DXP ENTERPRISES INC, S-1, 1998-05-22

DXP ENTERPRISES INC
S-1, 1998-05-22
INDUSTRIAL MACHINERY & EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NUMBER 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

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

<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 MELISSA M. BALDWIN
FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 600 TRAVIS, SUITE 4200
HOUSTON, TEXAS 77010-3095 HOUSTON, TEXAS 77002
713/651-5658 713/220-4200
</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. [ ]

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>
<CAPTION>
==================================================================================================================
NUMBER OF PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SHARES TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share........................... 3,220,000 $10.25 $33,005,000 $9,737
==================================================================================================================
</TABLE>

(1) Includes 420,000 shares of Common Stock subject to the Underwriters'
over-allotment option (assumes the effectiveness of a two-to-one reverse
stock split to be effected prior to the consummation of the Offering).

(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<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 MAY 22, 1998

2,800,000 SHARES

[LOGO]

COMMON STOCK

Of the 2,800,000 shares of Common Stock of DXP Enterprises, Inc. ("DXP" or
the "Company"), par value $.01 per share (the "Common Stock"), offered hereby
(the "Offering"), 2,500,000 shares are being offered and sold by DXP and 300,000
shares are being sold by certain Selling Shareholders (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
Common Stock by the Selling Shareholders. See "Security Ownership of Management,
Principal Shareholders and Selling Shareholders". The Common Stock is listed on
The Nasdaq National Market under the symbol "DXPE". On May 21, 1998, the last
sales price of the Common Stock was $ 10.50 (restated to give effect to the
two-to-one reverse stock split to occur prior to the consummation of the
Offering). See "Price Range of Common Stock and Dividend Policy".

AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
===================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING SHAREHOLDERS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $ $
===================================================================================================================
</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting".

(2) Before deducting expenses payable by the Company, estimated at $600,000.

(3) The Company and the Selling Shareholders have granted the several
Underwriters an option for 30 days from the date hereof to purchase up to an
additional 420,000 shares of Common Stock (105,000 of which will be sold by
the Selling Shareholders on a pro rata basis) solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Shareholders will be $ , $ , $ and
$ , respectively. See "Underwriting".

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made on or about
, 1998.
---------------------
MORGAN KEEGAN & COMPANY, INC.
HANIFEN, IMHOFF INC.

SANDERS MORRIS MUNDY

, 1998.
<PAGE> 3

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING".
2
<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 which was effected May 12, 1997 and
another two-to-one reverse stock split which will be effected prior to the
consummation of the Offering. Prospective investors should consider carefully
the information set forth under the heading "Risk Factors". Unless the context
otherwise requires, references in this Prospectus to the "Company" or "DXP"
shall mean DXP Enterprises, Inc., as the successor to SEPCO Industries, Inc.
("SEPCO"), together with the Company's subsidiaries.

THE COMPANY

The Company is a leading supplier of maintenance, repair and operating
("MRO") products, equipment and services to industrial customers. The Company
provides a wide range of MRO products in the following categories: fluid
handling equipment, bearings and power transmission equipment, general mill and
safety supplies and electrical products. The Company also offers a line of valve
and valve automation products within the pipe, valve and fittings category and
is seeking to expand its presence in this area. The Company offers its customers
a single source of supply on an efficient and competitive basis by being a
first-tier distributor which purchases its products directly from the
manufacturer. The Company also provides value-added services such as system
design, fabrication, installation, repair and maintenance for its customers. The
Company offers this wide range of industrial MRO products, equipment and
services through a complete continuum of customized and efficient MRO solutions,
ranging from traditional distribution to fully integrated supply contracts.

Since current management acquired control of the Company in 1986, the
Company has grown substantially through 12 acquisitions. This growth has been
designed to position and differentiate the Company as a single source,
first-tier distributor of the major product categories in the United States
industrial market. The Company currently provides a wide range of products in
four of the five major product categories. The Company also intends to expand
its product offerings in the fifth product category, pipe, valve and fittings.

The Company currently has 54 distribution centers strategically located in
45 cities in 14 states throughout the United States. The Company serves as a
first-tier distributor of more than 170,000 stock keeping units ("SKUs") by more
than 2,000 original equipment manufacturers. The Company has a diverse customer
base of over 25,000 customers in various industries throughout the United States
served by a sales force of 275 representatives. The Company also maintains
state-of-the-art management information systems that allow for electronic
communication of orders, processing and distribution.

INDUSTRIAL DISTRIBUTION MARKET

The Company estimates that annual sales in the United States for MRO
products for industrial customers are in excess of $200 billion, of which the
Company estimates over $150 billion are in the five major product categories of
(i) fluid handling equipment, (ii) bearings and power transmission equipment,
(iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v)
electrical products. While growth in the industrial distribution market is
generally related to the expansion of the United States economy, revenues
attributable to the outsourcing of MRO procurement, inventory control and
warehouse management, known as "integrated supply", are expected to grow at an
annualized rate of 40% from $1.8 billion in 1995 to $10 billion in 2000. The
industrial distribution market is highly fragmented, with the 50 largest
distributors accounting for less than 15% of the total United States market
during 1996. Based on 1996 sales as reported by industry sources, the Company
was the 40th largest distributor of MRO products in the United States. On a
combined basis after giving effect to the Company's 1997 acquisitions of
Strategic Supply, Inc. ("SSI") and Pelican State Supply Company, Inc.
("Pelican"), and the acquisition of Tri-Electric Supply LLC ("Tri-Electric) in
February 1998 the Company would have been the 28th largest distributor of MRO
products in the United States.
3
<PAGE> 5

To compete more effectively, the Company's customers and other users of MRO
products are seeking ways to enhance efficiencies and lower MRO product and
procurement costs. In response to this customer desire, three primary trends
have emerged in the industrial supply industry:

Industry Consolidation. Industrial customers have reduced the number of
supplier relationships they maintain to lower total purchasing costs, improve
inventory management, assure consistently high levels of customer service and
enhance purchasing power. This focus on fewer suppliers has led to consolidation
within the fragmented industrial distribution industry.

Customized Value-Added Service. As industrial customers focus on their core
manufacturing or other production competencies, they increasingly are demanding
customized distribution services, ranging from value-added traditional
distribution to integrated supply.

Single Source, First-Tier Distribution. As industrial customers continue to
address cost containment, there is a trend toward reducing the number of
suppliers and eliminating multiple tiers of distribution. Therefore, to lower
overall costs to the MRO customer, some MRO distributors are expanding their
product coverage to eliminate second-tier distributors and the difficulties
associated with alliances.

BUSINESS STRATEGY

The Company's strategy is focused on addressing current trends in the
industrial distribution market through a combination of acquisitions and
internal growth. The Company seeks acquisitions that will provide the Company
access to additional product lines and customers to enhance its position as a
single source industrial distributor with first-tier distribution capabilities.
Key elements of the Company's internal growth strategy include leveraging
existing customer relationships, expanding product offerings from existing
locations, reducing costs through consolidated purchasing programs and combined
product distribution centers, designing and implementing innovative solutions to
address the procurement and supply needs of the Company's customers and using
the Company's traditional distribution and integrated supply capabilities to
increase sales in each area.

The Company's key strategies are:

Industry Consolidator; Focused Acquisition Strategy. The Company is an
active consolidator in the industrial distribution industry. The Company
believes that significant acquisition opportunities exist in this industry due
in large part to the fragmented nature of the industry and customer desire to
reduce costs and improve efficiencies through vendor reduction. The Company's
acquisition strategy is focused on enhancing the Company's position as a single
source industrial distributor with first-tier distribution capabilities for a
broad range of MRO products and improving the Company's ability to deliver
value-added traditional distribution and flexible integrated supply solutions.
Although the Company provides as a first-tier distributor a substantial portion
of products in four of the five major MRO product categories, the Company plans
to continue to seek acquisitions that will broaden its product coverage within
each of the five major MRO product categories. The Company also believes that
substantial opportunities exist to expand the Company's customer base and to
penetrate geographic markets not currently served by the Company through
selective acquisitions. Acquisitions also provide the opportunity for the
Company to increase its operating margins by reducing administrative overhead,
consolidating distribution locations and personnel and reducing costs for
products through volume purchases and similar arrangements. The Company further
believes that as acquisitions are assimilated, additional opportunities should
arise to increase sales to the customers of the acquired companies by providing
products and services to these customers that were not previously offered by the
acquired company.

4
<PAGE> 6

MRO products, the Company is able to reduce substantially the markups paid by
the customer to second-tier distributors and significantly reduce the number of
supplier relationships needed by the customer without the difficulties
associated with alliances.

Value-Added Services. The Company's distribution strategy is focused on
building and maintaining long-term relationships by understanding the customers'
operations and providing value-added services such as product application,
engineering and system design. Because the Company has extensive experience as a
traditional distributor, the Company has built strong knowledge of its
customers' operations and can provide valuable assistance in identifying the
products that will best meet their needs. DXP's role extends beyond procurement
services due to the Company's ability to deliver personal, after-the-sale
service.

Customized Distribution Solutions; Integrated Supply. The Company believes
that the most desirable approach to industrial distribution is to provide the
customer with a complete continuum of supply options, ranging from traditional
distribution to integrated supply. Through the Company's SmartSource program,
the customer is able to select only those products and services needed. For
those customers purchasing a number of products in large quantities, the Company
offers its American MRO program, a "fully integrated supply" program that
permits the customer to outsource all or most of their procurement needs to the
Company.

Cost Efficiencies. As the Company expands into new geographic regions and
further penetrates existing markets, the Company intends to consolidate many
functions such as accounting, management information systems and certain
purchasing arrangements to eliminate duplicative costs that otherwise would be
incurred at the operating level. The Company seeks higher volume purchasing in
order to reduce product costs. The Company may also continue to consolidate
facilities or branches to optimize efficiencies.

RECENT AND PROPOSED ACQUISITIONS

The Company completed two strategic acquisitions in 1997 and a third in the
first quarter of 1998 directed at expanding its product lines and increasing its
geographic presence. Based on information provided to the Company, the three
acquired businesses generated combined revenues of $74.1 million in 1997 (of
which $31.7 million appeared in the Company's consolidated financial statements
for 1997). Through the Company's acquisition of the assets of SSI, the Company
added general mill and safety supplies to its product offerings and expanded its
geographic presence to include more than seven additional states and 24
additional cities throughout the United States. The acquisition of SSI also
enhanced the Company's integrated supply capabilities through SSI's existing
integrated supply contracts and SmartSource program. The Company's acquisition
of Pelican expanded the Company's general mill and safety supplies product lines
and added an additional integrated supply contract with a major refinery in
Baton Rouge, Louisiana. The Company's acquisition of Tri-Electric added
electrical products to its product offerings.

The Company recently entered into letters of intent to acquire the
electrical product distribution assets and operations of Lucky Electric Supply,
Inc. ("Lucky") and the pump distribution assets and operations of M.W. Smith
Equipment, Inc. ("Smith") (the "Proposed Acquisitions") for a total
consideration of approximately $6.0 million, $1.0 million in cash and $5.0
million in notes. Based on information provided to the Company, Lucky and Smith
had combined revenues of approximately $13.0 million in 1997. The Proposed
Acquisitions will expand the Company's electrical and pump distribution
capabilities.

The consummation of the Proposed Acquisitions is subject to the execution
of definitive agreements, which are expected to contain customary conditions to
closing. There can be no assurance that the Proposed Acquisitions will close or
as to the timing thereof. The Company intends to use a portion of the net
proceeds from the Offering to repay amounts borrowed to finance the Proposed
Acquisitions. See "Use of Proceeds".

CORPORATE INFORMATION

The Company is a Texas corporation that was formed in 1996 to effect a
consolidation of SEPCO and Newman Communications Corporation (the
"Reorganization") pursuant to which DXP became a public company. The Company's
principal executive offices are located at 580 West Lake Park Boulevard, Suite
1100, Houston, Texas 77079 and its telephone number is 281/531-4214.

5
<PAGE> 7

THE OFFERING

Common Stock offered:
By the Company................ 2,500,000 shares
By the Selling Shareholders... 300,000 shares
Total................. 2,800,000 shares

Common Stock to be outstanding
after the Offering.............. 7,143,047 shares(1)

Use of proceeds................. To repay an aggregate of approximately $23.4
million of indebtedness, including $6.0
million expected to be incurred by the
Company in connection with the Proposed
Acquisitions. See "Use of Proceeds".

Nasdaq National Market symbol... DXPE
- ---------------

(1) Includes 420,000 shares of Common Stock issuable in connection with
conversion of shares of Series B Convertible Preferred Stock by one of the
Selling Shareholders, 10,625 shares issuable to prior holders of Newman
Communications Corporation common stock and 16,800 shares issuable to prior
holders of SEPCO common stock in connection with the Reorganization but
which have not been issued and 55,000 shares of Common Stock issuable upon
exercise of options by two of the Selling Shareholders. Excludes 1,323,700
shares of Common Stock issuable upon exercise of outstanding options at May
15, 1998 and 84,500 additional shares reserved for issuance pursuant to the
Company's Long-Term Incentive Plan ("LTIP"). See "Management -- Benefit
Plans".

6
<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 selected financial data set forth below for each of the periods in
the two-years ended December 31, 1997 have been derived from the audited
consolidated financial statements of the Company, and assume that the
Reorganization had been effected on the first day of the period presented. The
summary historical consolidated selected financial data set forth below for the
quarters ended March 31, 1998 and 1997 have been derived from the unaudited
consolidated financial statements of the Company. The summary pro forma
consolidated financial information set forth below assumes that the acquisition
of SSI was completed on the first day of the periods presented, and such
information has been derived from the pro forma financial statements appearing
elsewhere in this Prospectus. The pro forma information does not reflect the
acquisitions of Pelican and Tri-Electric. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------ THREE MONTHS
SEPCO DXP DXP ENDED MARCH 31,
-------- -------- -------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------------------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF PRO
EARNINGS DATA: ACTUAL FORMA
-------- --------
Revenues.................................. $111,328 $125,208 $169,667 $190,754 $30,129 $49,004
Gross profit(1)........................... 29,157 32,117 44,880 49,797 8,373 12,585
Operating income(1)....................... 4,598 2,785 6,434 5,789 1,330 2,077
Income before provision for income
taxes................................... 3,512 1,635 4,670 3,869 1,220 1,468
Net income................................ 2,088 890 2,768 2,182 791 878
Preferred stock dividend.................. (23) (119) (103) (103) 38 21
Net income attributable to common
shareholders............................ 2,065 771 2,665 2,079 753 857

Basic earnings per common share........... $ 0.54 $ 0.19 $ 0.65 $ 0.51 $ .19 $ .21
Common shares outstanding................. 3,837 3,997 4,082 4,081 3,997 4,157
Dilutive earnings per share............... 0.46 0.16 0.47 0.37 0.14 0.15
Common and common equivalent shares
outstanding(2)(3)....................... 4,501 4,857 5,703 5,703 5,492 5,700
</TABLE>

<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(4)(5)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital............................................. $38,213 $38,213
Total assets................................................ 77,162 77,162
Long-term debt obligations.................................. 38,245 14,220
Shareholders' equity(2)..................................... 13,888 37,913
</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 which became effective May 12,
1997 and another two-to-one reverse stock split to be effected prior to the
consummation of the Offering.

(4) Adjusted to give effect to the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby, at an assumed price to the public of $10.50
per share, and the application of the net proceeds thereof.

(5) Assumes conversion of 15,000 shares of Series B Convertible Preferred Stock
into 420,000 shares of Common Stock by a Selling Shareholder and exercise of
an option to purchase 55,000 shares of Common Stock by another Selling
Shareholder.

7
<PAGE> 9

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. The following factors should be considered carefully, together with the
information provided elsewhere in this Prospectus, in evaluating an investment
in the shares of Common Stock offered hereby. Special Note: Certain statements
set forth below constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). See "Special Note Regarding Forward-Looking Statements".

RISKS ASSOCIATED WITH ACQUISITION STRATEGY

Future results for the Company will depend in part on the success of the
Company in implementing its acquisition strategy. This strategy includes taking
advantage of a consolidation trend in the industry and effecting acquisitions of
distributors with complementary or desirable new product lines, strategic
distribution locations and attractive customer bases and manufacturer
relationships. The ability of the Company to implement this strategy will be
dependent on its ability to identify, consummate and successfully assimilate
acquisitions on economically favorable terms. Although the Company is actively
seeking acquisitions that would meet its strategic objectives, there can be no
assurance that the Company will be successful in these efforts. In addition,
acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities, expenses associated with obsolete inventory of an
acquired company and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
or other industrial supply distributors acquired in the future will achieve
anticipated revenues and earnings. In addition, the Company's credit facilities
contain certain restrictions that could adversely affect its ability to
implement its acquisition strategy. Such restrictions include a provision
prohibiting the Company from merging or consolidating with, or acquiring all or
a substantial part of the properties or capital stock of, any other entity
without the prior written consent of the lender. There can be no assurance that
the Company will be able to obtain the lender's consent to any of its proposed
acquisitions.

RISKS RELATED TO ACQUISITION FINANCING

The Company currently intends to finance acquisitions by using shares of
Common Stock for a portion or all of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to use more of its cash resources, if available, to maintain its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. Under the Company's loan agreements with its bank lender (the
"Credit Facility"), all available cash generally is applied to reduce
outstanding borrowings. As of March 31, 1998, the Company had $3.1 million
available under the Credit Facility, and there can be no assurance that the
Company will be able to obtain additional financing on a timely basis or on
terms the Company deems acceptable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".

RISKS RELATED TO GROWTH STRATEGY

Future results for the Company also will depend in part on the Company's
success in implementing its internal growth strategy, which includes expanding
existing product lines and adding new product lines. The ability of the Company
to implement this strategy will depend on its success in acquiring and
integrating new product lines and marketing integrated forms of supply
arrangements such as those being pursued by the Company through its SmartSource
and American MRO programs. The Company acquired SSI and Pelican in the second
quarter of 1997 and Tri-Electric in the first quarter of 1998 and plans to
acquire other distributors with complementary or desirable product lines and
customer bases. Although the Company intends to increase sales and product
offerings to the customers of SSI, Pelican and Tri-Electric and other acquired
companies, reduce costs through consolidating certain administrative and sales
functions and
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<PAGE> 10

integrate the acquired companies' management information systems with the
Company's system, there can be no assurance that the Company will be successful
in these efforts.

SUBSTANTIAL COMPETITION

The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger distributors
that provide integrated supply programs such as those offered through
outsourcing services similar to those that are offered by the Company's
SmartSource and American MRO programs. Some of these large distributors may be
able to supply their products in a more timely and cost-efficient manner than
the Company. The Company's competitors include direct mail suppliers, large
warehouse stores and, to a lesser extent, certain manufacturers.

RISKS OF ECONOMIC TRENDS

Demand for the Company's products is subject to changes in the United
States economy in general and economic trends affecting the Company's customers
and the industries in which they compete in particular. Many of these
industries, such as the oil and gas industry, are subject to volatility while
others, such as the petrochemical industry, are cyclical and materially affected
by changes in the economy. As a result, the Company may experience changes in
demand for its products as changes occur in the markets of its customers.

DEPENDENCE ON KEY PERSONNEL

The Company will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, its Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Little or any other
executive officer of the Company could have a material adverse effect on the
Company's financial condition and results of operations. The Company does not
maintain key-man life insurance on the life of Mr. Little or on the lives of its
other executive officers. In addition, the Company's ability to grow
successfully will be dependent upon its ability to attract and retain qualified
management and technical and operational personnel. The failure to attract and
retain such persons could materially adversely effect the Company's financial
condition and results of operations.

DEPENDENCE ON SUPPLIER RELATIONSHIPS

The Company has distribution rights for certain product lines and depends
on these distribution rights for a substantial portion of its business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. The termination or limitation by
any key supplier of its relationship with the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Suppliers".

CONTROL BY MANAGEMENT

Following the Offering, directors and officers of the Company will own
beneficially an aggregate of approximately 48.8% of the outstanding Common Stock
(45.8% if the Underwriters' overallotment option is exercised in full). See
"Security Ownership of Management, Principal Shareholders and Selling
Shareholders". Accordingly, these persons, if they were to act in concert, would
have substantial influence over the affairs of the Company, including the
ability to control the election of directors and other matters requiring
shareholder approval.

SHARES AVAILABLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE

Sales of substantial amounts of Common Stock in the public market following
completion of the Offering could have an adverse effect on the market price of
the Common Stock. Of the 7,143,047 shares of Common Stock to be outstanding
after the Offering, the Company estimates that 4,468,494 shares, including the
9
<PAGE> 11

2,800,000 shares of Common Stock to be sold by the Company and the Selling
Shareholders in the Offering, will be freely tradable without restriction, and
2,674,553 shares of Common Stock will be eligible for sale pursuant to the
provisions of Rule 144 under the Securities Act. In connection with the
Offering, officers and directors and certain shareholders of the Company
including the Selling Shareholders, who will hold an aggregate of 2,750,877
shares (2,665,127 if the over-allotment option is exercised in full) of Common
Stock and 1,202,500 shares (1,186,750 if the over-allotment option is exercised
in full) of Common Stock issuable upon the exercise of options following the
Offering, have entered into lock-up agreements pursuant to which they have
agreed not to sell or otherwise dispose of their shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Morgan Keegan & Company, Inc. on behalf of the Underwriters.

IMMEDIATE AND SUBSTANTIAL DILUTION

Because the offering price will be substantially higher than the book value
per share of the Common Stock, purchasers of shares of Common Stock in the
Offering will incur immediate and substantial dilution of $5.75 per share, or
54.8% of the public offering price. In addition, investors purchasing shares in
the Offering will incur additional dilution to the extent that outstanding stock
options are exercised. See "Dilution".

LIMITATION ON ABILITY TO PAY DIVIDENDS

The Company anticipates that future earnings will be retained to finance
the continuing development of its business. In addition, the Company's loan
agreement with its principal lender prohibits the Company from declaring or
paying any dividends or other distributions on its capital stock except for
limited dividends on its preferred stock. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
See "Dividend Policy".

POTENTIAL ANTI-TAKEOVER EFFECTS

The Company's Restated Articles of Incorporation, as amended, allow the
Board of Directors of the Company to issue shares of preferred stock without
shareholder approval on such terms as the Board of Directors may determine. The
rights of all the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The Company's Restated Articles of Incorporation, as
amended, also do not allow cumulative voting in the election of directors. In
addition, Part Thirteen of the Texas Business Corporation Act imposes a special
voting requirement for the approval of certain business combinations and related
party transactions between public corporations such as the Company and
shareholders who beneficially own 20% or more of the corporation's voting stock
unless the transaction or the acquisition of shares by the affiliated
shareholder is approved by the board of directors of the corporation prior to
the shareholder acquiring such 10% ownership. All of the foregoing could have
the effect of delaying, deferring or preventing a change in control of the
Company and could limit the price that certain investors might be willing to pay
in the future for shares of the Common Stock. See "Description of Capital
Stock".

LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Although the Common Stock is listed on The Nasdaq National Market, trading
to date has been limited. In addition, factors such as market expansion, the
development of additional services, the Company's competitors and other third
parties, as well as quarterly variations in the Company's anticipated or actual
results of operations or market conditions generally, may cause the market price
of the Common Stock to fluctuate significantly. Further, the stock market has on
occasion experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.

