-----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, C0WShcE7DmVdisG3zFtF7Xrr+1j/aaRv7NkhPnE+N6m1gCSxJadkap1duvnPz0ag ZefaVH3KV0/0UXA8Ro8GHg== 0000950129-98-002299.txt : 19980525 0000950129-98-002299.hdr.sgml : 19980525 ACCESSION NUMBER: 0000950129-98-002299 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980522 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: S-1 SEC ACT: SEC FILE NUMBER: 333-53387 FILM NUMBER: 98630381 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 S-1 1 DXP ENTERPRISES, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998 REGISTRATION NUMBER 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DXP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) TEXAS 5084 76-0509661 (State or other jurisdiction (Primary Standard (I.R.S. Employer Identification No.) of Industrial incorporation or organization) Classification Code Number)
580 WESTLAKE PARK BOULEVARD, SUITE 1100 HOUSTON, TEXAS 77079 281/531-4214 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DAVID R. LITTLE CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER DXP ENTERPRISES, INC. 580 WESTLAKE PARK BOULEVARD, SUITE 1100 HOUSTON, TEXAS 77079 281/531-4214 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: LAURA J. MCMAHON MELISSA M. BALDWIN FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P. 1301 MCKINNEY, SUITE 5100 600 TRAVIS, SUITE 4200 HOUSTON, TEXAS 77010-3095 HOUSTON, TEXAS 77002 713/651-5658 713/220-4200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================================== NUMBER OF PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF SHARES TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value per share........................... 3,220,000 $10.25 $33,005,000 $9,737 ==================================================================================================================
(1) Includes 420,000 shares of Common Stock subject to the Underwriters' over-allotment option (assumes the effectiveness of a two-to-one reverse stock split to be effected prior to the consummation of the Offering). (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457 of the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 22, 1998 2,800,000 SHARES [LOGO] COMMON STOCK Of the 2,800,000 shares of Common Stock of DXP Enterprises, Inc. ("DXP" or the "Company"), par value $.01 per share (the "Common Stock"), offered hereby (the "Offering"), 2,500,000 shares are being offered and sold by DXP and 300,000 shares are being sold by certain Selling Shareholders (the "Selling Shareholders"). The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. See "Security Ownership of Management, Principal Shareholders and Selling Shareholders". The Common Stock is listed on The Nasdaq National Market under the symbol "DXPE". On May 21, 1998, the last sales price of the Common Stock was $ 10.50 (restated to give effect to the two-to-one reverse stock split to occur prior to the consummation of the Offering). See "Price Range of Common Stock and Dividend Policy". AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=================================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) SELLING SHAREHOLDERS - ------------------------------------------------------------------------------------------------------------------- Per Share...................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------- Total(3)....................... $ $ $ $ ===================================================================================================================
(1) The Company and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting". (2) Before deducting expenses payable by the Company, estimated at $600,000. (3) The Company and the Selling Shareholders have granted the several Underwriters an option for 30 days from the date hereof to purchase up to an additional 420,000 shares of Common Stock (105,000 of which will be sold by the Selling Shareholders on a pro rata basis) solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting". The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1998. --------------------- MORGAN KEEGAN & COMPANY, INC. HANIFEN, IMHOFF INC. SANDERS MORRIS MUNDY , 1998. 3 --------------------- CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING". 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise noted, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option and has been restated to give effect to a two-to-one reverse stock split of the Common Stock which was effected May 12, 1997 and another two-to-one reverse stock split which will be effected prior to the consummation of the Offering. Prospective investors should consider carefully the information set forth under the heading "Risk Factors". Unless the context otherwise requires, references in this Prospectus to the "Company" or "DXP" shall mean DXP Enterprises, Inc., as the successor to SEPCO Industries, Inc. ("SEPCO"), together with the Company's subsidiaries. THE COMPANY The Company is a leading supplier of maintenance, repair and operating ("MRO") products, equipment and services to industrial customers. The Company provides a wide range of MRO products in the following categories: fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical products. The Company also offers a line of valve and valve automation products within the pipe, valve and fittings category and is seeking to expand its presence in this area. The Company offers its customers a single source of supply on an efficient and competitive basis by being a first-tier distributor which purchases its products directly from the manufacturer. The Company also provides value-added services such as system design, fabrication, installation, repair and maintenance for its customers. The Company offers this wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional distribution to fully integrated supply contracts. Since current management acquired control of the Company in 1986, the Company has grown substantially through 12 acquisitions. This growth has been designed to position and differentiate the Company as a single source, first-tier distributor of the major product categories in the United States industrial market. The Company currently provides a wide range of products in four of the five major product categories. The Company also intends to expand its product offerings in the fifth product category, pipe, valve and fittings. The Company currently has 54 distribution centers strategically located in 45 cities in 14 states throughout the United States. The Company serves as a first-tier distributor of more than 170,000 stock keeping units ("SKUs") by more than 2,000 original equipment manufacturers. The Company has a diverse customer base of over 25,000 customers in various industries throughout the United States served by a sales force of 275 representatives. The Company also maintains state-of-the-art management information systems that allow for electronic communication of orders, processing and distribution. INDUSTRIAL DISTRIBUTION MARKET The Company estimates that annual sales in the United States for MRO products for industrial customers are in excess of $200 billion, of which the Company estimates over $150 billion are in the five major product categories of (i) fluid handling equipment, (ii) bearings and power transmission equipment, (iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v) electrical products. While growth in the industrial distribution market is generally related to the expansion of the United States economy, revenues attributable to the outsourcing of MRO procurement, inventory control and warehouse management, known as "integrated supply", are expected to grow at an annualized rate of 40% from $1.8 billion in 1995 to $10 billion in 2000. The industrial distribution market is highly fragmented, with the 50 largest distributors accounting for less than 15% of the total United States market during 1996. Based on 1996 sales as reported by industry sources, the Company was the 40th largest distributor of MRO products in the United States. On a combined basis after giving effect to the Company's 1997 acquisitions of Strategic Supply, Inc. ("SSI") and Pelican State Supply Company, Inc. ("Pelican"), and the acquisition of Tri-Electric Supply LLC ("Tri-Electric) in February 1998 the Company would have been the 28th largest distributor of MRO products in the United States. 3 5 To compete more effectively, the Company's customers and other users of MRO products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In response to this customer desire, three primary trends have emerged in the industrial supply industry: Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry. Customized Value-Added Service. As industrial customers focus on their core manufacturing or other production competencies, they increasingly are demanding customized distribution services, ranging from value-added traditional distribution to integrated supply. Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the MRO customer, some MRO distributors are expanding their product coverage to eliminate second-tier distributors and the difficulties associated with alliances. BUSINESS STRATEGY The Company's strategy is focused on addressing current trends in the industrial distribution market through a combination of acquisitions and internal growth. The Company seeks acquisitions that will provide the Company access to additional product lines and customers to enhance its position as a single source industrial distributor with first-tier distribution capabilities. Key elements of the Company's internal growth strategy include leveraging existing customer relationships, expanding product offerings from existing locations, reducing costs through consolidated purchasing programs and combined product distribution centers, designing and implementing innovative solutions to address the procurement and supply needs of the Company's customers and using the Company's traditional distribution and integrated supply capabilities to increase sales in each area. The Company's key strategies are: Industry Consolidator; Focused Acquisition Strategy. The Company is an active consolidator in the industrial distribution industry. The Company believes that significant acquisition opportunities exist in this industry due in large part to the fragmented nature of the industry and customer desire to reduce costs and improve efficiencies through vendor reduction. The Company's acquisition strategy is focused on enhancing the Company's position as a single source industrial distributor with first-tier distribution capabilities for a broad range of MRO products and improving the Company's ability to deliver value-added traditional distribution and flexible integrated supply solutions. Although the Company provides as a first-tier distributor a substantial portion of products in four of the five major MRO product categories, the Company plans to continue to seek acquisitions that will broaden its product coverage within each of the five major MRO product categories. The Company also believes that substantial opportunities exist to expand the Company's customer base and to penetrate geographic markets not currently served by the Company through selective acquisitions. Acquisitions also provide the opportunity for the Company to increase its operating margins by reducing administrative overhead, consolidating distribution locations and personnel and reducing costs for products through volume purchases and similar arrangements. The Company further believes that as acquisitions are assimilated, additional opportunities should arise to increase sales to the customers of the acquired companies by providing products and services to these customers that were not previously offered by the acquired company. First-Tier Distributor of Extensive Line of MRO Products. The Company has direct relationships with a substantial number of original equipment manufacturers and does not rely on other distributors to supply bearings and power transmission equipment, general mill and safety supplies, electrical products and fluid handling equipment. While many of the Company's competitors offer traditional distribution of a more limited product range, the Company is not aware of any major competitor, other than direct-mail distributors, that offers as many product categories as the Company offers. As a first-tier distributor of an extensive line of 4 6 MRO products, the Company is able to reduce substantially the markups paid by the customer to second-tier distributors and significantly reduce the number of supplier relationships needed by the customer without the difficulties associated with alliances. Value-Added Services. The Company's distribution strategy is focused on building and maintaining long-term relationships by understanding the customers' operations and providing value-added services such as product application, engineering and system design. Because the Company has extensive experience as a traditional distributor, the Company has built strong knowledge of its customers' operations and can provide valuable assistance in identifying the products that will best meet their needs. DXP's role extends beyond procurement services due to the Company's ability to deliver personal, after-the-sale service. Customized Distribution Solutions; Integrated Supply. The Company believes that the most desirable approach to industrial distribution is to provide the customer with a complete continuum of supply options, ranging from traditional distribution to integrated supply. Through the Company's SmartSource program, the customer is able to select only those products and services needed. For those customers purchasing a number of products in large quantities, the Company offers its American MRO program, a "fully integrated supply" program that permits the customer to outsource all or most of their procurement needs to the Company. Cost Efficiencies. As the Company expands into new geographic regions and further penetrates existing markets, the Company intends to consolidate many functions such as accounting, management information systems and certain purchasing arrangements to eliminate duplicative costs that otherwise would be incurred at the operating level. The Company seeks higher volume purchasing in order to reduce product costs. The Company may also continue to consolidate facilities or branches to optimize efficiencies. RECENT AND PROPOSED ACQUISITIONS The Company completed two strategic acquisitions in 1997 and a third in the first quarter of 1998 directed at expanding its product lines and increasing its geographic presence. Based on information provided to the Company, the three acquired businesses generated combined revenues of $74.1 million in 1997 (of which $31.7 million appeared in the Company's consolidated financial statements for 1997). Through the Company's acquisition of the assets of SSI, the Company added general mill and safety supplies to its product offerings and expanded its geographic presence to include more than seven additional states and 24 additional cities throughout the United States. The acquisition of SSI also enhanced the Company's integrated supply capabilities through SSI's existing integrated supply contracts and SmartSource program. The Company's acquisition of Pelican expanded the Company's general mill and safety supplies product lines and added an additional integrated supply contract with a major refinery in Baton Rouge, Louisiana. The Company's acquisition of Tri-Electric added electrical products to its product offerings. The Company recently entered into letters of intent to acquire the electrical product distribution assets and operations of Lucky Electric Supply, Inc. ("Lucky") and the pump distribution assets and operations of M.W. Smith Equipment, Inc. ("Smith") (the "Proposed Acquisitions") for a total consideration of approximately $6.0 million, $1.0 million in cash and $5.0 million in notes. Based on information provided to the Company, Lucky and Smith had combined revenues of approximately $13.0 million in 1997. The Proposed Acquisitions will expand the Company's electrical and pump distribution capabilities. The consummation of the Proposed Acquisitions is subject to the execution of definitive agreements, which are expected to contain customary conditions to closing. There can be no assurance that the Proposed Acquisitions will close or as to the timing thereof. The Company intends to use a portion of the net proceeds from the Offering to repay amounts borrowed to finance the Proposed Acquisitions. See "Use of Proceeds". CORPORATE INFORMATION The Company is a Texas corporation that was formed in 1996 to effect a consolidation of SEPCO and Newman Communications Corporation (the "Reorganization") pursuant to which DXP became a public company. The Company's principal executive offices are located at 580 West Lake Park Boulevard, Suite 1100, Houston, Texas 77079 and its telephone number is 281/531-4214. 5 7 THE OFFERING Common Stock offered: By the Company................ 2,500,000 shares By the Selling Shareholders... 300,000 shares Total................. 2,800,000 shares Common Stock to be outstanding after the Offering.............. 7,143,047 shares(1) Use of proceeds................. To repay an aggregate of approximately $23.4 million of indebtedness, including $6.0 million expected to be incurred by the Company in connection with the Proposed Acquisitions. See "Use of Proceeds". Nasdaq National Market symbol... DXPE - --------------- (1) Includes 420,000 shares of Common Stock issuable in connection with conversion of shares of Series B Convertible Preferred Stock by one of the Selling Shareholders, 10,625 shares issuable to prior holders of Newman Communications Corporation common stock and 16,800 shares issuable to prior holders of SEPCO common stock in connection with the Reorganization but which have not been issued and 55,000 shares of Common Stock issuable upon exercise of options by two of the Selling Shareholders. Excludes 1,323,700 shares of Common Stock issuable upon exercise of outstanding options at May 15, 1998 and 84,500 additional shares reserved for issuance pursuant to the Company's Long-Term Incentive Plan ("LTIP"). See "Management -- Benefit Plans". 6 8 SUMMARY FINANCIAL DATA Prior to the Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. The Reorganization has been accounted for as a recapitalization of SEPCO. The summary historical consolidated financial data of SEPCO set forth below for the year ended December 31, 1995 has been derived from the audited consolidated financial statements of SEPCO. The summary historical consolidated selected financial data set forth below for each of the periods in the two-years ended December 31, 1997 have been derived from the audited consolidated financial statements of the Company, and assume that the Reorganization had been effected on the first day of the period presented. The summary historical consolidated selected financial data set forth below for the quarters ended March 31, 1998 and 1997 have been derived from the unaudited consolidated financial statements of the Company. The summary pro forma consolidated financial information set forth below assumes that the acquisition of SSI was completed on the first day of the periods presented, and such information has been derived from the pro forma financial statements appearing elsewhere in this Prospectus. The pro forma information does not reflect the acquisitions of Pelican and Tri-Electric. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------------------------ THREE MONTHS SEPCO DXP DXP ENDED MARCH 31, -------- -------- -------------------- ----------------- 1995 1996 1997 1997 1998 -------- -------- -------------------- ------- ------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENTS OF PRO EARNINGS DATA: ACTUAL FORMA -------- -------- Revenues.................................. $111,328 $125,208 $169,667 $190,754 $30,129 $49,004 Gross profit(1)........................... 29,157 32,117 44,880 49,797 8,373 12,585 Operating income(1)....................... 4,598 2,785 6,434 5,789 1,330 2,077 Income before provision for income taxes................................... 3,512 1,635 4,670 3,869 1,220 1,468 Net income................................ 2,088 890 2,768 2,182 791 878 Preferred stock dividend.................. (23) (119) (103) (103) 38 21 Net income attributable to common shareholders............................ 2,065 771 2,665 2,079 753 857 Basic earnings per common share........... $ 0.54 $ 0.19 $ 0.65 $ 0.51 $ .19 $ .21 Common shares outstanding................. 3,837 3,997 4,082 4,081 3,997 4,157 Dilutive earnings per share............... 0.46 0.16 0.47 0.37 0.14 0.15 Common and common equivalent shares outstanding(2)(3)....................... 4,501 4,857 5,703 5,703 5,492 5,700
AS OF MARCH 31, 1998 ------------------------- PRO FORMA AS ACTUAL ADJUSTED(4)(5) ------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA Working capital............................................. $38,213 $38,213 Total assets................................................ 77,162 77,162 Long-term debt obligations.................................. 38,245 14,220 Shareholders' equity(2)..................................... 13,888 37,913
- --------------- (1) Year ended December 31, 1996 includes a one-time charge to compensation expense of $618,000 for the amendment of book value options to fair market value options and approximately $284,000 in professional costs associated with the Reorganization. The Company disposed of approximately $1,100,000 of excess inventory in December 1996 which it had accumulated through prior acquisitions of product groups that were subject to shelf-life restrictions. This is a one-time charge not expected to occur in future years. (2) Number of shares used to compute earnings per share and shareholders' equity has been restated to reflect the Reorganization as of the first day of the first period presented. (3) Common stock and earnings per share have been restated to give effect to the two-to-one reverse split of the Common Stock which became effective May 12, 1997 and another two-to-one reverse stock split to be effected prior to the consummation of the Offering. (4) Adjusted to give effect to the sale of the 2,500,000 shares of Common Stock offered by the Company hereby, at an assumed price to the public of $10.50 per share, and the application of the net proceeds thereof. (5) Assumes conversion of 15,000 shares of Series B Convertible Preferred Stock into 420,000 shares of Common Stock by a Selling Shareholder and exercise of an option to purchase 55,000 shares of Common Stock by another Selling Shareholder. 7 9 RISK FACTORS An investment in the Common Stock offered hereby involves a high degree of risk. The following factors should be considered carefully, together with the information provided elsewhere in this Prospectus, in evaluating an investment in the shares of Common Stock offered hereby. Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See "Special Note Regarding Forward-Looking Statements". RISKS ASSOCIATED WITH ACQUISITION STRATEGY Future results for the Company will depend in part on the success of the Company in implementing its acquisition strategy. This strategy includes taking advantage of a consolidation trend in the industry and effecting acquisitions of distributors with complementary or desirable new product lines, strategic distribution locations and attractive customer bases and manufacturer relationships. The ability of the Company to implement this strategy will be dependent on its ability to identify, consummate and successfully assimilate acquisitions on economically favorable terms. Although the Company is actively seeking acquisitions that would meet its strategic objectives, there can be no assurance that the Company will be successful in these efforts. In addition, acquisitions involve a number of special risks, including possible adverse effects on the Company's operating results, diversion of management's attention, failure to retain key acquired personnel, risks associated with unanticipated events or liabilities, expenses associated with obsolete inventory of an acquired company and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company or other industrial supply distributors acquired in the future will achieve anticipated revenues and earnings. In addition, the Company's credit facilities contain certain restrictions that could adversely affect its ability to implement its acquisition strategy. Such restrictions include a provision prohibiting the Company from merging or consolidating with, or acquiring all or a substantial part of the properties or capital stock of, any other entity without the prior written consent of the lender. There can be no assurance that the Company will be able to obtain the lender's consent to any of its proposed acquisitions. RISKS RELATED TO ACQUISITION FINANCING The Company currently intends to finance acquisitions by using shares of Common Stock for a portion or all of the consideration to be paid. In the event that the Common Stock does not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept Common Stock as part of the consideration for the sale of their businesses, the Company may be required to use more of its cash resources, if available, to maintain its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain additional capital through debt or equity financings. Under the Company's loan agreements with its bank lender (the "Credit Facility"), all available cash generally is applied to reduce outstanding borrowings. As of March 31, 1998, the Company had $3.1 million available under the Credit Facility, and there can be no assurance that the Company will be able to obtain additional financing on a timely basis or on terms the Company deems acceptable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". RISKS RELATED TO GROWTH STRATEGY Future results for the Company also will depend in part on the Company's success in implementing its internal growth strategy, which includes expanding existing product lines and adding new product lines. The ability of the Company to implement this strategy will depend on its success in acquiring and integrating new product lines and marketing integrated forms of supply arrangements such as those being pursued by the Company through its SmartSource and American MRO programs. The Company acquired SSI and Pelican in the second quarter of 1997 and Tri-Electric in the first quarter of 1998 and plans to acquire other distributors with complementary or desirable product lines and customer bases. Although the Company intends to increase sales and product offerings to the customers of SSI, Pelican and Tri-Electric and other acquired companies, reduce costs through consolidating certain administrative and sales functions and 8 10 integrate the acquired companies' management information systems with the Company's system, there can be no assurance that the Company will be successful in these efforts. SUBSTANTIAL COMPETITION The Company's business is highly competitive. The Company competes with a variety of industrial supply distributors, some of which may have greater financial and other resources than the Company. Although many of the Company's traditional distribution competitors are small enterprises selling to customers in a limited geographic area, the Company also competes with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by the Company's SmartSource and American MRO programs. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than the Company. The Company's competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. RISKS OF ECONOMIC TRENDS Demand for the Company's products is subject to changes in the United States economy in general and economic trends affecting the Company's customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, the Company may experience changes in demand for its products as changes occur in the markets of its customers. DEPENDENCE ON KEY PERSONNEL The Company will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, its Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of the Company could have a material adverse effect on the Company's financial condition and results of operations. The Company does not maintain key-man life insurance on the life of Mr. Little or on the lives of its other executive officers. In addition, the Company's ability to grow successfully will be dependent upon its ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely effect the Company's financial condition and results of operations. DEPENDENCE ON SUPPLIER RELATIONSHIPS The Company has distribution rights for certain product lines and depends on these distribution rights for a substantial portion of its business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. The termination or limitation by any key supplier of its relationship with the Company could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Suppliers". CONTROL BY MANAGEMENT Following the Offering, directors and officers of the Company will own beneficially an aggregate of approximately 48.8% of the outstanding Common Stock (45.8% if the Underwriters' overallotment option is exercised in full). See "Security Ownership of Management, Principal Shareholders and Selling Shareholders". Accordingly, these persons, if they were to act in concert, would have substantial influence over the affairs of the Company, including the ability to control the election of directors and other matters requiring shareholder approval. SHARES AVAILABLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE Sales of substantial amounts of Common Stock in the public market following completion of the Offering could have an adverse effect on the market price of the Common Stock. Of the 7,143,047 shares of Common Stock to be outstanding after the Offering, the Company estimates that 4,468,494 shares, including the 9 11 2,800,000 shares of Common Stock to be sold by the Company and the Selling Shareholders in the Offering, will be freely tradable without restriction, and 2,674,553 shares of Common Stock will be eligible for sale pursuant to the provisions of Rule 144 under the Securities Act. In connection with the Offering, officers and directors and certain shareholders of the Company including the Selling Shareholders, who will hold an aggregate of 2,750,877 shares (2,665,127 if the over-allotment option is exercised in full) of Common Stock and 1,202,500 shares (1,186,750 if the over-allotment option is exercised in full) of Common Stock issuable upon the exercise of options following the Offering, have entered into lock-up agreements pursuant to which they have agreed not to sell or otherwise dispose of their shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Morgan Keegan & Company, Inc. on behalf of the Underwriters. IMMEDIATE AND SUBSTANTIAL DILUTION Because the offering price will be substantially higher than the book value per share of the Common Stock, purchasers of shares of Common Stock in the Offering will incur immediate and substantial dilution of $5.75 per share, or 54.8% of the public offering price. In addition, investors purchasing shares in the Offering will incur additional dilution to the extent that outstanding stock options are exercised. See "Dilution". LIMITATION ON ABILITY TO PAY DIVIDENDS The Company anticipates that future earnings will be retained to finance the continuing development of its business. In addition, the Company's loan agreement with its principal lender prohibits the Company from declaring or paying any dividends or other distributions on its capital stock except for limited dividends on its preferred stock. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy". POTENTIAL ANTI-TAKEOVER EFFECTS The Company's Restated Articles of Incorporation, as amended, allow the Board of Directors of the Company to issue shares of preferred stock without shareholder approval on such terms as the Board of Directors may determine. The rights of all the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Company's Restated Articles of Incorporation, as amended, also do not allow cumulative voting in the election of directors. In addition, Part Thirteen of the Texas Business Corporation Act imposes a special voting requirement for the approval of certain business combinations and related party transactions between public corporations such as the Company and shareholders who beneficially own 20% or more of the corporation's voting stock unless the transaction or the acquisition of shares by the affiliated shareholder is approved by the board of directors of the corporation prior to the shareholder acquiring such 10% ownership. All of the foregoing could have the effect of delaying, deferring or preventing a change in control of the Company and could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. See "Description of Capital Stock". LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Although the Common Stock is listed on The Nasdaq National Market, trading to date has been limited. In addition, factors such as market expansion, the development of additional services, the Company's competitors and other third parties, as well as quarterly variations in the Company's anticipated or actual results of operations or market conditions generally, may cause the market price of the Common Stock to fluctuate significantly. Further, the stock market has on occasion experienced extreme price and volume fluctuations, which have particularly affected the market prices of many companies. These broad market fluctuations may adversely affect the market price of the Common Stock. RISKS ASSOCIATED WITH HAZARDOUS MATERIALS Certain of the Company's operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although 10 12 the Company believes that it has adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on the Company. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of Section 21E of the Exchange Act. All statements other than statements of historical facts included in this Prospectus, including, without limitation, statements regarding the Company's financial position, business strategy, products and services, markets, budgets and plans and objectives of management for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed under "Risk Factors" and elsewhere in this Prospectus, including, without limitation, in conjunction with the forward-looking statements included in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $23.9 million ($27.0 million, if the Underwriters' over-allotment option is exercised in full), based on an assumed public offering price of $10.50 per share and after deducting the estimated underwriting discount and offering expenses payable by the Company. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Shareholders. The Company anticipates that it will use the net proceeds of the Offering to repay an aggregate of approximately $23.9 million of indebtedness under the Credit Facility. The indebtedness under the Credit Facility includes approximately (i) $5.3 million incurred in May 1997 in connection with the acquisitions of SSI and Pelican, (ii) $6.2 million incurred in February 1998 in connection with the acquisition of Tri-Electric, (iii) $1.0 million expected to be incurred in connection with the cash component of the Proposed Acquisitions and (iv) $648,000 incurred in connection with capital expenditures. Amounts borrowed under the Credit Facility bear interest at an annual rate ranging from LIBOR plus 1.50% to LIBOR plus 3.0% (8.5% at March 31, 1998). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". In addition to the net proceeds to be received by the Company in the Offering, Mr. Little, a Selling Shareholder, intends to apply a portion of the net proceeds from his sale of shares of Common Stock hereunder to repay approximately $258,000 owed to the Company. See "Security Ownership of Management, Principal Shareholders and Selling Shareholders" and "Certain Transactions". 11 13 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock has traded on The Nasdaq National Market since July 2, 1997, under the symbol "DXPE". From December 27, 1996, through July 2, 1997, the Common Stock traded on the Over the Counter Bulletin Board of National Association of Securities Dealers, Inc. ("OTC Bulletin Board"). The following table sets forth on a per share basis the high and low sales prices for the Common Stock as reported on The Nasdaq National Market and the OTC Bulletin Board, as applicable, for the periods indicated, restated to give effect to the two-to-one stock split of the Common Stock to be effected prior to the consummation of the Offering.
HIGH LOW ------ ------ 1996 Fourth Quarter (Beginning December 27, 1996).............. $15.00 $14.00 1997 First Quarter............................................. 16.00 9.00 Second Quarter............................................ 13.50 10.50 Third Quarter............................................. 14.00 12.00 Fourth Quarter............................................ 12.50 10.00 1998 First Quarter............................................. 12.00 10.00 Second Quarter (through May 21, 1998)..................... 11.00 8.00
On May 21, 1998, the closing sales price of the Common Stock was $10.50 per share. On May 21, 1998, there were 138 holders of record of outstanding shares of Common Stock. The Company anticipates that future earnings will be retained to finance the continuing development of its business. In addition, the Company's Credit Facility with its principal lender prohibits the Company from declaring or paying any dividends or other distributions on its capital stock except for limited dividends on its preferred stock. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the success of the Company's business activities, regulatory and capital requirements, the general financial condition of the Company and general business conditions. 12 14 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1998, and, as adjusted, to reflect the issuance of the 2,500,000 shares of Common Stock offered by the Company hereby and the application of the proceeds therefrom (assuming an offering price of $10.50 per share). This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto appearing elsewhere in this Prospectus. See also "Use of Proceeds".
