-----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, Lnx0UqFhAGDg3tk7lxrhwHsi3ybcEgAMCi5WDFG8pZ/iW6OvExMDLXaMtpeEPj0C MBvF7QWZMTy5xi0KyKBnBA== 0000950129-97-002947.txt : 19970728 0000950129-97-002947.hdr.sgml : 19970728 ACCESSION NUMBER: 0000950129-97-002947 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970602 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970725 SROS: NASD 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21513 FILM NUMBER: 97645826 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 8-K/A 1 AMENDMENT TO 8-K FOR DXP ENTERPRISES, INC.06/02/97 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM 8-K ON FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (Date of earliest event reported): JUNE 2, 1997 DXP ENTERPRISES, INC. (Exact name of registrant as specified in charter) TEXAS 0-21513 76-0509661 (State of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.) 580 WESTLAKE PARK BOULEVARD, SUITE 1100 HOUSTON, TEXAS 77079 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 531-4214 ================================================================================ 2 EXPLANATION As discussed in the Current Report on Form 8-K dated June 2, 1997 (the "Current Report") of DXP Enterprises, Inc., a Texas corporation (the "Registrant"), as filed with the Securities and Exchange Commission (the "Commission") on June 17, 1997, on June 2, 1997, a wholly-owned subsidiary of the Registrant acquired substantially all of the assets ("the Strategic Acquisition") of Strategic Supply, Inc., a Delaware corporation ("Strategic"), pursuant to an Asset Purchase Agreement dated May 27, 1997 (the "Agreement"), among Strategic, Coulson Technologies, Inc., a Delaware corporation, Strategic Distribution, Inc., a Delaware corporation, Strategic Acquisition, Inc., a Nevada corporation and wholly-owned subsidiary of the Registrant, and the Registrant. The purchase price, which is subject to adjustment, consisted of approximately $4.1 million in existing cash, assumption of approximately $4.7 million of trade payables and other accrued expenses, $2.8 million in promissory notes payable to Strategic and earn-out payments based on the earnings before interest and taxes of Strategic to be paid over a period of approximately six years, which earn-out payments shall not exceed $3,500,000. Item 7 of the Current Report is hereby amended and restated in its entirety as follows: ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Strategic. Index to Consolidated Financial Statements
Page No. -------- Year Ended December 31, 1996: Independent Auditors' Report..................................4 Consolidated Balance Sheets...................................5 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)......................6 Consolidated Statements of Cash Flows.........................7 Notes to Consolidated Financial Statements....................8 Three Months Ended March 31, 1997: Condensed Consolidated Balance Sheets........................15 Condensed Consolidated Statements of Earnings................16 Condensed Consolidated Statements of Cash Flows..............17 Notes to Condensed Consolidated Financial Statements.........18
Page 2 3 (b) Pro Forma Financial Information. Index to Pro Forma Financial Information
Page No. -------- Pro Forma Combined Balance Sheet as of March 31, 1997........21 Pro Forma Combined Statement of Operations...................22 Pro Forma Adjustments........................................24
Page 3 4 Independent Auditors' Report The Board of Directors Strategic Supply, Inc.: We have audited the accompanying consolidated balance sheets of Strategic Supply, Inc., a wholly-owned subsidiary of Strategic Distribution, Inc. (Parent), and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations and retained earnings (accumulated deficit) and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Strategic Supply, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As described in note 2, on May 27, 1997, the Parent entered into an agreement to sell the Company. As a result of that transaction, the Company has written off its goodwill and certain other intangible assets as of December 31, 1996. KPMG Peat Marwick, LLP May 27, 1997 Page 4 5 Strategic Supply, Inc. and Subsidiary Consolidated Balance Sheets