RISKS ASSOCIATED WITH HAZARDOUS MATERIALS

10
<PAGE> 12

the Company believes that it has adequate procedures to comply with applicable
discharge and other environmental laws, the risks of accidental contamination or
injury from the discharge of controlled or hazardous materials and chemicals
cannot be eliminated completely. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
have a material adverse effect on the Company.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements regarding the Company's
financial position, business strategy, products and services, markets, budgets
and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus. All subsequent
written and oral forward-looking statements attributable to the Company, or
persons acting on its behalf, are expressly qualified in their entirety by the
Cautionary Statements.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23.9 million ($27.0 million, if the Underwriters' over-allotment option is
exercised in full), based on an assumed public offering price of $10.50 per
share and after deducting the estimated underwriting discount and offering
expenses payable by the Company. The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Shareholders.

The Company anticipates that it will use the net proceeds of the Offering
to repay an aggregate of approximately $23.9 million of indebtedness under the
Credit Facility. The indebtedness under the Credit Facility includes
approximately (i) $5.3 million incurred in May 1997 in connection with the
acquisitions of SSI and Pelican, (ii) $6.2 million incurred in February 1998 in
connection with the acquisition of Tri-Electric, (iii) $1.0 million expected to
be incurred in connection with the cash component of the Proposed Acquisitions
and (iv) $648,000 incurred in connection with capital expenditures. Amounts
borrowed under the Credit Facility bear interest at an annual rate ranging from
LIBOR plus 1.50% to LIBOR plus 3.0% (8.5% at March 31, 1998). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

In addition to the net proceeds to be received by the Company in the
Offering, Mr. Little, a Selling Shareholder, intends to apply a portion of the
net proceeds from his sale of shares of Common Stock hereunder to repay
approximately $258,000 owed to the Company. See "Security Ownership of
Management, Principal Shareholders and Selling Shareholders" and "Certain
Transactions".

11
<PAGE> 13

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock has traded on The Nasdaq National Market since July 2,
1997, under the symbol "DXPE". From December 27, 1996, through July 2, 1997, the
Common Stock traded on the Over the Counter Bulletin Board of National
Association of Securities Dealers, Inc. ("OTC Bulletin Board"). The following
table sets forth on a per share basis the high and low sales prices for the
Common Stock as reported on The Nasdaq National Market and the OTC Bulletin
Board, as applicable, for the periods indicated, restated to give effect to the
two-to-one stock split of the Common Stock to be effected prior to the
consummation of the Offering.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Fourth Quarter (Beginning December 27, 1996).............. $15.00 $14.00
1997
First Quarter............................................. 16.00 9.00
Second Quarter............................................ 13.50 10.50
Third Quarter............................................. 14.00 12.00
Fourth Quarter............................................ 12.50 10.00
1998
First Quarter............................................. 12.00 10.00
Second Quarter (through May 21, 1998)..................... 11.00 8.00
</TABLE>

On May 21, 1998, the closing sales price of the Common Stock was $10.50 per
share. On May 21, 1998, there were 138 holders of record of outstanding shares
of Common Stock.

The Company anticipates that future earnings will be retained to finance
the continuing development of its business. In addition, the Company's Credit
Facility with its principal lender prohibits the Company from declaring or
paying any dividends or other distributions on its capital stock except for
limited dividends on its preferred stock. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the success of the Company's business activities, regulatory and capital
requirements, the general financial condition of the Company and general
business conditions.

12
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1998, and, as adjusted, to reflect the issuance of the 2,500,000 shares of
Common Stock offered by the Company hereby and the application of the proceeds
therefrom (assuming an offering price of $10.50 per share). This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto appearing elsewhere in this Prospectus. See also "Use of Proceeds".

<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 1,198 $ 1,198
======= =======
Long-term debt, less current portion........................ $38,245 $14,220(2)
------- -------
Equity subject to redemption................................ 2,075 2,075
Shareholders' equity:
Series A preferred stock.................................... 2 2
Series B convertible preferred stock........................ 18 3
Common Stock, $.01 par value(3)............................. 40 70
Paid-in capital........................................... 892 24,902
Retained earnings........................................... 13,516 13,516
------- -------
14,468 38,493
Less Treasury stock, 374 shares Series A preferred, 2,700
shares Series B preferred, and 30,436 shares common
stock..................................................... (580) (580)
------- -------
Total shareholders' equity........................... 13,888 37,913
------- -------
Total capitalization.............................. $55,406 $55,406
======= =======
</TABLE>

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

(1) Assumes conversion of 15,000 shares of Series B Convertible Preferred Stock
into 420,000 shares of Common Stock by a Selling Shareholder and exercise of
options to purchase an aggregate of 55,000 shares of Common Stock by another
Selling Shareholder.

(2) Does not give effect to the incurrence of $6.0 million in debt in connection
with the Proposed Acquisitions.

(3) Excludes 1,323,700 shares of Common Stock issuable upon exercise of
outstanding options and warrants and an additional 84,500 shares reserved
for issuance pursuant to the LTIP. See "Management -- Benefit Plans".

13
<PAGE> 15

DILUTION

At March 31, 1998, the net tangible book value of the Company attributable
to common shareholders was $10.0 million, or $2.15 per share. The number of
shares used for the per share calculation includes the 4,168,047 shares
outstanding prior to the Offering and assumes conversion of 420,000 shares of
Series B Convertible Preferred Stock and the exercise of options to purchase an
aggregate of 55,000 shares of Common Stock. After giving effect to the sale by
the Company of 2,500,000 shares offered hereby and the receipt of an estimated
$23.9 million of net proceeds from the Offering (based on an assumed offering
price of $10.50 per share and net of underwriting discounts and estimated
expenses of the Offering), pro forma net tangible book value of the Company at
March 31, 1998 would have been $4.75 per share. This represents an immediate
increase in pro forma net tangible book value of $2.60 per share to the existing
stockholders and an immediate dilution of $5.75 per share to the new investors
purchasing Common Stock in the Offering. The following table sets forth the per
share dilution:

<TABLE>
<S> <C> <C>
Public offering price....................................... $10.50
Book value prior to the Offering.......................... $2.15
Increase attributable to new investors.................... 2.60
-----
Pro Forma net tangible book value after the Offering........ 4.75
------
Dilution in net tangible book value to new investors........ $ 5.75
======
</TABLE>

The following table sets forth, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and new investors purchasing shares in the Offering
(before deducting underwriting discounts and commissions and estimated offering
expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 4,643,047 65.1% $ 9,988,400 27.6% $ 2.15
New investors................... 2,500,000 34.9 26,250,000 72.4 $10.50
--------- ----- ----------- -----
Total................. 7,143,047 100.0% $36,238,400 100.0%
========= ===== =========== =====
</TABLE>

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

14
<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 quarters ended March 31, 1998 and 1997 have been derived
from the unaudited consolidated financial statements of the Company. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
--------------------------------------------------- ENDED
SEPCO DXP MARCH 31,
----------------------------- ------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS DATA:
Revenues........................ $99,353 $102,592 $111,328 $125,208 $169,667 $30,129 $49,004
Gross profit(1)................. 26,792 27,217 29,157 32,117 44,880 8,373 12,585
Operating income(1)............. 3,288 4,150 4,598 2,785 6,434 1,330 2,077
Income before provision for
income taxes, minority
interest and change in
accounting principle.......... 2,346 3,038 3,512 1,635 4,670 1,220 1,468
Minority interest in earnings
(loss) of a subsidiary(2)..... (403) -- -- -- -- -- --
Cumulative effect of change in
accounting principle(3)....... 882 -- -- -- -- --
Net income...................... 1,843 1,862 2,088 890 2,768 791 878
Preferred stock dividend........ -- -- (23) (119) (103) 38 21
Net income attributable to
common shareholders........... 1,843 1,862 2,065 771 2,665 753 857
Basic earnings per common
share......................... $ 0.38 $ 0.38 $ 0.54 $ 0.19 $ 0.65 0.19 .21
Common shares outstanding(5).... 4,878 4,878 3,837 3,997 4,082 3,997 4,157
Dilutive earnings per share..... 0.35 0.35 0.46 0.16 0.47 0.14 0.15
Common and common equivalent
shares outstanding(4)(5)...... 5,225 5,370 4,501 4,857 5,703 5,492 5,700
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SEPCO DXP MARCH 31,
----------------------------- ------------------- -----------------
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 $25,962 $38,213
Total assets.................... 38,686 38,163 43,254 45,042 67,636 47,123 77,162
Long-term debt obligations...... 20,766 18,461 21,275 22,300 33,395 22,792 38,245
Shareholders' equity(4)......... 6,453 8,315 9,688 10,459 13,031 11,212 13,888
</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 which became effective May 12,
1997 and another two-to-one reverse stock split to be effected prior to the
consummation of the Offering.

16
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company is a leading supplier of MRO products, equipment and services
to industrial customers. The Company provides a wide range of MRO products in
the fluid handling equipment, bearings and power transmission equipment, general
mill and safety supplies and electrical products. The Company also offers a line
of valve and valve automation products within the pipe, valve and fittings
category and is seeking to expand its presence in this area. The Company offers
its customers a single source of supply on an efficient and competitive basis by
being a first-tier distributor which purchases its products directly from the
manufacturer. The Company also provides value-added services such as system
design, fabrication, installation, repair and maintenance for its customers. The
Company offers this wide range of industrial MRO products, equipment and
services through a complete continuum of customized and efficient MRO solutions,
ranging from traditional distribution to fully integrated supply contracts.

The Company's products and services are marketed in 14 states to over
25,000 customers that are engaged in a variety of industries, many of which may
be counter cyclical to each other. Demand for the Company's products generally
is subject to changes in the United States economy and economic trends affecting
the Company's customers and the industries in which they compete in particular.
Certain of these industries, such as the oil and gas industry, are subject to
volatility while others, such as the petrochemical industry, are cyclical and
materially affected by changes in the economy. As a result, the Company may
within particular markets and product categories experience changes in demand as
changes occur in the markets of its customers.

The ability of the Company to implement its acquisition and internal growth
strategy will be dependent on its ability to identify, consummate and assimilate
acquisitions on economically favorable terms, to acquire and successfully
integrate new product lines and to successfully market alternate forms of supply
arrangements through the Company's SmartSource and American MRO programs.
Although the Company is actively seeking acquisitions and integrated supply
arrangements that would meet its strategic objectives, there can be no assurance
that the Company will be successful in these efforts. Further, the ability of
the Company to effect its strategic plans will be dependent on its obtaining
financing for its planned acquisitions and expansions, which there can be no
assurance will be available. The Company plans to examine appropriate methods of
financing any such acquisitions, including issuance of additional capital stock,
debt or other securities or a combination thereof. If the Company were to issue
shares of its capital stock in any acquisition, such issuance could be dilutive
to existing shareholders.

The Reorganization

The Company was incorporated on July 26, 1996, to facilitate the
Reorganization. On December 4, 1996, the Reorganization was effected through (i)
a merger of a wholly owned subsidiary of the Company with and into SEPCO and
(ii) a merger of a wholly owned subsidiary of the Company with and into Newman
Communications Corporation ("Newman").

17
<PAGE> 19

Prior to the Reorganization, the Company had no operations and its only
assets consisted of $1,000 cash. The Reorganization has been accounted for as a
recapitalization of SEPCO. Prior to the Company's acquisition of Newman, Newman
was a non-operating entity with nominal assets. The merger with Newman was
effected as a means to implement the original registration of the Common Stock
under the Securities Exchange Act of 1934, as amended, and increase the
Company's shareholder base. The Reorganization resulted in approximately
$900,000 in one-time costs, which included a $618,000 charge for additional
compensation expense for the conversion of outstanding book-value options into
market-based options and approximately $284,000 in professional costs associated
with the Reorganization.

In December 1996, the Company disposed of $1.1 million of excess inventory
which it had accumulated through prior acquisitions of product groups that were
subject to shelf-life restrictions. This is a one-time charge not expected to
occur in future years.

Unless the context otherwise requires, references to the Company with
respect to operations prior to December 4, 1996 shall mean SEPCO and references
to the Company with respect to operations on and after December 4, 1996 shall
mean the Company.

RESULTS OF OPERATIONS

The Company currently distributes a substantial number of products in four
of the five major product categories within the industrial distribution market
and also provides products in the fifth category, pipe, valve and fittings.
Three of those product categories, fluid handling equipment, bearings and
transmission equipment and pipe, valve and fittings have been provided by the
Company for a number of years. The fourth product category, general mill and
safety supplies, was added in 1997 with the acquisitions of SSI and Pelican and
the fifth category, electrical products, was added in February 1998 with the
acquisition of Tri-Electric.

The following table sets forth the revenues generated from the sales of
major products and services distributed by the Company and the percentage of
revenues of various items.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
SEPCO DXP MARCH 31,
-------------------- -------- ------------
1995 1996 1997 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Revenues:
Fluid handling equipment................... $ 61,630 $ 65,709 $ 75,472 $ 17,832
Bearings and power transmission
equipment................................ 39,500 49,144 53,180 14,379
General mill and safety supplies(1)........ -- -- 31,660 13,357
Pipe, valve and fittings................... 10,198 10,355 9,355 2,320
Electrical products(2)..................... -- -- -- 1,116
-------- -------- -------- --------
Total revenues................... $111,328 $125,208 $169,667 $ 49,004
Percent of Revenues:
Cost of sales............................ 73.8% 74.3% 73.5% 74.3%
Gross profit............................... 26.2 25.7 26.5 25.7
Selling, general and administrative
expense............................... 22.1 23.5 22.7 21.4
Operating income........................... 4.1 2.2 3.8 4.3
Other income............................. .8 .8 .5 .3
Interest expense, net...................... 1.8 1.7 1.6 1.6
Income before taxes........................ 3.2 1.3 2.7 3.0
Income tax expense....................... 1.3 .6 1.1 1.2
Net income................................. 1.9% 0.7% 1.6% 1.8%
======== ======== ======== ========
</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 acquisition of Tri-Electric in
the first quarter of 1998.

18
<PAGE> 20
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997

Revenues for the three months ended March 31, 1998 increased 62.7% to $49.0
million from the three months ended March 31, 1997. The Company's acquisitions
during the period accounted for $14.5 million of the $18.9 million increase in
revenues. Sales of bearings and power transmission equipment for the quarter
ended March 31, 1998 increased 19.6%, or $2.4 million over the comparable period
in 1997, accounting for 7.8% of the revenue increase. Sales of valve and valve
automation equipment increased 39.8%, or $.7 million over the comparable period
in 1997, accounting for 2.2% of the revenue increase. During the three months
ended March 31, 1998, sales of pumps and pump products increased 4.5%, or $1.3
million, over the comparable period in 1997, accounting for 5.6% of the revenue
increase.

Gross margins decreased 2.1% for the first quarter of 1998 as compared to
the first quarter of 1997, from 27.8% of sales to 25.7%. The decrease in gross
margin is attributable to lower margins associated with the two businesses
acquired in May, 1997 and a third in February, 1998. The Company currently
expects some increase in manufacturers prices to continue due to increased raw
material costs and strong market conditions. Although the Company intends to
attempt to pass on these price increases to its customers to maintain current
gross margins, there can be no assurances that the Company will be successful in
this regard.

Selling, general and administrative expense decreased as a percentage of
revenues by 1.9% for the first quarter of 1998 as compared to the first quarter
of 1997.

Operating income for the three month period ended March 31, 1998 was
consistent as a percentage of revenues as compared to the first quarter of 1997.

Interest expense during the first quarter of 1998 increased by $246,000 to
$785,000 compared to the first quarter of 1997. Long-term debt at March 31, 1998
increased by $15.5 million as a result of the financing of two acquisitions
during the second quarter of 1997 and a third during the first quarter of 1998,
resulting in greater interest costs. Average interest rates were consistent
during the three months ended March 31, 1998 as compared to the same period in
1997.

The Company's provision for income taxes for the three months ended March
31, 1998 increased by $161,000 compared to the same period of 1997, as a result
of the increase in profits.

Net income for the three month period ended March 31, 1998, increased
$87,000 from the three month period ended March 31, 1997 due to the increase in
revenue volume and the decrease of selling, general and administrative expenses
as a percentage of revenue.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenues for 1997 increased 35.5% to $169.7 million from 1996. This revenue
growth resulted from a combination of acquisitions and internal growth. The SSI
and Pelican acquisitions added $31.6 million in revenues during 1997 while
revenues at existing branches in 1997 increased $12.8 million, or 10.2% from
1996. This internal growth was driven by increased demand from existing
customers and the Company's focus on cross selling product categories. Sales of
fluid handling equipment increased 14.9% in 1997, or $9.8 million, over 1996.
Sales of bearings and power transmission equipment for 1997 increased 8.2%, or
$4.0 million, over 1996. Sales of pipe, valve and fittings decreased $1.0
million in 1997 over 1996 due primarily to increased competition.

Gross margin increased $12.8 million, or 39.7% for 1997 as compared to
1996. Gross margin as a percentage of sales increased from 25.7% to 26.5% in
1997 as compared to the same period in 1996. The increase in 1997 gross margin
was primarily attributable to the $1.1 million inventory write down in 1996. The
Company, also realized increases in its gross margins for sales of its fluid
handling equipment, bearings and transmission equipment and pipe valve and
fittings. These increases in the profit margins for sales in the Company's
historical product lines were offset by the lower average margins associated
with sales of general mill and safety supplies.

Selling, general and administrative expenses were 22.7% of revenues for
1997 compared to 23.5% for 1996. This decrease was attributable to the
incurrence of various one-time expenses during 1996 aggregating $900,000,
including a one-time expense of $618,000 for additional compensation associated
with converting book value stock options to market value options and
approximately $284,000 in professional fees associated with the Reorganization.

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Operating income for 1997 increased 131% over 1996, from $2.8 million to
$6.4 million. As a percentage of revenues, operating income increased from 2.2%
of sales to 3.8% of sales in 1997 as compared to the same period in 1996, due to
the various factors discussed above.

Interest expense for 1997 increased by $553,000, or 26.3%, from 1996 as a
result of increased debt levels associated with the Company's acquisitions
during 1997 and increased working capital requirements during the period.
Average interest rates were slightly lower during the year ended December 31,
1997 as compared to 1996.

The Company's provision for income taxes for 1997 increased by $1.2 million
compared to 1996 as a result of an increase of approximately $3.0 million in
pre-tax income. Included in the 1996 income tax provision was a $135,000 reserve
for an Internal Revenue Service ("IRS") examination, which was resolved in 1997
by the Company making a payment of $69,100 to the IRS.

Net income for 1997 increased $1.9 million, or 210%, compared to 1996.
Increased net income for 1997 as compared to 1996 can be primarily attributed to
an increase in gross margin and a decrease in selling general and administrative
costs as of percent of sales.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Revenues for 1996 increased 12.5% to $125.2 million from $111.3 million for
1995 primarily due to sales of bearings and power transmission products at
locations where fluid handling equipment was sold previously ($4.6 million),
revenue attributable to the two companies acquired in December 1995 and February
1996 ($4.1 million) and from other internal revenue growth ($5.2 million).
During 1996, sales of fluid handling equipment, increased 6.7% as compared to
1995, while sales of pipe valve and fittings increased 1.6% in 1996 as compared
to 1995. Sales of bearings and power transmission equipment increased 24.5% in
1996 as compared to 1995.

Gross profit as a percentage of revenues decreased .5% in 1996 compared to
1995. Included in cost of sales is a one time charge of $1.1 million related to
the disposal of excess inventory in December 1996 that was accumulated through
prior acquisitions of product groups subject to shelf-life restrictions. The
disposal of the inventory reduced the Company's tax liability resulting in an
increase in the Company's 1996 cash flow. In 1996, the Company installed a new
management information system designed to manage inventory effectively and
significantly minimize any future accumulation of inventory not salable in the
ordinary course of business. Excluding the one-time charge related to the
disposal of inventory, gross margins in 1996 would have remained consistent with
the previous year.

Selling, general and administrative expense increased as a percentage of
revenues by 1.4% for 1996 as compared to 1995, due primarily to a one-time
charge of $618,000 for additional compensation expense associated with the
amendment of certain book value stock options into market-based stock options,
costs associated with the Company's expansion of bearing and power transmission
operations into locations where only fluid handling equipment was sold
previously, training and education expenses related to the Company's software
conversion and professional fees associated with the Reorganization. Excluding
the effect of the amendments to the stock options and the other non-recurring
expenses identified above, selling, general and administrative expenses as a
percentage of revenues remained relatively consistent from period to period.

Operating income for 1996 as a percentage of revenues declined to 2.2% from
4.1% in 1995, due primarily to the compensation expense recorded in connection
with the stock option amendments, interest and other costs associated with
SEPCO's expansion of operations and software conversion, increased professional
fees related to the Reorganization, expenses related to the Company's expansion
of bearing and power transmission equipment into locations where only pumps were
sold previously and the inventory disposal. Excluding the effect of the
amendments to the stock options and the other non-recurring expenses identified
above, operating income for 1996 as a percentage of revenues would have been
3.8%.

Interest expense during 1996 increased slightly compared to 1995, due to
average debt increasing during the period as a result of increased working
capital required to support sales. Average interest rates were slightly lower
during 1996 as compared to 1995.

The Company's provision for income taxes for 1996 decreased by $679,000
compared to 1995 due to lower operating income.

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Net income for 1996 declined by approximately $1.2 million from 1995 due
primarily to the effects of the disposition of inventory ($1.1 million),
additional compensation associated with amendments to Company's stock options
($618,000), costs associated with the software conversion ($350,000), increased
professional fees associated with the Reorganization ($284,000), expenses
related to the Company's expansion of bearing and power transmission equipment
into locations where only pumps were sold previously and a provision for the
pending IRS examination ($135,000).

LIQUIDITY AND CAPITAL RESOURCES

Under the Credit Facility, all available cash is generally applied to
reduce outstanding borrowings, with operations funded through borrowings under
the credit facility. The Company's policy is to maintain low levels of cash and
cash equivalents and to use borrowings under its line of credit for working
capital. The Company had $3.1 million available for borrowings under its working
capital line of credit at March 31, 1998. Following the consummation of the
Offering, the Company expects to have an aggregate of $32.0 million available
under its working capital line of credit and $15 million available under its
acquisition line of credit, and the Company intends to seek an increased line of
credit. Working capital at March 31, 1998 and December 31, 1997 was $38.2
million and $36.5 million, respectively. During the first three months of 1998
and the year 1997, the Company collected its trade receivables in approximately
49 and 46 days, respectively, and turned its inventory approximately five times
on an annualized basis.

Subsequent to the end of the first quarter of 1998, the Company amended the
Credit Facility and currently has a combined line of credit for up to $50
million. Additionally, the loan restructure increased the Company's term loan
from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan to the term loan. The amended Credit
Facility provides for a $15.0 million acquisition term loan to be used for
acquisitions provided certain customary provisions related to combined cash
flows and acquisition pricing are met. Additionally, interest rates will range
from LIBOR plus 1.50 percent to LIBOR plus 3.00 percent depending upon the
relationship of the Company's debt to cash flow and financial covenants tied to
debt service levels and cash flow. The line of credit is secured by receivables,
inventory, and machinery and equipment and matures January 2000. The facility
contains customary affirmative and negative covenants as well as financial
covenants that require the Company to maintain a positive cash flow and other
financial ratios, such as tangible net worth less than five to one and current
assets to current liabilities greater than two to one.

