depending upon the relationship of the Company's debt to cash
flow and financial covenants tied to debt service levels and cash flow. At
December 31, 1998, the Company had borrowings under the Credit Facility of $19.9
million at LIBOR plus 2.00 (approximately 7.35% at December 31, 1998). The
remainder of the Company's borrowings under the Credit Facility bore interest at
prime (7.75% at December 31, 1998) for a weighted
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average interest rate of 7.55%. Borrowings under the Credit Facility are secured
by receivables, inventory, and machinery and equipment and mature January 2000.
As of December 31, 1998, the Company was not in compliance with certain of
its financial ratios for which it subsequently obtained waivers from its lender.
In conjunction with obtaining those waivers, the Company and its lender amended
the Credit Facility effective March 30, 1999, 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 and (ii) $44.0 million. Additionally, the
LIBOR pricing, set to expire as of June 30, 1999, was cancelled and therefore
all of the borrowings under Credit Facility will bear interest at prime. As of
March 22, 1999, the unused line under the amended credit facility is
approximately $3.0 million.
The Company generated cash from operating activities of $5.7 million in
1998 as compared to $.12 million generated during 1997, due primarily to a
decrease in the Company's trade accounts receivable balance.
The Company had capital expenditures of approximately $3.9 million in 1998
as compared to $.83 million during 1997. Capital expenditures in 1998 were
primarily related to the purchase and improvement of real property ($2.5
million) to be used as the corporate headquarters for the Company's management
and administrative group as well as other office, computer and communication
equipment. Capital expenditures for 1997 were predominantly for the expansion of
a facility in LaPorte, Texas ($.15 million), computers and related equipment
($.29 million) and office furniture and equipment ($.29 million).
During 1998, in three separate transactions, the Company completed the
acquisition of substantially all of the assets of three unaffiliated businesses
for an aggregate consideration consisting of approximately $12.5 million in
cash, $2.3 million of assumed trade payables and other accrued expenses, $.7
million in a promissory note and up to approximately $.3 million in a deferred
payment (based on the earnings before interest, taxes and depreciation of one of
the acquired businesses). The cash portion of the consideration was financed
through the acquisition term loan under the Credit Facility. An aggregate of
$7.2 million of goodwill was recorded in connection with these acquisitions,
which may be adjusted based on any adjustments to the purchase prices. The
Company believes that any such adjustments would be minimal.
The Company believes that cash generated from operations and available
under its Credit Facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of the Company's acquisition efforts and
integrated supply strategy will require capital in the form of the issuance of
additional equity or debt financing. There can be no assurance that future
funding will be available to the Company or, if available, as to the terms and
conditions thereof.
YEAR 2000 READINESS DISCLOSURE
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. The Year 2000 issue is the
risk that systems, products and equipment utilizing date-sensitive software or
computer chips with two-digit date fields will fail to properly recognize the
Year 2000. Such failures by the Company's software or hardware or that of
government entities, customers, major vendors and other third parties with whom
the Company has material relationships could result in interruptions of the
Company's business which could have a material adverse effect on the Company.
In response to the Year 2000 issue, the Company has implemented a
company-wide Year 2000 program designed to identify, assess and address
significant Year 2000 issues in the Company's key business operations, including
products and services, business applications, information technology systems and
facilities and to identify the Company's customers, major vendors and other
third parties with whom the Company has material relationships that may have
Year 2000 issues.
The Company's Year 2000 program is an integrated, multi-phase process
covering information technology systems and hardware as well as equipment and
products with embedded computer chips technology. The primary phases of the
program are (1) inventorying existing equipment and systems; (2) analyzing
equipment and systems to identify those which are not Year 2000 ready and to
prioritize critical items; (3) communicat-
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ing with customers, major vendors and other third parties with whom the Company
has material relationships regarding their Year 2000 readiness; (4) remediating,
repairing or replacing equipment and systems that are not Year 2000 ready; and
(5) testing to verify that Year 2000 readiness has been achieved for the
Company's equipment and systems.
Phases (1) and (2) of the Company's Year 2000 program have been completed.
The Company has developed and implemented a web-based questionnaire along with a
standard questionnaire in order to implement phase (3) of its Year 2000 program.
The Company will continue communicating with customers, major vendors and other
third parties with whom the Company has material relationships to determine if
they will be ready for the Year 2000 by the end of 1999. Although the most
likely worst case scenario faced by the Company would require the Company to
carry additional inventory levels to mitigate vendor complications, to the
extent the Company's customers, vendors and other third parties are not
compliant by the Year 2000 and unexpected complications result therefrom, it
could have a material adverse effect upon the Company's results of operations
and financial condition. With respect to phase (4), the Company currently
expects that its software will be Year 2000 compliant by the end of the third
quarter of 1999. The upgrading of the Company's software to address Year 2000
issues is being handled through new releases of current software. Costs incurred
to date relative to this conversion have been minimal and are expected to
continue to be minimal in future periods. The Company will continue to analyze
systems and services that utilize date embedded codes that may experience
operational problems when the Year 2000 is reached. The Company expects to begin
phase (5) in the second quarter of 1999. All costs associated with Year 2000
issues will be included as part of normal software upgrades or operating costs,
as appropriate.
The foregoing statements of this subsection are intended to be and are
hereby designated "Year 2000 Readiness Disclosure" statements within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB"), issued
Statements Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures
about Segments of an Enterprise and Related Information", respectively. The
major provisions of these statements and their impact on the Company are
discussed below.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. The adoption of
this statement in 1998 is not anticipated to have any impact as the Company
currently does not enter into any transactions which result in charges (or
credits) directly to equity (such as additional minimum pension liability
charges, currency translation adjustments or unrealized gains and losses on
available-for-sale securities, etc.).