December 31, --------------------------- Assets 1995 1996 ------------ ------------ Current assets: Cash and cash equivalents $ 106,141 $ 0 Accounts receivable, net 6,947,908 6,385,989 Inventories 7,877,020 9,548,536 Prepaid expenses and other current assets 226,614 30,190 ------------ ------------ Total current assets 15,157,683 15,964,715 Property and equipment, net 2,300,739 2,401,595 Excess of cost over fair value of assets acquired, net 2,448,164 0 Deferred tax asset 336,000 336,000 Other assets 727,995 66,240 ------------ ------------ Total assets $ 20,970,581 $ 18,768,550 ============ ============ Liabilities and Stockholder's Equity Current liabilities: Accounts payable and accrued expenses $ 6,261,349 $ 3,824,606 Current portion of long-term debt 138,659 339,470 Due to Parent 7,451,445 13,593,445 ------------ ------------ Total current liabilities 13,851,453 17,757,521 Long-term debt 849,671 510,204 ------------ ------------ Total liabilities 14,701,124 18,267,725 ------------ ------------ Stockholder's Equity: Common stock, par value $.01 per share, Authorized: 10,000 shares; issued and outstanding: 1,000 shares 10 10 Additional paid-in capital 2,399,990 2,399,990 Contribution to capital 896,000 214,000 Retained earnings (accumulated deficit) 2,973,457 (2,113,175) ------------ ------------ Total stockholder's equity 6,269,457 500,825 ------------ ------------ Total liabilities and stockholder's equity $ 20,970,581 $ 18,768,550 ============ ============
See notes to consolidated financial statements Page 5 6 Strategic Supply, Inc. and Subsidiary Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)
Years ended December 31, ------------------------------------------ 1994 1995 1996 ------------ ------------ ------------ Revenues $ 46,366,524 $ 55,972,220 $ 50,972,098 Cost of sales 34,032,678 41,742,240 38,906,766 ------------ ------------ ------------ Gross profit 12,333,846 14,229,980 12,065,332 Selling, general and administrative expenses 10,705,017 12,774,700 13,989,380 Restructuring charge 0 0 877,620 Special charges 0 0 2,836,363 ------------ ------------ ------------ Operating income (loss) 1,628,829 1,455,280 (5,638,031) Interest expense 570,151 120,483 130,601 ------------ ------------ ------------ Income (loss) before income taxes 1,058,678 1,334,797 (5,768,632) Income tax expense (benefit) 465,000 614,000 (682,000) ------------ ------------ ------------ Net income (loss) 593,678 720,797 (5,086,632) Retained earnings, beginning of year 1,658,982 2,252,660 2,973,457 ------------ ------------ ------------ Retained earnings (accumulated deficit), end of year $ 2,252,660 $ 2,973,457 $ (2,113,175) ============ ============ ============
See notes to consolidated financial statements Page 6 7 Strategic Supply, Inc. and Subsidiary Consolidated Statements of Cash Flows
Years ended December 31, ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) $ 593,678 $ 720,797 $(5,086,632) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 532,473 656,736 652,873 Deferred taxes 163,000 20,000 0 Tax contribution (charge) from Parent 302,000 574,000 (682,000) Restructuring charge 0 0 877,620 Special charges 0 0 2,836,363 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (1,429,378) (1,598,454) 561,919 Inventories (1,030,776) (1,998) (1,671,516) Prepaid expenses and other current assets 18,214 (72,995) 196,424 Accounts payable and accrued expenses 337,478 35,019 (2,854,138) Other, net (55,190) 23,938 15,079 ----------- ----------- ----------- Net cash provided by (used in) operating activities (568,501) 357,043 (5,154,008) ----------- ----------- ----------- Cash flows used in investing activities: Acquisition of businesses, net of cash acquired (2,040,000) (175,000) 0 Additions of property and equipment (338,102) (642,461) (955,477) ----------- ----------- ----------- Net cash used in investing activities (2,378,102) (817,461) (955,477) ----------- ----------- ----------- Cash flows from financing activities: Repayment of note payable (5,201,211) 0 0 Borrowings from Parent 8,498,018 498,024 6,142,000 Repayment of long-term obligations (408,108) (191,832) (138,656) ----------- ----------- ----------- Net cash provided by financing activities 2,888,699 306,192 6,003,344 ----------- ----------- ----------- Decrease in cash and cash equivalents (57,904) (154,226) (106,141) Cash and cash equivalents, at beginning of the year 318,271 260,367 106,141 ----------- ----------- ----------- Cash and cash equivalents, at end of the year $ 260,367 $ 106,141 $ 0 =========== =========== =========== Supplemental cash flow information: Taxes paid $ 12,223 $ 78,288 $ 47,766 Interest paid 567,748 92,687 80,339