MARCH 31, 1998 ------------------------- ACTUAL AS ADJUSTED(1) ------- -------------- (IN THOUSANDS) Current portion of long-term debt........................... $ 1,198 $ 1,198 ======= ======= Long-term debt, less current portion........................ $38,245 $14,220(2) ------- ------- Equity subject to redemption................................ 2,075 2,075 Shareholders' equity: Series A preferred stock.................................... 2 2 Series B convertible preferred stock........................ 18 3 Common Stock, $.01 par value(3)............................. 40 70 Paid-in capital........................................... 892 24,902 Retained earnings........................................... 13,516 13,516 ------- ------- 14,468 38,493 Less Treasury stock, 374 shares Series A preferred, 2,700 shares Series B preferred, and 30,436 shares common stock..................................................... (580) (580) ------- ------- Total shareholders' equity........................... 13,888 37,913 ------- ------- Total capitalization.............................. $55,406 $55,406 ======= =======
- --------------- (1) Assumes conversion of 15,000 shares of Series B Convertible Preferred Stock into 420,000 shares of Common Stock by a Selling Shareholder and exercise of options to purchase an aggregate of 55,000 shares of Common Stock by another Selling Shareholder. (2) Does not give effect to the incurrence of $6.0 million in debt in connection with the Proposed Acquisitions. (3) Excludes 1,323,700 shares of Common Stock issuable upon exercise of outstanding options and warrants and an additional 84,500 shares reserved for issuance pursuant to the LTIP. See "Management -- Benefit Plans". 13 15 DILUTION At March 31, 1998, the net tangible book value of the Company attributable to common shareholders was $10.0 million, or $2.15 per share. The number of shares used for the per share calculation includes the 4,168,047 shares outstanding prior to the Offering and assumes conversion of 420,000 shares of Series B Convertible Preferred Stock and the exercise of options to purchase an aggregate of 55,000 shares of Common Stock. After giving effect to the sale by the Company of 2,500,000 shares offered hereby and the receipt of an estimated $23.9 million of net proceeds from the Offering (based on an assumed offering price of $10.50 per share and net of underwriting discounts and estimated expenses of the Offering), pro forma net tangible book value of the Company at March 31, 1998 would have been $4.75 per share. This represents an immediate increase in pro forma net tangible book value of $2.60 per share to the existing stockholders and an immediate dilution of $5.75 per share to the new investors purchasing Common Stock in the Offering. The following table sets forth the per share dilution: Public offering price....................................... $10.50 Book value prior to the Offering.......................... $2.15 Increase attributable to new investors.................... 2.60 ----- Pro Forma net tangible book value after the Offering........ 4.75 ------ Dilution in net tangible book value to new investors........ $ 5.75 ======
The following table sets forth, on a pro forma basis as of March 31, 1998, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing shareholders and new investors purchasing shares in the Offering (before deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing shareholders........... 4,643,047 65.1% $ 9,988,400 27.6% $ 2.15 New investors................... 2,500,000 34.9 26,250,000 72.4 $10.50 --------- ----- ----------- ----- Total................. 7,143,047 100.0% $36,238,400 100.0% ========= ===== =========== =====
The foregoing computations assume no exercise of outstanding stock options granted previously under the Company's LTIP or any non-qualified options previously granted. 14 16 SELECTED FINANCIAL DATA Prior to the Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. The Reorganization has been accounted for as a recapitalization of SEPCO. The selected historical consolidated financial data of SEPCO set forth below for each of the years in the three-year period ended December 31, 1995, have been derived from the audited consolidated financial statements of SEPCO. The selected historical consolidated financial data set forth below for each of the years in the two-year period ended December 31, 1997 have been derived from the audited consolidated financial statements of the Company, and assume that the Reorganization had been effected on the first day of the period presented. The historical consolidated selected financial data set forth below for the quarters ended March 31, 1998 and 1997 have been derived from the unaudited consolidated financial statements of the Company. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, THREE MONTHS --------------------------------------------------- ENDED SEPCO DXP MARCH 31, ----------------------------- ------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- -------- -------- -------- -------- ------- ------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Revenues........................ $99,353 $102,592 $111,328 $125,208 $169,667 $30,129 $49,004 Gross profit(1)................. 26,792 27,217 29,157 32,117 44,880 8,373 12,585 Operating income(1)............. 3,288 4,150 4,598 2,785 6,434 1,330 2,077 Income before provision for income taxes, minority interest and change in accounting principle.......... 2,346 3,038 3,512 1,635 4,670 1,220 1,468 Minority interest in earnings (loss) of a subsidiary(2)..... (403) -- -- -- -- -- -- Cumulative effect of change in accounting principle(3)....... 882 -- -- -- -- -- Net income...................... 1,843 1,862 2,088 890 2,768 791 878 Preferred stock dividend........ -- -- (23) (119) (103) 38 21 Net income attributable to common shareholders........... 1,843 1,862 2,065 771 2,665 753 857 Basic earnings per common share......................... $ 0.38 $ 0.38 $ 0.54 $ 0.19 $ 0.65 0.19 .21 Common shares outstanding(5).... 4,878 4,878 3,837 3,997 4,082 3,997 4,157 Dilutive earnings per share..... 0.35 0.35 0.46 0.16 0.47 0.14 0.15 Common and common equivalent shares outstanding(4)(5)...... 5,225 5,370 4,501 4,857 5,703 5,492 5,700
YEAR ENDED DECEMBER 31, --------------------------------------------------- SEPCO DXP MARCH 31, ----------------------------- ------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- -------- -------- -------- -------- ------- ------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) CONSOLIDATED BALANCE SHEET DATA: Working capital................. $18,402 $ 20,011 $ 23,967 $ 25,612 $ 36,262 $25,962 $38,213 Total assets.................... 38,686 38,163 43,254 45,042 67,636 47,123 77,162 Long-term debt obligations...... 20,766 18,461 21,275 22,300 33,395 22,792 38,245 Shareholders' equity(4)......... 6,453 8,315 9,688 10,459 13,031 11,212 13,888
- --------------- (1) Year ended December 31, 1996 includes a one-time charge to compensation expense of $618,000 for the amendment of book value options to fair market value options and approximately $284,000 in professional costs associated with the Reorganization. The Company disposed of approximately $1,100,000 of excess inventory in December 1996 that it had accumulated through prior acquisitions of 15 17 product groups that were subject to shelf-life restrictions. This is a one-time charge not expected to occur in future years. (2) In September 1993, SEPCO acquired the remaining shares of capital stock of Southern Engine and Pump Company. The acquisition eliminated any need to account for minority interest in earnings of this subsidiary. (3) Effective January 1, 1993, SEPCO changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". As permitted under the rules, prior years' financial statements were not restated. The cumulative effect of adopting Statement 109 as of January 1, 1993 was to increase net earnings by $882,000. (4) Number of shares used to compute earnings per share and shareholders' equity has been restated to reflect the Reorganization as of the first day of the first period presented. (5) Common stock and earnings per share have been restated to give effect to the two-to-one reverse split of the Common Stock which became effective May 12, 1997 and another two-to-one reverse stock split to be effected prior to the consummation of the Offering. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading supplier of MRO products, equipment and services to industrial customers. The Company provides a wide range of MRO products in the fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical products. The Company also offers a line of valve and valve automation products within the pipe, valve and fittings category and is seeking to expand its presence in this area. The Company offers its customers a single source of supply on an efficient and competitive basis by being a first-tier distributor which purchases its products directly from the manufacturer. The Company also provides value-added services such as system design, fabrication, installation, repair and maintenance for its customers. The Company offers this wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional distribution to fully integrated supply contracts. The Company's products and services are marketed in 14 states to over 25,000 customers that are engaged in a variety of industries, many of which may be counter cyclical to each other. Demand for the Company's products generally is subject to changes in the United States economy and economic trends affecting the Company's customers and the industries in which they compete in particular. Certain of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, the Company may within particular markets and product categories experience changes in demand as changes occur in the markets of its customers. The Company's strategy is focused on addressing current trends in the industrial distribution market through a combination of acquisitions and internal growth. The Company seeks acquisitions that will provide the Company access to additional product lines and customers to enhance its position as a single source industrial distributor with first-tier distribution capabilities. Key elements of the Company's internal growth strategy include leveraging existing customer relationships, expanding product offerings from existing locations, reducing costs through consolidated purchasing programs and combined product distribution centers, designing and implementing innovative solutions to address the procurement and supply needs of the Company's customers and using the Company's traditional distribution and integrated supply capabilities to increase sales in each area. Future results for the Company will be dependent on the success of the Company in implementing its acquisition and internal growth strategy. The ability of the Company to implement its acquisition and internal growth strategy will be dependent on its ability to identify, consummate and assimilate acquisitions on economically favorable terms, to acquire and successfully integrate new product lines and to successfully market alternate forms of supply arrangements through the Company's SmartSource and American MRO programs. Although the Company is actively seeking acquisitions and integrated supply arrangements that would meet its strategic objectives, there can be no assurance that the Company will be successful in these efforts. Further, the ability of the Company to effect its strategic plans will be dependent on its obtaining financing for its planned acquisitions and expansions, which there can be no assurance will be available. The Company plans to examine appropriate methods of financing any such acquisitions, including issuance of additional capital stock, debt or other securities or a combination thereof. If the Company were to issue shares of its capital stock in any acquisition, such issuance could be dilutive to existing shareholders. The Reorganization The Company was incorporated on July 26, 1996, to facilitate the Reorganization. On December 4, 1996, the Reorganization was effected through (i) a merger of a wholly owned subsidiary of the Company with and into SEPCO and (ii) a merger of a wholly owned subsidiary of the Company with and into Newman Communications Corporation ("Newman"). 17 19 Prior to the Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. The Reorganization has been accounted for as a recapitalization of SEPCO. Prior to the Company's acquisition of Newman, Newman was a non-operating entity with nominal assets. The merger with Newman was effected as a means to implement the original registration of the Common Stock under the Securities Exchange Act of 1934, as amended, and increase the Company's shareholder base. The Reorganization resulted in approximately $900,000 in one-time costs, which included a $618,000 charge for additional compensation expense for the conversion of outstanding book-value options into market-based options and approximately $284,000 in professional costs associated with the Reorganization. In December 1996, the Company disposed of $1.1 million of excess inventory which it had accumulated through prior acquisitions of product groups that were subject to shelf-life restrictions. This is a one-time charge not expected to occur in future years. Unless the context otherwise requires, references to the Company with respect to operations prior to December 4, 1996 shall mean SEPCO and references to the Company with respect to operations on and after December 4, 1996 shall mean the Company. RESULTS OF OPERATIONS The Company currently distributes a substantial number of products in four of the five major product categories within the industrial distribution market and also provides products in the fifth category, pipe, valve and fittings. Three of those product categories, fluid handling equipment, bearings and transmission equipment and pipe, valve and fittings have been provided by the Company for a number of years. The fourth product category, general mill and safety supplies, was added in 1997 with the acquisitions of SSI and Pelican and the fifth category, electrical products, was added in February 1998 with the acquisition of Tri-Electric. The following table sets forth the revenues generated from the sales of major products and services distributed by the Company and the percentage of revenues of various items.
YEAR ENDED DECEMBER 31, THREE MONTHS -------------------------------- ENDED SEPCO DXP MARCH 31, -------------------- -------- ------------ 1995 1996 1997 1998 -------- -------- -------- ------------ Revenues: Fluid handling equipment................... $ 61,630 $ 65,709 $ 75,472 $ 17,832 Bearings and power transmission equipment................................ 39,500 49,144 53,180 14,379 General mill and safety supplies(1)........ -- -- 31,660 13,357 Pipe, valve and fittings................... 10,198 10,355 9,355 2,320 Electrical products(2)..................... -- -- -- 1,116 -------- -------- -------- -------- Total revenues................... $111,328 $125,208 $169,667 $ 49,004 Percent of Revenues: Cost of sales............................ 73.8% 74.3% 73.5% 74.3% Gross profit............................... 26.2 25.7 26.5 25.7 Selling, general and administrative expense............................... 22.1 23.5 22.7 21.4 Operating income........................... 4.1 2.2 3.8 4.3 Other income............................. .8 .8 .5 .3 Interest expense, net...................... 1.8 1.7 1.6 1.6 Income before taxes........................ 3.2 1.3 2.7 3.0 Income tax expense....................... 1.3 .6 1.1 1.2 Net income................................. 1.9% 0.7% 1.6% 1.8% ======== ======== ======== ========
- --------------- (1) Product category added in connection with the acquisitions of SSI and Pelican in the second quarter of 1997. (2) Product category added in connection with the acquisition of Tri-Electric in the first quarter of 1998. 18 20 Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenues for the three months ended March 31, 1998 increased 62.7% to $49.0 million from the three months ended March 31, 1997. The Company's acquisitions during the period accounted for $14.5 million of the $18.9 million increase in revenues. Sales of bearings and power transmission equipment for the quarter ended March 31, 1998 increased 19.6%, or $2.4 million over the comparable period in 1997, accounting for 7.8% of the revenue increase. Sales of valve and valve automation equipment increased 39.8%, or $.7 million over the comparable period in 1997, accounting for 2.2% of the revenue increase. During the three months ended March 31, 1998, sales of pumps and pump products increased 4.5%, or $1.3 million, over the comparable period in 1997, accounting for 5.6% of the revenue increase. Gross margins decreased 2.1% for the first quarter of 1998 as compared to the first quarter of 1997, from 27.8% of sales to 25.7%. The decrease in gross margin is attributable to lower margins associated with the two businesses acquired in May, 1997 and a third in February, 1998. The Company currently expects some increase in manufacturers prices to continue due to increased raw material costs and strong market conditions. Although the Company intends to attempt to pass on these price increases to its customers to maintain current gross margins, there can be no assurances that the Company will be successful in this regard. Selling, general and administrative expense decreased as a percentage of revenues by 1.9% for the first quarter of 1998 as compared to the first quarter of 1997. Operating income for the three month period ended March 31, 1998 was consistent as a percentage of revenues as compared to the first quarter of 1997. Interest expense during the first quarter of 1998 increased by $246,000 to $785,000 compared to the first quarter of 1997. Long-term debt at March 31, 1998 increased by $15.5 million as a result of the financing of two acquisitions during the second quarter of 1997 and a third during the first quarter of 1998, resulting in greater interest costs. Average interest rates were consistent during the three months ended March 31, 1998 as compared to the same period in 1997. The Company's provision for income taxes for the three months ended March 31, 1998 increased by $161,000 compared to the same period of 1997, as a result of the increase in profits. Net income for the three month period ended March 31, 1998, increased $87,000 from the three month period ended March 31, 1997 due to the increase in revenue volume and the decrease of selling, general and administrative expenses as a percentage of revenue. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues for 1997 increased 35.5% to $169.7 million from 1996. This revenue growth resulted from a combination of acquisitions and internal growth. The SSI and Pelican acquisitions added $31.6 million in revenues during 1997 while revenues at existing branches in 1997 increased $12.8 million, or 10.2% from 1996. This internal growth was driven by increased demand from existing customers and the Company's focus on cross selling product categories. Sales of fluid handling equipment increased 14.9% in 1997, or $9.8 million, over 1996. Sales of bearings and power transmission equipment for 1997 increased 8.2%, or $4.0 million, over 1996. Sales of pipe, valve and fittings decreased $1.0 million in 1997 over 1996 due primarily to increased competition. Gross margin increased $12.8 million, or 39.7% for 1997 as compared to 1996. Gross margin as a percentage of sales increased from 25.7% to 26.5% in 1997 as compared to the same period in 1996. The increase in 1997 gross margin was primarily attributable to the $1.1 million inventory write down in 1996. The Company, also realized increases in its gross margins for sales of its fluid handling equipment, bearings and transmission equipment and pipe valve and fittings. These increases in the profit margins for sales in the Company's historical product lines were offset by the lower average margins associated with sales of general mill and safety supplies. Selling, general and administrative expenses were 22.7% of revenues for 1997 compared to 23.5% for 1996. This decrease was attributable to the incurrence of various one-time expenses during 1996 aggregating $900,000, including a one-time expense of $618,000 for additional compensation associated with converting book value stock options to market value options and approximately $284,000 in professional fees associated with the Reorganization. 19 21 Operating income for 1997 increased 131% over 1996, from $2.8 million to $6.4 million. As a percentage of revenues, operating income increased from 2.2% of sales to 3.8% of sales in 1997 as compared to the same period in 1996, due to the various factors discussed above. Interest expense for 1997 increased by $553,000, or 26.3%, from 1996 as a result of increased debt levels associated with the Company's acquisitions during 1997 and increased working capital requirements during the period. Average interest rates were slightly lower during the year ended December 31, 1997 as compared to 1996. The Company's provision for income taxes for 1997 increased by $1.2 million compared to 1996 as a result of an increase of approximately $3.0 million in pre-tax income. Included in the 1996 income tax provision was a $135,000 reserve for an Internal Revenue Service ("IRS") examination, which was resolved in 1997 by the Company making a payment of $69,100 to the IRS. Net income for 1997 increased $1.9 million, or 210%, compared to 1996. Increased net income for 1997 as compared to 1996 can be primarily attributed to an increase in gross margin and a decrease in selling general and administrative costs as of percent of sales. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues for 1996 increased 12.5% to $125.2 million from $111.3 million for 1995 primarily due to sales of bearings and power transmission products at locations where fluid handling equipment was sold previously ($4.6 million), revenue attributable to the two companies acquired in December 1995 and February 1996 ($4.1 million) and from other internal revenue growth ($5.2 million). During 1996, sales of fluid handling equipment, increased 6.7% as compared to 1995, while sales of pipe valve and fittings increased 1.6% in 1996 as compared to 1995. Sales of bearings and power transmission equipment increased 24.5% in 1996 as compared to 1995. Gross profit as a percentage of revenues decreased .5% in 1996 compared to 1995. Included in cost of sales is a one time charge of $1.1 million related to the disposal of excess inventory in December 1996 that was accumulated through prior acquisitions of product groups subject to shelf-life restrictions. The disposal of the inventory reduced the Company's tax liability resulting in an increase in the Company's 1996 cash flow. In 1996, the Company installed a new management information system designed to manage inventory effectively and significantly minimize any future accumulation of inventory not salable in the ordinary course of business. Excluding the one-time charge related to the disposal of inventory, gross margins in 1996 would have remained consistent with the previous year. Selling, general and administrative expense increased as a percentage of revenues by 1.4% for 1996 as compared to 1995, due primarily to a one-time charge of $618,000 for additional compensation expense associated with the amendment of certain book value stock options into market-based stock options, costs associated with the Company's expansion of bearing and power transmission operations into locations where only fluid handling equipment was sold previously, training and education expenses related to the Company's software conversion and professional fees associated with the Reorganization. Excluding the effect of the amendments to the stock options and the other non-recurring expenses identified above, selling, general and administrative expenses as a percentage of revenues remained relatively consistent from period to period. Operating income for 1996 as a percentage of revenues declined to 2.2% from 4.1% in 1995, due primarily to the compensation expense recorded in connection with the stock option amendments, interest and other costs associated with SEPCO's expansion of operations and software conversion, increased professional fees related to the Reorganization, expenses related to the Company's expansion of bearing and power transmission equipment into locations where only pumps were sold previously and the inventory disposal. Excluding the effect of the amendments to the stock options and the other non-recurring expenses identified above, operating income for 1996 as a percentage of revenues would have been 3.8%. Interest expense during 1996 increased slightly compared to 1995, due to average debt increasing during the period as a result of increased working capital required to support sales. Average interest rates were slightly lower during 1996 as compared to 1995. The Company's provision for income taxes for 1996 decreased by $679,000 compared to 1995 due to lower operating income. 20 22 Net income for 1996 declined by approximately $1.2 million from 1995 due primarily to the effects of the disposition of inventory ($1.1 million), additional compensation associated with amendments to Company's stock options ($618,000), costs associated with the software conversion ($350,000), increased professional fees associated with the Reorganization ($284,000), expenses related to the Company's expansion of bearing and power transmission equipment into locations where only pumps were sold previously and a provision for the pending IRS examination ($135,000). LIQUIDITY AND CAPITAL RESOURCES Under the Credit Facility, all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the credit facility. The Company's policy is to maintain low levels of cash and cash equivalents and to use borrowings under its line of credit for working capital. The Company had $3.1 million available for borrowings under its working capital line of credit at March 31, 1998. Following the consummation of the Offering, the Company expects to have an aggregate of $32.0 million available under its working capital line of credit and $15 million available under its acquisition line of credit, and the Company intends to seek an increased line of credit. Working capital at March 31, 1998 and December 31, 1997 was $38.2 million and $36.5 million, respectively. During the first three months of 1998 and the year 1997, the Company collected its trade receivables in approximately 49 and 46 days, respectively, and turned its inventory approximately five times on an annualized basis. Subsequent to the end of the first quarter of 1998, the Company amended the Credit Facility and currently has a combined line of credit for up to $50 million. Additionally, the loan restructure increased the Company's term loan from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts outstanding under the revolving loan to the term loan. The amended Credit Facility provides for a $15.0 million acquisition term loan to be used for acquisitions provided certain customary provisions related to combined cash flows and acquisition pricing are met. Additionally, interest rates will range from LIBOR plus 1.50 percent to LIBOR plus 3.00 percent depending upon the relationship of the Company's debt to cash flow and financial covenants tied to debt service levels and cash flow. The line of credit is secured by receivables, inventory, and machinery and equipment and matures January 2000. The facility contains customary affirmative and negative covenants as well as financial covenants that require the Company to maintain a positive cash flow and other financial ratios, such as tangible net worth less than five to one and current assets to current liabilities greater than two to one. The Company generated cash from operating activities of $3.4 million in the first three months of 1998 as compared to $1.0 million during the first three months of 1997 due primarily to a reduction in the net working capital components during the first three months of 1998. The Company had capital expenditures of approximately $250,000 for the first three months of 1998 as compared to $227,000 during the same period of 1997. Capital expenditures in the first three months of 1998 were primarily related to computer hardware ($136,000). Capital expenditures for 1997 were predominantly for the expansion of a facility in LaPorte, Texas ($80,000), leasehold improvements and furniture and fixtures at the corporate office and for office equipment and computer automation. On February 26, 1998, a wholly-owned subsidiary of the Company acquired substantially all of the assets of Tri-Electric. The purchase price consisted of $6.2 million in cash, assumption of 1.6 million of trade payables and other accrued expenses and a deferred payment of up to a maximum of $275,000 based on the earnings before interest and taxes and depreciation of the acquired Company to be paid on March 31, 1999, if earned. The results of operations of Tri-Electric are included in the consolidated statements of income from the date of acquisition. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $3.9 million was recorded in connection with the acquisition. The Company expects that its software will be year 2000 compatible by the end of 1998. The upgrading of the Company's software to address year 2000 issues is being handled through new releases of current software. All costs associated with year 2000 issues will be included as part of normal software upgrades or operating costs, as appropriate. The Company does not believe that any of the costs associated with year 2000 issues will be material to its financial condition or results of operations. 21 23 The Company believes that cash generated from operations and available under its Credit Facility will meet its future ongoing operational and liquidity needs and capital requirements. Funding of the Company's acquisition program and integrated supply strategy will require capital in the form of the issuance of additional equity or debt financing. There can be no assurance that such financing will be available to the Company or as to the terms thereof. ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". In February 1997, the FASB issued Statements Nos. 128 and 129 "Earnings per Share" and "Disclosure of Information about Capital Structure", respectively, and in June 1997, issued Statements Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information", respectively. The major provisions of these statements and their impact on the Company are discussed below. Statement No. 125 established criteria for recognition of a sale in conjunction with the transfer of financial assets, under which sales may be recognized only when the transferor has surrendered control of the assets. This statement currently is not anticipated to have any impact on the Company as the Company does not currently enter into transactions which fall under the scope of this statement. Statement No. 128 requires the presentation of basic earnings per share and diluted earnings per share in financial statements of public enterprises rather than primary and fully diluted earnings per share as previously required. Under the provisions of this statement, basic earnings per share will be computed based on weighted average shares outstanding and will exclude dilutive securities such as options and warrant. Diluted earnings per share will be computed including the impacts of all potentially dilutive securities. The Company adopted this statement in 1997, as required, and has restated all previously stated earnings per share data in this Prospectus. The difference between fully diluted earnings per share and diluted earnings per share was not material. In June 1997, the FASB issued Statement No. 130, which requires additional disclosure of information about an entity's capital structure, including information about dividend and liquidation preferences, voting rights, contracts to issue additional shares, conversion and exercise prices, etc. The Company plans to adopt this statement in December 1997. SFAS No. 129 requires additional disclosure of information about an entity's capital structure, including information about dividend and liquidation preferences, voting rights, contracts to issue additional shares, conversion and exercise prices, etc. The Company has adopted this statement as of and for the period ended December 31, 1997. In June 1997, the FASB adopted Statement No. 131, which requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. The adoption of this statement is not anticipated to have an impact on the Company as the Company currently does not enter into any transactions that result in charges (or credits) directly to equity (such as additional minimum pension liability changes, currency translation adjustments, unrealized gains and losses on available for sale securities). Statement No. 131 provides revised disclosure guidelines for segments of an enterprise based on a management approach to defining operating segments. The Company currently operates in only one industry segment and analyzes operations on a Company-wide basis; therefore, the adoption of the statement is not expected to materially impact the Company. The Company plans to adopt this statement in 1998. INFLATION The Company does not believe the effects of inflation have any material adverse effect on its results of operations or financial condition and attempts to minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable. 22 24 BUSINESS GENERAL The Company is a leading supplier of MRO products, equipment and services to industrial customers. The Company provides a wide range of MRO products in the following categories: fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical products. The Company also offers a line of valve and valve automation products within the pipe, valve and fittings category and is seeking to expand its presence in this area. The Company offers its customers a single source of supply on an efficient and competitive basis by being a first-tier distributor which purchases its products directly from the manufacturer. The Company also provides value-added services such as system design, fabrication, installation, repair and maintenance for its customers. The Company offers this wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional distribution to fully integrated supply contracts. Since current management acquired control of the Company in 1986, the Company has grown substantially through 12 acquisitions. This growth has been designed to position and differentiate the Company as a single source, first-tier distributor of the major product categories in the United States industrial market. The Company currently provides a wide range of products in four of the five major product categories. The Company also intends to expand its product offering in the fifth product category, pipe, valve and fittings. INDUSTRY OVERVIEW The Company estimates that annual sales in the United States of MRO products for industrial customers currently exceeds $200 billion, of which the Company estimates over $150 billion are in the five major product categories of (i) fluid handling equipment, (ii) bearings and power transmission equipment, (iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v) electrical products. The Company's MRO products include a wide range of products in the fluid handling equipment, bearings and power transmission equipment and general mill and safety supplies categories. The Company also offers a line of valve and valve automation products within the pipe, valve and fittings category and is seeking to expand its presence in this area. With additional expansion in the pipe, valve and fittings category, the Company will be able to provide as a first-tier distributor products in the five major MRO product categories. Based on 1996 sales as reported by industry sources, the Company was the 40th largest distributor of MRO products in the United States. On a combined basis after giving effect to the Company's 1997 acquisitions of SSI and Pelican and 1998 acquisition of Tri-Electric, the Company would have been the 28th largest distributor of MRO products in the United States. While the growth in the industrial distribution market is generally related to the expansion of the United States economy, revenues attributable to the outsourcing of MRO supply procurement, inventory control and warehouse management, known as "integrated supply", are expected to grow at an annualized rate of 40% from $1.8 billion in 1995 to $10 billion in 2000. The industrial distribution market is highly fragmented, with the 50 largest distributors accounting for less than 15% of the total United States market during 1996. As a result, most industrial customers currently purchase their industrial supplies through numerous local distribution and supply companies. These distributors generally provide the customer with repair and maintenance services, technical support and application expertise with respect to one product category. Products typically are purchased by the distributor for resale directly from the manufacturer and warehoused at branch distribution facilities of the distributor until sold to the customer. The customer also typically will purchase an amount of product inventory for its near term anticipated needs and warehouse those products at its industrial site until the products are used. The Company believes that the current distribution system for industrial products in the United States creates inefficiencies at both the customer and the distributor level through excess inventory requirements and duplicative cost structures. To compete more effectively, the Company's customers and other users of MRO 23 25 products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In response to this customer desire, three primary trends have emerged in the industrial supply industry: Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry. Customized Value-Added Service. As industrial customers focus on their core manufacturing or other production competencies, they increasingly are demanding customized distribution services, ranging from value-added traditional distribution to integrated supply. Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the MRO customer, some MRO distributors are expanding their product coverage to eliminate second-tier distributors and the difficulties associated with alliances. Industrial distributors typically provide professional sales expertise, engineering expertise, inventory availability, fabrication and assembly and in-house and field service. The Company believes that the acquisition of other businesses should not materially affect its ability to continue to provide these services to its customers and the customers of the acquired distributors. In fact, the Company believes that as a larger and more diverse organization it should be able to maintain the same or higher level of service to its customers and the customers of any acquired distributors. The Company also believes that the level of service provided to the customers of the acquired business may be enhanced as a result of the availability of a broader range of products, the elimination of duplicative overhead and DXP's SmartSource and American MRO integrated supply programs. BUSINESS STRATEGY The Company's strategy is focused on addressing current trends in the industrial distribution market through a combination of acquisitions and internal growth. The Company seeks acquisitions that will provide the Company access to additional products lines and customers to enhance its position as a single source industrial distributor with first-tier distribution capabilities. Key elements of the Company's internal growth strategy include leveraging existing customer relationships, expanding product offerings from existing locations, reducing costs through consolidated purchasing programs and combined product distribution centers, designing and implementing innovative solutions to address the procurement and supply needs of the Company's customers and using the Company's traditional distribution and integrated supply capabilities to increase sales in each area. The Company's key strategies are: Industry Consolidator; Focused Acquisition Strategy. The Company is an active consolidator in the industrial distribution industry. The Company believes that significant acquisition opportunities exist in this industry due in large part to the fragmented nature of the industry and customer desire to reduce costs and improve efficiencies through vendor reduction. The Company's acquisition strategy is focused on enhancing the Company's position as a single source industrial distributor with first-tier distribution capabilities for a broad range of MRO products and improving the Company's ability to deliver value-added traditional distribution and flexible integrated supply solutions. Although the Company provides as a first-tier distributor a substantial portion of products in four of the five major MRO product categories, the Company plans to continue to seek acquisitions that will broaden its product coverage within each of the five major MRO product categories. The Company also believes that substantial opportunities exist to expand the Company's customer base and to penetrate geographic markets not currently served by the Company through selective acquisitions. Acquisitions also provide the opportunity for the Company to increase its operating margins by reducing administrative overhead, consolidating distribution locations and personnel and reducing costs for products through volume purchases and similar arrangements. The Company further believes that as acquisitions are assimilated, additional opportunities should arise to increase sales to the customers of the 24 26 acquired companies by providing products to these customers that were not previously offered by the acquired company. First-Tier Distributor of Extensive Line of MRO Products. The Company has direct relationships with a substantial number of original equipment manufacturers and does not rely on other distributors to supply bearings and power transmission equipment, general mill and safety supplies, electrical products and fluid handling equipment. While many of the Company's competitors offer traditional distribution of a more limited product range, the Company is not aware of any major competitor, other than direct-mail distributors, that offers on a non-direct mail basis as many product categories as the Company offers. As a first-tier distributor of an extensive line of MRO products, the Company is able to reduce substantially the markups paid by the customer to second-tier distributors and significantly reduce the number of supplier relationships needed by the customer, without the difficulties associated with alliances. Value-Added Services. The Company's distribution strategy is focused on building and maintaining long-term relationships by understanding the customers' operations and providing value-added services such as product application, engineering and system design. Because the Company has extensive experience as a traditional distributor, the Company has built strong knowledge of its customers' operations and can provide valuable assistance in identifying the products that will best meet their needs. DXP's role extends beyond procurement services due to the Company's ability to deliver personal, after-the-sale service. Customized Distribution Solutions; Integrated Supply. The Company believes that the most desirable approach to industrial distribution is to provide the customer with a complete continuum of supply options, ranging from traditional distribution to integrated supply. Through the Company's SmartSource program, the customer is able to select only those products and services needed. For those customers purchasing a number of products in large quantities, the Company offers its American MRO program, a "fully integrated supply" program that permits the customer to outsource all or most of their procurement needs to the Company. Cost Efficiencies. As the Company expands into new geographic regions and further penetrates existing markets, the Company intends to consolidate many functions such as accounting, management information systems and certain purchasing arrangements to eliminate duplicative costs that otherwise would be incurred at the operating level. The Company seeks higher volume purchasing in order to reduce product costs. The Company may also continue to consolidate facilities or branches to optimize efficiencies. RECENT ACQUISITIONS The Company completed two strategic acquisitions and a third in the first quarter of 1998 with combined 1997 revenues of $74.1 million (of which $31.7 million appeared in the Company's consolidated financial statements for 1997) directed at expanding its product lines and increasing its geographic presence. Through the Company's acquisition of the assets of SSI, the Company added general mill and safety supply to its product offerings and expanded its geographic presence to seven additional states and 24 additional cities throughout the United States. The acquisition of SSI also enhanced the Company's integrated supply capabilities through SSI's existing integrated supply contracts and SmartSource program. The Company's May 1997 acquisition of Pelican expanded the Company's general mill and safety supply product lines and added an additional integrated supply contract with a major refinery in Baton Rouge, Louisiana. In the first quarter of 1998, the Company completed the acquisition of the assets of Tri-Electric, thereby adding electrical products to its product offerings. PRODUCTS AND SERVICES The Company currently serves as a first-tier distributor of more than 170,000 SKUs for use primarily by customers engaged in the general manufacturing, oil and gas, petrochemical, service and repair and wood products industries. Other industries served by the Company include mining, construction, chemical, municipal, food and beverage and pulp and paper. The Company's MRO products include a wide range of products in the fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical products. The Company also offers a line of valve and valve automation products within the pipe, valve and fittings category and is seeking to expand its presence in this area. With additional 25 27 expansion in the pipe, valve and fittings category, the Company will be able to provide as a first-tier distributor a substantial portion of products in the five major MRO product categories. The Company's products are distributed from 54 distribution centers strategically located throughout the United States and sold through a sales force of 275 sales representatives who generally are compensated on a commission basis. Fluid Handling Equipment The Company's fluid handling equipment line includes a full line of (i) centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production, (ii) rotary gear pumps for low-to medium-pressure service applications, such as pumping lubricating oils and other viscous liquids, (iii) plunger and piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service and (iv) air-operated diaphragm pumps. The Company also provides various pump accessories. Sales of fluid handling equipment accounted for 55%, 53%, 44% and 36% of the Company's revenues for the years ended December 31, 1995, 1996, 1997 and quarter ended March 31, 1998 respectively. Such sales accounted for 36% and 35% of the Company's revenues for the year ended December 31, 1997 and the quarter ended March 31, 1998, respectively, on a pro forma basis after giving effect to the SSI, Pelican and Tri-Electric acquisitions. Bearings and Power Transmission Equipment The Company provides a full line of bearings, hoses, seals and power transmission products. The Company's bearing products include several types of mounted and unmounted bearings for a variety of applications. Hose products distributed by the Company include a large selection of industrial fittings and stainless steel hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as well as hoses for chemical, petroleum, air and water applications. The Company distributes seal products for downhole, wellhead, valve and completion equipment to oilfield service companies. Power transmission products distributed by the Company include speed reducers, flexible coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses. Sales of bearings, hoses, seals and power transmission equipment accounted for 35%, 39%, 31% and 29% of the Company's revenues for the years ended December 31, 1995, 1996, 1997 and quarter ended March 31, 1998, respectively. Such sales accounted for 25% and 28% of the Company's revenues for the year ended December 31, 1997 and the quarter ended March 31, 1998, respectively, on a pro forma basis after giving effect to the SSI, Pelican, and Tri-Electric acquisitions. General Mill and Safety Supplies The Company, as a result of the acquisitions of SSI and Pelican in May 1997, offers a broad range of general mill and safety supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, cutting tools, fasteners, hand tools, janitorial products, pneumatic tools, welding equipment, eye and face protection products, first aid products, protection products, hazardous material handling products, instrumentation and respiratory protection products. Sales of general mill supply and safety products accounted for approximately 27% of the Company's revenue on a pro forma basis for the year ended December 31, 1997 and 26% of the Company's revenue for the quarter ended March 31, 1998. Pipe, Valve and Fittings The Company's valve and valve automation products within this category include a full line of pneumatic, hydraulic and electric actuators for critical or high-pressure service applications or remote valve operation applications, such as refinery, offshore and pipeline applications, as well as for applications involving large-diameter pipe. The Company also provides a full line of manual worm gear and bevel gear actuators for low-pressure applications not requiring remote operation, including tank farms, water lines and municipal water systems. Sales of valves and valve automation products accounted for 9%, 8%, 6% and 5% of the Company's revenues for years ended December 31, 1995, 1996, 1997 and quarter ended March 31, 1998, respectively. Such sales accounted for 4% of the Company's revenue for the year ended December 31, 1997 and quarter ended March 31, 1998, on a pro forma basis after giving effect to the SSI, Pelican and Tri-Electric acquisitions. 26 28 Electrical Products The Company offers a broad range of electrical products, such as wire conduit, wiring devices, electrical fittings and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries, fans and fuses. Sales of electrical products accounted for 2% of the Company's revenues for the quarter ended March 31, 1998. Such sales accounted for 8% and 7% of the Company's revenues for the year ended December 31, 1997 and the quarter ended March 31, 1998, respectively, on a pro forma basis after giving effect to the SSI, Pelican and Tri-Electric acquisitions. CUSTOMIZED DISTRIBUTION SERVICES System Design, Fabrication, Installation and Repair and Maintenance Services In addition to distributing products, the Company provides complete, customized pumping, valve automation and power transmission system design and fabrication services through its engineering personnel and fabrication facilities. The Company also provides training services with respect to the installation and basic applications of its products as well as around-the-clock field repair services supported by a fleet of fully equipped service vehicles. Integrated Supply The Company actively markets to its customers through the Company's SmartSource program, a method whereby the customer may choose from a menu of options the aspects of integrated supply that it prefers. Additionally, through its American MRO program, the Company offers a comprehensive outsourcing program designed to provide all aspects of the maintenance, repair and operating supply procurement and the inventory management and distribution functions for its customers at the customer's location. These two programs allow the customer to tailor a program to meet its specific needs. CUSTOMERS The Company provides its products and services to over 25,000 customers in various industries, principally general manufacturing, oil and gas, petrochemical, service and repair and wood products. Other industries include mining, construction, chemical, municipal, food and beverage and pulp and paper. No one customer represented more than 5% of the Company's sales for the year ended December 31, 1997. SALES AND MARKETING The Company markets its products through its sales force, consisting of approximately 126 outside sales representatives and 149 direct sales representatives. The Company has structured compensation to provide incentives to its sales representatives to increase sales through the use of commissions. The Company's outside sales representatives focus on building long-term relationships with customers and, through their product and industry expertise, providing customers with product application, engineering and after-the-sale services. The direct sales representatives support the outside sales representatives and are responsible for entering product orders and providing technical support with respect to the Company's products. Because the Company offers a broad range of products, the Company's outside and direct sales representatives are able to use their existing customer relationships with respect to one product line to cross-sell the Company's other product lines. In addition, geographic locations in which certain products are sold also are being utilized to sell products not historically sold at such locations. Unlike many of its competitors, the Company markets its products primarily as a first-tier distributor, generally procuring products directly from the manufacturers, rather than from other distributors. As a first-tier distributor, the Company is able to reduce its customers' costs and improve efficiencies in the supply chain. The Company has increased its competitive advantage through its traditional and integrated supply programs, designed to address the customer's specific product and procurement needs. The Company offers its customers various options for the integration of their supply needs, ranging from serving as a single source of 27 29 supply for all or specific lines of products and product categories to offering a fully integrated supply package in which the Company assumes the procurement and management functions, including ownership of inventory, at the customer's location. The Company's unique approach to integrated supply allows the Company to design a program that best fits the needs of the customer. For those customers purchasing a number of products in large quantities, the customer is able to outsource all or most of those needs to the Company. For customers with smaller supply needs, the Company is able to combine its traditional distribution capabilities with its broad product categories and advanced ordering systems to allow the customer to engage in one-stop shopping without the commitment required under an integrated supply contract. SUPPLIERS The Company acquires its products through numerous original equipment manufacturers. The Company has distribution agreements with these manufacturers, some of which give the Company exclusive rights to distribute the manufacturers' products in a specific geographic area. All of the Company's distribution agreements are subject to cancellation by the manufacturer upon one year notice or less. No one manufacturer provides products that account for 10% or more of the Company's revenues. The Company believes that alternative sources of supply could be obtained in a timely manner if any distribution agreement were canceled. Accordingly, the Company does not believe that the loss of any one distribution agreement would have a material adverse effect on its business, financial condition or results of operations. Representative manufacturers of the Company's products include (i) Gould's, G&L, Viking, Wilden and Gaso (fluid handling products), (ii) SKF, Torrington/Fafnir, Timkin and NTN, Dodge/Reliance, Falk, Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric (bearing and power transmission products), (iii) Union Bullerfield, Gulf Coast Fasteners, Norton Gray Abrasives, Sastech, Inc., and LaCross Rainfair Safety Products (general mill and safety supply), (iv) Cutler-Hammer, Cooper, Killark, and Allied and American Insulated Wiring (electrical products) and (v) G.H. Bettis (valve and valve automation products). MANAGEMENT INFORMATION SYSTEM The Company uses technology to benefit customers and to improve the Company's productivity and efficiency. In addition to traditional functions of inventory control, order processing, purchasing, accounts receivable, accounts payable and general ledger, the Company's computer system has the flexibility to integrate with the customer's maintenance, accounting and management systems. The Company's system allows for real-time reporting of industrial products used by work order, department and individual, as well as on-line stock inquiry and order-status reports. The Company's system supports advanced functions, such as EDI, customized billing, end user reporting, facsimile transmission, bar coding and preventative maintenance. The Company's Smart Source and American MRO programs deliver DXP's technology to the integrated supply customer, thereby eliminating duplication and inefficiencies to lower the total acquisition cost of MRO products. This system links the Company's branches and corporate offices with manufacturers and customers into one network system. The Company operates a mainframe system that is supported by the industry standard open system environment. The Company has invested significant resources within the last 18 months to increase the capabilities and networking opportunities of this system. The Company's system supports a large number of customer specific databases which tie into the Company's primary database. This capability allows the Company to provide its customers with a wide variety of reports that are customized to meet the specific needs of the customer. COMPETITION The Company's business is highly competitive. The Company competes with a variety of industrial supply distributors, many of which may have greater financial and other resources than the Company. Many of the Company's competitors are small enterprises selling to customers in a limited geographic area. The Company also competes with larger distributors that provide integrated supply programs and outsourcing services similar to those offered by the Company through its SmartSource and American MRO programs, some of which may be able to supply their products in a more efficient and cost-effective manner than the Company. The 28 30 Company also competes with direct mail distributors, large warehouse stores and, to a lesser extent, manufacturers. While many of the Company's competitors offer traditional distribution of some of the product groupings offered by the Company, the Company is not aware of any major competitor that offers on a non- direct mail basis a product grouping as broad as that which will be offered by the Company following the Proposed Acquisitions. Further, while certain direct-mail distributors provide product offerings as broad as the Company, these competitors do not offer the product application, engineering and after-the-sale services provided by the Company. BACKLOG Backlog is not material to the Company's business. INSURANCE The Company maintains liability and other insurance that it believes to be customary and generally consistent with industry practice. There can be no assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply to all liabilities. The occurrence of an adverse claim in excess of the coverage limits maintained by the Company could have a material adverse effect on the Company's financial condition and results of operations. GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS The Company is subject to various laws and regulations relating to its business and operations, and various health and safety regulations as established by the Occupational Safety and Health Administration. Certain of the Company's operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although the Company believes that is has adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could have a material adverse effect on the Company. The Company is not currently aware of any situation or condition that it believes is likely to have a material adverse effect on its results of operations or financial condition. EMPLOYEES At March 31, 1998, the Company had 709 full-time employees. The Company believes that its relationship with its employees is good. FACILITIES AND OPERATIONS The Company owns or leases 54 branch distribution facilities located in Alabama, Arizona, Arkansas, Colorado, Idaho, Louisiana, Montana, Nevada, New Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming. These facilities average from 2,500 square feet to 138,000 square feet in size. Those facilities that are not owned by the Company are leased for terms generally ranging from three to five years. The leases provide for periodic specified rental payments and certain leases are renewable at the option of the Company. The Company believes that if the leases for any of its facilities were not renewed, other suitable facilities could be leased with no material adverse effect on its business, financial condition or results of operations. Certain of the facilities owned by the Company are pledged to secure indebtedness of the Company. 29 31 MANAGEMENT The following table sets forth certain information as of March 31, 1998, about the executive officers and directors of the Company. All directors of the Company hold office until the next annual meeting of shareholders or until their respective successors have been elected and qualified. Executive officers are elected by the Company's Board of Directors to hold office until their respective successors are elected and qualified.
NAME AGE POSITION(S) ---- --- ----------- David R. Little................... 46 Chairman of the Board, President and Chief Executive Officer Gary A. Allcorn................... 45 Senior Vice President/Finance and Chief Financial Officer Jerry J. Jones.................... 59 Senior Vice President/Operations and Director Bryan H. Wimberly................. 59 Senior Vice President/Corporate Development and Director Cletus Davis...................... 67 Director Kenneth H. Miller................. 58 Director Thomas V. Orr..................... 47 Director
Set forth below is a description of the backgrounds of the executive officers and directors of the Company. David R. Little has served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company since its organization in 1996 and has also held these positions with SEPCO since he acquired a controlling interest in the Company in 1986. Mr. Little has been employed by SEPCO since 1975 in various capacities, including Staff Accountant, Controller, Vice President/Finance and President. Gary A. Allcorn has served as Senior Vice President/Finance of the Company since August 1996 and was appointed Chief Financial Officer in November 1997. Mr. Allcorn also has held these positions with SEPCO since June 1995. Mr. Allcorn has been employed by SEPCO since 1985 in various capacities, including Vice President/Finance and Chief Financial Officer. Jerry J. Jones has served as a Director since July 1996 and as Senior Vice President/Operations since September 1997. From August 1996 to September 1997, Mr. Jones served as Senior Vice President/ Corporate Development. Mr. Jones has also served as a Director of SEPCO since 1986 and as Senior Vice President/Corporate Marketing of SEPCO since June 1995. From February 1993 to June 1995, Mr. Jones served as President of T.L. Walker Bearing Group, a subsidiary of SEPCO. Prior to his employment with SEPCO, Mr. Jones served as President and Chief Executive Officer of the Energy Partners, Inc./Perry Oceanographics, a renewable energy development company and offshore underwater equipment manufacturer, from November 1989 to December 1992. Bryan H. Wimberly has served as a Director since July 1996 and as Senior Vice President/Corporate Development since September 1997. From August 1996 to September 1997, he served as Senior Vice President/Pump, Bearing, Power Transmission and Valve Automation Group. Mr. Wimberly has also served as a Director of SEPCO since 1987 and the President and Chief Operating Officer of SEPCO since October 1995. Mr. Wimberly has been employed by SEPCO since 1987 in various capacities, including Senior Vice President/Operations. Cletus Davis has served as a Director of the Company since August 1996. Mr. Davis has also served as a Director of SEPCO since May 1996. Mr. Davis is an attorney practicing in the areas of commercial real estate, banking, corporate, estate planning and general litigation and is also a trained mediator. From May 1988 to February 1992, Mr. Davis was a member of the law firm of Wood, Lucksinger & Epstein. Since March 1992, Mr. Davis has practiced law with the law firm of Cletus Davis, P.C. 30 32 Kenneth H. Miller has served as a Director of the Company since August 1996. Mr. Miller has also served as a Director of SEPCO since April 1989. Mr. Miller is a Certified Public Accountant and has been a solo practitioner since 1983. Thomas V. Orr has served as a Director of the Company since August 1996. Mr. Orr has also served as a Director of SEPCO since May 1996. Mr. Orr has been Executive Managing Director of Morgan Keegan & Company, Inc. ("Morgan Keegan"), an investment banking firm and one of the underwriters, since August 1997. From February 1995 to July 1997 he was a Senior Vice President and Divisional Manager of Morgan Keegan. From June 1990 to January 1995, Mr. Orr served as Divisional Sales Manager for two years and Branch Officer Manager for three years for PaineWebber, Inc., an investment banking firm. BOARD OF DIRECTORS' COMPENSATION The Company's Bylaws provide that directors may be paid their expenses, if any, and may be paid a fixed sum for attendance of each Board of Directors meeting. The Company pays each non-employee director $1,000 per committee or board meeting not to exceed $1,500 in the event two meetings occur on the same day. In 1997, Mr. Davis received $4,000 and Messrs. Orr and Miller received $3,000 for attendance at Board of Directors meetings. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has two committees, an Audit Committee and a Compensation Committee, each composed of at least three independent directors. The Audit Committee, composed of Messrs. Davis, Miller and Orr, makes recommendations to the Board of Directors on matters regarding the independent public accountants of the Company and the annual audit of the Company's financial statements and accounts. The Compensation Committee, composed of Messrs. Davis, Miller and Orr, makes recommendations to the Board of Directors regarding compensation for the Company's executive officers, directors, employees consultants and agents, and will act as the administrative committee for any stock-based plan of the Company. COMPENSATION OF EXECUTIVE OFFICERS Set forth in the following table is certain compensation information concerning the Chief Executive Officer and each of the Company's most highly compensated executive officers as to whom the total annual salary and bonus for the fiscal year ended December 31, 1997, exceeded $100,000. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------- ------------ OTHER SECURITIES ANNUAL UNDERLYING SALARY BONUS COMPENSATION OPTIONS NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) --------------------------- ---- ------- ------- ------------ ------------ David R. Little, 1997 279,277 112,849 -- -- President and Chief Executive Officer 1996 263,714 93,454 -- -- 1995 222,567 131,888 -- 800,000 Jerry J. Jones, Senior Vice President/ 1997 131,672 75,035 -- -- Operations 1996 116,264 62,516 -- -- 1995 113,330 67,503 357,216(1) 359,200 Bryan H. Wimberly, 1997 142,567 94,227 -- -- Senior Vice President/Corporate 1996 136,031 65,620 -- -- Development 1995 121,967 92,589 -- 48,800 Gary A. Allcorn, 1997 123,066 30,023 -- -- Senior Vice President/Finance and 1996 114,161 10,741 -- 20,000 Chief Financial Officer 1995 103,707 9,059 -- --
- --------------- (1) Represents payments to Mr. Jones in respect of the repurchase by the Company of shares acquired by Mr. Jones on exercise of options held by him. 31 33 The following table sets forth information concerning the value of unexercised options held by each of the executive officers named in the Summary Compensation Table at December 31, 1997. None of such executive officers exercised any stock options during the year ended December 31, 1997. OPTION VALUES AT DECEMBER 31, 1997
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED AT DECEMBER 31, 1997 IN-THE-MONEY OPTIONS AT (# SHARES) DECEMBER 31, 1997($)(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- David R. Little............................. 800,000 -- 7,760,000 -- Jerry J. Jones.............................. 359,200 -- 3,541,712 -- Bryan H. Wimberly........................... 48,800 -- 488,790 -- Gary A. Allcorn............................. 20,000 -- 183,750 --
- --------------- (1) Based on a price per share of $11.50, the closing sales price of the Common Stock on December 31, 1997 (as adjusted to reflect the two-to-one reverse stock split to be effected immediately prior to the consummation of the Offering). EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement (the "Little Employment Agreement"), effective July 1, 1996, as amended, with Mr. Little. The Little Employment Agreement is for a term of three years. The Little Employment Agreement provides for compensation in a minimum amount of $260,000 per annum, to be reviewed at least annually for possible increases, monthly bonuses equal to 3% of the profit before tax of the Company as shown on the books and records of the Company at the end of each month (up to an aggregate annual amount not to exceed twice the annual base salary paid to Mr. Little under the Little Employment Agreement) and other perquisites in accordance with the Company policy. In the event Mr. Little terminates his employment for "Good Reason" (as defined therein), or is terminated by the Company for other than "Good Cause" (as defined therein), Mr. Little is entitled to receive a cash lump sum payment equal to the sum of (i) the base salary for the remainder of the employment period under the Little Employment Agreement, (ii) an amount equal to the sum of the most recent 12 months of bonuses paid to him, (iii) two times the sum of his current annual base salary plus the total of the most recent 12 months of bonuses, (iv) all compensation previously deferred and any accrued interest thereon and any accrued vacation pay not yet paid by the Company and (v) continuation of benefits under the Company's benefit plans for the current employment period. Mr. Little is also entitled under the Little Employment Agreement to certain gross-up payments if an excise tax is imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended, which imposes an excise tax on certain severance payments in excess of three times an annualized compensation amount following certain changes in control or any payment of distribution made to him. As amended on May 21, 1998, the Little Employment Agreement will terminate June 30, 2001 if Mr. Little enters into a new agreement with the Company, as approved by the Compensation Committee, and will not be renewable automatically. The Company also has entered into employment agreements (each Employment Agreement hereinafter referred to as an "Employment Agreement" and the three Employment Agreements hereinafter collectively referred to as the "Employment Agreements"), effective as of July 1, 1996, with Messrs. Jerry J. Jones, Bryan H. Wimberly and Gary A. Allcorn, (each hereinafter referred to as "Employee"). Each Employment Agreement is for a term of one year. The Employment Agreements provide for (i) annual salary ("Salary") in the amounts of $130,001 for Mr. Jones, $130,000 for Mr. Wimberly and $113,100 for Mr. Allcorn and (ii) other perquisites in accordance with Company policy. The Employment Agreements provide for bonuses as follows: (i) Mr. Jones is entitled to a monthly bonus of two percent of the monthly profit before tax of the Company, excluding sales of fixed assets and extraordinary items; (ii) Mr. Wimberly is entitled to a monthly bonus of two percent of the monthly profit before tax of SEPCO, excluding sales of fixed assets and extraordinary items; and (iii) Mr. Allcorn is entitled to a monthly bonus of one percent of the monthly profit 32 34 before tax of the Company, excluding sales of fixed assets and extraordinary items. The Employment Agreements were amended on May 21, 1998 to provide that the aggregate of the monthly bonuses in any one year may not exceed twice the annual base salary paid to the employee. The May 1998 amendment also provides that the Employment Agreements will not be renewed July 1, 1998 if Messrs. Jones, Bryan and Allcorn have entered into new employment agreements with the Company, as approved by the Compensation Committee. In the event Employee terminates his employment for "Good Reason" (as defined therein), or is terminated by the Company for other than "Cause" (as defined therein), each Employee would receive (i) 12 monthly payments each equal to one month of the Salary, in the case of Messrs. Jones, Wimberly and Allcorn, and six monthly payments each equal to one month of Salary, in the case of Mr. Evans, (ii) a termination bonus equal to the previous 12 monthly bonuses, in the case of Messrs. Jones, Allcorn, and Wimberly and (iii) any other payments due through the date of termination. In the event Employee dies, become disabled, terminates the Employment Agreement with notice or the Employment Agreement is terminated by the Company for Cause, Employee or Employee's estate, as applicable, would receive all payments then due him under the Employment Agreement through the date of termination. BENEFIT PLANS Employee Stock Ownership Plan The Company maintains an employee stock ownership plan (the "ESOP") for the benefit of eligible employees pursuant to which annual contributions may be made. The amount and form of the annual contribution is within the discretion of the Company's Board of Directors. Such contributions are limited to a maximum of 15% of the total compensation paid to all participants eligible to receive an allocation during the fiscal year. The Company (or its predecessor, SEPCO) contributed $150,000 for each of the years ended December 31, 1996, 1995 and 1994. The ESOP currently is administered by the Company's Compensation Committee. Long-Term Incentive Plan In August 1996, the Company established the LTIP, which provides for the grant of stock options (which may be non-qualified stock options or incentive stock options for tax purposes), stock appreciation rights issued independent of or in tandem with such options, restricted stock awards and performance awards to certain key employees of the Company and its subsidiaries. The LTIP is administered by the Compensation Committee. At March 31, 1998, 84,500 shares of Common Stock (approximately 2% of the current outstanding shares of Common Stock) were available for issuance under the LTIP, and options granted under the LTIP to purchase 111,500 shares of Common Stock were outstanding. In addition, as of January 1 of each year the LTIP is in effect, if the total number of shares of Common Stock issued and outstanding, not including any shares issued under the LTIP, exceeds the total number of shares of Common Stock issued and outstanding as of January 1 of the preceding year, the number of shares available will be increased by an amount such that the total number of shares available for issuance under the LTIP equals 5% of the total number of shares of Common Stock outstanding, not including any shares issued under the LTIP. Lapsed, forfeited or canceled awards will not count against these limits. Cash exercises of SARs and cash settlement of other awards will also not be counted against these limits but the total number of SARs and other awards settled in cash shall not exceed the total number of shares authorized for issuance under the LTIP (without reduction for issuances). The consummation of the Offering will result in an increase in 127,500 shares of Common Stock available under the LTIP, which may be used for grants other than stock options under the LTIP. 33 35 CERTAIN TRANSACTIONS In December 1989, the Company restructured certain loans previously made by the Company to David R. Little, Chairman of the Board, President and Chief Executive Officer of the Company, pursuant to which Mr. Little executed two promissory notes in the amounts of $149,910 and $58,737, respectively, each bearing interest at 9% per annum. The notes require monthly payments of $1,349 and $528, respectively. The outstanding balances of such loans at December 31, 1997, were $127,814 and $50,080, respectively. In December 1993, the Company loaned Mr. Little approximately $210,940 to purchase 59,800 shares of SEPCO's Class A Common Stock. The loan bore interest at 6% per annum and provided for annual interest payments and one principal payment upon sale of the stock which secured such loan. The loan was repaid on August 5, 1996. The Company from time to time also has made non-interest bearing advances to Mr. Little that as of December 31, 1997 totaled approximately $340,439. The Company and Mr. Little have agreed that the amount of non-interest bearing advances made to Mr. Little will not exceed the amount outstanding at December 31, 1997. The largest aggregate amount of Mr. Little's indebtedness outstanding to the Company during the year ended December 31, 1997 was approximately $638,152. Mr. Little, a Selling Shareholder, intends to apply a portion of the net proceeds from his sale of shares of Common Stock hereunder to repay approximately $258,000 owed to the Company. See "Security Ownership of Management, Principal Shareholders and Selling Shareholders". Mr. Allcorn, Senior Vice President/Finance and Chief Financial Officer of the Company, is the trustee of three trusts for the benefit of Mr. Little's children, each of which holds 570,932 shares of Common Stock and 5,000 shares of Series B Convertible Preferred Stock. Mr. Allcorn has advised the Company that if the Offering is consummated, immediately prior to the consummation of the Offering, the aggregate of 15,000 shares of Series B Convertible Preferred Stock will be converted into shares of Common Stock. Mr. Allcorn exercises sole voting and investment power over the shares held by such trusts. Mr. Little personally guaranteed up to $500,000 of the obligations of the Company under the Credit Facility. In addition, all of the shares of Common Stock and Series B Convertible Preferred Stock held in trust for Mr. Little's children have been pledged to such lender to secure the obligations of the Company under the Credit Facility. 34 36 SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDERS The following table sets forth information as of May 15, 1998, with respect to (i) persons known to the Company to be beneficial holders of five percent or more of either the outstanding shares of Common Stock or Series A Preferred Stock, (ii) named executive officers and directors of the Company, (iii) all executive officers and directors of the Company as a group and (iv) certain information regarding the Selling Shareholders.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2) ------------------------------------------------------------------- COMMON STOCK COMMON STOCK PRIOR TO SUBSEQUENT TO SERIES A THE OFFERING NUMBER THE OFFERING NAME AND ADDRESS OF PREFERRED ---------------- OF SHARES ---------------- BENEFICIAL OWNER(1) STOCK % NUMBER % TO BE SOLD NUMBER % ------------------- --------- ---- --------- ---- ---------- --------- ---- Gary A. Allcorn(3)............................ -- -- 2,247,419 48.8 105,000 2,142,419 29.9 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 David R. Little(4)............................ -- -- 1,080,069 21.7 100,000 980,069 12.3 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Bryan H. Wimberly(5).......................... -- -- 418,562 9.9 20,000 398,562 5.5 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Jerry J. Jones(6)............................. -- -- 359,643 7.9 45,000 314,643 4.2 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 SEPCO Industries, Inc......................... 1,870 62.5 938,021 22.5 -- 938,021 13.1 Employee Stock Ownership Plan c/o River Oaks Trust Company, Trustee 2001 Kirby Houston, Texas 77210 J. Michael Wappler(7)......................... -- -- 220,160 5.3 10,000 210,160 2.9 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Denny Lawrence(8)............................. -- -- 86,048 2.1 10,000 76,000 1.1 Rt. 1, Box 265-B Farmersville, Louisiana 71241 Donald E. Tefertiller(9)...................... 374 12.5 46,649 1.1 -- 46,649 * 4425 Congressional Drive Corpus Christi, Texas 78413 Norman O. Schenk(10).......................... 374 12.5 40,112 * -- 40,112 * 4415 Waynesboro Houston, Texas 77035 Charles E. Jacob(11).......................... 187 6.3 24,017 * -- 24,017 * P. O. Box 57 Maypearl, Texas 76064 Ernest E. Herbert(12)......................... 187 6.3 23,688 * -- 23,688 * 57 Coronado Avenue Kenner, Louisiana James Webster(13)............................. -- -- 21,476 * 10,000 11,476 * 6306 Glenhill Spring, Texas 77389 Thomas V. Orr, Director(14)................... -- -- 6,500 * -- 6,500 *
35 37
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2) ------------------------------------------------------------------- COMMON STOCK COMMON STOCK PRIOR TO SUBSEQUENT TO SERIES A THE OFFERING NUMBER THE OFFERING NAME AND ADDRESS OF PREFERRED ---------------- OF SHARES ---------------- BENEFICIAL OWNER(1) STOCK % NUMBER % TO BE SOLD NUMBER % ------------------- --------- ---- --------- ---- ---------- --------- ---- Kenneth H. Miller, Director(15)............... -- -- 6,500 * -- 6,500 * Cletus Davis, Director(16).................... -- -- 6,500 * -- 6,500 * All executive officers and directors as a group (8 persons)(17)....................... -- -- 4,345,353 74.5 300,000 4,065,353 48.8