The Company generated cash from operating activities of $3.4 million in the
first three months of 1998 as compared to $1.0 million during the first three
months of 1997 due primarily to a reduction in the net working capital
components during the first three months of 1998.

The Company had capital expenditures of approximately $250,000 for the
first three months of 1998 as compared to $227,000 during the same period of
1997. Capital expenditures in the first three months of 1998 were primarily
related to computer hardware ($136,000). Capital expenditures for 1997 were
predominantly for the expansion of a facility in LaPorte, Texas ($80,000),
leasehold improvements and furniture and fixtures at the corporate office and
for office equipment and computer automation.

On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Tri-Electric. The purchase price consisted of
$6.2 million in cash, assumption of 1.6 million of trade payables and other
accrued expenses and a deferred payment of up to a maximum of $275,000 based on
the earnings before interest and taxes and depreciation of the acquired Company
to be paid on March 31, 1999, if earned. The results of operations of
Tri-Electric are included in the consolidated statements of income from the date
of acquisition. The acquisition has been accounted for using the purchase method
of accounting. Goodwill of $3.9 million was recorded in connection with the
acquisition.

The Company expects that its software will be year 2000 compatible by the
end of 1998. The upgrading of the Company's software to address year 2000 issues
is being handled through new releases of current software. All costs associated
with year 2000 issues will be included as part of normal software upgrades or
operating costs, as appropriate. The Company does not believe that any of the
costs associated with year 2000 issues will be material to its financial
condition or results of operations.

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The Company believes that cash generated from operations and available
under its Credit Facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of the Company's acquisition program and
integrated supply strategy will require capital in the form of the issuance of
additional equity or debt financing. There can be no assurance that such
financing will be available to the Company or as to the terms thereof.

ACCOUNTING PRONOUNCEMENTS

In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities". In February 1997, the FASB issued Statements
Nos. 128 and 129 "Earnings per Share" and "Disclosure of Information about
Capital Structure", respectively, and in June 1997, issued Statements Nos. 130
and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information", respectively. The major provisions of these
statements and their impact on the Company are discussed below.

Statement No. 125 established criteria for recognition of a sale in
conjunction with the transfer of financial assets, under which sales may be
recognized only when the transferor has surrendered control of the assets. This
statement currently is not anticipated to have any impact on the Company as the
Company does not currently enter into transactions which fall under the scope of
this statement.

Statement No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrant. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company adopted this statement in 1997, as required, and has restated all
previously stated earnings per share data in this Prospectus. The difference
between fully diluted earnings per share and diluted earnings per share was not
material.

In June 1997, the FASB issued Statement No. 130, which requires additional
disclosure of information about an entity's capital structure, including
information about dividend and liquidation preferences, voting rights, contracts
to issue additional shares, conversion and exercise prices, etc. The Company
plans to adopt this statement in December 1997.

SFAS No. 129 requires additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, conversion and
exercise prices, etc. The Company has adopted this statement as of and for the
period ended December 31, 1997.

In June 1997, the FASB adopted Statement No. 131, which requires the
presentation of comprehensive income in an entity's financial statements.
Comprehensive income represents all changes in equity of an entity during the
reporting period, including net income and charges directly to equity which are
excluded from net income. The adoption of this statement is not anticipated to
have an impact on the Company as the Company currently does not enter into any
transactions that result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities).

Statement No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a Company-wide basis; therefore, the adoption of the statement is not
expected to materially impact the Company. The Company plans to adopt this
statement in 1998.

INFLATION

The Company does not believe the effects of inflation have any material
adverse effect on its results of operations or financial condition and attempts
to minimize inflationary trends by passing manufacturer price increases on to
the customer whenever practicable.

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BUSINESS

GENERAL

The Company is a leading supplier of MRO products, equipment and services
to industrial customers. The Company provides a wide range of MRO products in
the following categories: fluid handling equipment, bearings and power
transmission equipment, general mill and safety supplies and electrical
products. The Company also offers a line of valve and valve automation products
within the pipe, valve and fittings category and is seeking to expand its
presence in this area. The Company offers its customers a single source of
supply on an efficient and competitive basis by being a first-tier distributor
which purchases its products directly from the manufacturer. The Company also
provides value-added services such as system design, fabrication, installation,
repair and maintenance for its customers. The Company offers this wide range of
industrial MRO products, equipment and services through a complete continuum of
customized and efficient MRO solutions, ranging from traditional distribution to
fully integrated supply contracts.

Since current management acquired control of the Company in 1986, the
Company has grown substantially through 12 acquisitions. This growth has been
designed to position and differentiate the Company as a single source,
first-tier distributor of the major product categories in the United States
industrial market. The Company currently provides a wide range of products in
four of the five major product categories. The Company also intends to expand
its product offering in the fifth product category, pipe, valve and fittings.

INDUSTRY OVERVIEW

The Company estimates that annual sales in the United States of MRO
products for industrial customers currently exceeds $200 billion, of which the
Company estimates over $150 billion are in the five major product categories of
(i) fluid handling equipment, (ii) bearings and power transmission equipment,
(iii) general mill and safety supplies, (iv) pipe, valve and fittings and (v)
electrical products. The Company's MRO products include a wide range of products
in the fluid handling equipment, bearings and power transmission equipment and
general mill and safety supplies categories. The Company also offers a line of
valve and valve automation products within the pipe, valve and fittings category
and is seeking to expand its presence in this area. With additional expansion in
the pipe, valve and fittings category, the Company will be able to provide as a
first-tier distributor products in the five major MRO product categories. Based
on 1996 sales as reported by industry sources, the Company was the 40th largest
distributor of MRO products in the United States. On a combined basis after
giving effect to the Company's 1997 acquisitions of SSI and Pelican and 1998
acquisition of Tri-Electric, the Company would have been the 28th largest
distributor of MRO products in the United States.

While the growth in the industrial distribution market is generally related
to the expansion of the United States economy, revenues attributable to the
outsourcing of MRO supply procurement, inventory control and warehouse
management, known as "integrated supply", are expected to grow at an annualized
rate of 40% from $1.8 billion in 1995 to $10 billion in 2000. The industrial
distribution market is highly fragmented, with the 50 largest distributors
accounting for less than 15% of the total United States market during 1996. As a
result, most industrial customers currently purchase their industrial supplies
through numerous local distribution and supply companies. These distributors
generally provide the customer with repair and maintenance services, technical
support and application expertise with respect to one product category. Products
typically are purchased by the distributor for resale directly from the
manufacturer and warehoused at branch distribution facilities of the distributor
until sold to the customer. The customer also typically will purchase an amount
of product inventory for its near term anticipated needs and warehouse those
products at its industrial site until the products are used.

The Company believes that the current distribution system for industrial
products in the United States creates inefficiencies at both the customer and
the distributor level through excess inventory requirements and duplicative cost
structures. To compete more effectively, the Company's customers and other users
of MRO

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<PAGE> 25

products are seeking ways to enhance efficiencies and lower MRO product and
procurement costs. In response to this customer desire, three primary trends
have emerged in the industrial supply industry:

Industrial distributors typically provide professional sales expertise,
engineering expertise, inventory availability, fabrication and assembly and
in-house and field service. The Company believes that the acquisition of other
businesses should not materially affect its ability to continue to provide these
services to its customers and the customers of the acquired distributors. In
fact, the Company believes that as a larger and more diverse organization it
should be able to maintain the same or higher level of service to its customers
and the customers of any acquired distributors. The Company also believes that
the level of service provided to the customers of the acquired business may be
enhanced as a result of the availability of a broader range of products, the
elimination of duplicative overhead and DXP's SmartSource and American MRO
integrated supply programs.

BUSINESS STRATEGY

The Company's strategy is focused on addressing current trends in the
industrial distribution market through a combination of acquisitions and
internal growth. The Company seeks acquisitions that will provide the Company
access to additional products lines and customers to enhance its position as a
single source industrial distributor with first-tier distribution capabilities.
Key elements of the Company's internal growth strategy include leveraging
existing customer relationships, expanding product offerings from existing
locations, reducing costs through consolidated purchasing programs and combined
product distribution centers, designing and implementing innovative solutions to
address the procurement and supply needs of the Company's customers and using
the Company's traditional distribution and integrated supply capabilities to
increase sales in each area.

The Company's key strategies are:

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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 and a third in the first
quarter of 1998 with combined 1997 revenues of $74.1 million (of which $31.7
million appeared in the Company's consolidated financial statements for 1997)
directed at expanding its product lines and increasing its geographic presence.
Through the Company's acquisition of the assets of SSI, the Company added
general mill and safety supply to its product offerings and expanded its
geographic presence to seven additional states and 24 additional cities
throughout the United States. The acquisition of SSI also enhanced the Company's
integrated supply capabilities through SSI's existing integrated supply
contracts and SmartSource program. The Company's May 1997 acquisition of Pelican
expanded the Company's general mill and safety supply product lines and added an
additional integrated supply contract with a major refinery in Baton Rouge,
Louisiana. In the first quarter of 1998, the Company completed the acquisition
of the assets of Tri-Electric, thereby adding electrical products to its product
offerings.

PRODUCTS AND SERVICES

The Company currently serves as a first-tier distributor of more than
170,000 SKUs for use primarily by customers engaged in the general
manufacturing, oil and gas, petrochemical, service and repair and wood products
industries. Other industries served by the Company include mining, construction,
chemical, municipal, food and beverage and pulp and paper. The Company's MRO
products include a wide range of products in the fluid handling equipment,
bearings and power transmission equipment, general mill and safety supplies and
electrical products. The Company also offers a line of valve and valve
automation products within the pipe, valve and fittings category and is seeking
to expand its presence in this area. With additional

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<PAGE> 27
expansion in the pipe, valve and fittings category, the Company will be able to
provide as a first-tier distributor a substantial portion of products in the
five major MRO product categories. The Company's products are distributed from
54 distribution centers strategically located throughout the United States and
sold through a sales force of 275 sales representatives who generally are
compensated on a commission basis.

Fluid Handling Equipment

The Company's fluid handling equipment line includes a full line of (i)
centrifugal pumps for transfer and process service applications, such as
petrochemicals, refining and crude oil production, (ii) rotary gear pumps for
low-to medium-pressure service applications, such as pumping lubricating oils
and other viscous liquids, (iii) plunger and piston pumps for high-pressure
service applications such as salt water injection and crude oil pipeline service
and (iv) air-operated diaphragm pumps. The Company also provides various pump
accessories. Sales of fluid handling equipment accounted for 55%, 53%, 44% and
36% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and quarter ended March 31, 1998 respectively. Such sales accounted for 36% and
35% of the Company's revenues for the year ended December 31, 1997 and the
quarter ended March 31, 1998, respectively, on a pro forma basis after giving
effect to the SSI, Pelican and Tri-Electric acquisitions.

Bearings and Power Transmission Equipment

The Company provides a full line of bearings, hoses, seals and power
transmission products. The Company's bearing products include several types of
mounted and unmounted bearings for a variety of applications. Hose products
distributed by the Company include a large selection of industrial fittings and
stainless steel hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as
well as hoses for chemical, petroleum, air and water applications. The Company
distributes seal products for downhole, wellhead, valve and completion equipment
to oilfield service companies. Power transmission products distributed by the
Company include speed reducers, flexible coupling drives, chain drives,
sprockets, gears, conveyors, clutches, brakes and hoses. Sales of bearings,
hoses, seals and power transmission equipment accounted for 35%, 39%, 31% and
29% of the Company's revenues for the years ended December 31, 1995, 1996, 1997
and quarter ended March 31, 1998, respectively. Such sales accounted for 25% and
28% of the Company's revenues for the year ended December 31, 1997 and the
quarter ended March 31, 1998, respectively, on a pro forma basis after giving
effect to the SSI, Pelican, and Tri-Electric acquisitions.

General Mill and Safety Supplies

The Company, as a result of the acquisitions of SSI and Pelican in May
1997, offers a broad range of general mill and safety supplies, such as
abrasives, tapes and adhesive products, coatings and lubricants, cutting tools,
fasteners, hand tools, janitorial products, pneumatic tools, welding equipment,
eye and face protection products, first aid products, protection products,
hazardous material handling products, instrumentation and respiratory protection
products. Sales of general mill supply and safety products accounted for
approximately 27% of the Company's revenue on a pro forma basis for the year
ended December 31, 1997 and 26% of the Company's revenue for the quarter ended
March 31, 1998.

Pipe, Valve and Fittings

The Company's valve and valve automation products within this category
include a full line of pneumatic, hydraulic and electric actuators for critical
or high-pressure service applications or remote valve operation applications,
such as refinery, offshore and pipeline applications, as well as for
applications involving large-diameter pipe. The Company also provides a full
line of manual worm gear and bevel gear actuators for low-pressure applications
not requiring remote operation, including tank farms, water lines and municipal
water systems. Sales of valves and valve automation products accounted for 9%,
8%, 6% and 5% of the Company's revenues for years ended December 31, 1995, 1996,
1997 and quarter ended March 31, 1998, respectively. Such sales accounted for 4%
of the Company's revenue for the year ended December 31, 1997 and quarter ended
March 31, 1998, on a pro forma basis after giving effect to the SSI, Pelican and
Tri-Electric acquisitions.

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Electrical Products

The Company offers a broad range of electrical products, such as wire
conduit, wiring devices, electrical fittings and boxes, signaling devices,
heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries,
fans and fuses. Sales of electrical products accounted for 2% of the Company's
revenues for the quarter ended March 31, 1998. Such sales accounted for 8% and
7% of the Company's revenues for the year ended December 31, 1997 and the
quarter ended March 31, 1998, respectively, on a pro forma basis after giving
effect to the SSI, Pelican and Tri-Electric acquisitions.

CUSTOMIZED DISTRIBUTION SERVICES

System Design, Fabrication, Installation and Repair and Maintenance Services

In addition to distributing products, the Company provides complete,
customized pumping, valve automation and power transmission system design and
fabrication services through its engineering personnel and fabrication
facilities. The Company also provides training services with respect to the
installation and basic applications of its products as well as around-the-clock
field repair services supported by a fleet of fully equipped service vehicles.

Integrated Supply

The Company actively markets to its customers through the Company's
SmartSource program, a method whereby the customer may choose from a menu of
options the aspects of integrated supply that it prefers. Additionally, through
its American MRO program, the Company offers a comprehensive outsourcing program
designed to provide all aspects of the maintenance, repair and operating supply
procurement and the inventory management and distribution functions for its
customers at the customer's location. These two programs allow the customer to
tailor a program to meet its specific needs.

CUSTOMERS

The Company provides its products and services to over 25,000 customers in
various industries, principally general manufacturing, oil and gas,
petrochemical, service and repair and wood products. Other industries include
mining, construction, chemical, municipal, food and beverage and pulp and paper.
No one customer represented more than 5% of the Company's sales for the year
ended December 31, 1997.

SALES AND MARKETING

The Company markets its products through its sales force, consisting of
approximately 126 outside sales representatives and 149 direct sales
representatives. The Company has structured compensation to provide incentives
to its sales representatives to increase sales through the use of commissions.
The Company's outside sales representatives focus on building long-term
relationships with customers and, through their product and industry expertise,
providing customers with product application, engineering and after-the-sale
services. The direct sales representatives support the outside sales
representatives and are responsible for entering product orders and providing
technical support with respect to the Company's products. Because the Company
offers a broad range of products, the Company's outside and direct sales
representatives are able to use their existing customer relationships with
respect to one product line to cross-sell the Company's other product lines. In
addition, geographic locations in which certain products are sold also are being
utilized to sell products not historically sold at such locations.

Unlike many of its competitors, the Company markets its products primarily
as a first-tier distributor, generally procuring products directly from the
manufacturers, rather than from other distributors. As a first-tier distributor,
the Company is able to reduce its customers' costs and improve efficiencies in
the supply chain.

The Company has increased its competitive advantage through its traditional
and integrated supply programs, designed to address the customer's specific
product and procurement needs. The Company offers its customers various options
for the integration of their supply needs, ranging from serving as a single
source of

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<PAGE> 29
supply for all or specific lines of products and product categories to offering
a fully integrated supply package in which the Company assumes the procurement
and management functions, including ownership of inventory, at the customer's
location. The Company's unique approach to integrated supply allows the Company
to design a program that best fits the needs of the customer. For those
customers purchasing a number of products in large quantities, the customer is
able to outsource all or most of those needs to the Company. For customers with
smaller supply needs, the Company is able to combine its traditional
distribution capabilities with its broad product categories and advanced
ordering systems to allow the customer to engage in one-stop shopping without
the commitment required under an integrated supply contract.

SUPPLIERS

The Company acquires its products through numerous original equipment
manufacturers. The Company has distribution agreements with these manufacturers,
some of which give the Company exclusive rights to distribute the manufacturers'
products in a specific geographic area. All of the Company's distribution
agreements are subject to cancellation by the manufacturer upon one year notice
or less. No one manufacturer provides products that account for 10% or more of
the Company's revenues. The Company believes that alternative sources of supply
could be obtained in a timely manner if any distribution agreement were
canceled. Accordingly, the Company does not believe that the loss of any one
distribution agreement would have a material adverse effect on its business,
financial condition or results of operations. Representative manufacturers of
the Company's products include (i) Gould's, G&L, Viking, Wilden and Gaso (fluid
handling products), (ii) SKF, Torrington/Fafnir, Timkin and NTN, Dodge/Reliance,
Falk, Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric
(bearing and power transmission products), (iii) Union Bullerfield, Gulf Coast
Fasteners, Norton Gray Abrasives, Sastech, Inc., and LaCross Rainfair Safety
Products (general mill and safety supply), (iv) Cutler-Hammer, Cooper, Killark,
and Allied and American Insulated Wiring (electrical products) and (v) G.H.
Bettis (valve and valve automation products).

MANAGEMENT INFORMATION SYSTEM

The Company uses technology to benefit customers and to improve the
Company's productivity and efficiency. In addition to traditional functions of
inventory control, order processing, purchasing, accounts receivable, accounts
payable and general ledger, the Company's computer system has the flexibility to
integrate with the customer's maintenance, accounting and management systems.
The Company's system allows for real-time reporting of industrial products used
by work order, department and individual, as well as on-line stock inquiry and
order-status reports. The Company's system supports advanced functions, such as
EDI, customized billing, end user reporting, facsimile transmission, bar coding
and preventative maintenance. The Company's Smart Source and American MRO
programs deliver DXP's technology to the integrated supply customer, thereby
eliminating duplication and inefficiencies to lower the total acquisition cost
of MRO products. This system links the Company's branches and corporate offices
with manufacturers and customers into one network system.

The Company operates a mainframe system that is supported by the industry
standard open system environment. The Company has invested significant resources
within the last 18 months to increase the capabilities and networking
opportunities of this system. The Company's system supports a large number of
customer specific databases which tie into the Company's primary database. This
capability allows the Company to provide its customers with a wide variety of
reports that are customized to meet the specific needs of the customer.

COMPETITION

The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, many of which may have greater
financial and other resources than the Company. Many of the Company's
competitors are small enterprises selling to customers in a limited geographic
area. The Company also competes with larger distributors that provide integrated
supply programs and outsourcing services similar to those offered by the Company
through its SmartSource and American MRO programs, some of which may be able to
supply their products in a more efficient and cost-effective manner than the
Company. The

28
<PAGE> 30

Company also competes with direct mail distributors, large warehouse stores and,
to a lesser extent, manufacturers. While many of the Company's competitors offer
traditional distribution of some of the product groupings offered by the
Company, the Company is not aware of any major competitor that offers on a non-
direct mail basis a product grouping as broad as that which will be offered by
the Company following the Proposed Acquisitions. Further, while certain
direct-mail distributors provide product offerings as broad as the Company,
these competitors do not offer the product application, engineering and
after-the-sale services provided by the Company.

BACKLOG

Backlog is not material to the Company's business.

INSURANCE

The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. There can be no
assurance that such insurance will be adequate for the risks involved, that
coverage limits will not be exceeded or that such insurance will apply to all
liabilities. The occurrence of an adverse claim in excess of the coverage limits
maintained by the Company could have a material adverse effect on the Company's
financial condition and results of operations.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

The Company is subject to various laws and regulations relating to its
business and operations, and various health and safety regulations as
established by the Occupational Safety and Health Administration.

Certain of the Company's operations are subject to federal, state and local
laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although the Company believes
that is has adequate procedures to comply with applicable discharge and other
environmental laws, the risks of accidental contamination or injury from the
discharge of controlled or hazardous materials and chemicals cannot be
eliminated completely. In the event of such an accident, the Company could be
held liable for any damages that result, and any such liability could have a
material adverse effect on the Company. The Company is not currently aware of
any situation or condition that it believes is likely to have a material adverse
effect on its results of operations or financial condition.

EMPLOYEES

At March 31, 1998, the Company had 709 full-time employees. The Company
believes that its relationship with its employees is good.

FACILITIES AND OPERATIONS

The Company owns or leases 54 branch distribution facilities located in
Alabama, Arizona, Arkansas, Colorado, Idaho, Louisiana, Montana, Nevada, New
Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming. These facilities
average from 2,500 square feet to 138,000 square feet in size. Those facilities
that are not owned by the Company are leased for terms generally ranging from
three to five years. The leases provide for periodic specified rental payments
and certain leases are renewable at the option of the Company. The Company
believes that if the leases for any of its facilities were not renewed, other
suitable facilities could be leased with no material adverse effect on its
business, financial condition or results of operations. Certain of the
facilities owned by the Company are pledged to secure indebtedness of the
Company.

29
<PAGE> 31

MANAGEMENT

The following table sets forth certain information as of March 31, 1998,
about the executive officers and directors of the Company. All directors of the
Company hold office until the next annual meeting of shareholders or until their
respective successors have been elected and qualified. Executive officers are
elected by the Company's Board of Directors to hold office until their
respective successors are elected and qualified.

<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
Jerry J. Jones.................... 59 Senior Vice President/Operations and Director
Bryan H. Wimberly................. 59 Senior Vice President/Corporate Development and
Director
Cletus Davis...................... 67 Director
Kenneth H. Miller................. 58 Director
Thomas V. Orr..................... 47 Director
</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.

Jerry J. Jones has served as a Director since July 1996 and as Senior Vice
President/Operations since September 1997. From August 1996 to September 1997,
Mr. Jones served as Senior Vice President/ Corporate Development. Mr. Jones has
also served as a Director of SEPCO since 1986 and as Senior Vice
President/Corporate Marketing of SEPCO since June 1995. From February 1993 to
June 1995, Mr. Jones served as President of T.L. Walker Bearing Group, a
subsidiary of SEPCO. Prior to his employment with SEPCO, Mr. Jones served as
President and Chief Executive Officer of the Energy Partners, Inc./Perry
Oceanographics, a renewable energy development company and offshore underwater
equipment manufacturer, from November 1989 to December 1992.

