DXP ENTERPRISES INC, S-1/A, 1998-12-02

DXP ENTERPRISES INC
S-1/A, 1998-12-02
INDUSTRIAL MACHINERY & EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1998

REGISTRATION NUMBER 333-53387

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
TEXAS 5084 76-0509661
(State or other jurisdiction (Primary Standard (I.R.S. Employer Identification No.)
of Industrial
incorporation or organization) Classification Code Number)
</TABLE>

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:

<TABLE>
<S> <C>
LAURA J. MCMAHON RANDOLPH H. FIELDS
FULBRIGHT & JAWORSKI L.L.P. GREENBERG TRAURIG, P.A.
1301 MCKINNEY, SUITE 5100 111 NORTH ORANGE AVE., 20TH FLOOR
HOUSTON, TEXAS 77010-3095 ORLANDO, FLORIDA 32801
713/651-5658 407/420-1000
</TABLE>

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. [X]

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

<TABLE>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE PER AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Units, each comprising one share of Common
Stock and one Warrant................... 1,955,000 $11.25 $21,993,750
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Common Stock.............................. 1,955,000 -- --
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Warrants to purchase Common Stock......... 1,955,000 -- --
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Common Stock(3)........................... 1,955,000 $11.00 $21,505,000
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Underwriters Warrant to purchase Units 170,000 $12.95 $ 2,201,500
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Common Stock(4) 170,000 -- --
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Warrants(5) 170,000 -- --
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Common Stock(6) 170,000 $11.00 $ 1,870,000
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Total
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<CAPTION>
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TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
- ------------------------------------------------------------------------------------------
Units, each comprising one share of Common
Stock and one Warrant................... $ 6,114.27
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Common Stock.............................. --
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Warrants to purchase Common Stock......... --
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Common Stock(3)........................... $ 5,978.39
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Underwriters Warrant to purchase Units $ 612.02
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Common Stock(4) --
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Warrants(5) --
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Common Stock(6) $ 519.86
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Total $13,224.55(7)
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</TABLE>

(1) Assumes the Underwriters' over-allotment option is exercised in full.

(2) Estimated solely for the purpose of calculation of the registration fee.

(3) Includes 1,955,000 shares of Common Stock issuable upon exercise of the
Warrants and, pursuant to Rule 416 promulgated under the Securities Act of
1933, as amended, an indeterminate number of additional shares of Common
Stock that may be come issuable pursuant to anti-dilution provisions.

(4) Shares of Common Stock included in the Units issuable on exercise of the
Underwriters Warrant and, pursuant to Rule 416 promulgated under the
Securities Act of 1933, as amended, an indeterminate number of additional
shares of Common Stock that may become issuable pursuant to anti-dilutive
provisions.

(5) Warrants included in the Units issuable on exercise of the Underwriters
Warrant.

(6) Shares of Common Stock issuable upon exercise of the Warrants included in
the Units issuable on exercise of the Underwriters Warrant and, pursuant to
Rule 416 promulgated under the Securities Act of 1933, as amended, an
indeterminate number of additional shares of Common Stock that may be
issuable pursuant to anti-dilution provisions.

(7) Of the registration fee of $13,224.55, $9,737 was previously paid.

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.
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<PAGE> 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 DECEMBER 2, 1998

1,700,000 UNITS

[DXP ENTERPRISES, INC. LOGO]
COMMON STOCK

DXP Enterprises, Inc. ("DXP" or the "Company") is offering 1,700,000 Units
(the "Units"), each of which consists of one share of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") and one Warrant entitling
the holder thereof to purchase one share of Common Stock at a purchase price of
$11.00 (the "Warrants"). Each share of Common Stock and Warrant constituting a
Unit will become separable 18 months from the date of this Prospectus or on such
earlier date as the Underwriters may determine (the "Separation Date"). The
Warrants are subject to redemption at $.25 per Warrant provided the trading
price of the Common Stock for 30 consecutive trading days ending on the third
day prior to the date on which the Company gives notice of redemption is in
excess of $15.00.

Prior to the Offering, there has been no public market for the Units. It is
currently anticipated that the initial public offering price per Unit will be
between $9.25 and $11.25. See "Underwriting" for factors to be considered in
determining the initial public offering price of the Units. The Company intends
to apply for listing of the Units and the Warrants on The Nasdaq National Market
under the symbols "DXPU" and "DXPW", respectively. The Common Stock is listed on
The Nasdaq National Market under the symbol "DXPE". On December 1, 1998, the
last sales price of the Common Stock was $ . See "Price Range of Common
Stock and Dividend Policy".

AN INVESTMENT IN THE UNITS 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 UNITS 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.

<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit........................................ $ $ (3) $
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Total(4)........................................ $ $ $
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</TABLE>

(1) The Company and certain shareholders of the Company (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) See "Underwriting" for a description of additional compensation payable by
the Company to the Underwriters consisting of (i) a non-accountable expense
allowance equal to 2% of the gross proceeds of the Offering, or $314,500
($361,675 if the underwriters' over-allotment option is exercised in full),
of which $25,000 has been paid, (ii) a warrant to purchase 170,000 Units at
$12.95 per Unit, exercisable during the five years commencing on the first
anniversary of the date of this Prospectus (the "Underwriters Warrants"),
(iii) a 25-month consulting agreement at $4,000 per month, (iv) a two-year
right of first refusal on future public offerings and (v) a commission
payable on exercise of the Warrants equal to 5% of the per share exercise
price, or $.55.

(3) Before deducting expenses payable by the Company, estimated at $914,500,
including the Underwriters' non-accountable expense allowance.

(4) The Company and the Selling Shareholders have granted the several
Underwriters an option for 45 days from the date hereof to purchase up to an
additional 255,000 Units (comprising 255,000 shares of Common Stock owned by
the Selling Shareholders and 255,000 Warrants offered by the Company) solely
to cover over-allotments, if any. If the option is 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 Units 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 Units will be made on or about , 1998 at the offices of
J.P. Turner & Company, L.L.C., 3340 Peachtree Road, Suite 450, Atlanta, Georgia
30326.

---------------------

J.P. TURNER & COMPANY, L.L.C.

[LOGO]

, 1998

<PAGE> 3

[COMPANY LOGO]

[PHOTOGRAPHS OF SAMPLE COMPANY PRODUCTS]

Fluid Handling Equipment
Bearings & Power Transmission Equipment
Electrical Supplies
General Mill & Safety Supplies
Pipes, Valves & Fittings

---------------------

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, 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
<PAGE> 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 that was effected May 12, 1997 and
another two-to-one reverse stock split that was effected July 17, 1998.
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.,
together with its subsidiaries.

THE COMPANY

The Company is a leading provider of maintenance, repair and operating
("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 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 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.

Since current management acquired control of the Company in 1986, the
Company has grown substantially through 14 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 16 states throughout the Southern and Rocky Mountain regions of 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 the sales efforts
of approximately 300 of the Company's 708 employees. 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 16% of the total United States market
during 1997. Based on 1997 sales as reported by industry sources, the Company
was the 37th 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"), the acquisition of Tri-Electric Supply, Ltd. ("Tri-

3
<PAGE> 5

Electric") in February 1998 and the acquisitions of Lucky Electric & Supply,
Inc. ("Lucky") and M.W. Smith Equipment, Inc. ("Smith") in May 1998, the Company
would have been the 30th largest distributor of MRO products in the United
States.

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 Integrated 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 and improve operating margin.

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.

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 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.

Integrated Services. The Company's distribution strategy is focused on
building and maintaining long-term relationships by understanding the customers'
operations and providing integrated 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
services 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 also seeks higher volume purchasing
in order to reduce product costs and may continue to consolidate facilities or
branches to optimize efficiencies.

RECENT ACQUISITIONS

The Company completed two strategic acquisitions in 1997, and three
additional acquisitions in the first six months of 1998. These acquisitions were
directed at expanding the Company's product lines and increasing its geographic
presence. Based on information provided to the Company, the five acquired
businesses generated combined revenues of approximately $87.3 million in 1997
(of which $31.7 million appeared in the Company's 1997 consolidated financial
statements). Through the Company's acquisition 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 acquisitions of Tri-Electric and Lucky added electrical
products to its product offerings. The acquisition of Smith expanded the
Company's pump distribution facilities in East Texas.

CORPORATE INFORMATION

The Company is a Texas corporation that was formed in 1996 to effect a
consolidation of SEPCO Industries, Inc. ("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
<PAGE> 7

THE OFFERING

Units offered................... 1,700,000

Common Stock to be outstanding
after the Offering.............. 5,864,773 shares(1)

Use of proceeds................. All of the proceeds to the Company will be
used to repay an aggregate of approximately
$13.4 million of indebtedness, $11.2 million
of which was incurred in connection with five
acquisitions and $2.2 million of which was
incurred in connection with the acquisition
of real property and other capital
expenditures. See "Use of Proceeds".

Nasdaq National Market symbol
for Common Stock................ DXPE

Proposed Nasdaq Market symbols:

Units...................... DXPU

Warrants................... DXPW

- ---------------

(1) Based upon number of shares outstanding as of December 1, 1998. Includes
1,700,000 shares of Common Stock being sold as part of the Units, 9,000
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. Excludes
1,700,000 shares of Common Stock issuable upon exercise of the Warrants,
340,000 shares of Common Stock issuable upon exercise of the Underwriters
Warrants (and the Warrants issuable upon exercise thereof), 1,443,000 shares
of Common Stock issuable upon exercise of outstanding options at December 1,
1998 and 42,500 additional shares reserved for issuance pursuant to the
Company's Long-Term Incentive Plan, as amended (the "LTIP"). See
"Management -- Benefit Plans".

