-----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, ArLu1krWKcSkXk29afIhXy5k8MeMAqBj12tzo/DD4Jl24Ckg0ntOtuIPNrn6/LgF 2gy25+qaoJrqwr2EO3sMAA== 0000950129-99-004902.txt : 19991115 0000950129-99-004902.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950129-99-004902 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DXP ENTERPRISES INC CENTRAL INDEX KEY: 0001020710 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 760509661 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21513 FILM NUMBER: 99747056 BUSINESS ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 713-531-42 MAIL ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 FORMER COMPANY: FORMER CONFORMED NAME: INDEX INC DATE OF NAME CHANGE: 19960808 10-Q 1 DXP ENTERPRISES, INC. - DATED 09/30/1999 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-21513 DXP ENTERPRISES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 76-0509661 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7272 PINEMONT 77040 HOUSTON, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 713/996-4700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares outstanding of each of the issuer's classes of common stock, as of November 5, 1999: Common Stock: 4,055,092 ================================================================================ 2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash ........................................................... $ 808 $ 1,625 Trade accounts receivable, net of allowance for doubtful accounts of $1,638 and $1,155, respectively .................. 23,252 24,367 Inventory ...................................................... 24,116 28,926 Prepaid expenses and other ..................................... 1,550 1,453 Deferred income taxes .......................................... 984 870 -------- -------- Total current assets ........................................ $ 50,710 $ 57,241 Property, plant and equipment, net .............................. 13,014 13,160 Goodwill, net ................................................... 10,163 10,447 Other assets .................................................... 1,078 484 -------- -------- Total assets ................................................ $ 74,965 $ 81,332 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable ......................................... $ 16,861 $ 14,826 Employee compensation .......................................... 1,114 1,449 Other accrued liabilities ...................................... 921 99 Current portion of long-term debt .............................. 3,116 3,782 -------- -------- Total current liabilities ................................... $ 22,012 $ 20,156 Long-term debt, less current portion ............................ 35,714 42,910 Deferred compensation ........................................... 739 739 Deferred income taxes ........................................... 561 563 Equity subject to redemption: Series A preferred stock -- 1,122 shares ....................... 112 112 Common stock, -0- and 140,214 shares ........................... -- 1,245 Shareholders' equity: Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; 1,000,000 shares authorized; 2,992 shares issued and outstanding .................................................. 2 2 Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; 1,000,000 shares authorized; 17,700 shares issued, 15,000 outstanding and 2,700 shares are treasury stock .............. 18 18 Common stock, $.01 par value, 100,000,000 shares authorized; 4,212,043 and 4,211,010 shares issued, of which 4,055,092, and 4,155,773 shares are outstanding, and 156,951 and 55,237 shares are treasury stock ............. 41 40 Paid-in capital ................................................. 2,152 908 Retained earnings ............................................... 15,332 15,443 Treasury stock .................................................. (1,718) (804) -------- -------- Total shareholders' equity ................................... 15,827 15,607 -------- -------- Total liabilities and shareholders' equity ................... $ 74,965 $ 81,332 ======== ========
See notes to condensed consolidated financial statements. 2 3 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Sales ................................................. $ 44,158 $ 52,296 $ 139,004 $ 153,886 Cost of sales ......................................... 32,495 38,247 102,890 113,505 --------- --------- --------- --------- Gross profit .......................................... 11,663 14,049 36,114 40,381 Selling, general and administrative expenses .......... 10,995 11,940 33,954 33,758 --------- --------- --------- --------- Operating income ...................................... 668 2,109 2,160 6,623 Other income .......................................... 417 177 991 695 Interest expense ...................................... (924) (1,041) (2,789) (2,735) --------- --------- --------- --------- Income before income taxes ............................ 161 1,245 362 4,583 Provision for income taxes ............................ 64 498 406 1,833 --------- --------- --------- --------- Net income (loss) ..................................... $ 97 $ 747 $ (44) $ 2,750 Preferred stock dividend .............................. 23 25 68 69 --------- --------- --------- --------- Net income (loss) attributable to common shareholders ......................................... $ 74 $ 722 $ (112) $ 2,681 ========= ========= ========= ========= Basic earnings (loss) per common share ................ $ 0.02 $ .17 $ (.03) $ .64 ========= ========= ========= ========= Common shares outstanding ............................. 4,055 4,173 4,085 4,168 ========= ========= ========= ========= Diluted earnings (loss) per share ..................... $ 0.02 $ .13 $ (.03) $ .49 ========= ========= ========= ========= Common and common equivalents shares outstanding ...... 4,055 5,635 4,085 5,630 ========= ========= ========= =========
