1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 0-21513 DXP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Texas 76-0509661 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 580 Westlake Park Boulevard, Suite 1100 77079 Houston, Texas (Zip Code) (Address of principal executive offices) 281/531-4214 (Registrant's telephone number, including area code) Index, Inc. (Former name, if changed since last report) 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 April 21, 1997: Common Stock: 12,079,975 (6,039,987 after giving effect to two-to-one reverse stock split effected May 12, 1997)
2 Item 1: Financial Statement DXP ENTERPRISES, INC. AND SUBSIDIARIES (CONDENSED CONSOLIDATED BALANCE SHEETS) (In Thousands) <TABLE> <CAPTION> March 31, December 31, 1997 1996 ------------------------- (Unaudited) <S> <C> <C> Assets Current assets: Cash $ 979 $ 876 Trade accounts receivable, net of allowance for doubtful accounts of $301,000 and $210,000, respectively 19,899 17,125 Inventory 16,665 17,175 Prepaid expenses and other current assets 266 539 Deferred income taxes 569 511 ------------------------- Total current assets 38,378 36,226 Property and equipment, net 7,792 7,818 Other assets 953 998 Total assets 47,123 45,042 ========================= Liabilities and Shareholders' Equity Current liabilities: Trade accounts payable 8,944 6,963 Employee compensation 884 1,296 Other accrued liabilities 965 601 Current portion of long-term debt 623 609 Current portion of subordinated debt -- 1,145 ------------------------- Total current liabilities 11,416 10,614 Long-term debt, less current portion 22,792 22,300 Deferred compensation 739 739 Deferred income taxes 364 330 Equity subject to redemption Series A Preferred stock--1,496 shares 150 150 Series B convertible preferred stock -- 4,500 shares 450 450 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; 3,366 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; 19,500 shares issued and outstanding 15 15 Common stock, $.01 par value, 100,000,000 shares authorized; 7,993,997 shares issued and outstanding 160 160 Paid-in capital 288 288 Retained earnings 10,747 9,994 ------------------------- Total shareholders' equity 11,212 10,459 Total liabilities and shareholders' equity $47,123 $45,042 ========================= </TABLE> 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) <TABLE> <CAPTION> Three Months Ended March 31 1997 1996 ---------------------------- <S> <C> <C> Sales $ 30,129 $ 30,918 Cost of sales 21,756 22,832 ---------------------------- Gross Profit 8,373 8,086 Selling, general and administrative expenses 7,043 7,623 ---------------------------- Operating income 1,330 463 Other income 429 368 Interest expense (539) (473) ---------------------------- (110) (105) ---------------------------- Income before income taxes 1,220 358 Provision for income taxes 429 145 ---------------------------- Net income $ 791 $ 213 Preferred Stock Dividend 38 23 ---------------------------- Net Income Attributable to Common Shareholders $ 753 $ 190 ============================ Primary net income per common and common equivalent shares $ 0.08 $ 0.02 ============================ Number of shares used to compute primary net income per common and common equivalent shares 9,892 8,580 ============================ Fully diluted net income per common and common equivalent share $ 0.07 $ 0.02 ============================ Number of shares used to compute fully diluted net income per common and common equivalent shares 10,984 9,724 ============================ </TABLE> See notes to condensed consolidated financial statements. 3
4 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) <TABLE> <CAPTION> Three Months Ended March 31, 1997 1996 ---------------------------- <S> <C> <C> OPERATING ACTIVITIES Net cash provided by operating activities $ 1,006 $ 1,851 INVESTING ACTIVITIES Purchase of Austin Bearing net assets -- (329) Decrease in notes receivable from shareholders and employee receivables -- (117) Purchase of property and equipment (227) (66) ---------------------------- Net cash used in investing activities (227) (512) FINANCING ACTIVITIES Proceeds from debt 29,205 27,636 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank (29,844) (30,444) Dividends paid (38) (23) ---------------------------- Net cash used in financing activities (677) (2,831) ---------------------------- INCREASE (DECREASE) IN CASH 102 (1,492) CASH AT BEGINNING OF PERIOD 876 1,492 ============================ CASH AT END OF PERIOD $ 979 $ -- ============================ </TABLE> 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. 