- --------------- * Less than 1%. (1) Each beneficial owner's percentage ownership is determined by assuming that options, warrants and other convertible securities that are held by such person (but not those held by any other person) and that are exercisable or convertible within 60 days have been exercised or converted. (2) Unless otherwise noted, the Company believes that all persons named in the above table have sole voting and investment power with respect to all shares of Common Stock and Series A Preferred Stock beneficially owned by them. (3) Includes 1,712,796 shares of Common Stock and 15,000 shares of Series B Convertible Preferred Stock owned by the Kacey Joyce, Andrea Rae and Nicholas David Little 1988 Trusts (the "Trusts") for which Mr. Allcorn serves as trustee. Because of this relationship, Mr. Allcorn may be deemed to the beneficial owner of such shares and the 420,000 shares of Common Stock issuable upon conversion of the 15,000 shares of Series B Preferred Stock held by the Trusts. The 15,000 shares of Series B Convertible Preferred Stock will be converted into 420,000 shares of Common Stock immediately prior to the consummation of the Offering. Also includes 20,000 shares of Common Stock issuable upon exercise of an option and 7,423 shares of Common Stock held of record by the ESOP for Mr. Allcorn's account. If the underwriters' over-allotment option is exercised in full, Mr. Allcorn will sell an additional 36,750 shares of Common Stock. (4) Includes 800,000 shares of Common Stock issuable to Mr. Little upon exercise of an option and 40,844 shares of Common Stock held of record by the ESOP for Mr. Little's account. If the underwriters' over-allotment option is exercised in full, Mr. Little will sell an additional 35,000 shares of Common Stock. (5) Includes 50,400 shares of Common Stock owned of record by a trust of which Mr. Wimberly is one-third beneficiary and 48,800 shares of Common Stock issuable upon exercise of an option granted to Mr. Wimberly. Also includes 8,962 shares of Common Stock held by the ESOP for Mr. Wimberly's account. If the underwriters' over-allotment option is exercised in full, Mr. Wimberly will sell an additional 7,000 shares of Common Stock. (6) Includes 359,200 shares of Common Stock issuable upon exercise of an option granted to Mr. Jones and 443 shares of Common Stock held by the ESOP for Mr. Jones's account. If the underwriters' over-allotment option is exercised in full, Mr. Jones will sell an additional 15,750 shares of Common Stock. (7) Includes 7,810 shares of Common Stock held of record by the ESOP for Mr. Wappler's account. If the underwriters' over-allotment option is exercised in full, Mr. Wappler will sell an additional 3,500 shares of Common Stock. (8) Includes 21,200 shares of Common Stock issuable upon exercise of an option and 276 shares of Common Stock held by the ESOP for Mr. Lawrence's account. If the underwriters' over-allotment option is exercised in full, Mr. Lawrence will sell an additional 3,500 shares of Common Stock. (9) Includes 4,000 shares of Common Stock issuable upon exercise of an option and 11,849 shares of Common Stock held of record by the ESOP for Mr. Tefertiller's account. (10) Includes 9,312 shares of Common Stock held of record by the ESOP for Mr. Schenk's account. (11) Includes 8,417 shares of Common Stock held of record by the ESOP for Mr. Jacob's account. 36 38 (12) Includes 11,938 shares of Common Stock held of record by the ESOP for Mr. Herbert's account. (13) Includes 48 shares of Common Stock held of record by the ESOP for Mr. Webster's account. If the underwriters' over-allotment option is exercised in full, Mr. Webster will sell an additional 3,500 shares of Common Stock. (14) Includes 6,500 shares of Common Stock issuable upon exercise of an option. (15) Includes 6,500 shares of Common Stock issuable upon exercise of an option. (16) Includes 6,500 shares of Common Stock issuable upon exercise of an option. (17) See notes (3) through (6) and (14) through (16). INFORMATION REGARDING SELLING SHAREHOLDERS Gary A. Allcorn has served as Senior Vice President/Finance of the Company since August 1996 and as Chief Financial Officer since December 1997. Mr. Allcorn also has held these positions with SEPCO since June 1995 and has been employed by SEPCO since 1985 in various capacities. Mr. Allcorn is the trustee of three trusts for the benefit of the children of David R. Little, the Chairman of the Board, President and Chief Executive Officer of the Company, and exercises sole voting and investment power over the shares held by such trusts. Such shares are pledged to the lender under the Credit Facility. See "Management" and "Certain Transactions". David R. Little has served as President and a Director of the Company since July 1996 and as Chairman of the Board and Chief Executive Officer since August 1996. Mr. Little also has held these positions with SEPCO since he acquired a controlling interest of the Company in 1986. The Company has from time to time made certain loans to Mr. Little which aggregated approximately $340,439 as of December 31, 1997. Mr. Little also has personally guaranteed up to $500,000 of the obligations of the Company under one of its credit facilities. See "Management" and "Certain Transactions". Jerry J. Jones has been a Director of the Company since July 1996 and has served as Senior Vice President/Operations since September 1997. From August 1996 to September 1997, Mr. Jones was Senior Vice President/Corporate Development. Mr. Jones also has serviced as a Director of SEPCO since 1986 and as Senior Vice President/Corporate Marketing of SEPCO since June 1995. From February 1993 to June 1995, Mr. Jones served as President of a subsidiary of SEPCO. See "Management". Bryan H. Wimberly has been a Director of the Company since July 1996 and has served as Senior Vice President/Corporate Development since September 1997. From August 1996 to September 1997, Mr. Wimberly was the Senior Vice President/Pump, Bearing, Power Transmission and Valve Automation Group. Mr. Wimberly also has served as a Director of SEPCO since 1987 and as President and Chief Operating Officer of SEPCO since October 1995. Mr. Wimberly has been employed by SEPCO since 1987 in various capacities, including Senior Vice President/Operations. See "Management". J. Michael Wappler, James Webster and Denny Lawrence are employees of the Company. 37 39 DESCRIPTION OF CAPITAL STOCK The following summary of certain provisions of the capital stock of DXP does not purport to be complete and is subject to, and qualified in its entirety by the Restated Articles of Incorporation, as amended, and the Bylaws of the Company which are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. GENERAL The Company has an authorized capitalization of 110,000,000 shares of capital stock, consisting of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, of which 1,000,000 shares have been designated Series A Preferred Stock, and 1,000,000 shares of which have been designated Series B Convertible Preferred Stock. As of May 15, 1998, there were 4,139,194 shares of Common Stock (after giving effect to the two-to-one reverse stock split to be effected prior to the consummation of the Offering), 2,992 shares of Series A Preferred Stock and 15,000 shares of Series B Convertible Preferred Stock outstanding. As of such date, there were 138 holders of Common Stock of record. COMMON STOCK Dividends. The holders of shares of Series B Convertible Preferred Stock are entitled to dividends before the payment of any dividends to holders of shares of Common Stock. The holders of shares of Common Stock have no right or preference to the holders of shares of any other class of capital stock of the Company in respect of the declaration or payment of any dividends or distributions by the Company. The holders of shares of Common Stock shall be entitled to equally receive any dividends or distributions, if and when declared by the Board of Directors out of any funds legally available for that purpose. Liquidation, Dissolution or Winding Up. Subject to the required cash payments to the Series A Series A Preferred Stock and the Series B Convertible Preferred Stock, the remainder of the assets of the Company, if any, shall be divided and distributed ratably among the holders of the Series B Convertible Preferred Stock and the Common Stock. Redemption. No shares of Common Stock are callable or redeemable by the Company. Conversion. No holder of Common Stock have the right to convert or exchange any such shares with or into any other shares of capital stock of the Company. Voting. Each share of Common Stock entitles the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of the Company on all propositions presented to the shareholders generally. PREFERRED STOCK Dividends. The holders of shares of Series A Preferred Stock shall not as a matter of right be entitled to be paid or receive or have declared or set apart for such Series A Preferred Stock, any dividends or distributions of the Company. The holders of shares of Series B Convertible Preferred Stock receive dividends out of any funds legally available for that purpose at the annual rate of 6% per annum of the par value and no more. These dividends are payable in cash monthly on the last day of each month. The dividends accrue from the date the Series B Convertible Preferred Stock is issued and is considered to accrue from day to day, whether or not earned or declared. The dividends are payable before any dividends are paid, declared, or set apart for any other capital stock of the Company. The dividends are cumulative so that if for any dividend period the dividends on the outstanding Series B Convertible Preferred Stock are not paid or declared and set apart, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution (by dividend or otherwise) is paid on, declared, or set apart for any other capital stock of the Company. The holders of shares of Series B Convertible Preferred Stock shall not be entitled to receive any other dividends or distributions. 38 40 Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of outstanding shares of Series A Preferred Stock shall be entitled to receive $100.00 in cash for each share of Series A Preferred Stock, before any distribution of the assets of the Company shall be made to the holders of the outstanding shares of Series B Convertible Preferred Stock, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Series A Preferred Stock so as to be and continue to be available therefor. After the $100.00 distribution per share of the Series A Preferred Stock, the holders of outstanding shares of Series B Convertible Preferred Stock shall be entitled to receive $100.00 in cash for each share, before any distribution of the assets of the Company shall be made to the holders of the outstanding shares of any other capital stock of the Company, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Series B Convertible Preferred Stock so as to be and continue to be available therefor. Redemption. No shares of Series A Preferred Stock shall be callable or redeemable by the Company. The Company, at the option of its Board of Directors, may at any time five years from the date of issuance redeem the whole or any part of the outstanding Series B Convertible Preferred Stock shares by paying in cash $110.00 per share plus all dividends accrued, unpaid, and accumulated through and including the redemption date. If only a part of the outstanding Series B Convertible Preferred Stock shares is redeemed, redemption will be pro rata. No Series B Convertible Preferred Stock shares may be redeemed unless all accrued dividends on the Series B Convertible Preferred Stock have been paid for all past dividend periods and full dividends for the current period, except those to be redeemed, have been paid or declared and set apart for payment. The holders of any shares of the Series B Convertible Preferred Stock called for redemption are entitled to receive 28 shares of Common Stock for each share of Series B Convertible Preferred Stock. The holders are entitled to exercise said conversion right at any time after redemption notice is given and before the close of business on the fifth day before the redemption date stated in the notice. The right to receive the converted shares is at the shareholder's option and requires delivery to the Company of the shareholder's written notice stating the number of shares the shareholder is electing to convert. The exercise of the right also requires the shareholder, on or before the redemption date, to surrender the certificate or certificates, duly endorsed to the Company, for the Series B Convertible Preferred Stock shares at the office of the Company or its transfer agent. Conversion. No holder of Series A Preferred Stock shall have the right to convert or exchange shares with or into any other shares of capital stock of the Company. The holders of shares of Series B Convertible Preferred Stock shall have the right to convert each share of Series B Convertible Preferred Stock into 28 shares of Common Stock at any time. The right to receive the converted shares requires delivery to the Company's office or its transfer agent of the shareholder's written notice stating the number of shares the shareholder is electing to convert. Such notice shall be accompanied by the surrender of the Series B Convertible Preferred Stock certificate or certificates, duly endorsed to the Company. The date of conversion shall be the date of receipt by the Company or its transfer agent of the notice and the duly endorsed certificate(s). Voting. Each share of Series A Preferred Stock and each share of Series B Convertible Preferred Stock shall entitle the holder thereof to 1/10th of a vote, in person or by proxy, at any and all meetings of shareholders of the Company on all propositions presented to shareholders generally. CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS AND THE TEXAS BUSINESS CORPORATION ACT The Company's Restated Articles of Incorporation, as amended, and Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender or exchange offer, a proxy contest or otherwise. The description of such provisions set forth below is intended only as a summary and is qualified in its entirety by reference to the Restated Articles of Incorporation, as amended, and Bylaws, each 39 41 of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. See "Risk Factors -- Possible Anti-Takeover Effects". Preferred Stock. The Restated Articles of Incorporation, as amended, authorizes the Board of Directors to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock the terms and rights of such series. The Company believes that the ability of the Board of Directors to issue one or more series of preferred stock will provide the Company with flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs that may arise. The authorized shares of preferred stock, as well as shares of Common Stock, will be available for issuance without further action by the Company's shareholders, unless such action is required by the Restated Articles of Incorporation, as amended, applicable laws or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The Board of Directors will make any determination to issue such shares based on its judgment as to the best interests of the Company and its shareholders. The Board of Directors, in so acting, could issue preferred stock having terms that could discourage an acquisition attempt through which an acquiror otherwise may be able to change the composition of the Board of Directors, including a tender or exchange offer or other transaction that some, or a majority, of the Company's shareholders might believe to be in their best interests or in which shareholders might receive a premium for their stock over the then current market price of such stock. Special Meeting of Shareholders. The Bylaws provide that special meetings of shareholders may be called only by the President or the Board of Directors. Such provisions, together with the other anti-takeover provisions described herein, also could have the effect of discouraging a third party from initiating a proxy contest, making a tender or exchange offer or otherwise attempting to obtain control of the Company. Texas Anti-Takeover Law. Part Thirteen ("Part Thirteen") of the Texas Business Corporation Act (the "TBCA") imposes a special voting requirement for the approval of certain business combinations and related party transactions between public corporations and affiliated shareholders unless the transaction or the acquisition of shares by the affiliated shareholder is approved by the board of directors of the corporation prior to the affiliated shareholder becoming an affiliated shareholder. Part Thirteen prohibits certain mergers, sales of assets, reclassifications and other transactions (defined as business combinations) between shareholders beneficially owning 20% or more of the outstanding stock of a Texas public corporation (such shareholders being defined as an affiliated shareholder) for a period of three years following the date the shareholder acquired the shares representing 20% or more of the corporation's voting power unless two-thirds of the unaffiliated shareholders approve the transaction at a meeting held no earlier than six months after the shareholder acquires that ownership. The provisions requiring such a vote of shareholders do not apply to any transaction with an affiliated shareholder if the transaction or the purchase of shares by the affiliated shareholder is approved by the board of directors before the affiliated shareholder acquires beneficial ownership of 20% of the shares or if the affiliated shareholder was an affiliated shareholder prior to December 31, 1996, and continued as such through the date of the transaction. Part Thirteen contains a provision that allows a corporation to elect out of the statute by an amendment to its articles of incorporation or bylaws prior to December 31, 1997. Part Thirteen could have the effect of delaying, deferring or preventing a change in control of the Company. TRANSFER AGENT The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company, New York, New York. 40 42 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement (the "Underwriting Agreement") among the Company, the Selling Shareholders and the Underwriters named below (the "Underwriters"), the Company and the Selling Shareholders have collectively agreed to sell to each of such Underwriters, and each of such Underwriters has severally agreed to purchase from the Company and the Selling Shareholders, the respective number of shares of Common Stock set forth opposite its name below.
NUMBER UNDERWRITER OF SHARES ----------- ---------------- Morgan Keegan & Company, Inc. .............................. Hanifen, Imhoff Inc. ....................................... Sanders Morris Mundy Inc. .................................. ------- Total............................................. =======
The Underwriting Agreement provides that the Underwriters' obligation to pay for and accept delivery of the shares of Common Stock offered hereby is subject to certain conditions precedent and that the Underwriters will be obligated to purchase all such shares, excluding shares covered by the over-allotment option, if any are purchased. The Underwriters have informed the Company that no sales of Common Stock will be confirmed to discretionary accounts. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the price to public set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Underwriters. In connection with the Offering, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions, "passive" market making and purchases to cover syndicate short positions created in connection with the Offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock, and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Company and the Selling Shareholders in the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the shares of Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on The Nasdaq National Market, in the over-the-counter market or otherwise. As permitted by Rule 103 under the Securities Exchange Act of 1934, as amended, certain Underwriters (and selling group members, if any) that are market makers ("passive market makers") in the Common Stock may make bids for or purchases of the Common Stock in the Nasdaq National Market until such time, if any, when a stabilizing bid for such securities has been made. Rule 103 generally provides that (i) a passive market maker's net daily purchases of the Common Stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months (or any 60 consecutive days ending within the 10 days) immediately preceding the filing date of the registration statement of which this Prospectus forms a part, (ii) a passive market maker may not effect transactions or display bids for the Common Stock at a price that exceeds the highest independent bid for the Common Stock by persons who are not passive market makers and (iii) bids made by passive market makers must be identified as such. 41 43 The Company and the Selling Shareholders have granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 420,000 additional shares of Common Stock (105,000 of which will be sold by the Selling Shareholders on a pro rata basis) solely to cover overallotments, if any. If the Underwriters exercise the overallotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them, as shown in the table above, bears to the 2,800,000 shares of Common Stock offered hereby. The Company, the Company's executive officers and directors and the Selling Shareholders, who will beneficially own an aggregate of 4,152,877 (4,040,877 if the over-allotment option is exercised in full) shares of Common Stock after the Offering, have agreed, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of the Prospectus, not to offer, pledge, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, or announce any offer, sale, pledge, grant of any option to purchase or other disposition of, directly or indirectly, any shares of Common Stock or securities convertible into, exercisable for or exchangeable for shares of Common Stock (other than, with respect to the Company, pursuant to the LTIP or in connection with acquisitions of businesses or assets by the Company) without prior consent of the Representatives. Hanifen, Imhoff Inc. from time to time has provided investment banking and financial advisory services to the Company, and such firm may in the future provide similar services to the Company, for which it has received or is expected to receive customary fees. Mr. Thomas Orr, who serves as a director of the Company, is an Executive Managing Director of Morgan Keegan & Company, Inc. LEGAL MATTERS The legality of the Common Stock offered hereby will be passed upon for the Company by Fulbright & Jaworski L.L.P., Houston, Texas. Certain legal matters for the Underwriters will be passed upon by Andrews & Kurth L.L.P., Houston, Texas. EXPERTS The audited consolidated financial statements of the Company included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of SSI as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996, have been included in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the Common Stock offered by this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information contained in the Registration Statement and in the exhibits and schedules thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered by this Prospectus, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is hereby made to the copy of such contract or other documents filed as an exhibit to the Registration Statement, each statement being qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected, without charge, and copies may be obtained at prescribed rates at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission at Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 42 44 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. The Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information can be obtained at the address as set forth above. 43 45 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- DXP ENTERPRISES AND SUBSIDIARIES: Pro Forma Statements of Operations.......................... F-2 Report of Independent Public Accounts....................... F-4 Audited Consolidated Financial Statements -- Consolidated Balance Sheets............................... F-5 Consolidated Statements of Earnings....................... F-6 Consolidated Statements of Shareholders' Equity........... F-7 Consolidated Statements of Cash Flows..................... F-8 Notes to Consolidated Financial Statements................ F-9 Unaudited Condensed Consolidated Financial Statements -- Condensed Consolidated Balance Sheets..................... F-20 Condensed Consolidated Statements of Income............... F-21 Condensed Consolidated Statements of Cash Flows........... F-22 Notes to Condensed Consolidated Financial Statements...... F-23 STRATEGIC SUPPLY, INC.: Independent Auditors' Report................................ F-25 Audited Financial Statements -- Consolidated Balance Sheets............................... F-26 Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)......................... F-27 Consolidated Statements of Cash Flows..................... F-28 Notes to Consolidated Financial Statements................ F-29
F-1 46 DXP ENTERPRISES, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------- STRATEGIC DXP SUPPLY PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- Revenues........................................ $169,667 $21,087 -- $190,754 Costs and Expenses: Cost of Sales................................. 124,787 16,170 -- 140,957 Selling, general and administrative........... 38,446 5,562 -- 44,008 -------- ------- ----- -------- Operating income (loss)......................... 6,434 (645) -- 5,789 Other income (expense) Other income.................................. 890 -- -- 890 Interest expense.............................. (2,654) (35) (121)(1) (2,810) -------- ------- ----- -------- Earnings (loss) before income taxes............. 4,670 (680) (121) 3,869 Provision for income taxes...................... 1,902 25 (240)(2) 1,687 -------- ------- ----- -------- Net income...................................... 2,768 (705) 119 2,182 Preferred stock dividend........................ 103 -- -- 103 -------- ------- ----- -------- Net income attributable to common shareholders.................................. $ 2,665 $ (705) $ 119 $ 2,079 ======== ======= ===== ======== Basic earnings per share........................ $ .65 $ .51 ======== ======== Common shares outstanding....................... 4,081 4,081 ======== ======== Dilutive earnings per share..................... $ .47 $ .37 ======== ======== Common and common equivalent shares outstanding................................... 5,694 5,694 ======== ========
F-2 47 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro forma combined statements of earnings for the years ended December 31, 1997 give effect to the acquisition by a wholly owned subsidiary of the Company of substantially all of the assets of Strategic Supply, Inc. ("SSI") on June 2, 1997. The unaudited pro forma combined statements of earnings assume all such transactions occurred at the beginning of the period presented. The unaudited pro forma combined statement of earnings 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 SSI, which are included elsewhere in this Prospectus. The pro forma adjustments do not reflect projected cost savings of $626,000 for the year ended December 31, 1997 relating to the elimination of duplicative personnel and intercompany charges reflected in SSI's results. PRO FORMA ADJUSTMENTS (1.) To adjust interest expense for the debt incurred in the acquisition of the net assets of Strategic Supply, Inc. (2.) To adjust federal income tax expense for the tax effect of the adjustments made to operations and interest expense. F-3 48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of DXP Enterprises, Inc., and Subsidiaries: We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DXP Enterprises, Inc., and subsidiaries at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas January 30, 1998, (except with respect to the matter discussed in Note 13 as to which the date is May 20, 1998) F-4 49 DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, ------------------ 1996 1997 ------- ------- Current assets: Cash...................................................... $ 876 $ 736 Trade accounts receivable, net of allowance for doubtful accounts of $210 in 1996 and $476 in 1997.............. 17,125 25,707 Inventories............................................... 17,175 26,018 Prepaid expenses and other................................ 539 996 Deferred income taxes..................................... 511 722 ------- ------- Total current assets.............................. 36,226 54,179 ------- ------- Property, plant and equipment, net.......................... 7,818 10,403 Other assets: Intangible assets, net of accumulated amortization of $1,607 in 1996 and $1,817 in 1997...................... 673 2,682 Receivable from officers and employees.................... 205 200 Other..................................................... 120 172 ------- ------- 998 3,054 ------- ------- Total assets...................................... $45,042 $67,636 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable.................................... $ 6,963 $14,368 Accrued wages and benefits................................ 1,296 1,384 Other accrued liabilities................................. 601 704 Current portion of long-term debt......................... 609 1,461 Current portion of subordinated debt...................... 1,145 -- ------- ------- Total current liabilities......................... 10,614 17,917 Long-term debt, less current portion........................ 22,300 33,395 Deferred compensation....................................... 739 739 Deferred income taxes....................................... 330 479 Equity subject to redemption: Series A preferred stock, 1,496 shares and 1,122 shares, respectively........................................... 150 112 Series B convertible preferred stock, 4,500 shares and no shares, respectively................................... 450 -- Common stock, 140,214 shares.............................. -- 1,963 Commitments and contingencies Shareholders' equity: Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; 1,000,000 shares authorized, 2,992 shares issued and outstanding............................................ 2 2 Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; 1,000,000 shares authorized, 17,700 shares issued and 15,000 outstanding............................................ 15 18 Common stock, $.01 par value, 25,000,000 shares authorized; 4,187,797 shares issued, of which 4,017,147 shares are outstanding 140,214 shares are equity subject to redemption, and 30,436 shares are treasury stock.................................................. 40 40 Paid-in capital........................................... 408 892 Retained earnings......................................... 9,994 12,659 Treasury stock............................................ -- (580) ------- ------- Total shareholders' equity........................ 10,459 13,031 ------- ------- Total liabilities and shareholders' equity........ $45,042 $67,636 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 50 DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 -------- -------- -------- Sales...................................................... $111,328 $125,208 $169,667 Cost of sales.............................................. 82,171 93,091 124,787 -------- -------- -------- Gross profit..................................... 29,157 32,117 44,880 Selling, general and administrative expenses............... 24,559 29,332 38,446 -------- -------- -------- Operating income................................. 4,598 2,785 6,434 Other income............................................... 867 951 890 Interest expense........................................... (1,953) (2,101) (2,654) -------- -------- -------- Income before income taxes................................. 3,512 1,635 4,670 Provision for income taxes................................. 1,424 745 1,902 -------- -------- -------- Net income................................................. 2,088 890 2,768 Preferred stock dividend................................... (23) (119) (103) -------- -------- -------- Net income attributable to common shareholders............. $ 2,065 $ 771 $ 2,665 ======== ======== ======== Basic earnings per common share............................ $ .54 $ .19 $ .65 ======== ======== ======== Common shares outstanding.................................. 3,837 3,997 4,082 Diluted earnings per share................................. $ .46 $ .16 $ .47 ======== ======== ======== Common and common equivalent shares outstanding............ 4,501 4,857 5,703
The accompanying notes are an integral part of these consolidated financial statements. F-6 51 DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
REDEEMABLE SERIES A SERIES B COMMON COMMON PAID-IN TREASURY RETAINED PREFERRED PREFERRED STOCK STOCK CAPITAL STOCK EARNINGS TOTAL --------- --------- ---------- ------ ------- -------- -------- ------- Balance at December 31, 1994............ $ 2 $-- $ -- $ 45 $ 1,110 $ -- $ 7,158 $ 8,315 Issuance of 359,200 shares of common stock............................... -- -- -- 4 228 -- -- 232 Issuance of 4,500 shares of Series B convertible preferred stock......... -- 5 -- -- 445 -- -- 450 Conversion of 840,000 shares of common stock to 15,000 shares of Series B preferred stock..................... -- 15 -- (9) (6) -- -- -- Acquisition and retirement of 560,804 shares of common stock and 2,431 shares of Series A preferred stock............................... -- -- -- -- (1,167) -- -- (1,167) Increase in paid-in capital due to reduction of equity subject to redemption as a result of acquiring 2,431 shares of Series A preferred stock............................... -- -- -- -- 243 -- -- 243 Reduction in paid-in capital due to increase in equity subject to redemption as a result of issuing 4,500 shares of Series B convertible preferred stock..................... -- (5) -- -- (445) -- -- (450) Dividends paid........................ -- -- -- -- -- -- (23) (23) Net income............................ -- -- -- -- -- -- 2,088 2,088 --- --- ------ ---- ------- ----- ------- ------- Balance at December 31, 1995............ 2 -- 40 408 -- 9,223 9,688 Dividends paid........................ -- -- -- -- -- -- (119) (119) Net income............................ -- -- -- -- -- -- 890 890 --- --- ------ ---- ------- ----- ------- ------- Balance at December 31, 1996............ 2 15 -- 40 408 -- 9,994 10,459 Dividends paid........................ -- -- -- -- -- -- (103) (103) Increase in paid-in capital due to reduction of equity subject to redemption as a result of acquiring 374 shares of Series A preferred stock............................... -- -- -- -- 37 (37) -- -- Increase in paid-in capital due to reduction of equity subject to redemption as a result of acquiring 2,700 shares of Series B preferred stock............................... -- 3 -- -- 268 (271) -- -- Increase in paid-in capital due to reduction of equity subject to redemption as a result of converting 1,800 shares of Series B preferred stock to 50,400 shares of common stock............................... -- -- -- 1 179 -- -- 180 Acquisition of 30,436 shares of common stock............................... -- -- -- (1) -- (272) -- (273) Issuance of 140,214 shares of common stock............................... -- -- 1,963 -- -- -- -- 1,963 Net income............................ -- -- -- -- -- -- 2,768 2,768 --- --- ------ ---- ------- ----- ------- ------- Balance at December 31, 1997............ $ 2 $18 $1,963 $ 40 $ 892 $(580) $12,659 $14,994 === === ====== ==== ======= ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 52 DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1996 1997 --------- --------- --------- Cash flows from operating activities: Net income............................................. $ 2,088 $ 890 $ 2,768 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization....................... 965 964 1,341 Deferred compensation on stock option plans......... 87 359 -- Provision (benefit) for deferred income taxes....... 109 (216) (62) Loss (gain) on sale of property and equipment....... (11) 7 (103) Changes in operating assets and liabilities -- Trade accounts receivable......................... (1,915) (1,233) (7,971) Inventories....................................... (1,288) (469) 2,899 Prepaid expenses and other........................ (88) 274 (640) Trade accounts payable and other accrued liabilities.................................... (6) (123) 1,892 --------- --------- --------- Net cash provided by (used in) operating activities................................... (59) 453 124 --------- --------- --------- Cash flows from investing activities: Purchase of Bayou Pumps common stock, net of cash received............................................ 38 -- -- Purchase of Austin Bearings net assets................. -- (329) -- Purchase of Strategic Supply net assets................ -- -- (4,118) Purchase of Pelican Supply common stock................ -- -- (1,070) Purchase of property and equipment..................... (739) (2,271) (825) Proceeds from sale of property and equipment........... 177 8 -- Payments received on notes receivable from officers.... 172 435 Other.................................................. -- (120) -- --------- --------- --------- Net cash used in investing activities.......... (352) (2,277) (6,013) --------- --------- --------- Cash flows from financing activities: Borrowings from debt................................... 123,261 129,379 183,715 Principal payments on revolving line of credit, long-term and subordinated debt and notes payable to bank................................................ (121,867) (128,052) (177,395) Proceeds on sale of Corpus Christi facility............ -- -- 112 Issuance of common stock............................... 232 -- -- Acquisition of preferred and common stock.............. (589) -- (580) Dividends paid in cash................................. (23) (119) (103) --------- --------- --------- Net cash provided by financing activities...... 1,014 1,208 5,749 --------- --------- --------- Increase (decrease) in cash.............................. 603 (616) (140) Cash at beginning of year................................ 889 1,492 876 --------- --------- --------- Cash at end of year...................................... $ 1,492 $ 876 $ 736 ========= ========= ========= Supplemental disclosures of noncash investing and financing activities: Cash paid for -- Interest............................................ $ 1,901 $ 2,172 $ 2,654 ========= ========= ========= Income taxes........................................ $ 1,500 $ 1,040 $ 1,551 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-8 53 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation DXP Enterprises, Inc. (DXP or the Company), a Texas corporation, was incorporated on July 26, 1996, to facilitate a reorganization of SEPCO Industries, Inc. (SEPCO), a Texas corporation, in anticipation of an acquisition by DXP as the successor to SEPCO of Newman Communications Corporation (Newman), a New Mexico corporation. On December 4, 1996, the reorganization of SEPCO (the SEPCO Reorganization) was effected through a merger of a wholly owned subsidiary of the Company with and into SEPCO pursuant to which the Company acquired all of the outstanding shares of SEPCO in exchange for shares of the Company. Immediately following the SEPCO Reorganization, the Company acquired Newman through a merger of a wholly owned subsidiary of the Company with and into Newman (the Newman Merger). Prior to the SEPCO Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. Prior to the Company's acquisition of Newman, Newman was a nonoperating entity with nominal assets. The Newman Merger was effected as a means to increase the Company's shareholder base. On or about April 30, 1997, a proxy statement was furnished to the holders of the Company's common stock, Series A preferred stock and Series B preferred stock, in connection with a solicitation of consents by the board of directors of the Company for the adoption of an amendment to the restated articles of incorporation of the Company to effect a two-to-one reverse split of the issued and outstanding shares of common stock and change the name of the Company from Index, Inc., to DXP Enterprises, Inc. The shareholders approved the two-to-one reverse stock split and name change, which became effective after the close of market on May 12, 1997. Common stock and earnings per share have been restated to give effect to a two-for-one reverse stock split. SEPCO Reorganization Accounting Treatment The SEPCO Reorganization was treated as a recapitalization of SEPCO into the Company (with respect to the SEPCO merger) and the issuance of the Company's capital stock for the underlying tangible net assets of Newman (with respect to the Newman Merger) for accounting and financial statement purposes because, among other factors, the Company is a recently formed holding company with nominal net assets, Newman is a nonoperating shell company with cash as its primary asset, and the SEPCO shareholders control the Company after the SEPCO Reorganization. Accordingly, the historical pre-SEPCO Reorganization financial statements of the combined Company after the closing are those of SEPCO. The retained earnings of SEPCO were carried forward after the SEPCO Reorganization and the historical shareholders' equity of SEPCO prior to the SEPCO Reorganization is retroactively restated for the equivalent number of shares received in the SEPCO Reorganization. Unless the context otherwise requires, references to the Company with respect to historical operations shall mean the Company and SEPCO. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Concentration of Credit Risk The Company sells rotating equipment to a diversified customer base in the north and southwestern regions of the United States. The Company believes no significant concentration of credit risk exists. The Company continually evaluates the creditworthiness of its customers' financial positions and monitors accounts on a periodic basis, but does not require collateral. F-9 54 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventory Inventory consists principally of finished goods and is priced at lower of cost or market, cost being determined using both the first-in, first-out (FIFO) and the last-in, first-out (LIFO) method. Property, Plant and Equipment Assets are carried on the basis of cost. Provisions for depreciation are computed at rates considered to be sufficient to amortize the costs of assets over their expected useful lives. Depreciation and amortization of property, plant and equipment is computed using principally the straight-line method for financial reporting purposes. Useful lives assigned to property, plant and equipment range from three to 20 years. Maintenance and repairs of depreciable assets are charged against earnings as incurred. Additions and improvements are capitalized. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted SFAS No. 121 in the first quarter of 1996, and the effect of adoption was not material. Intangibles Intangibles consist of noncompete and licensing agreements and goodwill. The noncompete and licensing agreements are amortized over five years, and goodwill is amortized over five to 30 years. All amortization of intangibles is computed using the straight-line method. Federal Income Taxes The Company utilizes the liability method in accounting for income taxes. Under this method, deferred taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates and laws that will be in effect when the differences reverse. Fair Value of Financial Instruments A summary of the carrying value and the fair value of financial instruments at December 31, 1997, is as follows:
CARRYING FAIR VALUE VALUE -------- ------- (IN THOUSANDS) Cash........................................................ $ 736 $ 736 Notes receivable from officers and employees................ 200 200 Long-term debt, including current portion................... 34,856 34,856