An investment in the Units offered hereby, and the Common Stock and
Warrants included in the Units, involves a high degree of risk. See "Risk
Factors" and "Dilution" for a discussion of certain factors that should be
considered in connection with an investment in the Units offered hereby.

6
<PAGE> 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 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
summary historical consolidated financial data set forth below for the nine
months ended September 30, 1997 and 1998 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, Tri-Electric, Lucky and Smith. 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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------ NINE MONTHS ENDED
SEPCO DXP DXP SEPTEMBER 30,
-------- -------- -------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------------------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
PRO
CONSOLIDATED STATEMENTS OF EARNINGS DATA: ACTUAL FORMA
-------- --------
Revenues................................ $111,328 $125,208 $169,667 $190,754 $118,277 $153,886
Gross profit(1)......................... 29,157 32,117 44,880 49,797 31,571 40,381
Operating income(1)..................... 4,598 2,785 6,434 5,789 3,929 6,623
Income before provision for income
taxes................................. 3,512 1,635 4,670 3,869 2,950 4,583
Net income.............................. 2,088 890 2,768 2,182 1,880 2,750
Preferred stock dividend................ (23) (119) (103) (103) (109) (69)
Net income attributable to common
shareholders.......................... 2,065 771 2,665 2,079 1,771 2,681

Basic earnings per common share......... $ 0.54 $ 0.19 $ 0.65 $ 0.51 $ .44 $ .64
Common shares outstanding............... 3,837 3,997 4,082 4,082 4,044 4,168
Dilutive earnings per share............. 0.46 0.16 0.49 0.38 0.34 0.49
Common and common equivalent shares
outstanding(2)(3)..................... 4,501 4,857 5,703 5,703 5,596 5,630
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
----------------------
PRO FORMA
AS
ACTUAL ADJUSTED(4)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $39,909 $39,909
Total assets................................................ 83,619 83,619
Long-term debt obligations.................................. 44,327 30,932
Shareholders' equity........................................ 15,527 28,922
</TABLE>

- ---------------

(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 that became effective May 12,
1997 and another two-to-one reverse stock split that became effective July
17, 1998.

(4) Adjusted to give effect to the sale of the 1,700,000 Units offered by the
Company hereby, at an assumed price to the public of $9.25 per Unit, and the
application of the net proceeds thereof.

7
<PAGE> 9

RISK FACTORS

An investment in the Units 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 Units 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 loan agreements
with its bank lender (the "Credit Facility"), 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 Credit Facility, all available cash generally is
applied to reduce outstanding borrowings. As of September 30, 1998, the Company
had approximately $5.2 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 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
and American MRO programs. The Company acquired SSI and Pelican in the second
quarter of 1997, Tri-Electric in the first quarter of 1998 and Lucky and Smith
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

8
<PAGE> 10

SSI, Pelican, Tri-Electric Lucky and Smith 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 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 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. See "Business--Suppliers".

CONTROL BY MANAGEMENT

Following the Offering, directors and officers of the Company will own
beneficially an aggregate of approximately 57.7% of the outstanding Common Stock
(52.5% if the Underwriters' overallotment option is exercised in full).
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. See "Security Ownership of Management, Principal Shareholders and
Selling Shareholders".

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 4,164,773 shares of Common

9
<PAGE> 11

Stock to be outstanding after the Offering, the Company estimates that 1,540,139
shares will be freely tradable without restriction. In addition, the 1,700,000
shares of Common Stock forming a part of the Units will be freely tradable
following the Separation Date. In connection with the Offering, officers and
directors and certain shareholders of the Company including the Selling
Shareholders, who will hold an aggregate of 2,679,871 shares (2,509,871 if the
over-allotment option is exercised in full) of Common Stock and 1,247,500 shares
(1,162,500 if the over-allotment option is exercised in full) of Common Stock
issuable upon the exercise of options and 420,000 shares of Common Stock
issuable upon conversion of 15,000 shares of the Company's Series B Convertible
Preferred Stock 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 two years after the date of this
Prospectus without the prior written consent of J.P. Turner & Company, L.L.C. on
behalf of the Underwriters or in the event the Company achieves certain
performance-related goals.

IMMEDIATE AND SUBSTANTIAL DILUTION

Because the offering price will be substantially higher than the book value
per share of the Common Stock, purchasers of Units in the Offering will incur
immediate and substantial dilution of $6.38 per Unit, or 68.9% of the public
offering price. In addition, investors purchasing Units in the Offering will
incur additional dilution to the extent that outstanding stock options are
exercised. See "Dilution".

LIMITATION ON ABILITY TO PAY DIVIDENDS

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 20% 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".

NO PRIOR PUBLIC MARKET FOR UNITS AND WARRANTS; LIMITED PUBLIC MARKET FOR COMMON
STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Units or the
Warrants. Although the Company intends to apply for listing of the Units and the
Warrants (for trading after the Separation Date) on the Nasdaq National Market,
there can be no assurance that an active trading market will develop or continue
upon completion of the Offering. The initial public offering price of the Units
will be determined by negotiations between the Company and representatives of
the underwriters and may not be indicative of the market price of the Units
after the Offering.

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

10
<PAGE> 12

competitors, 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, the Units and, when separable, the Warrants 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.

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 is in the
process of assessing its state of readiness for the Year 2000 and expects its
software to be Year 2000 compliant upon completion of the upgrading of its
software. Additionally, the Company is in the process of communicating 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 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and 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 1,700,000 Units
offered by the Company hereby are estimated to be approximately $13.4 million
($13.7 million, if the Underwriters' over-allotment option is exercised in
full), based on an assumed public offering price of $9.25 per Unit and after
deducting the estimated underwriting discount and offering expenses payable by
the Company. In the event the Underwriters exercise the over-allotment option,
the Company will receive only the portion of the proceeds related to the
Warrants ($1.25 per Warrant) from the sale of Units by the Selling Shareholders.
The portion of the proceeds

11
<PAGE> 13

related to the shares of Common Stock ($8.00 per share) from the sale of the
Units by the Selling Shareholders will be for the account of the Selling
Shareholders.

The Company anticipates that it will use the net proceeds of the Offering
to repay an aggregate of approximately $13.4 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) $5.3 million incurred in
June 1998 in connection with the cash component of the acquisitions of Lucky and
Smith and (iv) $2.2 million incurred in connection with capital expenditures and
the purchase of real property to be used as the Company's corporate
headquarters. Amounts borrowed under the Credit Facility bear interest at an
annual rate ranging from LIBOR plus 1.50% to LIBOR plus 3.0% (approximately
7.64% at September 30, 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 and in the event the Underwriters' over-allotment is exercised in full,
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 $289,000 owed to the Company. See "Security Ownership of
Management, Principal Shareholders and Selling Shareholders" and "Certain
Transactions".

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.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
Fourth Quarter (Beginning December 27, 1996)(1)(2)........ $15 $14
1997
First Quarter(1)(2)....................................... 16 9
Second Quarter(1)(2)...................................... 13 1/2 10 1/2
Third Quarter(2).......................................... 14 12
Fourth Quarter(2)......................................... 12 1/2 10
1998
First Quarter(2).......................................... 12 10
Second Quarter(2)......................................... 10 1/2 8
Third Quarter(2).......................................... 11 7
Fourth Quarter (through December 1, 1998)................. 8 1/2 6 7/8
</TABLE>

- ---------------

(1) Restated to give effect to a two-to-one stock split of the Common Stock that
was effected May 12, 1997.

(2) Restated to give effect to a two-to-one stock split of the Common Stock that
was effected July 17, 1998.

On December 1, 1998, the closing sales price of the Common Stock was $6 7/8
per share. On December 1, there were 149 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 Credit Facility
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
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1998, and, as adjusted, to reflect the issuance of the 1,700,000
Units offered by the Company hereby and the application of the proceeds
therefrom (assuming an offering price of $9.25 per Unit). 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".

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 3,115 $ 3,115
======= =======
Long-term debt, less current portion........................ $44,327 $30,932
------- -------
Equity subject to redemption................................ 2,075 2,075
Shareholders' equity:
Series A preferred stock.................................... 2 2
Series B convertible preferred stock........................ 18 18
Common Stock, $.01 par value(1)(2).......................... 40 57
Paid-in capital........................................... 908 14,286
Retained earnings........................................... 15,340 15,340
------- -------
16,308 29,703
Less Treasury stock, 374 shares Series A preferred, 2,700
shares Series B preferred, and 30,436 shares common
stock..................................................... (781) (781)
------- -------
Total shareholders' equity........................... 15,527 28,922
------- -------
Total capitalization.............................. $65,044 $65,044
======= =======
</TABLE>

- ---------------

(1) Assumes no exercise of the Warrants or the Underwriters Warrants.

(2) Excludes 1,443,000 shares of Common Stock issuable upon exercise of
outstanding options and warrants and an additional 42,500 shares reserved
for issuance pursuant to the LTIP. See "Management -- Benefit Plans".

