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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21513
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DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7272 PINEMONT
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
713/996-4700
(Registrant's telephone number, including area code)
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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 [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common stock, as
of May 12, 1999:
COMMON STOCK: 4,211,072
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ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
Current assets:
Cash...................................................... $ 999 $ 1,625
Trade accounts receivable, net of allowance for doubtful
accounts of $1,322 and $1,155, respectively............ 25,966 24,367
Inventory................................................. 31,455 28,926
Prepaid expenses and other................................ 2,079 1,453
Deferred income taxes..................................... 958 870
------- -------
Total current assets.............................. 61,457 57,241
Property, plant and equipment, net.......................... 13,095 13,160
Goodwill, net............................................... 10,351 10,447
Other assets................................................ 471 484
------- -------
Total assets...................................... 85,374 81,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.................................... 18,279 14,826
Employee compensation..................................... 1,024 1,449
Other accrued liabilities................................. 331 99
Current portion of long-term debt......................... 3,838 3,782
------- -------
Total current liabilities......................... 23,472 20,156
Long-term debt, less current portion........................ 44,097 42,910
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 580 563
Equity subject to redemption:
Series A preferred stock -- 1,122 shares.................. 112 112
Common stock, -0- and 140,214 shares...................... -- 1,245
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; 4,211,072 shares issued, of which 4,075,621
shares are outstanding, and 135,451 shares are treasury
stock.................................................. 41 40
Paid-in capital........................................... 2,152 908
Retained earnings......................................... 15,679 15,443
Treasury stock............................................ (1,518) (804)
------- -------
Total shareholders' equity........................ 16,374 15,607
------- -------
Total liabilities and shareholders' equity........ $85,374 $81,332
======= =======
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
Sales....................................................... $48,410 $49,004
Cost of sales............................................... 35,648 36,419
------- -------
Gross Profit................................................ 12,762 12,585
Selling, general and administrative expenses................ 11,825 10,508
------- -------
Operating income............................................ 937 2,077
Other income................................................ 508 176
Interest expense............................................ (929) (785)
------- -------
Income before income taxes.................................. 516 1,468
Provision for income taxes.................................. 258 590
------- -------
Net income.................................................. $ 258 $ 878
Preferred stock dividend.................................... 23 21
------- -------
Net Income attributable to common Shareholders.............. $ 235 $ 857
======= =======
Basic earnings per common share............................. $ .06 $ .21
------- -------
Common shares outstanding................................... 4,129 4,157
------- -------
Diluted earnings per share.................................. $ .05 $ .15
------- -------
Common and common equivalent shares outstanding............. 5,552 5,701
------- -------
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net cash provided by operating activities................... $ (866) $ 3,415
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply net assets.................. -- (6,208)
Proceeds on the sale of assets, at cost..................... 267 --
Purchase of property and equipment.......................... (534) (250)
-------- --------
Net cash used in investing activities....................... (267) (6,458)
FINANCING ACTIVITIES:
Proceeds from debt.......................................... 48,040 53,634
Principal payments on revolving line of credit, long-term
and Subordinated debt, and notes payable to bank.......... (46,796) (49,047)
Acquisition of common stock................................. (714) --
Dividends paid.............................................. (23) (21)
-------- --------
Net cash provided by financing activities................... 507 4,566
-------- --------
INCREASE (DECREASE) IN CASH................................. (626) 1,523
CASH AT BEGINNING OF PERIOD................................. 1,625 736
-------- --------
CASH AT END OF PERIOD....................................... $ 999 $ 2,259
======== ========
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. DXP Enterprises, Inc. (the
"Company") believes that the presentations and disclosures herein are adequate
to make the information not misleading. The condensed consolidated financial
statements reflect all elimination entries and adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 1998, filed with
the Securities and Exchange Commission.
NOTE 2: THE COMPANY
The Company was incorporated on July 26, 1996 in the State of Texas. The
Company is a leading supplier of maintenance, repair and operating ("MRO")
products, equipment and services to industrial customers. The Company provides
MRO products in the following categories: fluid handling equipment, bearings and
power transmission equipment, general mill and safety supplies and electrical
supplies. The Company also offers a line of valve and valve automation products
to its customers.