The carrying value of the long-term debt and subordinated debt approximates fair value based upon the current rates and terms available to the Company for instruments with similar remaining maturities. The carrying value of the notes receivable from officers approximates fair value because the interest rate of the notes (9 percent) is consistent with the interest rate of the Company's revolving debt and with rates currently available in the market for similar instruments. F-10 55 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition The Company recognizes revenue as products are shipped to the customer. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Reclassifications Certain 1995 and 1996 amounts have been reclassified to conform with the 1997 presentation. 2. NEW ACCOUNTING PRONOUNCEMENTS: During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." During February 1997, the FASB issued SFAS Nos. 128 and 129, "Earnings per Share," and "Disclosure of Information about Capital Structure," respectively, and in June 1997 issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income," and "Disclosures about Segments of an Enterprise and Related Information," respectively. The major provisions of these statements and their impact on the Company are discussed below. SFAS No. 128 requires the presentation of basic earnings per share and diluted earnings per share in financial statements of public enterprises rather than primary and fully diluted earnings per share as previously required. Under the provisions of this statement, basic earnings per share will be computed based on weighted average shares outstanding and will exclude dilutive securities such as options, warrants, etc. Diluted earnings per share will be computed including the impacts of all potentially dilutive securities. As required, the Company adopted this statement in 1997 and has restated all previously reported earnings per share data. The difference between previously reported fully diluted earnings per share and the now required diluted earnings per share was insignificant. SFAS No. 129 requires additional disclosure of information about an entity's capital structure, including information about dividend and liquidation preferences, voting rights, contracts to issue additional shares, conversion and exercise prices, etc. The Company has adopted this statement as of and for the period ended December 31, 1997. SFAS No. 130 requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. The adoption of this statement in 1998 is not anticipated to have any impact as the Company currently does not enter into any transactions which result in charges (or credits) directly to equity (such as additional minimum pension liability changes, currency translation adjustments and unrealized gains and losses on available-for-sale securities, etc.) SFAS No. 131 provides revised disclosure guidelines for segments of an enterprise based on a management approach to defining operating segments. The Company currently operates in only one industry segment and analyzes operations on a company-wide basis; therefore, the adoption of the statement is not expected to materially impact the Company. The Company plans to adopt this statement in 1998. F-11 56 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITIONS: Effective December 31, 1995, SEPCO acquired 100 percent of the outstanding common stock of Bayou Pumps, Inc. The purchase price totaled $500,000 and consisted of (a) issuance of $450,000 of the Company's Class A convertible preferred stock and (b) cash of $50,000. The acquisition has been accounted for using the purchase method of accounting. Accordingly, results of operations of the acquired company are included in the consolidated results of operations from the acquisition date. Goodwill of $356,000 was recorded on the acquisition. Pro forma disclosures of operating results are omitted because the acquired company's operations were not significant. Effective February 2, 1996, SEPCO acquired the net assets of Austin Bearing Corporation. The purchase price totaled approximately $578,000 and consisted of (a) a $249,000 note, bearing interest at 9 percent, payable monthly over five years, and (b) cash of $329,000. The acquisition has been accounted for using the purchase method of accounting. Accordingly, results of operations of the acquired company are included in the consolidated results of operations from the date of acquisition. Goodwill of $84,000 was recorded in connection with the acquisition. Pro forma disclosures of operating results are omitted because the acquired company's operations were not significant. Effective May 30, 1997, the Company acquired 100 percent of the outstanding stock of Pelican State Supply Company (Pelican). The purchase price totaled approximately $3.0 million and consisted of 140,214 shares of the Company's common stock and cash of approximately $1.0 million. The acquisition has been accounted for using the purchase method of accounting. Accordingly, results of operations of the acquired company are included in the consolidated results of operations from the date of acquisition. Goodwill of approximately $2.0 million was recorded in connection with the acquisition. Pro forma disclosures of operating results are omitted because the acquired Company's operations were not significant. On June 2, 1997, a wholly owned subsidiary of the Company acquired substantially all the assets of Strategic Supply, Inc. (Strategic). The purchase price, which is subject to adjustments, consisted of approximately $4.1 million in cash, assumption of $4.7 million of trade payables and other accrued expenses, $2.8 million in promissory notes payable to the seller and earn-out payments (based on the earnings before interest and taxes of Strategic) to be paid over a period of approximately six years, up to a maximum of $3.5 million. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $50,000 was recorded in connection with the acquisition. The following table presents selected unaudited consolidated financial information for the Company on a pro forma basis assuming the Strategic acquisition had occurred on January 1, 1996. The pro forma information set forth below is not necessarily indicative of the results that actually would have been achieved had such transaction been consummated as of January 1, 1996, or that may be achieved in the future.
DECEMBER 31, ------------------- 1996 1997 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $176,180 $190,754 Net income.................................................. (4,197) 2,182 Basic earnings per share.................................... (1.06) .52 Dilutive earnings per share................................. (.86) .38
The pro forma results for 1996 include the effect of a one-time special charge of $2.8 million recognized by Strategic for the write-off of certain goodwill and intangible assets. F-12 57 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVENTORY: The Company uses the LIFO method of inventory valuation for approximately 43 percent of its inventories. Remaining inventories are accounted for using the FIFO method. The reconciliation of FIFO inventory to LIFO basis is as follows:
DECEMBER 31 ------------------ 1996 1997 ------- ------- (IN THOUSANDS) Finished goods.............................................. $18,215 $27,280 Work in process............................................. 2,405 2,276 ------- ------- Inventories at FIFO......................................... 20,620 29,556 Less -- LIFO allowance...................................... (3,445) (3,538) ------- ------- Inventories................................................. $17,175 $26,018 ======= =======
5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are comprised of the following:
DECEMBER 31 ----------------- 1996 1997 ------- ------- (IN THOUSANDS) Land........................................................ $ 1,421 $ 1,411 Buildings and leasehold improvements........................ 6,298 6,457 Furniture, fixtures and equipment........................... 8,143 11,660 ------- ------- 15,862 19,528 Less -- Allowances for depreciation and amortization........ (8,044) (9,125) ------- ------- $ 7,818 $10,403 ======= =======
F-13 58 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM AND SUBORDINATED DEBT: Long-term and subordinated notes consist of the following:
DECEMBER 31 ------------------ 1996 1997 ------- ------- (IN THOUSANDS) Long-term debt -- Revolving credit agreement................................ $18,680 $27,520 Note payable to insurance company, 10.125%, collateralized by real property, payable in monthly installments through December 2006.................................. 1,699 1,596 Notes payable to credit corporation, 2.25% above prime (8.5% at December 31, 1997), collateralized by computer equipment, payable in monthly installments............. 1,459 1,174 Promissory note payable, 7.0%, payable in monthly installments through June 2002......................... -- 2,660 Other..................................................... 1,071 1,906 ------- ------- 22,909 34,856 Less -- Current portion..................................... 609 1,461 ------- ------- $22,300 $33,395 ======= ======= Subordinated debt -- Notes payable to former shareholders, 12%, unsecured, payable in varying installments through January 1997... $ 1,145 $ -- ======= =======
The Company has a secured lines of credit for up to $40 million with an institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent to prime plus .50 percent (9.00 percent at December 31, 1997). The line of credit is secured by receivables, inventory, and machinery and equipment and matures January 1999. An officer shareholder has personally guaranteed up to $500,000 of the obligations of the Company under the line of credit. Additionally, certain shares held in trust for this shareholder's children discussed in footnote 8 are also pledged to secure this line of credit. As of December 31, 1997, the unused line is approximately $4.9 million. The facility includes loan covenants which, among other things, require the Company to maintain a positive cash flow and other financial ratios, which are measured monthly. The maturities of long-term and subordinated debt for the next five years and thereafter are as follows (in thousands): 1998........................................................ $ 1,461 1999........................................................ 28,714 2000........................................................ 1,382 2001........................................................ 1,385 2002........................................................ 947 Thereafter.................................................. 967 ------- $34,856 =======
F-14 59 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES: The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31 ------------------------- 1995 1996 1997 ------ ----- ------ (IN THOUSANDS) Current -- Federal................................................ $1,172 $ 829 $1,652 State.................................................. 143 132 312 ------ ----- ------ 1,315 961 1,964 Deferred -- Federal................................................ 107 (216) (62) State.................................................. 2 -- -- ------ ----- ------ $1,424 $ 745 $1,902 ====== ===== ======
The difference between income taxes computed at the federal statutory income tax rate and the provision for income taxes is as follows:
YEAR ENDED DECEMBER 31 ------------------------ 1995 1996 1997 ------ ---- ------ (IN THOUSANDS) Income taxes computed at federal statutory income tax rate.................................................... $1,194 $556 $1,588 State income taxes, net of federal benefit................ 96 68 206 Nondeductible goodwill amortization....................... 51 43 63 Other..................................................... 83 78 45 ------ ---- ------ $1,424 $745 $1,902 ====== ==== ======
The net current and noncurrent components of deferred income taxes are as follows:
DECEMBER 31 -------------- 1996 1997 ----- ----- (IN THOUSANDS) Net current assets.......................................... $ 511 $ 722 Net noncurrent liabilities.................................. 330 479 ----- ----- Net liability (asset)....................................... $(181) $(243) ===== =====
F-15 60 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax liabilities and assets were comprised of the following:
DECEMBER 31 -------------- 1996 1997 ----- ----- (IN THOUSANDS) Deferred tax liability -- Difference between financial and tax depreciation of assets acquired........................................ $ 330 $ 479 ----- ----- Deferred tax assets -- Amortization of goodwill.................................. 3 5 Unamortized rent reduction................................ 42 32 Allowance for doubtful accounts........................... 71 162 Section 263A inventory costs.............................. 139 206 Deferred compensation on stock options.................... 251 251 Other..................................................... 5 66 ----- ----- Total deferred tax assets......................... 511 722 ----- ----- Net deferred tax liability (asset)................ $(181) $(243) ===== =====
8. SHAREHOLDERS' EQUITY: The equity capitalization of the Company consists of 4,187,797 shares of common stock, 2,992 shares of Series A preferred stock and 17,700 shares of Series B convertible preferred stock. The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to a $100 liquidation preference per share. Each share of the Series B convertible preferred stock is convertible into 28 shares of common stock and a monthly dividend per share of $0.50. The holders of the Series B convertible stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. Prior to the SEPCO Reorganization, as more fully described in Note 1, SEPCO had agreements with certain holders of common, Series A preferred and Series B convertible preferred stock that, upon termination of employment, the shareholders had an obligation to sell and SEPCO had the first opportunity to buy the stock. SEPCO also had the opportunity to match a higher offer obtained by the shareholder from another party. The selling price of the stock was at a price per share equal to the equity per share for the common stock and $100 per share for the Series A preferred and Series B convertible preferred stock. Payment may be in the form of cash or a promissory note bearing interest at 10 percent and payable in five equal installments beginning on the first anniversary date of the note. During 1995, SEPCO purchased 560,804 shares of common stock and 2,431 shares of Series A preferred stock in exchange for a note payable of $578,000 to a shareholder upon his retirement. Upon the exchange of SEPCO shares for DXP Enterprises shares pursuant to the plan of reorganization, the above agreements were terminated. An officer shareholder of the Company is the trustee of three trusts for the benefit of another officer shareholder's children, each of which hold 570,932 shares of common stock and 5,000 shares of Series B convertible preferred stock. It is anticipated that in connection with the public offering discussed below that the Series B convertible preferred shares will be converted to common stock. The trustee has sole voting control of these shares. The 140,214 shares of common stock issued pursuant to the purchase of Pelican are subject to a put option whereby any time between November 30, 1998 and November 30, 2000 the Company may be required F-16 61 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to purchase all or part of such shares at a price of $14.00 per share. The shares issued for the purchase of Pelican are subject to certain rights of offset pursuant to terms of the purchase agreement. Stock Options Prior to and during 1995, the Company issued nonqualified, book value plan stock options to certain officers of the Company to purchase shares of its common stock, which had exercise prices equal to the book value of the common stock at the date of grant. The option agreement allows the employee to put the stock acquired back to the Company at the book value at that time. The Company recognized compensation expense for increases in the book value of the stock while the options were outstanding. Effective March 31, 1996, the above-mentioned book value options were converted to fair market value options once the put option was eliminated. A one-time charge to compensation of $618,000 was made during the first quarter of 1996. In 1996, the Company issued nonqualified fair market value stock options to certain directors of the Company to purchase shares of its common stock which had exercise prices equal to the fair market value of the Company's common stock at the date of grant. Additionally, the Company issued options to certain officers and employees pursuant to the terms of the Company's long-term incentive plan. Compensation expense related to these option agreements of $87,000, $618,000 and $-- was recorded in 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, a deferred compensation liability of $739,000 and $739,000, respectively, has been recorded in conjunction with these option agreements. Activity during 1997 with respect to the stock options follows:
OPTION WEIGHTED-AVERAGE SHARES PRICE PER SHARE EXERCISE PRICE --------- --------------- ---------------- Outstanding and Exercisable at December 31, 1994.............................. 380,400 $.68 -- $1.64 $ 1.60 Granted............................... 1,208,000 $1.48 -- $1.80 $ 1.74 Exercised............................. (359,200) $.68 $ .68 Canceled or expired................... -- -- --------- Outstanding and Exercisable at December 31, 1995.............................. 1,229,200 $.64 -- $1.80 $ 3.72 Granted............................... 120,500 $3.12 -- $16.00 $ 3.20 Exercised............................. 4,000 $3.12 $ 3.12 Canceled or expired................... (4,000) $3.12 $ 3.12 --------- Outstanding and Exercisable at December 31, 1996.............................. 1,349,700 $1.46 -- $2.32 $ 1.50 Granted............................... -- -- $ -- Exercised............................. -- -- -- Canceled or expired................... -- -- -- --------- Outstanding and Exercisable at December 31, 1997.............................. 1,349,700 $1.48 -- $2.32 $ 1.50 =========
The outstanding options at December 31, 1997, expire between March 31, 1999, and October 24, 2005, or 90 days after termination of full-time employment. The weighted-average remaining contractual life was 6.9 years, 6.9 years and 5.9 years at December 31, 1995, 1996 and 1997, respectively. During 1995, the Company purchased 359,200 shares acquired by an officer upon exercise of his options at $0.82 per share. F-17 62 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-Based Compensation Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock options under the fair value method as provided therein. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for options issued in 1995, 1996 and 1997: risk-free interest rates of 6.5 percent for 1995 and 6 percent for 1996 and 1997; expected lives of five years; 18.4 percent assumed volatility; and no expected dividends. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth below is a summary of the Company's net income and earnings per share as reported and pro forma as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The pro forma information is not meant to be representative of the effects on reported net income for future years because, as provided by SFAS No. 123, only the effects of awards granted after January 1, 1995, are considered in the pro forma calculation. As such, the pro forma impact is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. Certain compensation expense related to the Company's book value stock option plans was recognized in 1996. The effect of such expense ($618,000) has been excluded from the pro forma disclosure for 1996, as the related options are assumed to be accounted for using the fair market-based method of accounting as defined in SFAS No. 123. The effect of applying the fair market-based method, versus the exclusion of the book value-based method expense actually recognized, resulted in a pro forma increase in net income attributable to common shareholders in 1996.
1995 1996 1997 ----------------------- ----------------------- ----------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- b2(In thousands, except per share amounts) Net income attributable to common shareholders (in thousands)........... $2,065 $2,049 $771 $1,132 $2,665 $1,893 Basic earnings per common share......... .54 .54 .20 .28 .66 .66 Dilutive earnings per share................ .46 .46 .18 .24 .48 .34
9. COMMITMENTS AND CONTINGENCIES: The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December 31, 1997, for noncancelable leases are as follows (in thousands): 1998........................................................ $1,551 1999........................................................ 1,083 2000........................................................ 718 2001........................................................ 310 2002........................................................ 142 Thereafter.................................................. -- ------ $3,804 ======
Rental expense for operating leases was $1,338,000, $1,417,000 and $1,681,675 for the years ended December 31, 1995, 1996 and 1997, respectively. F-18 63 DXP ENTERPRISES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. RETIREMENT PLANS: SEPCO provides an employee stock ownership plan (ESOP) which is eligible to employees having 1,000 hours of service in 12 consecutive months of employment. Employer contributions are at the discretion of the board of directors. The ESOP held 956,298 shares of the Company's common stock at December 31, 1997 (see Note 1). The Company contributed and expensed $150,000 in 1995, 1996 and 1997. The Company also offers a 401(k) profit-sharing plan for employees having 1,000 hours of service in 12 consecutive months of employment. The Company matches contributions at a rate of 10 percent. The Company contributed $56,000, $62,000 and $81,000 in the years ended December 31, 1995, 1996 and 1997, respectively. 11. RELATED PARTY-TRANSACTIONS: In December 1989 the Company restructured certain loans previously made by the Company to an officer of the Company, pursuant to which the officer executed two promissory notes in the amounts of $149,910 and $58,737, respectively, each bearing interest at 9% per annum. The outstanding balances of such loans were $127,814 and 50,080 at December 31, 1996 and 1997, respectively. Additionally, the Company from time to time has made non-interest bearing advances to this officer. As of December 31, 1996 and 1997, these advances amounted to $330,439 and $340,439, respectively. 12. SUBSEQUENT EVENTS: In January 1998, the Company signed a nonbinding letter of intent to purchase a distribution company located in the central Texas area. Pursuant to the proposed acquisition, the Company would acquire the net assets of $5.4 million payable in cash and a to-be-determined amount of common stock shares. The consummation of the acquisition is subject to customary conditions, including the negotiation and execution of mutually satisfactory definitive documentation and the completion of a satisfactory due-diligence review by the Company. There can be no assurance, however, that the Company will consummate the acquisition of the central Texas distribution company or, if consummated, that the terms will be as described above. In January 1998, the Company signed a nonbinding letter of intent to purchase a distribution company located in Utah. Pursuant to the proposed acquisition, the Company would acquire the net assets for $1.0 million payable in cash and shares of common stock. The consummation of the acquisition is subject to customary conditions, including the negotiation and execution of mutually satisfactory definitive documentation and the completion of a satisfactory due-diligence review by the Company. There can be no assurance, however, that the Company will consummate the acquisition of the Utah distribution company or, if consummated, that the terms will be as described above. On January 8, 1998, the Company's board of directors resolved to increase the Company's common stock issuable to the Company's long-term incentive plan by 130,000 shares, from 200,000 shares to 330,000 shares. In conjunction, the Company's board of directors, pursuant to the Company's long-term incentive plan, granted certain employees an aggregate of 130,000 stock options at a per share exercise price of $12.00 with all options vesting 20 percent per year expiring on January 8, 2006. 13. EVENTS OCCURRING SUBSEQUENT TO AUDIT REPORT DATE On May 20, 1998, the Company's board of directors declared a two-for-one stock split on the Company's common stock. Common stock, Paid-in capital and per share amounts have been restated to reflect this reverse split. F-19 64 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) Current assets: Cash...................................................... $ 2,259 $ 736 Trade accounts receivable, net of allowance for doubtful accounts of $608 and $476, respectively................ 26,830 25,707 Inventory................................................. 28,922 26,018 Prepaid expenses and other current assets................. 1,107 996 Deferred income taxes..................................... 796 722 ------- ------- Total current assets.............................. 59,914 54,179 Property, plant and equipment, net.......................... 10,384 10,403 Other assets................................................ 6,864 3,054 ------- ------- Total assets...................................... $77,162 $67,636 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable.................................... $18,197 $14,368 Employee compensation..................................... 1,224 1,384 Other accrued liabilities................................. 1,082 704 Current portion of long-term debt......................... 1,198 1,461 ------- ------- Total current liabilities......................... 21,701 17,917 Long-term debt, less current portion........................ 38,245 33,395 Deferred compensation....................................... 739 739 Deferred income taxes....................................... 514 479 Equity subject to redemption: Series A preferred stock--1,122 shares.................... 112 112 Common stock, 140,214 shares.............................. 1,963 1,963 Shareholders' Equity: Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; 1,000,000 shares authorized; 2,992 shares issued and outstanding:........................................... 2 2 Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; 1,000,000 shares authorized; 17,700 shares issued and outstanding....... 18 18 Common stock, $.01 par value, 25,000,000 shares authorized; 4,187,858 shares issued, of which 4,017,208 shares are outstanding, 140,214 shares are equity subject to redemption, and 30,436 shares are treasury stock.................................................. 40 40 Paid-in capital........................................... 892 892 Retained earnings......................................... 13,516 12,659 Treasury stock............................................ (580) (580) ------- ------- Total shareholders' equity........................ 13,888 13,031 Total liabilities and shareholders' equity........ $77,162 $67,636 ======= =======
See notes to condensed consolidated financial statements. F-20 65 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ------------------ 1998 1997 ------- ------- Sales....................................................... $49,004 $30,129 Cost of sales............................................... 36,419 21,756 ------- ------- Gross Profit................................................ 12,585 8,373 Selling, general and administrative expenses................ 10,508 7,043 ------- ------- Operating income............................................ 2,077 1,330 Other income................................................ 176 429 Interest expense............................................ (785) (539) ------- ------- Income before income taxes.................................. 1,468 1,220 Provision for income taxes.................................. 590 429 ------- ------- Net income.................................................. $ 878 $ 791 Preferred stock dividend.................................... 21 38 ------- ------- Net Income attributable to common Shareholders.............. $ 857 $ 753 ======= ======= Basic earnings per common share............................. $ .21 $ .19 ------- ------- Common shares outstanding................................... 4,157 3,997 ------- ------- Diluted earnings per share.................................. $ .15 $ .14 ------- ------- Common and common equivalent shares outstanding............. 5,700 5,492 ------- -------
See notes to condensed consolidated financial statements. F-21 66 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1998 1997 -------- -------- OPERATING ACTIVITIES: Net cash provided by operating activities................. $ 3,415 $ 1,006 INVESTING ACTIVITIES: Purchase of Tri-Electric Supply net assets................ (6,208) -- Purchase of property and equipment........................ (250) (227) -------- -------- Net cash used in investing activities....................... (6,458) (227) FINANCING ACTIVITIES: Proceeds from debt........................................ 53,634 29,205 Principal payments on revolving line of credit, long-term and Subordinated debt, and notes payable to bank....... (49,047) (29,844) Dividends paid............................................ (21) (38) -------- -------- Net cash provided by financing activities................... 4,566 (677) -------- -------- INCREASE(DECREASE) IN CASH.................................. 1,523 102 CASH AT BEGINNING OF PERIOD................................. 736 876 -------- -------- CASH AT END OF PERIOD....................................... $ 2,259 $ 979 ======== ========
See notes to condensed consolidated financial statements. F-22 67 DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. 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, 1997, filed with the Securities and Exchange Commission. NOTE 2: THE COMPANY DXP Enterprises, Inc. (the "Company") was incorporated on July 26, 1996 in the State of Texas. The Company is a leading supplier of maintenance, repair and operating ("MRO") products, equipment and services to industrial customers. The Company provides MRO products in the following categories: fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical supplies. The Company also offers a line of valve and valve automation products to its customers. NOTE 3: INVENTORY The Company uses the last-in, first-out (LIFO) method of inventory valuation for approximately 56 percent of its inventories. Remaining inventories are accounted for using the first-in, first-out (FIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO basis is as follows:
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ (IN THOUSANDS) Finished goods.............................................. $29,976 $27,280 Work in process............................................. 2,697 2,276 ------- ------- Inventories at FIFO......................................... 32,673 29,556 Less -- LIFO allowance...................................... (3,751) (3,538) ------- ------- Inventories................................................. $28,922 $26,018 ======= =======
NOTE 4: ACQUISITION On February 26, 1998, a wholly-owned subsidiary of the Company acquired substantially all the assets of Tri-Electric Supply, Ltd ("Tri-Electric"). The purchase price consisted of $6.2 million in cash, assumption of $1.6 million of trade payables and other accrued expenses and a deferred payment up to a maximum of $275,000 based on the earnings before interest and taxes and depreciation of the acquired company to be paid on March 31, 1999, if earned. The results of operations of Tri-Electric are included in the consolidated statements of income from the date of acquisition. Goodwill of $3.9 million was recorded in connection with the acquisition. The acquisition has been accounted for using the purchase method of accounting. F-23 68 DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is continuing its evaluation of the acquisition of Tri-Electric as it relates to the purchase price allocation. The allocation of the purchase price is based on the best estimates of the Company using information currently available. Certain adjustments relating to this acquisition are subject to change based upon the final determination of the fair values of the net assets acquired. NOTE 5: LONG-TERM DEBT The Company has secured lines of credit for up to $40 million with an institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent to prime plus .50 percent (8.50 percent at March 31, 1998). The line of credit is secured by receivables, inventory, and machinery and equipment and matures January, 1999. An executive officer of the Company, who is also a shareholder of the Company, has personally guaranteed up to $500,000 of the obligations of the Company under the line of credit. Additionally, certain shares held in trust for this executive officer's children are also pledged to secure this line of credit. The borrowings available under the existing lines of credit at March 31, 1998 approximated $3.1 million. This facility includes loan covenants, which, among other things, require the Company to maintain a positive cash flow and other financial ratios, which are measured monthly. During April 1998, the Company amended its Credit Facility. (See Note 6) NOTE 6: SUBSEQUENT EVENTS Effective April 29th, 1998, the Company amended its lines of credit with its lender. The restructure provided for a combined line of credit for up to $50 million. Additionally, the loan restructure increased the Company's term loan from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts outstanding under the revolving loan to the term loan. The amended credit facility provides for a $15.0 million acquisition term loan to be used for acquisitions provided certain customary provisions related to combined cash flows and acquisition pricing are met. Additionally, interest rates will range from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of the Company's debt to cash flow and financial covenants tied to debt service levels and cash flow. On May 20, 1998, the Company's board of directors declared a two-for-one stock split on the Company's common stock. Common stock, Paid-in capital and per share amounts have been restated to reflect this reverse split. F-24 69 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, 1995 and 1996, 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. 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. 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, 1995 and 1996, 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. KPMG Peat Marwick LLP El Paso, Texas May 27, 1997 F-25 70 STRATEGIC SUPPLY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- 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 F-26 71 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. F-27 72 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 F-28 73 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. 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 F-29 74 STRATEGIC SUPPLY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. (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. F-30 75 STRATEGIC SUPPLY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. (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. F-31 76 STRATEGIC SUPPLY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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:
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 $594,000, 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. F-32 77 STRATEGIC SUPPLY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1996, a valuation allowance was established 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 assets 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. F-33 78 STRATEGIC SUPPLY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. F-34 79 ====================================================== NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... Risk Factors Special Note Regarding Forward-Looking Statements........... Use of Proceeds........................ Dividend Policy........................ Capitalization......................... Dilution............................... Selected Consolidated Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations........................... Business............................... Management............................. Certain Transactions................... Security Ownership of Management, Principal Shareholders and Selling Shareholders......................... Description of Capital Stock........... Underwriting........................... Legal Matters.......................... Experts................................ Available Information.................. Index to Consolidated Financial Statements........................... F-1
====================================================== ====================================================== 2,800,000 SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- MORGAN KEEGAN & COMPANY, INC. HANIFEN, IMHOFF INC. SANDERS MORRIS MUNDY , 1998 ====================================================== 80 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the Offering are: Securities and Exchange Commission Registration Fee......... $ 9,737 NASD Filing Fee............................................. 3,801 Nasdaq National Market Listing Fee.......................... 17,500 Legal Fees and Expenses..................................... 150,000 Accounting Fees and Expenses................................ 120,000 Printing Expenses........................................... 125,000 Transfer Agent and Registrar Fees........................... 3,500 Miscellaneous............................................... 170,462 -------- TOTAL............................................. $600,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.01-1 of the Texas Business Corporation Act ("TBCA") provides that a corporation may indemnify any director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding because he is or was a director or officer, provided that the director or officer (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct in his official capacity, that his conduct was in the corporation's best interests or (b) in all other cases, that his conduct was at least not opposed to the corporation's best interests and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, a director or officer may not be indemnified if the person is found liable to the corporation or if the person is found liable on the basis that he improperly received a personal benefit. Under Texas law, reasonable expenses incurred by a director or officer may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding after the corporation receives a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and a written undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined that the director or officer is not entitled to indemnification by the corporation. Texas law requires a corporation to indemnify an officer or director against reasonable expenses incurred in connection with a proceeding in which he is named a defendant or respondent because he is or was a director or officer if he is wholly successful in defense of the proceeding. Texas law also permits a corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1 of the TBCA. The Company's Restated Articles of Incorporation, as amended, and Bylaws provide for indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted under the TBCA. Such indemnification may be made even though directors and officers would not otherwise be entitled to indemnification under other provisions of the Company's Bylaws. The above discussion of the TBCA and the Company's Restated Articles of Incorporation, as amended and Bylaws is not intended to be exhaustive and is qualified in its entirety by such statute, the Restated Articles of Incorporation and Bylaws, respectively. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. II-1 81 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In July 1996, David R. Little, Chairman of the Board, President and Chief Executive Officer of the Company, purchased 100 shares of Common Stock for an aggregate consideration of $1,000. In December 1996, pursuant to the SEPCO Reorganization and the Newman Merger, Halter Financial Group, Inc., a consulting firm ("Halter"), and certain transferees of Halter received an aggregate of 347,391 shares of Common Stock in exchange for shares of common stock, no par value, of Newman ("Newman Common Stock"). The shares of Common Stock that Newman and its transferees received in such exchange were not registered in connection with the SEPCO Reorganization and the Newman Merger. The shares of Newman Common Stock were issued to Halter in connection with consulting and related services provided by Halter in the SEPCO Reorganization and the Newman Merger. In June 1997, in connection with its acquisition of Pelican, the Company issued 280,428 shares of Common Stock to the seller of Pelican as part of the purchase price for the acquisition. In August 1997, the Company issued 6,603 shares of Common Stock for an aggregate consideration of $9,250 to an employee pursuant to the exercise of a stock option granted under the Company's Long-Term Incentive Plan. The consideration for such shares was paid in accordance with the "cashless exercise" provisions of the stock option pursuant to which the Company withheld approximately 1,397 shares of Common Stock subject to the stock option to pay the exercise price. The Company considers all of such securities to have been offered and sold or exchange, as the case may be, in transactions not involving a public offering and, therefore, to be exempted from registration under Section 4(2) of the Securities Act. None of the foregoing transactions involved underwriters. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. *1.1 -- Form of Underwriting Agreement. 3.1 -- Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, filed with the Commission on May 15, 1997). 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). 4.1 -- Form of Common Stock certificate (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, filed with the Commission on May 15, 1997.) 4.2 -- See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of the holders of Common Stock. 4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of holders of Common Stock. *5.1 -- Opinion of Fulbright & Jaworski L.L.P. 10.1 -- Index, Inc. Long Term Incentive Plan, as amended (incorporated by reference to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Kenneth H. Miller (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996).