See notes to consolidated financial statements Page 7 8 STRATEGIC SUPPLY, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Description of Business The Company is a leading provider of industrial supply services to commercial and industrial customers in the western United States. On May 24, 1996, the Company (formerly SafetyMaster Corporation) and Lewis Supply (Delaware), Inc. ("Lewis") were merged (The "Merger"). The Company was the surviving corporation of the Merger. The related companies were wholly-owned subsidiaries of Strategic Distribution, Inc. (the "Parent"). Accordingly, the Merger has been accounted for on an as if pooling basis in all periods presented. The Company is a wholly-owned subsidiary of the Parent. On May 27, 1997, the Parent entered into an agreement to sell the Company. The purchase price was net tangible assets, as defined therein. (2) Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Coulson Technologies, Inc. All significant intercompany accounts and transactions have been eliminated. The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Disclosures About Fair Value of Financial Instruments The carrying amount of the Company's financial instruments approximate fair value due to their short maturity and variable interest rate feature. Inventories Inventories of finished goods are stated at the lower of cost (first-in, first-out basis) or market. Page 8 9 Property and Equipment Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining life of the asset or the lease term. Maintenance and repairs are charged to expense. Major renewals and improvements are capitalized and depreciated over the remaining useful life of the asset. Estimated useful lives are as follows: Building 20 years Warehouse and office equipment 5-12 years Leasehold improvements 5-14 years Transportation equipment 4-8 years
Intangible Assets Excess of cost over fair value of net assets acquired ("Goodwill") is net of accumulated amortization of $377,000 at December 31, 1995. On May 27, 1997, the Parent entered into an agreement to sell the Company. The purchase price was net tangible assets, as defined therein, plus an earn-out note, payable only upon achievement of certain profitability levels over the next five years. Due to the uncertainty of achieving these profitability levels, the Company has written off $2,836,363 of Goodwill and other intangible assets. This write-off has been recorded in "Special Charges" in the accompanying Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit). Income Taxes The Parent and the Company file consolidated federal and state income tax returns. Income taxes in these financial statements have been calculated as if the Company had filed separate tax returns. Accordingly, in some instances, the amounts recorded may differ from those included in the consolidated tax returns. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. (3) Accounts Receivable Accounts receivable is net of an allowance for doubtful accounts of $71,000 and $171,000 at December 31, 1995 and 1996, respectively. Page 9 10 (4) Property and Equipment
December 31, ----------------------- 1995 1996 ---------- ---------- Land $ 240,000 $ 240,000 Building and leasehold improvements 921,328 811,304 Warehouse and office equipment 2,067,646 2,067,416 Transportation equipment 249,339 334,947 ---------- ---------- 3,478,313 3,453,667 Less: accumulated depreciation and amortization 1,177,574 1,052,072 ---------- ---------- $2,300,739 $2,401,595 ========== ==========