SFAS No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a Company-wide basis, therefore, the adoption of this statement is not
expected to materially impact the Company. The Company has adopted this
statement for the year ended December 31, 1998.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge to the exposure to variable cash flows
of a forecasted transaction or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains
17
20
or losses) depends on the intended use of the derivative and the resulting
designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe that the adoption of
this statement will have material impact on the financial position or results of
operations of the Company.
INFLATION
The Company does not believe the effects of inflation have any material
adverse effect on its results of operations or financial condition and attempts
to minimize inflationary trends by passing manufacturer price increases on to
the customer whenever practicable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
18
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
DXP ENTERPRISES AND SUBSIDIARIES:
Report of Independent Public Accountants.................... 20
Audited Consolidated Financial Statements --
Consolidated Balance Sheets............................... 21
Consolidated Statements of Earnings....................... 22
Consolidated Statements of Shareholders' Equity........... 23
Consolidated Statements of Cash Flows..................... 24
Notes to Consolidated Financial Statements................ 25
19
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DXP
Enterprises, Inc. (a Texas corporation), and Subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DXP
Enterprises, Inc., and subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
March 22, 1999
20
23
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31
-----------------
1997 1998
------- -------
CURRENT ASSETS:
Cash...................................................... $ 736 $ 1,625
Trade accounts receivable, net of allowance for doubtful
accounts of $476 in 1997 and $1,155 in 1998............. 25,707 24,367
Inventories............................................... 26,018 28,926
Prepaid expenses and other................................ 996 1,453
Deferred income taxes..................................... 722 870
------- -------
Total current assets............................... 54,179 57,241
------- -------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 10,403 13,160
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$1,817 in 1997 and $2,175 in 1998....................... 2,682 10,447
Notes Receivable from officers and employees.............. 200 324
Other..................................................... 172 160
------- -------
3,054 10,931
------- -------
Total assets....................................... $67,636 $81,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $14,368 $14,826
Accrued wages and benefits................................ 1,384 1,449
Other accrued liabilities................................. 704 99
Current portion of long-term debt......................... 1,461 3,782
------- -------
Total current liabilities.......................... 17,917 20,156
------- -------
LONG-TERM DEBT, less current portion........................ 33,395 42,910
DEFERRED COMPENSATION....................................... 739 739
DEFERRED INCOME TAXES....................................... 479 563
EQUITY SUBJECT TO REDEMPTION:
Series A preferred stock, 1,122 shares.................... 112 112
Common stock, 140,214 shares.............................. 1,963 1,245
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A preferred stock, 1/10th vote per share; $1.00 par
value; liquidation preference of $100 per share;
1,000,000 shares authorized, 2,992 shares issued and
outstanding............................................. 2 2
Series B convertible preferred stock, 1/10th vote per
share; $1.00 par value; $100 stated value; liquidation
preference of $100 per share; 1,000,000 shares
authorized, 17,700 shares issued and 15,000 shares
outstanding............................................. 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,211,010 shares issued of which 4,157,361
and 4,155,773 shares are outstanding, 140,214 shares are
equity subject to redemption and 55,237 shares are
treasury stock.......................................... 40 40
Paid-in capital........................................... 892 908
Retained earnings......................................... 12,659 15,443
Treasury stock............................................ (580) (804)
------- -------
Total shareholders' equity......................... 13,031 15,607
------- -------
Total liabilities and shareholders' equity......... $67,636 $81,332
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
21
24
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
------------------------------
1996 1997 1998
-------- -------- --------
SALES....................................................... $125,208 $169,667 $203,443
COST OF SALES............................................... 93,091 124,787 149,423
-------- -------- --------
Gross profit...................................... 32,117 44,880 54,020
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 29,332 38,446 46,570
-------- -------- --------
Operating income.................................. 2,785 6,434 7,450
OTHER INCOME................................................ 951 890 1,241
INTEREST EXPENSE............................................ (2,101) (2,654) (3,687)
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 1,635 4,670 5,004
PROVISION FOR INCOME TAXES.................................. 745 1,902 2,130
-------- -------- --------
NET INCOME.................................................. 890 2,768 2,874
PREFERRED STOCK DIVIDEND.................................... (119) (103) (90)
-------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS.............. $ 771 $ 2,665 $ 2,784
======== ======== ========
BASIC EARNINGS PER COMMON SHARE............................. $ .19 $ .65 $ .67
======== ======== ========
COMMON SHARES OUTSTANDING................................... 3,997 4,082 4,159
======== ======== ========
DILUTED EARNINGS PER SHARE.................................. $ .18 $ .49 $ .51
======== ======== ========
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING............. 4,857 5,703 5,596
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
22
25
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES A SERIES B COMMON PAID-IN RETAINED TREASURY
PREFERRED PREFERRED STOCK CAPITAL EARNINGS STOCK TOTAL
--------- --------- ------ ------- -------- -------- -------
BALANCE AT DECEMBER 31, 1995...................... $2 $15 $40 $408 $ 9,223 $ -- $ 9,688
Dividends paid.................................. -- -- -- -- (119) -- (119)
Net income...................................... -- -- -- -- 890 -- 890
-- --- --- ---- ------- ----- -------
BALANCE AT DECEMBER 31, 1996...................... 2 15 40 408 9,994 -- 10,459
Dividends paid.................................. -- -- -- -- (103) -- (103)
Increase in paid-in capital due to reduction of
equity subject to redemption as a result of
acquiring 374 shares of Series A preferred
stock......................................... -- -- -- 37 -- (37) --