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 filing with the Securities and Exchange Commission for 1996. Note 2: The Company DXP Enterprises, Inc. (the "Company") was incorporated on July 26, 1996 in the State of Texas. The Company was formed to facilitate a proposed reorganization transaction whereby subsequent to July 31, 1996 the Company became a public holding company and acquired 100% of the outstanding capital stock of SEPCO Industries, Inc. ("SEPCO"), a private distribution company with revenues approximating $125 million, and Newman Communications Corporation ("Newman"), an inactive public entity with nominal net tangible assets. The Company filed a registration statement on Form S-4 with the Securities and Exchange to register 18,584,400 shares of its Common Stock, 19,500 shares of its Series B Convertible Preferred Stock and 3,399 shares of its Series A Preferred Stock. This registration statement became effective November 12, 1996. Because the Company and Newman are non-operating entities with nominal tangible net assets, the proposed transaction was accounted for as a recapitalization of SEPCO into the Company and an issuance of shares for the net tangible assets of Newman. Accordingly, the historical financial statements for the Company presented in the filing of this Form 10-Q are those of SEPCO. Note 3. Per Share Amounts Net income per common and common equivalent share has been computed on a pro forma basis as if the reorganization had occurred between the registrant and SEPCO. These amounts were determined by dividing net income applicable to common stock by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. To the extent they are dilutive, options to purchase common stock issued by the Company within the 12 months preceding the filing of the registration statement referenced above have been included in the calculation of common equivalent shares outstanding (using the treasury stock method) as if they were outstanding for all periods presented. The computation of fully diluted net income per common and common equivalent share assumes the Class A convertible preferred stock was converted as of the beginning of the period. Per share amounts have been restated to give effect to the two-to-one reverse stock split. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under SFAS No. 128, primary earnings per share ("Primary EPS") will be replaced by basic earnings per share ("Basic EPS"), and fully diluted earnings per share ("Fully Diluted EPS") will be replaced with diluted earnings per share ("Diluted EPS"). Basic EPS differs from Primary EPS in that it only includes the weighted average impact of outstanding shares of the Company's Common Stock (i.e., it excludes common stock equivalents and the dilutive effect of options, etc.) Diluted EPS is substantially similar to Fully Diluted EPS as previously reported. The provisions of SFAS No. 128 will result in the retroactive restatement of previously reported Primary EPS and Fully Diluted EPS figures, but SFAS No. 128 prohibits such restatement prior to December 31, 1997. Based on the Company's computations, the adoption of SFAS No. 128 is not expected to impact earnings per share amounts reported during the current quarter or any recent prior period. Note 4: Inventory The company uses the LIFO method of inventory valuation for approximately 75 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: 5
6 <TABLE> <CAPTION> 12/31/96 3/31/97 ---------------------------- (in thousands) <S> <C> <C> Finished goods $ 18,215 $ 18,103 Work in process 2,405 2,007 ---------------------------- Inventories at FIFO 20,620 20,110 Less - LIFO allowance (3,445) (3,445) ---------------------------- Inventories $ 17,175 $ 16,665 ============================ </TABLE> Note 5: Acquisition Effective December 31, 1995, SEPCO Industries, Inc. acquired 100% of the outstanding common stock of Bayou Pumps. The purchase price totaled $500,000 and consisted of (i) issuance of $450,000 of the SEPCO's Class A convertible preferred stock and (ii) cash of $50,000. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $400,000 was recorded in connection with the acquisition. Effective February 2, 1996, the SEPCO Industries, Inc. acquired the net assets of Austin Bearing Corporation. The purchase price totaled approximately $578,000 and consisted of (i) issuance of a $249,000 note, bearing interest at 9%, payable monthly over five years and (ii) cash of $329,000. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $84,000 was recorded in connection with the acquisition. Note 6: Commitments and Contingencies SEPCO is currently undergoing an examination of its tax returns by the Internal Revenue Service ("IRS") which is asserting claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $328,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. SEPCO believes that its LIFO elections were valid and currently is pursuing its rights to administrative appeal. Although an unfavorable outcome on this matter would result in the payment of additional taxes and impact SEPCO's liquidity position, SEPCO believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position of SEPCO. The Company has been engaged in discussion with representatives of the IRS regarding this matter and has reserved $30,000 to cover any possible tax liability related to this matter. Note 7: Stock Options Prior to and during 1995, SEPCO issued non-qualified, book value plan stock options to certain officers of the Company to purchase shares of its Class A common stock, which had exercise prices equal to the book value of the common stock on the date of the grant. The option agreement allowed the employee to put the stock acquired back to SEPCO at the book value at that time. SEPCO recognized compensation expense for increases in the book value of the stock while the options were outstanding. Effective March, 31, 1996, the stock option agreements were amended to become non-qualified, market value plan stock options. Under the amended agreement, the employees can no longer put the acquired stock back to SEPCO. In connection with these changes, SEPCO recognized approximately $618,000 of compensation expense in the three months ended March 31, 1996. 6
