DXP Enterprises and Circos embroiled in legal battle
The former owners of Precision Industries, an Omaha, Neb.-based distributor, and DXP Enterprises, the Houston-based company that acquired Precision in 2007, have filed competing lawsuits against one another.
The lawsuits concern the value of inventories held by Precision Industries at the time of the acquisition and the amount of money held in reserve to cover the value of obsolete, excess, damaged, slow-moving or other unusable inventory.
Dennis Circo and Christopher Circo filed a complaint with the U.S. District Court in Nebraska on August 9 alleging that DXP threatened legal action against the Circos in order to extract "sums not due defendant" and also to avoid paying Dennis Circo agreed upon earned buy-out fees. The complaint also alleges that DXP has "attempted to coerce employees of Precision into making changes in the inventory accounting methods that are unwarranted."
In a countersuit filed on August 16, DXP denies the allegations, and claims that the Circos "knowingly and intentionally made false representation to DXP regarding the financial condition of Precision." In particular, the suit alleges that the Circos misrepresented the value of the inventory and the amount of the accounting reserve, "thus fraudulently inducing DXP to buy" the Circos' shares of stock in Precision.
At the time of the sale of the company, Precision valued its inventory at over $43 million and claimed to have an adequate reserve of approximately $1 million reflected on the balance sheet for obsolete, excess, damaged, slow-moving or otherwise unusable inventory. According to court documents, when DXP converted Precision's financial information into DXP's systems in late 2009, DXP discovered the inventory of Precision was "grossly overstated and the reserve was grossly understated." The suit claims that the reserve should have been in excess of $20 million, not $1 million. DXP said it was forced to write off millions of dollars for unsalable, dead and excess inventory.
The Circos claims that DXP had ample time to evaluate the inventories for 12 months following the purchase of the company. The purchase agreement provided that "no claim for breach of the closing covenants may be made or brought by any party" after the first anniversary of the closing date.
In its claim with the court, DXP is seeking to rescind the stock purchase agreement and the return of all amounts paid for Precision's shares of stock. Alternatively, the company seeks damages equal to the difference between the value of the shares of stock represented by Precision, less the "true value of the shares" as of the acquisition date.
The Circos are seeking a declaration from the court that the time for DXP to assert any claims regarding inventories has passed, and that there has been no breach of agreement with DXP.
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