See notes to condensed consolidated financial statements. 3 4 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net cash provided by operating activities ...................... $ 9,085 $ 4,918 INVESTING ACTIVITIES: Purchase of Tri-Electric Supply, Ltd. net assets ............... -- (6,208) Purchase of Lucky Electric Supply, Inc. net assets ............. -- (2,206) Purchase of M. W. Smith Equipment, Inc. net assets ............. -- (4,206) Purchase of Pelican State Supply common stock .................. -- (839) Purchase of property and equipment ............................. (1,909) (2,451) Proceeds on the sale of assets, at cost ........................ 850 26 --------- --------- Net cash used in investing activities ....................... (1,059) (15,884) FINANCING ACTIVITIES: Proceeds from debt ............................................. 136,249 168,044 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank ........... 144,110) (155,458) Issuance of common stock ....................................... -- 16 Acquisition of common stock .................................... (914) (201) Dividends paid ................................................. (68) (69) --------- --------- Net cash provided by financing activities ................... (8,843) 12,332 --------- --------- INCREASE (DECREASE) IN CASH ..................................... (817) 1,366 CASH AT BEGINNING OF PERIOD ..................................... 1,625 736 ========= ========= CASH AT END OF PERIOD ........................................... $ 808 $ 2,102 ========= =========
See notes to condensed consolidated financial statements. 4 5 DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. DXP Enterprises, Inc. (the "Company") believes that the presentations and disclosures herein are adequate to make the information not misleading. The condensed consolidated financial statements reflect all elimination entries and adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. While the Company has outstanding stock options and Series A Preferred Stock convertible into Common Stock, these are not included in the computation of diluted earnings (loss) per share for the quarter ended September 30, 1999 and the nine months ended September 30, 1999 because to do so would be anti-dilutive. 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 Annual Report on Form 10-K for the year ended December 31, 1998, filed with the Securities and Exchange Commission. NOTE 2: THE COMPANY The Company was incorporated on July 26, 1996 in the State of Texas. The Company is a leading supplier of maintenance, repair and operating ("MRO") products, equipment and services to industrial customers. The Company provides MRO products in the following categories: fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical supplies. NOTE 3: INVENTORY The Company uses the last-in, first-out ("LIFO") method of inventory valuation for approximately 59 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 the Company's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond the Company'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:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- -------------- (IN THOUSANDS) Finished goods............... $ 25,819 $29,717 Work in process.............. 2,329 3,093 -------- ------- Inventories at FIFO.......... 28,148 32,810 Less -- LIFO allowance........ (4,032) (3,884) -------- ------- Inventories.................. $ 24,116 $28,926 ======== =======
NOTE 4: ACQUISITIONS AND OTHER SIGNIFICANT EVENTS 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 $6.1 million in cash, assumption of $1.6 million of trade payables and other accrued expenses. 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. 5 6 On May 31, 1998, a wholly-owned subsidiary of the Company acquired substantially all the assets of Lucky Electric & Supply, Inc. ("Lucky Electric"). The purchase price consisted of approximately $2.4 million in cash, a $735,000 promissory note and the assumption of $149,000 of trade payables and other accrued expenses. The results of operations of Lucky Electric are included in the consolidated statements of income of the Company from the date of acquisition. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $.6 million was recorded in connection with the acquisition. On May 31, 1998, a wholly-owned subsidiary of the Company acquired substantially all the assets of M.W. Smith Equipment, Inc. ("Smith Equipment"). The purchase price consisted of approximately $3.9 million in cash and the assumption of $618,000 of trade payables and other accrued expenses. The results of operations of Smith Equipment are included in the consolidated statements of income of the Company from the date of acquisition. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $2.7 million was recorded in connection with the acquisition. On July 16, 1999, the Company completed the sale of certain assets of Wesco Equipment, a division that specializes in valve and valve automation products, for approximately $2.04 million in cash, a $500,000 promissory note and the assumption of a $114,000 note payable. The consideration received from the sale of the assets approximated the net book value of the assets sold, which consisted of inventory and personal property. The Company retained and will collect the accounts receivable balances associated with that division. Since the completion of the transaction, the Company no longer competes in the valve and valve automation business. NOTE 5: LONG-TERM DEBT The Company has secured lines of credit for up to $44 million with an institutional lender (the "Credit Facility"). The Credit Facility was amended by the Company and its lender in each of the first three quarters of 1999, which at September 30, 1999 provided for borrowings up to an aggregate of the lessor of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $44.0 million. The amendments also extended the maturity date of the Credit Facility from April 1, 2000 to April 1, 2001. Additionally, the LIBOR pricing, set to expire on June 30, 1999, was cancelled and the interest rate was increased to prime plus 1% on the term loan portion of the Credit Facility, which was $13.4 million at September 30, 1999, and prime plus 1/2% on the revolving loan portion of the Credit Facility, which was $19.8 million at September 30, 1999. The Credit Facility is secured by receivables, inventory, and machinery and equipment. An executive officer of the Company, who is also a shareholder of the Company, has personally guaranteed up to $.5 million of the obligations of the Company under the line of credit. Additionally, certain shares held in trust for this executive officer's children are also pledged to secure this line of credit. The available borrowings under the Credit Facility at September 30, 1999 were approximately $3.7 million. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require the Company to maintain a certain cash flow and other financial ratios. NOTE 6: SUBSEQUENT EVENTS As of September 30, 1999, the Company was not in compliance with certain of the covenants in the Credit Facility regarding financial ratios for which it subsequently obtained waivers from its lender. 6 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading provider of MRO products, equipment and integrated services, including engineering expertise and logistics capabilities, to industrial customers. The Company provides a wide range of MRO products in the fluid handling equipment, bearings and power transmission equipment, general mill and safety supplies and electrical product categories. On July 16, 1999, the Company completed the sale of certain assets of its valve and valve automation products division, for approximately $2.65 million, consisting of $2.04 million in cash, a $500,000 promissory note and the assumption of a $114,000 note payable. As a result, the Company no longer competes in the valve and valve automation business. The Company offers its customers a single source of integrated services and supply on an efficient and competitive basis by being a first-tier distributor which purchases its products directly from the manufacturer. The Company also provides integrated services such as system design, fabrication, installation, repair and maintenance for its customers. The Company offers a wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional distribution to fully integrated supply contracts. The integrated solution is tailored to satisfy the customer's unique needs. The Company's products and services are marketed in 15 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, within particular markets and product categories the Company may experience changes in demand as changes occur in the markets of its customers. The Company's strategy in the past focused on addressing current trends in the industrial distribution market through a combination of acquisitions and internal growth. Due to current conditions in the industry, the Company has curtailed its acquisitions efforts. 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. When conditions in the industry improve, the Company intends to seek 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. Future results for the Company will be dependent on the success of the Company in implementing its internal growth strategy and, to the extent the Company completes any acquisitions, the ability of the Company to integrate such acquisitions. RESULTS OF OPERATIONS Three Months Ended September 30, 1999 compared to Three Months Ended September 30, 1998 Revenues for the three months ended September 30, 1999 decreased 15.6% to $44.2 million from the three months ended September 30, 1998. Excluding revenues attributable to the Company's valve and valve automation division, which the Company sold early in the third quarter of 1999, revenues in the third quarter of 1999 decreased 12.0% to $44.2 million from $50.2 in the third quarter of 1998. Sales of fluid handling equipment decreased 5.5%, or $1.1 million, from the comparable period in 1998. Sales of bearings and power transmission equipment for the quarter ended September 30, 1999 decreased 19.3%, or $2.5 million, from the comparable period in 1998. During the three months ended September 30, 1999, sales of general mill and safety supplies decreased 13.0%, or $1.6 million, from the comparable period in 1998. The Company added electrical product sales pursuant to two acquisitions, one in the first quarter of 1998 and the other in the second quarter of 1998. Sales of electrical products decreased 17.5%, or $.8 million, from $4.7 million to $3.9 million for the quarter ended September 30, 1999, from the comparable period in 1998. The decrease in revenues resulted primarily from the effects associated with declining oil prices and a slow recovery by the oil industry along with a softness related to the mining industry. Gross margins for the third quarter of 1999 remained relatively consistent compared to the third quarter of 1998. The Company currently expects some increase in manufacturers' prices to continue due to increased raw material costs. 