13
<PAGE> 15

DILUTION

At September 30, 1998, the net tangible book value of the Company
attributable to common shareholders was $4.6 million, or $1.01 per share. The
number of shares used for the per share calculation includes the 4,164,773
shares outstanding prior to the Offering and the common stock equivalent of
15,000 shares of Series B Convertible Preferred Stock convertible into 420,000
shares of common stock. After giving effect to the sale by the Company of
1,700,000 Units offered hereby and the receipt by the Company of an estimated
$13.4 million of net proceeds from the Offering (based on an assumed offering
price of $9.25 per Unit, $8.00 of which is attributable to the Common Stock and
$1.25 of which is attributable to the Warrant included in the Unit, and net of
underwriting discounts and estimated expenses of the Offering), pro forma net
tangible book value of the Company at September 30, 1998 would have been $2.87
per share. This represents an immediate increase in pro forma net tangible book
value of $1.86 per share to the existing shareholders and an immediate dilution
of $6.38 per Unit to the new investors purchasing Units in the Offering. The
following table sets forth the per share dilution:

<TABLE>
<S> <C> <C>
Public offering price(1).................................... $9.25
Book value prior to the Offering.......................... $1.01
Increase attributable to new investors.................... 1.86
-----
Pro Forma net tangible book value after the Offering........ 2.87
-----
Dilution in net tangible book value to new investors........ $6.38
=====
</TABLE>

The following table sets forth, on a pro forma basis as of September 30,
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 Units in the Offering (before
deducting underwriting discounts and commissions and estimated offering
expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 4,584,773 72.9% $ 4,626,000 22.7% $ 1.01
New investors(1)................ 1,700,000 27.1 15,725,000 77.3% $ 9.25
--------- ----- ----------- -----
Total................. 6,284,773 100.0% $20,351,000 100.0%
========= ===== =========== =====
</TABLE>

The foregoing computations assume no exercise of outstanding stock options
granted previously under the Company's LTIP, any non-qualified options
previously granted, Warrants and Underwriters Warrants.

- ---------------

(1) Includes the portion of the purchase price of the Units attributable to the
Warrants ($1.25 per Warrant), but excludes shares of Common Stock issuable
upon exercise of the Warrants and the Underwriters Warrants.

14
<PAGE> 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 nine months ended September 30, 1997 and 1998 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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------- NINE MONTHS ENDED
SEPCO DXP SEPTEMBER 30,
----------------------------- ------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS DATA:
Revenues...................... $99,353 $102,592 $111,328 $125,208 $169,667 $118,277 $153,886
Gross profit(1)............... 26,792 27,217 29,157 32,117 44,880 31,571 40,381
Operating income(1)........... 3,288 4,150 4,598 2,785 6,434 3,929 6,623
Income before provision for
income taxes, minority
interest and change in
accounting principle........ 2,346 3,038 3,512 1,635 4,670 2,950 4,583
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 1,880 2,750
Preferred stock dividend...... -- -- (23) (119) (103) (109) (69)
Net income attributable to
common shareholders......... 1,843 1,862 2,065 771 2,665 1,771 2,681
Basic earnings per common
share....................... $ 0.38 $ 0.38 $ 0.54 $ 0.19 $ 0.65 $ 0.44 $ 0.64
Common shares
outstanding(5).............. 4,878 4,878 3,837 3,997 4,082 4,044 4,168
Dilutive earnings per share... $ 0.35 $ 0.35 $ 0.46 $ 0.18 $ 0.49 $ 0.34 $ 0.49
Common and common equivalent
shares outstanding(4)(5).... 5,225 5,370 4,501 4,857 5,703 5,596 5,630
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SEPCO DXP SEPTEMBER 30,
----------------------------- ------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $18,402 $ 20,011 $ 23,967 $ 25,612 $ 36,262 $36,262 $39,909
Total assets.................... 38,686 38,163 43,254 45,042 67,636 67,636 83,619
Long-term debt obligations...... 20,766 18,461 21,275 22,300 33,395 33,395 44,327
Shareholders' equity(4)......... 6,453 8,315 9,688 10,459 13,031 13,031 15,527
</TABLE>

- ---------------

(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
<PAGE> 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 that became effective May 12,
1997 and another two-to-one reverse stock split that became effective July
17, 1998.

16
<PAGE> 18

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. 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 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 16 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 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, and there can be no
assurance that any such financing 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

17
<PAGE> 19

into SEPCO and (ii) a merger of a wholly owned subsidiary of the Company with
and into Newman Communications Corporation ("Newman").

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 Exchange Act 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.

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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
-------------------------------- ENDED
SEPCO DXP SEPTEMBER 30,
-------------------- -------- -------------
1995 1996 1997 1998
-------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Fluid handling equipment.................... $ 61,630 $ 65,709 $ 75,472 $ 57,934
Bearings and power transmission equipment... 39,500 49,144 53,180 40,651
General mill and safety supplies(1)......... -- -- 31,660 38,120
Pipe, valve and fittings.................... 10,198 10,355 9,355 7,104
Electrical products(2)...................... -- -- -- 10,078
-------- -------- -------- --------
Total revenues.................... $111,328 $125,208 $169,667 $153,886
Percent of Revenues:
Cost of sales............................... 73.8% 74.3% 73.5% 73.8%
Gross profit................................ 26.2 25.7 26.5 26.2
Selling, general and administrative
expense................................... 22.1 23.5 22.7 21.9
Operating income............................ 4.1 2.2 3.8 4.3
Other income................................ .8 .8 .5 .5
Interest expense, net....................... 1.8 1.7 1.6 1.8
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%
======== ======== ======== ========
</TABLE>

- ---------------

(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 acquisitions of Tri-Electric
and Lucky in the first six months of 1998.

18
<PAGE> 20

Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997

Revenues for the nine months ended September 30, 1998 increased 30.1% to
$153.9 million from the nine months ended September 30, 1997. The Company's
acquisitions, which included general mill and safety supply and electrical
supply companies, during the period accounted for $32.8 million of the $35.6
million increase in revenues. Sales of bearings and power transmission equipment
for the nine months ended September 30, 1998 increased 3.5%, or $1.4 million
over the comparable period in 1997, accounting for 1.2% of the revenue increase.
Sales of valve and valve automation equipment increased 15.2%, or $.9 million
over the comparable period in 1997, accounting for .8% of the revenue increase.
During the nine months ended September 30, 1998, sales of fluid handling
equipment remained consistent over the comparable period in 1997. A comparison
of general mill and safety supplies and electrical supplies is not presented due
to the fact that the product categories did not exist during the entire
comparative prior period.

Gross margins remained relatively consistent in the first nine months of
1998 as compared to 1997. The Company currently expects some increase in
manufacturers prices to continue due to increased raw material costs and 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 expenses decreased as a percentage of
revenues by 1.4% for the first nine months of 1998 as compared to the first nine
months of 1997, due primarily to an effort to maintain or reduce operating
expenses where possible.

Operating income for the nine month period ended September 30, 1998
increased 68.6% from the corresponding period in 1997, from $3.9 million to $6.6
million, due to the various factors discussed above.

Interest expense during the first nine months of 1998 increased by $.78
million to $2.7 million as compared to the first nine months of 1997. The
increase was primarily due to greater interest expense resulting from the
financing of two acquisitions during the second quarter of 1997, a third during
the first quarter of 1998, two acquisitions during the second quarter of 1998
and the purchase of real property to be used as the Company's corporate
headquarters. Average interest rates were slightly lower during the nine months
ended September 30, 1998 as compared to the same period in 1997.

The Company's provision for income taxes for the nine months ended
September 30, 1998 increased by $.76 million compared to the same period of
1997, as a result of the increase in profits.

Net income for the nine month period ended September 30, 1998, increased
$.87 million from the nine month period ended September 30, 1997 due to the
increase in revenue volume and the decrease in 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

19
<PAGE> 21

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.

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
20
<PAGE> 22

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.

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

General

Under the Company's loan agreements with its bank lender (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 the Credit Facility for working capital. The Company had
$5.2 million available for borrowings under the working capital component of the
Credit Facility at September 30, 1998. Working capital at September 30, 1998 and
December 31, 1997 was $39.9 million and $36.3 million, respectively. During the
first nine months of 1998 and the year ended December 31, 1997, the Company
collected its trade receivables in approximately 50 and 46 days, respectively,
and turned its inventory approximately four times on an annualized basis.

In the second and again in the fourth quarter of 1998, the Company amended
the Credit Facility, which currently provides for borrowings up to an aggregate
of $50.0 million. Additionally, the amendments increased borrowings under the
term loan component of the Credit Facility from $4.9 million to $12.4 million
upon conversion of $5.0 million of the amounts outstanding under the revolving
loan component to the term loan and added an additional $2.5 million term loan
to be used for the purchase and renovation of real property to serve as the
Company's corporate headquarters. To date, $1.7 million has been advanced under
the real property term loan component. The Credit Facility, as amended, 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 and lender approval is obtained. To date, $3.5 million has been
advanced under the acquisition term loan component. Additionally, interest rates
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. At September 30, 1998, the Company had borrowings under
the Credit Facility of $20.1 million at LIBOR plus 2.00 (approximately 7.64% at
September 30, 1998). The remainder of the Company's borrowings under the Credit
Facility bear interest at prime (8.25% at September 30, 1998) for a weighted
average interest rate of 7.95%. Borrowings under the Credit Facility are secured
by receivables, inventory, and machinery and equipment and mature January 2000.
The Credit 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.

The Company generated cash from operating activities of $4.9 million in the
first nine months of 1998 as compared to $2.1 million utilized during the first
nine months of 1997, due primarily to increased earnings and a decrease in the
Company's trade accounts receivable balance.

The Company had capital expenditures of approximately $2.5 million in the
first nine months of 1998 as compared to $.65 million during the same period of
1997. Capital expenditures in 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

21
<PAGE> 23

for the Company's management and administrative group as well as other office,
computer and communication equipment. Capital expenditures for the first nine
months of 1997 were predominantly for the expansion of a facility in LaPorte,
Texas ($.14 million) and computers and related equipment ($.13 million).

