-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fj9bYa6Zm8OSuELsv+sKX24Chgyp73dDDuPLtOBuJkQ4nIka7+SEXkrk4zwjEZRE sqbxYAEewzvO9uh/4mlgYw== 0000950129-01-500842.txt : 20010516 0000950129-01-500842.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950129-01-500842 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DXP ENTERPRISES INC CENTRAL INDEX KEY: 0001020710 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 760509661 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21513 FILM NUMBER: 1639499 BUSINESS ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 713-531-42 MAIL ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 FORMER COMPANY: FORMER CONFORMED NAME: INDEX INC DATE OF NAME CHANGE: 19960808 10-Q 1 h87438e10-q.txt DXP ENTERPRISES INC - PERIOD ENDED MARCH 31, 2001 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-21513 --------------- DXP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0509661 (State or other jurisdiction of 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) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares outstanding of each of the issuer's classes of common stock, as of May 15, 2001: Common Stock: 4,071,685 2 ================================================================================ ITEM 1: FINANCIAL STATEMENTS DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 --------------- ---------------- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash.................................................... $ 456 $ 2,744 Trade accounts receivable, net of allowance for doubtful accounts of $1,908 and $1,888, respectively......................................... 23,650 24,377 Inventory............................................... 23,780 23,504 Prepaid expenses and other.............................. 863 578 Deferred income taxes................................... 1,251 1,308 ------- ------- Total current assets............................ 50,000 52,511 Property, plant and equipment, net........................ 9,565 9,314 Goodwill, net............................................. 2,523 2,547 Note receivables from officers and employees.............. 813 811 Deferred income taxes..................................... 1,313 1,388 Other assets.............................................. 448 568 ------- ------- Total assets.................................... 64,662 67,139 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable................................... 19,284 18,498 Accrued wages and benefits............................... 1,577 999 Other accrued liabilities................................ 1,107 661 Current portion of long-term debt........................ 9,101 9,675 ------- ------- Total current liabilities........................ 31,069 29,833 Long-term debt, less current portion....................... 24,593 28,476 Equity subject to redemption: Series A preferred stock -- 1,122 shares................. 112 112 Shareholders' Equity: Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; 1,000,000 shares authorized; 2,992 shares issued and outstanding:.................. 2 2 Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; 1,000,000 shares authorized; 17,700 shares issued, 15,000 shares outstanding and 2,700 shares in treasury stock.............................. 18 18 Common stock, $.01 par value, 100,000,000 shares authorized; 4,257,760 shares issued and 4,071,685 shares are outstanding and 186,075 shares in treasury stock........................................ 41 41 Paid-in capital.......................................... 2,765 2,765 Retained earnings........................................ 7,956 7,786 Treasury stock........................................... (1,894) (1,894) -------- ------- Total shareholders' equity....................... 8,888 8,718 ------- ------- Total liabilities and shareholders' equity $64,662 $67,139 ======= =======
See notes to condensed consolidated financial tatements. 2 3 DXP ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ------------------------ 2001 2000 -------- -------- Sales........................................ $ 46,890 $ 45,014 Cost of sales................................ 35,335 34,062 -------- -------- Gross Profit................................. 11,555 10,952 Selling, general and administrative expenses. 10,363 10,464 -------- -------- Operating income............................. 1,192 488 Other income................................. 25 1,744 Interest expense............................. (784) (930) --------- -------- Income before income taxes................... 433 1,302 Provision for income taxes................... 239 565 -------- -------- Net income................................... $ 194 $ 737 Preferred stock dividend..................... 23 22 -------- -------- Net Income attributable to common shareholders $ 171 $ 715 ======== ======== Basic earnings per common share.............. $ .04 $ .18 -------- -------- Common shares outstanding.................... 4,072 4,073 -------- -------- Diluted earnings per share................... $ .04 $ .15 -------- -------- Common and common equivalent shares outstanding 4,072 4,867 -------- --------
See notes to condensed consolidated financial tatements. 3 4 DXP ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------------------- 2001 2000 ---------- ---------- OPERATING ACTIVITIES: Net income........................................ $ 194 $ 737 Adjustments to reconcile net income to net cash Provided by (used in) operating activities Depreciation and amortization..................... 332 539 Provision (benefit) for deferred income taxes..... 132 (28) (Gain) on sale of property and equipment....................................... -- (1,692) Changes in operating assets and liabilities: Trade accounts receivable....................... 727 (1,211) Inventories..................................... (276) (382) Prepaid expenses and other...................... (167) (412) Accounts payable and accrued liabilities........ 1,796 2,864 --------- ---------- Net cash provided by operating activities....... 2,738 415 INVESTING ACTIVITIES: Purchase of property and equipment................ (546) (364) Net proceeds on the sale of assets................ -- 2,585 --------- ---------- Net cash provided by/(used in)investing activities.................................... (546) 2,221 FINANCING ACTIVITIES: Proceeds from debt................................ 41,242 29,754 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank................................. (45,699) (34,454) Dividends paid.................................... (23) (22) --------- ---------- Net cash used in financing activities......... (4,480) (4,722)) --------- ---------- DECREASE IN CASH.................................. (2,288) (2,086) CASH AT BEGINNING OF PERIOD....................... 2,744 2,991 ========= ========== CASH AT END OF PERIOD............................. $ 456 $ 905 ========= ==========