7 Note 8: Long-Term Debt In September, 1996 SEPCO amended its credit facility, including its $20 million line of credit, with its lender to extend the maturity to 1999. The amendment increased the existing balance of the term loan from $123,898 to $5,000,000 upon conversion of approximately $4.9 million of the amounts outstanding under the revolving loan to the term loan. The interest rate on the line of credit was reduced to prime plus .50% from prime plus .75%. The line of credit is secured by accounts receivable, inventory, machinery and equipment and real estate and matures January, 1999. The borrowings available under the existing credit facility at March 31, 1997 approximated $2,100,000. Note 9: Subsequent Events In February, 1997, the company signed a non-binding letter of intent to purchase Pelican State Supply Company, Inc. ("Pelican"), a general mill supply company located in Baton Rouge, Louisiana. Pursuant to the proposed acquisition, the company would acquire all of the issued and outstanding shares of capital stock of Pelican for $1.5 million in cash and 432,286 shares of common stock. The consummation of the acquisition is subject to customary conditions, including the Company's 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 Pelican, or, if consummated, that the terms will be as described above. On or about April 30, 1997, a consent 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 amendments to the Restated Articles of Incorporation of the Company, that would effect (1) a change in the Company's name to DXP Enterprises, Inc. and (2) a two-to-one reverse split of the issued and outstanding shares of Common Stock. The shareholders have approved the name change and two-to-one reverse stock split which became effective after the close of market on May 12, 1997. The shareholders equity section and earnings per share have been restated to give effect for the two-to-one reverse stock split. 7
8 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Revenues for the three months ended March 31, 1997 decreased 2.6% to $30.1 million from the three months ended March 31, 1996. The decrease in revenues for the 1997 period was primarily attributable to a reduction in sales of valve and valve automation equipment. Sales of valve and valve automation equipment declined by $1 million over the comparable period in 1996 due primarily to increased competition. The decrease in valve and valve automation equipment represents 3.3% of total sales. During the three months ended March 31, 1997, sales of pumps and pump products increased 2.1% over the comparable period in 1996. Sales of bearings and power transmission equipment for the quarter ended March 31, 1997 were consistent with the comparable period in 1995. Gross margins increased 1.6% for the first quarter of 1997 as compared to the first quarter of 1996, from 26.2% of sales to 27.8%. The increase in margins is attributable to the company's avoidance of low-margin sales, the ability to pass on manufacturer price increases, and reductions in cost-of-sales overhead expenses. 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 assurance that the Company will be successful in this regard. Selling, general and administrative expense decreased as a percentage of revenues by 5.3% for first quarter of 1997 as compared to the first quarter of 1996, due primarily to the Company's recognition of approximately $618,000 in compensation expense in 1996 as a result of amending its stock option agreements from being book value to market value options. In accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), no further compensation expense related to options currently outstanding will be recognized in future periods. In addition to the compensation expense, first quarter 1996 results also included expenses attributable to training and implementation of a new management information system. Excluding the effect of the 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 the three month period ended March 31, 1997 as a percentage of revenues increased from 1.5% of sales to 4.4%, due to the various factors discussed above. Interest expense during the first quarter of 1997 increased by $66,000 compared to the first quarter of 1996. Average debt for the first quarter of 1997 as compared to the first quarter of 1996 was $2,000,000 higher as a result of increased inventory and receivable levels during the three months ended March 31, 1997 as compared March 31, 1996. Average interest rates were slightly lower during the three months ended March 31, 1997 as compared to 1996. Further increases in inventories may be required to the extent sales and activity levels increase. The Company's provision for income taxes for the three months ended March 31, 1997 increased by $284,000 compared to the same period of 1996, as a result of the increase in profits. Net income for the three month period ended March 31, 1997, increased $578,000 from the three month period ended March 31, 1996 due to the increase in the gross profit percentage, the compensation expense of $618,000 recognized in 1996 associated with the company's amendment of its stock option agreements, and the costs incurred in 1996 relative to the implementation of a new management information system. 8