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. Although the Company reduced selling, general and administrative expenses to $11.0 million in the third quarter of 1999 from $11.9 million in the third quarter of 1998, as a percentage of revenues, these expenses increased by 2.1%, from 22.8% to 24.9%, due 7 8 primarily to the greater decrease in revenue volume and the Company's expanded marketing efforts. Operating income for the three month period ended September 30, 1999 decreased from $2.1 million to $.7 million as compared to the third quarter of 1998, due to the fact that the decrease in revenue volume outpaced the expense reduction efforts undertaken by the Company. Interest expense during the third quarter of 1999 decreased by $.1 million to $.9 million compared to the second quarter of 1998, due to the use of the proceeds from the sale of the valve and valve automation assets to reduce outstanding debt under the Credit Facility. The Company's provision for income taxes for the three months ended September 30, 1999 decreased by $.4 million compared to the same period of 1998, as a result of the decrease in profits. Net income for the three month period ended September 30, 1999, decreased $.7 million from the three month period ended September 30, 1998, due to the various factors discussed above. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Revenues for the nine months ended September 30, 1999 decreased 9.7% to $139.0 million from the nine months ended September 30, 1998. The Company's acquisitions during the first and second quarters of 1998 accounted for $15.6 million in revenues during the period ended September 30, 1999 and $13.1 million in revenues for the same period in 1998. The valve and valve automation business, which was sold in the third quarter of 1999, generated revenues of $3.7 million for the nine months ended September 30, 1999 and $7.1 million in the same period in 1998. Excluding revenues generated by the acquired companies and the valve and valve automation business, revenues for the nine months ended September 30, 1999 decreased by 10.4% to $119.7 million from $133.6 million for the nine months ended September 30, 1998. Sales of fluid handling equipment remained consistent over the first nine months of 1999 as compared to the same period in 1998. Sales of bearings and power transmission equipment for the nine months ended September 30, 1999 decreased 24.2%, or $9.9 million, from the comparable period in 1998. Sales of general mill and safety supplies for the nine months ended September 30, 1999 decreased 10.7%, or $4.1 million, from the comparable period in 1998. The decrease in revenues resulted primarily from the effects associated with declining oil prices and a slow recovery by the oil industry along with a softness related to the mining industry. The Company did not have revenues from the sale of electrical products during the entire nine months of 1998. Gross margins remained consistent over the first nine months of 1999 as compared to 1998. The Company currently expects some increase in manufacturers prices to continue due to increased raw material costs. Although the Company intends to attempt to pass on these price increases to its customers to maintain current gross margins, there can be no assurances that the Company will be successful in this regard. Selling, general and administrative expense for the first nine months of 1999 increased as a percentage of revenues by 2.5%, from 21.9% to 24.4%, as compared to the same period of 1998. This was due primarily to the decrease in revenue volume which outpaced the expense reduction efforts undertaken by the Company in the first nine months of 1999 as compared to the first nine months of 1998 and the Company's additional investment in marketing and other administrative departments ($.9 million). Operating income for the nine month period ended September 30, 1999 decreased from $6.6 million to $2.2 million compared to the same period in 1998, due to the fact that the decrease in revenue volume outpaced the expense reduction efforts undertaken by the Company. Interest expense during the first nine months of 1999 remained consistent as compared to the first nine months of 1998. The Company's provision for income taxes for the nine months ended September 30, 1999 decreased by $1.4 million compared to the same period of 1998, as a result of the decrease in profits. The current tax provision resulted from deductions allowed for book purposes but not allowed for tax purposes and state income taxes. Net income for the nine month period ended September 30, 1999, decreased $2.8 million from the nine month period ended September 30, 1998, due to the various factors discussed above. 