See notes to condensed consolidated financial statements. 4 5 DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. 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, 2000, filed with the Securities and Exchange Commission. NOTE 2: THE COMPANY DXP Enterprises, Inc. and subsidiaries (DXP or the Company), a Texas corporation, was incorporated on July 26, 1996, to be the successor to SEPCO Industries, Inc. (SEPCO). The Company is organized into two segments: Maintenance, Repair and Operating (MRO) and Electrical Contractor. NOTE 3: RECENT OPERATIONS AND LIQUIDITY The Company sustained a net loss of approximately $7.4 million during fiscal year 2000 primarily from non-recurring operating charges of $10.8 million. This operating loss coupled with a default on a subordinated note payable caused the Company to be in violation of covenants under the Credit Facility with its bank lender; consequently, the Company reclassified the subordinated note and a portion of its debt under the Credit Facility to a current liability in 2000, as well as for the quarter ended March 31, 2001 (see Note 6 below for further discussion). For first quarter of 2001, the Company generated $433,000 in income before taxes. Revenues and gross profit increased from the comparable period in 2000, resulting from improved sales and margins in its MRO segment. Additionally, sales, general and administrative expenses are lower when compared to the first and fourth quarter of 2000 (see "Management's Discussion and Analysis of Financial Condition and Result of Operations" for further information). The Company was in compliance with its financial covenants for the first quarter of 2001. In addition to $0.5 million of cash on hand, the Company has approximately $3.5 million available for additional borrowings under its Credit Facility at March 31, 2001. NOTE 4: INVENTORY The Company uses the last-in, first-out ("LIFO") method of inventory valuation for approximately 61 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, 2001 DECEMBER 31, 2000 -------------- ----------------- (IN THOUSANDS) Finished goods...... $ 25,257 $25,770 Work in process..... 1,915 985 -------- ------- Inventories at FIFO. 27,172 26,755 Less - LIFO allowance (3,392) (3,251) -------- ------- Inventories......... $ 23,780 $23,504 ======== =======
5 6 NOTE 5: DIVESTITURES During the first quarter of 2000, the Company sold a warehouse facility for approximately $2.8 million in cash. A gain of approximately $1.7 million was recorded as other income as a result of the sale. NOTE 6: LONG-TERM DEBT 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 consists of three secured lines of credit with various subsidiaries of the Company and a term loan. Under the terms of the asset purchase agreement associated with the acquisition of a MRO business in 1997, the Company can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. The Company notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, the Company suspended principal and interest payments on the note. The seller has notified the Company's bank lender that the Company is in default on the subordinated note. The Company's bank lender notified the Company that the default on the subordinated note caused the Company to be in default on one of its secured lines of credit with an outstanding balance of $4.1 million at March 31, 2001. However, the Company and the bank lender have entered into a forbearance agreement whereby the bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate the forbearance agreement at anytime. The $4.1 million balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at March 31, 2001. In management's opinion, should the $4.1 million balance of the secured line of credit be demanded upon termination of the forebearance agreement, the Company would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. The Company intends to aggressively pursue the Company's claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. The Company did not accrue interest or penalty interest on the subordinated note for the three months ended March 31, 2001. Management believes the subordinated note will either be paid off using funds obtained from the seller in settlement of the Company's claims or the subordinated note will be offset against its claims. However, there can be no assurance that the Company will be successful in collecting the funds due under its claims or in offsetting the subordinated note against its claims. During April of 2001, the Company and its bank amended the Credit Facility effective December 31, 2000, which now provides for borrowings up to an aggregate of the lesser of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $35.0 million, and matures April 1, 2002, except for the $4.1 million balance of the secured line of credit which is in default and callable at anytime under the forebearance agreement previously discussed. Interest accrues at prime plus 1/2% on the revolving portion of the Credit Facility and prime plus 1 1/2% on the term portion of the Credit Facility. The prime rate at March 31, 2001, was 8.0%. The Credit Facility is secured by receivables, inventory, real estate and machinery and equipment. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require the Company to maintain a certain cash flow and other financial ratios. The Company from time to time has not been in compliance with certain covenants under the Credit Facility including the minimum earnings requirement and the fixed charge coverage ratio. At March 31, 2001, the Company was in compliance with these covenants. In addition to the $0.5 million of cash on hand at March 31, 2001 the Company had $3.5 million available for borrowings under the amended credit facility at March 31, 2001. 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 the lender will be willing to waive such non-compliance or further amend such covenants. 6 7 NOTE 7: EARNINGS PER SHARE DATA The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.