During the first nine months of 1998, in three separate transactions, the
Company completed the acquisition of substantially all of the assets of three
unaffiliated businesses for an aggregate consideration consisting of
approximately $11.9 million in cash, $2.3 million of assumed trade payables and
other accrued expenses, $.7 million in a promissory note and up to approximately
$.28 million in a deferred payment (based on the earnings before interest, taxes
and depreciation of one of the acquired businesses). The cash portion of the
consideration was financed through the acquisition term loan under the Credit
Facility. An aggregate of $7.2 million of goodwill was recorded in connection
with these acquisitions, which may be adjusted based on any adjustments to the
purchase prices. The Company believes that any such adjustments would be
minimal.

The Company believes that cash generated from operations and available
under its Credit Facility, together with the proceeds of the Offering, 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 future funding will be available to
the Company or, if available, as to the terms and conditions 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.

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 a comprehensive, 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.
The Company is in the process of developing a questionnaire to implement phase
(3) of its Year 2000 program. 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. To the extent 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 results of operations and financial condition. With
respect to phase (4), the Company currently expects that its software will be
Year 2000 compliant by the end of the first quarter of 1999. The upgrading of
the Company's software to address Year 2000 issues is being handled through new
releases of current software. The Company will continue to analyze systems and
services that utilize date embedded codes that may experience operational
problems when the Year 2000 is reached. The Company expects to begin phase (5)
in the second quarter of 1999. All costs associated with Year 2000 issues will
be included as part of normal software upgrades or operating costs, as
appropriate.

22
<PAGE> 24

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.

ACCOUNTING PRONOUNCEMENTS

During 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.

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 stated earnings per share data in this Prospectus. 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 this statement is not
expected to materially impact the Company. The Company plans to adopt this
statement for the year ending December 31, 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.

23
<PAGE> 25

BUSINESS
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
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 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.

Since current management acquired control of the Company in 1986, the
Company has grown substantially through 14 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,
general mill and safety supplies and electrical product 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 1997 sales as reported by industry sources, the
Company was the 37th 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 acquisitions of Tri-Electric, Lucky and Smith, the
Company would have been the 30th 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 16% of the total United States market during 1997. 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

24
<PAGE> 26

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:

Customized Integrated Service. As industrial customers focus on their core
manufacturing or other production competencies, they increasingly are demanding
customized integration services, ranging from value-added traditional
distribution to integrated supply and system design, fabrication, installation
and repair and maintenance services.

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 and operating margin.

The Company's key strategies are:

25
<PAGE> 27

acquisitions are assimilated, additional opportunities should arise to increase
sales to the customers of the 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.

RECENT ACQUISITIONS

The Company completed two strategic acquisitions in 1997, and three
additional acquisitions in the first six months of 1998 with combined 1997
revenues of approximately $87.3 million (of which $31.7 million appeared in the
Company's 1997 consolidated financial statements) directed at expanding its
product lines and increasing its geographic presence. Through the Company's
acquisition 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 six months of 1998, the
Company completed the acquisitions of the assets of Tri-Electric and Lucky,
thereby adding electrical products to its product offerings. The Company's
acquisition of the assets of Smith in May 1998 expanded its pump distribution
capabilities in East Texas.

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
26
<PAGE> 28

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 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 the
sales efforts of approximately 300 employees 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
38% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and the nine months ended September 30, 1998 respectively. Such sales accounted
for 37% and 38% of the Company's revenues for the year ended December 31, 1997
and the nine months ended, September 30, 1998, respectively, on a pro forma
basis after giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith
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
26% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and the nine months ended September 30, 1998, respectively. Such sales accounted
for 24% and 25% of the Company's revenues for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively, on a pro forma basis
after giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith
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 26% of the Company's revenue on a pro forma basis for the year
ended December 31, 1997 and 24% of the Company's revenue for the nine months
ended September 30, 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 the nine months ended September 30, 1998, respectively. Such sales
accounted for 4% and 4% of the Company's revenue for the year ended December 31,
1997 and the nine months ended September 30, 1998, respectively, on a pro forma
basis after giving effect to the SSI, Pelican, Tri-Electric, Lucky and Smith
acquisitions.

27
<PAGE> 29

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 7% of the Company's
revenues for the nine months ended September 30, 1998. Such sales accounted for
9% of the Company's revenues for the year ended December 31, 1997 and the nine
months ended September 30, 1998, on a pro forma basis after giving effect to the
SSI, Pelican, Tri-Electric, Lucky and Smith 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 leased 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 revenues for the year
ended December 31, 1997.

SALES AND MARKETING

Approximately 300 employees, serving in various capacities ranging from
branch or operations managers (46), outside sales representatives (92) and
direct sales representatives (162) support the Company's marketing and sales
efforts. The Company's branch and operations managers support the sales efforts
through direct customer contact and manage the efforts of the outside and 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. As the
Company expands its product lines and geographical presence, it assesses the
opportunities and appropriate timing of introducing existing products to new
customers and new products to existing customers. Prior to implementing such
cross selling efforts, the Company must provide appropriate sales training and
product expertise to its sales force.

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.

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<PAGE> 30

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 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
29
<PAGE> 31

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 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 September 30, 1998, the Company had 708 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, Georgia, Idaho, Louisiana, Montana,
Nevada, New Mexico, North Dakota, Oklahoma, Tennessee, 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.

LEGAL PROCEEDINGS

From time to time the Company is a party to various legal proceedings
arising in the ordinary course of its business. The Company believes that the
outcome of any of these proceedings will not have a material adverse effect on
its business, financial condition or results of operations.

30
<PAGE> 32

MANAGEMENT

The following table sets forth certain information as of November 30, 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.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
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
Richard A. Fortune................ 51 Senior Vice President/Information Technology
Jerry J. Jones.................... 59 Senior Vice President/Operations and Director
Dan L. Rice....................... 39 Senior Vice President/Marketing
Bryan H. Wimberly................. 59 Senior Vice President/Corporate Development
Cletus Davis...................... 67 Director
Kenneth H. Miller................. 58 Director
Thomas V. Orr..................... 48 Director
</TABLE>

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.

Richard A. Fortune was elected Senior Vice President/Information Technology
in October 1998. Mr. Fortune served as project manager for Wang Global Systems,
Inc., a high technology services company, from March 1993 to October 1998.

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.

Dan L. Rice was elected Senior Vice President/Marketing in September 1998
after having served as the head of DXP's marketing since July 1998. From June
1996 through June 1998, Mr. Rice served as general manager of Rockwell
Automation de Mexico, S.A. de C.V., a diversified electronics manufacturing
company. Prior to that, from March 1992 to May 1996, he was global account
director for Rockwell Automation, Inc., U.S.A., a diversified electronics
manufacturing company.

Bryan H. Wimberly has served 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.
From July 1996 to July 1998, Mr. Wimberly was a Director of the Company. Mr.
Wimberly has also served as a Director of SEPCO since 1987 and the President and
Chief

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<PAGE> 33

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.

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, 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 acts as the administrative committee for
any stock-based plan of the Company.

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<PAGE> 34

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

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
--------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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 -- --
</TABLE>

- ---------------

(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.

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

<TABLE>
<CAPTION>
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
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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 --
</TABLE>

- ---------------

(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 that was effected on July 17, 1998).

EMPLOYMENT AGREEMENTS

The Company 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

33
<PAGE> 35

Agreement) and other perquisites in accordance with 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 or distribution made
to him. As amended on May 21, 1998, the Little Employment Agreement will
terminate June 30, 2001.

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 one-half of one percent of the monthly profit before tax of the
Company, 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
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.

In the event an Employee terminates his employment for "Good Reason" (as
defined therein), or is terminated by the Company for other than "Cause" (as
defined therein), the Employee would receive (i) 12 monthly payments each equal
to one month of the Salary, (ii) a termination bonus equal to the previous 12
monthly bonuses and (iii) any other payments due through the date of
termination. In the event an Employee dies, become disabled, terminates the
Employment Agreement with notice or the Employment Agreement is terminated by
the Company for Cause, the Employee or the 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, 1997, 1996 and
1995. 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

34
<PAGE> 36

certain key employees of the Company and its subsidiaries. The LTIP is
administered by the Compensation Committee.

At September 30, 1998, 42,500 shares of Common Stock (approximately 1% of
the currently outstanding shares of Common Stock) were available for issuance
under the LTIP, and options granted under the LTIP to purchase 107,500 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 of
127,500 shares of Common Stock available under the LTIP, which may be used for
grants other than stock options under the LTIP.

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 September 30,
1998, 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 has made non-interest bearing advances to Mr.
Little that as of November 30, 1998 totaled approximately $420,439. The Company
and Mr. Little have agreed that subsequent to the consummation of the Offering,
the amount of non-interest bearing advances made to Mr. Little will not exceed
the amount outstanding at December 31, 1997, which was $340,439. The largest
aggregate amount of Mr. Little's indebtedness outstanding to the Company during
the year ended December 31, 1997 was approximately $638,152. If the Underwriters
over-allotment option is exercised in full, Mr. Little, a Selling Shareholder,
will sell 85,000 shares of Common Stock in the Offering and intends to apply a
portion of the net proceeds therefrom to repay approximately $289,000 owed to
the Company.

In November 1998, the Company loaned Gary Allcorn, Senior Vice
President/Finance and Chief Financial Officer, $17,500. This loan bears interest
at an annual rate equal to 8% and matures in November 1999.

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.