NOTE 3: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 63 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
Finished goods........................................ $30,689 $29,717
Work in process....................................... 4,794 3,093
------- -------
Inventories at FIFO................................... 35,483 32,810
Less -- LIFO allowance................................ (4,028) (3,884)
------- -------
Inventories........................................... $31,455 $28,926
======= =======
NOTE 4: 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 up to a maximum
of $275,000 based on the earnings before interest and taxes and depreciation of
the acquired company to be paid on March 31, 1999, if earned. No deferred
payment was required to be made. Tri-Electric did not meet the deferred payment
requirements based on the earnings before interest and taxes and depreciation
for the twelve month period ended March 31, 1999. The results of operations of
Tri-Electric are included in the consolidated
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DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements of income from the date of acquisition. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of $3.9 million
was recorded in connection with the acquisition.
NOTE 5: LONG-TERM DEBT
The Company has secured lines of credit for up to $44 million with an
institutional lender (the "Credit Facility"). The Credit Facility was amended by
the Company and its lender effective March 30, 1999, which now provides for
borrowings up to an aggregate of the lessor 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. The Credit Facility is secured by receivables,
inventory, and machinery and equipment and matures April 2000. An executive
officer of the Company, who is also a shareholder of the Company, has personally
guaranteed up to $500,000 of the obligations of the Company under the line of
credit. Additionally, certain shares held in trust for this executive officer's
children are also pledged to secure this line of credit. The available
borrowings under the Credit Facility at March 31, 1999 were approximately $2.8
million. The Credit Facility includes loan covenants that are measured monthly,
which, among other things, require the Company to maintain a certain cash flow
and other financial ratios.
NOTE 6: SUBSEQUENT EVENTS
The Company amended the Credit Facility, effective May 13, 1999, to extend
its maturity date from January 2, 2000 to April 1, 2000. All other terms and
conditions remain as stated above.
On April 27, 1999, the Company entered into an agreement to sell certain
assets of Wesco Equipment, a division that specializes in valve and valve
automation products, for approximately $3.173 million. The sale is expected to
be completed by the second quarter of 1999. The assets being sold include
inventory and personal property. The Company will retain and collect the
customer accounts receivable balances. Upon completion of this transaction, the
Company will no longer be in the valve automation business.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading provider of MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. The Company provides a wide range of MRO products in the
fluid handling equipment, bearings and power transmission equipment, general
mill and safety supplies and electrical product categories. The Company also
offers a line of valve and valve automation products within the pipe, valve and
fittings category but has entered into an agreement to sell its valve automation
products business. Upon completion of this transaction, the Company will no
longer derive revenues from the valve automation business. 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 compared to Three Months Ended March 31,
1998
Revenues for the three months ended March 31, 1999 decreased 1.2% to $48.4
million from the three months ended March 31, 1998. The Company's acquisitions
in 1998 accounted for $5.3 million of the $48.4 million in revenues during the
period ended March 31, 1999. Sales of fluid handling equipment increased 16.1%,
or $2.9 million, over the comparable period in 1998, due in part to the $1.7
million in revenues generated by Smith Equipment Company, the fluid handling
equipment business acquired in May 1998. Sales of bearings and power
transmission equipment for the quarter ended March 31, 1999 decreased 28.7%, or
$4.1 million over the comparable period in 1998, due primarily to the effects of
lower oil prices and its affects on the oil industry. Sales of valve and valve
automation equipment decreased 18.1%, or $.4 million over the comparable period
in 1998. During the three months ended March 31, 1999, sales of general mill and
safety supplies decreased 11.5%, or $1.5 million over the comparable period in
1998. A comparison of electrical supplies is not presented because the product
category did not exist during the entire comparative prior period.
Gross margins increased .7% for the first quarter of 1999 as compared to
the first quarter of 1998, from 25.7% of sales to 26.4%. The increase in gross
margin is attributable to higher margins associated with the two
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businesses acquired in the second quarter of 1998. 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 expense for the first quarter of 1999
increased as a percentage of revenues by 3.0%, or $1.3 million, as compared to
the first quarter of 1998. This was due in large part to the selling expenses
($.7 million) generated by the acquired companies, Tri-Electric, in the first
quarter of 1998 as well as M.W. Smith Equipment, Inc. and Lucky Electric &
Supply, Inc. in the second quarter of 1998. Also contributing to the increase
was the focus and investment ($.6 million) in the areas of marketing and
information technologies in an effort to improve the Company's future position
in the industrial distribution market.