THREE MONTHS ENDED MARCH 31, 2001 2000 Basic: Average shares outstanding 4,071,685 4,072,718 Net income attributable to common shareholders $ 171,000 $ 715,000 Per share amount $ .04 $ .18 Diluted: Average shares outstanding 4,071,685 4,072,718 Net effect of dilutive stock options-- based on the treasury stock method -- 374,375 Assumed conversion of Class B convertible preferred stock -- 420,000 Total 4,071,685 4,867,093 Net income for diluted earnings per share $ 171,000 $ 737,000 Per share amount $ .04 $ .15
For the three months ended March 31, 2001, the Class B convertible preferred stock is anti-dilutive and is excluded from the computation of diluted earnings per share. NOTE 8: SEGMENT REPORTING The MRO Segment is engaged in providing maintenance, repair and operating 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, power transmission equipment, general mill, safety supply and electrical products categories. The Electrical Contractor segment sells 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, to electrical contractors. The Company began offering electrical products to electrical contractors following its acquisition of the assets of two electrical supply businesses in 1998. All business segments operate primarily in the United States. The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. Financial information relating the Company's segments is as follows:
ELECTRICAL MRO CONTRACTOR TOTAL --- ---------- ----- 2001 Sales $ 43,958 $ 2,932 $ 46,890 Operating income 1,317 (125) 1,192 2000 Sales $ 42,223 $ 2,791 $ 45,014 Operating income (loss) 550 (62) 488
7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000 SALES. Revenues for the quarter ended March 31, 2001, increased $1.9 million, or 4.2%, to approximately $46.9 million from $45.0 million in 2000. Sales for the MRO Segment increased $1.7 million, or 4.0%, primarily due to an improvement in the oil and gas industry. Sales for the Electrical Contractor segment increased by $0.1 million, or 5.0%, for the current quarter when compared to same period in 2000. This increase is the result of an effort to increase sales. GROSS PROFIT. Gross profit as a percentage of sales increased by approximately 0.3% for the first quarter of 2001, when compared to the same period in 2000. This increase can be primarily attributed to increased margins in fluid handling equipment sold by the MRO segment. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 19.0% in the three months ended March 31, 2001, down from 26.5% in the comparable period of 2000. This decline resulted from lower margin sales associated with the effort to increase sales. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for the quarter ended March 31, 2001, decreased by approximately $0.1 million when compared to the same period in 2000. As a percentage of revenue, the 2001 expense declined by approximately 1.1% to 22.1% from 23.2% for 2000. This decrease is primarily attributable to a decrease in depreciation and amortization expense during the current quarter resulting from the write-off of certain fixed assets and intangible assets in the fourth quarter of 2000. OPERATING INCOME. Operating income for the first three months of 2001 increased $0.7 million when compared to the same period in 2000. This increase is the net of an $0.8 million increase in operating income for the MRO Segment and a $0.1 million increase in the operating loss for the Electrical Contractor Segment. The improved operating income for the MRO segment is the result of increased sales and gross profit combined with reduced selling, general and administrative expenses. The increased loss for the Electrical Contractor Segment is the result of lower gross margins, partially offset by reduced amortization expense due to the write-off of intangibles in the fourth quarter of 2000. INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2001 decreased by $0.1 million to $0.8 million from $0.9 million during the same period in 2000. This decline results from a lower average debt balance for the first three months of 2001 when compared to the first quarter of 2000 as well as lower interest rates. OTHER INCOME. Other income was approximately $1.7 million lower in 2001 than in 2000 due to a $1.7 million gain on the sale of a warehouse facility during 2000. INCOME TAXES. The effective tax rate for the quarter ended March 31, 2001, of 55% increased from 43% for the same period in 2000 because of the higher 2000 income before tax resulting from the $1.7 million gain on the sale of the warehouse facility. The amount of permanent differences between tax and book income for the two periods was approximately the same. NET INCOME. Excluding the gain on the sale of the warehouse facility in 2000, net income increased by $0.6 million in 2001 from a loss of $0.4 million in 2000. LIQUIDITY AND CAPITAL RESOURCES GENERAL As a distributor of MRO and Electrical products, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology 8 9 and warehouse equipment. We also require cash to pay our lease obligations and to service our debt. Under the loan agreements with our bank lender, all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the Credit Facility. Our policy is to maintain low levels of cash and cash equivalents and to use borrowings under our line of credit for working capital. We had approximately $3.5 million available for borrowings under the revolving portion of the Credit Facility at March 31, 2001. Working capital at March 31, 2001 and December 31, 2000 was approximately $18.9 million and $22.7 million, respectively. During the first three months of 2001 and 2000, we collected trade receivables in approximately 51 and 47 days, respectively. For the three months ended March 31, 2001 and 2000, we turned our inventory approximately five and four times, respectively, on an annualized basis. Under the terms of the asset purchase agreement associated with the acquisition of a MRO business in 1997, we can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. We notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, we suspended principal and interest payments on the note. The seller has notified our bank lender that we were in default on the subordinated note. Our bank lender notified us that the default on the subordinated note caused us to be in default on one of our secured lines of credit with an outstanding balance of $4.1 million at March 31, 2001. However, we have entered into a forbearance agreement with our bank lender whereby the bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate the forbearance agreement at anytime. The $4.1 million balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at March 31, 2001. In our opinion, should the $4.1 million balance of the secured line of credit be demanded upon termination of the forebearance agreement, we would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. We intend to aggressively pursue our claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. The Company did not accrue interest or penalty interest on the subordinated note for the three months ended March 31, 2001. We believe the subordinated note will either be paid off using funds obtained from the seller in settlement of our claims or the subordinated note will be offset against our claims. However, there can be no assurance that we will be successful in collecting the funds due under our claims or in offsetting the subordinated note against our claims. During April of 2001, we amended the Credit Facility with our bank lender effective December 31, 2000, which now provides for borrowings up to an aggregate of the lesser of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $35.0 million, and matures April 1, 2002, except for the $4.1 million balance of the secured line of credit which is in default and callable at anytime under the forebearance agreement previously discussed. Interest accrues at prime plus 1/2% on the revolving portion of the Credit Facility and prime plus 1 1/2% on the term portion of the Credit Facility. The prime rate at March 31, 2001, was 8.0%. The Credit Facility is secured by receivables, inventory, real estate and machinery and equipment. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require that we maintain certain cash flow and other financial ratios. We have, from time to time, not been in compliance with certain covenants under the Credit Facility including the minimum earnings requirement and the fixed charge coverage ratio. At March 31, 2001, we are in compliance with these covenants. In addition to the $0.5 million of cash on hand at March 31, 2001, we had $3.5 million available for borrowings under the amended credit facility at March 31, 2001. Although we expect 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 we will be able to do so or that our lender will be willing to waive such non-compliance or further amend such covenants We generated cash through operating activities of approximately $2.7 million in the first three months of 2001 as compared to $0.4 million during the first three months of 2000. This increase is primarily attributable to improved operating income and to a decrease in accounts receivable in 2001 compared to an increase in accounts receivable in 2000. In the first quarter of 2001, sales increased approximately $0.3 million from the fourth quarter of 2000; for the comparable period in 2000, sales increased approximately $3.0 million from the fourth quarter of 1999. 9 10 We used cash from investing activities of approximately $0.5 million in the first three months of 2001 as compared to generating $2.2 million in cash during the first three months of 2000. This decrease results from the first quarter 2000 sale of a warehouse facility for approximately $2.8 million in cash. Fixed asset purchases of $0.5 during the first quarter of 2001 related primarily to computer software. Capital expenditures of $0.4 million during the first three months of 2000 were related primarily to computer equipment and developing an e-commerce website, which we subsequently wrote-off during the fourth quarter of 2000. Our internal cash flow projections indicate our cash generated from operations and available under our Credit Facility will meet our normal working capital needs during the next twelve months. However, we will require additional debt or equity financing to meet our future debt service obligations. Such financing may include additional bank debt or the public or private sale of equity or debt securities. In connection with such financing, we may be required to issue securities that substantially dilute the interest of our shareholders. As described above, all of our Credit Facility matures on or before April 1, 2002. However, we may not be able to renew and extend or replace the Credit Facility. Any extended or replacement facility may have higher interest costs, less borrowing capacity, more restrictive conditions and could involve equity dilution. Our ability to obtain a satisfactory credit facility may depend, in part, upon the level of our asset base for collateral purposes, our future financial performance and our ability to obtain additional equity. We would require additional capital to fund any future acquisitions. At this time, we do not plan to grow through acquisitions unless the market price of our common stock rises to levels that will make acquisitions accretive to our earnings or we generate excess cash flow. We may also pursue additional equity or debt financing to fund future acquisitions, although we may not be able to obtain additional financing on attractive terms. RECENTLY ISSUED ACCOUNTING STANDARDS On December 8, 1999, the United States Securities and Exchange Commission ("SEC") staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. We reviewed our revenue recognition procedures and are satisfied that we are in compliance with this SAB. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities (SFAS No. 133)". This statement requires the fair value of derivatives be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives are accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. SFAS No. 133, as amended, is effective for us beginning January 1, 2001. We adopted the statement effective January 1, 2001; there was no impact on our financial results as we were not a party to any derivative instruments. In 2000, the Emerging Issues Task Force of the FASB reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue 00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues"). We adopted the Issues in the fourth quarter of 2000 and have restated our quarterly and annual financial statements to conform to the requirements of the Issues. There was no effect on net income as a result of the adoption of the Issues. The net effect of the adoption of the Issues was an increase in net sales of $1.3 million, an increase in cost of sales of $1.3 million, a decrease in selling, general and administrative expenses of $0.2 million and a decrease in other income of $0.2 million for the quarter ended March 31, 2000. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk results from volatility in interest rates. This risk is monitored and managed. Our exposure to interest rate risk relates primarily to our debt portfolio. To limit interest rate risk on borrowings, we target a portfolio within certain parameters for fixed and floating rate loans taking into consideration the interest rate environment and our forecasted cash flow. This policy limits exposure to rising interest rates and allows us to benefit during periods of falling interest rates. Our interest rate exposure is generally limited to our Credit Facility. See "Liquidity and Capital Resources." 10 11 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. CAUTIONARY STATEMENTS Our 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 our realization of such expectations. Our 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 Our loan agreements with our bank lender (the "Credit Facility") requires that we comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. Our ability to comply with any of the foregoing restrictions will depend on our future performance, which will be subject to prevailing economic conditions and other factors, including factors beyond our 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 our indebtedness under the Credit Facility. From time to time we have 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 have, when necessary, obtained waivers or amendments to the covenants from our lender. Although we expect 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 we will be able to do so or that our lender will be willing to waive such non-compliance or further amend such covenants. Risk of Being Delisted From the Nasdaq SmallCap Market We have been notified by Nasdaq Staff, in a letter dated April 17, 2001, that we have failed to comply with the minimum bid price and market value of public float requirements for continued listing as set forth in Marketplace Rule 4310, and that our common stock, therefore, is subject to delisting from the Nasdaq SmallCap Market. We have requested a hearing before a Nasdaq Listing Qualifications Panel to review Nasdaq Staff's determination and have been granted a hearing on June 6, 2001. DXP's common stock will continue to be listed on the Nasdaq SmallCap Market pending the results of the hearing. There can be no assurance that the Nasdaq Panel will grant our request for continued listing. 