Bryan H. Wimberly has served as a Director since July 1996 and as Senior
Vice President/Corporate Development since September 1997. From August 1996 to
September 1997, he served as Senior Vice President/Pump, Bearing, Power
Transmission and Valve Automation Group. Mr. Wimberly has also served as a
Director of SEPCO since 1987 and the President and Chief Operating Officer of
SEPCO since October 1995. Mr. Wimberly has been employed by SEPCO since 1987 in
various capacities, including Senior Vice President/Operations.

Cletus Davis has served as a Director of the Company since August 1996. Mr.
Davis has also served as a Director of SEPCO since May 1996. Mr. Davis is an
attorney practicing in the areas of commercial real estate, banking, corporate,
estate planning and general litigation and is also a trained mediator. From May
1988 to February 1992, Mr. Davis was a member of the law firm of Wood,
Lucksinger & Epstein. Since March 1992, Mr. Davis has practiced law with the law
firm of Cletus Davis, P.C.

30
<PAGE> 32

Kenneth H. Miller has served as a Director of the Company since August
1996. Mr. Miller has also served as a Director of SEPCO since April 1989. Mr.
Miller is a Certified Public Accountant and has been a solo practitioner since
1983.

Thomas V. Orr has served as a Director of the Company since August 1996.
Mr. Orr has also served as a Director of SEPCO since May 1996. Mr. Orr has been
Executive Managing Director of Morgan Keegan & Company, Inc. ("Morgan Keegan"),
an investment banking firm and one of the underwriters, since August 1997. From
February 1995 to July 1997 he was a Senior Vice President and Divisional Manager
of Morgan Keegan. From June 1990 to January 1995, Mr. Orr served as Divisional
Sales Manager for two years and Branch Officer Manager for three years for
PaineWebber, Inc., an investment banking firm.

BOARD OF DIRECTORS' COMPENSATION

The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting. The Company pays each non-employee director $1,000 per committee or
board meeting not to exceed $1,500 in the event two meetings occur on the same
day. In 1997, Mr. Davis received $4,000 and Messrs. Orr and Miller received
$3,000 for attendance at Board of Directors meetings.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least three independent directors.
The Audit Committee, composed of Messrs. Davis, Miller and Orr, makes
recommendations to the Board of Directors on matters regarding the independent
public accountants of the Company and the annual audit of the Company's
financial statements and accounts. The Compensation Committee, composed of
Messrs. Davis, Miller and Orr, makes recommendations to the Board of Directors
regarding compensation for the Company's executive officers, directors,
employees consultants and agents, and will act as the administrative committee
for any stock-based plan of the Company.

COMPENSATION OF EXECUTIVE OFFICERS

Set forth in the following table is certain compensation information
concerning the Chief Executive Officer and each of the Company's most highly
compensated executive officers as to whom the total annual salary and bonus for
the fiscal year ended December 31, 1997, exceeded $100,000.

SUMMARY COMPENSATION TABLE

<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.

31
<PAGE> 33

The following table sets forth information concerning the value of
unexercised options held by each of the executive officers named in the Summary
Compensation Table at December 31, 1997. None of such executive officers
exercised any stock options during the year ended December 31, 1997.

OPTION VALUES AT DECEMBER 31, 1997

<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 to be effected immediately prior to the consummation of the
Offering).

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement (the "Little
Employment Agreement"), effective July 1, 1996, as amended, with Mr. Little. The
Little Employment Agreement is for a term of three years. The Little Employment
Agreement provides for compensation in a minimum amount of $260,000 per annum,
to be reviewed at least annually for possible increases, monthly bonuses equal
to 3% of the profit before tax of the Company as shown on the books and records
of the Company at the end of each month (up to an aggregate annual amount not to
exceed twice the annual base salary paid to Mr. Little under the Little
Employment Agreement) and other perquisites in accordance with the Company
policy. In the event Mr. Little terminates his employment for "Good Reason" (as
defined therein), or is terminated by the Company for other than "Good Cause"
(as defined therein), Mr. Little is entitled to receive a cash lump sum payment
equal to the sum of (i) the base salary for the remainder of the employment
period under the Little Employment Agreement, (ii) an amount equal to the sum of
the most recent 12 months of bonuses paid to him, (iii) two times the sum of his
current annual base salary plus the total of the most recent 12 months of
bonuses, (iv) all compensation previously deferred and any accrued interest
thereon and any accrued vacation pay not yet paid by the Company and (v)
continuation of benefits under the Company's benefit plans for the current
employment period. Mr. Little is also entitled under the Little Employment
Agreement to certain gross-up payments if an excise tax is imposed pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended, which imposes an
excise tax on certain severance payments in excess of three times an annualized
compensation amount following certain changes in control or any payment of
distribution made to him. As amended on May 21, 1998, the Little Employment
Agreement will terminate June 30, 2001 if Mr. Little enters into a new agreement
with the Company, as approved by the Compensation Committee, and will not be
renewable automatically.

The Company also has entered into employment agreements (each Employment
Agreement hereinafter referred to as an "Employment Agreement" and the three
Employment Agreements hereinafter collectively referred to as the "Employment
Agreements"), effective as of July 1, 1996, with Messrs. Jerry J. Jones, Bryan
H. Wimberly and Gary A. Allcorn, (each hereinafter referred to as "Employee").
Each Employment Agreement is for a term of one year. The Employment Agreements
provide for (i) annual salary ("Salary") in the amounts of $130,001 for Mr.
Jones, $130,000 for Mr. Wimberly and $113,100 for Mr. Allcorn and (ii) other
perquisites in accordance with Company policy. The Employment Agreements provide
for bonuses as follows: (i) Mr. Jones is entitled to a monthly bonus of two
percent of the monthly profit before tax of the Company, excluding sales of
fixed assets and extraordinary items; (ii) Mr. Wimberly is entitled to a monthly
bonus of two percent of the monthly profit before tax of SEPCO, excluding sales
of fixed assets and extraordinary items; and (iii) Mr. Allcorn is entitled to a
monthly bonus of one percent of the monthly profit

32
<PAGE> 34

before tax of the Company, excluding sales of fixed assets and extraordinary
items. The Employment Agreements were amended on May 21, 1998 to provide that
the aggregate of the monthly bonuses in any one year may not exceed twice the
annual base salary paid to the employee. The May 1998 amendment also provides
that the Employment Agreements will not be renewed July 1, 1998 if Messrs.
Jones, Bryan and Allcorn have entered into new employment agreements with the
Company, as approved by the Compensation Committee.

In the event Employee terminates his employment for "Good Reason" (as
defined therein), or is terminated by the Company for other than "Cause" (as
defined therein), each Employee would receive (i) 12 monthly payments each equal
to one month of the Salary, in the case of Messrs. Jones, Wimberly and Allcorn,
and six monthly payments each equal to one month of Salary, in the case of Mr.
Evans, (ii) a termination bonus equal to the previous 12 monthly bonuses, in the
case of Messrs. Jones, Allcorn, and Wimberly and (iii) any other payments due
through the date of termination. In the event Employee dies, become disabled,
terminates the Employment Agreement with notice or the Employment Agreement is
terminated by the Company for Cause, Employee or Employee's estate, as
applicable, would receive all payments then due him under the Employment
Agreement through the date of termination.

BENEFIT PLANS

Employee Stock Ownership Plan

The Company maintains an employee stock ownership plan (the "ESOP") for the
benefit of eligible employees pursuant to which annual contributions may be
made. The amount and form of the annual contribution is within the discretion of
the Company's Board of Directors. Such contributions are limited to a maximum of
15% of the total compensation paid to all participants eligible to receive an
allocation during the fiscal year. The Company (or its predecessor, SEPCO)
contributed $150,000 for each of the years ended December 31, 1996, 1995 and
1994. The ESOP currently is administered by the Company's Compensation
Committee.

Long-Term Incentive Plan

In August 1996, the Company established the LTIP, which provides for the
grant of stock options (which may be non-qualified stock options or incentive
stock options for tax purposes), stock appreciation rights issued independent of
or in tandem with such options, restricted stock awards and performance awards
to certain key employees of the Company and its subsidiaries. The LTIP is
administered by the Compensation Committee.

At March 31, 1998, 84,500 shares of Common Stock (approximately 2% of the
current outstanding shares of Common Stock) were available for issuance under
the LTIP, and options granted under the LTIP to purchase 111,500 shares of
Common Stock were outstanding. In addition, as of January 1 of each year the
LTIP is in effect, if the total number of shares of Common Stock issued and
outstanding, not including any shares issued under the LTIP, exceeds the total
number of shares of Common Stock issued and outstanding as of January 1 of the
preceding year, the number of shares available will be increased by an amount
such that the total number of shares available for issuance under the LTIP
equals 5% of the total number of shares of Common Stock outstanding, not
including any shares issued under the LTIP. Lapsed, forfeited or canceled awards
will not count against these limits. Cash exercises of SARs and cash settlement
of other awards will also not be counted against these limits but the total
number of SARs and other awards settled in cash shall not exceed the total
number of shares authorized for issuance under the LTIP (without reduction for
issuances). The consummation of the Offering will result in an increase in
127,500 shares of Common Stock available under the LTIP, which may be used for
grants other than stock options under the LTIP.

33
<PAGE> 35

CERTAIN TRANSACTIONS

In December 1989, the Company restructured certain loans previously made by
the Company to David R. Little, Chairman of the Board, President and Chief
Executive Officer of the Company, pursuant to which Mr. Little executed two
promissory notes in the amounts of $149,910 and $58,737, respectively, each
bearing interest at 9% per annum. The notes require monthly payments of $1,349
and $528, respectively. The outstanding balances of such loans at December 31,
1997, were $127,814 and $50,080, respectively.

In December 1993, the Company loaned Mr. Little approximately $210,940 to
purchase 59,800 shares of SEPCO's Class A Common Stock. The loan bore interest
at 6% per annum and provided for annual interest payments and one principal
payment upon sale of the stock which secured such loan. The loan was repaid on
August 5, 1996. The Company from time to time also has made non-interest bearing
advances to Mr. Little that as of December 31, 1997 totaled approximately
$340,439. The Company and Mr. Little have agreed that the amount of non-interest
bearing advances made to Mr. Little will not exceed the amount outstanding at
December 31, 1997. The largest aggregate amount of Mr. Little's indebtedness
outstanding to the Company during the year ended December 31, 1997 was
approximately $638,152. Mr. Little, a Selling Shareholder, intends to apply a
portion of the net proceeds from his sale of shares of Common Stock hereunder to
repay approximately $258,000 owed to the Company. See "Security Ownership of
Management, Principal Shareholders and Selling Shareholders".

Mr. Allcorn, Senior Vice President/Finance and Chief Financial Officer of
the Company, is the trustee of three trusts for the benefit of Mr. Little's
children, each of which holds 570,932 shares of Common Stock and 5,000 shares of
Series B Convertible Preferred Stock. Mr. Allcorn has advised the Company that
if the Offering is consummated, immediately prior to the consummation of the
Offering, the aggregate of 15,000 shares of Series B Convertible Preferred Stock
will be converted into shares of Common Stock. Mr. Allcorn exercises sole voting
and investment power over the shares held by such trusts.

Mr. Little personally guaranteed up to $500,000 of the obligations of the
Company under the Credit Facility. In addition, all of the shares of Common
Stock and Series B Convertible Preferred Stock held in trust for Mr. Little's
children have been pledged to such lender to secure the obligations of the
Company under the Credit Facility.

34
<PAGE> 36

SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL SHAREHOLDERS
AND SELLING SHAREHOLDERS

The following table sets forth information as of May 15, 1998, with respect
to (i) persons known to the Company to be beneficial holders of five percent or
more of either the outstanding shares of Common Stock or Series A Preferred
Stock, (ii) named executive officers and directors of the Company, (iii) all
executive officers and directors of the Company as a group and (iv) certain
information regarding the Selling Shareholders.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2)
-------------------------------------------------------------------
COMMON STOCK COMMON STOCK
PRIOR TO SUBSEQUENT TO
SERIES A THE OFFERING NUMBER THE OFFERING
NAME AND ADDRESS OF PREFERRED ---------------- OF SHARES ----------------
BENEFICIAL OWNER(1) STOCK % NUMBER % TO BE SOLD NUMBER %
------------------- --------- ---- --------- ---- ---------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gary A. Allcorn(3)............................ -- -- 2,247,419 48.8 105,000 2,142,419 29.9
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
David R. Little(4)............................ -- -- 1,080,069 21.7 100,000 980,069 12.3
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Bryan H. Wimberly(5).......................... -- -- 418,562 9.9 20,000 398,562 5.5
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Jerry J. Jones(6)............................. -- -- 359,643 7.9 45,000 314,643 4.2
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
SEPCO Industries, Inc......................... 1,870 62.5 938,021 22.5 -- 938,021 13.1
Employee Stock Ownership Plan
c/o River Oaks Trust Company, Trustee
2001 Kirby
Houston, Texas 77210
J. Michael Wappler(7)......................... -- -- 220,160 5.3 10,000 210,160 2.9
580 Westlake Park Blvd., Suite 1100
Houston, Texas 77079
Denny Lawrence(8)............................. -- -- 86,048 2.1 10,000 76,000 1.1
Rt. 1, Box 265-B
Farmersville, Louisiana 71241
Donald E. Tefertiller(9)...................... 374 12.5 46,649 1.1 -- 46,649 *
4425 Congressional Drive
Corpus Christi, Texas 78413
Norman O. Schenk(10).......................... 374 12.5 40,112 * -- 40,112 *
4415 Waynesboro
Houston, Texas 77035
Charles E. Jacob(11).......................... 187 6.3 24,017 * -- 24,017 *
P. O. Box 57
Maypearl, Texas 76064
Ernest E. Herbert(12)......................... 187 6.3 23,688 * -- 23,688 *
57 Coronado Avenue
Kenner, Louisiana
James Webster(13)............................. -- -- 21,476 * 10,000 11,476 *
6306 Glenhill
Spring, Texas 77389
Thomas V. Orr, Director(14)................... -- -- 6,500 * -- 6,500 *
</TABLE>

35
<PAGE> 37

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

* Less than 1%.

(1) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants and other convertible securities that are held by such
person (but not those held by any other person) and that are exercisable or
convertible within 60 days have been exercised or converted.

(2) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to all
shares of Common Stock and Series A Preferred Stock beneficially owned by
them.

(3) Includes 1,712,796 shares of Common Stock and 15,000 shares of Series B
Convertible Preferred Stock owned by the Kacey Joyce, Andrea Rae and
Nicholas David Little 1988 Trusts (the "Trusts") for which Mr. Allcorn
serves as trustee. Because of this relationship, Mr. Allcorn may be deemed
to the beneficial owner of such shares and the 420,000 shares of Common
Stock issuable upon conversion of the 15,000 shares of Series B Preferred
Stock held by the Trusts. The 15,000 shares of Series B Convertible
Preferred Stock will be converted into 420,000 shares of Common Stock
immediately prior to the consummation of the Offering. Also includes 20,000
shares of Common Stock issuable upon exercise of an option and 7,423 shares
of Common Stock held of record by the ESOP for Mr. Allcorn's account. If
the underwriters' over-allotment option is exercised in full, Mr. Allcorn
will sell an additional 36,750 shares of Common Stock.

(4) Includes 800,000 shares of Common Stock issuable to Mr. Little upon
exercise of an option and 40,844 shares of Common Stock held of record by
the ESOP for Mr. Little's account. If the underwriters' over-allotment
option is exercised in full, Mr. Little will sell an additional 35,000
shares of Common Stock.

(5) Includes 50,400 shares of Common Stock owned of record by a trust of which
Mr. Wimberly is one-third beneficiary and 48,800 shares of Common Stock
issuable upon exercise of an option granted to Mr. Wimberly. Also includes
8,962 shares of Common Stock held by the ESOP for Mr. Wimberly's account.
If the underwriters' over-allotment option is exercised in full, Mr.
Wimberly will sell an additional 7,000 shares of Common Stock.

(6) Includes 359,200 shares of Common Stock issuable upon exercise of an option
granted to Mr. Jones and 443 shares of Common Stock held by the ESOP for
Mr. Jones's account. If the underwriters' over-allotment option is
exercised in full, Mr. Jones will sell an additional 15,750 shares of
Common Stock.

(7) Includes 7,810 shares of Common Stock held of record by the ESOP for Mr.
Wappler's account. If the underwriters' over-allotment option is exercised
in full, Mr. Wappler will sell an additional 3,500 shares of Common Stock.

(8) Includes 21,200 shares of Common Stock issuable upon exercise of an option
and 276 shares of Common Stock held by the ESOP for Mr. Lawrence's account.
If the underwriters' over-allotment option is exercised in full, Mr.
Lawrence will sell an additional 3,500 shares of Common Stock.

(9) Includes 4,000 shares of Common Stock issuable upon exercise of an option
and 11,849 shares of Common Stock held of record by the ESOP for Mr.
Tefertiller's account.

(10) Includes 9,312 shares of Common Stock held of record by the ESOP for Mr.
Schenk's account.

(11) Includes 8,417 shares of Common Stock held of record by the ESOP for Mr.
Jacob's account.
36
<PAGE> 38

(12) Includes 11,938 shares of Common Stock held of record by the ESOP for Mr.
Herbert's account.

(13) Includes 48 shares of Common Stock held of record by the ESOP for Mr.
Webster's account. If the underwriters' over-allotment option is exercised
in full, Mr. Webster will sell an additional 3,500 shares of Common Stock.

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

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

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

(17) See notes (3) through (6) and (14) through (16).

INFORMATION REGARDING SELLING SHAREHOLDERS

Gary A. Allcorn has served as Senior Vice President/Finance of the Company
since August 1996 and as Chief Financial Officer since December 1997. Mr.
Allcorn also has held these positions with SEPCO since June 1995 and has been
employed by SEPCO since 1985 in various capacities. Mr. Allcorn is the trustee
of three trusts for the benefit of the children of David R. Little, the Chairman
of the Board, President and Chief Executive Officer of the Company, and
exercises sole voting and investment power over the shares held by such trusts.
Such shares are pledged to the lender under the Credit Facility. See
"Management" and "Certain Transactions".

David R. Little has served as President and a Director of the Company since
July 1996 and as Chairman of the Board and Chief Executive Officer since August
1996. Mr. Little also has held these positions with SEPCO since he acquired a
controlling interest of the Company in 1986. The Company has from time to time
made certain loans to Mr. Little which aggregated approximately $340,439 as of
December 31, 1997. Mr. Little also has personally guaranteed up to $500,000 of
the obligations of the Company under one of its credit facilities. See
"Management" and "Certain Transactions".

Jerry J. Jones has been a Director of the Company since July 1996 and has
served as Senior Vice President/Operations since September 1997. From August
1996 to September 1997, Mr. Jones was Senior Vice President/Corporate
Development. Mr. Jones also has serviced as a Director of SEPCO since 1986 and
as Senior Vice President/Corporate Marketing of SEPCO since June 1995. From
February 1993 to June 1995, Mr. Jones served as President of a subsidiary of
SEPCO. See "Management".

Bryan H. Wimberly has been a Director of the Company since July 1996 and
has served as Senior Vice President/Corporate Development since September 1997.
From August 1996 to September 1997, Mr. Wimberly was the Senior Vice
President/Pump, Bearing, Power Transmission and Valve Automation Group. Mr.
Wimberly also has served as a Director of SEPCO since 1987 and as President and
Chief Operating Officer of SEPCO since October 1995. Mr. Wimberly has been
employed by SEPCO since 1987 in various capacities, including Senior Vice
President/Operations. See "Management".

J. Michael Wappler, James Webster and Denny Lawrence are employees of the
Company.

37
<PAGE> 39

DESCRIPTION OF CAPITAL STOCK

The following summary of certain provisions of the capital stock of DXP
does not purport to be complete and is subject to, and qualified in its entirety
by the Restated Articles of Incorporation, as amended, and the Bylaws of the
Company which are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.

GENERAL

The Company has an authorized capitalization of 110,000,000 shares of
capital stock, consisting of 100,000,000 shares of Common Stock and 10,000,000
shares of preferred stock, of which 1,000,000 shares have been designated Series
A Preferred Stock, and 1,000,000 shares of which have been designated Series B
Convertible Preferred Stock. As of May 15, 1998, there were 4,139,194 shares of
Common Stock (after giving effect to the two-to-one reverse stock split to be
effected prior to the consummation of the Offering), 2,992 shares of Series A
Preferred Stock and 15,000 shares of Series B Convertible Preferred Stock
outstanding. As of such date, there were 138 holders of Common Stock of record.

COMMON STOCK

Dividends. The holders of shares of Series B Convertible Preferred Stock
are entitled to dividends before the payment of any dividends to holders of
shares of Common Stock. The holders of shares of Common Stock have no right or
preference to the holders of shares of any other class of capital stock of the
Company in respect of the declaration or payment of any dividends or
distributions by the Company. The holders of shares of Common Stock shall be
entitled to equally receive any dividends or distributions, if and when declared
by the Board of Directors out of any funds legally available for that purpose.

Liquidation, Dissolution or Winding Up. Subject to the required cash
payments to the Series A Series A Preferred Stock and the Series B Convertible
Preferred Stock, the remainder of the assets of the Company, if any, shall be
divided and distributed ratably among the holders of the Series B Convertible
Preferred Stock and the Common Stock.

Redemption. No shares of Common Stock are callable or redeemable by the
Company.

Conversion. No holder of Common Stock have the right to convert or exchange
any such shares with or into any other shares of capital stock of the Company.

Voting. Each share of Common Stock entitles the holder thereof to one vote,
in person or by proxy, at any and all meetings of the shareholders of the
Company on all propositions presented to the shareholders generally.

PREFERRED STOCK

Dividends. The holders of shares of Series A Preferred Stock shall not as a
matter of right be entitled to be paid or receive or have declared or set apart
for such Series A Preferred Stock, any dividends or distributions of the
Company. The holders of shares of Series B Convertible Preferred Stock receive
dividends out of any funds legally available for that purpose at the annual rate
of 6% per annum of the par value and no more. These dividends are payable in
cash monthly on the last day of each month. The dividends accrue from the date
the Series B Convertible Preferred Stock is issued and is considered to accrue
from day to day, whether or not earned or declared. The dividends are payable
before any dividends are paid, declared, or set apart for any other capital
stock of the Company. The dividends are cumulative so that if for any dividend
period the dividends on the outstanding Series B Convertible Preferred Stock are
not paid or declared and set apart, the deficiency shall be fully paid or
declared and set apart for payment, without interest, before any distribution
(by dividend or otherwise) is paid on, declared, or set apart for any other
capital stock of the Company. The holders of shares of Series B Convertible
Preferred Stock shall not be entitled to receive any other dividends or
distributions.

38
<PAGE> 40

Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of
outstanding shares of Series A Preferred Stock shall be entitled to receive
$100.00 in cash for each share of Series A Preferred Stock, before any
distribution of the assets of the Company shall be made to the holders of the
outstanding shares of Series B Convertible Preferred Stock, unless funds
necessary for such payment shall have been set aside in trust for the account of
the holders of outstanding shares of Series A Preferred Stock so as to be and
continue to be available therefor. After the $100.00 distribution per share of
the Series A Preferred Stock, the holders of outstanding shares of Series B
Convertible Preferred Stock shall be entitled to receive $100.00 in cash for
each share, before any distribution of the assets of the Company shall be made
to the holders of the outstanding shares of any other capital stock of the
Company, unless funds necessary for such payment shall have been set aside in
trust for the account of the holders of outstanding shares of Series B
Convertible Preferred Stock so as to be and continue to be available therefor.