Operating income for the three month period ended March 31, 1999 decreased
as a percent of revenues by 2.3%, from $2.1 million to $.9 million as compared
to the first quarter of 1998, due to the decrease in revenue volume and the
increase of selling, general and administrative expenses as a percentage of
revenue.
Interest expense during the first quarter of 1999 increased by $.1 million
to $.9 million compared to the first quarter of 1998. The increase was primarily
due to greater interest expense resulting from additional borrowings incurred to
finance an acquisition late in the first quarter of 1998 and 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 the three months ended March 31, 1999 as compared to the same period in
1998.
The Company's provision for income taxes for the three months ended March
31, 1999 decreased by $.3 million compared to the same period of 1998, as a
result of the decrease in profits.
Net income for the three month period ended March 31, 1999, decreased $.6
million from the three month period ended March 31, 1998 due to the decrease in
revenue volume and the increase of selling, general and administrative expenses
as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
General
Under the Company's loan agreements with its bank lender, all available
cash is generally applied to reduce outstanding borrowings, with operations
funded through borrowings under the Credit Facility. The Company's policy is to
maintain low levels of cash and cash equivalents and to use borrowings under its
line of credit for working capital. The Company had $2.8 million available for
borrowings under the Credit Facility at March 31, 1999. Working capital at March
31, 1999 and December 31, 1998 was $38.0 million and $37.1 million,
respectively. During the first three months of 1999 and the year 1998, the
Company collected its trade receivables in approximately 48 and 49 days,
respectively, and turned its inventory approximately four times on an annualized
basis.
In the first and again in the second quarter of 1999, the Company and its
lender amended the Credit Facility effective March 30, 1999 and May 13, 1999,
which now provides for borrowings up to an aggregate of the lessor 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 (7.75 percent at March 31, 1999). The line
of credit is secured by receivables, inventory, and machinery and equipment. The
Company and its lender further amended the Credit Facility, effective May 13,
1999 to extend the maturity date to April 1, 2000. The Credit Facility contains
customary affirmative and negative covenants as well as financial covenants that
are measured monthly and require the Company to maintain a certain cash flow and
other financial ratios.
The Company expended cash through operating activities of $.9 million in
the first three months of 1999 as compared to $3.4 million in cash generation
during the first three months of 1998, due primarily to a decrease in earnings
along with an increase in both accounts receivable and inventory.
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The Company had capital expenditures of approximately $.53 million for the
first three months of 1999 as compared to $.25 million during the same period of
1998. Capital expenditures in the first three months of 1999 were primarily
related to computer hardware ($.27 million) and furniture and fixtures ($.22
million). Capital expenditures for 1998 were primarily related to computer
hardware ($.14 million).
On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of an electrical supply business. The purchase
price consisted of $6.2 million in cash, assumption of $1.6 million of trade
payables and other accrued expenses. The results of operations of the business
are included in the consolidated statements of income from the date of
acquisition. The acquisition has been accounted for using the purchase method of
accounting. Goodwill of $3.9 million was recorded in connection with the
acquisition.
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
will require capital in the form of the issuance of additional equity or debt
financing. There can be no assurance that such financing will be available to
the Company or as to the terms 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) communicating with customers, major vendors and
other third parties with whom the Company has material relationships regarding
their Year 2000 readiness; (4) remediating, repairing or replacing equipment and
systems that are not Year 2000 ready; and (5) testing to verify that Year 2000
readiness has been achieved for the Company's equipment and systems.
Phases (1) and (2) of the Company's Year 2000 program have been completed.