35
<PAGE> 37

SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL SHAREHOLDERS
AND SELLING SHAREHOLDERS

The following table sets forth information as of November 30, 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.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2)
-------------------------------------------------------------------
COMMON STOCK COMMON STOCK
PRIOR TO SUBSEQUENT TO
SERIES A THE OFFERING NUMBER THE OFFERING
PREFERRED ---------------- OF SHARES ----------------
BENEFICIAL OWNER(1) STOCK % NUMBER % TO BE SOLD NUMBER %
------------------- --------- ---- --------- ---- ---------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gary A. Allcorn(3)............................ -- -- 2,247,686 48.8 2,247,686 35.6
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
David R. Little(4)............................ -- -- 1,080,538 21.8 -- 1,080,538 16.2
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Bryan H. Wimberly(5).......................... -- -- 418,885 9.9 -- 418,885 7.1
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Jerry J. Jones(6)............................. -- -- 360,348 8.0 -- 360,348 5.8
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
SEPCO Industries, Inc......................... 1,870 62.5 938,021 22.5 -- 938,021 16.0
Employee Stock Ownership Plan
c/o River Oaks Trust Company, Trustee
2001 Kirby
Houston, Texas 77210
J. Michael Wappler(7)......................... -- -- 220,414 5.3 -- 220,414 3.8
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Donald E. Tefertiller(8)...................... 374 12.5 46,765 1.1 -- 46,765 *
4425 Congressional Drive
Corpus Christi, Texas 78413
Norman O. Schenk(9)........................... 374 12.5 40,217 * -- 40,217 *
4415 Waynesboro
Houston, Texas 77035
Charles E. Jacob(10).......................... 187 6.3 24,103 * -- 24,103 *
P. O. Box 57
Maypearl, Texas 76064
Ernest E. Herbert(11)......................... 187 6.3 23,857 * -- 23,857 *
57 Coronado Avenue
Kenner, Louisiana
Thomas V. Orr, Director(12)................... -- -- 6,500 * -- 6,500 *
Kenneth H. Miller, Director(13)............... -- -- 6,500 * -- 6,500 *
Cletus Davis, Director(14).................... -- -- 6,500 * -- 6,500 *
All executive officers and directors as a
group (10 persons)(15)...................... -- -- 4,347,371 74.5 4,347,371 57.7
</TABLE>

- ---------------

* Less than 1%.

36
<PAGE> 38

(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 420,000 shares of Common
Stock issuable upon conversion of 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. Also includes 20,000 shares of Common Stock issuable
upon exercise of an option and 7,690 shares of Common Stock held of record
by the ESOP for Mr. Allcorn's account.

(4) Includes 800,000 shares of Common Stock issuable to Mr. Little upon
exercise of an option and 41,313 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 85,000 shares of Common
Stock, in which event the "Number" and "%" of "Common Stock Subsequent to
Offering" would be 995,538 and 14.2%, respectively.

(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
9,285 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 85,000 shares of Common Stock, in which event the
"Number" and "%" of "Common Stock Subsequent to Offering" would be 333,885
and 5.3%, respectively.

(6) Includes 359,200 shares of Common Stock issuable upon exercise of an option
granted to Mr. Jones and 1,148 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 85,000 shares of Common Stock, in
which event the "Number" and "%" of "Common Stock Subsequent to Offering"
would be 275,348 and 4.2%, respectively.

(7) Includes 8,064 shares of Common Stock held of record by the ESOP for Mr.
Wappler's account.

(8) Includes 4,000 shares of Common Stock issuable upon exercise of an option
and 11,965 shares of Common Stock held of record by the ESOP for Mr.
Tefertiller's account.

(9) Includes 9,417 shares of Common Stock held of record by the ESOP for Mr.
Schenk's account.

(10) Includes 8,503 shares of Common Stock held of record by the ESOP for Mr.
Jacob's account.

(11) Includes 12,107 shares of Common Stock held of record by the ESOP for Mr.
Herbert's account.

(12) Includes 6,500 shares of Common Stock issuable upon exercise of an option.

(13) Includes 6,500 shares of Common Stock issuable upon exercise of an option.

(14) Includes 6,500 shares of Common Stock issuable upon exercise of an option.

(15) See notes (3) through (6) and (12) through (14).

INFORMATION REGARDING SELLING SHAREHOLDERS

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 $400,439 as of
June 30, 1998. 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".

37
<PAGE> 39

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 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. From July 1996 to July 1998, Mr. Wimberly was a Director of the Company.
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".

38
<PAGE> 40

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 authorized capital stock of 110,000,000 shares, 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 have been designated Series B Convertible Preferred Stock. As
of November 30, 1998, there were 4,164,773 shares of Common Stock, 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 149 holders of record of Common
Stock.

UNITS

The Units comprise one share of Common Stock and one Warrant. The
components of the Units are separable on the Separation Date.

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 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.

WARRANTS

Each Warrant entitles its holder to purchase one share of Common Stock at
an exercise price of $11.00 per share, subject to adjustment in certain
circumstances, for a period of three years commencing on the date of this
Prospectus.

The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Representative and American Stock Transfer &
Trust Company, the warrant agent, and will be evidenced by warrant certificates
in registered form.

The exercise price of the Warrants and the number and kind of Common Stock
or other securities and property issuable upon the exercise of the Warrants are
subject to adjustment in certain circumstances, including a stock split of,
stock dividend on, or a subdivision, combination or capitalization of the Common
Stock and for any issuance of Common Stock for less than the lesser of the
market price of a share of

39
<PAGE> 41

Common Stock or the exercise price of the Warrants. Additionally, an adjustment
will be made upon the sale of all or substantially all of the assets of the
Company in order to enable holders of Warrants to purchase the kind and number
of shares or other securities or property (including cash) receivable in such
event by a holder of the number of shares of Common Stock that might otherwise
have been purchased upon exercise of the Warrants.

The Warrants do not confer upon the holder any voting or other rights of a
shareholder of the Company. Upon notice to the holders of the Warrants, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.

Warrants may be exercised upon surrender of the warrant certificate
evidencing those Warrants on or prior to the respective expiration date (or
earlier redemption date) of the Warrants at the offices of the warrant agent,
with the form of "Election to Purchase" on the reverse side of the warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified check payable to the order of the warrant
agent) for the number of the Warrants being exercised.

No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
Common Stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The Company has undertaken to use
Commercially reasonable efforts to maintain a current prospectus relating to the
issuance of shares of Common Stock upon the exercise of the Warrants until the
expiration of the Warrants, subject to the terms of the Warrant Agreement. While
it is the Company's intention to maintain a current prospectus, there is no
assurance that it will be able to do so.

No fractional shares will be issued upon exercise of the Warrants. However,
if a holder of a Warrant exercises all Warrants then owned of record, the
Company will pay to that holder, in lieu of the issuance of any fractional share
which would be otherwise issuable, an amount in cash equal to such fractional
interest based on the market value of the Common Stock on the last trading day
prior to the exercise date.

The Warrants are redeemable by the Company commencing eighteen months after
the date of this Prospectus (or sooner with the consent of the Representative)
at a redemption price of $0.25 per Warrant on not less than 30 days written
notice, provided that the last sale price per share of Common Stock, for 30
consecutive trading days ending on the third business day prior to the date of
redemption notice, is at least $15.00 (subject to adjustment for certain
events). The Warrants shall be exercisable until the close of the business day
preceding the date fixed for redemption. In addition, subject to the rules of
the NASD, the Company has agreed to engage the Representative as its exclusive
warrant solicitation agent, in connection with which the Representative would be
entitled to a 5% fee upon exercise of the Warrants (or $.055 per Warrant). See
"Underwriting."

PREFERRED STOCK

Dividends. The holders of shares of Series A Preferred Stock are not as a
matter of right 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 are not
be entitled to receive any other dividends or distributions.

40
<PAGE> 42

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 are 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
are entitled to receive $100 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 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 convert each such share into 28 shares of
Common Stock. The holders are entitled to exercise the conversion right at any
time after a 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 conversion 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 to the Company or
its transfer agent the certificate or certificates for the shares to be
converted, duly endorsed to the Company.

Conversion. No holder of Series A Preferred Stock has 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 conversion
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 must 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 certificates.

Voting. Each share of Series A Preferred Stock and each share of Series B
Convertible Preferred Stock entitles 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 CHARTER,
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 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
41
<PAGE> 43

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 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 ("AST"). The Company intends to
appoint AST as transfer agent for the Units and as warrant agent for the
Warrants.

42
<PAGE> 44

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Shareholders and
the Underwriters named below (the "Underwriters"), for whom J.P. Turner &
Company, L.L.C. is acting as Representative, the Underwriters have severally
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, on a firm commitment basis, the respective number of Units set
forth below opposite each such Underwriter's name:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
<S> <C>
J.P. Turner & Company, L.L.C................................
---------
Total....................................................... 1,700,000
=========
</TABLE>

The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering prices set forth on the cover page of
this Prospectus and that they may allow to selected dealers who are members of
the NASD, concessions of not in excess of $ per Unit, of which not more
than $ per Unit may be reallowed to certain other dealers who are members
of the NASD. After the initial public offering, the public offering prices,
concessions and reallowances may be changed.

The Underwriting Agreement further provides that the Underwriters will
receive a non-accountable expense allowance of 2% of the aggregate public
offering price of the Units sold hereunder (including any Units sold pursuant to
the over-allotment option), which allowance amounts to $314,500 (or $361,675 if
the over-allotment option is exercised in full), of which $25,000 has been paid
to date.

The Company and the Selling Shareholders have granted to the Underwriters
an option exercisable for a period of 45 days after the Closing, to purchase up
to an aggregate 255,000 additional Units (up to 15% of the Units being offered
hereby) at the public offering price, less underwriting discounts and
commissions, solely to cover over-allotments, if any. The Units to be offered
pursuant to the over-allotment option consist of shares of Common Stock owned by
the Selling Shareholders and Warrants being offered by the Company.