11 12 If DXP's common stock is delisted from the Nasdaq SmallCap Market, we expect our common stock will be available for quotation on the OTC Bulletin Board electronic quotation system, and shareholders will be able to access current trading information, including the last trade, bid and ask quotations, and share volume. Risks Related to Internal Growth Strategy Future results for us will depend in part on our success in implementing our internal growth strategy, which includes expanding existing product lines and adding new product lines. Our ability to implement this strategy will depend on our success in acquiring and integrating new product lines and marketing integrated supply arrangements such as those being pursued by us through our SmartSource program. Although we intend to increase sales and product offerings to existing customers, improve our business to business e-commerce capability through outsourcing our website and reduce costs through consolidating certain administrative and sales functions, there can be no assurance that we will be successful in these efforts. Substantial Competition Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our SmartSource program. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Risk Associated with Default on Subordinated Note Payable Under the terms of the asset purchase agreement associated with the acquisition of a business in 1997, we can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. We notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, we suspended principal and interest payments on the note. The seller has notified our bank lender that we were in default on the subordinated note. Our bank lender notified us that the default on the subordinated note caused us to be in default on one of our secured lines of credit with an outstanding balance of $4.1 million at March 31, 2001. However, we have entered into a forbearance agreement with our bank lender whereby the bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate the forbearance agreement at any time. The $4.1 million balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at March 31, 2001. In our opinion, should the $4.1 million balance of the secured line of credit be demanded upon termination of the forebearance agreement, we would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. We intend to aggressively pursue our claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. The Company did not accrue interest or penalty interest on the subordinated note for the three months ended March 31, 2001. We believe the subordinated note will either be paid off using funds obtained from the seller in settlement of our claims or the subordinated note will be offset against our claims. However, there can be no assurance that we will be successful in collecting the funds due under our claims or in offsetting the subordinated note against our claims. Risks of Economic Trends Demand for our products is subject to changes in the United States economy in general and economic trends affecting our 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, we may experience changes in demand for our products as changes occur in the markets of our customers. 12 13 Dependence on Key Personnel We will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, our Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of our company could have a material adverse effect on our financial condition and results of operations. We do not maintain key-man life insurance on the life of Mr. Little or on the lives of our other executive officers. In addition, our ability to grow successfully will be dependent upon our ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect our financial condition and results of operations. Dependence on Supplier Relationships We have distribution rights for certain product lines and depend on these distribution rights for a substantial portion of our business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although we believe that we could obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with our company could result in a temporary disruption on our business and, in turn, could adversely affect results of operations and financial condition. See "Business--Suppliers". Risks Associated With Hazardous Materials Certain of our 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 we believe that we have 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, we could be held liable for any damages that result and any such liability could have a material adverse effect on our financial condition and results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 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 Commission on August 20, 1998) 3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.1 -- April 2001 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements Dated April 16, 2001 by and among Sepco Industries, Inc., Bayou Pump, Inc., American MRO, Inc. and Fleet Capital Corporation (b) Reports on Form 8-K. None. 13 14 SIGNATURES 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, thereunto duly authorized. DXP ENTERPRISES, INC. (Registrant) By: /s/ MAC McCONNELL ------------------------------------- Mac McConnell Senior Vice-President/Finance and Chief Financial Officer Dated: May 15, 2001 14 15 EXHIBIT INDEX EXHIBIT NUMBER 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 Commission on August 20, 1998) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.1 -- April 2001 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements Dated April 16, 2001 by and among Sepco Industries, Inc., Bayou Pump,Inc., American MRO, Inc. and Fleet Capital Corporation EX-10.1 2 h87438ex10-1.txt AMENDMENT TO SECOND AMENDED LOAN SECURITY AGRMT 1 EXHIBIT 10.1 APRIL 2001 AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND MODIFICATION TO OTHER AGREEMENTS THIS APRIL 2001 AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND MODIFICATION TO OTHER AGREEMENTS (this "Amendment") is made and entered into this 16th day of April, 2001, to be effective as of the respective date herein indicated, by and among SEPCO INDUSTRIES, INC., a Texas corporation ("Sepco"), BAYOU PUMPS, INC., a Texas corporation ("Bayou") and AMERICAN MRO, INC., a Nevada corporation ("American") (Sepco, Bayou and American being hereinafter individually and collectively referred to as "Borrower", as governed by the provisions of Section 1.4, Section 1.5, and Section 1.6 of the Loan Agreement, as hereinafter defined), and FLEET CAPITAL CORPORATION, a Rhode Island corporation ("Lender"), successor-in-interest by merger to Fleet Capital Corporation, a Connecticut corporation (Fleet Capital Corporation, a Connecticut corporation, having been, formerly known as Shawmut Capital Corporation, and having been the successor-in-interest by assignment to Barclays Business Credit, Inc., a Connecticut corporation). RECITALS A. Sepco and Barclays Business Credit, Inc., have entered into that certain Second Amended and Restated Loan and Security Agreement, dated as of April 1, 1994, as amended by that certain First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note, dated May, 1995, executed by Sepco and Fleet Capital Corporation, a Connecticut corporation (at that time known as Shawmut Capital Corporation), and as amended by that certain Second Amendment to Second Amended and Restated Loan and Security Agreement, entered into on April 3, 1996, executed by Sepco and Fleet Capital Corporation, a Connecticut corporation, and as amended by that certain Third