Increase in paid-in capital due to reduction of
equity subject to redemption as a result of
acquiring 2,700 shares of Series B preferred
stock......................................... -- 3 -- 268 -- (271) --
Increase in paid-in capital due to reduction of
equity subject to redemption as a result of
converting 1,800 shares of Series B preferred
stock to 50,400 shares of common stock........ -- -- 1 179 -- -- 180
Acquisition of 30,436 shares of common stock.... -- -- (1) -- -- (272) (273)
Net income...................................... -- -- -- -- 2,768 -- 2,768
-- --- --- ---- ------- ----- -------
BALANCE AT DECEMBER 31, 1997...................... 2 18 40 892 12,659 (580) 13,031
Dividends paid.................................. -- -- -- -- (90) -- (90)
Increase in paid-in capital due to issuance of
21,200 shares of common stock based on options
exercised..................................... -- -- -- 16 -- -- 16
Acquisition of 21,500 shares of common stock.... -- -- -- -- -- (201) (201)
Acquisition of 3,301 shares of common stock..... -- -- -- -- -- (23) (23)
Net income...................................... -- -- -- -- 2,874 -- 2,874
-- --- --- ---- ------- ----- -------
BALANCE AT DECEMBER 31, 1998...................... $2 $18 $40 $908 $15,443 $(804) $15,607
== === === ==== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
23
26
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
---------------------------------
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 890 $ 2,768 $ 2,874
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................ 964 1,341 1,820
Compensation expense related to stock option plans... 359 --
Benefit for deferred income taxes.................... (216) (62) (64)
Loss (gain) on sale of property and equipment........ 7 (103) 47
Changes in operating assets and liabilities --
Trade accounts receivable.......................... (1,233) (7,971) 5,484
Inventories........................................ (469) 2,899 (142)
Prepaid expenses and other......................... 274 (640) (1,237)
Trade accounts payable and accrued liabilities..... (123) 1,892 (3,121)
--------- --------- ---------
Net cash provided by operating activities....... 453 124 5,661
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Austin Bearings net assets.................. (329) -- --
Purchase of Strategic Supply net assets................. -- (4,118) --
Purchase of Pelican Supply common stock................. -- (1,070) --
Purchase of Tri-Electric Supply net assets.............. -- -- (6,109)
Purchase of Lucky Electric Supply net assets............ -- -- (2,430)
Purchase of Mark W. Smith Equipment net assets.......... -- -- (3,938)
Purchase of property and equipment...................... (2,271) (825) (3,859)
Proceeds from sale of property and equipment............ 8 -- 26
Payments received on notes receivable from officers..... 435 -- --
Other................................................... (120) -- --
--------- --------- ---------
Net cash used in investing activities........... (2,277) (6,013) (16,310)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from debt.................................... 129,379 183,715 219,011
Principal payments on revolving line of credit,
long-term and subordinated debt and notes payable to
bank................................................. (128,052) (177,395) (207,175)
Proceeds on sale of Corpus Christi facility............. -- 112 --
Issuance of common stock................................ -- -- 16
Acquisition of preferred and common stock............... -- (580) (224)
Dividends paid in cash.................................. (119) (103) (90)
--------- --------- ---------
Net cash provided by financing activities....... 1,208 5,749 11,538
--------- --------- ---------
INCREASE (DECREASE) IN CASH............................... (616) (140) 889
CASH AT BEGINNING OF YEAR................................. 1,492 876 736
--------- --------- ---------
CASH AT END OF YEAR....................................... $ 876 $ 736 $ 1,625
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for --
Interest............................................. $ 2,172 $ 2,654 $ 3,687
========= ========= =========
Income taxes......................................... $ 1,040 $ 1,551 $ 2,986
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
24
27
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
DXP Enterprises, Inc. (DXP or the Company), a Texas corporation, was
incorporated on July 26, 1996, to facilitate a reorganization of SEPCO
Industries, Inc. (SEPCO), a Texas corporation, in anticipation of an acquisition
by DXP as the successor to SEPCO of Newman Communications Corporation (Newman),
a New Mexico corporation. On December 4, 1996, the reorganization of SEPCO (the
SEPCO Reorganization) was effected through a merger of a wholly owned subsidiary
of the Company with and into SEPCO pursuant to which the Company acquired all of
the outstanding shares of SEPCO in exchange for shares of the Company.
Immediately following the SEPCO Reorganization, the Company acquired Newman
through a merger of a wholly owned subsidiary of the Company with and into
Newman (the Newman Merger). Prior to the SEPCO Reorganization, the Company had
no operations and its only assets consisted of $1,000 cash. Prior to the
Company's acquisition of Newman, Newman was a nonoperating entity with nominal
assets. The Newman Merger was effected as a means to increase the Company's
shareholder base.
SEPCO REORGANIZATION ACCOUNTING TREATMENT
The SEPCO Reorganization was treated as a recapitalization of SEPCO into
the Company (with respect to the SEPCO merger) and the issuance of the Company's
capital stock for the underlying tangible net assets of Newman (with respect to
the Newman Merger) for accounting and financial statement purposes because,
among other factors, the Company was a recently formed holding company with
nominal net assets, Newman was a nonoperating public shell company with cash as
its primary asset, and the SEPCO shareholders controlled the Company after the
SEPCO Reorganization. Accordingly, the historical pre-SEPCO Reorganization
financial statements of the combined Company after the closing will be those of
SEPCO. The retained earnings of SEPCO will be carried forward after the SEPCO
Reorganization and the historical shareholders' equity of SEPCO prior to the
SEPCO Reorganization is retroactively restated for the equivalent number of
shares received in the SEPCO Reorganization.
Unless the context otherwise requires, references to the Company with
respect to historical operations shall mean the Company and SEPCO.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
The Company provides maintenance, repair and operating products, equipment
and integrated services, including engineering expertise and logistics
capabilities to a diversified customer base in the north and southwestern
regions of the United States. The Company believes no significant concentration
of credit risk exists. The Company continually evaluates the creditworthiness of
its customers' financial positions and monitors accounts on a periodic basis,
but does not require collateral.
INVENTORY
Inventory consists principally of finished goods and is priced at lower of
cost or market, cost being determined using both the first-in, first-out (FIFO)
and the last-in, first-out (LIFO) method.