8 9 LIQUIDITY AND CAPITAL RESOURCES General 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 $3.7 million available for borrowings under the Credit Facility at September 30, 1999. Working capital at September 30, 1999 and December 31, 1998 was $28.7 million and $37.1 million, respectively, due in part to the current business conditions and the sale of the assets of the valve and valve automation division in the third quarter of 1999. During the first nine months of 1999 and the year 1998, the Company collected its trade receivables in approximately 49 days and turned its inventory approximately four times on an annualized basis. The Company and its lender amended the Credit Facility three times in the first nine months of 1999: effective March 30, 1999, May 13, 1999 and August 13, 1999. At September 30, 1999, the Credit Facility provided for borrowings of up to an aggregate of the lessor of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $44.0 million. The amendments to the Credit Facility extended the maturity date of the Credit Facility from April 1, 2000 to April 1, 2001. In addition, the interest rates on borrowings under the Credit Facility were amended and increased from a LIBOR rate to prime (8.25% at September 30, 1999) plus 1% on the term loan portion of the Credit Facility and prime plus 1/2% on the revolving loan portion of the Credit Facility. At September 30, 1999, the Company had outstanding indebtedness of $13.4 million under the term loan portion of the Credit Facility and $19.8 million under the revolving loan portion of the Credit Facility. The Credit Facility is secured by receivables, inventory, and machinery and equipment. An executive officer of the Company, who is also a shareholder of the Company, has personally guaranteed up to $.5 million of the obligations of the Company under the line of credit. Additionally, certain shares held in trust for this executive officer's children are pledged to secure this line of credit. The available borrowings under the Credit Facility at September 30, 1999 were approximately $3.7 million. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require the Company to maintain a certain cash flow and other financial ratios. The Company from time to time has not been in compliance with certain covenants under the Credit Facility regarding financial ratios. At September 30, 1999, the Company again was not in compliance with certain of those covenants. The lender has provided waivers to the Company regarding the compliance with these covenants, although there can be no assurance the lender will be willing to provide waivers in the future if the Company is unable to comply with the financial ratio covenants. The Company generated cash through operating activities of $9.1 million in the first nine months of 1999 as compared to $4.9 million in cash generation during the first nine months of 1998, due primarily to a decrease in accounts receivable, inventory and an increase in accounts payable. The Company had capital expenditures of approximately $1.9 million for the first nine months of 1999 as compared to $2.5 million during the same period of 1998. Capital expenditures in the first nine months of 1999 were primarily related to the purchase of furniture and fixtures and a telephone system ($.9 million) for the Company's corporate headquarters as well as the purchase of computer equipment and software ($.8 million). Capital expenditures for the first nine months of 1998 were primarily related to the purchase of real property ($1.7 million) to be used as the corporate headquarters and computer equipment ($.5 million). 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 any acquisitions, should the Company decide to resume such efforts, will require capital in the form of the issuance of additional equity or debt financing. There can be no assurance that such financing will be available to the Company or as to the terms thereof. Year 2000 Readiness Disclosure Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. The Year 2000 issue is the risk that systems, products and equipment utilizing date-sensitive software or computer chips with two-digit date fields will fail to properly recognize the Year 2000. Such failures by the Company's software or hardware or that of government entities, customers, major vendors and other third parties with whom the Company has material relationships could result in interruptions of the Company's business which could have a material adverse effect on the Company. 9 10 In response to the Year 2000 issue, the Company has implemented a company-wide Year 2000 program designed to identify, assess and address significant Year 2000 issues in the Company's key business operations, including products and services, business applications, information technology systems and facilities and to identify the Company's customers, major vendors and other third parties with whom the Company has material relationships that may have Year 2000 issues. The Company's Year 2000 program is an integrated, multi-phase process covering information technology systems and hardware as well as equipment and products with embedded computer chips technology. The primary phases of the program are (1) inventorying existing equipment and systems; (2) analyzing equipment and systems to identify those which are not Year 2000 ready and to prioritize critical items; (3) communicating with customers, major vendors and other third parties with whom the Company has material relationships regarding their Year 2000 readiness; (4) remediating, repairing or replacing equipment and systems that are not Year 2000 ready; and (5) testing to verify that Year 2000 readiness has been achieved for the Company's equipment and systems. Phases (1) and (2) of the Company's Year 2000 program have been completed. In support of phase (3) of the Company's Year 2000 program, the Company developed and implemented a vendor/client Year 2000 questionnaire on the Company web-site, as well as the development of a paper based version of the questionnaire. Phase (3) is complete with the mailing to the majority of the Company's active customers and vendors. To date, all responses received have indicated that vendors and customers will be Year 2000 compliant. The Company will