(5) Related - Party Transactions The Company has received advances from the Parent. The Company's results include an allocation from the Parent for interest expense. The Parent's interest expense is allocated based upon the pro rata share of intercompany borrowings. The allocated interest expense was $-0-, $20,000 and $49,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Included in selling, general and administrative expenses are certain allocated expenses of the Parent of approximately $71,000, $215,000 and $440,000 for the years ended December 31, 1994, 1995 and 1996, respectively. These charges are to cover expenses incurred by the Parent to provide primarily accounting and legal services to the Company. Management believes the allocations are reasonable. Because of the relationship between the Company and its Parent, the amount of these transactions reflected in the accompanying financial statements may not have been the same as they would have been among unaffiliated parties. (6) Accounts Payable and Accrued Expenses
December 31, ---------------------------- 1995 1996 ---------- ---------- Accounts payable $4,896,052 $2,367,550 Accrued expenses 770,470 1,093,564 Payroll and related expenses 594,827 363,492 ---------- ---------- $6,261,349 $3,824,606 ========== ==========
(7) Long-Term Debt Long-term debt consists of several loans with a weighted average interest rates of 7.5% and 7.6% at December 31, 1995 and 1996, respectively. Principal payments due on long-term obligations during each of the next four years are: 1997: $339,470; 1998: $29,950; 1999: $ 18,461 and 2000: $461,793. Page 10 11 (8) Acquisition On June 16, 1994, the Company acquired certain assets of the Industrial Supplies Division of Lufkin Industries, Inc. ("the Lufkin Division"). The purchase price consisted of: (i) $2,040,000 in cash and (ii) a mortgage note in the amount of $600,000. The source of the cash portion of the purchase price was borrowings under a revolving bank facility. The method of accounting for this acquisition was the purchase accounting method. The results of operations of the Lufkin Division are included in the Company's statements of operations from the date of acquisition. (9) Restructuring Charge In connection with the Merger, the Company recorded a restructuring charge aggregating $877,620 for employee termination benefits, asset write-offs and lease payments. The termination benefits were paid and asset write-offs were recorded in 1996, and lease payments will be made in accordance with their original terms. As of December 31, 1996, the remaining restructuring liability was approximately $131,000, which represented unpaid leases. In addition, the Company incurred approximately $485,000 of one-time expenses associated with the Merger and branch closings, which amount has been included in selling, general and administrative expenses. (10) Retirement Plan The Company has a qualified defined contribution plan (the "Retirement Savings Plan") for employees who meet certain eligibility requirements. Contributions to the Retirement Savings Plan are at the discretion of the Board of Directors and are limited to the amount deductible for Federal income tax purposes. The expense for the Retirement Savings Plan was $23,848, $31,671 and $24,580 for the years ended December 31, 1994, 1995 and 1996, respectively. (11) Income Taxes The income tax expense(benefit) in the Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) is as follows:
1994 1995 1996 -------- --------- --------- Current Federal $234,000 $ 460,000 $(682,000) State 68,000 134,000 -- Deferred Federal 138,000 16,000 -- State 25,000 4,000 -- -------- --------- --------- $465,000 $ 614,000 $(682,000) ======== ========= =========
A reconciliation of the expected Federal income tax expense at the statutory rate to the Company's income tax expense follows: Page 11 12
1994 1995 1996 ----------- ----------- ----------- Expected tax expense $ 360,000 $ 454,000 $(1,961,000) Increase (reduction) in tax expense resulting from: State taxes 61,000 91,000 Valuation allowance, federal 260,000 Goodwill and other special charges 25,000 36,000 1,006,000 Other 19,000 33,000 13,000 ----------- ----------- ----------- $ 465,000 $ 614,000 $ (682,000) =========== =========== ===========