II-2 82 10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Tommy Orr (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Cletus Davis (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.5 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and Jerry J. Jones (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.6 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and Bryan H. Wimberly (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.7 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and David R. Little (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.8 -- Employment Agreement dated effective as of July 15, 1996, between SEPCO Industries, Inc. and David R. Little, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.9 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Jerry J. Jones, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.10 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Bryan H. Wimberly, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.11 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Gary A. Allcorn, as amended by Amendment to Employment Agreement dated effective May 21, 1998.
II-3 83 10.12 -- Second Amended and Restated Loan and Security Agreement dated effective as of April 1, 1994, by and between Barclays Business Credit, Inc. and SEPCO Industries, Inc., as amended by First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note dated May , 1995, by and between SEPCO Industries, Inc. and Shawmut Capital Corporation, successor-in-interest by assignment to Barclays Business Credit, Inc., as amended by Second Amendment to Second Amended and Restated Loan and Security Agreement dated April 3, 1996, by and between SEPCO Industries, Inc. and Fleet Capital Corporation, formerly known as Shawmut Capital Corporation, as amended by Third Amendment to Second Amended and Restated Loan and Security Agreement dated September 9, 1996, by and between SEPCO Industries, Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation, as amended by Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated October 24, 1996, by and between SEPCO Industries, Inc. American MRO, Inc. and Fleet Capital Corporation and as amended by Letter Agreement dated November 4, 1996, from Fleet Capital Corporation to SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. (incorporated by reference to Exhibit 10.13 to Amendment No. 4 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on November 6, 1996). 10.13 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $149,910.00, made by David R. Little and payable to SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $58,737.00, made by David R. Little and payable to SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.15 -- Vehicle Lease Agreement dated July 28, 1993, by and between World Omni Financial Corp. and SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.16 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump Company, payable to the order of Southwestern Life Insurance Company (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.17 -- SEPCO Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 13, 1996). 10.18 -- Fifth Amendment to Second Amended and Restated Loan and Security Agreement dated June 2, 1997, by and among Sepco Industries, Inc., Bayou Pumps, Inc., American MRO, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997).
II-4 84 10.19 -- Loan and Security Agreement dated June 16, 1997, by and between Fleet Capital Corporation and DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.20 -- Continuing Guaranty Agreement dated June 16, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Enterprises, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by Sepco Industries, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by American MRO, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by Bayou Pumps, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Sepco Industries, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997).
II-5 85 10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Bayou Pumps, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.29 -- Loan and Security Agreement dated May 29, 1997, by and between Fleet Capital Corporation and Pelican State Supply Company, Inc. (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.30 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP Enterprises, Inc., guarantying the indebtedness of Pelican State Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by Sepco Industries, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by American MRO, Inc., guarantying the indebtedness of Pelican State Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.15 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by Bayou Pumps, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.16 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of Sepco Industries, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.17 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997).
II-6 86 10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of Bayou Pumps, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.37 -- Amendment No. Two to Sepco Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.38 -- Amendment No. Three to Sepco Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.39 -- Sixth Amendment to Second Amended and Restated Loan and Security Agreement and Amendment to Other Agreements dated April 29, 1998, by and among SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.40 -- Amendment to Loan and Security Agreement dated April 29, 1998, by and between Pelican State Supply Company, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.41 -- Amendment to Loan and Security Agreement dated April 29, 1998, by and between DXP Acquisition, Inc., d/b/a Strategic Acquisition, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.42 -- Secured Promissory Note dated April 29, 1998, payable by SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 11.1 -- Statement re Computation of Per Share Earnings. 21.1 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of KPMG Peat Marwick LLP. *23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5.1). 24.1 -- Powers of Attorney (contained on page II-9).
- --------------- * To be filed by amendment. As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed with this Registration Statement certain instruments defining the rights of holders of long-term debt of the Company, if any, because the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request. (b) Financial Statement Schedules: None. II-7 87 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 88 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 22nd day of May, 1998. DXP ENTERPRISES, INC. (Registrant) By: /s/ DAVID R. LITTLE ---------------------------------- David R. Little Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints David R. Little and Gary A. Allcorn, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to (i) this Registration Statement and (ii) a second Registration Statement on Form S-1 with respect to additional shares of Common Stock pursuant to Rule 462 under the Securities Act, and to file the same and all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID R. LITTLE Chairman of the Board, May 22, 1998 - ----------------------------------------------------- President, Chief Executive David R. Little Officer and Director (Principal Executive Officer) /s/ JERRY J. JONES Director May 22, 1998 - ----------------------------------------------------- Jerry J. Jones /s/ GARY A. ALLCORN Senior Vice President/Finance May 22, 1998 - ----------------------------------------------------- and Chief Financial Officer Gary A. Allcorn (Principal Financial and Accounting Officer) /s/ CLETUS DAVIS Director May 22, 1998 - ----------------------------------------------------- Cletus Davis /s/ KENNETH H. MILLER Director May 22, 1998 - ----------------------------------------------------- Kenneth H. Miller /s/ THOMAS V. ORR Director May 22, 1998 - ----------------------------------------------------- Thomas V. Orr /s/ BRYAN H. WIMBERLY Director May 22, 1998 - ----------------------------------------------------- Bryan H. Wimberly
II-9 89 INDEX TO EXHIBITS *1.1 -- Form of Underwriting Agreement. 3.1 -- Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, filed with the Commission on May 15, 1997). 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). 4.1 -- Form of Common Stock certificate (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, filed with the Commission on May 15, 1997.) 4.2 -- See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of the holders of Common Stock. 4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of holders of Common Stock. *5.1 -- Opinion of Fulbright & Jaworski L.L.P. 10.1 -- Index, Inc. Long Term Incentive Plan, as amended (incorporated by reference to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Kenneth H. Miller (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Tommy Orr (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between SEPCO Industries, Inc. and Cletus Davis (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.5 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and Jerry J. Jones (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.6 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and Bryan H. Wimberly (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.7 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between SEPCO Industries, Inc. and David R. Little (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.8 -- Employment Agreement dated effective as of July 15, 1996, between SEPCO Industries, Inc. and David R. Little, as amended by Amendment to Employment Agreement dated effective May 21, 1998.
90 10.9 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Jerry J. Jones, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.10 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Bryan H. Wimberly, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.11 -- Employment Agreement dated as of July 1, 1996, between SEPCO Industries, Inc. and Gary A. Allcorn, as amended by Amendment to Employment Agreement dated effective May 21, 1998. 10.12 -- Second Amended and Restated Loan and Security Agreement dated effective as of April 1, 1994, by and between Barclays Business Credit, Inc. and SEPCO Industries, Inc., as amended by First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note dated May , 1995, by and between SEPCO Industries, Inc. and Shawmut Capital Corporation, successor-in-interest by assignment to Barclays Business Credit, Inc., as amended by Second Amendment to Second Amended and Restated Loan and Security Agreement dated April 3, 1996, by and between SEPCO Industries, Inc. and Fleet Capital Corporation, formerly known as Shawmut Capital Corporation, as amended by Third Amendment to Second Amended and Restated Loan and Security Agreement dated September 9, 1996, by and between SEPCO Industries, Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation, as amended by Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated October 24, 1996, by and between SEPCO Industries, Inc. American MRO, Inc. and Fleet Capital Corporation and as amended by Letter Agreement dated November 4, 1996, from Fleet Capital Corporation to SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. (incorporated by reference to Exhibit 10.13 to Amendment No. 4 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on November 6, 1996). 10.13 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $149,910.00, made by David R. Little and payable to SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $58,737.00, made by David R. Little and payable to SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.15 -- Vehicle Lease Agreement dated July 28, 1993, by and between World Omni Financial Corp. and SEPCO Industries, Inc. (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996).
91 10.16 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump Company, payable to the order of Southwestern Life Insurance Company (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). 10.17 -- SEPCO Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 13, 1996). 10.18 -- Fifth Amendment to Second Amended and Restated Loan and Security Agreement dated June 2, 1997, by and among Sepco Industries, Inc., Bayou Pumps, Inc., American MRO, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.19 -- Loan and Security Agreement dated June 16, 1997, by and between Fleet Capital Corporation and DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.20 -- Continuing Guaranty Agreement dated June 16, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Enterprises, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by Sepco Industries, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by American MRO, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by Bayou Pumps, Inc., guarantying the indebtedness of DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997).
92 10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Sepco Industries, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Bayou Pumps, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.29 -- Loan and Security Agreement dated May 29, 1997, by and between Fleet Capital Corporation and Pelican State Supply Company, Inc. (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.30 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP Enterprises, Inc., guarantying the indebtedness of Pelican State Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by Sepco Industries, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by American MRO, Inc., guarantying the indebtedness of Pelican State Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.15 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by Bayou Pumps, Inc., guarantying the indebtedness of Pelican State Supply Company, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.16 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997).
93 10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of Sepco Industries, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.17 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by Pelican State Supply Company, Inc., guarantying the indebtedness of Bayou Pumps, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A for the quarterly period ended June 30, 1997, filed with the Commission on November 17, 1997). 10.37 -- Amendment No. Two to Sepco Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.38 -- Amendment No. Three to Sepco Industries, Inc. Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 10.39 -- Sixth Amendment to Second Amended and Restated Loan and Security Agreement and Amendment to Other Agreements dated April 29, 1998, by and among SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.40 -- Amendment to Loan and Security Agreement dated April 29, 1998, by and between Pelican State Supply Company, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.41 -- Amendment to Loan and Security Agreement dated April 29, 1998, by and between DXP Acquisition, Inc., d/b/a Strategic Acquisition, Inc. and Fleet Capital Corporation (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 10.42 -- Secured Promissory Note dated April 29, 1998, payable by SEPCO Industries, Inc., Bayou Pumps, Inc. and American MRO, Inc. to Fleet Capital Corporation (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 14, 1998). 11.1 -- Statement re Computation of Per Share Earnings. 21.1 -- Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Registrant's Annual Report on Form 10-K, filed with the Commission on February 26, 1998). 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of KPMG Peat Marwick LLP. *23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5.1). 24.1 -- Powers of Attorney (contained on page II-9).
- --------------- * To be filed by amendment. EX-10.8 2 EMPLOYMENT AGREEMENT - (SEPCO & DAVID R. LITTLE) 1 EXHIBIT 10.8 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") by and between SEPCO INDUSTRIES, INC., a Texas corporation (the "Company") and DAVID R. LITTLE (the "Employee"), dated effective as of the 15th day of July, 1996. Employee and Company desire to have Employee continue employment with Company. Employee and Company desire to set forth the terms and conditions of Employee's employment with Company. AGREEMENTS 1. Employment Period. The Company hereby agrees to continue the Employee in its employ as Chief Executive Officer, and the Employee hereby agrees to remain in the employ of the Company for the period commencing on the date hereof ("Effective Date") and ending on the third anniversary of such date (the "Employment Period"). Unless this Agreement is terminated, on the first annual anniversary date hereof and on each annual anniversary of such date (such date and each annual anniversary thereafter shall be hereinafter referred to as the "Renewal Date"), the Employment Period shall be automatically extended so as to terminate three (3) years from such Renewal Date. Notwithstanding the foregoing, the Renewal Date shall not extend beyond the date of the 70th birthday of Employee or such later retirement date as determined by the Board of Directors ("Retirement Date"). 2. Terms of Employment. (a) Position and Duties. During the Employment Period, the Employee's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall remain commensurate in all material respects with those held, exercised and assigned as of the Effective Date 2 and the Employee's services shall be performed at Employer's current location at 6500 Brittmoore, Houston, Harris County, Texas or only at any other office or location of Company within thirty (30) miles of said current location. During the Employment Period, and excluding any periods of vacation and sick leave to which the Employee is entitled, the Employee agrees to serve in said capacity and to perform diligently and to the best of Employee's abilities the responsibilities assigned to the Employee hereunder and to perform faithfully and efficiently such responsibilities. Further, Employee shall serve, when elected, as a director of the Company and as a director or officer of any subsidiary of Company and as a member of any committee of any such Board of Directors to which he may be appointed, and Employee shall perform such other duties commensurate with his office as the Board of Directors may from time to time assign. During the Employment Period it shall not be a violation of this Agreement for the Employee to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures and fulfill speaking engagements or (iii) manage personal investments for so long as such activities do not materially interfere with the performance of the Employee's responsibilities in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Employee prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Employee's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Employee shall receive an annual base salary ("Base Salary") of TWO HUNDRED SIXTY THOUSAND AND NO/100 DOLLARS ($260,000.00), which shall be payable in equal bi-monthly installments. The Base Salary shall be reviewed at least annually and shall be increased at such time and at any time and from time to time as shall be substantially consistent with previous actions regarding increases in base salary awarded to -2- 3 Employee. Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Employee under this Agreement. Base Salary shall never be reduced. (ii) Monthly Bonus. In addition to Base Salary, the Employee shall be awarded each month during the Employment Period, an monthly bonus ("Monthly Bonus") in cash equal to three percent (3%) of the profit before tax of the Company as shown on the books and records of the Company at the end of each month. (iii) Incentive, Savings and Retirement Plans. In addition to Base Salary and Monthly Bonus, the Employee shall be entitled to participate during the Employment Period in all incentive, savings and retirement plans, practices, policies and programs applicable to other key employees of the Company. Such plans, practices, policies and programs, in the aggregate, shall provide the Employee with compensation, benefits and reward opportunities at least as favorable as those in effect as of the Effective Date. (iv) Welfare Benefit Plans. During the Employment Period, the Employee and/or the Employee's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company to other key employees, including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs. (v) Expenses. During the Employment Period, the Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in accordance with the policies, practices and procedures of the Company in effect, as of the Effective Date, for Employee. (vi) Fringe Benefits. During the Employment Period, the Employee shall be entitled to fringe benefits, including use of two automobiles in furtherance of Employee's position and duties and payment of related expenses and payment of any professional dues and dues for social club memberships, in -3- 4 accordance with the plans, practices, programs and policies of the Company in effect, as of the Effective Date, for Employee. (vii) Office and Support Staff. During the Employment Period, the Employee shall be entitled to an office or offices of a size and with furnishings and other appointments, and to secretarial and other assistance, at least equal to that provided to the Employee by the Company as of the Effective Date. (viii) Vacation. During the Employment Period, the Employee shall be entitled to paid vacation of three (3) weeks in accordance with the plans, policies, programs and practices of the Company in effect as of the Effective Date for Employee. 3. Termination. (a) Provision for. This Agreement may be terminated by Company or Employee only in accordance with the terms of Sections 3, 4 and 5 hereof. (b) Notice of Termination. Any termination by the Company or by the Employee shall be communicated by Notice of Termination to the other party hereto given in accordance with the notice provisions contained in this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which specifies the termination date. (c) Date of Termination. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that (i) if the Employee's employment is terminated by the Company, the Date of Termination shall be the date on which the Company notifies the Employee of such termination except for termination for "Good Cause" (as hereinafter defined) (ii) if the Employee's employment is terminated by reason of death or retirement, the Date shall be the date of death or date of retirement of the Employee, and (iii) if the Employee's employment is terminated by reason of Good Cause the Date shall be the date of the conviction, adjudication or judgment by the court of competent jurisdiction. -4- 5 4. Obligation of the Company upon Termination (Except Death or "Good Cause"). If after the date of the Agreement, the Company shall breach any agreement providing for or respecting the employment of the Employee or if during the Employment Period, the Company shall terminate the Employee's employment for any reason other than for Death, Retirement or Good Cause, or if during the Employment Period, the Employee shall terminate his Employment for "Good Reason" (defined hereinbelow) then the Company shall pay or cause to be paid to the Employee in a cash lump sum within 30 days after the Date of Termination the aggregate of the following amounts: A. the Employee's Current Base Annual Salary for the remainder of the Employment Period; and B. an amount equal to the sum of the most recent twelve months of Monthly Bonuses paid to the Employee, (the "Recent Bonus"); and C. the product of two (2) times the sum of the current annual Base Salary plus the Recent Bonus; and D. in the case of compensation previously deferred by the Employee, all amounts previously deferred (together with any accrued interest hereon) and not yet paid by the Company, and any accrued vacation pay not yet paid by the Company; and E. for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Employee and/or the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 2(b)(iv) and (vi) of this Agreement if the Employee's employment had not been terminated, including health insurance and life insurance, in accordance with the plans, practices, programs or policies of the Company in effect prior to the Termination Date, and for purposes of eligibility for retiree benefits pursuant to such plans, practices, programs and policies, the Employee shall be -5- 6 considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period. For purposes of this Agreement, "Good Reason" means: (i) if there is a change in the nature or scope of functions, powers, authorities, duties or responsibilities as set forth in Section 2(a) of this Agreement, which change is not remedied by the Company within thirty (30) days after receipt of notice thereof given by the Employee; (ii) any failure by the Company to comply with any of the provisions of Section 2(b) of this Agreement, which is not remedied by the Company within thirty (30) days after receipt of notice thereof given by the Employee; (iii) the Company's requiring the Employee to be based at any office or location other than that described in Section 2(a) hereof, except for travel reasonably required in the performance of the Employee's responsibilities; (iv) any purported termination by the Company of the Employee's employment except for "Good Cause" (hereinafter defined) or Death; or (v) any failure by the Company to comply with and satisfy Section 11 of this Agreement. 5. Obligation of the Company Upon Retirement, Death or "Good Cause". If the Employee's employment is terminated by reason of Employee's retirement, death or "Good Cause" (hereinafter defined), this Agreement shall terminate without further obligations to Employee or the Employee's legal representatives, except as set out in this Section and under this Agreement as it does not conflict with this Section, including those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, and including (i) the Employee's full Base Salary through the Date of Termination, (ii) the Monthly Bonuses required to be paid to the Employee up to and including the month within which the Date of Termination occurs and (iii) any compensation previously -6- 7 deferred by the Employee (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (such amounts specified in clauses (i), (ii) and (iii) above are hereinafter referred to as "Accrued Obligations"). All such Accrued Obligations shall be paid to Employee or to Employee's estate or beneficiary, as applicable, in a cash lump sum within thirty (30) days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee's family in the event of Employee's death shall be entitled to continue to receive the benefits provided by the Company to surviving families of key employees of the Company and Employee's Base Salary payable in equal bi-monthly installments for a period of twenty-four (24) months after the month in which Employee dies. For purposes of this Agreement, "Good Cause" means: (i) Employee has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal. (ii) Employee has been adjudicated by a court of competent jurisdiction to be mentally, physically and/or emotionally incapacitated so as to render him incapable of performing his required duties and services, and such adjudication is no longer subject to direct appeal. (iii) A court of competent jurisdiction has rendered a judgment that Employee has committed acts of fraud, theft or willful malfeasance that has materially damaged the Company and such determination is no longer subject to direct appeal. 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any stock option or warrant or other agreements with the Company. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company -7- 8 at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 7. Full Settlement. The Company's obligation to make or cause to be made the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. The Company agrees to pay, or cause to be paid, to the full extent permitted by law, all legal fees and expenses which the Employee may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code. 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. -8- 9 (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the accounting firm preparing the Company's tax return or, if such firm is not reasonably available, such other firm of similar national recognition mutually acceptable to the Company and the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the Date of Termination, if applicable, or such earlier time as is requested by the Company. The initial Gross-Up Payment, if any, as determined pursuant to this Section 8(b), shall be paid to the Employee within 5 days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable to the Employee, it shall furnish the Employee with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with any penalties and interest) shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee knows of such claim and shall apprise the Company of the nature of such claims and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the -9- 10 thirty-day period following the date on which the Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including attorney fees and any additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section (8)(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect to such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and -10- 11 hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service, or any other authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 8(c), the Employee become entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 8(c), promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claims and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of thirty days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. Protective Covenants. The Employee recognizes that his employment by the Company is one of the highest trust and confidence because (i) the Employee will become fully familiar with all aspects of the Company's business during the period of his employment with the Company, (ii) certain information of which the Employee will gain knowledge during his employment is proprietary and confidential information which is special and peculiar value to the Company, and (iii) if any such proprietary and confidential information were imparted to or became known by any person, including -11- 12 the Employee, engaging in a business in competition with that of the Company, hardship, loss or irreparable injury and damage could result to the Company, the measurement of which would be difficult if not impossible to ascertain. The Employee acknowledges that the Company has developed unique skills, concepts, designs, marketing programs, marketing strategy, business practices, methods of operation, trademarks, licenses, hiring and training methods, financial and other confidential and proprietary information concerning its operations and expansion plans ("Trade Secrets"). Therefore, the Employee agrees that it is necessary for the Company to protect its business from such damage, and the Employee further agrees that the following covenants constitute a reasonable and appropriate means, consistent with the best interest of both the Employee and the Company, to protect the Company against such damage and shall apply to and be binding upon the Employee as provided herein: (a) Trade Secrets. The Employee recognizes that his position with the Company is one of the highest trust and confidence by reason by of the Employee's access to and contact with certain Trade Secrets of the Company. The Employee agrees and covenants to use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets of the Company. The Employee further agrees and covenants that, except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, the Employee shall not, either during the term of this Agreement or thereafter, directly or indirectly, use for the Employee's own benefit or for the benefit of another, or disclose, disseminate, or distribute to another, any Trade Secret (whether or not acquired, learned, obtained, or developed by the Employee alone or in conjunction with others) of the Company or of others with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents, or other writings whatsoever made, compiled, acquired, or received by the Employee during the term of this Agreement, arising out of, in connection with, or related to any activity or business of the Company, including, but not limited to, the Company's operations, the marketing of the Company's products, the Company's customers, suppliers, or others with whom the Company has -12- 13 a business relationship, the Company's arrangements with such parties, and the Company's pricing and expansion policies and strategy, are, and shall continue to be, the sole and exclusive property of the Company, and shall, together with all copies thereof and all advertising literature, be returned and delivered to the Company by the Employee immediately, without demand, upon the termination of this Agreement, or at any time upon the Company's demand. (b) Restriction on Soliciting Employees of the Company. The Employee covenants that for a period of twelve (12) months following the termination of this Agreement, he will not, either directly or indirectly, call on, solicit, or take away, or attempt to call on, solicit or take away any of the employees of the Company, either for himself or for any other person, firm, corporation or other entity. (c) Covenant Not to Compete. The Employee hereby covenants and agrees that for a period of twenty-four (24) months following the termination of this Agreement, he will not directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than through ownership of publicly-traded capital stock of a corporation which represents less than five percent (5%) (of the outstanding capital stock of such corporation), corporate officer, director, investor, financier or in any other individual or representative capacity, engage or participate in any business competitive with the Company within Texas, Oklahoma or Louisiana. (d) Survival of Covenants. Each covenant of the Employee set forth in this Section 9 shall survive the termination of this Agreement and shall be construed as an agreement independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Employee against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of said covenant. (e) Remedies. In the event of breach or threatened breach by the Employee of any provision of this Section 9, the Company shall be entitled to relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which -13- 14 it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation. The Employee hereby acknowledges that the Employee's agreement to be bound by the protective covenants set forth in this Section 9 was a material inducement for the Company entering into this Agreement and agreeing to pay the Employee the compensation and benefits set forth herein. 10. Assignment and Binding Effect. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by each party hereto and each party's respective successors, heirs, assigns and legal representatives. 11. Successor. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets. 12. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without reference to principles of conflict of laws. This Agreement was executed in Houston, Harris County, Texas and at least partial performance of this Agreement will be made in such place. -14- 15 13. Notices. All notices and other communications hereunder shall be in writing and shall be personally given by hand delivery to the other party or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: David R. Little 427 Thamer Houston, Texas 77024 If to the Company: Sepco Industries, Inc. 6500 Brittmoore Houston, Texas 77041 Attention: Senior Vice President/Finance or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee, or if mailed, on the seventh day following the day on which it was deposited in the United States mail. 14. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement and each separate provision hereof shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 15. Headings. The headings of the paragraph of this Agreement have been inserted for convenience of reference only and shall not be construed or interpreted to restrict or modify any of the terms or provisions hereof. 16. Remedies. With respect to each and every breach, violation, or threatened breach or violation by Employee or Company of any of the covenants set forth herein, Company and Employee, in addition to all other remedies available at law or in equity, including specific performance of the -15- 16 provisions hereof, shall be entitled to enjoin the commencement or continuance thereof and may apply for entry of an injunction. 17. No Waiver. The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every such provision of this Agreement in accordance with the terms of this Agreement. 18. Entire Agreement. (a) This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter hereof, unless expressly provided otherwise herein and except for (1) all rights of Employee under any other existing employee benefit plans established and adopted for employees of Company in general, (2) all rights of Employee to indemnity under all indemnification provided by Company or any third parties and (3) other similar arrangements of Company and all agreements with respect to the foregoing. (b) No amendment or modification of this Agreement, unless expressly provided otherwise herein, shall be valid unless made in writing and signed by each of the parties whose rights, duties, or obligations hereunder would in any way be affected by any amendment or modification. (c) No representations, inducements, or agreements have been made to induce either Employee or Company to enter into this Agreement which are not expressly set forth herein. This Agreement is the sole source of rights and duties as between Company and Employee relating to the subject matter of this Agreement, except as expressly provided herein. -16- 17 IN WITNESS WHEREOF, the Employee has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. EMPLOYEE: /s/ DAVID R. LITTLE ----------------------------------------------- DAVID R. LITTLE COMPANY: SEPCO INDUSTRIES, INC., a Texas Corporation By: /s/ DAVID R. LITTLE -------------------------------------------- Printed Name: David R. Little ------------------------------- Title: Chairman & CEO -------------------------------------- -17- 18 AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, on July 15, 1996, SEPCO INDUSTRIES, INC., a Texas corporation ("the Company") and DAVID R. LITTLE (the "Executive") entered into that one certain Employment Agreement (the "Agreement"); WHEREAS, the Company and the Executive desire to amend said Employment Agreement pursuant to the provisions hereof. NOW, THEREFORE, in consideration of the covenants, and agreements set out below, the parties agree as follows: 1. All terms defined in the Agreement, which are used in this First Amendment, shall have the same meaning as set forth in the Agreement except as specifically changed or modified hereby. 