Redemption. No shares of Series A Preferred Stock shall be callable or
redeemable by the Company. The Company, at the option of its Board of Directors,
may at any time five years from the date of issuance redeem the whole or any
part of the outstanding Series B Convertible Preferred Stock shares by paying in
cash $110.00 per share plus all dividends accrued, unpaid, and accumulated
through and including the redemption date. If only a part of the outstanding
Series B Convertible Preferred Stock shares is redeemed, redemption will be pro
rata. No Series B Convertible Preferred Stock shares may be redeemed unless all
accrued dividends on the Series B Convertible Preferred Stock have been paid for
all past dividend periods and full dividends for the current period, except
those to be redeemed, have been paid or declared and set apart for payment.

The holders of any shares of the Series B Convertible Preferred Stock
called for redemption are entitled to receive 28 shares of Common Stock for each
share of Series B Convertible Preferred Stock. The holders are entitled to
exercise said conversion right at any time after redemption notice is given and
before the close of business on the fifth day before the redemption date stated
in the notice. The right to receive the converted shares is at the shareholder's
option and requires delivery to the Company of the shareholder's written notice
stating the number of shares the shareholder is electing to convert. The
exercise of the right also requires the shareholder, on or before the redemption
date, to surrender the certificate or certificates, duly endorsed to the
Company, for the Series B Convertible Preferred Stock shares at the office of
the Company or its transfer agent.

Conversion. No holder of Series A Preferred Stock shall have the right to
convert or exchange shares with or into any other shares of capital stock of the
Company. The holders of shares of Series B Convertible Preferred Stock shall
have the right to convert each share of Series B Convertible Preferred Stock
into 28 shares of Common Stock at any time. The right to receive the converted
shares requires delivery to the Company's office or its transfer agent of the
shareholder's written notice stating the number of shares the shareholder is
electing to convert. Such notice shall be accompanied by the surrender of the
Series B Convertible Preferred Stock certificate or certificates, duly endorsed
to the Company. The date of conversion shall be the date of receipt by the
Company or its transfer agent of the notice and the duly endorsed
certificate(s).

Voting. Each share of Series A Preferred Stock and each share of Series B
Convertible Preferred Stock shall entitle the holder thereof to 1/10th of a
vote, in person or by proxy, at any and all meetings of shareholders of the
Company on all propositions presented to shareholders generally.

CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION, BYLAWS AND THE TEXAS BUSINESS CORPORATION ACT

The Company's Restated Articles of Incorporation, as amended, and Bylaws
contain certain provisions that could make more difficult the acquisition of the
Company by means of a tender or exchange offer, a proxy contest or otherwise.
The description of such provisions set forth below is intended only as a summary
and is qualified in its entirety by reference to the Restated Articles of
Incorporation, as amended, and Bylaws, each

39
<PAGE> 41

of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. See "Risk Factors -- Possible Anti-Takeover Effects".

Preferred Stock. The Restated Articles of Incorporation, as amended,
authorizes the Board of Directors to establish one or more series of preferred
stock and to determine, with respect to any series of preferred stock the terms
and rights of such series. The Company believes that the ability of the Board of
Directors to issue one or more series of preferred stock will provide the
Company with flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that may arise. The authorized
shares of preferred stock, as well as shares of Common Stock, will be available
for issuance without further action by the Company's shareholders, unless such
action is required by the Restated Articles of Incorporation, as amended,
applicable laws or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded.

Although the Board of Directors has no intention at the present time of
doing so, it could issue a series of preferred stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the Company
and its shareholders. The Board of Directors, in so acting, could issue
preferred stock having terms that could discourage an acquisition attempt
through which an acquiror otherwise may be able to change the composition of the
Board of Directors, including a tender or exchange offer or other transaction
that some, or a majority, of the Company's shareholders might believe to be in
their best interests or in which shareholders might receive a premium for their
stock over the then current market price of such stock.

Special Meeting of Shareholders. The Bylaws provide that special meetings
of shareholders may be called only by the President or the Board of Directors.
Such provisions, together with the other anti-takeover provisions described
herein, also could have the effect of discouraging a third party from initiating
a proxy contest, making a tender or exchange offer or otherwise attempting to
obtain control of the Company.

Texas Anti-Takeover Law. Part Thirteen ("Part Thirteen") of the Texas
Business Corporation Act (the "TBCA") imposes a special voting requirement for
the approval of certain business combinations and related party transactions
between public corporations and affiliated shareholders unless the transaction
or the acquisition of shares by the affiliated shareholder is approved by the
board of directors of the corporation prior to the affiliated shareholder
becoming an affiliated shareholder. Part Thirteen prohibits certain mergers,
sales of assets, reclassifications and other transactions (defined as business
combinations) between shareholders beneficially owning 20% or more of the
outstanding stock of a Texas public corporation (such shareholders being defined
as an affiliated shareholder) for a period of three years following the date the
shareholder acquired the shares representing 20% or more of the corporation's
voting power unless two-thirds of the unaffiliated shareholders approve the
transaction at a meeting held no earlier than six months after the shareholder
acquires that ownership. The provisions requiring such a vote of shareholders do
not apply to any transaction with an affiliated shareholder if the transaction
or the purchase of shares by the affiliated shareholder is approved by the board
of directors before the affiliated shareholder acquires beneficial ownership of
20% of the shares or if the affiliated shareholder was an affiliated shareholder
prior to December 31, 1996, and continued as such through the date of the
transaction. Part Thirteen contains a provision that allows a corporation to
elect out of the statute by an amendment to its articles of incorporation or
bylaws prior to December 31, 1997. Part Thirteen could have the effect of
delaying, deferring or preventing a change in control of the Company.

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.

40
<PAGE> 42

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, the Selling Shareholders and the
Underwriters named below (the "Underwriters"), the Company and the Selling
Shareholders have collectively agreed to sell to each of such Underwriters, and
each of such Underwriters has severally agreed to purchase from the Company and
the Selling Shareholders, the respective number of shares of Common Stock set
forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------------
<S> <C>
Morgan Keegan & Company, Inc. ..............................
Hanifen, Imhoff Inc. .......................................
Sanders Morris Mundy Inc. ..................................
-------
Total.............................................
=======
</TABLE>

The Underwriting Agreement provides that the Underwriters' obligation to
pay for and accept delivery of the shares of Common Stock offered hereby is
subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all such shares, excluding shares covered by the
over-allotment option, if any are purchased. The Underwriters have informed the
Company that no sales of Common Stock will be confirmed to discretionary
accounts.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the price to public set forth on the cover page of
this Prospectus, and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Underwriters.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, "passive" market making and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock, and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Shareholders in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the shares of Common Stock sold in the Offering for
their account may be reclaimed by the syndicate if such shares of Common Stock
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on The Nasdaq National Market, in the
over-the-counter market or otherwise.

As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended, certain Underwriters (and selling group members, if any) that are
market makers ("passive market makers") in the Common Stock may make bids for or
purchases of the Common Stock in the Nasdaq National Market until such time, if
any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (i) a passive market maker's net daily purchases of the
Common Stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months (or any 60 consecutive
days ending within the 10 days) immediately preceding the filing date of the
registration statement of which this Prospectus forms a part, (ii) a passive
market maker may not effect transactions or display bids for the Common Stock at
a price that exceeds the highest independent bid for the Common Stock by persons
who are not passive market makers and (iii) bids made by passive market makers
must be identified as such.

41
<PAGE> 43

The Company and the Selling Shareholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 420,000 additional shares of Common Stock (105,000 of which
will be sold by the Selling Shareholders on a pro rata basis) solely to cover
overallotments, if any. If the Underwriters exercise the overallotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by each of them, as shown in the table above, bears
to the 2,800,000 shares of Common Stock offered hereby.

The Company, the Company's executive officers and directors and the Selling
Shareholders, who will beneficially own an aggregate of 4,152,877 (4,040,877 if
the over-allotment option is exercised in full) shares of Common Stock after the
Offering, have agreed, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
the Prospectus, not to offer, pledge, issue, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, or announce any offer, sale,
pledge, grant of any option to purchase or other disposition of, directly or
indirectly, any shares of Common Stock or securities convertible into,
exercisable for or exchangeable for shares of Common Stock (other than, with
respect to the Company, pursuant to the LTIP or in connection with acquisitions
of businesses or assets by the Company) without prior consent of the
Representatives.

Hanifen, Imhoff Inc. from time to time has provided investment banking and
financial advisory services to the Company, and such firm may in the future
provide similar services to the Company, for which it has received or is
expected to receive customary fees. Mr. Thomas Orr, who serves as a director of
the Company, is an Executive Managing Director of Morgan Keegan & Company, Inc.

LEGAL MATTERS

The legality of the Common Stock offered hereby will be passed upon for the
Company by Fulbright & Jaworski L.L.P., Houston, Texas. Certain legal matters
for the Underwriters will be passed upon by Andrews & Kurth L.L.P., Houston,
Texas.

EXPERTS

The audited consolidated financial statements of the Company included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.

The consolidated financial statements of SSI as of December 31, 1995 and
1996, and for each of the years in the three-year period ended December 31,
1996, have been included in this Prospectus in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the Common Stock offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information contained in the Registration Statement and in the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered by this Prospectus, reference is made
to the Registration Statement, including the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is hereby made to the copy of such
contract or other documents filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by such reference.

The Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, and copies may be obtained at prescribed rates at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Northwestern Atrium Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois

42
<PAGE> 44

60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy and information statements and other information with the Commission. Such
reports, proxy and information statements and other information can be obtained
at the address as set forth above.

43
<PAGE> 45

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DXP ENTERPRISES AND SUBSIDIARIES:
Pro Forma Statements of Operations.......................... F-2
Report of Independent Public Accounts....................... F-4
Audited Consolidated Financial Statements --
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Earnings....................... F-6
Consolidated Statements of Shareholders' Equity........... F-7
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-9
Unaudited Condensed Consolidated Financial Statements --
Condensed Consolidated Balance Sheets..................... F-20
Condensed Consolidated Statements of Income............... F-21
Condensed Consolidated Statements of Cash Flows........... F-22
Notes to Condensed Consolidated Financial Statements...... F-23
STRATEGIC SUPPLY, INC.:
Independent Auditors' Report................................ F-25
Audited Financial Statements --
Consolidated Balance Sheets............................... F-26
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit)......................... F-27
Consolidated Statements of Cash Flows..................... F-28
Notes to Consolidated Financial Statements................ F-29
</TABLE>

F-1
<PAGE> 46

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....................... 4,081 4,081
======== ========
Dilutive earnings per share..................... $ .47 $ .37
======== ========
Common and common equivalent shares
outstanding................................... 5,694 5,694
======== ========
</TABLE>

F-2
<PAGE> 47

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma combined statements of earnings for the years ended
December 31, 1997 give effect to the acquisition by a wholly owned subsidiary of
the Company of substantially all of the assets of Strategic Supply, Inc. ("SSI")
on June 2, 1997. The unaudited pro forma combined statements of earnings assume
all such transactions occurred at the beginning of the period presented.

The unaudited pro forma combined statement of earnings may not be
indicative of the results that would have occurred if the combination had been
in effect on the dates indicated or which may occur in the future. The unaudited
pro forma condensed combined financial statements should be read in conjunction
with the financial statements of SSI, which are included elsewhere in this
Prospectus.

The pro forma adjustments do not reflect projected cost savings of $626,000
for the year ended December 31, 1997 relating to the elimination of duplicative
personnel and intercompany charges reflected in SSI's results.

PRO FORMA ADJUSTMENTS

(1.) To adjust interest expense for the debt incurred in the acquisition of
the net assets of Strategic Supply, Inc.

(2.) To adjust federal income tax expense for the tax effect of the
adjustments made to operations and interest expense.

F-3
<PAGE> 48

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries:

We have audited the accompanying consolidated balance sheets of DXP
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DXP
Enterprises, Inc., and subsidiaries at December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Houston, Texas
January 30, 1998, (except with respect to
the matter discussed in Note 13 as to which
the date is May 20, 1998)

F-4
<PAGE> 49

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> 50

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 $ .16 $ .47
======== ======== ========
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> 51

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 -- 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> 52

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> 53

DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

DXP Enterprises, Inc. (DXP or the Company), a Texas corporation, was
incorporated on July 26, 1996, to facilitate a reorganization of SEPCO
Industries, Inc. (SEPCO), a Texas corporation, in anticipation of an acquisition
by DXP as the successor to SEPCO of Newman Communications Corporation (Newman),
a New Mexico corporation. On December 4, 1996, the reorganization of SEPCO (the
SEPCO Reorganization) was effected through a merger of a wholly owned subsidiary
of the Company with and into SEPCO pursuant to which the Company acquired all of
the outstanding shares of SEPCO in exchange for shares of the Company.
Immediately following the SEPCO Reorganization, the Company acquired Newman
through a merger of a wholly owned subsidiary of the Company with and into
Newman (the Newman Merger). Prior to the SEPCO Reorganization, the Company had
no operations and its only assets consisted of $1,000 cash. Prior to the
Company's acquisition of Newman, Newman was a nonoperating entity with nominal
assets. The Newman Merger was effected as a means to increase the Company's
shareholder base.

On or about April 30, 1997, a proxy statement was furnished to the holders
of the Company's common stock, Series A preferred stock and Series B preferred
stock, in connection with a solicitation of consents by the board of directors
of the Company for the adoption of an amendment to the restated articles of
incorporation of the Company to effect a two-to-one reverse split of the issued
and outstanding shares of common stock and change the name of the Company from
Index, Inc., to DXP Enterprises, Inc. The shareholders approved the two-to-one
reverse stock split and name change, which became effective after the close of
market on May 12, 1997. Common stock and earnings per share have been restated
to give effect to a two-for-one reverse stock split.

SEPCO Reorganization Accounting Treatment

The SEPCO Reorganization was treated as a recapitalization of SEPCO into
the Company (with respect to the SEPCO merger) and the issuance of the Company's
capital stock for the underlying tangible net assets of Newman (with respect to
the Newman Merger) for accounting and financial statement purposes because,
among other factors, the Company is a recently formed holding company with
nominal net assets, Newman is a nonoperating shell company with cash as its
primary asset, and the SEPCO shareholders control the Company after the SEPCO
Reorganization. Accordingly, the historical pre-SEPCO Reorganization financial
statements of the combined Company after the closing are those of SEPCO. The
retained earnings of SEPCO were carried forward after the SEPCO Reorganization
and the historical shareholders' equity of SEPCO prior to the SEPCO
Reorganization is retroactively restated for the equivalent number of shares
received in the SEPCO Reorganization.

Unless the context otherwise requires, references to the Company with
respect to historical operations shall mean the Company and SEPCO.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Concentration of Credit Risk

The Company sells rotating equipment to a diversified customer base in the
north and southwestern regions of the United States. The Company believes no
significant concentration of credit risk exists. The Company continually
evaluates the creditworthiness of its customers' financial positions and
monitors accounts on a periodic basis, but does not require collateral.

F-9
<PAGE> 54
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventory

Inventory consists principally of finished goods and is priced at lower of
cost or market, cost being determined using both the first-in, first-out (FIFO)
and the last-in, first-out (LIFO) method.

Property, Plant and Equipment

Assets are carried on the basis of cost. Provisions for depreciation are
computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation and amortization of property,
plant and equipment is computed using principally the straight-line method for
financial reporting purposes. Useful lives assigned to property, plant and
equipment range from three to 20 years. Maintenance and repairs of depreciable
assets are charged against earnings as incurred. Additions and improvements are
capitalized. When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and gains or losses are
credited or charged to earnings.

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 in
the first quarter of 1996, and the effect of adoption was not material.

Intangibles

Intangibles consist of noncompete and licensing agreements and goodwill.
The noncompete and licensing agreements are amortized over five years, and
goodwill is amortized over five to 30 years. All amortization of intangibles is
computed using the straight-line method.

Federal Income Taxes

The Company utilizes the liability method in accounting for income taxes.
Under this method, deferred taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted marginal tax rates and laws that will be in effect when the
differences reverse.

Fair Value of Financial Instruments

A summary of the carrying value and the fair value of financial instruments
at December 31, 1997, is as follows:

<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> 55
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

The Company recognizes revenue as products are shipped to the customer.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.

Reclassifications

Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.

2. NEW ACCOUNTING PRONOUNCEMENTS:

During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." During
February 1997, the FASB issued SFAS Nos. 128 and 129, "Earnings per Share," and
"Disclosure of Information about Capital Structure," respectively, and in June
1997 issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income," and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. The major provisions of these statements and their impact on the
Company are discussed below.

SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options, warrants, etc. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. As
required, the Company adopted this statement in 1997 and has restated all
previously reported earnings per share data. The difference between previously
reported fully diluted earnings per share and the now required diluted earnings
per share was insignificant.

SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. The adoption of
this statement in 1998 is not anticipated to have any impact as the Company
currently does not enter into any transactions which result in charges (or
credits) directly to equity (such as additional minimum pension liability
changes, currency translation adjustments and unrealized gains and losses on
available-for-sale securities, etc.)

SFAS No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments. The
Company currently operates in only one industry segment and analyzes operations
on a company-wide basis; therefore, the adoption of the statement is not
expected to materially impact the Company. The Company plans to adopt this
statement in 1998.

F-11
<PAGE> 56
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS:

Effective December 31, 1995, SEPCO acquired 100 percent of the outstanding
common stock of Bayou Pumps, Inc. The purchase price totaled $500,000 and
consisted of (a) issuance of $450,000 of the Company's Class A convertible
preferred stock and (b) cash of $50,000. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, results of operations of
the acquired company are included in the consolidated results of operations from
the acquisition date. Goodwill of $356,000 was recorded on the acquisition. Pro
forma disclosures of operating results are omitted because the acquired
company's operations were not significant.

Effective February 2, 1996, SEPCO acquired the net assets of Austin Bearing
Corporation. The purchase price totaled approximately $578,000 and consisted of
(a) a $249,000 note, bearing interest at 9 percent, payable monthly over five
years, and (b) cash of $329,000. The acquisition has been accounted for using
the purchase method of accounting. Accordingly, results of operations of the
acquired company are included in the consolidated results of operations from the
date of acquisition. Goodwill of $84,000 was recorded in connection with the
acquisition. Pro forma disclosures of operating results are omitted because the
acquired company's operations were not significant.

Effective May 30, 1997, the Company acquired 100 percent of the outstanding
stock of Pelican State Supply Company (Pelican). The purchase price totaled
approximately $3.0 million and consisted of 140,214 shares of the Company's
common stock and cash of approximately $1.0 million. The acquisition has been
accounted for using the purchase method of accounting. Accordingly, results of
operations of the acquired company are included in the consolidated results of
operations from the date of acquisition. Goodwill of approximately $2.0 million
was recorded in connection with the acquisition. Pro forma disclosures of
operating results are omitted because the acquired Company's operations were not
significant.

On June 2, 1997, a wholly owned subsidiary of the Company acquired
substantially all the assets of Strategic Supply, Inc. (Strategic). The purchase
price, which is subject to adjustments, consisted of approximately $4.1 million
in cash, assumption of $4.7 million of trade payables and other accrued
expenses, $2.8 million in promissory notes payable to the seller and earn-out
payments (based on the earnings before interest and taxes of Strategic) to be
paid over a period of approximately six years, up to a maximum of $3.5 million.
The acquisition has been accounted for using the purchase method of accounting.
Goodwill of $50,000 was recorded in connection with the acquisition.

The following table presents selected unaudited consolidated financial
information for the Company on a pro forma basis assuming the Strategic
acquisition had occurred on January 1, 1996. The pro forma information set forth
below is not necessarily indicative of the results that actually would have been
achieved had such transaction been consummated as of January 1, 1996, or that
may be achieved in the future.

<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> 57
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVENTORY:

The Company uses the LIFO method of inventory valuation for approximately
43 percent of its inventories. Remaining inventories are accounted for using the
FIFO method. The reconciliation of FIFO inventory to LIFO basis is as follows:

<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> 58
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM AND SUBORDINATED DEBT:

Long-term and subordinated notes consist of the following:

<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 a secured lines of credit for up to $40 million with an
institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent
to prime plus .50 percent (9.00 percent at December 31, 1997). The line of
credit is secured by receivables, inventory, and machinery and equipment and
matures January 1999. An officer shareholder has personally guaranteed up to
$500,000 of the obligations of the Company under the line of credit.
Additionally, certain shares held in trust for this shareholder's children
discussed in footnote 8 are also pledged to secure this line of credit. As of
December 31, 1997, the unused line is approximately $4.9 million.

The facility includes loan covenants which, among other things, require the
Company to maintain a positive cash flow and other financial ratios, which are
measured monthly. The maturities of long-term and subordinated debt for the next
five years and thereafter are as follows (in thousands):

<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> 59
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

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

<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> 60
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> 61
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to purchase all or part of such shares at a price of $14.00 per share. The
shares issued for the purchase of Pelican are subject to certain rights of
offset pursuant to terms of the purchase agreement.

Stock Options

Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its
common stock, which had exercise prices equal to the book value of the common
stock at the date of grant. The option agreement allows the employee to put the
stock acquired back to the Company at the book value at that time. The Company
recognized compensation expense for increases in the book value of the stock
while the options were outstanding. Effective March 31, 1996, the
above-mentioned book value options were converted to fair market value options
once the put option was eliminated. A one-time charge to compensation of
$618,000 was made during the first quarter of 1996. In 1996, the Company issued
nonqualified fair market value stock options to certain directors of the Company
to purchase shares of its common stock which had exercise prices equal to the
fair market value of the Company's common stock at the date of grant.
Additionally, the Company issued options to certain officers and employees
pursuant to the terms of the Company's long-term incentive plan. Compensation
expense related to these option agreements of $87,000, $618,000 and $-- was
recorded in 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997,
a deferred compensation liability of $739,000 and $739,000, respectively, has
been recorded in conjunction with these option agreements. Activity during 1997
with respect to the stock options follows:

<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 $ 3.72
Granted............................... 120,500 $3.12 -- $16.00 $ 3.20
Exercised............................. 4,000 $3.12 $ 3.12
Canceled or expired................... (4,000) $3.12 $ 3.12
---------
Outstanding and Exercisable at December
31, 1996.............................. 1,349,700 $1.46 -- $2.32 $ 1.50
Granted............................... -- -- $ --
Exercised............................. -- -- --
Canceled or expired................... -- -- --
---------
Outstanding and Exercisable at December
31, 1997.............................. 1,349,700 $1.48 -- $2.32 $ 1.50
=========
</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> 62
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options under the fair value method as provided therein. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options issued in 1995, 1996 and 1997: risk-free interest
rates of 6.5 percent for 1995 and 6 percent for 1996 and 1997; expected lives of
five years; 18.4 percent assumed volatility; and no expected dividends.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Set forth
below is a summary of the Company's net income and earnings per share as
reported and pro forma as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The pro forma information is not meant to be
representative of the effects on reported net income for future years because,
as provided by SFAS No. 123, only the effects of awards granted after January 1,
1995, are considered in the pro forma calculation. As such, the pro forma impact
is likely to increase in future years as additional options are granted and
amortized ratably over the vesting period. Certain compensation expense related
to the Company's book value stock option plans was recognized in 1996. The
effect of such expense ($618,000) has been excluded from the pro forma
disclosure for 1996, as the related options are assumed to be accounted for
using the fair market-based method of accounting as defined in SFAS No. 123. The
effect of applying the fair market-based method, versus the exclusion of the
book value-based method expense actually recognized, resulted in a pro forma
increase in net income attributable to common shareholders in 1996.