In 1994, 1995 and 1996, the Parent had no federal or state consolidated tax liabilities allocable to the Company, therefore no taxes are due to or from the Parent under a tax sharing provision. Accordingly, the 1994 and 1995 current expenses of $302,000 and $574,000, respectively, have been reported as contribution to capital in 1994 and 1995 and the 1996 tax benefit of $682,000 has been reported as a reduction to contributed capital. Page 12 13 The components of the net deferred tax asset were as follows:
1995 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforward (expires during the period ending 2011) $ -- $ 122,000 Accounts receivable 27,000 60,000 Inventories 362,000 354,000 Accrued expenses 156,000 245,000 Vacation accrual 57,000 99,000 Other 11,000 34,000 Valuation allowances -- (280,000) ----------- ----------- Total deferred tax asset 613,000 634,000 ----------- ----------- Deferred tax liabilities: Property and equipment 141,000 153,000 Other assets 123,000 132,000 Goodwill 13,000 13,000 ----------- ----------- Total deferred tax liability 277,000 298,000 =========== =========== Net deferred tax asset $ 336,000 $ 336,000 =========== ===========
At December 31, 1995 and 1996, valuation allowances were established, when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. (12) Stockholder's Equity The Parent's credit facility is collateralized by substantially all of the Company's asset and a pledge of all of the Company's capital stock. (13) Lease Commitments The Company leases equipment and real estate for initial terms of five to eight years. The minimum future rental payments for operating leases with initial noncancelable lease terms in excess of one year as of December 31, 1996 are as follows: 1997 $ 462,000 1998 363,000 1999 225,000 2000 137,000 2001 98,000 Thereafter 65,000
Rental expense for the years ended December 31, 1994, 1995 and 1996 was $576,509, $644,765, and $639,840, respectively. Page 13 14 (14) Supplemental Cash Flow Information In conjunction with acquisition of the Lufkin Division in 1994, liabilities assumed and refinanced were: Fair value of assets acquired $3,539,810 Net cash 2,040,000 ---------- Liabilities assumed $1,499,810 ==========
In 1995, there was a $175,000 adjustment to the purchase price in connection with the acquisition of Lewis. Page 14 15 STRATEGIC SUPPLY, INC. AND SUBSIDIARY (CONDENSED CONSOLIDATED BALANCE SHEETS) (In Thousands)
March 31, December 31, 1997 1996 ----------- ----------- (Unaudited) Assets Current assets: Cash $ 131 $ -- Trade accounts receivable, net of allowance for doubtful 6,121 6,386 accounts of $301,000 and $210,000, respectively Inventory 9,300 9,549 Prepaid expenses and other current assets 79 30 Deferred income taxes -- -- ----------- ----------- Total current assets 15,631 15,965 Property and equipment, net 2,328 2,401 Other assets 404 402 ----------- ----------- Total assets $ 18,363 $ 18,768 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable and accrued expenses $ 4,334 $ 3,824 Employee compensation -- -- Other accrued liabilities -- -- Current portion of long-term debt 392 339 Due to parent 12,794 13,593 ----------- ----------- Total current liabilities 17,520 17,756 Long-term debt, less current portion 450 510 Deferred compensation -- -- Deferred income taxes -- -- Equity subject to redemption Series A Preferred Stock--1,496 shares -- -- Series B Convertible Preferred Stock -- 4,500 shares -- -- Stockholders' Equity: Common stock, par value $.01 per share, 10,000 shares 1 1 authorized, 1,000 shares issued and outstanding Contribution to capital 214 214 Paid-in capital 2,400 2,400 Retained earnings (2,222) (2,113) ----------- ----------- Total stockholders' equity 393 502 Total liabilities and stockholders' equity $ 18,363 $ 18,768 =========== ===========
See notes to condensed consolidated financial statements. Page 15 16 STRATEGIC SUPPLY, INC. AND SUBSIDIARY (CONDENSED CONSOLIDATED STATEMENTS OF INCOME) (Unaudited) (In Thousands, except Per Share Amounts)
Three Months Ended March 31, ---------------------------- 1997 1996 ----------- ------------ Sales $ 12,372 $ 14,139 Cost of sales 9,281 10,538 ----------- ----------- Gross Profit 3,091 3,601 Selling, general and administrative expenses 3,163 3,431 ----------- ----------- Operating income (72) 170 Interest expense (22) (266) ----------- ----------- Income before income taxes (94) (96) Provision for income taxes 15 -- ----------- ----------- Net income $ (109) $ (96) =========== ===========