9 Liquidity and Capital Resources Under the Company's 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 $2.1 million available for borrowings under its working capital line of credit at March 31, 1997. Working capital at March 31, 1997 and December 31, 1996 was $27 million and $26 million, respectively. During the first three months of 1997 and the year 1996, SEPCO collected its trade receivables in approximately 56 and 48 days, respectively, and turned its inventory approximately five times on an annualized basis. The Company currently has a $20 million secured line of credit with an institutional lender. The rate of interest is prime plus .5% (9.00% and 8.75% at March 31, 1997 and December 31, 1996, respectively). The line of credit is secured by receivables, inventory, and machinery and equipment and matures January, 1999. 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 aggregate indebtedness to tangible net worth not more than five to one and current assets to current liabilities greater than two to one. The Company currently expects to renew the line of credit at its maturity. The Company generated cash from operating activities of $1.0 million in the first three months of 1997 as compared to 1.9 million during the first three months of 1996 due primarily to a greater investment in the net working capital components for the first three months of 1997 as compared to the first three months of 1996. The Company had capital expenditures of approximately $227,000 for the first three months of 1997 as compared to $66,000 during the same period of 1996. Capital expenditures in the first three months of 1997 were 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. Capital expenditures for 1996 were primarily for office and shop equipment and computer automation. During the first quarter of 1996, the Company expended approximately $329,000 for the acquisition of the assets of Austin Bearings. In February, 1997, the Company signed a non-binding letter of intent to purchase Pelican State Supply Company, Inc. ("Pelican"), a general mill supply company located in Baton Rouge, Louisiana. Pursuant to the proposed acquisition, the Company would acquire all of the issued and outstanding shares of capital stock of Pelican for $1.5 million in cash and 432,286 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 Pelican or, if consummated, that the terms will be as described above. The Company is currently undergoing an examination of its tax returns by the IRS which is asserting claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $328,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. SEPCO believes that its LIFO elections were valid and currently is pursuing its rights to administrative appeal. Although an unfavorable outcome on this matter would result in the payment of additional taxes and impact the Company's liquidity position, the Company believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position of the Company. The company has been engaged in discussions with representatives of the IRS and has reserved $30,000 to cover any possible tax liability related to this matter. 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. 9
10 Item 3: Quantitative and Qualitative Disclosures About Market Price Not Applicable Part II: Other Information Item 1. Legal Proceedings - None Item 2. Changes in Securities The shareholders of the Company approved an amendment (the "Amendment") to the Company's Restated Certificate of Incorporation to, among other things, effect a reclassification of the Company's Common Stock, par value $.01 per share (the "Common Stock") through a two-to-one reverse stock split. See Item 4 "Submission of Matters to a Vote of Security Holders". The Amendment became effective after the close of market on May 12, 1997, pursuant to which one new share of Common Stock will be exchanged for every two shares of Common Stock outstanding as of May 12, 1997 (the "Effective Date"). Based on information as of April 25, 1997, the Company anticipates that the number of shares of Common Stock that would be outstanding on the Effective Date is approximately 6,039,987. In addition, it is expected that 5,551,597 shares of Common Stock will be reserved for issuance upon the conversion or exercise of various of the Company's other outstanding securities (convertible preferred stock and options), and approximately two million shares of Common Stock will be reserved for issuance to remaining holders of certificates formerly representing shares of common stock of SEPCO and Newman, leaving a total of approximately 86.4 million shares of Common Stock available for future issuances. No fractional shares of new Common Stock will be issued for any fractional new share interest. Rather, each shareholder who would otherwise receive a fractional new shares of Common Stock as a result of the Amendment will receive an amount of cash equal to the average of the closing sale price of a share of Common Stock on the OTC Bulletin Board during the 20 trading days immediately preceding the Effective Date multiplied by the number of shares of Common Stock held by such holder that would otherwise have been exchanged for such fractional interest. Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders On or about April 30, 1997, a consent statement was furnished to the holders of 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 amendments to the Restated Articles of Incorporation of the Company, that would effect (1) a change in the Company's name to DXP Enterprises, Inc. and (2) a two-to-one reverse split of the issued and outstanding shares of Common Stock. The name change and two-to-one reverse stock split became effective after the close of market on May 12, 1997. Item 5. Other Information 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. 10
11 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 the iPower Consortium and outsourcing services similar to those that are being offered by American MRO, Inc. ("AMRO"), a wholly-owned subsidiary of the Company. 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 Associated with Implementation of Corporate Strategy Future results for the Company also will be dependent on the success of the Company in implementing its acquisition and growth strategy. This strategy includes taking advantage of a consolidation in the industry and effecting acquisitions of distributors with complementary or desirable new product lines, strategic distribution locations and attractive customer bases and manufacturer relations. The Company's strategy also includes expanding its product lines, adding new product lines and establishing alliances and joint ventures with other suppliers in order to provide the Company's customers with a source of integrated supply. The ability of the Company to implement this strategy will depend on its ability to identify, consummate and assimilate acquisitions on economic terms, to acquire and successfully integrate new product lines and to establish and successfully market new integrated forms of supply arrangements such as that being pursued by AMRO. 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 depend on obtaining financing for its planned expansions and acquisitions. There can be no assurance that such financing will be available on a timely basis or on terms satisfactory to the Company. The Company plans to examine appropriate methods of financing any such acquisition, including issuance of additional capital stock, debt or other securities or a combination of both. If the Company were to issue shares of its capital stock in any acquisition, such issuance could be dilutive to existing shareholders. 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 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 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 operation. Risks Associated with Hazardous Materials Certain of the Company's activities involve the controlled use of hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials 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 exceed the resources of the Company. IRS Examination The Company currently is undergoing an examination of its tax returns by the IRS. The IRS has asserted claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $328,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. Although the Company believes that its LIFO elections were valid and is pursuing its rights to administrative appeal, an unfavorable outcome on this matter would result 11
12 in the payment of additional taxes and impact the company's liquidity position. The Company has been engaged in discussions with representatives of the IRS and has reserved $30,000 to cover any possible tax liability related to this matter. Limitations on Ability to Pay Dividends The Company anticipates that future earnings, except for dividends payable on the Series B Convertible Preferred Stock, will be retained to finance the continuing development of its business. Accordingly, the Company does not anticipate paying cash dividends on the common Stock in the foreseeable future. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Restated Articles of Incorporation, as amended 4.1 Form of Common Stock Certificate 11.1 Statement re: Computation of Per Share Earnings 27.1 Financial Data Schedule (b) Reports of Form 8-K None Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DXP Enterprises, Inc. By: /s/ Gary A. Allcorn ------------------------------------ Gary A. Allcorn Senior Vice President/Finance (Duly authorized officer and principal financial officer) 12
13 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 3.1 Restated Articles of Incorporation, as amended 4.1 Form of Common Stock Certificate 11.1 Statement re: Computation of Per Share Earnings 27.1 Financial Data Schedule </TABLE>