<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
b2(In thousands, except per share amounts)
Net income attributable
to common
shareholders (in
thousands)........... $2,065 $2,049 $771 $1,132 $2,665 $1,893
Basic earnings per
common share......... .54 .54 .20 .28 .66 .66
Dilutive earnings per
share................ .46 .46 .18 .24 .48 .34
</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> 63
DXP ENTERPRISES, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. RETIREMENT PLANS:

SEPCO provides an employee stock ownership plan (ESOP) which is eligible to
employees having 1,000 hours of service in 12 consecutive months of employment.
Employer contributions are at the discretion of the board of directors. The ESOP
held 956,298 shares of the Company's common stock at December 31, 1997 (see Note
1). The Company contributed and expensed $150,000 in 1995, 1996 and 1997. The
Company also offers a 401(k) profit-sharing plan for employees having 1,000
hours of service in 12 consecutive months of employment. The Company matches
contributions at a rate of 10 percent. The Company contributed $56,000, $62,000
and $81,000 in the years ended December 31, 1995, 1996 and 1997, respectively.

11. RELATED PARTY-TRANSACTIONS:

In December 1989 the Company restructured certain loans previously made by
the Company to an officer of the Company, pursuant to which the officer executed
two promissory notes in the amounts of $149,910 and $58,737, respectively, each
bearing interest at 9% per annum. The outstanding balances of such loans were
$127,814 and 50,080 at December 31, 1996 and 1997, respectively.

Additionally, the Company from time to time has made non-interest bearing
advances to this officer. As of December 31, 1996 and 1997, these advances
amounted to $330,439 and $340,439, respectively.

12. SUBSEQUENT EVENTS:

In January 1998, the Company signed a nonbinding letter of intent to
purchase a distribution company located in the central Texas area. Pursuant to
the proposed acquisition, the Company would acquire the net assets of $5.4
million payable in cash and a to-be-determined amount of common stock shares.
The consummation of the acquisition is subject to customary conditions,
including the negotiation and execution of mutually satisfactory definitive
documentation and the completion of a satisfactory due-diligence review by the
Company. There can be no assurance, however, that the Company will consummate
the acquisition of the central Texas distribution company or, if consummated,
that the terms will be as described above.

In January 1998, the Company signed a nonbinding letter of intent to
purchase a distribution company located in Utah. Pursuant to the proposed
acquisition, the Company would acquire the net assets for $1.0 million payable
in cash and shares of common stock. The consummation of the acquisition is
subject to customary conditions, including the negotiation and execution of
mutually satisfactory definitive documentation and the completion of a
satisfactory due-diligence review by the Company. There can be no assurance,
however, that the Company will consummate the acquisition of the Utah
distribution company or, if consummated, that the terms will be as described
above.

On January 8, 1998, the Company's board of directors resolved to increase
the Company's common stock issuable to the Company's long-term incentive plan by
130,000 shares, from 200,000 shares to 330,000 shares. In conjunction, the
Company's board of directors, pursuant to the Company's long-term incentive
plan, granted certain employees an aggregate of 130,000 stock options at a per
share exercise price of $12.00 with all options vesting 20 percent per year
expiring on January 8, 2006.

13. EVENTS OCCURRING SUBSEQUENT TO AUDIT REPORT DATE

On May 20, 1998, the Company's board of directors declared a two-for-one
stock split on the Company's common stock. Common stock, Paid-in capital and per
share amounts have been restated to reflect this reverse split.

F-19
<PAGE> 64

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 2,259 $ 736
Trade accounts receivable, net of allowance for doubtful
accounts of $608 and $476, respectively................ 26,830 25,707
Inventory................................................. 28,922 26,018
Prepaid expenses and other current assets................. 1,107 996
Deferred income taxes..................................... 796 722
------- -------
Total current assets.............................. 59,914 54,179
Property, plant and equipment, net.......................... 10,384 10,403
Other assets................................................ 6,864 3,054
------- -------
Total assets...................................... $77,162 $67,636
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade accounts payable.................................... $18,197 $14,368
Employee compensation..................................... 1,224 1,384
Other accrued liabilities................................. 1,082 704
Current portion of long-term debt......................... 1,198 1,461
------- -------
Total current liabilities......................... 21,701 17,917
Long-term debt, less current portion........................ 38,245 33,395
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 514 479
Equity subject to redemption:
Series A preferred stock--1,122 shares.................... 112 112
Common stock, 140,214 shares.............................. 1,963 1,963
Shareholders' Equity:
Series A preferred stock, 1/10th vote per share; $1.00 par
value; liquidation preference of $100 per share;
1,000,000 shares authorized; 2,992 shares issued and
outstanding:........................................... 2 2
Series B convertible preferred stock, 1/10th vote per
share; $1.00 par value; $100 stated value; liquidation
preference of $100 per share; 1,000,000 shares
authorized; 17,700 shares issued and outstanding....... 18 18
Common stock, $.01 par value, 25,000,000 shares
authorized; 4,187,858 shares issued, of which 4,017,208
shares are outstanding, 140,214 shares are equity
subject to redemption, and 30,436 shares are treasury
stock.................................................. 40 40
Paid-in capital........................................... 892 892
Retained earnings......................................... 13,516 12,659
Treasury stock............................................ (580) (580)
------- -------
Total shareholders' equity........................ 13,888 13,031
Total liabilities and shareholders' equity........ $77,162 $67,636
======= =======
</TABLE>

See notes to condensed consolidated financial statements.

F-20
<PAGE> 65

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Sales....................................................... $49,004 $30,129
Cost of sales............................................... 36,419 21,756
------- -------
Gross Profit................................................ 12,585 8,373
Selling, general and administrative expenses................ 10,508 7,043
------- -------
Operating income............................................ 2,077 1,330
Other income................................................ 176 429
Interest expense............................................ (785) (539)
------- -------
Income before income taxes.................................. 1,468 1,220
Provision for income taxes.................................. 590 429
------- -------
Net income.................................................. $ 878 $ 791
Preferred stock dividend.................................... 21 38
------- -------
Net Income attributable to common Shareholders.............. $ 857 $ 753
======= =======
Basic earnings per common share............................. $ .21 $ .19
------- -------
Common shares outstanding................................... 4,157 3,997
------- -------
Diluted earnings per share.................................. $ .15 $ .14
------- -------
Common and common equivalent shares outstanding............. 5,700 5,492
------- -------
</TABLE>

See notes to condensed consolidated financial statements.

F-21
<PAGE> 66

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities................. $ 3,415 $ 1,006
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply net assets................ (6,208) --
Purchase of property and equipment........................ (250) (227)
-------- --------
Net cash used in investing activities....................... (6,458) (227)
FINANCING ACTIVITIES:
Proceeds from debt........................................ 53,634 29,205
Principal payments on revolving line of credit, long-term
and Subordinated debt, and notes payable to bank....... (49,047) (29,844)
Dividends paid............................................ (21) (38)
-------- --------
Net cash provided by financing activities................... 4,566 (677)
-------- --------
INCREASE(DECREASE) IN CASH.................................. 1,523 102
CASH AT BEGINNING OF PERIOD................................. 736 876
-------- --------
CASH AT END OF PERIOD....................................... $ 2,259 $ 979
======== ========
</TABLE>

See notes to condensed consolidated financial statements.

F-22
<PAGE> 67

DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The condensed consolidated financial statements reflect all
elimination entries and adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the interim periods.

The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.

NOTE 2: THE COMPANY

DXP Enterprises, Inc. (the "Company") was incorporated on July 26, 1996 in
the State of Texas. The Company is a leading supplier of maintenance, repair and
operating ("MRO") products, equipment and services to industrial customers. The
Company provides MRO products in the following categories: fluid handling
equipment, bearings and power transmission equipment, general mill and safety
supplies and electrical supplies. The Company also offers a line of valve and
valve automation products to its customers.

NOTE 3: INVENTORY

The Company uses the last-in, first-out (LIFO) method of inventory
valuation for approximately 56 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out (FIFO) method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $29,976 $27,280
Work in process............................................. 2,697 2,276
------- -------
Inventories at FIFO......................................... 32,673 29,556
Less -- LIFO allowance...................................... (3,751) (3,538)
------- -------
Inventories................................................. $28,922 $26,018
======= =======
</TABLE>

NOTE 4: ACQUISITION

On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Tri-Electric Supply, Ltd ("Tri-Electric"). The
purchase price consisted of $6.2 million in cash, assumption of $1.6 million of
trade payables and other accrued expenses and a deferred payment up to a maximum
of $275,000 based on the earnings before interest and taxes and depreciation of
the acquired company to be paid on March 31, 1999, if earned. The results of
operations of Tri-Electric are included in the consolidated statements of income
from the date of acquisition. Goodwill of $3.9 million was recorded in
connection with the acquisition. The acquisition has been accounted for using
the purchase method of accounting.

F-23
<PAGE> 68
DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company is continuing its evaluation of the acquisition of Tri-Electric
as it relates to the purchase price allocation. The allocation of the purchase
price is based on the best estimates of the Company using information currently
available. Certain adjustments relating to this acquisition are subject to
change based upon the final determination of the fair values of the net assets
acquired.

NOTE 5: LONG-TERM DEBT

The Company has secured lines of credit for up to $40 million with an
institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent
to prime plus .50 percent (8.50 percent at March 31, 1998). The line of credit
is secured by receivables, inventory, and machinery and equipment and matures
January, 1999. An executive officer of the Company, who is also a shareholder of
the Company, has personally guaranteed up to $500,000 of the obligations of the
Company under the line of credit. Additionally, certain shares held in trust for
this executive officer's children are also pledged to secure this line of
credit. The borrowings available under the existing lines of credit at March 31,
1998 approximated $3.1 million. This facility includes loan covenants, which,
among other things, require the Company to maintain a positive cash flow and
other financial ratios, which are measured monthly. During April 1998, the
Company amended its Credit Facility. (See Note 6)

NOTE 6: SUBSEQUENT EVENTS

Effective April 29th, 1998, the Company amended its lines of credit with
its lender. The restructure provided for a combined line of credit for up to $50
million. Additionally, the loan restructure increased the Company's term loan
from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan to the term loan. The amended credit
facility provides for a $15.0 million acquisition term loan to be used for
acquisitions provided certain customary provisions related to combined cash
flows and acquisition pricing are met. Additionally, interest rates will range
from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of the
Company's debt to cash flow and financial covenants tied to debt service levels
and cash flow.

F-24
<PAGE> 69

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Strategic Supply, Inc.:

We have audited the accompanying consolidated balance sheets of Strategic
Supply, Inc., a wholly-owned subsidiary of Strategic Distribution, Inc.
(Parent), and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations and retained earnings (accumulated
deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

As described in note 2, on May 27, 1997, the Parent entered into an
agreement to sell the Company. As a result of that transaction, the Company has
written off its goodwill and certain other intangible assets as of December 31,
1996.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Strategic
Supply, Inc. and subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

El Paso, Texas
May 27, 1997

F-25
<PAGE> 70

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-26
<PAGE> 71

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-27
<PAGE> 72

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-28
<PAGE> 73

STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

The Company is a leading provider of industrial supply services to
commercial and industrial customers in the western United States. On May 24,
1996, the Company (formerly SafetyMaster Corporation) and Lewis Supply
(Delaware), Inc. ("Lewis") were merged (the "Merger"). The Company was the
surviving corporation of the Merger. The related companies were wholly-owned
subsidiaries of Strategic Distribution, Inc. (the "Parent"). Accordingly, the
Merger has been accounted for on an as if pooling basis in all periods
presented. The Company is a wholly-owned subsidiary of the Parent.

On May 27, 1997, the Parent entered into an agreement to sell the Company.
The purchase price was net tangible assets, as defined therein.

(2) SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Coulson Technologies, Inc. All significant
intercompany accounts and transactions have been eliminated. The preparation of
the consolidated financial statements requires estimates and assumptions that
affect amounts reported and disclosed in the financial statements and related
notes. Actual results could differ from these estimates.

Disclosures About Fair Value of Financial Instruments

The carrying amount of the Company's financial instruments approximate fair
value due to their short maturity and variable interest rate feature.

Inventories

Inventories of finished goods are stated at the lower of cost (first-in,
first-out basis) or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the remaining life of the asset or the lease term. Maintenance and repairs
are charged to expense. Major renewals and improvements are capitalized and
depreciated over the remaining useful life of the asset. Estimated useful lives
are as follows:

<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-29
<PAGE> 74
STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in "Special Charges" in the accompanying Consolidated Statements of Operations
and Retained Earnings (Accumulated Deficit).

Income Taxes

The Parent and the Company file consolidated federal and state income tax
returns. Income taxes in these financial statements have been calculated as if
the Company had filed separate tax returns. Accordingly, in some instances, the
amounts recorded may differ from those included in the consolidated tax returns.

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.

(3) ACCOUNTS RECEIVABLE

Accounts receivable is net of an allowance for doubtful accounts of $71,000
and $171,000 at December 31, 1995 and 1996, respectively.

(4) PROPERTY AND EQUIPMENT

<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-30
<PAGE> 75
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-31
<PAGE> 76
STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) INCOME TAXES

The income tax expense (benefit) in the Consolidated Statements of
Operations and Retained Earnings (Accumulated Deficit) is as follows:

<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-32
<PAGE> 77
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-33
<PAGE> 78
STRATEGIC SUPPLY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SUPPLEMENTAL CASH FLOW INFORMATION

In conjunction with acquisition of the Lufkin Division in 1994, liabilities
assumed and refinanced were:

<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-34
<PAGE> 79

======================================================

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
ON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.....................
Risk Factors Special Note Regarding
Forward-Looking Statements...........
Use of Proceeds........................
Dividend Policy........................
Capitalization.........................
Dilution...............................
Selected Consolidated Financial Data
Management's Discussion and Analysis
of Financial Condition and Results of
Operations...........................
Business...............................
Management.............................
Certain Transactions...................
Security Ownership of Management,
Principal Shareholders and Selling
Shareholders.........................
Description of Capital Stock...........
Underwriting...........................
Legal Matters..........................
Experts................................
Available Information..................
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

======================================================
======================================================
2,800,000 SHARES
[LOGO]
COMMON STOCK
---------------------

PROSPECTUS
---------------------
MORGAN KEEGAN & COMPANY, INC.

HANIFEN, IMHOFF INC.

SANDERS MORRIS MUNDY

, 1998
======================================================
<PAGE> 80

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the Offering are:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 9,737
NASD Filing Fee............................................. 3,801
Nasdaq National Market Listing Fee.......................... 17,500
Legal Fees and Expenses..................................... 150,000
Accounting Fees and Expenses................................ 120,000
Printing Expenses........................................... 125,000
Transfer Agent and Registrar Fees........................... 3,500
Miscellaneous............................................... 170,462
--------
TOTAL............................................. $600,000
========
</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> 81

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In July 1996, David R. Little, Chairman of the Board, President and Chief
Executive Officer of the Company, purchased 100 shares of Common Stock for an
aggregate consideration of $1,000.

In December 1996, pursuant to the SEPCO Reorganization and the Newman
Merger, Halter Financial Group, Inc., a consulting firm ("Halter"), and certain
transferees of Halter received an aggregate of 347,391 shares of Common Stock in
exchange for shares of common stock, no par value, of Newman ("Newman Common
Stock"). The shares of Common Stock that Newman and its transferees received in
such exchange were not registered in connection with the SEPCO Reorganization
and the Newman Merger. The shares of Newman Common Stock were issued to Halter
in connection with consulting and related services provided by Halter in the
SEPCO Reorganization and the Newman Merger.

In June 1997, in connection with its acquisition of Pelican, the Company
issued 280,428 shares of Common Stock to the seller of Pelican as part of the
purchase price for the acquisition.

In August 1997, the Company issued 6,603 shares of Common Stock for an
aggregate consideration of $9,250 to an employee pursuant to the exercise of a
stock option granted under the Company's Long-Term Incentive Plan. The
consideration for such shares was paid in accordance with the "cashless
exercise" provisions of the stock option pursuant to which the Company withheld
approximately 1,397 shares of Common Stock subject to the stock option to pay
the exercise price.

The Company considers all of such securities to have been offered and sold
or exchange, as the case may be, in transactions not involving a public offering
and, therefore, to be exempted from registration under Section 4(2) of the
Securities Act. None of the foregoing transactions involved underwriters.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<C> <S>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, filed with the
Commission on May 15, 1997).
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
4.1 -- Form of Common Stock certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997,
filed with the Commission on May 15, 1997.)
4.2 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Index, Inc. Long Term Incentive Plan, as amended
(incorporated by reference to the Registrant's Annual
Report on Form 10-K, filed with the Commission on
February 26, 1998).
10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
</TABLE>

II-2
<PAGE> 82
<TABLE>
<C> <S>
10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little, as
amended by Amendment to Employment Agreement dated
effective May 21, 1998.
10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998.
10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
</TABLE>

II-3
<PAGE> 83
<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 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.14 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.15 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.16 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.17 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.18 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-4 (Reg. No. 333-10021), filed with the Commission on
August 13, 1996).
10.18 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among Sepco
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
</TABLE>

II-4
<PAGE> 84
<TABLE>
<C> <S>
10.19 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.20 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
</TABLE>

II-5
<PAGE> 85
<TABLE>
<C> <S>
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.29 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.30 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Sepco Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
</TABLE>

II-6
<PAGE> 86
<TABLE>
<C> <S>
10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.37 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.38 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.39 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by and among SEPCO Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
10.40 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.41 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.42 -- Secured Promissory Note dated April 29, 1998, payable by
SEPCO Industries, Inc., Bayou Pumps, Inc. and American
MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q, filed with the Commission on May 14,
1998).
11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG Peat Marwick LLP.
*23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in
Exhibit 5.1).
24.1 -- Powers of Attorney (contained on page II-9).
</TABLE>

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

* To be filed by amendment.

As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed
with this Registration Statement certain instruments defining the rights of
holders of long-term debt of the Company, if any, because the total amount of
securities authorized under any of such instruments does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis. The
Company agrees to furnish a copy of any such agreements to the Securities and
Exchange Commission upon request.

(b) Financial Statement Schedules: None.

II-7
<PAGE> 87

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

The undersigned Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as a part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-8
<PAGE> 88

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 22nd day of May, 1998.

DXP ENTERPRISES, INC.
(Registrant)

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints David R. Little and Gary A. Allcorn, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to (i) this Registration Statement and (ii) a second Registration
Statement on Form S-1 with respect to additional shares of Common Stock pursuant
to Rule 462 under the Securities Act, and to file the same and all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID R. LITTLE Chairman of the Board, May 22, 1998
- ----------------------------------------------------- President, Chief Executive
David R. Little Officer and Director
(Principal Executive Officer)

/s/ JERRY J. JONES Director May 22, 1998
- -----------------------------------------------------
Jerry J. Jones

/s/ GARY A. ALLCORN Senior Vice President/Finance May 22, 1998
- ----------------------------------------------------- and Chief Financial Officer
Gary A. Allcorn (Principal Financial and
Accounting Officer)

/s/ CLETUS DAVIS Director May 22, 1998
- -----------------------------------------------------
Cletus Davis

/s/ KENNETH H. MILLER Director May 22, 1998
- -----------------------------------------------------
Kenneth H. Miller

/s/ THOMAS V. ORR Director May 22, 1998
- -----------------------------------------------------
Thomas V. Orr

/s/ BRYAN H. WIMBERLY Director May 22, 1998
- -----------------------------------------------------
Bryan H. Wimberly
</TABLE>