See notes to condensed consolidated financial statements. Page 16 17 STRATEGIC SUPPLY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Three Months Ended March 31, ---------------------- 1997 1996 --------- --------- OPERATING ACTIVITIES Net cash provided by operating activities $ 220 $ 431 INVESTING ACTIVITIES Purchase of property and equipment (36) (110) --------- --------- Net cash used in investing activities (36) (110) FINANCING ACTIVITIES Repayment to parent (46) (290) Repayment of long-term obligations (7) (12) --------- --------- Net cash used in financing activities (53) (302) --------- --------- INCREASE(DECREASE) IN CASH 131 19 CASH AT BEGINNING OF PERIOD -- 106 --------- --------- CASH AT END OF PERIOD $ 131 $ 125 ========= =========
See notes to condensed consolidated financial statements Page 17 18 STRATEGIC SUPPLY, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements March 31, 1997 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. Strategic Supply, Inc., a Delaware corporation (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 were part of the financial statements of Strategic Distribution, Inc., a reporting company (the "Parent"), and should be read in conjunction with the Parent's audited consolidated financial statements included in the Parent's Annual Report on Form 10-K for the year ended December 31, 1996. Note 2: The Company The Company is a leading provider of industrial supply services to commercial and industrial customers in the western United States. On May 24, 1996, the Company (formerly SafetyMaster Corporation) and Lewis Supply (Delaware), Inc. ("Lewis") were merged (the "Merger"). The Company was the surviving corporation of the Merger. The related companies were wholly-owned subsidiaries of the Parent. Accordingly, the Merger has been accounted for on an as if pooling basis in all periods presented. The Company was a wholly owned subsidiary of the Parent until May 30, 1997 when substantially all of the assets and operations of the Company were acquired by DXP Enterprises, Inc., a Texas corporation (the "Registrant"). Note 3: Inventory Inventories of finished goods are stated at the lower of cost (first-in, first-put basis) or market. Note 4: Long-Term Debt Long-term debt consists of several loans with a weighted average interest rates of 7.5% at March 31, 1997 and December 31, 1996. The maturity of long term obligations during the next four years are: 1997: $339,470; 1998: $29,950; 1999: $18,461 and 2000; $461,793. Note 5: Subsequent Events On June 2, 1997, substantially all of the assets of the Company were acquired by a wholly owned subsidiary of the Registrant. The acquisition was pursuant to an Asset Purchase Agreement dated May 27, 1997, among the Company, Coulson Technologies, Inc., a Delaware corporation, the Parent, Strategic Acquisition, Inc. a Nevada corporation and wholly owned subsidiary of the Registrant, and the Registrant. The purchase price, which is subject to adjustment, consisted of approximately $4.1 million Page 18 19 in existing cash, assumption of approximately $4.7 million of trade payables and other accrued expenses, $2.8 million in promissory notes payable to the Company and earn-out payments based on the earnings before interest and taxes of the Company to be paid over a period of approximately six years, which earn-out payments shall not exceed $3.5 million. Page 19 20 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro forma combined balance sheets as of March 31, 1997 and unaudited pro forma combined statements of earnings for the three months ended March 31, 1997 and the year ended December 31, 1996 give effect to the acquisition by a wholly-owned subsidiary of the Registrant of substantially all of the assets of Strategic on June 2, 1997. The unaudited pro forma combined statements of earnings assume all such transactions occurred at the beginning of the periods presented. The unaudited pro forma combined balance sheets assume all such transactions occurred at the end of the periods presented. The unaudited pro forma combined financial statements may not be indicative of the results that would have occurred if the combination had been in effect on the dates indicated or which may occur in the future. The unaudited pro forma condensed combined financial statements should be read in conjunction with the financial statements of Strategic, which are included elsewhere in this Current Report. Page 20 21 DXP ENTERPRISES, INC. PRO FORMA COMBINED BALANCE SHEET (IN THOUSANDS)