25
28
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Assets are carried on the basis of cost. Provisions for depreciation are
computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation of property, plant and equipment
is computed using principally the straight-line method for financial reporting
purposes. Useful lives assigned to property, plant and equipment range from 3 to
39 years. Maintenance and repairs of depreciable assets are charged against
earnings as incurred. Additions and improvements are capitalized. When
properties are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and gains or losses are credited or
charged to earnings.
INTANGIBLES
Intangibles consist of noncompete and licensing agreements and goodwill.
The noncompete and licensing agreements are amortized over five years, and
goodwill is amortized over 5 to 35 years. All amortization of intangibles is
computed using the straight-line method.
FEDERAL INCOME TAXES
The Company utilizes the asset and liability method prescribed by SFAS No.
109 in accounting for income taxes. Under this method, deferred taxes are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted marginal tax rates and
laws that will be in effect when the differences reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the carrying and the fair value of financial instruments at
December 31, 1998, is as follows:
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
Cash........................................................ $ 1,625 $ 1,625
Notes receivable from officers and employees................ 324 324
Long-term debt, including current portion................... 46,692 46,692
The carrying value of the notes receivable from officers approximates fair
value because the interest rate of the notes (9 percent) is consistent with the
interest rate of the Company's revolving debt and with rates currently available
in the market for similar instruments. The carrying value of the long-term debt
approximates fair value based upon the current rates and terms available to the
Company for instruments with similar remaining maturities.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by the Company in the
accompanying financial statements relate to the allowance for doubtful accounts
and reserves for obsolete inventory. Actual results could differ from those
estimates.
26
29
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting
Comprehensive Income," and "Disclosures About Segments of an Enterprise and
Related Information," respectively. The major provisions of these statements and
their impact on the Company are discussed below.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement
does not have any impact as the Company currently does not enter into any
transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability charges, currency translation adjustments
or unrealized gains and losses on available-for-sale securities, etc.).
SFAS No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a company wide basis; therefore, the adoption of the statement as of December
31, 1998 does not materially impact the Company.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge to the exposure to variable cash flows
of a forecasted transaction or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains or losses) depends on the intended use of the derivative and the
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management does not believe that the
adoption of this statement will have a material impact on the financial position
or results of operations of the Company.
3. ACQUISITIONS:
Effective February 2, 1996, SEPCO acquired the net assets of Austin Bearing
Corporation. The purchase price totaled approximately $578,000 and consisted of
(a) a $249,000 note, bearing interest at 9 percent, payable monthly over five
years, and (b) cash of $329,000. The acquisition has been accounted for using
the purchase method of accounting. Goodwill of $84,000 was recorded in
connection with the acquisition. Pro forma disclosures of operating results are
omitted because the acquired companies' operations were not significant.
Effective May 30, 1997, the Company acquired 100 percent of the outstanding
stock of Pelican State Supply Company (Pelican). The purchase price totaled
approximately $3.0 million and consisted of 140,214 shares of the Company's
common stock and cash of approximately $1.0 million. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of approximately
$2.0 million was recorded in connection with the acquisition. Pro forma
disclosures of operating results are omitted because the acquired companies'
operations were not significant.
27
30
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 2, 1997, a wholly owned subsidiary of the Company acquired
substantially all the assets of Strategic Supply, Inc. (Strategic). The purchase
price, which is subject to adjustments, consisted of approximately $4.1 million
in cash, assumption of $4.7 million of trade payables and other accrued
expenses, $2.8 million in promissory notes payable to the seller and earn-out
payments (based on the earnings before interest and taxes of Strategic) to be
paid over a period of approximately six years, up to a maximum of $3.5 million.
The acquisition has been accounted for using the purchase method of accounting.
Goodwill of $50,000 was recorded in connection with the acquisition.
On February 26, 1998, a wholly owned subsidiary of the Company acquired
substantially all the assets of Tri-Electric Supply, Ltd. (Tri-Electric). The
purchase price consisted of $6.2 million in cash, assumption of $1.6 million of
trade payables and other accrued expenses and a deferred payment of up to a
maximum of $275,000, based on the earnings before interest, taxes and
depreciation of the acquired company, to be paid on March 31, 1999, if earned.
The acquisition has been accounted for using the purchase method of accounting.
Goodwill of $3.9 million was recorded in connection with the acquisition.
On May 31, 1998, a wholly owned subsidiary of the Company acquired
substantially all the assets of Lucky Electric & Supply, Inc. (Lucky). The
purchase price consisted of approximately $1.5 million in cash, a $735,000
promissory note and the assumption of $149,000 of trade payables and other
accrued expenses. The acquisition has been accounted for using the purchase
method of accounting. Goodwill of $0.6 million was recorded in connection with
the acquisition.
Effective May 31, 1998, a wholly owned subsidiary of the Company acquired
substantially all the assets of M.W. Smith Equipment, Inc. (Smith). The purchase
price consisted of approximately $4.2 million in cash and the assumption of
$618,000 of trade payables and other accrued expenses. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of $2.7 million
was recorded in connection with the acquisition.
The Company is continuing the evaluation of the acquisitions described
above as it relates to the purchase price allocation. The allocation of the
purchase price is based on the best estimates of the Company using information
currently available. Certain estimates relating to these acquisitions are
subject to change based upon the final determination of the fair values of the
net assets acquired.
The results of operations of all acquisitions are included since the date
of acquisition in the historical financial statements. The following table
presents selected unaudited consolidated financial information for the Company
on a pro forma basis assuming all acquisitions had occurred on January 1, 1997
and January 1, 1998 (in thousands, except per share amounts). The pro forma
information set forth below is not necessarily indicative of the results that
actually would have been achieved had such transaction been consummated as of
January 1, 1997 and January 1, 1998, or that may be achieved in the future.