continue communicating with customers, major vendors and other third parties with whom the Company has material relationships to determine if they will be ready for the Year 2000 by the end of 1999. With respect to phase (4), the Company has completed the implementation of Year 2000 compliant upgrades to, or new releases of, current software. The Company installed the latest upgrade to its' main business system software on the 8th of May 1999, at which time the main business system supporting the Company became Year 2000 compliant. Company policy has been, and remains, that the Company will maintain version/release currency on business software packages for maintainability and interoperability considerations. With respect to phase (5), the Company began testing and verification at the end of the first quarter of 1999 and completed the last of these efforts during the third quarter. The last of the testing efforts addressed the Company's desktop computers, and was completed in the third quarter of 1999. Those desktop computers that the Company determined to be non-Year 2000 compliant were identified and will be replaced. All costs associated with the Year 2000 issues will be included as part of the normal software/hardware upgrades or operating costs, as appropriate. As a result of the completion of the Company's Year 2000 program, the Company does not anticipate that the Year 2000 issue will have a material effect on its business. If any issues arise as a result of customers or vendors not being Year 2000 compliant, the Company may find it necessary to increase inventory levels to mitigate complications related to vendors. The foregoing statements of this subsection are intended to be and are hereby designated "Year 2000 Readiness Disclosure" statements within the meaning of the Year 2000 Information and Readiness Disclosure Act. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the results of operations or financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 11 ITEM 5. OTHER INFORMATION. None. CAUTIONARY STATEMENTS The Company's expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be contained in this Quarterly Report on Form 10-Q, are subject to risks and uncertainties that must be considered when evaluating the likelihood of the Company's realization of such expectations. The Company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. Ability to Comply with Financial Covenants of Credit Facility The Credit Facility requires the Company to comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. The Company's ability to comply with any of the foregoing restrictions will depend on its future performance, which will be subject to prevailing economic conditions and other factors, including factors beyond the Company's control. A failure to comply with any of these obligations could result in an event of default under the Credit Facility, which could permit acceleration of the Company's indebtedness under the Credit Facility. The Company from time to time has been unable to comply with some of the financial covenants contained in the Credit Facility (relating to, among other things, the maintenance of prescribed financial ratios) and has, when necessary, obtained waivers or amendments to the covenants from its lender. Although the Company expects to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no assurance that in the future the Company will be able to do so or that its lender will be willing to waive such compliance or further amend such covenants. Risks Related to Internal Growth Strategy Future results for the Company also will depend in part on the Company's success in implementing its internal growth strategy, which includes expanding existing product lines and adding new product lines. The ability of the Company to implement this strategy will depend on its success in acquiring and integrating new product lines and marketing integrated forms of supply arrangements such as those being pursued by the Company through its SmartSource program. The Company acquired two businesses in the second quarter of 1997, a third in the first quarter of 1998 and two additional businesses in the second quarter of 1998 and plans to acquire other distributors with complementary or desirable product lines and customer bases. Although the Company intends to increase sales and product offerings to the customers of these and other acquired companies, reduce costs through consolidating certain administrative and sales functions and integrate the acquired companies' management information systems with the Company's system, there can be no assurance that the Company will be successful in these efforts. Substantial Competition The Company's business is highly competitive. The Company competes with a variety of industrial supply distributors, some of which may have greater financial and other resources than the Company. Although many of the Company's traditional distribution competitors are small enterprises selling to customers in a limited geographic area, the Company also competes with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by the Company's SmartSource program. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than the Company. The Company's competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Risks of Economic Trends Demand for the Company's products is subject to changes in the United States economy in general and economic trends affecting the Company's customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, the Company may experience changes in demand for its products as changes occur in the markets of its customers. 