II-9
<PAGE> 89

INDEX TO EXHIBITS

*1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, filed with the
Commission on May 15, 1997).
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
4.1 -- Form of Common Stock certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997,
filed with the Commission on May 15, 1997.)
4.2 -- See Exhibit 3.1 for provisions of the Company's Restated
Articles of Incorporation, as amended, defining the
rights of the holders of Common Stock.
4.3 -- See Exhibit 3.2 for provisions of the Company's Bylaws
defining the rights of holders of Common Stock.
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Index, Inc. Long Term Incentive Plan, as amended
(incorporated by reference to the Registrant's Annual
Report on Form 10-K, filed with the Commission on
February 26, 1998).
10.2 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Kenneth H. Miller
(incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.3 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Tommy Orr
(incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.4 -- Stock Option Agreement dated effective as of May 7, 1996,
between SEPCO Industries, Inc. and Cletus Davis
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
10.5 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Jerry J. Jones (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.6 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and Bryan H. Wimberly (incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.7 -- Amended and Restated Stock Option Agreement dated
effective as of March 31, 1996, between SEPCO Industries,
Inc. and David R. Little (incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-10021), filed with the
Commission on August 12, 1996).
10.8 -- Employment Agreement dated effective as of July 15, 1996,
between SEPCO Industries, Inc. and David R. Little, as
amended by Amendment to Employment Agreement dated
effective May 21, 1998.
</TABLE>
<PAGE> 90
<TABLE>
<C> <S>
10.9 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Jerry J. Jones, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
10.10 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Bryan H. Wimberly, as amended
by Amendment to Employment Agreement dated effective May
21, 1998.
10.11 -- Employment Agreement dated as of July 1, 1996, between
SEPCO Industries, Inc. and Gary A. Allcorn, as amended by
Amendment to Employment Agreement dated effective May 21,
1998.
10.12 -- Second Amended and Restated Loan and Security Agreement
dated effective as of April 1, 1994, by and between
Barclays Business Credit, Inc. and SEPCO Industries,
Inc., as amended by First Amendment to Second Amended and
Restated Loan and Security Agreement and Secured
Promissory Note dated May , 1995, by and between SEPCO
Industries, Inc. and Shawmut Capital Corporation,
successor-in-interest by assignment to Barclays Business
Credit, Inc., as amended by Second Amendment to Second
Amended and Restated Loan and Security Agreement dated
April 3, 1996, by and between SEPCO Industries, Inc. and
Fleet Capital Corporation, formerly known as Shawmut
Capital Corporation, as amended by Third Amendment to
Second Amended and Restated Loan and Security Agreement
dated September 9, 1996, by and between SEPCO Industries,
Inc. and Bayou Pumps, Inc. and Fleet Capital Corporation,
as amended by Fourth Amendment to Second Amended and
Restated Loan and Security Agreement dated October 24,
1996, by and between SEPCO Industries, Inc. American MRO,
Inc. and Fleet Capital Corporation and as amended by
Letter Agreement dated November 4, 1996, from Fleet
Capital Corporation to SEPCO Industries, Inc., Bayou
Pumps, Inc. and American MRO, Inc. (incorporated by
reference to Exhibit 10.13 to Amendment No. 4 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on November 6,
1996).
10.13 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $149,910.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.14 -- Promissory Note dated December 31, 1989, in the aggregate
principal amount of $58,737.00, made by David R. Little
and payable to SEPCO Industries, Inc. (incorporated by
reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.15 -- Vehicle Lease Agreement dated July 28, 1993, by and
between World Omni Financial Corp. and SEPCO Industries,
Inc. (incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12,
1996).
</TABLE>
<PAGE> 91
<TABLE>
<C> <S>
10.16 -- Real Estate Note dated November 8, 1979, by Southern
Engine & Pump Company, payable to the order of
Southwestern Life Insurance Company (incorporated by
reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021),
filed with the Commission on August 12, 1996).
10.17 -- SEPCO Industries, Inc. Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.18 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-4 (Reg. No. 333-10021), filed with the Commission on
August 13, 1996).
10.18 -- Fifth Amendment to Second Amended and Restated Loan and
Security Agreement dated June 2, 1997, by and among Sepco
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.19 -- Loan and Security Agreement dated June 16, 1997, by and
between Fleet Capital Corporation and DXP Acquisition,
Inc. d/b/a Strategic Acquisition, Inc. (incorporated by
reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.20 -- Continuing Guaranty Agreement dated June 16, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of DXP Acquisition, Inc. d/b/a Strategic
Acquisition, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.21 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.22 -- Continuing Guaranty Agreement dated June 16, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
DXP Acquisition, Inc. d/b/a Strategic Acquisition, Inc.
to Fleet Capital Corporation (incorporated by reference
to Exhibit 10.5 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.23 -- Continuing Guaranty Agreement dated June 16, 1997, by
American MRO, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.24 -- Continuing Guaranty Agreement dated June 16, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
</TABLE>
<PAGE> 92
<TABLE>
<C> <S>
10.25 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Sepco Industries, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.8 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.26 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of American MRO, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.27 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Bayou Pumps, Inc. to
Fleet Capital Corporation (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.28 -- Continuing Guaranty Agreement dated June 16, 1997, by DXP
Acquisition, Inc. d/b/a Strategic Acquisition, Inc.,
guarantying the indebtedness of Pelican State Supply
Company, Inc. to Fleet Capital Corporation (incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q on Form 10-Q/A
for the quarterly period ended June 30, 1997, filed with
the Commission on November 17, 1997).
10.29 -- Loan and Security Agreement dated May 29, 1997, by and
between Fleet Capital Corporation and Pelican State
Supply Company, Inc. (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registrant's
Quarterly Report on Form 10-Q on Form 10-Q/A for the
quarterly period ended June 30, 1997, filed with the
Commission on November 17, 1997).
10.30 -- Continuing Guaranty Agreement dated May 29, 1997, by DXP
Enterprises, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.31 -- Continuing Guaranty Agreement dated May 29, 1997, by
Sepco Industries, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.32 -- Continuing Guaranty Agreement dated May 29, 1997, by
American MRO, Inc., guarantying the indebtedness of
Pelican State Company, Inc. to Fleet Capital Corporation
(incorporated by reference to Exhibit 10.15 to Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q
on Form 10-Q/A for the quarterly period ended June 30,
1997, filed with the Commission on November 17, 1997).
10.33 -- Continuing Guaranty Agreement dated May 29, 1997, by
Bayou Pumps, Inc., guarantying the indebtedness of
Pelican State Supply Company, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
</TABLE>
<PAGE> 93
<TABLE>
<C> <S>
10.34 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Sepco Industries, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.17
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.35 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of American MRO, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.18
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.36 -- Continuing Guaranty Agreement dated May 29, 1997, by
Pelican State Supply Company, Inc., guarantying the
indebtedness of Bayou Pumps, Inc. to Fleet Capital
Corporation (incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Quarterly Report
on Form 10-Q on Form 10-Q/A for the quarterly period
ended June 30, 1997, filed with the Commission on
November 17, 1997).
10.37 -- Amendment No. Two to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.38 -- Amendment No. Three to Sepco Industries, Inc. Employee
Stock Ownership Plan (incorporated by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
10.39 -- Sixth Amendment to Second Amended and Restated Loan and
Security Agreement and Amendment to Other Agreements
dated April 29, 1998, by and among SEPCO Industries,
Inc., Bayou Pumps, Inc. and American MRO, Inc. and Fleet
Capital Corporation (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q,
filed with the Commission on May 14, 1998).
10.40 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between Pelican State Supply Company, Inc.
and Fleet Capital Corporation (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998).
10.41 -- Amendment to Loan and Security Agreement dated April 29,
1998, by and between DXP Acquisition, Inc., d/b/a
Strategic Acquisition, Inc. and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q, filed with
the Commission on May 14, 1998).
10.42 -- Secured Promissory Note dated April 29, 1998, payable by
SEPCO Industries, Inc., Bayou Pumps, Inc. and American
MRO, Inc. to Fleet Capital Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q, filed with the Commission on May 14,
1998).
11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form
10-K, filed with the Commission on February 26, 1998).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG Peat Marwick LLP.
*23.3 -- Consent of Fulbright & Jaworski L.L.P. (contained in
Exhibit 5.1).
24.1 -- Powers of Attorney (contained on page II-9).
</TABLE>

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* To be filed by amendment.

<PAGE> 1
EXHIBIT 10.8

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT ("Agreement") by and between SEPCO INDUSTRIES,
INC., a Texas corporation (the "Company") and DAVID R. LITTLE (the "Employee"),
dated effective as of the 15th day of July, 1996.

Employee and Company desire to have Employee continue employment with
Company.

Employee and Company desire to set forth the terms and conditions of
Employee's employment with Company.

AGREEMENTS

1. Employment Period. The Company hereby agrees to continue the
Employee in its employ as Chief Executive Officer, and the Employee hereby
agrees to remain in the employ of the Company for the period commencing on the
date hereof ("Effective Date") and ending on the third anniversary of such date
(the "Employment Period"). Unless this Agreement is terminated, on the first
annual anniversary date hereof and on each annual anniversary of such date
(such date and each annual anniversary thereafter shall be hereinafter referred
to as the "Renewal Date"), the Employment Period shall be automatically
extended so as to terminate three (3) years from such Renewal Date.
Notwithstanding the foregoing, the Renewal Date shall not extend beyond the
date of the 70th birthday of Employee or such later retirement date as
determined by the Board of Directors ("Retirement Date").

2. Terms of Employment.

(a) Position and Duties. During the Employment Period, the
Employee's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall remain commensurate
in all material respects with those held, exercised and assigned as of the
Effective Date
<PAGE> 2
and the Employee's services shall be performed at Employer's current location
at 6500 Brittmoore, Houston, Harris County, Texas or only at any other office
or location of Company within thirty (30) miles of said current location.

During the Employment Period, and excluding any periods of vacation
and sick leave to which the Employee is entitled, the Employee agrees to serve
in said capacity and to perform diligently and to the best of Employee's
abilities the responsibilities assigned to the Employee hereunder and to
perform faithfully and efficiently such responsibilities. Further, Employee
shall serve, when elected, as a director of the Company and as a director or
officer of any subsidiary of Company and as a member of any committee of any
such Board of Directors to which he may be appointed, and Employee shall
perform such other duties commensurate with his office as the Board of
Directors may from time to time assign. During the Employment Period it shall
not be a violation of this Agreement for the Employee to (i) serve on
corporate, civic or charitable boards or committees, (ii) deliver lectures and
fulfill speaking engagements or (iii) manage personal investments for so long
as such activities do not materially interfere with the performance of the
Employee's responsibilities in accordance with this Agreement. It is expressly
understood and agreed that to the extent that any such activities have been
conducted by the Employee prior to the Effective Date, the continued conduct of
such activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Employee's responsibilities to the
Company.

(b) Compensation.

(i) Base Salary. During the Employment Period, the Employee shall
receive an annual base salary ("Base Salary") of TWO HUNDRED SIXTY THOUSAND AND
NO/100 DOLLARS ($260,000.00), which shall be payable in equal bi-monthly
installments. The Base Salary shall be reviewed at least annually and shall be
increased at such time and at any time and from time to time as shall be
substantially consistent with previous actions regarding increases in base
salary awarded to

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<PAGE> 3
Employee. Any increase in Base Salary shall not serve to limit or reduce any
other obligation to the Employee under this Agreement. Base Salary shall never
be reduced.

(ii) Monthly Bonus. In addition to Base Salary, the Employee shall
be awarded each month during the Employment Period, an monthly bonus ("Monthly
Bonus") in cash equal to three percent (3%) of the profit before tax of the
Company as shown on the books and records of the Company at the end of each
month.

(iii) Incentive, Savings and Retirement Plans. In addition to Base
Salary and Monthly Bonus, the Employee shall be entitled to participate during
the Employment Period in all incentive, savings and retirement plans,
practices, policies and programs applicable to other key employees of the
Company. Such plans, practices, policies and programs, in the aggregate, shall
provide the Employee with compensation, benefits and reward opportunities at
least as favorable as those in effect as of the Effective Date.

(iv) Welfare Benefit Plans. During the Employment Period, the
Employee and/or the Employee's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company to other key
employees, including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs.

(v) Expenses. During the Employment Period, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred
by the Employee in accordance with the policies, practices and procedures of
the Company in effect, as of the Effective Date, for Employee.

(vi) Fringe Benefits. During the Employment Period, the Employee
shall be entitled to fringe benefits, including use of two automobiles in
furtherance of Employee's position and duties and payment of related expenses
and payment of any professional dues and dues for social club memberships, in

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<PAGE> 4
accordance with the plans, practices, programs and policies of the Company in
effect, as of the Effective Date, for Employee.

(vii) Office and Support Staff. During the Employment Period, the
Employee shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to secretarial and other assistance, at
least equal to that provided to the Employee by the Company as of the Effective
Date.

(viii) Vacation. During the Employment Period, the Employee shall be
entitled to paid vacation of three (3) weeks in accordance with the plans,
policies, programs and practices of the Company in effect as of the Effective
Date for Employee.

3. Termination.

(a) Provision for. This Agreement may be terminated by Company or
Employee only in accordance with the terms of Sections 3, 4 and 5 hereof.

(b) Notice of Termination. Any termination by the Company or by
the Employee shall be communicated by Notice of Termination to the other party
hereto given in accordance with the notice provisions contained in this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which specifies the termination date.

(c) Date of Termination. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as
the case may be; provided, however, that (i) if the Employee's employment is
terminated by the Company, the Date of Termination shall be the date on which
the Company notifies the Employee of such termination except for termination
for "Good Cause" (as hereinafter defined) (ii) if the Employee's employment is
terminated by reason of death or retirement, the Date shall be the date of
death or date of retirement of the Employee, and (iii) if the Employee's
employment is terminated by reason of Good Cause the Date shall be the date of
the conviction, adjudication or judgment by the court of competent
jurisdiction.

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<PAGE> 5
4. Obligation of the Company upon Termination (Except Death or
"Good Cause"). If after the date of the Agreement, the Company shall breach
any agreement providing for or respecting the employment of the Employee or if
during the Employment Period, the Company shall terminate the Employee's
employment for any reason other than for Death, Retirement or Good Cause, or if
during the Employment Period, the Employee shall terminate his Employment for
"Good Reason" (defined hereinbelow) then the Company shall pay or cause to be
paid to the Employee in a cash lump sum within 30 days after the Date of
Termination the aggregate of the following amounts:

A. the Employee's Current Base Annual Salary for the
remainder of the Employment Period; and

B. an amount equal to the sum of the most recent twelve
months of Monthly Bonuses paid to the Employee, (the "Recent Bonus");
and

C. the product of two (2) times the sum of the current
annual Base Salary plus the Recent Bonus; and

D. in the case of compensation previously deferred by
the Employee, all amounts previously deferred (together with any
accrued interest hereon) and not yet paid by the Company, and any
accrued vacation pay not yet paid by the Company; and

E. for the remainder of the Employment Period, or such
longer period as any plan, program, practice or policy may provide,
the Company shall continue benefits to the Employee and/or the
Employee's family at least equal to those which would have been
provided to them in accordance with the plans, programs, practices and
policies described in Section 2(b)(iv) and (vi) of this Agreement if
the Employee's employment had not been terminated, including health
insurance and life insurance, in accordance with the plans, practices,
programs or policies of the Company in effect prior to the Termination
Date, and for purposes of eligibility for retiree benefits pursuant to
such plans, practices, programs and policies, the Employee shall be

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<PAGE> 6
considered to have remained employed until the end of the Employment
Period and to have retired on the last day of such period.

For purposes of this Agreement, "Good Reason" means:

(i) if there is a change in the nature or scope of functions,
powers, authorities, duties or responsibilities as set forth in Section 2(a) of
this Agreement, which change is not remedied by the Company within thirty (30)
days after receipt of notice thereof given by the Employee;

(ii) any failure by the Company to comply with any of the provisions
of Section 2(b) of this Agreement, which is not remedied by the Company within
thirty (30) days after receipt of notice thereof given by the Employee;

(iii) the Company's requiring the Employee to be based at any office
or location other than that described in Section 2(a) hereof, except for travel
reasonably required in the performance of the Employee's responsibilities;

(iv) any purported termination by the Company of the Employee's
employment except for "Good Cause" (hereinafter defined) or Death; or

(v) any failure by the Company to comply with and satisfy Section 11
of this Agreement.

5. Obligation of the Company Upon Retirement, Death or "Good
Cause".

If the Employee's employment is terminated by reason of Employee's
retirement, death or "Good Cause" (hereinafter defined), this Agreement shall
terminate without further obligations to Employee or the Employee's legal
representatives, except as set out in this Section and under this Agreement as
it does not conflict with this Section, including those obligations accrued or
earned and vested (if applicable) by the Employee as of the Date of
Termination, and including (i) the Employee's full Base Salary through the Date
of Termination, (ii) the Monthly Bonuses required to be paid to the Employee up
to and including the month within which the Date of Termination occurs and
(iii) any compensation previously

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<PAGE> 7
deferred by the Employee (together with any accrued interest thereon) and not
yet paid by the Company and any accrued vacation pay not yet paid by the
Company (such amounts specified in clauses (i), (ii) and (iii) above are
hereinafter referred to as "Accrued Obligations"). All such Accrued
Obligations shall be paid to Employee or to Employee's estate or beneficiary,
as applicable, in a cash lump sum within thirty (30) days of the Date of
Termination. Anything in this Agreement to the contrary notwithstanding, the
Employee's family in the event of Employee's death shall be entitled to
continue to receive the benefits provided by the Company to surviving families
of key employees of the Company and Employee's Base Salary payable in equal
bi-monthly installments for a period of twenty-four (24) months after the month
in which Employee dies.

For purposes of this Agreement, "Good Cause" means:

(i) Employee has been convicted of a felony by a court of
competent jurisdiction and such conviction is no longer subject to direct
appeal.

(ii) Employee has been adjudicated by a court of competent
jurisdiction to be mentally, physically and/or emotionally incapacitated so as
to render him incapable of performing his required duties and services, and
such adjudication is no longer subject to direct appeal.

(iii) A court of competent jurisdiction has rendered a judgment that
Employee has committed acts of fraud, theft or willful malfeasance that has
materially damaged the Company and such determination is no longer subject to
direct appeal.

6. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Employee's continuing or future participation in any
benefit, bonus, incentive or other plans, programs, policies or practices,
provided by the Company and for which the Employee may qualify, nor shall
anything herein limit or otherwise affect such rights as the Employee may have
under any stock option or warrant or other agreements with the Company.
Amounts which are vested benefits or which the Employee is otherwise entitled
to receive under any plan, policy, practice or program of the Company

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<PAGE> 8
at or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program.

7. Full Settlement. The Company's obligation to make or cause to
be made the payments provided for in this Agreement and otherwise to perform
its obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Employee or others. In no event shall the Employee be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Employee under any of the provisions of this Agreement.
The Company agrees to pay, or cause to be paid, to the full extent permitted by
law, all legal fees and expenses which the Employee may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the Company or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof, plus in each case
interest at the applicable Federal rate provided for in Section 7872(f)(2) of
the Code.

8. Certain Additional Payments by the Company.

(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Employee, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any
interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Employee shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Employee of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

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<PAGE> 9
(b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by the
accounting firm preparing the Company's tax return or, if such firm is not
reasonably available, such other firm of similar national recognition mutually
acceptable to the Company and the Employee (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and the Employee
within 15 business days of the Date of Termination, if applicable, or such
earlier time as is requested by the Company. The initial Gross-Up Payment, if
any, as determined pursuant to this Section 8(b), shall be paid to the Employee
within 5 days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable to the Employee, it
shall furnish the Employee with an opinion that he has substantial authority
not to report any Excise Tax on his federal income tax return. Any
determination by the Accounting Firm shall be binding upon the Company and the
Employee. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that the Gross-Up Payments which will not have been
made by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 8(c) and the Employee thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment (together with any penalties and interest) shall be promptly paid
by the Company to or for the benefit of the Employee.

(c) The Employee shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Employee knows of
such claim and shall apprise the Company of the nature of such claims and the
date on which such claim is requested to be paid. The Employee shall not pay
such claim prior to the expiration of the

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<PAGE> 10
thirty-day period following the date on which the Employee gives such notice to
the Company (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Company notifies the Employee
in writing prior to the expiration of such period that it desires to contest
such claim, the Employee shall:

(i) give the Company any information reasonably requested by the
Company relating to such claim;

(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company;

(iii) cooperate with the Company in good faith in order effectively
to contest such claim;

(iv) permit the Company to participate in any proceedings relating
to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including attorney fees and any additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Employee harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result of
such representation and payment of costs and expenses. Without limitation of
the foregoing provisions of this Section (8)(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect to such claim and may, at its
sole option, either direct the Employee to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Employee agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Employee to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Employee, on an interest-free basis
and shall indemnify and

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hold the Employee harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Employee
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service, or any other authority.

(d) If, after the receipt by the Employee of an amount advanced by
the Company pursuant to Section 8(c), the Employee become entitled to receive
any refund with respect to such claim, the Employee shall (subject to the
Company's complying with the requirements of Section 8(c), promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Employee
of an amount advanced by the Company pursuant to Section 8(c), a determination
is made that the Employee shall not be entitled to any refund with respect to
such claims and the Company does not notify the Employee in writing of its
intent to contest such denial of refund prior to the expiration of thirty days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.

9. Protective Covenants. The Employee recognizes that his
employment by the Company is one of the highest trust and confidence because
(i) the Employee will become fully familiar with all aspects of the Company's
business during the period of his employment with the Company, (ii) certain
information of which the Employee will gain knowledge during his employment is
proprietary and confidential information which is special and peculiar value to
the Company, and (iii) if any such proprietary and confidential information
were imparted to or became known by any person, including

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<PAGE> 12
the Employee, engaging in a business in competition with that of the Company,
hardship, loss or irreparable injury and damage could result to the Company,
the measurement of which would be difficult if not impossible to ascertain.
The Employee acknowledges that the Company has developed unique skills,
concepts, designs, marketing programs, marketing strategy, business practices,
methods of operation, trademarks, licenses, hiring and training methods,
financial and other confidential and proprietary information concerning its
operations and expansion plans ("Trade Secrets"). Therefore, the Employee
agrees that it is necessary for the Company to protect its business from such
damage, and the Employee further agrees that the following covenants constitute
a reasonable and appropriate means, consistent with the best interest of both
the Employee and the Company, to protect the Company against such damage and
shall apply to and be binding upon the Employee as provided herein:

(a) Trade Secrets. The Employee recognizes that his position with
the Company is one of the highest trust and confidence by reason by of the
Employee's access to and contact with certain Trade Secrets of the Company.
The Employee agrees and covenants to use his best efforts and exercise utmost
diligence to protect and safeguard the Trade Secrets of the Company. The
Employee further agrees and covenants that, except as may be required by the
Company in connection with this Agreement, or with the prior written consent of
the Company, the Employee shall not, either during the term of this Agreement
or thereafter, directly or indirectly, use for the Employee's own benefit or
for the benefit of another, or disclose, disseminate, or distribute to another,
any Trade Secret (whether or not acquired, learned, obtained, or developed by
the Employee alone or in conjunction with others) of the Company or of others
with whom the Company has a business relationship. All memoranda, notes,
records, drawings, documents, or other writings whatsoever made, compiled,
acquired, or received by the Employee during the term of this Agreement,
arising out of, in connection with, or related to any activity or business of
the Company, including, but not limited to, the Company's operations, the
marketing of the Company's products, the Company's customers, suppliers, or
others with whom the Company has

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<PAGE> 13
a business relationship, the Company's arrangements with such parties, and the
Company's pricing and expansion policies and strategy, are, and shall continue
to be, the sole and exclusive property of the Company, and shall, together with
all copies thereof and all advertising literature, be returned and delivered to
the Company by the Employee immediately, without demand, upon the termination
of this Agreement, or at any time upon the Company's demand.

(b) Restriction on Soliciting Employees of the Company. The
Employee covenants that for a period of twelve (12) months following the
termination of this Agreement, he will not, either directly or indirectly, call
on, solicit, or take away, or attempt to call on, solicit or take away any of
the employees of the Company, either for himself or for any other person, firm,
corporation or other entity.

(c) Covenant Not to Compete. The Employee hereby covenants and
agrees that for a period of twenty-four (24) months following the termination
of this Agreement, he will not directly or indirectly, either as an employee,
employer, consultant, agent, principal, partner, shareholder (other than
through ownership of publicly-traded capital stock of a corporation which
represents less than five percent (5%) (of the outstanding capital stock of
such corporation), corporate officer, director, investor, financier or in any
other individual or representative capacity, engage or participate in any
business competitive with the Company within Texas, Oklahoma or Louisiana.

(d) Survival of Covenants. Each covenant of the Employee set
forth in this Section 9 shall survive the termination of this Agreement and
shall be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of the Employee
against the Company whether predicated on this Agreement or otherwise shall not
constitute a defense to the enforcement by the Company of said covenant.

(e) Remedies. In the event of breach or threatened breach by the
Employee of any provision of this Section 9, the Company shall be entitled to
relief by temporary restraining order, temporary injunction, or permanent
injunction or otherwise, in addition to other legal and equitable relief to
which

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it may be entitled, including any and all monetary damages which the Company
may incur as a result of said breach, violation or threatened breach or
violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be
deemed an election of remedies or waiver of the right to pursue any other of
such remedies as to such breach, violation, or threatened breach or violation,
or as to any other breach, violation, or threatened breach or violation.

The Employee hereby acknowledges that the Employee's agreement to be
bound by the protective covenants set forth in this Section 9 was a material
inducement for the Company entering into this Agreement and agreeing to pay the
Employee the compensation and benefits set forth herein.

10. Assignment and Binding Effect. This Agreement is personal to
the Employee and without the prior written consent of the Company shall not be
assignable by the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall be binding upon and shall inure to the
benefit of and be enforceable by each party hereto and each party's respective
successors, heirs, assigns and legal representatives.

11. Successor. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets.

12. Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without reference
to principles of conflict of laws. This Agreement was executed in Houston,
Harris County, Texas and at least partial performance of this Agreement will be
made in such place.

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13. Notices. All notices and other communications hereunder shall
be in writing and shall be personally given by hand delivery to the other party
or sent by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:

If to the Employee: David R. Little
427 Thamer
Houston, Texas 77024

If to the Company: Sepco Industries, Inc.
6500 Brittmoore
Houston, Texas 77041
Attention: Senior Vice President/Finance

or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee, or if mailed, on the seventh day
following the day on which it was deposited in the United States mail.