March 31, 1997 ------------------------------------------------------------- Strategic DXP Supply Pro Forma Pro Forma Historical Historical Adjustments Combined ------------------------------------------------------------- ASSETS Current Assets: Cash $ 979 $ 131 $ (131)(1) $ 979 Trade accounts receivable, net 19,899 6,121 (6,121)(1) 19,899 Inventories 16,665 9,300 -- 25,965 Prepaid Expenses and other current assets 266 79 -- 345 Deferred income taxes 569 -- -- 569 ----------- ----------- ----------- ----------- Total current assets 38,378 15,631 (6,252) 47,757 Property, plant and equipment, net 7,792 2,328 -- 10,120 Other assets 953 404 (336)(1) 1,021 ----------- ----------- ----------- ----------- Total assets $ 47,123 $ 18,363 $ (6,588) $ 58,898 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 8,944 $ 4,334 $ -- $ 13,278 Employee compensation 884 -- -- 884 Other accrued liabilities 965 -- -- 965 Current portion of long-term debt 623 81 (52)(2) 652 Current portion of subordinated debt -- -- 125 (2) 125 Due to parent -- 12,794 (12,794)(1) -- ----------- ----------- ----------- ----------- Total current liabilities 11,416 17,207 (12,721) 15,904 Suspense -- -- 6,598 (1) -- -- -- (6,598)(2) -- Long term debt, less current portion 22,792 762 4,150 (2) 27,704 Subordinated debt -- -- 2,375 (2) 2,375 Deferred compensation 739 -- -- 739 Deferred income taxes 364 -- -- 364 ----------- ----------- ----------- ----------- Total liabilities 35,311 17,971 (6,196) 47,086 Equity Subject to Redemption: Series A Preferred Stock 150 -- -- 150 Series B Convertible Preferred Stock 450 -- -- 450 Shareholders' Equity: Series A Preferred Stock 2 -- -- 2 Series B Preferred Stock 15 -- -- 15 Common Stock 160 1 (1)(1) 160 Paid-in capital 288 2,614 (2,614)(1) 288 Retained earnings 10,747 (2,222) 2,222 (1) 10,747 ----------- ----------- ----------- ----------- Total shareholders' equity 11,212 393 (393) 11,212 ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity $ 47,123 $ 18,363 $ (6,588) $ 58,898 =========== =========== =========== ===========
Page 21 22 DXP Enterprises, Inc. Pro Forma Combined Statement of Operations (in thousands, except for per share data)
Three Months Ended March 31, 1997 ----------------------------------------------------------- Strategic DXP Supply Pro Forma Pro Forma Historical Historical Adjustments Combined ----------- ----------- ----------- ----------- Revenues $ 30,129 $ 12,372 $ -- $ 42,501 Costs and Expenses: Cost of Sales 21,756 9,281 -- 31,037 Selling, general and administrative 7,043 3,163 (414)(3) 9,792 ----------- ----------- ----------- ----------- Operating income (loss) 1,330 (72) 414 1,672 Other income (expense) Other income 429 -- -- 429 Interest expense (539) (22) (121)(4) (682) ----------- ----------- ----------- ----------- Earnings (loss) before income taxes 1,220 (94) 293 1,419 Provision for income taxes 429 15 110 (5) 554 ----------- ----------- ----------- ----------- Net income 791 (109) 183 865 Preferred stock dividend 38 -- -- 38 ----------- ----------- ----------- ----------- Net income attributable to common shareholders $ 753 $ (109) $ 183 $ 827 =========== =========== =========== =========== Net income per share $ 0.08 $ 0.08 =========== =========== Weighted average shares outstanding 9,892 9,892 =========== ===========
Page 22 23 DXP Enterprises, Inc. Pro Forma Combined Statement of Operations (in thousands, except for per share data)