Amendment to Second Amended and Restated Loan and Security Agreement, dated September 9, 1996, executed by Sepco, Bayou and Lender, and as amended by that certain Fourth Amendment to Second Amended and Restated Loan and Security Agreement, dated October 24, 1996, executed by Lender and Borrower, and as amended by that certain letter agreement dated November 4, 1996, entered into by Lender and Borrower, and as amended by that certain Fifth Amendment to Second Amended and Restated Loan and Security Agreement, dated June 2, 1997, executed by Lender and Borrower, and as amended by that certain Sixth Amendment to Second Amended and Restated Loan and Security Agreement and Amendment to Other Agreements executed by Borrower and Lender, and as amended by that certain Seventh Amendment to Second Amended and Restated Loan and Security Agreement, entered into on June 30, 1998, executed by Borrower and Lender, and as amended by that certain Eighth Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, entered into on October 20, 1998, executed by Borrower and Lender, and as amended by that certain letter agreement dated April 30, 1999, executed by Borrower and Lender, and as amended by that certain letter agreement, dated May 13, 1999, executed by Borrower and Lender, and as amended by that certain August 1999 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, entered into on August 13, 1999, executed by Borrower and Lender, and as amended by that certain August 2000 2 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, executed by Borrower and Lender, and as amended by that certain November 2000 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, entered into on November 13, 2000, executed by Borrower and Lender (as amended, the "Loan Agreement"). B. Lender, effective May 1, 1996, as successor-in-interest by merger to Fleet Capital Corporation, a Connecticut corporation, succeeded to, and today remains the present holder of, all right, title and interest of Fleet Capital Corporation, a Connecticut corporation, in the Loan Agreement and each of the Other Agreements. C. Borrower and Lender desire to further amend the Loan Agreement and the Other Agreements as hereinafter set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT ARTICLE I DEFINITIONS 1.01 Capitalized terms used in this Amendment are defined in the Loan Agreement, as amended hereby, unless otherwise stated. ARTICLE II AMENDMENTS AND MODIFICATION Effective as of the respective date herein indicated, the Loan Agreement and the Other Agreements are hereby respectively amended as follows: 2.01 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT; ADDITION OF NEW DEFINITION. Effective as of the date of execution of this Amendment, Section 1.1 of the Loan Agreement is hereby amended by adding the following new definition thereto, to be inserted in its proper alphabetical order: "APRIL 2001 AMENDMENT - that certain April 2001 Amendment to Second Amendment and Restated Loan and Security Agreement, executed by Lender and Borrower." 2.02 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT; AMENDMENT OF THE DEFINITION OF "BORROWING BASE". Effective as of the date of execution of this Amendment, the definition of "Borrowing Base" contained in Section 1.1 of the Loan Agreement is hereby amended by deleting therefrom the reference to the phrase "Thirty Million Eight Hundred Thousand Dollars ($30,800,000)", and substituting therefor the phrase "Twenty-Seven Million Eight Hundred Thousand Dollars ($27,800,000)." 3 2.03 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT; AMENDMENT AND RESTATEMENT OF THE DEFINITION OF "COMMITMENT". Effective as of the date of execution of this Amendment, the definition of "Commitment" contained in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "COMMITMENT" - shall mean Twenty-Seven Million Eight Hundred Thousand Dollars ($27,800,000)." 2.04 AMENDMENT TO DEFINITION OF "TERM NOTE" IN SECTION 1.1 OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, the definition of "Term Note" in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "TERM NOTE - that certain Secured Promissory Note, dated March 1, 1994, in the original principal amount of $1,329,277.37, executed by Sepco, and payable to the order of Lender, as renewed, extended, modified and restated from time to time, including, without limitation, as modified and extended by (i) the Third Amendment Modification Agreements (which Third Amendment Modification Agreements, among other things, modified the Term Note to reflect the increase of the Term Loan to $5,000,000), (ii) the Sixth Amendment (which Sixth Amendment, among other things, modified the Term Note to reflect the increase of the Term Loan to $9,887,000), (iii) the Seventh Amendment (which Seventh Amendment, among other things, modified the Term Note to reflect the increase of the Term Loan to $12,387,000), (iv) that certain May 1999 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements executed by Borrower (which document, among other things, modified the Term Note to extend the maturity of the Term Loan until April 1, 2000), (v) that certain August 1999 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, executed by Borrower and Lender (which document, among other things, modified the Term Note to extend the maturity of the Term Loan until April 1, 2001), (vi) that certain August 2000 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, executed by Lender and Borrower (which document, among other things, modified the Term Note to extend the maturity of the Term Loan until June 1, 2001), (vii) that certain November 2000 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, executed by Lender and Borrower which document, among other things, modified the Term Note to extend the maturity of the Term Loan until October 1, 2001), and (viii) that certain April 2001 Amendment to Second Amended and Restated Loan and Security Agreement and Modification to Other Agreements, executed by Lender and Borrower (which document, among other things, modified the Term Note to reflect the increase of the Term Loan on the date of such document from $8,547,730.06 to $9,002,730.06 and to extend the maturity of the Term Loan until April 1, 2002)." 2.05 AMENDMENT TO SECTION 2.2 OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, Section 2.2 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: 4 "2.2 TERM LOAN. The parties hereto agree that (i) effective as of April 1, 1994, Lender made to Sepco that certain term loan in the original principal amount of $1,329,277.37, evidenced by that certain Secured Promissory Note, dated April 1, 1994, in the original principal amount of $1,329,277.37, executed by Sepco and payable to the order of Lender, and (ii) as of the date of execution of the Third Amendment, the unpaid principal amount of such term loan was $82,231.76, and that in connection with the Third Amendment, at the request of Sepco, Lender converted $4,917,768.24 of the principal amount of Revolving Credit Loans made to Sepco by Lender outstanding on the date of execution of the Third Amendment to a term loan, which term loan was combined and consolidated with the outstanding principal amount of the term loan made to Sepco on April 1, 1994, such that the combined term loan was in the aggregate principal amount of $5,000,000, and (iii) as of the date of execution of the Sixth Amendment, the unpaid principal amount of such term loan was $4,887,000.00, and that in connection with the Sixth Amendment, at the request of Sepco, Lender made on the date of execution of the Sixth Amendment an additional $5,000,000 term loan to Sepco, the proceeds of which were used to replace working capital