DECEMBER 31
----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
(UNAUDITED)
Revenues.................................................... $220,565 $210,803
Net income.................................................. 3,464 3,150
Basic earnings per share.................................... .82 .74
Dilutive earnings per share................................. .61 .56
28
31
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORY:
The Company uses the LIFO method of inventory valuation for approximately
61 percent of its inventories. Remaining inventories are accounted for using the
FIFO method. The reconciliation of FIFO inventory to LIFO basis is as follows:
DECEMBER 31
-----------------
1997 1998
------- -------
(IN THOUSANDS)
Finished goods.............................................. $27,280 $29,717
Work in process............................................. 2,276 3,093
------- -------
Inventories at FIFO......................................... 29,556 32,810
Less -- LIFO allowance...................................... (3,538) (3,884)
------- -------
Inventories................................................. $26,018 $28,926
======= =======
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are comprised of the following:
DECEMBER 31
-------------------
1997 1998
------- --------
(IN THOUSANDS)
Land........................................................ $ 1,411 $ 1,837
Buildings and leasehold improvements........................ 6,457 9,048
Furniture, fixtures and equipment........................... 11,660 12,745
------- --------
19,528 23,630
Less -- Allowances for depreciation and amortization........ (9,125) (10,470)
------- --------
$10,403 $ 13,160
======= ========
6. LONG-TERM DEBT:
Long-term and subordinated notes consist of the following:
DECEMBER 31
-----------------
1997 1998
------- -------
(IN THOUSANDS)
Long-term debt --
Credit facility:
Working capital component.............................. $27,520 $24,895
Term loan component.................................... -- 14,933
Note payable to insurance company, 10.125%, collateralized
by real property, payable in monthly installments
through December 2006.................................. 1,596 1,481
Notes payable to credit corporation, 2.25% above prime
(7.75% at December 31, 1998), collateralized by
computer equipment, payable in monthly installments
through April 2001..................................... 1,174 853
Promissory note payable, 7.0% payable in monthly
installments through June 2002......................... 2,660 2,380
Other..................................................... 1,906 2,150
------- -------
34,856 46,692
Less -- Current portion..................................... (1,461) (3,782)
------- -------
$33,395 $42,910
======= =======
29
32
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the Credit Facility.
The Credit Facility contains customary affirmative and negative covenants as
well as financial covenants that require the Company to maintain a positive cash
flow and other financial ratios. The Company had $4.3 million available for
borrowings under the working capital component of the Credit Facility at
December 31, 1998. The Company had no availability under the acquisition term
loan component of the Credit Facility at December 31, 1998.
In the second and again in the fourth quarter of 1998, the Company amended
the Credit Facility that provided for borrowings up to an aggregate of the
lesser of (i) a percentage of the collateral value based on a formula set forth
therein and (ii) $50.0 million. Additionally, the amendments increased
borrowings under the term loan component of the Credit Facility from $4.9
million to $12.4 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan component to the term loan and added an
additional $2.5 million term loan which has been used for the purchase and
renovation of real property to serve as the Company's corporate headquarters.
As of December 31, 1998, interest rates ranged from LIBOR plus 1.50 to
LIBOR plus 3.00 depending upon the relationship of the Company's debt to cash
flow and financial covenants tied to debt service levels and cash flow. At
December 31, 1998, the Company had borrowings under the Credit Facility of $19.9
million at LIBOR plus 2.00 (approximately 7.35% at December 31, 1998). The
remainder of the Company's borrowings under the Credit Facility bore interest at
prime (7.75% at December 31, 1998) for a weighted average interest rate of
7.55%. Borrowings under the Credit Facility are secured by receivables,
inventory, and machinery and equipment and mature January 2000. An officer
shareholder has personally guaranteed up to $500,000 of the obligations of the
Company under a line of credit. Additionally, certain shares held in trust for
this shareholder's children discussed in Note 8 are also pledged to secure this
line of credit. In management's opinion, the Company should be able to maintain
compliance with the various covenants under the amended Credit Facility,
although there can be no absolute assurance that defaults will not occur.
The facility includes loan covenants which, among other things, require the
Company to maintain a positive cash flow and other financial ratios, which are
measured quarterly. The maturities of long-term debt for the next five years and
thereafter are as follows (in thousands):
1999........................................................ $ 3,782
2000........................................................ 37,168
2001........................................................ 2,270
2002........................................................ 1,988
2003........................................................ 726
Thereafter.................................................. 758
-------
$46,692
=======
As of December 31, 1998, the Company was not in compliance with certain of
its financial ratios for which it subsequently obtained waivers from its lender.
In conjunction with obtaining those waivers, the Company and its lender amended
the Credit Facility effective March 30, 1999, 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 and (ii) $44.0 million. Additionally, the
LIBOR pricing, set to expire as of June 30, 1999, was cancelled and therefore
all of the borrowings under the Credit Facility will bear interest at prime. As
of March 22, 1999, the unused line under the amended Credit Facility is
approximately $3.0 million.