2. The Company has become a wholly owned subsidiary of DXP Enterprises, Inc., a Texas corporation ("DXP"). Therefore the Company shall, for the purposes of the Agreement, be DXP. 3. Section 1 is hereby amended by adding the following as the last sentence. "Notwithstanding anything herein to the contrary, this Agreement shall terminate June 30, 1998, if the Company and Executive execute a new Employment Agreement before that date. If a new Employment Agreement is not executed before June 30, 1998, then this Agreement shall terminate June 30, 2001." 4. Series 2(b)(ii) of the Agreement is hereby amended by adding the following as the last sentence: "Notwithstanding the foregoing, the annual total of the monthly bonus shall not exceed twice the annual Base Salary." Page 1 of 2 Pages 19 5. Except as herein amended and modified, the Agreement shall remain in full force and effect. EXECUTED effective the 21st day of May, 1998. DXP ENTERPRISES, INC. By: /s/ GARY A. ALLCORN ------------------------------- GARY A. ALLCORN Senior Vice President/CFO /s/ DAVID R. LITTLE ------------------------------- DAVID R. LITTLE Page 2 of 2 Pages EX-10.9 3 EMPLOYEMENT AGREEMENT - (SEPCO & JERRY J. JONES) 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement) by and between SEPCO INDUSTRIES, INC., a Texas corporation (the "Company"), and JERRY J. JONES (the "Executive") is made and entered into as of the Effective Date set forth in Section 1.3 below: RECITALS A. The Company desires to employ the Executive in the capacity set forth on Exhibit A pursuant to the provisions of this Agreement; and B. The Executive desires employment as an employee of the Company pursuant to the provisions of this Agreement. ARTICLE I. TERMS OF EMPLOYMENT The terms of employment are as follows: 1.1 Employment. The Company hereby employs the Executive for and during the term hereof in the capacity set forth on Exhibit A, but Company may subsequently assign Executive to a different position or modify Executive's duties and responsibilities. The Executive hereby accepts employment under the terms and conditions set forth in this Agreement. 1.2 Duties of Executive. The Executive shall perform in the capacity described in Section 1.1 hereof and shall have such duties, responsibilities, and authorities as may be designated for such office. The Executive agrees to devote the Executive's best efforts, abilities, knowledge, experience and full business time to the faithful performance of the duties, responsibilities, and authorities which may be assigned to the Executive. Executive may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Executive's performance of Executive's duties hereunder, is contrary to the interests of the Company, or requires any significant portion of Executives's business time. Executive shall at all times comply with and be subject to such policies and procedures as the Company may establish from time to time. Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act which would injure Company's business, its interests, or its reputation. 1.3 Term. This Agreement shall become effective as of the 1st day of July, 1996 (the "Effective Date") and shall continue in force and effect for one (1) year unless sooner terminated as provided in Section 2.1 hereof. Unless this Agreement is terminated before its annual anniversary date, the term hereof shall be automatically extended for one (1) year unless this Agreement is renewed or extended by written agreement between the Company and the Executive pursuant to terms and conditions mutually acceptable. 1.4 Compensation. The Company shall pay the Executive, as "Compensation" for services rendered by the Executive under this Agreement the following Salary plus Bonus. -1- 2 (a) Salary: A base salary per month as set forth on Exhibit A, prorated for any partial period of employment ("Salary"). Such Salary shall be paid in installments in accordance with the Company's regular payroll practices. (b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus"). 1.5 Employment Benefits. In addition to the Salary payable to the Executive hereunder, the Executive shall be entitled to the following benefits: (a) Employment Benefits. As an employee of the Company, the Executive shall participate in and receive all general employee benefit plans and programs, as may be in effect from time to time, upon satisfaction by the Executive of the eligibility requirements therefor. Nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated employees pursuant to the terms and conditions of such benefit plans and programs. (b) Working Facilities. During the term of this Agreement, the Company shall provide, at its expense, office space, furniture, equipment, supplies and personnel as shall be adequate for the Executive's use in performing Executive's duties and responsibilities under this Agreement. (c) Automobile Allowance. During the term of this Agreement, the Company shall provide Executive with a vehicle in accordance with the Company's vehicle policy. (d) Limitations. Company shall not by reason of this Article 1.5 be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such incentive compensation or employee benefit program or plan, so long as such actions are similarly applicable to covered employees similarly situated. ARTICLE II. TERMINATION 2.1 Termination. Notwithstanding anything herein to the contrary, this Agreement and the Executive's employment hereunder may be terminated without any breach of this Agreement at any time during the term hereof by reason of and in accordance with the following provisions: (a) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate as of the date of the Executive's death, and the Company shall have no further liability hereunder to the Executive or Executive's estate, except to the extent set forth in Section 2.2(a) hereof. (b) Disability. If, during the term of this Agreement, the Executive shall be prevented from performing the Executive's duties hereunder by reason of becoming disabled as hereinafter defined, the Company may terminate this Agreement immediately -2- 3 upon written notice to the Executive without any further liability hereunder to the Executive except as set forth in Section 2.2(b) hereof. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon the written report of a qualified physician designated by the Board of Directors of the Company or by its insurers, shall have determined that the Executive has become mentally, physically and/or emotionally incapable of performing Executive's duties and services under this Agreement. (c) Termination by the Company for Cause. Prior to the expiration of the term of this Agreement, the Company may discharge the Executive for cause and terminate this Agreement immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.1(c) hereof. For purposes of this Agreement, a "discharge for cause" shall mean termination of the Executive upon written notice to the Executive limited, however, to one or more of the following reasons: (1) Conviction of the Executive by a court of competent jurisdiction of a felony or a crime involving moral turpitude; (2) The Executive's failure or refusal to comply with the Company's policies, standards, and regulations of the Company, which from time to time may be established; (3) The Executive's engaging in conduct amounting to fraud, dishonesty, gross negligence, willful misconduct or conduct that is unprofessional, unethical, or detrimental to the reputation, character or standing of the Company; or (4) The Executive's failure to faithfully and diligently perform the duties required hereunder or to comply with the provisions of this Agreement. Prior to terminating this Agreement pursuant to Section 2.1(c), (2), or (4), the Company shall furnish the Executive written notice of the Executive's alleged failure to abide by or alleged breach of this Agreement. The Executive shall have thirty (30) days after the Executive's receipt of such notice to cure such failure to abide or breach and the Company's Board of Directors shall determine if the failure to abide or breach is cured. (d) Termination by the Company with Notice. The Company may terminate this Agreement at any time, for any reason, other than as set forth in Subparagraphs (a), (b) or (c) of this Section 2.1, with or without cause, in the Company's sole discretion, immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.2(d) hereof. (e) Termination by the Executive for Good Reason. The Executive may terminate this Agreement at any time for Good Reason (as hereinafter defined) in which event the Company shall have no further liability hereunder to the Executive except to -3- 4 the extent set forth in Section 2.2(e) hereof. For purposes of this Agreement, the term "Good Reason" shall mean, without the Executive's express written consent, the occurrence of any of the following circumstances: (1) The Company's failure to pay the Executive the Compensation pursuant to the terms of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company; (2) The failure of the Company to obtain an agreement, from any successor to assume and agree to perform this Agreement; or (3) Any failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company. (f) Termination by the Executive with Notice. The Executive may terminate this Agreement for any reason other than Good Reason on thirty (30) days prior written notice, in the sole discretion of the Executive, in which event the Company shall have no further liability hereunder to the Executive, except to the extent set forth in Section 2.2(f) hereof. 2.2 Compensation upon Termination. (a) Death. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(a) hereof due to the death of the Executive, the Company shall have no further obligation to the Executive or Executive's estate, except to pay to the Executive's spouse, or if none, to the estate of the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of death but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the death of the Executive. (b) Disability. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(b) hereof due to Disability of the Executive, the Company shall be relieved of all of its obligations under this Agreement, except to pay the Executive any accrued, but unpaid Salary, and vacation or sick leave benefits which have accrued as of the date on which such permanent disability is determined, but then remain unpaid. The provisions of the preceding sentence shall not affect the Executive's rights to receive payments under the Company's disability insurance plan, if any. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (c) Cause. In the event the Executive's employment hereunder is terminated by the Company for Cause pursuant to the provisions of Section 2.1(c) hereof, the Company shall have no further obligation to the Executive under this Agreement except -4- 5 to pay the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of the Executive's employment hereunder. (d) Termination Pursuant to Section 2.1(d). In the event the Executive's employment hereunder is terminated by the Company pursuant to the provisions of Section 2.1(d) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused, (ii) an amount payable in monthly installments equal to the Executive's full monthly Salary payable for a period of twelve (12) months and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (e) Termination by the Executive for Good Reason. In the event this Agreement is terminated by the Executive pursuant to the provisions of Section 2.1(e) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits which have accrued as of the date of termination-of the Agreement, but were then unpaid or unused, (ii) the full monthly Salary payable hereunder for a period of twelve (12) months after this Agreement is terminated by the Executive in accordance with the Company's regular payroll periods or over such lesser period as the Company may determine and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (f) Termination Pursuant to Section 2.1(f). In the event the Executive's employment hereunder is terminated by the Executive pursuant to the provisions of Section 2.1(f) hereof, all future compensation to which Executive is entitled and all future benefits for which Executive is eligible shall cease and terminate as of the date of termination. Executive shall be entitled to pro rata Salary through the date of termination. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of Executive's Employment hereunder. (g) Termination of Obligations of the Company Upon Payment of Compensation. Upon payment of the amount, if any, due the Executive pursuant to the preceding provisions of this Section, the Company shall have no further obligation to the Executive under this Agreement. 2.3 Merger or Acquisition. In the event the Company should consolidate, or merge into another corporation, or transfer all or substantially all of its assets to another entity, or divide its assets among a number of entities, this Agreement shall continue in full force and effect. The Company will require any and all successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree pursuant to an -5- 6 appropriate written assumption agreement to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to or contemporaneously with the effectiveness of any such successor shall be a breach of the Agreement and shall entitle the Executive, as his or her sole remedy, to terminate Executive's employment and this Agreement for Good Reason. 2.4 Offset. The Company shall have the right to deduct from any amounts due the Executive hereunder any obligations owed by the Executive to the Company. ARTICLE III. PROTECTION OF INFORMATION AND NON-COMPETITION Protective Covenants. The Executive recognizes that his employment by the Company is one of the highest trust and confidence because (i) the Executive will become fully familiar with all aspects of the Company's business during the period of his employment with the Company, (ii) certain information of which the Executive will gain knowledge during his employment is proprietary and confidential information which is special and peculiar value to the Company, and (iii) if any such proprietary and confidential information were imparted to or became known by any person, including the Executive, engaging in a business in competition with that of the Company, hardship, loss or irreparable injury and damage could result to the Company, the measurement of which would be difficult if not impossible to ascertain. The Executive acknowledges that the Company has developed unique skills, concepts, designs, marketing programs, marketing strategy, business practices, methods of operation, trademarks, licenses, hiring and training methods, financial and other confidential and proprietary information concerning its operations and expansion plans ("Trade Secrets"). Therefore, the Executive agrees that it is necessary for the Company to protect its business from such damage, and the Executive further agrees that the following covenants constitute a reasonable and appropriate means, consistent with the best interest of both the Executive and the Company, to protect the Company against such damage and shall apply to and be binding upon the Executive as provided herein: (a) Trade Secrets. The Executive recognizes that his position with the Company is one of the highest trust and confidence by reason by of the Executive's access to and contact with certain Trade Secrets of the Company. The Executive agrees and covenants to use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets of the Company. The Executive further agrees and covenants that, except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, the Executive shall not, either during the term of this Agreement or thereafter, directly or indirectly, use for the Executive's own benefit or for the benefit of another, or disclose, disseminate, or distribute to another, any Trade Secret (whether or not acquired, learned, obtained, or developed by the Executive alone or in conjunction with others) of the Company or of others with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents, or other writings whatsoever made, compiled, acquired, or received by the Executive during the term of this Agreement, arising out of, in connection with, or related to any activity or business of the Company, including, but -6- 7 not limited to, the Company's operations, the marketing of the Company's products, the Company's customers, suppliers, or others with whom the Company has a business relationship, the Company's arrangements with such parties, and the Company's pricing and expansion policies and strategy, are, and shall continue to be, the sole and exclusive property of the Company, and shall, together with all copies thereof and all advertising literature, be returned and delivered to the Company by the Executive immediately, without demand, upon the termination of this Agreement, or at any time upon the Company's demand. (b) Restriction on Soliciting Employees of the Company. The Executive covenants that during the term of this Agreement and for a period of twelve (12) months following the termination of this Agreement, he will not, either directly or indirectly, call on, solicit, or take away, or attempt to call on, solicit, induce or take away any employee of the Company, either for himself or for any other person, firm, corporation or other entity. Further, Executive shall not induce any employee of the Company to terminate his or her employment with the Company. (c) Covenant Not to Compete. The Executive hereby covenants and agrees that during the term of this Agreement and for the period set forth in Exhibit "A" following the termination of this Agreement ("Non- Compete Period"), he will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than through ownership of publicly-traded capital stock of a corporation which represents less than five percent (5%) of the outstanding capital stock of such corporation), corporate officer, director, investor, financier or in any other individual or representative capacity, engage or participate in any business competitive with the business conducted by the Company within Texas, Oklahoma or Louisiana. (d) Survival of Covenants. Each covenant of the Executive set forth in this Article III shall survive the termination of this Agreement and shall be construed as an agreement independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Executive against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of said covenant. (e) Remedies. In the event of breach or threatened breach by the Executive of any provision of this Article III, the Company shall be entitled to relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation. -7- 8 The Executive hereby acknowledges that the Executive's agreement to be bound by the protective covenants set forth in this Article III was a material inducement for the Company entering into this Agreement and agreeing to pay the Executive the compensation and benefits set forth herein. Further, Executive understands the foregoing restrictions may limit his or her ability to engage in certain businesses during the period of time provided for, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. ARTICLE IV. GENERAL PROVISIONS 4.1 Notices. all notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the respective parties as follows: If to the Executive: As set forth in Exhibit "A" If to the Company: Sepco Industries, Inc. 6500 Brittmoore Houston, Texas 77041 ATTN: David R. Little Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 4.2 Severability. If any provision contained in this Agreement is determined by a court of competent jurisdiction or an arbitrator pursuant to Section 5 below to be void, illegal or unenforceable, in whole or in part, then the other provisions contained herein shall remain in full force and effect as if the provision which was determined to be void, illegal, or unenforceable had not been contained herein. If the restrictions contained in Article III are found by a court to be unreasonable or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for said restrictions to be modified by said court so as to be reasonable and enforceable and, as so modified, to be fully enforced. 4.3 Waiver Modification, and Integration. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. This instrument contains the entire agreement of the parties concerning employment and supersedes all prior and contemporaneous representations, understandings and agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and all such prior or contemporaneous -8- 9 representations, understandings and agreements, both oral and written, are hereby terminated. This Agreement may not be modified, altered or amended except by written agreement of all the parties hereto. 4.4 Binding Effect. This Agreement shall be binding and effective upon the parties and their respective successors. Neither party shall assign this Agreement without the prior written consent of the other party, except that the Company shall have the right to assign this Agreement to an entity. 4.5 Governing Law. The parties intend that the laws of the State of Texas should govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties hereto. 4.6 Representation of Executive. The Executive hereby represents and warrants to the Company that the Executive has not previously assumed any obligations inconsistent with those contained in this Agreement. The Executive further represents and warrants to the Company that the Executive has entered into this Agreement pursuant to Executive's own initiative and that this Agreement is not in contravention of any existing commitments. The Executive acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of the Executive. 4.7 Counterpart Execution. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 4.8 Company. For the purposes of this Agreement, Company shall include any parent, subsidiary division of the Company, or any entity, who directly or indirectly, controls, is controlled by, or is under common control with the Company. ARTICLE V. ARBITRATION 5.1 Resolution of Disputes. In any dispute between the Parties, the Parties shall cooperate in good faith to resolve the dispute. If the parties cannot resolve the dispute between themselves, they shall each, within ten (10) days, select one mediator to help resolve the dispute. If a resolution of the dispute does not occur through mediation within thirty (30) days after the selection of the two mediators, any Party may demand binding arbitration. 5.2 Arbitration. In the event any dispute cannot be resolved through mediation the Parties agree to submit such dispute to binding arbitration. Any such arbitration arising hereunder shall be conducted in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. The costs of arbitration shall be borne equally by the Parties. However, each Party shall be responsible for such Party's own attorneys' fees. -9- 10 ARTICLE VI. CONFIDENTIALITY 6.1 Confidentiality. This Agreement is confidential, and the substance may be disclosed only as mutually agreed by the Parties or as may be required by law. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written effective as of the Effective Date. THE COMPANY: SEPCO INDUSTRIES, INC., a Texas corporation By: /s/ DAVID R. LITTLE ---------------------------------------- Printed Name: DAVID R. LITTLE ------------------------- Title: Chairman & CEO -------------------------------- EXECUTIVE: By: /s/ JERRY J. JONES ---------------------------------------- JERRY J. JONES Senior Vice President -10- 11 EXHIBIT "A" TO EMPLOYMENT AGREEMENT NAME: Jerry J. Jones POSITION: Senior Vice President MONTHLY BASE: $10,833.42 BONUS: Two percent (2%) of the monthly profit before tax of DXP Enterprises, Inc., excluding sales of fixed assets and extra-ordinary items, as determined by DXP, which shall be payable monthly in accordance with the Company's regular bonus practices NON-COMPETE PERIOD: Twelve (12) months HOME ADDRESS: 507 Timber Circle Houston, TX 77079 TERMINATION BONUS: The sum equal to the total of twelve (12) previous monthly bonus payments made to Employee in accordance with Section 1.4(b) of this Agreement 12 AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation ("the Company") and JERRY J. JONES (THE "EXECUTIVE") entered into that one certain Employment Agreement (the "Agreement"); WHEREAS, the Company and the Executive desire to amend said Employment Agreement pursuant to the provisions hereof. NOW, THEREFORE, in consideration of the covenants, and agreements set out below, the parties agree as follows: 1. All terms defined in the Agreement, which are used in this First Amendment, shall have the same meaning as set forth in the Agreement except as specifically changed or modified hereby. 2. The Company has become a wholly owned subsidiary of DXP Enterprises, Inc., a Texas corporation ("DXP"). Therefore the Company shall, for the purposes of the Agreement, be DXP. 3. Section 1.3 is hereby amended by adding the following as the last sentence: "This Agreement shall terminate June 30, 1998, if the Company and Executive execute a new Employment Agreement." 4. The Bonus Section in Exhibit A to the Agreement is hereby amended by adding the following as the last sentence: "Notwithstanding the foregoing, the annual total of the monthly bonus shall not exceed twice the annual base salary." Page 1 of 2 Pages 13 5. Except as herein amended and modified, the Agreement shall remain in full force and effect. EXECUTED effective the 21st day of May, 1998. DXP EXTERPRISES, INC. By:/s/ DAVID R. LITTLE ------------------------------------- DAVID R. LITTLE Chairman and Chief Executive Officer /s/ JERRY J. JONES ------------------------------------- JERRY J. JONES Page 2 of 2 Pages EX-10.10 4 EMPLOYMENT AGREEMENT-(SEPCO & BRYAN H. WIMBERLY) 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement) by and between SEPCO INDUSTRIES, INC., a Texas corporation (the "Company"), and BRYAN H. WIMBERLY (the "Executive") is made and entered into as of the Effective Date set forth in Section 1.3 below: RECITALS A. The Company desires to employ the Executive in the capacity set forth on Exhibit A pursuant to the provisions of this Agreement; and B. The Executive desires employment as an employee of the Company pursuant to the provisions of this Agreement. ARTICLE I. TERMS OF EMPLOYMENT The terms of employment are as follows: 1.1 Employment. The Company hereby employs the Executive for and during the term hereof in the capacity set forth on Exhibit A, but Company may subsequently assign Executive to a different position or modify Executive's duties and responsibilities. The Executive hereby accepts employment under the terms and conditions set forth in this Agreement. 1.2 Duties of Executive. The Executive shall perform in the capacity described in Section 1.1 hereof and shall have such duties, responsibilities, and authorities as may be designated for such office. The Executive agrees to devote the Executive's best efforts, abilities, knowledge, experience and full business time to the faithful performance of the duties, responsibilities, and authorities which may be assigned to the Executive. Executive may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Executive's performance of Executive's duties hereunder, is contrary to the interests of the Company, or requires any significant portion of Executives's business time. Executive shall at all times comply with and be subject to such policies and procedures as the Company may establish from time to time. Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act which would injure Company's business, its interests, or its reputation. 1.3 Term. This Agreement shall become effective as of the 1st day of July, 1996 (the "Effective Date") and shall continue in force and effect for one (1) year unless sooner terminated as provided in Section 2.1 hereof. Unless this Agreement is terminated before its annual anniversary date, the term hereof shall be automatically extended for one (1) year unless this Agreement is renewed or extended by written agreement between the Company and the Executive pursuant to terms and conditions mutually acceptable. 1.4 Compensation. The Company shall pay the Executive, as "Compensation" for services rendered by the Executive under this Agreement the following Salary plus Bonus. -1- 2 (a) Salary: A base salary per month as set forth on Exhibit A, prorated for any partial period of employment ("Salary"). Such Salary shall be paid in installments in accordance with the Company's regular payroll practices. (b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus"). 1.5 Employment Benefits. In addition to the Salary payable to the Executive hereunder, the Executive shall be entitled to the following benefits: (a) Employment Benefits. As an employee of the Company, the Executive shall participate in and receive all general employee benefit plans and programs, as may be in effect from time to time, upon satisfaction by the Executive of the eligibility requirements therefor. Nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated employees pursuant to the terms and conditions of such benefit plans and programs. (b) Working Facilities. During the term of this Agreement, the Company shall provide, at its expense, office space, furniture, equipment, supplies and personnel as shall be adequate for the Executive's use in performing Executive's duties and responsibilities under this Agreement. (c) Automobile Allowance. During the term of this Agreement, the Company shall provide Executive with a vehicle in accordance with the Company's vehicle policy. (d) Limitations. Company shall not by reason of this Article 1.5 be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such incentive compensation or employee benefit program or plan, so long as such actions are similarly applicable to covered employees similarly situated. ARTICLE II. TERMINATION 2.1 Termination. Notwithstanding anything herein to the contrary, this Agreement and the Executive's employment hereunder may be terminated without any breach of this Agreement at any time during the term hereof by reason of and in accordance with the following provisions: (a) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate as of the date of the Executive's death, and the Company shall have no further liability hereunder to the Executive or Executive's estate, except to the extent set forth in Section 2.2(a) hereof. (b) Disability. If, during the term of this Agreement, the Executive shall be prevented from performing the Executive's duties hereunder by reason of becoming disabled as hereinafter defined, the Company may terminate this Agreement immediately -2- 3 upon written notice to the Executive without any further liability hereunder to the Executive except as set forth in Section 2.2(b) hereof. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon the written report of a qualified physician designated by the Board of Directors of the Company or by its insurers, shall have determined that the Executive has become mentally, physically and/or emotionally incapable of performing Executive's duties and services under this Agreement. (c) Termination by the Company for Cause. Prior to the expiration of the term of this Agreement, the Company may discharge the Executive for cause and terminate this Agreement immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.1(c) hereof. For purposes of this Agreement, a "discharge for cause" shall mean termination of the Executive upon written notice to the Executive limited, however, to one or more of the following reasons: (1) Conviction of the Executive by a court of competent jurisdiction of a felony or a crime involving moral turpitude; (2) The Executive's failure or refusal to comply with the Company's policies, standards, and regulations of the Company, which from time to time may be established; (3) The Executive's engaging in conduct amounting to fraud, dishonesty, gross negligence, willful misconduct or conduct that is unprofessional, unethical, or detrimental to the reputation, character or standing of the Company; or (4) The Executive's failure to faithfully and diligently perform the duties required hereunder or to comply with the provisions of this Agreement. Prior to terminating this Agreement pursuant to Section 2.1(c), (2), or (4), the Company shall furnish the Executive written notice of the Executive's alleged failure to abide by or alleged breach of this Agreement. The Executive shall have thirty (30) days after the Executive's receipt of such notice to cure such failure to abide or breach and the Company's Board of Directors shall determine if the failure to abide or breach is cured. (d) Termination by the Company with Notice. The Company may terminate this Agreement at any time, for any reason, other than as set forth in Subparagraphs (a), (b) or (c) of this Section 2.1, with or without cause, in the Company's sole discretion, immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.2(d) hereof. (e) Termination by the Executive for Good Reason. The Executive may terminate this Agreement at any time for Good Reason (as hereinafter defined) in which event the Company shall have no further liability hereunder to the Executive except to -3- 4 the extent set forth in Section 2.2(e) hereof. For purposes of this Agreement, the term "Good Reason" shall mean, without the Executive's express written consent, the occurrence of any of the following circumstances: (1) The Company's failure to pay the Executive the Compensation pursuant to the terms of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company; (2) The failure of the Company to obtain an agreement, from any successor to assume and agree to perform this Agreement; or (3) Any failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company. (f) Termination by the Executive with Notice. The Executive may terminate this Agreement for any reason other than Good Reason on thirty (30) days prior written notice, in the sole discretion of the Executive, in which event the Company shall have no further liability hereunder to the Executive, except to the extent set forth in Section 2.2(f) hereof. 2.2 Compensation upon Termination. (a) Death. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(a) hereof due to the death of the Executive, the Company shall have no further obligation to the Executive or Executive's estate, except to pay to the Executive's spouse, or if none, to the estate of the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of death but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the death of the Executive. (b) Disability. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(b) hereof due to Disability of the Executive, the Company shall be relieved of all of its obligations under this Agreement, except to pay the Executive any accrued, but unpaid Salary, and vacation or sick leave benefits which have accrued as of the date on which such permanent disability is determined, but then remain unpaid. The provisions of the preceding sentence shall not affect the Executive's rights to receive payments under the Company's disability insurance plan, if any. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (c) Cause. In the event the Executive's employment hereunder is terminated by the Company for Cause pursuant to the provisions of Section 2.1(c) hereof, the Company shall have no further obligation to the Executive under this Agreement except -4- 5 to pay the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of the Executive's employment hereunder. (d) Termination Pursuant to Section 2.1(d). In the event the Executive's employment hereunder is terminated by the Company pursuant to the provisions of Section 2.1(d) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused, (ii) an amount payable in monthly installments equal to the Executive's full monthly Salary payable for a period of twelve (12) months and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (e) Termination by the Executive for Good Reason. In the event this Agreement is terminated by the Executive pursuant to the provisions of Section 2.1(e) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits which have accrued as of the date of termination-of the Agreement, but were then unpaid or unused, (ii) the full monthly Salary payable hereunder for a period of twelve (12) months after this Agreement is terminated by the Executive in accordance with the Company's regular payroll periods or over such lesser period as the Company may determine and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (f) Termination Pursuant to Section 2.1(f). In the event the Executive's employment hereunder is terminated by the Executive pursuant to the provisions of Section 2.1(f) hereof, all future compensation to which Executive is entitled and all future benefits for which Executive is eligible shall cease and terminate as of the date of termination. Executive shall be entitled to pro rata Salary through the date of termination. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of Executive's Employment hereunder. (g) Termination of Obligations of the Company Upon Payment of Compensation. Upon payment of the amount, if any, due the Executive pursuant to the preceding provisions of this Section, the Company shall have no further obligation to the Executive under this Agreement. 2.3 Merger or Acquisition. In the event the Company should consolidate, or merge into another corporation, or transfer all or substantially all of its assets to another entity, or divide its assets among a number of entities, this Agreement shall continue in full force and effect. The Company will require any and all successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree pursuant to an -5- 6 appropriate written assumption agreement to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to or contemporaneously with the effectiveness of any such successor shall be a breach of the Agreement and shall entitle the Executive, as his or her sole remedy, to terminate Executive's employment and this Agreement for Good Reason. 