The Representative has informed the Company that the Underwriters will not
make sales of the Units offered by this Prospectus to accounts over which they
exercise discretionary authority.

The Company has agreed to sell to the Underwriters for nominal
consideration, the Underwriters Warrant to purchase up to 170,000 Units. On the
Separation Date, the Underwriters Warrant will become exercisable for the
purchase of 170,000 shares of Common Stock at a per share exercise price of
$11.20 or 170,000 Warrants at a per Warrant exercise price of $1.75 or for both.
The Underwriters Warrant will be nonexercisable for one year after the date of
this Prospectus. Thereafter, for a period of four years, the Underwriters
Warrant will be exercisable to purchase Units at $12.95 per Unit (140% of the
initial public offering price), and the Warrants contained in Units issuable
upon the exercise of the Underwriters Warrants will be exercisable to purchase
Common Stock at $11.00 per share. The Underwriters Warrants will be restricted
from sale, transfer, assignment, pledge or hypothecation for a period of one
year from the effective date of the Offering except to officers and partners
(not directors) of the Underwriters' and members of the selling group. The
Company has agreed to file, during the four year period beginning one year from
the Effective Date of this Prospectus, on one occasion at the Company's cost, at
the request of the holders of at least 80% of the Underwriters' Warrants and the
underlying securities, and to use commercially reasonable efforts to cause to
become effective, a post-effective amendment to the Registration Statement or a
new registration statement under the Securities Act, as required, to permit the
public sale of the Units issued or issuable upon exercise of the Underwriters
Warrants, as well as the Common Stock and Warrants issuable upon separation of
the Units, or the Common Stock issuable upon the exercise of the Warrants
contained in the Units and issuable upon exercise of the Underwriters Warrants.
In addition, the Company has agreed to give advance notice to holders of the
Underwriters Warrants of its intention to file certain registration statements
commencing one year and ending five years after the Effective Date and, in such
case, holders of such Underwriters Warrants or underlying Warrants or shares of
Common Stock shall have the right to

43
<PAGE> 45

require the Company to include all or part of such Units, Warrants or shares of
Common Stock underlying such Underwriters Warrants in such registration
statement at the Company's expense.

For the life of the Underwriters Warrant, the holders thereof are given, at
nominal costs, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
shareholders. Further, the holders may be expected to exercise the Underwriters
Warrants at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriters
Warrants.

The Company has agreed to retain the Underwriters as the Company's
financial consultants for a period of 25 months to commence on the closing of
this Offering, at a monthly fee of $4,000, or an aggregate of $100,000, all of
which shall be payable in advance on the closing of the Offering. Pursuant to
this agreement, the Underwriters shall provide advisory services related to
merger and acquisition activity, corporate finance and other matters.

The public offering price of the Units offered hereby has been determined
by negotiation between the Company and the Representative. Factors considered in
determining the offering price of the Units offered hereby included the current
market price of the Company's Common Stock as quoted on the Nasdaq National
Market, the spread between the bid and ask prices of such Common Stock, the
business in which the Company is engaged, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets and the demand for similar securities of comparable companies.

The Company has agreed, for a period of two years from the date of this
Prospectus, not to issue any shares of Common Stock, Warrants or any options or
other rights to purchase Common Stock without the prior written consent of the
Representative. Notwithstanding the foregoing, the Company may issue up to
shares upon exercise or conversion of any options under the LTIP
whether or not currently outstanding. In addition, each of the Company's
shareholders who is an officer or director has agreed not to publicly sell or
otherwise dispose or any of their Common Stock for a period of two years
following the Effective Date without the consent of the Representative, which
consent would be subject to the nature of the market for the Company's
securities, the volume and price of the Common Stock, and the operations and
financial condition of the Company.

In connection with the Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Units. Such transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Units for
the purpose of stabilizing their respective market prices. The Underwriters also
may create a short position for the account of the Underwriters by selling more
Units in connection with the Offering than they are committed to purchase from
the Company, and in such case may purchase Units in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position by
exercising the over-allotment option. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Units at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken they may be discontinued at any time.

As permitted by Rule 103 under the Exchange Act, 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 on the
Nasdaq National Market until such time, if any, when a stabilizing bid for each
such securities has been made. Rule 103 generally provides that (i) a passive
market maker's net daily purchases of the Units 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.

44
<PAGE> 46

Commencing one year after the date of this Prospectus, the Company will pay
the Underwriters a fee of 5% of the exercise price of each Warrant exercised,
provided (i) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (ii) the
exercise of the Warrant was solicited by a member of the NASD; (iii) the Warrant
was not held in a discretionary account; (iv) the disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Warrant; (v) the solicitation of the exercise of the Warrant was
not a violation of Regulation M promulgated under the Exchange Act; (vi) the
Underwriters provide bona fide services in connection with solicitation of the
Warrant and (vii) the Warrant holder designates in writing which broker-dealer
made the solicitation. The Underwriters and any other soliciting broker-dealers
may be prohibited from engaging in any market-making activities or solicited
brokerage activities with regard to the Company's securities during the periods
prescribed by Regulation M, five business days (or other applicable period as
Regulation M may provide) before the solicitation of the exercise of any Warrant
until the later of the termination of such solicitation activity or the
termination of any right the Underwriters and any other soliciting broker/dealer
may have to receive a fee for the solicitation of the exercise of the Warrants.

The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.

J.P. Turner & Company, L.L.C., the Representative, was organized,
registered as a broker-dealer and operating as of August 12, 1997. The principal
business function of J.P. Turner & Company, L.L.C. in the Offering is to
purchase the Units pursuant to the Underwriting Agreement and to resell such
Units. Since August 12, 1997, J.P. Turner & Company, L.L.C. has co-managed three
public offerings of equity securities and has acted as an underwriter in one
additional public offering of equity securities. J.P. Turner & Company, L.L.C.
has no material relationship with the Company or its controlling persons, except
with respect to its contractual relationship pursuant to the Underwriting
Agreement.

The foregoing is a summary of the material terms of the Underwriting
Agreement, the Underwriters Warrant and the consulting agreement. Reference is
made to the copies of the Underwriting Agreement, the Underwriters Warrant and
the consulting agreement, which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.

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 Greenberg Traurig, P.A., Orlando,
Florida.

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 with respect to the
Units offered by this Prospectus. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all of the information contained in
the

45
<PAGE> 47

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 Units
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 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 Exchange
Act 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.

46
<PAGE> 48

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DXP ENTERPRISES AND SUBSIDIARIES:
Pro Forma Combined Statement 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-26
Audited Financial Statements --
Consolidated Balance Sheets............................... F-27
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit)......................... F-28
Consolidated Statements of Cash Flows..................... F-29
Notes to Consolidated Financial Statements................ F-30
</TABLE>

F-1
<PAGE> 49

DXP ENTERPRISES, INC.

PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
STRATEGIC
DXP SUPPLY PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
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....................... 4,082 4,082
======== ========
Dilutive earnings per share..................... $ .49 $ .38
======== ========
Common and common equivalent shares
outstanding................................... 5,703 5,703
======== ========
</TABLE>

F-2
<PAGE> 50

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

The unaudited pro forma combined statement of operations for the year ended
December 31, 1997 gives 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 statement of
operations assumes all such transactions occurred at the beginning of the period
presented.

The unaudited pro forma combined statement of operations may not be
indicative of the results that would have occurred if the combination had been
in effect on the date indicated or which may occur in the future. The unaudited
pro forma 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
<PAGE> 51

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
<PAGE> 52

DXP ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 53

DXP ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
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 $ .18 $ .49
======== ======== ========
Common and common equivalent shares outstanding............ 4,501 4,857 5,703
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE> 54

DXP ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
REDEEMABLE
SERIES A SERIES B COMMON COMMON PAID-IN TREASURY RETAINED
PREFERRED PREFERRED STOCK STOCK CAPITAL STOCK EARNINGS TOTAL
--------- --------- ---------- ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 15 -- 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
=== === ====== ==== ======= ===== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-7
<PAGE> 55

DXP ENTERPRISES, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-8
<PAGE> 56

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 public 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
<PAGE> 57
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:

<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 736 $ 736
Notes receivable from officers and employees................ 200 200
Long-term debt, including current portion................... 34,856 34,856
</TABLE>

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
<PAGE> 58
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 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. 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
<PAGE> 59
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.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $176,180 $190,754
Net income.................................................. (4,197) 2,182
Basic earnings per share.................................... (1.06) .52
Dilutive earnings per share................................. (.86) .38
</TABLE>

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
<PAGE> 60
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:

<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>

F-13
<PAGE> 61
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:

<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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 $ --
======= =======
</TABLE>

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 (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):

<TABLE>
<S> <C>
1998........................................................ $ 1,461
1999........................................................ 28,714
2000........................................................ 1,382
2001........................................................ 1,385
2002........................................................ 947
Thereafter.................................................. 967
-------
$34,856
=======
</TABLE>

F-14
<PAGE> 62
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ===== ======
</TABLE>

The difference between income taxes computed at the federal statutory
income tax rate and the provision for income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996 1997
------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ==== ======
</TABLE>

The net current and noncurrent components of deferred income taxes are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Net current assets.......................................... $ 511 $ 722
Net noncurrent liabilities.................................. 330 479
----- -----
Net liability (asset)....................................... $(181) $(243)
===== =====
</TABLE>

F-15
<PAGE> 63
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax liabilities and assets were comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
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)
===== =====
</TABLE>

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
<PAGE> 64
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:

<TABLE>
<CAPTION>
OPTION WEIGHTED-AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
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 $ 1.79
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
=========
</TABLE>

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
<PAGE> 65
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.