30
33
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
-----------------------
1996 1997 1998
----- ------ ------
(IN THOUSANDS)
Current --
Federal................................................... $ 829 $1,652 $1,794
State..................................................... 132 312 400
----- ------ ------
961 1,964 2,194
Deferred --
Federal................................................... (216) (62) (64)
----- ------ ------
$ 745 $1,902 $2,130
===== ====== ======
The difference between income taxes computed at the federal statutory
income tax rate and the provision for income taxes is as follows:
YEAR ENDED
DECEMBER 31
----------------------
1996 1997 1998
---- ------ ------
(IN THOUSANDS)
Income taxes computed at federal statutory rate............. $556 $1,588 $1,701
State income taxes, net of federal benefit.................. 68 206 264
Nondeductible goodwill amortization......................... 43 63 92
Other....................................................... 78 45 73
---- ------ ------
$745 $1,902 $2,130
==== ====== ======
The net current and noncurrent components of deferred income taxes are as
follows:
DECEMBER 31
---------------
1997 1998
------ ------
(IN THOUSANDS)
Net current assets.......................................... $ 722 $ 870
Net noncurrent liabilities.................................. 479 563
----- -----
Net asset................................................... $(243) $(307)
===== =====
31
34
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets were comprised of the following:
DECEMBER 31
---------------
1997 1998
------ ------
(IN THOUSANDS)
Deferred tax assets --
Amortization of goodwill.................................. 5 2
Unamortized rent reduction................................ 32 22
Allowance for doubtful accounts........................... 162 277
Section 263A inventory costs.............................. 206 313
Deferred compensation on stock options.................... 251 251
Other..................................................... 66 5
----- -----
Total deferred tax assets......................... 722 870
----- -----
Deferred tax liability --
Difference between financial and tax depreciation of
assets acquired........................................ $ 479 $ 563
----- -----
Net deferred tax asset............................ $(243) $(307)
===== =====
8. SHAREHOLDERS' EQUITY:
The equity capitalization of the Company consists of 4,211,010 shares of
common stock of which 140,214 are redeemable, 2,992 shares of Series A preferred
stock and 15,000 shares Series B convertible preferred stock. The holders of
Series A preferred stock are entitled to one-tenth of a vote per share on all
matters presented to a vote of shareholders generally, voting as a class with
the holders of common stock, and are not entitled to any dividends or
distributions other than in the event of a liquidation of the Company, in which
case the holders of the Series A preferred stock are entitled to a $100
liquidation preference per share. Each share of the Series B convertible
preferred stock is convertible into 28 shares of common stock and a monthly
dividend per share of $.50. The holders of the Series B convertible stock are
also entitled to a $100 liquidation preference per share after payment of the
distributions to the holders of the Series A preferred stock and to one-tenth of
a vote per share on all matters presented to a vote of shareholders generally,
voting as a class with the holders of the common stock.
In each of 1997 and 1998, the Company effected a two-to-one reverse stock
split. The Company's financial statements have been restated to reflect the
effect of these reverse stock splits.
An officer shareholder of the Company is the trustee of three trusts for
the benefit of another officer shareholder's children, each of which hold
570,932 shares of common stock and 5,000 shares of Series B convertible
preferred stock. The trustee has sole voting control of these shares.
The 140,214 shares of common stock issued pursuant to the purchase of
Pelican are subject to a put option whereby at any time between November 30,
1998, and November 30, 2000, the Company may be required to purchase all or part
of such shares at a price of $8.88 per share. During 1998, the repurchase price
of these shares was reduced from $14.00 to $8.88 per share pursuant to the
rights of offset set forth in the purchase agreement. The reduction in the
repurchase price has been reflected as a $718,000 reduction of goodwill and
equity subject to redemption. In March 1999, the Company agreed to repurchase
80,214 of these common shares at $8.88 per share. Furthermore, as a part of this
repurchase, the remaining 60,000 shares outstanding are no longer subject to the
put option.
On July 17, 1998, the Company entered into a stock purchase agreement with
a common shareholder. The Company has agreed to purchase 43,000 shares for a
total of $401,000 over two installments. On September 1, 1998, the Company
purchased one-half of the shares in exchange for $200,500. The remainder of the
shares will be purchased after January 1, 1999, but no later than June 1, 1999,
in exchange for $200,500.
32
35
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its
common stock, which had exercise prices equal to the book value of the common
stock at the date of grant. The option agreement allows the employee to put the
stock acquired back to the Company at the book value at that time. The Company
recognized compensation expense for increases in the book value of the stock
while the options were outstanding. Effective March 31, 1996, the
above-mentioned book value options were converted to fair market value options
once the put option was eliminated. A one-time charge to compensation of
$618,000 was made during the first quarter of 1996. In 1996, the Company issued
nonqualified stock options to certain directors of the Company to purchase
shares of its common stock which had exercise prices equal to the fair market
value of the Company's common stock at the date of grant. Additionally, the
Company issued options to certain officers and employees pursuant to the terms
of the Company's long-term incentive plan. Compensation expense related to these
option agreements of $618,000 was recorded in 1996 and none were recorded in
1997 and 1998. As of December 31, 1997 and 1998, a deferred compensation
liability of $739,000, has been recorded in conjunction with these option
agreements. Activity during 1998 with respect to the stock options follows:
WEIGHTED
OPTION AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- --------------
Outstanding at December 31, 1996............... 1,349,700 $1.48-$16.00 $ 1.50
None granted, exercised, cancelled or expired
during 1997............................... -- -- --
---------
Outstanding at December 31, 1997............... 1,349,700 $1.48-$16.00 $ 1.50
Granted...................................... 265,000 $7.50-$12.00 $10.79
Exercised.................................... (21,200) $.76 $ .76
Canceled or expired.......................... (20,500) $10.66 $10.66
---------
Outstanding at December 31, 1998............... 1,573,000 $1.48-$16.00 $ 3.32
=========
The outstanding options at December 31, 1998, expire between March 31,
2000, and October 24, 2005, or 90 days after termination of full-time
employment. The weighted average remaining contractual life was 6.9 years, 5.9
years and 4.8 years at December 31, 1996, 1997 and 1998, respectively.