In support of phase (3) of the Company's Year 2000 program, the Company has
developed and implemented a vendor/client Year 2000 questionnaire on the Company
web-site, as well as the development of a paper based version of the
questionnaire. Phase (3) is well under way with an initial mailing to over
20,000 customers/vendors. 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 is addressing Year 2000 software issues through the
implementation of Year 2000 compliant upgrades to, or new releases of, current
software. The Company installed the latest upgrade to its main business system
software on the 8th of May 1999, at which time the main business system
supporting the Company became Year 2000 compliant. Cost incurred to date
relative to the conversions and upgrades have been minimal and are expected to
continue to be minimal in future periods, as the Company
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policy has been, and continues to be to maintain the most current version of its
business software packages for maintainability and interoperability
considerations. The Company will continue to analyze systems and services that
utilize date imbedded codes that may experience operational problems when the
Year 2000 is reached. The Company began phase (5) at the end of the first
quarter of 1999 and expects to complete testing and verification efforts by the
end of the second quarter of 1999. All costs associated with the Year 2000
issues will be included as part of the 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
CAUTIONARY STATEMENTS
The Company's expectations with respect to future results of operations
that may be embodied in oral and written forward-looking statements, including
any forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of the Company's realization of such expectations. The
Company's actual results could differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
Ability to Comply with Financial Covenants of Credit Facility
The 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,
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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 Credit Facility contains
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 March 31, 1999, the Company had
approximately $2.8 million available under the Credit Facility, and there can be
no assurance that the Company will be able to obtain additional financing on a
timely basis or on terms the Company deems acceptable. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Risks Related to Internal Growth Strategy
Future results for the Company also will depend in part on the Company's
success in implementing its internal growth strategy, which includes expanding
existing product lines and adding new product lines. The ability of the Company
to implement this strategy will depend on its success in acquiring and
integrating new product lines and marketing integrated forms of supply
arrangements such as those being pursued by the Company through its SmartSource
program. The Company acquired two businesses in the second quarter of 1997, a
third in the first quarter of 1998 and two additional businesses 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 these 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.
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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.
Year 2000 Issues
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000. The Company relies on its
computer systems and software for financial reporting, customer account
information and inventory management and replenishment. The Company is in the
process of assessing its state of readiness for the Year 2000 and expects its
software to be Year 2000 compliant by the end of the third quarter of 1999 upon
completion of the upgrading of its software and verification testing efforts.
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
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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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 -- Waiver and Amendment dated March 30, 1999 between SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.2 -- Waiver and Amendment dated March 30, 1999 between Pelican
State Supply Company, Inc. and Fleet Capital Corporation.
10.3 -- Waiver and Amendment dated March 30, 1999 between DXP
Acquisition, Inc., d/b/a Strategic Acquisition, Inc. and
Fleet Capital Corporation.
10.4 -- May 1999 Amendment to Second Amended and Restated Loan
and Security Agreement and Modification to Other
Agreements dated May 13, 1999, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.5 -- May 1999 Amendment to Loan and Security Agreement dated
May 13, 1999, by and among Pelican State Supply Company,
Inc. and Fleet Capital Corporation.
10.6 -- May 1999 Amendment to Loan and Security Agreement dated
May 13, 1999, by and among DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital
Corporation.
11.1 -- Statement re: Computation of Per Share Earnings.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DXP ENTERPRISES, INC.
By: /s/ GARY A. ALLCORN
----------------------------------
Gary A. Allcorn
Senior Vice President/Finance and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Date: May 13, 1999
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 -- Waiver and Amendment dated March 30, 1999 between SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.2 -- Waiver and Amendment dated March 30, 1999 between Pelican
State Supply Company, Inc. and Fleet Capital Corporation.
10.3 -- Waiver and Amendment dated March 30, 1999 between DXP
Acquisition, Inc., d/b/a Strategic Acquisition, Inc. and
Fleet Capital Corporation.
10.4 -- May 1999 Amendment to Second Amended and Restated Loan
and Security Agreement and Modification to Other
Agreements dated May 13, 1999, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.5 -- May 1999 Amendment to Loan and Security Agreement dated
May 13, 1999, by and among Pelican State Supply Company,
Inc. and Fleet Capital Corporation.
10.6 -- May 1999 Amendment to Loan and Security Agreement dated
May 13, 1999, by and among DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital
Corporation.
11.1 -- Statement re: Computation of Per Share Earnings.
27.1 -- Financial Data Schedule.