11 12 Dependence on Key Personnel The Company will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, its Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of the Company could have a material adverse effect on the Company's financial condition and results of operations. The Company does not maintain key-man life insurance on the life of Mr. Little or on the lives of its other executive officers. In addition, the Company's ability to grow successfully will be dependent upon its ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect the Company's financial condition and results of operations. Dependence on Supplier Relationships The Company has distribution rights for certain product lines and depends on these distribution rights for a substantial portion of its business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although the Company believes that it could obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with the Company could result in a temporary disruption on the Company's business and, in turn, could adversely affect results of operations and financial condition. Possible Delisting from the Nasdaq National Market In June 1999, the Nasdaq-Amex Market Group advised the Company that it did not meet the Nasdaq National Market requirements for number of shares and value of public float. While the Company has resolved with Nasdaq the issue regarding the requirement for number of shares of public float, due to the current trading price of the Common Stock, the Company does not comply with the value of public float requirement. The Company agreed to submit an application to move the listing of its Common Stock from the Nasdaq National Market to the Nasdaq Small-Cap Market. There can be no assurance, however, that the Company's transition application will be approved by Nasdaq. If the application is not approved, Nasdaq will remove the Company's Common Stock from listing on the Nasdaq National Market. If the Common Stock is removed from listing, the liquidity of the Common Stock will be materially adversely affected, as there can be no assurance that any alternative market for the Common Stock will be available. Year 2000 Issues Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the Year 2000. The Company relies on its computer systems and software for financial reporting, customer account information and inventory management and replenishment. The company has completed the upgrading of its business system software and has tested and verified its state of readiness for the Year 2000. Additionally, the Company has developed and implemented a web-based questionnaire along with a standard questionnaire in order to communicate with customers, major vendors and other third parties with whom it has material relationships to determine if they will be ready for the Year 2000. To the extent unexpected problems associated with the Year 2000 arise during the implementation phase of the Company's Year 2000 program or due to the fact that the Company's customers, vendors and other third parties are not compliant by the Year 2000, it could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure." Risks Associated With Hazardous Materials Certain of the Company's operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although the Company believes that it has adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on the Company's financial condition and results of operations. 12 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NUMBER DESCRIPTION -------------- ----------- 11.1 -- Statement re: Computation of Per Share Earnings. 27.1 -- Financial Data Schedule. (b) Reports on Form 8-K. None. 13 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DXP Enterprises, Inc. By: ------------------------------------ Gary A. Allcorn Senior Vice President/Finance and Chief Financial Officer (Duly authorized officer and principal financial officer) Date: November 12, 1999 14 15 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 11.1 -- Statement re: Computation of Per Share Earnings. 27.1 -- Financial Data Schedule.
EX-11.1 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Basic: Average shares outstanding ...................... 4,055,092 4,173,159 4,084,862 4,167,832 Net income (loss) attributable to common shareholders .................................. $ 74,000 $ 722,000 $ (112,000) $ 2,681,000 Per share amount ................................ $ .0182 $ .1730 $ (.0274) $ .6433 Diluted: Average shares outstanding ...................... 4,055,092 4,173,159 4,084,862 4,167,832 Net effect of dilutive stock options -- based on the treasury stock method using period-end market price, if higher than average market price .............. -- 1,041,728 -- 1,041,728 Assumed conversion of Class A convertible Preferred stock ................................. -- 420,000 -- 420,000 Total ...................................... 4,055,092 5,634,877 4,084,862 5,629,560 Net income (loss) ................................ $ 74,000 $ 747,000 $ (112,000) $ 2,750,000 Per share amount* $ .0182 $ .1326 $ (.0274) $ .4885
- ---------- * Due to a loss for the quarter ended September 30, 1999 and for the nine months ended September 30, 1999, the conversion of common stock equivalents would be anti-dilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED FINANCIAL STATEMENTS OF DXP ENTERPRISES, INC. AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 808 0 23,252 1,638 24,116 50,710 22,827 9,813 74,965 22,012 0 112 0 41 15,786 74,965 139,004 139,004 102,890 102,890 33,954 0 2,789 362 406 (44) 0 0 0 (44) (.03) (.03)
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