EARNINGS PER SHARE
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially dilutive
securities. The following table sets forth the shares outstanding for the
earnings per share calculations for the years ended December 31, 1996, 1997 and
1998:
33
36
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
Common stock outstanding, beginning of period............... 3,996,974 3,996,974 4,157,361
Weighted average common stock issued in stock option
exercise.................................................. -- -- 15,150
Weighted average common stock issued in acquisition......... -- 93,476 --
Less: weighted average treasury shares repurchased.......... -- (13,095) (13,192)
Weighted average common stock issued in conversion of
preferred stock........................................... -- 4,200 --
--------- --------- ---------
Shares used in computing basic earnings per share........... 3,996,974 4,081,555 4,159,319
Dilutive effect of stock options, net of assumed repurchase
of treasury stock......................................... 313,559 1,138,321 1,016,430
Dilutive effect of convertible preferred stock.............. 546,000 482,854 420,000
--------- --------- ---------
Shares used in computing diluted earnings per share......... 4,856,533 5,702,730 5,595,749
========= ========= =========
STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options under the fair value method as provided therein. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options issued in 1996, 1997 and 1998: risk-free interest
rates of 6 percent for 1996, 1997 and 1998; expected lives of five years; 18.4
percent assumed volatility; and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Set forth
below is a summary of the Company's net income and earnings per share as
reported and pro forma as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The pro forma information is not meant to be
representative of the effects on reported net income for future years because,
as provided by SFAS No. 123, only the effects of awards granted after January 1,
1995, are considered in the pro forma calculation. Certain compensation expense
related to the Company's book value stock option plans was recognized in 1996.
The effect of such expense ($618,000) has been excluded from the pro forma
disclosure for 1996, as the related options are assumed to be accounted for
using the fair market-based method of accounting as defined in SFAS No. 123. The
effect of applying the fair market-based method versus the exclusion of the book
value-based method expense actually recognized resulted in a pro forma increase
in net income attributable to common shareholders in 1996.
1996 1997 1998
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net income attributable to common
shareholders (in thousands)..... $771 $1,132 $2,665 $2,620 $2,784 $2,616
Basic earnings per common share... $.19 $ .28 $ .65 $ .64 $ .67 $ .63
Diluted earnings per common
share........................... $.18 $ .26 $ .49 $ .48 $ .51 $ .48
34
37
DXP ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
The Company leases equipment, automobiles and office facilities under
various operating leases. The future minimum rental commitments as of December
31, 1998, for noncancelable leases are as follows (in thousands):
1999........................................................ $1,786
2000........................................................ 1,183
2001........................................................ 758
2002........................................................ 471
2003........................................................ 217
Thereafter.................................................. 103
------
$4,518
======
Rental expense for operating leases was $1,417,000, $1,681,675, $1,949,130
for the years ended December 31, 1996, 1997 and 1998, respectively.
10. RETIREMENT PLANS:
SEPCO provides an employee stock ownership plan (ESOP) which is eligible to
employees having 1,000 hours of service in 12 consecutive months of employment.
Employer contributions are at the discretion of the board of directors. The ESOP
held 891,241 shares of the Company's common stock at December 31, 1998. The
Company contributed to the ESOP Plan and expensed $150,000 in 1996, 1997 and
1998. The Company also offers a 401(k) profit-sharing plan for employees having
1,000 hours of service in 12 consecutive months of employment. The Company
matches contributions at a rate of 10 percent. The Company contributed to the
401(k) profit sharing-plan $62,000, $81,000 and $214,000 in the years ended
December 31, 1996, 1997 and 1998, respectively.
11. RELATED-PARTY TRANSACTIONS:
In December 1989, the Company restructured certain loans previously made by
the Company to an officer of the Company, pursuant to which the officer executed
two promissory notes in the amounts of $149,910 and $58,737, respectively, each
bearing interest at 9 percent per annum. The outstanding balances of such loans
were $127,814 and $50,080 at December 31, 1997 and 1998, respectively.
Additionally, the Company from time to time has made noninterest-bearing
advances to this officer. As of December 31, 1997 and 1998, the outstanding
advances amounted to $340,439 and $420,439, respectively.
35
38
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, inclusive, of
Form 10-K is hereby incorporated by reference from the Company's Definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders, which shall be file
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year to which this Annual Report on Form 10-K relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. Financial Statements
PAGE
----
DXP ENTERPRISES AND SUBSIDIARIES:
Report of Independent Public Accountants.................... 21
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................... 22
Consolidated Statements of Earnings....................... 23
Consolidated Statements of Shareholders' Equity........... 24
Consolidated Statements of Cash Flows..................... 25
Notes to Consolidated Financial Statements................ 26
(B) REPORTS ON FORM 8-K:
None.
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 14.
The Company undertakes to furnish to any stockholder so requesting a copy
of any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement On Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
3.2 -- Bylaws (incorporated by reference Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
4.1 -- Form of Common Stock certificate (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
the Commission on August 20, 1998)
36
39
EXHIBIT
NO. DESCRIPTION
------- -----------
4.2 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
+10.1 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little
(incorporated by reference to Exhibit No. 10.8 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the Commission on May 22, 1998).
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998 (incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the commission on May 22, 1998).
+10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 1998).
37
40
EXHIBIT
NO. DESCRIPTION
------- -----------
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998 (incorporated by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the Commission on May 22, 1998).
10.12 -- Second Amended and Restated Loan and Security Agreement
dated effective as of April 1, 1994, by and between
Barclays Business Credit, Inc. and SEPCO Industries,
Inc., as amended by First Amendment to Second Amended and
Restated Loan and Security Agreement and Secured
Promissory Note dated May, 1995, by and between SEPCO
Industries, Inc. and Shawmut Capital Corporation,
successor-in-interest by assignment to Barclays Business
Credit, Inc., as amended by Second Amendment to Second
Amended and Restated Loan and Security Agreement dated
April 3, 1996, by and between SEPCO Industries, Inc. and
Fleet Capital Corporation, formerly known as Shawmut
Capital Corporation, as amended by Third Amendment to
Second Amended and Restated Loan and Security Agreement
dated September 9, 1996, by and between SEPCO Industries,
Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation,
as amended by Fourth Amendment to Second Amended and
Restated Loan and Security Agreement dated October 24,
1996, by and between SEPCO Industries, Inc. American MRO,
Inc. and Fleet Capital Corporation and as amended by
Letter Agreement dated November 4, 1996, from Fleet
Capital Corporation to SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. (incorporated by
reference to Amendment No. 4 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on November 6, 1996).