<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
) (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
</TABLE>

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):

<TABLE>
<S> <C>
1998........................................................ $1,551
1999........................................................ 1,083
2000........................................................ 718
2001........................................................ 310
2002........................................................ 142
Thereafter.................................................. --
------
$3,804
======
</TABLE>

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
<PAGE> 66
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.

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.

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 of up to a
maximum of $275,000, based on the earnings before interest, 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 of the Company 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.
Goodwill may be adjusted based upon the final purchase price; however, it is
anticipated that any such adjustment will be minimal.

F-19
<PAGE> 67

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,102 $ 736
Trade accounts receivable, net of allowance for doubtful
accounts of $1,208 and $476, respectively.............. 26,651 25,707
Inventory 28,957 26,018
Prepaid expenses and other current assets................. 1,624 996
Deferred income taxes..................................... 966 722
------- -------
Total current assets.............................. $60,300 $54,179
Property, plant and equipment, net.......................... 12,139 10,403
Goodwill.................................................... 10,714 2,623
Other assets................................................ 466 431
------- -------
Total assets...................................... $83,619 $67,636
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $15,588 $14,368
Employee compensation..................................... 1,648 1,384
Other accrued liabilities................................. 40 704
Current portion of long-term debt......................... 3,115 1,461
------- -------
Total current liabilities......................... $20,391 $17,917
Long-term debt, less current portion........................ 44,327 33,395
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 560 479
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 15,000
outstanding............................................ 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,210,762 shares issued, of which 4,018,612
shares are outstanding, 140,214 shares are equity
subject to redemption, and 51,936 shares are treasury
stock.................................................. 40 40
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,210,762 shares issued, of which 4,018,612
shares are outstanding, 740,214 shares are equity
subject to redemption, and 51,936 shares are treasury
stock.................................................. 40 40
Paid-in capital........................................... 908 892
Retained earnings......................................... 15,340 12,659
Treasury stock............................................ (781) (580)
------- -------
Total shareholders' equity........................ 15,527 13,031
------- -------
Total liabilities and shareholders' equity........ $83,619 $67,636
======= =======
</TABLE>

See notes to condensed consolidated financial statements.

F-20
<PAGE> 68

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................................ $52,296 $48,806 $153,886 $118,277
Cost of sales........................................ 38,247 36,334 113,505 86,706
------- ------- -------- --------
Gross profit......................................... 14,049 12,472 40,381 31,571
Selling, general and administrative expenses......... 11,940 11,295 33,758 27,642
------- ------- -------- --------
Operating income..................................... 2,109 1,177 6,623 3,929
Other income......................................... 177 86 695 981
Interest expense..................................... (1,041) (793) (2,735) (1,960)
------- ------- -------- --------
Income before income taxes........................... 1,245 470 4,583 2,950
Provision for income taxes........................... 498 182 1,833 1,070
------- ------- -------- --------
Net income........................................... $ 747 $ 288 $ 2,750 $ 1,880
Preferred stock dividend............................. (25) (38) (69) (109)
------- ------- -------- --------
Net income attributable to common shareholders....... $ 722 $ 250 $ 2,681 $ 1,771
======= ======= ======== ========
Basic earnings per common share...................... $ .17 $ .06 $ .64 $ .44
======= ======= ======== ========
Common shares outstanding............................ 4,173 4,044 4,168 4,044
======= ======= ======== ========
Diluted earnings per share........................... $ .13 $ .05 $ .49 $ .34
======= ======= ======== ========
Common and common equivalents shares outstanding..... 5,635 5,596 5,630 5,596
======= ======= ======== ========
</TABLE>

See notes to condensed consolidated financial statements.

F-21
<PAGE> 69

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided(used) by operating activities........... $ 4,918 ($ 2,081)
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply, Ltd. net assets.......... (6,208) --
Purchase of Lucky Electric Supply, Inc. net assets........ (2,206) --
Purchase of Mark W. Smith Equipment, Inc. net assets...... (4,206) --
Purchase of Strategic Supply net assets................... -- (4,118)
Purchase of Pelican State Supply common stock............. (839) (1,070)
Purchase of property and equipment........................ (2,451) (648)
Proceeds from sale of property and equipment.............. 26 --
-------- --------
Net cash used in investing activities..................... (15,884) (5,836)
FINANCING ACTIVITIES:
Proceeds from debt........................................ 168,044 133,488
Principal payments on revolving line of credit, long-term
and Subordinated debt, and notes payable to bank....... (155,458) (125,314)
Proceeds from sales of Corpus Christi facility............ -- 112
Issuance of common stock.................................. 16 --
Acquisition of common stock............................... (201) (580)
Dividends paid............................................ (69) (109)
-------- --------
Net cash provided by financing activities................. 12,332 7,597
-------- --------
INCREASE(DECREASE) IN CASH.................................. 1,366 (320)
CASH AT BEGINNING OF PERIOD................................. 736 876
-------- --------
CASH AT END OF PERIOD....................................... $ 2,102 $ 556
======== ========
</TABLE>

See notes to condensed consolidated financial statements.

F-22
<PAGE> 70

DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 20, 1998, the Board of Directors of DXP Enterprises, Inc., a Texas
corporation ("DXP" or the "Company"), approved an amendment to the Company's
Restated Articles of Incorporation providing for a two-to-one reverse split of
the Company's Common Stock. On July 6, 1998, the Company's shareholders approved
the reverse stock split, which was effected on July 17, 1998. Unless otherwise
noted, the information in this Report has been restated to give effect to the
reverse stock split.

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

The Company was incorporated on July 26, 1996 in the State of Texas. The
Company is a leading provider of maintenance, repair and operating ("MRO")
products, equipment and services, including engineering expertise and logistics
capabilities, 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
to its customers.

NOTE 3: INVENTORY

The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 60 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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.......................................... $29,609 $27,280
Work in process......................................... 3,136 2,276
------- -------
Inventories at FIFO..................................... 32,745 29,556
Less -- LIFO allowance.................................. (3,788) (3,538)
------- -------
Inventories............................................. $28,957 $26,018
======= =======
</TABLE>

F-23
<PAGE> 71

DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: ACQUISITIONS

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 $1.5 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 $0.6 million was recorded in connection with the
acquisition. Goodwill may be adjusted based upon the final purchase price;
however, it is anticipated that any such adjustment will be minimal.

Effective as of 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 $4.2 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.
Goodwill may be adjusted based upon the final purchase price; however, it is
anticipated that any such adjustment will be minimal.

The Company is continuing its evaluation of the acquisitions described in
this Note 4 as they relate 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 these
acquisitions 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 currently has a combined line of credit for $50.0 million with
a bank lender (the "Credit Facility"). In the second and again in the fourth
quarter of 1998, the Company and its lender amended the Credit Facility. The
amendments increased the borrowings under the term loan component of the Credit
Facility from approximately $4.9 million to approximately $12.4 million upon
conversion of $5.0 million of the amounts outstanding under the revolving loan
component to the term loan and added an additional $2.5 million term loan
component to be used for the purchase and renovation of real property to serve
as the Company's corporate headquarters. To date, $1.7 million has been advanced
under the real property term loan component. The Credit Facility, as amended,
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 and the Company obtains lender approval. To date,
$3.5 million has been advanced under the acquisition term loan. Interest rates
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. At September 30, 1998, the Company had borrowings under
the Credit Facility of $20.1 million at LIBOR plus 2.00 (approximately 7.64% at
September 30, 1998). The remainder of the Company's borrowings under the Credit
Facility bear interest at prime (8.25% at September 30, 1998) for a weighted
average interest rate of 7.95%.

F-24
<PAGE> 72
DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Borrowings under the Credit Facility are secured by receivables, inventory,
and machinery and equipment and mature January 2000. An executive officer of the
Company, who is also a shareholder and director of the Company, has personally
guaranteed up to $500,000 of the obligations of the Company under the Credit
Facility. Additionally, certain shares held in trust for this executive
officer's children are pledged to secure borrowings under the Credit Facility.
The borrowings available under the Credit Facility at September 30, 1998 were
approximately $5.2 million. The Credit 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.

NOTE 6: SUBSEQUENT EVENTS

On May 20, 1998, the Company's board of directors approved an amendment to
the Company's Restated Articles of Incorporation providing for a two-to-one
reverse stock split of the Company's Common Stock. Common stock, Paid-in-capital
and Per share amounts have been restated to reflect the reverse split. On July
6, 1998, the Company's shareholders approved the reverse split. The reverse
split was effected on July 17, 1998.

The Company recently entered into a letter of intent to acquire the
electrical product distribution assets and operations of Texas Electrical Supply
Company ("TESCO") (the "Proposed Acquisition") for a total consideration of
approximately $2.7 million in cash. Based on information provided to the
Company, TESCO had $14.0 million in revenues in 1997. The Proposed Acquisition
will expand the Company's electrical distribution capabilities.

On July 17, 1998, the Company entered into an agreement with one of its
shareholders to purchase 43,000 shares of Common Stock from the shareholder for
$401,000, payable in two installments of $200,500 each. The first installment is
due on or before September 1, 1998 and the second installment is due at any time
after January 1, 1999 and before June 1, 1999.

F-25
<PAGE> 73

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.