Year Ended December 31, 1996 ----------------------------------------------------------- Strategic DXP Supply Pro Forma Pro Forma Historical Historical Adjustments Combined ----------------------------------------------------------- Revenues $ 125,208 $ 50,972 $ -- $ 176,180 Costs and Expenses: Cost of Sales 93,091 38,907 -- 131,998 Selling, general and administrative 29,332 13,989 (1,643)(6) 41,678 Restructuring charge -- 878 (878)(7) 0 Special charges -- 2,836 (2,836)(8) 0 ----------- ----------- ----------- ----------- Operating income (loss) 2,785 (5,638) 5,357 2,504 Other income (expense) Other income 951 -- -- 951 Interest expense (2,101) (131) (439)(4) (2,671) ----------- ----------- ----------- ----------- Earnings (loss) before income taxes 1,635 (5,769) 4,918 784 Provision for income taxes 745 (682) 204 (5) 267 ----------- ----------- ----------- ----------- Net income 890 (5,087) 4,714 517 Preferred stock dividend 119 -- -- 119 ----------- ----------- ----------- ----------- Net income attributable to common shareholders $ 771 $ (5,087) $ 4,714 $ 398 =========== =========== =========== =========== Net income per share $ 0.09 $ 0.05 =========== =========== Weighted average shares outstanding 8,621 8,621 =========== ===========
Page 23 24 Pro Forma Adjustments 1. To remove the assets, liabilities and equity not included in the purchase by the Registrant and place in suspense the net assets purchased by the Registrant pursuant to the Agreement. 2. To record the debt incurred by the Registrant for the acquisition of the net assets of the Company. 3. To reduce selling, general and administrative expenses for projected reduction of expenses as a result of the acquisition. Compensation and related expenses for those employees not hired approximated $171,000 and the elimination of corporate overhead by the Company's parent company approximated $243,000. 4. To adjust interest expense of the debt incurred for the acquisition of the net assets of the Company. 5. To adjust federal income tax expense for the tax effect of the adjustments made to operations and interest expense. 6. To adjust selling, general and administrative expenses for expenses related to employees not hired by the Registrant ($575,000), eliminate intercompany charges by the Company's parent company ($440,000), eliminate one time expenses associated with a prior mergers and branch closings ($485,000) and eliminate amortization of goodwill associated with prior acquisitions completed by the Company that were not purchased by the Registrant ($143,000). 7. To eliminate the Company's restructuring charge. 8. To eliminate special charges not expected to be incurred by the combined entities. Page 24 25 (c) Exhibits. *2.1 - Asset Purchase Agreement dated May 27, 1997, among Strategic Supply, Inc., Coulson Technologies, Inc., Strategic Distribution, Inc., DXP Acquisition, Inc. (d/b/a Strategic Acquisition, Inc.) and DXP Enterprises, Inc. 23.1 - Consent of KPMG Peat Marwick, LLP. *99.1 - Press Release of the Registrant dated June 5, 1997, announcing the closing of the Strategic Acquisition. - ------------------- * Previously filed. Page 25 26 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 hereunto duly authorized. DXP ENTERPRISES, INC. Dated: July 25, 1997 By: /s/ DAVID R. LITTLE --------------------------------------- David R. Little President and Chief Executive Officer 27 INDEX TO EXHIBITS
Number Exhibit ------ ------- *2.1 Asset Purchase Agreement dated May 27, 1997, among Strategic Supply, Inc., Coulson Technologies, Inc., Strategic Distribution, Inc., DXP Acquisition, Inc. (d/b/a Strategic Acquisition, Inc.) and DXP Enterprises, Inc. 23.1 Consent of KPMG Peat Marwick, LLP. *99.1 Press Release of the Registrant dated June 5, 1997, announcing the closing of the Strategic Acquisition.
- ------------------ * Previously filed. EX-23.1 2 CONSENT OF KPMG PEAT MARWICK, LLP 1 EXHIBIT 23.1 The Board of Directors Strategic Supply, Inc.: We consent to the inclusion of our report dated May 27, 1997 with respect to the consolidated balance sheets of Strategic Supply, Inc. and subsidiary as of December 31, 1996, and 1995, and the related consolidated statements of operations and retained earnings (accumulated deficit) and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in amendment number 1 to the current report on Form 8-K/A of DXP Enterprises, Inc. dated June 2, 1997. KPMG Peat Marwick LLP El Paso, Texas July 21, 1997 -----END PRIVACY-ENHANCED MESSAGE-----