used by Sepco to acquire assets of Tri-Electric Supply, Ltd., and that such additional $5,000,000 term loan was combined and consolidated with the existing term loan, such that the combined and consolidated term loan was in the aggregate principal amount of $9,887,000.00, and (iv) as of the date of execution of the Seventh Amendment, the unpaid principal amount of such term loan was $9,887,000.00, and that in connection with the Seventh Amendment, at the request of Sepco, Lender on the date of execution of the Seventh Amendment provided to Sepco an additional $2,500,000 term loan, the proceeds of which were used to purchase the real property legally described on Exhibit A to the Seventh Amendment, and that such additional $2,500,000 term loan was combined and consolidated with the outstanding principal amount of the existing term loan such that the combined and consolidated term loan (after the full principal amount of the new $2,500,000 term loan was funded) was in the aggregate principal amount of $12,387,000. Sepco further agrees, represents and warrants that as of the date of execution of the April 2001 Amendment, the unpaid principal amount of such term loan is $8,547,730.06, and that there are no claims or offsets against, or defenses or counterclaims to, payment of such amount to Lender. Sepco further agrees, represents and warrants that it has requested that Lender make on the date of execution of the April 2001 Amendment, an additional $455,000 term loan to Sepco, and that such $455,000 term loan be combined and consolidated with the existing term loan, such that the combined and consolidated term loan shall be in the aggregate principal amount of $9,002,730.06 (such combined and consolidated term loan being referred to in this Agreement as the 'Term Loan'). Subject to the terms and conditions of this Agreement, Lender agrees to make the Term Loan to Sepco, and in connection therewith to advance on the date of execution of the April 2001 Amendment an additional $455,000.00. The Term Loan shall be repayable in accordance with the terms of the Term Note, and shall be secured by the Collateral. The parties hereto agree that the Term Loan represents a portion of the 'Sepco Obligations' referred to and defined in Section 1.5 of this Agreement. If Sepco sells any of its Equipment or real Property, or if any of the other Property owned by Sepco is taken by condemnation, Sepco shall pay to Lender, unless otherwise agreed to by Lender, as and when received by Sepco and as a mandatory prepayment of the Term Loan (or, at Lender's option, such of the other Obligations as Lender may elect), a sum equal to 5 the proceeds received by Sepco from such sale or condemnation, less any state or federal income tax directly attributable thereto." 2.06 AMENDMENT TO SECTION 2.2(A) OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, Section 2.2(A) of the Loan Agreement is amended by deleting therefrom the reference to the date "September 30, 2001" and substituting therefor the date "March 31, 2002." 2.07 AMENDMENT TO SECTION 3.3(A) OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, Section 3.3(A) of the Loan Agreement is hereby amended by deleting therefrom the reference to the date "October 1, 2001" and substituting therefor the date "April 1, 2002." 2.08 AMENDMENT TO SECTION 9.2(I) OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, Section 9.2(I) of the Loan Agreement is amended and restated to read in its entirety as follows: "(I) Permit Capital Expenditures made by DXP and its Subsidiaries (including, without limitation, by way of capitalized leases) to exceed in the aggregate $1,250,000 during the period beginning April 1, 2001 and continuing through March 31, 2002." 2.09 AMENDMENT TO SECTION 9.3(F) OF THE LOAN AGREEMENT. Effective as of the date of execution of this Amendment, Section 9.3(F) of the Loan Agreement, is amended and restated to read in its entirety as follows: "(F) Maintain, on a consolidated basis in accordance with GAAP, EBITDA of DXP and its Subsidiaries for the month indicated below in an amount not less than the amount indicated below:
Month Minimum EBITDA ----- -------------- March, 2001 $ 555,000 April, 2001 $ 460,000 May, 2001 $ 500,000 June, 2001 $ 480,000 July, 2001 $ 590,000 August, 2001 $ 640,000 September, 2001 $ 540,000 October, 2001 $ 825,000 November, 2001 $ 725,000 December, 2001 $ 695,000 January, 2002 $ 695,000 February, 2002 $ 695,000"
6 2.10 AMENDMENT TO PRINCIPAL BALANCE OF TERM NOTE. Effective as of the date of execution of this Amendment, Borrower and Lender hereby amend the Term Note such that (i) each reference in the Term Note to the dollar amount "$12,387,000.00" is deleted and substituted therefor is the dollar amount "$9,002,730.06," and (ii) the reference to the phrase "TWELVE MILLION THREE HUNDRED EIGHTY-SEVEN THOUSAND AND NO/100 DOLLARS" is deleted and substituted therefor is the phrase "NINE MILLION TWO THOUSAND SEVEN HUNDRED THIRTY AND 06/100 DOLLARS". 2.11 AMENDMENT TO PAYMENT TERMS IN THE TERM NOTE. Borrower and Lender hereby agree that effective as of the date of execution of this Amendment, the last paragraph on page two of the Term Note is amended and restated to read in its entirety as follows: "The principal amount of and accrued interest on this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) interest shall be due and payable monthly, in arrears, on the first day of each month, continuing until such time as the full principal balance, together with all other amounts owing hereunder, shall have been paid in full; (b) the principal shall be due and payable in monthly installments of ONE HUNDRED THIRTY-THREE THOUSAND ONE HUNDRED TWENTY AND NO/100 DOLLARS ($133,120.00) and each shall be due and payable on May 1, 2001, and on the first day of each month thereafter to and including the first day of March, 2002; and (c) the entire unpaid principal balance hereof, together with any and all other amounts due hereunder, shall be due and payable on April 1, 2002." 2.12 EXTENSION OF MATURITY OF ACQUISITION TERM LOANS NOTE. Effective as of the date of execution of this Amendment, the maturity of the Acquisition Term Loans Note is hereby renewed and extended until April 1, 2002. 2.13 AMENDMENT TO PAYMENT TERMS IN THE ACQUISITION TERM LOANS NOTE. Borrower and Lender hereby agree that effective as of the date of execution of this Amendment, the last paragraph on page two of the Acquisition Term Loans Note is amended as follows: (a) The reference to the phrase "first day of September, 2001" is hereby deleted and substituted therefor is the phrase "first day of March, 2002." 