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-26
<PAGE> 74

STRATEGIC SUPPLY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>

See notes to consolidated financial statements

F-27
<PAGE> 75

STRATEGIC SUPPLY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-28
<PAGE> 76

STRATEGIC SUPPLY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>

See notes to consolidated financial statements

F-29
<PAGE> 77

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:

<TABLE>
<S> <C>
Building................................................. 20 years
Warehouse and office equipment........................... 5-12 years
Leasehold improvements................................... 5-14 years
Transportation equipment................................. 4-8 years
</TABLE>

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-30
<PAGE> 78
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

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>

(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-31
<PAGE> 79
STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>

(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-32
<PAGE> 80
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:

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
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)
======== ======== =========
</TABLE>

A reconciliation of the expected Federal income tax expense at the
statutory rate to the Company's income tax expense follows:

<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
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)
======== ======== ===========
</TABLE>

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-33
<PAGE> 81
STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net deferred tax asset were as follows:

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>

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:

<TABLE>
<S> <C>
1997.............................................. $462,000
1998.............................................. 363,000
1999.............................................. 225,000
2000.............................................. 137,000
2001.............................................. 98,000
Thereafter........................................ 65,000
</TABLE>

Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$576,509, $644,765, and $639,840, respectively.

F-34
<PAGE> 82
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:

<TABLE>
<S> <C>
Fair value of assets acquired............................... $3,539,810
Net cash.................................................... 2,040,000
----------
Liabilities assumed......................................... $1,499,810
==========
</TABLE>

In 1995, there was a $175,000 adjustment to the purchase price in
connection with the acquisition of Lewis.

F-35
<PAGE> 83

[MAP OF THE UNITED STATES IDENTIFYING
HEADQUARTERS AND BRANCH LOCATIONS]

DXP Enterprises, Inc. provides maintenance, repair and operating products,
equipment and services to industrial customers throughout the Southern and Rocky
Mountain regions of the United States.

<PAGE> 84

- ------------------------------------------------------
- ------------------------------------------------------

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
Special Note Regarding Forward-Looking
Statements........................... 11
Use of Proceeds........................ 11
Price Range of Common Stock and
Dividend Policy...................... 12
Capitalization......................... 13
Dilution............................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 24
Management............................. 31
Certain Transactions................... 35
Security Ownership of Management,
Principal Shareholders and Selling
Shareholders......................... 36
Description of Capital Stock........... 39
Underwriting........................... 43
Legal Matters.......................... 45
Experts................................ 45
Available Information.................. 45
Financial Statements................... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

1,700,000 UNITS

[DXP ENTERPRISES, INC. LOGO]

---------------------

PROSPECTUS
---------------------

[LOGO]

J.P. TURNER & COMPANY, L.L.C.

, 1998

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 85

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the Offering are:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 13,225
NASD Filing Fee............................................. 5,257
Nasdaq National Market Listing Fee.......................... 17,500
Legal Fees and Expenses..................................... 175,000
Accounting Fees and Expenses................................ 150,000
Printing Expenses........................................... 150,000
Transfer Agent, Warrant Agent and Registrar Fees............ 3,500
Miscellaneous............................................... 400,018
--------
TOTAL............................................. $914,500
========
</TABLE>

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
<PAGE> 86

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.

In May 1998, the Company issued 1,537 shares of Common Stock for an
aggregate consideration of $4,625 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 462 shares of Common Stock subject to the stock option to pay the
exercise price.

In May 1998, the Company issued 42,400 shares of Common Stock for an
aggregate consideration of $15,953 to an employee pursuant to the exercise of a
stock option.

The Company considers all of such securities to have been offered and sold
or exchanged, 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.

II-2
<PAGE> 87

<TABLE>
<C> <S>
10.1 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
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.
+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 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 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.
</TABLE>

II-3
<PAGE> 88

<TABLE>
<C> <S>
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 -- 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).
10.14 -- 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).
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
SEPCO Industries, Inc., Bayon Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eight Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998 by and among
SEPCO Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed with the Commission on November
13, 1998).
10.17 -- 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).
</TABLE>

II-4
<PAGE> 89

<TABLE>
<C> <S>
10.18 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
10.22 -- 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).
10.23 -- 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).
10.24 -- 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).
10.25 -- 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).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.27 -- 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).
10.28 -- 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).
</TABLE>

II-5
<PAGE> 90

<TABLE>
<C> <S>
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
10.32 -- 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).
10.33 -- 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).
10.34 -- 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).
10.35 -- 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).
10.36 -- 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).
10.37 -- 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).
</TABLE>

II-6
<PAGE> 91

<TABLE>
<C> <S>
10.38 -- Second Amendment to Loan and Security Agreement dated October 20, 1998, by and between
Pelican State Supply Company, Inc. and Fleet Capital Corporation (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed with the Commission on November 13, 1998).
10.39 -- 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).
10.40 -- 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).
10.41 -- 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).
10.42 -- 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).
10.43 -- 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).
10.44 -- 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).
10.45 -- 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).
10.46 -- 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 for the
quarterly period ended March 31, 1998, filed with the Commission on May 14, 1998).
*10.47 -- Form of Underwriters Warrant.
11.1 -- Statement re Computation of Per Share Earnings.
</TABLE>

II-7
<PAGE> 92

<TABLE>
<C> <S>
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form
10-K for the annual period ended December 31, 1997, 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.
</TABLE>

- ---------------

* To be filed by amendment.

+ Previously filed.

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.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;

(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
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; and

(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

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
II-8
<PAGE> 93

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-9
<PAGE> 94

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on the 1st day of December, 1998.

DXP ENTERPRISES, INC.
(Registrant)

By: /s/ DAVID R. LITTLE
----------------------------------
David R. Little
Chairman of the Board, President
and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID R. LITTLE Chairman of the Board, December 1, 1998
- ----------------------------------------------------- President, Chief Executive
David R. Little Officer and Director
(Principal Executive
Officer)

* Director December 1, 1998
- -----------------------------------------------------
Jerry J. Jones

/s/ GARY A. ALLCORN Senior Vice December 1, 1998
- ----------------------------------------------------- President/Finance and
Gary A. Allcorn Chief Financial Officer
(Principal Financial and
Accounting Officer)

* Director December 1, 1998
- -----------------------------------------------------
Cletus Davis

* Director December 1, 1998
- -----------------------------------------------------
Kenneth H. Miller

* Director December 1, 1998
- -----------------------------------------------------
Thomas V. Orr

*By: /s/ GARY A. ALLCORN December 1, 1998
-----------------------------------------------
Gary A. Allcorn
Attorney-in-Fact for each
of the persons indicated
</TABLE>

II-10
<PAGE> 95

INDEX TO EXHIBITS

<TABLE>
<C> <S>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
1998).
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 4.3 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
the Commission on August 20, 1998).
*4.2 -- Form of Warrant Certificate.
*4.3 -- Form of Warrant Agreement.
4.4 -- 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.
4.5 -- 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 -- DXP Enterprises, Inc. Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (Reg. No.
333-61953), filed with the Commission on August 20,
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.
+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.
</TABLE>

<PAGE> 96

<TABLE>
<C> <S>
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 and Amendment to Employment Agreement dated
effective June 30, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed
with the Commission on August 10, 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 -- 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).
10.14 -- 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).
10.15 -- Seventh Amendment to Second Amended and Restated Loan and
Security Agreement dated June 30, 1998, by and among
SEPCO Industries, Inc., Bayon Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1997, filed with the Commission on August 10, 1998).
10.16 -- Eight Amendment to Second Amended and Restated Loan and
Security Agreement dated October 20, 1998 by and among
SEPCO Industries, Inc., Bayou Pumps, Inc., American MRO,
Inc. and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998, filed with the Commission on November
13, 1998).
</TABLE>

<PAGE> 97
<TABLE>
<C> <S>
10.17 -- 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).
10.18 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
10.22 -- 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).
10.23 -- 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).
10.24 -- 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).
10.25 -- 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).
10.26 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between DXP Acquisition, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.27 -- 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).
</TABLE>
<PAGE> 98
<TABLE>
<C> <S>
10.28 -- 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).
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
10.32 -- 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).
10.33 -- 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).
10.34 -- 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).
10.35 -- 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).
10.36 -- 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).
</TABLE>
<PAGE> 99
<TABLE>
<C> <S>
10.37 -- 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).
10.38 -- Second Amendment to Loan and Security Agreement dated
October 20, 1998, by and between Pelican State Supply
Company, Inc. and Fleet Capital Corporation (incorporated
by reference to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998,
filed with the Commission on November 13, 1998).
10.39 -- 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).
10.40 -- 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).
10.41 -- 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).
10.42 -- 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).
10.43 -- 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).
10.44 -- 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).
</TABLE>
<PAGE> 100

<TABLE>
<C> <S>
10.45 -- 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).
10.46 -- 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 for the
quarterly period ended March 31, 1998, filed with the Commission on May 14, 1998).
*10.47 -- Form of Underwriters Warrant.
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 for the annual period ended December 31, 1997,
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.
</TABLE>

- ---------------

* To be filed by amendment.

+ Previously filed.

<PAGE> 1
EXHIBIT 11.1

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>

SEPTEMBER 30,
------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic:
Average shares outstanding 3,837,095 3,996,974 4,081,255 4,043,981 4,167,832
Net income $2,065,000 $ 771,000 $2,665,000 $1,771,000 $2,681,000
Basic earnings per share amount $0.54 $0.19 $0.65 $0.44 $0.64

Dilutive:
Average shares outstanding 3,837,095 3,996,974 4,081,255 4,043,981 4,167,832
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 1,081,611 1,041,728
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 182,000 546,000 482,854 470,400 420,000
Total 4,501,015 4,856,532 5,702,430 5,595,992 5,629,560
Net income $2,088,000 $890,000 $2,768,000 $1,880,000 $2,750,000
Dilutitive earnings per share amount $0.46 $0.18 $0.49 $0.34 $0.49
</TABLE>

<PAGE> 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

December 1, 1998

<PAGE> 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

December 1, 1998