10.13 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
Quarterly period ended June 30, 1997, filed with
Commission on November 17, 1997).
10.14 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by And among Sepco Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
Sepco Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eighth Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998, by and among
Sepco Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997, filed with the Commission on November
13, 1998).
38
41
EXHIBIT
NO. DESCRIPTION
------- -----------
10.17 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.18 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.19 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.20 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
+10.21 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 13,
1996).
10.22 -- Amendment No. Two to SEPCO Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.23 -- Amendment No. Three to SEPCO Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.24 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.25 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, for the quarterly period ended September 30,
1998, filed with the Commission on November 13, 1998).
39
42
EXHIBIT
NO. DESCRIPTION
------- -----------
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.29 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.30 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.33 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.34 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
40
43
EXHIBIT
NO. DESCRIPTION
------- -----------
10.35 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.36 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.37 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.38 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.39 -- Continuing Guaranty Agreement dated May 29, 1997, by
SEPCO Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.40 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.41 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.42 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of SEPCO Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
41
44
EXHIBIT
NO. DESCRIPTION
------- -----------
10.43 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.44 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.45 -- Secured Promissory Note dated April 29, 1998 payable by
SEPCO Industries, Inc., Bayou Pumps, Inc. and American
MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1998, filed with the Commission on May 14, 1998).
*11.1 -- Statement re Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent from Arthur Andersen LLP.
*27.1 -- Financial Data Schedule.
42
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ DAVID R. LITTLE
----------------------------------
David R. Little
Chairman of the Board,
President and Chief Executive
Officer
Dated: March 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ DAVID R. LITTLE Chairman of the Board, President, March 31, 1998
- ----------------------------------------------------- Chief Executive Officer and
David R. Little Director (Principal Executive
Officer)
/s/ GARY A. ALLCORN President/Finance and Senior Vice March 31, 1998
- ----------------------------------------------------- Chief Financial Officer
Gary A. Allcorn (Principal Financial and
Accounting Officer)
/s/ JERRY J. JONES Director March 31, 1998
- -----------------------------------------------------
Jerry J. Jones
/s/ CLETUS DAVIS Director March 31, 1998
- -----------------------------------------------------
Cletus Davis
/s/ KENNETH H. MILLER Director March 31, 1998
- -----------------------------------------------------
Kenneth H. Miller
/s/ THOMAS V. ORR Director March 31, 1998
- -----------------------------------------------------
Thomas V. Orr
43
46
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement On Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
3.2 -- Bylaws (incorporated by reference Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
4.1 -- Form of Common Stock certificate (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
the Commission on August 20, 1998)
4.2 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
+10.1 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
+10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
+10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
+10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12,
1996).
+10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little
(incorporated by reference to Exhibit No. 10.8 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the Commission on May 22, 1998).
47
EXHIBIT
NO. DESCRIPTION
------- -----------
+10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998 (incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the commission on May 22, 1998).
+10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 1998).
+10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998 (incorporated by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-53387), filed with the Commission on May 22, 1998).
10.12 -- Second Amended and Restated Loan and Security Agreement
dated effective as of April 1, 1994, by and between
Barclays Business Credit, Inc. and SEPCO Industries,
Inc., as amended by First Amendment to Second Amended and
Restated Loan and Security Agreement and Secured
Promissory Note dated May, 1995, by and between SEPCO
Industries, Inc. and Shawmut Capital Corporation,
successor-in-interest by assignment to Barclays Business
Credit, Inc., as amended by Second Amendment to Second
Amended and Restated Loan and Security Agreement dated
April 3, 1996, by and between SEPCO Industries, Inc. and
Fleet Capital Corporation, formerly known as Shawmut
Capital Corporation, as amended by Third Amendment to
Second Amended and Restated Loan and Security Agreement
dated September 9, 1996, by and between SEPCO Industries,
Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation,
as amended by Fourth Amendment to Second Amended and
Restated Loan and Security Agreement dated October 24,
1996, by and between SEPCO Industries, Inc. American MRO,
Inc. and Fleet Capital Corporation and as amended by
Letter Agreement dated November 4, 1996, from Fleet
Capital Corporation to SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. (incorporated by
reference to Amendment No. 4 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on November 6, 1996).
10.13 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
Quarterly period ended June 30, 1997, filed with
Commission on November 17, 1997).
10.14 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by And among Sepco Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
48
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
Sepco Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eighth Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998, by and among
Sepco Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997, filed with the Commission on November
13, 1998).
10.17 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.18 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
10.19 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.20 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-10021), filed with the Commission
on August 12, 1996).
+10.21 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 13,
1996).
10.22 -- Amendment No. Two to SEPCO Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.23 -- Amendment No. Three to SEPCO Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.24 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
49
EXHIBIT
NO. DESCRIPTION
------- -----------
10.25 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, for the quarterly period ended September 30,
1998, filed with the Commission on November 13, 1998).
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.29 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.30 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
50
EXHIBIT
NO. DESCRIPTION
------- -----------
10.33 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.34 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.35 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.36 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.37 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.38 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.39 -- Continuing Guaranty Agreement dated May 29, 1997, by
SEPCO Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.40 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
51
EXHIBIT
NO. DESCRIPTION
------- -----------
10.41 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.42 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of SEPCO Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.43 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.44 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.45 -- Secured Promissory Note dated April 29, 1998 payable by
SEPCO Industries, Inc., Bayou Pumps, Inc. and American
MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1998, filed with the Commission on May 14, 1998).
*11.1 -- Statement re Computation of Per Share Earnings.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent from Arthur Andersen LLP.
*27.1 -- Financial Data Schedule.