7 (b) The reference to the date "October 1, 2001" is hereby deleted and substituted therefor is the date "April 1, 2002." ARTICLE III LIMITED WAIVER 3.01 Borrower has informed Lender (i) that Borrower violated several times during calendar year 2000 and for the months of January, 2001 and February, 2001 the financial covenant contained in Section 9.3(D) of the Loan Agreement, and (ii) that Borrower violated for the month of January, 2001 and for the month of February, 2001, the financial covenant contained in Section 9.3(F) of the Loan Agreement, and (iii) that an Event of Default currently exists pursuant to Section 11.1(S) of the Loan Agreement due to the present existence of "Events of Default," as such term is defined in that certain Loan and Security Agreement, dated June 16, 1997, executed by Lender and DXP Acquisition, Inc., d/b/a Strategic Acquisition, Inc., and Borrower has requested that Lender waive (i) each such violation of Section 9.3(D) of the Loan Agreement which occurred during calendar year 2000 and for the months of January, 2001 and February, 2001, and (ii) each such violation of Section 9.3(F) of the Loan Agreement for the months of January, 2001 and February, 2001, and (iii) such Event of Default. Subject to the satisfaction of the conditions precedent set forth in Section 4.01 of this Amendment and to the other terms, conditions and provisions of this Amendment, the Lender hereby waives (i) each of the above-described violations of Section 9.3(D) of the Loan Agreement which occurred during calendar year 2000 and for the months of January, 2001 and February, 2001, and (ii) each of the above-described violations of Section 9.3(F) of the Loan Agreement for the months of January, 2001 and February, 2001, and (iii) the above-described Event of Default; provided, however, that the waiver described in this Section 3.01 of this Amendment is strictly limited to the Sections of the Loan Agreement and to the Event of Default described above and to the specific occurrences described above. Except as otherwise specifically provided for in this Amendment, nothing contained herein shall be construed as a waiver by Lender of any covenant or provision of or Event of Default under the Loan Agreement, the Other Agreements, this Amendment or of any other contract or instrument between Borrower and Lender, and the failure of Lender at any time or times hereafter to require strict performance by Borrower of any provision thereof shall not waive, affect or diminish any right of Lender to thereafter demand strict compliance therewith. Lender hereby reserves all rights granted under the Loan Agreement, the Other Agreement, this Amendment and any other contract or instrument between Borrower and Lender. ARTICLE IV CONDITIONS PRECEDENT 4.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent in a manner satisfactory to Lender, unless specifically waived in writing by Lender: (a) Lender shall have received each of the following, each in form and substance satisfactory to Lender, in its sole discretion, and, where applicable, each duly executed by each party thereto, other than Lender: (i) This Amendment, duly executed by Borrower, together with the relevant Consent, Ratification, and Amendment, respectively duly executed by David R. Little, individually, David C. Vinson, Trustee for Kacey Joyce Little, Nicholas 8 David Little and Andrea Rae Little 1988 Trusts, DXP Enterprises, Inc. ("Parent"), DXP Acquisition, Inc., d/b/a Strategic Acquisition, Inc. and Pelican State Supply Company, Inc.; (ii) Such extensions and modifications to existing real estate lien documentation as shall be required by Lender, in its sole discretion, duly executed by the relevant fee title owner of the real property covered by such real estate lien documentation; and (iii) All other documents Lender may request with respect to any matter relevant to this Amendment or the transactions contemplated hereby; (b) Evidence satisfactory to Lender, in its sole discretion, that the existing loan by Lender to David R. Little has been paid off in full; (c) The representations and warranties contained herein and in the Loan Agreement and the Other Agreements, as each is amended hereby, shall be true and correct as of the date hereof, as if made on the date hereof; (d) No Default or Event of Default shall have occurred and be continuing, unless such Default or Event of Default has been otherwise specifically waived in writing by Lender; and (e) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel. ARTICLE V RATIFICATIONS, REPRESENTATIONS AND WARRANTIES; FEE 5.01 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the Other Agreements, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Loan Agreement and the Other Agreements are ratified and confirmed and shall continue in full force and effect. Each Borrower and Lender agree that the Loan Agreement and the Other Agreements, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. 5.02 REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and warrants to Lender that (a) the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of such Borrower and will not violate the Articles of Incorporation or Bylaws of such Borrower; (b) attached hereto as Annex A is a true, correct and complete copy of presently effective resolutions of each Borrower's Board of Directors authorizing the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith, certified by the Assistant Secretary of Borrower; (c) the representations and warranties contained in the Loan Agreement, as amended hereby, and any Other Agreement are true and correct on and as of the date hereof and on and as of the date of execution hereof as though made on and as of each such date; (d) no Default or Event of Default under the 9 Loan Agreement, as amended hereby, has occurred and is continuing, unless such Default or Event of Default has been specifically waived in writing by Lender; (e) each Borrower is in full compliance with all covenants and agreements contained in the Loan Agreement and the Other Agreements, as amended hereby; (f) Sepco has not amended its Articles of Incorporation or its Bylaws since the date of the Loan Agreement, (g) Bayou has not amended its Articles of Incorporation or its Bylaws since the date of incorporation of Bayou and (h) American has not amended its Articles of Incorporation or its Bylaws since the date of incorporation of American. ARTICLE VI MISCELLANEOUS PROVISIONS 6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in the Loan Agreement or any Other Agreement, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the Other Agreements, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 6.02 REFERENCE TO LOAN AGREEMENT. Each of the Loan Agreement and the Other Agreements, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement, as amended hereby, are hereby amended so that any reference in the Loan Agreement and such Other Agreements to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. 6.03 EXPENSES OF LENDER. As provided in the Loan Agreement, each Borrower agrees to pay on demand all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Amendment and the Other Agreements executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Lender's legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Loan Agreement, as amended hereby, or any Other Agreements, including, without, limitation, the costs and fees of Lender's legal counsel. 6.04 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of Lender and each Borrower and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. 6.06 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. 10 6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant or condition by any Borrower shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty. 6.08 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 6.10 FINAL AGREEMENT. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY EACH BORROWER AND LENDER. 6.11 RELEASE. EACH BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. EACH BORROWER HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH ANY BORROWER MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT. 11 IN WITNESS WHEREOF, this Amendment has been executed and is effective as of the date first above-written. "BORROWER" -------- SEPCO INDUSTRIES, INC. By: /s/ Mac McConnell ------------------ Name Mac McConnell Title: Vice President BAYOU PUMPS, INC. By: /s/ Mac McConnell ------------------ Name Mac McConnell Title: Vice President AMERICAN MRO, INC. By: /s/ Mac McConnell ------------------ Name Mac McConnell Title: Vice President "LENDER" ------ FLEET CAPITAL CORPORATION By: /s/ H Michael Wills -------------------- Name H Michael Wills Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----