2.4 Offset. The Company shall have the right to deduct from any amounts due the Executive hereunder any obligations owed by the Executive to the Company. ARTICLE III. PROTECTION OF INFORMATION AND NON-COMPETITION Protective Covenants. The Executive recognizes that his employment by the Company is one of the highest trust and confidence because (i) the Executive will become fully familiar with all aspects of the Company's business during the period of his employment with the Company, (ii) certain information of which the Executive will gain knowledge during his employment is proprietary and confidential information which is special and peculiar value to the Company, and (iii) if any such proprietary and confidential information were imparted to or became known by any person, including the Executive, engaging in a business in competition with that of the Company, hardship, loss or irreparable injury and damage could result to the Company, the measurement of which would be difficult if not impossible to ascertain. The Executive acknowledges that the Company has developed unique skills, concepts, designs, marketing programs, marketing strategy, business practices, methods of operation, trademarks, licenses, hiring and training methods, financial and other confidential and proprietary information concerning its operations and expansion plans ("Trade Secrets"). Therefore, the Executive agrees that it is necessary for the Company to protect its business from such damage, and the Executive further agrees that the following covenants constitute a reasonable and appropriate means, consistent with the best interest of both the Executive and the Company, to protect the Company against such damage and shall apply to and be binding upon the Executive as provided herein: (a) Trade Secrets. The Executive recognizes that his position with the Company is one of the highest trust and confidence by reason by of the Executive's access to and contact with certain Trade Secrets of the Company. The Executive agrees and covenants to use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets of the Company. The Executive further agrees and covenants that, except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, the Executive shall not, either during the term of this Agreement or thereafter, directly or indirectly, use for the Executive's own benefit or for the benefit of another, or disclose, disseminate, or distribute to another, any Trade Secret (whether or not acquired, learned, obtained, or developed by the Executive alone or in conjunction with others) of the Company or of others with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents, or other writings whatsoever made, compiled, acquired, or received by the Executive during the term of this Agreement, arising out of, in connection with, or related to any activity or business of the Company, including, but -6- 7 not limited to, the Company's operations, the marketing of the Company's products, the Company's customers, suppliers, or others with whom the Company has a business relationship, the Company's arrangements with such parties, and the Company's pricing and expansion policies and strategy, are, and shall continue to be, the sole and exclusive property of the Company, and shall, together with all copies thereof and all advertising literature, be returned and delivered to the Company by the Executive immediately, without demand, upon the termination of this Agreement, or at any time upon the Company's demand. (b) Restriction on Soliciting Employees of the Company. The Executive covenants that during the term of this Agreement and for a period of twelve (12) months following the termination of this Agreement, he will not, either directly or indirectly, call on, solicit, or take away, or attempt to call on, solicit, induce or take away any employee of the Company, either for himself or for any other person, firm, corporation or other entity. Further, Executive shall not induce any employee of the Company to terminate his or her employment with the Company. (c) Covenant Not to Compete. The Executive hereby covenants and agrees that during the term of this Agreement and for the period set forth in Exhibit "A" following the termination of this Agreement ("Non-Compete Period"), he will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than through ownership of publicly-traded capital stock of a corporation which represents less than five percent (5%) of the outstanding capital stock of such corporation), corporate officer, director, investor, financier or in any other individual or representative capacity, engage or participate in any business competitive with the business conducted by the Company within Texas, Oklahoma or Louisiana. (d) Survival of Covenants. Each covenant of the Executive set forth in this Article III shall survive the termination of this Agreement and shall be construed as an agreement independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Executive against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of said covenant. (e) Remedies. In the event of breach or threatened breach by the Executive of any provision of this Article III, the Company shall be entitled to relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation. -7- 8 The Executive hereby acknowledges that the Executive's agreement to be bound by the protective covenants set forth in this Article III was a material inducement for the Company entering into this Agreement and agreeing to pay the Executive the compensation and benefits set forth herein. Further, Executive understands the foregoing restrictions may limit his or her ability to engage in certain businesses during the period of time provided for, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. ARTICLE IV. GENERAL PROVISIONS 4.1 Notices. all notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the respective parties as follows: If to the Executive: As set forth in Exhibit "A" If to the Company: Sepco Industries, Inc. 6500 Brittmoore Houston, Texas 77041 ATTN: David R. Little Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 4.2 Severability. If any provision contained in this Agreement is determined by a court of competent jurisdiction or an arbitrator pursuant to Section 5 below to be void, illegal or unenforceable, in whole or in part, then the other provisions contained herein shall remain in full force and effect as if the provision which was determined to be void, illegal, or unenforceable had not been contained herein. If the restrictions contained in Article III are found by a court to be unreasonable or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for said restrictions to be modified by said court so as to be reasonable and enforceable and, as so modified, to be fully enforced. 4.3 Waiver Modification, and Integration. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. This instrument contains the entire agreement of the parties concerning employment and supersedes all prior and contemporaneous representations, understandings and agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and all such prior or contemporaneous -8- 9 representations, understandings and agreements, both oral and written, are hereby terminated. This Agreement may not be modified, altered or amended except by written agreement of all the parties hereto. 4.4 Binding Effect. This Agreement shall be binding and effective upon the parties and their respective successors. Neither party shall assign this Agreement without the prior written consent of the other party, except that the Company shall have the right to assign this Agreement to an entity. 4.5 Governing Law. The parties intend that the laws of the State of Texas should govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties hereto. 4.6 Representation of Executive. The Executive hereby represents and warrants to the Company that the Executive has not previously assumed any obligations inconsistent with those contained in this Agreement. The Executive further represents and warrants to the Company that the Executive has entered into this Agreement pursuant to Executive's own initiative and that this Agreement is not in contravention of any existing commitments. The Executive acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of the Executive. 4.7 Counterpart Execution. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 4.8 Company. For the purposes of this Agreement, Company shall include any parent, subsidiary division of the Company, or any entity, who directly or indirectly, controls, is controlled by, or is under common control with the Company. ARTICLE V. ARBITRATION 5.1 Resolution of Disputes. In any dispute between the Parties, the Parties shall cooperate in good faith to resolve the dispute. If the parties cannot resolve the dispute between themselves, they shall each, within ten (10) days, select one mediator to help resolve the dispute. If a resolution of the dispute does not occur through mediation within thirty (30) days after the selection of the two mediators, any Party may demand binding arbitration. 5.2 Arbitration. In the event any dispute cannot be resolved through mediation the Parties agree to submit such dispute to binding arbitration. Any such arbitration arising hereunder shall be conducted in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. The costs of arbitration shall be borne equally by the Parties. However, each Party shall be responsible for such Party's own attorneys' fees. -9- 10 ARTICLE VI. CONFIDENTIALITY 6.1 Confidentiality. This Agreement is confidential, and the substance may be disclosed only as mutually agreed by the Parties or as may be required by law. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written effective as of the Effective Date. THE COMPANY: SEPCO INDUSTRIES, INC., a Texas corporation By: /s/ DAVID R. LITTLE ---------------------------------------- Printed Name: David R. Little --------------------------- Title: Chairman & CEO ---------------------------------- EXECUTIVE: By: /s/ BRYAN WIMBERLY ---------------------------------------- Bryan Wimberly President and Chief Operating Officer -10- 11 AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation ("the Company") and BRYAN H. WIMBERLY (the "Executive") entered into that one certain Employment Agreement (the "Agreement"); WHEREAS, the Company and the Executive desire to amend said Employment Agreement pursuant to the provisions hereof. NOW, THEREFORE, in consideration of the covenants, and agreements set out below, the parties agree as follows: 1. All terms defined in the Agreement, which are used in this First Amendment, shall have the same meaning as set forth in the Agreement except as specifically changed or modified hereby. 2. The Company has become a wholly owned subsidiary of DXP Enterprises, Inc., a Texas corporation ("DXP"). Therefore the Company shall, for the purposes of the Agreement, be DXP. 3. Section 1.3 is hereby amended by adding the following as the last sentence: "This Agreement shall terminate June 30, 1998, if the Company and Executive execute a new Employment Agreement." 4. The Bonus Section in Exhibit A to the Agreement is hereby amended by adding the following as the last sentence: "Notwithstanding the foregoing, the annual total of the monthly bonus shall not exceed twice the annual base salary." Page 1 of 2 Pages 12 5. Except as herein amended and modified, the Agreement shall remain in full force and effect. EXECUTED effective the 21st day of May, 1998. DXP ENTERPRISES, INC. By: /s/ DAVID R. LITTLE ------------------------------------ DAVID R. LITTLE Chairman and Chief Executive Officer /s/ BRYAN H. WIMBERLY ------------------------------------ BRYAN H. WIMBERLY Page 2 of 2 Pages EX-10.11 5 EMPLOYMENT AGREEMENT - (SEPCO & GARY A. ALLCORN) 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement) by and between SEPCO INDUSTRIES, INC., a Texas corporation (the "Company"), and GARY A. ALLCORN (the "Executive") is made and entered into as of the Effective Date set forth in Section 1.3 below: RECITALS A. The Company desires to employ the Executive in the capacity set forth on Exhibit A pursuant to the provisions of this Agreement; and B. The Executive desires employment as an employee of the Company pursuant to the provisions of this Agreement. ARTICLE I. TERMS OF EMPLOYMENT The terms of employment are as follows: 1.1 Employment. The Company hereby employs the Executive for and during the term hereof in the capacity set forth on Exhibit A, but Company may subsequently assign Executive to a different position or modify Executive's duties and responsibilities. The Executive hereby accepts employment under the terms and conditions set forth in this Agreement. 1.2 Duties of Executive. The Executive shall perform in the capacity described in Section 1.1 hereof and shall have such duties, responsibilities, and authorities as may be designated for such office. The Executive agrees to devote the Executive's best efforts, abilities, knowledge, experience and full business time to the faithful performance of the duties, responsibilities, and authorities which may be assigned to the Executive. Executive may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Executive's performance of Executive's duties hereunder, is contrary to the interests of the Company, or requires any significant portion of Executives's business time. Executive shall at all times comply with and be subject to such policies and procedures as the Company may establish from time to time. Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act which would injure Company's business, its interests, or its reputation. 1.3 Term. This Agreement shall become effective as of the 1st day of July, 1996 (the "Effective Date") and shall continue in force and effect for one (1) year unless sooner terminated as provided in Section 2.1 hereof. Unless this Agreement is terminated before its annual anniversary date, the term hereof shall be automatically extended for one (1) year unless this Agreement is renewed or extended by written agreement between the Company and the Executive pursuant to terms and conditions mutually acceptable. 1.4 Compensation. The Company shall pay the Executive, as "Compensation" for services rendered by the Executive under this Agreement the following Salary plus Bonus. -1- 2 (a) Salary: A base salary per month as set forth on Exhibit A, prorated for any partial period of employment ("Salary"). Such Salary shall be paid in installments in accordance with the Company's regular payroll practices. (b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus"). 1.5 Employment Benefits. In addition to the Salary payable to the Executive hereunder, the Executive shall be entitled to the following benefits: (a) Employment Benefits. As an employee of the Company, the Executive shall participate in and receive all general employee benefit plans and programs, as may be in effect from time to time, upon satisfaction by the Executive of the eligibility requirements therefor. Nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated employees pursuant to the terms and conditions of such benefit plans and programs. (b) Working Facilities. During the term of this Agreement, the Company shall provide, at its expense, office space, furniture, equipment, supplies and personnel as shall be adequate for the Executive's use in performing Executive's duties and responsibilities under this Agreement. (c) Automobile Allowance. During the term of this Agreement, the Company shall provide Executive with a vehicle in accordance with the Company's vehicle policy. (d) Limitations. Company shall not by reason of this Article 1.5 be obligated to institute, maintain, or refrain from changing, amending, or discontinuing, any such incentive compensation or employee benefit program or plan, so long as such actions are similarly applicable to covered employees similarly situated. ARTICLE II. TERMINATION 2.1 Termination. Notwithstanding anything herein to the contrary, this Agreement and the Executive's employment hereunder may be terminated without any breach of this Agreement at any time during the term hereof by reason of and in accordance with the following provisions: (a) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate as of the date of the Executive's death, and the Company shall have no further liability hereunder to the Executive or Executive's estate, except to the extent set forth in Section 2.2(a) hereof. (b) Disability. If, during the term of this Agreement, the Executive shall be prevented from performing the Executive's duties hereunder by reason of becoming disabled as hereinafter defined, the Company may terminate this Agreement immediately -2- 3 upon written notice to the Executive without any further liability hereunder to the Executive except as set forth in Section 2.2(b) hereof. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon the written report of a qualified physician designated by the Board of Directors of the Company or by its insurers, shall have determined that the Executive has become mentally, physically and/or emotionally incapable of performing Executive's duties and services under this Agreement. (c) Termination by the Company for Cause. Prior to the expiration of the term of this Agreement, the Company may discharge the Executive for cause and terminate this Agreement immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.1(c) hereof. For purposes of this Agreement, a "discharge for cause" shall mean termination of the Executive upon written notice to the Executive limited, however, to one or more of the following reasons: (1) Conviction of the Executive by a court of competent jurisdiction of a felony or a crime involving moral turpitude; (2) The Executive's failure or refusal to comply with the Company's policies, standards, and regulations of the Company, which from time to time may be established; (3) The Executive's engaging in conduct amounting to fraud, dishonesty, gross negligence, willful misconduct or conduct that is unprofessional, unethical, or detrimental to the reputation, character or standing of the Company; or (4) The Executive's failure to faithfully and diligently perform the duties required hereunder or to comply with the provisions of this Agreement. Prior to terminating this Agreement pursuant to Section 2.1(c), (2), or (4), the Company shall furnish the Executive written notice of the Executive's alleged failure to abide by or alleged breach of this Agreement. The Executive shall have thirty (30) days after the Executive's receipt of such notice to cure such failure to abide or breach and the Company's Board of Directors shall determine if the failure to abide or breach is cured. (d) Termination by the Company with Notice. The Company may terminate this Agreement at any time, for any reason, other than as set forth in Subparagraphs (a), (b) or (c) of this Section 2.1, with or without cause, in the Company's sole discretion, immediately upon written notice to the Executive without any further liability hereunder to the Executive, except to the extent set forth in Section 2.2(d) hereof. (e) Termination by the Executive for Good Reason. The Executive may terminate this Agreement at any time for Good Reason (as hereinafter defined) in which event the Company shall have no further liability hereunder to the Executive except to -3- 4 the extent set forth in Section 2.2(e) hereof. For purposes of this Agreement, the term "Good Reason" shall mean, without the Executive's express written consent, the occurrence of any of the following circumstances: (1) The Company's failure to pay the Executive the Compensation pursuant to the terms of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company; (2) The failure of the Company to obtain an agreement, from any successor to assume and agree to perform this Agreement; or (3) Any failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company. (f) Termination by the Executive with Notice. The Executive may terminate this Agreement for any reason other than Good Reason on thirty (30) days prior written notice, in the sole discretion of the Executive, in which event the Company shall have no further liability hereunder to the Executive, except to the extent set forth in Section 2.2(f) hereof. 2.2 Compensation upon Termination. (a) Death. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(a) hereof due to the death of the Executive, the Company shall have no further obligation to the Executive or Executive's estate, except to pay to the Executive's spouse, or if none, to the estate of the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of death but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the death of the Executive. (b) Disability. In the event the Executive's employment hereunder is terminated pursuant to the provisions of Section 2.1(b) hereof due to Disability of the Executive, the Company shall be relieved of all of its obligations under this Agreement, except to pay the Executive any accrued, but unpaid Salary, and vacation or sick leave benefits which have accrued as of the date on which such permanent disability is determined, but then remain unpaid. The provisions of the preceding sentence shall not affect the Executive's rights to receive payments under the Company's disability insurance plan, if any. Any amount due the Executive hereunder shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (c) Cause. In the event the Executive's employment hereunder is terminated by the Company for Cause pursuant to the provisions of Section 2.1(c) hereof, the Company shall have no further obligation to the Executive under this Agreement except -4- 5 to pay the Executive any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of the Executive's employment hereunder. (d) Termination Pursuant to Section 2.1(d). In the event the Executive's employment hereunder is terminated by the Company pursuant to the provisions of Section 2.1(d) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits, which have accrued as of the date of termination of this Agreement, but were then unpaid or unused, (ii) an amount payable in monthly installments equal to the Executive's full monthly Salary payable for a period of twelve (12) months and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (e) Termination by the Executive for Good Reason. In the event this Agreement is terminated by the Executive pursuant to the provisions of Section 2.1(e) hereof, the Executive shall be entitled to receive (i) any accrued, but unpaid, Salary and any vacation or sick leave benefits which have accrued as of the date of termination-of the Agreement, but were then unpaid or unused, (ii) the full monthly Salary payable hereunder for a period of twelve (12) months after this Agreement is terminated by the Executive in accordance with the Company's regular payroll periods or over such lesser period as the Company may determine and (iii) the Termination Bonus set forth in Exhibit A. Any amount due the Executive hereunder (i) of this Section shall be paid in a lump sum in cash within thirty (30) days after the termination of the Executive's employment hereunder. (f) Termination Pursuant to Section 2.1(f). In the event the Executive's employment hereunder is terminated by the Executive pursuant to the provisions of Section 2.1(f) hereof, all future compensation to which Executive is entitled and all future benefits for which Executive is eligible shall cease and terminate as of the date of termination. Executive shall be entitled to pro rata Salary through the date of termination. Any amount due the Executive hereunder shall be paid in a lump sum in cash within sixty (60) days after the termination of Executive's Employment hereunder. (g) Termination of Obligations of the Company Upon Payment of Compensation. Upon payment of the amount, if any, due the Executive pursuant to the preceding provisions of this Section, the Company shall have no further obligation to the Executive under this Agreement. 2.3 Merger or Acquisition. In the event the Company should consolidate, or merge into another corporation, or transfer all or substantially all of its assets to another entity, or divide its assets among a number of entities, this Agreement shall continue in full force and effect. The Company will require any and all successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree pursuant to an -5- 6 appropriate written assumption agreement to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to or contemporaneously with the effectiveness of any such successor shall be a breach of the Agreement and shall entitle the Executive, as his or her sole remedy, to terminate Executive's employment and this Agreement for Good Reason. 2.4 Offset. The Company shall have the right to deduct from any amounts due the Executive hereunder any obligations owed by the Executive to the Company. ARTICLE III. PROTECTION OF INFORMATION AND NON-COMPETITION Protective Covenants. The Executive recognizes that his employment by the Company is one of the highest trust and confidence because (i) the Executive will become fully familiar with all aspects of the Company's business during the period of his employment with the Company, (ii) certain information of which the Executive will gain knowledge during his employment is proprietary and confidential information which is special and peculiar value to the Company, and (iii) if any such proprietary and confidential information were imparted to or became known by any person, including the Executive, engaging in a business in competition with that of the Company, hardship, loss or irreparable injury and damage could result to the Company, the measurement of which would be difficult if not impossible to ascertain. The Executive acknowledges that the Company has developed unique skills, concepts, designs, marketing programs, marketing strategy, business practices, methods of operation, trademarks, licenses, hiring and training methods, financial and other confidential and proprietary information concerning its operations and expansion plans ("Trade Secrets"). Therefore, the Executive agrees that it is necessary for the Company to protect its business from such damage, and the Executive further agrees that the following covenants constitute a reasonable and appropriate means, consistent with the best interest of both the Executive and the Company, to protect the Company against such damage and shall apply to and be binding upon the Executive as provided herein: (a) Trade Secrets. The Executive recognizes that his position with the Company is one of the highest trust and confidence by reason by of the Executive's access to and contact with certain Trade Secrets of the Company. The Executive agrees and covenants to use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets of the Company. The Executive further agrees and covenants that, except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, the Executive shall not, either during the term of this Agreement or thereafter, directly or indirectly, use for the Executive's own benefit or for the benefit of another, or disclose, disseminate, or distribute to another, any Trade Secret (whether or not acquired, learned, obtained, or developed by the Executive alone or in conjunction with others) of the Company or of others with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents, or other writings whatsoever made, compiled, acquired, or received by the Executive during the term of this Agreement, arising out of, in connection with, or related to any activity or business of the Company, including, but -6- 7 not limited to, the Company's operations, the marketing of the Company's products, the Company's customers, suppliers, or others with whom the Company has a business relationship, the Company's arrangements with such parties, and the Company's pricing and expansion policies and strategy, are, and shall continue to be, the sole and exclusive property of the Company, and shall, together with all copies thereof and all advertising literature, be returned and delivered to the Company by the Executive immediately, without demand, upon the termination of this Agreement, or at any time upon the Company's demand. (b) Restriction on Soliciting Employees of the Company. The Executive covenants that during the term of this Agreement and for a period of twelve (12) months following the termination of this Agreement, he will not, either directly or indirectly, call on, solicit, or take away, or attempt to call on, solicit, induce or take away any employee of the Company, either for himself or for any other person, firm, corporation or other entity. Further, Executive shall not induce any employee of the Company to terminate his or her employment with the Company. (c) Covenant Not to Compete. The Executive hereby covenants and agrees that during the term of this Agreement and for the period set forth in Exhibit "A" following the termination of this Agreement ("Non- Compete Period"), he will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than through ownership of publicly-traded capital stock of a corporation which represents less than five percent (5%) of the outstanding capital stock of such corporation), corporate officer, director, investor, financier or in any other individual or representative capacity, engage or participate in any business competitive with the business conducted by the Company within Texas, Oklahoma or Louisiana. (d) Survival of Covenants. Each covenant of the Executive set forth in this Article III shall survive the termination of this Agreement and shall be construed as an agreement independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Executive against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of said covenant. (e) Remedies. In the event of breach or threatened breach by the Executive of any provision of this Article III, the Company shall be entitled to relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation. -7- 8 The Executive hereby acknowledges that the Executive's agreement to be bound by the protective covenants set forth in this Article III was a material inducement for the Company entering into this Agreement and agreeing to pay the Executive the compensation and benefits set forth herein. Further, Executive understands the foregoing restrictions may limit his or her ability to engage in certain businesses during the period of time provided for, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. ARTICLE IV. GENERAL PROVISIONS 4.1 Notices. all notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the respective parties as follows: If to the Executive: As set forth in Exhibit "A" If to the Company: Sepco Industries, Inc. 6500 Brittmoore Houston, Texas 77041 ATTN: David R. Little Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 4.2 Severability. If any provision contained in this Agreement is determined by a court of competent jurisdiction or an arbitrator pursuant to Section 5 below to be void, illegal or unenforceable, in whole or in part, then the other provisions contained herein shall remain in full force and effect as if the provision which was determined to be void, illegal, or unenforceable had not been contained herein. If the restrictions contained in Article III are found by a court to be unreasonable or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for said restrictions to be modified by said court so as to be reasonable and enforceable and, as so modified, to be fully enforced. 4.3 Waiver Modification, and Integration. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. This instrument contains the entire agreement of the parties concerning employment and supersedes all prior and contemporaneous representations, understandings and agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and all such prior or contemporaneous -8- 9 representations, understandings and agreements, both oral and written, are hereby terminated. This Agreement may not be modified, altered or amended except by written agreement of all the parties hereto. 4.4 Binding Effect. This Agreement shall be binding and effective upon the parties and their respective successors. Neither party shall assign this Agreement without the prior written consent of the other party, except that the Company shall have the right to assign this Agreement to an entity. 4.5 Governing Law. The parties intend that the laws of the State of Texas should govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties hereto. 4.6 Representation of Executive. The Executive hereby represents and warrants to the Company that the Executive has not previously assumed any obligations inconsistent with those contained in this Agreement. The Executive further represents and warrants to the Company that the Executive has entered into this Agreement pursuant to Executive's own initiative and that this Agreement is not in contravention of any existing commitments. The Executive acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of the Executive. 4.7 Counterpart Execution. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 4.8 Company. For the purposes of this Agreement, Company shall include any parent, subsidiary division of the Company, or any entity, who directly or indirectly, controls, is controlled by, or is under common control with the Company. ARTICLE V. ARBITRATION 5.1 Resolution of Disputes. In any dispute between the Parties, the Parties shall cooperate in good faith to resolve the dispute. If the parties cannot resolve the dispute between themselves, they shall each, within ten (10) days, select one mediator to help resolve the dispute. If a resolution of the dispute does not occur through mediation within thirty (30) days after the selection of the two mediators, any Party may demand binding arbitration. 5.2 Arbitration. In the event any dispute cannot be resolved through mediation the Parties agree to submit such dispute to binding arbitration. Any such arbitration arising hereunder shall be conducted in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. The costs of arbitration shall be borne equally by the Parties. However, each Party shall be responsible for such Party's own attorneys' fees. -9- 10 ARTICLE VI. CONFIDENTIALITY 6.1 Confidentiality. This Agreement is confidential, and the substance may be disclosed only as mutually agreed by the Parties or as may be required by law. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written effective as of the Effective Date. THE COMPANY: SEPCO INDUSTRIES, INC., a Texas corporation By: /s/ DAVID R. LITTLE ----------------------------------------- Printed Name: DAVID R. LITTLE ---------------------- Title: Chairman & CEO ----------------------------- EXECUTIVE: By: /s/ GARY A. ALLCORN ----------------------------------------- GARY A. ALLCORN Senior Vice President and Chief Financial Officer -10- 11 EXHIBIT "A" TO EMPLOYMENT AGREEMENT NAME: Gary A. Allcorn POSITION: Senior Vice President Chief Financial Officer MONTHLY BASE: $9,425.00 BONUS: One percent (1%) of the monthly profit before tax of DXP Enterprises, Inc., excluding sales of fixed assets and extra- ordinary items, as determined by DXP, which shall be payable monthly in accordance with the Company's regular bonus practices NON-COMPETE PERIOD: Twelve (12) months HOME ADDRESS: 23210 Gate Creek Court Katy, TX 77494 TERMINATION BONUS: The sum equal to the total of twelve (12) previous monthly bonus payments made to Employee in accordance with Section 1.4(b) of this Agreement
12 AMENDMENT TO EMPLOYMENT AGREEMENT WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation ("the Company") and GARY A. ALLCORN (THE "EXECUTIVE") entered into that one certain Employment Agreement (the "Agreement"); WHEREAS, the Company and the Executive desire to amend said Employment Agreement pursuant to the provisions hereof. NOW, THEREFORE, in consideration of the covenants, and agreements set out below, the parties agree as follows: 1. All terms defined in the Agreement, which are used in this First Amendment, shall have the same meaning as set forth in the Agreement except as specifically changed or modified hereby. 2. The Company has become a wholly owned subsidiary of DXP Enterprises, Inc., a Texas corporation ("DXP"). Therefore the Company shall, for the purposes of the Agreement, be DXP. 3. Section 1.3 is hereby amended by adding the following as the last sentence: "This Agreement shall terminate June 30, 1998, if the Company and Executive execute a new Employment Agreement." 4. The Bonus Section in Exhibit A to the Agreement is hereby amended by adding the following as the last sentence: "Notwithstanding the foregoing, the annual total of the monthly bonus shall not exceed twice the annual base salary." Page 1 of 2 Pages 13 5. Except as herein amended and modified, the Agreement shall remain in full force and effect. EXECUTED effective the 21st day of May, 1998. DXP EXTERPRISES, INC. By:/s/ DAVID R. LITTLE ------------------------------------- DAVID R. LITTLE Chairman and Chief Executive Officer /s/ GARY A. ALLCORN ------------------------------------- GARY A. ALLCORN Page 2 of 2 Pages EX-11.1 6 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
MARCH 31, ------------------------ 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- Basic: Average shares outstanding 3,837,095 3,996,974 4,081,255 3,996,974 4,157,424 Net income $2,065,000 $ 771,000 $2,665,000 $ 753,000 $ 857,000 Basic earnings per share amount $0.54 $0.19 $0.65 $0.19 $0.21 Dilutive: Average shares outstanding 3,837,095 3,996,974 4,081,255 3,996,974 4,157,424 Net effect of dilutive stock o options -- based on the treasure stock method using period-end market price, if higher than average market price 248,040 313,558 1,138,321 948,817 1,123,122 Adjustment to give effect to shares optioned to key employees within 12 months of the beginning of each period presented based on treasury stock method using estimated market price upon offering 233,880 Assumed conversion of Class A convertible Preferred Stock 182,000 546,000 482,854 546,000 420,000 Total 4,501,015 4,856,532 5,702,430 5,491,000 5,700,546 Net income $2,088,000 $890,000 $2,768,000 $ 791,000 $ 878,000 Dilutitive earnings per share amount $0.46 $0.18 $0.49 $0.14 $0.15
EX-23.1 7 CONSENT OF ARTHUR ANDERSEN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report included in this registration statement of our report dated January 30, 1998 (except with respect to the matter discussed in Note 13 as to which the date is May 20, 1998) for the year ended December 31, 1997 and to all references to our Firm included in the registration statement. ARTHUR ANDERSEN LLP Houston, Texas May 22, 1998 EX-23.2 8 CONSENT OF KPMG PEAT MARWICK, LLP 1 EXHIBIT 23.2 The Board of Directors DXP Enterprises, Inc. We consent to the use of our report dated May 27, 1997 with respect to the consolidated balance sheets of Strategic Supply, Inc. and subsidiary as of December 31, 1995 and 1996, 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 included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP El Paso, Texas May 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----