14. Severability. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement and each separate provision hereof shall be construed and enforced as
if such illegal, invalid, or unenforceable provision had never comprised a part
of this Agreement, and the remaining provisions of this Agreement shall remain
in full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement.

15. Headings. The headings of the paragraph of this Agreement
have been inserted for convenience of reference only and shall not be construed
or interpreted to restrict or modify any of the terms or provisions hereof.

16. Remedies. With respect to each and every breach, violation,
or threatened breach or violation by Employee or Company of any of the
covenants set forth herein, Company and Employee, in addition to all other
remedies available at law or in equity, including specific performance of the

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provisions hereof, shall be entitled to enjoin the commencement or continuance
thereof and may apply for entry of an injunction.

17. No Waiver. The failure to enforce at any time any of the
provisions of this Agreement or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect the validity of this Agreement, or any
part hereof, or the right of either party thereafter to enforce each and every
such provision of this Agreement in accordance with the terms of this
Agreement.

18. Entire Agreement.

(a) This Agreement embodies the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter hereof, unless expressly provided otherwise
herein and except for (1) all rights of Employee under any other existing
employee benefit plans established and adopted for employees of Company in
general, (2) all rights of Employee to indemnity under all indemnification
provided by Company or any third parties and (3) other similar arrangements of
Company and all agreements with respect to the foregoing.

(b) No amendment or modification of this Agreement, unless
expressly provided otherwise herein, shall be valid unless made in writing and
signed by each of the parties whose rights, duties, or obligations hereunder
would in any way be affected by any amendment or modification.

(c) No representations, inducements, or agreements have been made
to induce either Employee or Company to enter into this Agreement which are not
expressly set forth herein. This Agreement is the sole source of rights and
duties as between Company and Employee relating to the subject matter of this
Agreement, except as expressly provided herein.

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IN WITNESS WHEREOF, the Employee has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.

EMPLOYEE:

/s/ DAVID R. LITTLE
-----------------------------------------------
DAVID R. LITTLE

COMPANY:

SEPCO INDUSTRIES, INC., a Texas Corporation

By: /s/ DAVID R. LITTLE
--------------------------------------------
Printed Name: David R. Little
-------------------------------
Title: Chairman & CEO
--------------------------------------

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<PAGE> 18
AMENDMENT TO EMPLOYMENT AGREEMENT

WHEREAS, on July 15, 1996, SEPCO INDUSTRIES, INC., a Texas
corporation ("the Company") and DAVID R. LITTLE (the "Executive") entered into
that one certain Employment Agreement (the "Agreement");

WHEREAS, the Company and the Executive desire to amend said Employment
Agreement pursuant to the provisions hereof.

NOW, THEREFORE, in consideration of the covenants, and agreements set out
below, the parties agree as follows:

1. All terms defined in the Agreement, which are used in this First
Amendment, shall have the same meaning as set forth in the Agreement
except as specifically changed or modified hereby.

2. The Company has become a wholly owned subsidiary of DXP Enterprises,
Inc., a Texas corporation ("DXP"). Therefore the Company shall, for
the purposes of the Agreement, be DXP.

3. Section 1 is hereby amended by adding the following as the last
sentence.

"Notwithstanding anything herein to the contrary, this Agreement shall
terminate June 30, 1998, if the Company and Executive execute a new
Employment Agreement before that date. If a new Employment Agreement
is not executed before June 30, 1998, then this Agreement shall
terminate June 30, 2001."

4. Series 2(b)(ii) of the Agreement is hereby amended by adding the
following as the last sentence:

"Notwithstanding the foregoing, the annual total of the monthly bonus
shall not exceed twice the annual Base Salary."

Page 1 of 2 Pages
<PAGE> 19

5. Except as herein amended and modified, the Agreement shall remain in full
force and effect.

EXECUTED effective the 21st day of May, 1998.

DXP ENTERPRISES, INC.

By: /s/ GARY A. ALLCORN
-------------------------------
GARY A. ALLCORN
Senior Vice President/CFO

/s/ DAVID R. LITTLE
-------------------------------
DAVID R. LITTLE

Page 2 of 2 Pages

<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement) by and between SEPCO
INDUSTRIES, INC., a Texas corporation (the "Company"), and JERRY J. JONES (the
"Executive") is made and entered into as of the Effective Date set forth in
Section 1.3 below:

RECITALS

A. The Company desires to employ the Executive in the capacity
set forth on Exhibit A pursuant to the provisions of this
Agreement; and

B. The Executive desires employment as an employee of the Company
pursuant to the provisions of this Agreement.

ARTICLE I.
TERMS OF EMPLOYMENT

The terms of employment are as follows:

1.1 Employment. The Company hereby employs the Executive for and
during the term hereof in the capacity set forth on Exhibit A, but Company may
subsequently assign Executive to a different position or modify Executive's
duties and responsibilities. The Executive hereby accepts employment under the
terms and conditions set forth in this Agreement.

1.2 Duties of Executive. The Executive shall perform in the
capacity described in Section 1.1 hereof and shall have such duties,
responsibilities, and authorities as may be designated for such office. The
Executive agrees to devote the Executive's best efforts, abilities, knowledge,
experience and full business time to the faithful performance of the duties,
responsibilities, and authorities which may be assigned to the Executive.
Executive may not engage, directly or indirectly, in any other business,
investment, or activity that interferes with Executive's performance of
Executive's duties hereunder, is contrary to the interests of the Company, or
requires any significant portion of Executives's business time. Executive
shall at all times comply with and be subject to such policies and procedures
as the Company may establish from time to time. Executive acknowledges and
agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance
to act at all times in the best interests of the Company and to do no act which
would injure Company's business, its interests, or its reputation.

1.3 Term. This Agreement shall become effective as of the 1st day
of July, 1996 (the "Effective Date") and shall continue in force and effect for
one (1) year unless sooner terminated as provided in Section 2.1 hereof.
Unless this Agreement is terminated before its annual anniversary date, the
term hereof shall be automatically extended for one (1) year unless this
Agreement is renewed or extended by written agreement between the Company and
the Executive pursuant to terms and conditions mutually acceptable.

1.4 Compensation. The Company shall pay the Executive, as
"Compensation" for services rendered by the Executive under this Agreement the
following Salary plus Bonus.

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<PAGE> 2

(a) Salary: A base salary per month as set forth on Exhibit A,
prorated for any partial period of employment ("Salary"). Such Salary
shall be paid in installments in accordance with the Company's regular
payroll practices.

(b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus").

1.5 Employment Benefits. In addition to the Salary payable to the
Executive hereunder, the Executive shall be entitled to the following benefits:

(a) Employment Benefits. As an employee of the Company,
the Executive shall participate in and receive all general employee
benefit plans and programs, as may be in effect from time to time,
upon satisfaction by the Executive of the eligibility requirements
therefor. Nothing in this Agreement is to be construed or interpreted
to provide greater rights, participation, coverage, or benefits under
such benefit plans or programs than provided to similarly situated
employees pursuant to the terms and conditions of such benefit plans
and programs.

(b) Working Facilities. During the term of this
Agreement, the Company shall provide, at its expense, office space,
furniture, equipment, supplies and personnel as shall be adequate for
the Executive's use in performing Executive's duties and
responsibilities under this Agreement.

(c) Automobile Allowance. During the term of this
Agreement, the Company shall provide Executive with a vehicle in
accordance with the Company's vehicle policy.

(d) Limitations. Company shall not by reason of this Article
1.5 be obligated to institute, maintain, or refrain from changing,
amending, or discontinuing, any such incentive compensation or
employee benefit program or plan, so long as such actions are
similarly applicable to covered employees similarly situated.

ARTICLE II.
TERMINATION

2.1 Termination. Notwithstanding anything herein to the contrary,
this Agreement and the Executive's employment hereunder may be terminated
without any breach of this Agreement at any time during the term hereof by
reason of and in accordance with the following provisions:

(a) Death. If the Executive dies during the term of this
Agreement and while in the employ of the Company, this Agreement shall
automatically terminate as of the date of the Executive's death, and
the Company shall have no further liability hereunder to the Executive
or Executive's estate, except to the extent set forth in Section
2.2(a) hereof.

(b) Disability. If, during the term of this Agreement,
the Executive shall be prevented from performing the Executive's
duties hereunder by reason of becoming disabled as hereinafter
defined, the Company may terminate this Agreement immediately

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<PAGE> 3
upon written notice to the Executive without any further liability
hereunder to the Executive except as set forth in Section 2.2(b)
hereof. For purposes of this Agreement, the Executive shall be deemed
to have become disabled when the Board of Directors of the Company,
upon the written report of a qualified physician designated by the
Board of Directors of the Company or by its insurers, shall have
determined that the Executive has become mentally, physically and/or
emotionally incapable of performing Executive's duties and services
under this Agreement.

(c) Termination by the Company for Cause. Prior to the
expiration of the term of this Agreement, the Company may discharge
the Executive for cause and terminate this Agreement immediately upon
written notice to the Executive without any further liability
hereunder to the Executive, except to the extent set forth in Section
2.1(c) hereof. For purposes of this Agreement, a "discharge for
cause" shall mean termination of the Executive upon written notice to
the Executive limited, however, to one or more of the following
reasons:

(1) Conviction of the Executive by a court of
competent jurisdiction of a felony or a crime involving moral
turpitude;

(2) The Executive's failure or refusal to comply
with the Company's policies, standards, and regulations of the
Company, which from time to time may be established;

(3) The Executive's engaging in conduct amounting
to fraud, dishonesty, gross negligence, willful misconduct or
conduct that is unprofessional, unethical, or detrimental to
the reputation, character or standing of the Company; or

(4) The Executive's failure to faithfully and
diligently perform the duties required hereunder or to comply
with the provisions of this Agreement.

Prior to terminating this Agreement pursuant to
Section 2.1(c), (2), or (4), the Company shall furnish the
Executive written notice of the Executive's alleged failure to
abide by or alleged breach of this Agreement. The Executive
shall have thirty (30) days after the Executive's receipt of
such notice to cure such failure to abide or breach and the
Company's Board of Directors shall determine if the failure to
abide or breach is cured.

(d) Termination by the Company with Notice. The Company
may terminate this Agreement at any time, for any reason, other than
as set forth in Subparagraphs (a), (b) or (c) of this Section 2.1,
with or without cause, in the Company's sole discretion, immediately
upon written notice to the Executive without any further liability
hereunder to the Executive, except to the extent set forth in Section
2.2(d) hereof.

(e) Termination by the Executive for Good Reason. The
Executive may terminate this Agreement at any time for Good Reason (as
hereinafter defined) in which event the Company shall have no further
liability hereunder to the Executive except to

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<PAGE> 4
the extent set forth in Section 2.2(e) hereof. For purposes of this
Agreement, the term "Good Reason" shall mean, without the Executive's
express written consent, the occurrence of any of the following
circumstances:

(1) The Company's failure to pay the Executive
the Compensation pursuant to the terms of this Agreement that
has not been cured within thirty (30) days after notice of
such noncompliance has been given by the Executive to the
Company;

(2) The failure of the Company to obtain an
agreement, from any successor to assume and agree to perform
this Agreement; or

(3) Any failure by the Company to comply with any
material provision of this Agreement that has not been cured
within thirty (30) days after notice of such noncompliance has
been given by the Executive to the Company.

(f) Termination by the Executive with Notice. The
Executive may terminate this Agreement for any reason other than Good
Reason on thirty (30) days prior written notice, in the sole
discretion of the Executive, in which event the Company shall have no
further liability hereunder to the Executive, except to the extent set
forth in Section 2.2(f) hereof.

2.2 Compensation upon Termination.

(a) Death. In the event the Executive's employment
hereunder is terminated pursuant to the provisions of Section 2.1(a)
hereof due to the death of the Executive, the Company shall have no
further obligation to the Executive or Executive's estate, except to
pay to the Executive's spouse, or if none, to the estate of the
Executive any accrued, but unpaid, Salary and any vacation or sick
leave benefits, which have accrued as of the date of death but were
then unpaid or unused. Any amount due the Executive hereunder shall
be paid in a lump sum in cash within thirty (30) days after the death
of the Executive.

(b) Disability. In the event the Executive's employment
hereunder is terminated pursuant to the provisions of Section 2.1(b)
hereof due to Disability of the Executive, the Company shall be
relieved of all of its obligations under this Agreement, except to pay
the Executive any accrued, but unpaid Salary, and vacation or sick
leave benefits which have accrued as of the date on which such
permanent disability is determined, but then remain unpaid. The
provisions of the preceding sentence shall not affect the Executive's
rights to receive payments under the Company's disability insurance
plan, if any. Any amount due the Executive hereunder shall be paid in
a lump sum in cash within thirty (30) days after the termination of
the Executive's employment hereunder.

(c) Cause. In the event the Executive's employment
hereunder is terminated by the Company for Cause pursuant to the
provisions of Section 2.1(c) hereof, the Company shall have no further
obligation to the Executive under this Agreement except

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<PAGE> 5
to pay the Executive any accrued, but unpaid, Salary and any vacation
or sick leave benefits, which have accrued as of the date of
termination of this Agreement, but were then unpaid or unused. Any
amount due the Executive hereunder shall be paid in a lump sum in cash
within sixty (60) days after the termination of the Executive's
employment hereunder.

(d) Termination Pursuant to Section 2.1(d). In the event
the Executive's employment hereunder is terminated by the Company
pursuant to the provisions of Section 2.1(d) hereof, the Executive
shall be entitled to receive (i) any accrued, but unpaid, Salary and
any vacation or sick leave benefits, which have accrued as of the date
of termination of this Agreement, but were then unpaid or unused, (ii)
an amount payable in monthly installments equal to the Executive's
full monthly Salary payable for a period of twelve (12) months and
(iii) the Termination Bonus set forth in Exhibit A. Any amount due
the Executive hereunder (i) of this Section shall be paid in a lump
sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder.

(e) Termination by the Executive for Good Reason. In the
event this Agreement is terminated by the Executive pursuant to the
provisions of Section 2.1(e) hereof, the Executive shall be entitled
to receive (i) any accrued, but unpaid, Salary and any vacation or
sick leave benefits which have accrued as of the date of
termination-of the Agreement, but were then unpaid or unused, (ii) the
full monthly Salary payable hereunder for a period of twelve (12)
months after this Agreement is terminated by the Executive in
accordance with the Company's regular payroll periods or over such
lesser period as the Company may determine and (iii) the Termination
Bonus set forth in Exhibit A. Any amount due the Executive hereunder
(i) of this Section shall be paid in a lump sum in cash within thirty
(30) days after the termination of the Executive's employment
hereunder.

(f) Termination Pursuant to Section 2.1(f). In the event
the Executive's employment hereunder is terminated by the Executive
pursuant to the provisions of Section 2.1(f) hereof, all future
compensation to which Executive is entitled and all future benefits
for which Executive is eligible shall cease and terminate as of the
date of termination. Executive shall be entitled to pro rata Salary
through the date of termination. Any amount due the Executive
hereunder shall be paid in a lump sum in cash within sixty (60) days
after the termination of Executive's Employment hereunder.

(g) Termination of Obligations of the Company Upon
Payment of Compensation. Upon payment of the amount, if any, due the
Executive pursuant to the preceding provisions of this Section, the
Company shall have no further obligation to the Executive under this
Agreement.

2.3 Merger or Acquisition. In the event the Company should
consolidate, or merge into another corporation, or transfer all or
substantially all of its assets to another entity, or divide its assets among a
number of entities, this Agreement shall continue in full force and effect.
The Company will require any and all successors (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to expressly assume and agree
pursuant to an

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<PAGE> 6
appropriate written assumption agreement to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
agreement prior to or contemporaneously with the effectiveness of any such
successor shall be a breach of the Agreement and shall entitle the Executive,
as his or her sole remedy, to terminate Executive's employment and this
Agreement for Good Reason.

2.4 Offset. The Company shall have the right to deduct from any
amounts due the Executive hereunder any obligations owed by the Executive to
the Company.

ARTICLE III.
PROTECTION OF INFORMATION AND NON-COMPETITION

Protective Covenants. The Executive recognizes that his employment by
the Company is one of the highest trust and confidence because (i) the
Executive will become fully familiar with all aspects of the Company's business
during the period of his employment with the Company, (ii) certain information
of which the Executive will gain knowledge during his employment is proprietary
and confidential information which is special and peculiar value to the
Company, and (iii) if any such proprietary and confidential information were
imparted to or became known by any person, including the Executive, engaging
in a business in competition with that of the Company, hardship, loss or
irreparable injury and damage could result to the Company, the measurement of
which would be difficult if not impossible to ascertain. The Executive
acknowledges that the Company has developed unique skills, concepts, designs,
marketing programs, marketing strategy, business practices, methods of
operation, trademarks, licenses, hiring and training methods, financial and
other confidential and proprietary information concerning its operations and
expansion plans ("Trade Secrets"). Therefore, the Executive agrees that it is
necessary for the Company to protect its business from such damage, and the
Executive further agrees that the following covenants constitute a reasonable
and appropriate means, consistent with the best interest of both the Executive
and the Company, to protect the Company against such damage and shall apply to
and be binding upon the Executive as provided herein:

(a) Trade Secrets. The Executive recognizes that his
position with the Company is one of the highest trust and confidence
by reason by of the Executive's access to and contact with certain
Trade Secrets of the Company. The Executive agrees and covenants to
use his best efforts and exercise utmost diligence to protect and
safeguard the Trade Secrets of the Company. The Executive further
agrees and covenants that, except as may be required by the Company in
connection with this Agreement, or with the prior written consent of
the Company, the Executive shall not, either during the term of this
Agreement or thereafter, directly or indirectly, use for the
Executive's own benefit or for the benefit of another, or disclose,
disseminate, or distribute to another, any Trade Secret (whether or
not acquired, learned, obtained, or developed by the Executive alone
or in conjunction with others) of the Company or of others with whom
the Company has a business relationship. All memoranda, notes,
records, drawings, documents, or other writings whatsoever made,
compiled, acquired, or received by the Executive during the term of
this Agreement, arising out of, in connection with, or related to any
activity or business of the Company, including, but

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<PAGE> 7
not limited to, the Company's operations, the marketing of the Company's
products, the Company's customers, suppliers, or others with whom the Company
has a business relationship, the Company's arrangements with such parties, and
the Company's pricing and expansion policies and strategy, are, and shall
continue to be, the sole and exclusive property of the Company, and shall,
together with all copies thereof and all advertising literature, be returned
and delivered to the Company by the Executive immediately, without demand, upon
the termination of this Agreement, or at any time upon the Company's demand.

(b) Restriction on Soliciting Employees of the Company.
The Executive covenants that during the term of this Agreement and for
a period of twelve (12) months following the termination of this
Agreement, he will not, either directly or indirectly, call on,
solicit, or take away, or attempt to call on, solicit, induce or take
away any employee of the Company, either for himself or for any other
person, firm, corporation or other entity. Further, Executive shall
not induce any employee of the Company to terminate his or her
employment with the Company.

(c) Covenant Not to Compete. The Executive hereby
covenants and agrees that during the term of this Agreement and for
the period set forth in Exhibit "A" following the termination of this
Agreement ("Non- Compete Period"), he will not, directly or
indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder (other than through ownership of
publicly-traded capital stock of a corporation which represents less
than five percent (5%) of the outstanding capital stock of such
corporation), corporate officer, director, investor, financier or in
any other individual or representative capacity, engage or participate
in any business competitive with the business conducted by the Company
within Texas, Oklahoma or Louisiana.

(d) Survival of Covenants. Each covenant of the
Executive set forth in this Article III shall survive the termination
of this Agreement and shall be construed as an agreement independent
of any other provision of this Agreement, and the existence of any
claim or cause of action of the Executive against the Company whether
predicated on this Agreement or otherwise shall not constitute a
defense to the enforcement by the Company of said covenant.

(e) Remedies. In the event of breach or threatened
breach by the Executive of any provision of this Article III, the
Company shall be entitled to relief by temporary restraining order,
temporary injunction, or permanent injunction or otherwise, in
addition to other legal and equitable relief to which it may be
entitled, including any and all monetary damages which the Company may
incur as a result of said breach, violation or threatened breach or
violation. The Company may pursue any remedy available to it
concurrently or consecutively in any order as to any breach,
violation, or threatened breach or violation, and the pursuit of one
of such remedies at any time will not be deemed an election of
remedies or waiver of the right to pursue any other of such remedies
as to such breach, violation, or threatened breach or violation, or as
to any other breach, violation, or threatened breach or violation.

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<PAGE> 8
The Executive hereby acknowledges that the Executive's agreement to be
bound by the protective covenants set forth in this Article III was a material
inducement for the Company entering into this Agreement and agreeing to pay the
Executive the compensation and benefits set forth herein. Further, Executive
understands the foregoing restrictions may limit his or her ability to engage
in certain businesses during the period of time provided for, but acknowledges
that Executive will receive sufficiently high remuneration and other benefits
under this Agreement to justify such restriction.

ARTICLE IV.
GENERAL PROVISIONS

4.1 Notices. all notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or on the date deposited
in a receptacle maintained by the United States Postal Service for such
purpose, postage prepaid, by certified mail, return receipt requested,
addressed to the respective parties as follows:

If to the Executive: As set forth in Exhibit "A"

If to the Company: Sepco Industries, Inc.
6500 Brittmoore
Houston, Texas 77041
ATTN: David R. Little

Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.

4.2 Severability. If any provision contained in this Agreement is
determined by a court of competent jurisdiction or an arbitrator pursuant to
Section 5 below to be void, illegal or unenforceable, in whole or in part, then
the other provisions contained herein shall remain in full force and effect as
if the provision which was determined to be void, illegal, or unenforceable had
not been contained herein. If the restrictions contained in Article III are
found by a court to be unreasonable or overly broad as to geographic area or
time, or otherwise unenforceable, the parties intend for said restrictions to
be modified by said court so as to be reasonable and enforceable and, as so
modified, to be fully enforced.

4.3 Waiver Modification, and Integration. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This instrument
contains the entire agreement of the parties concerning employment and
supersedes all prior and contemporaneous representations, understandings and
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Company and all such prior or
contemporaneous

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<PAGE> 9
representations, understandings and agreements, both oral and written, are
hereby terminated. This Agreement may not be modified, altered or amended
except by written agreement of all the parties hereto.

4.4 Binding Effect. This Agreement shall be binding and effective
upon the parties and their respective successors. Neither party shall assign
this Agreement without the prior written consent of the other party, except
that the Company shall have the right to assign this Agreement to an entity.

4.5 Governing Law. The parties intend that the laws of the State
of Texas should govern the validity of this Agreement, the construction of its
terms, and the interpretation of the rights and duties of the parties hereto.

4.6 Representation of Executive. The Executive hereby represents
and warrants to the Company that the Executive has not previously assumed any
obligations inconsistent with those contained in this Agreement. The Executive
further represents and warrants to the Company that the Executive has entered
into this Agreement pursuant to Executive's own initiative and that this
Agreement is not in contravention of any existing commitments. The Executive
acknowledges that the Company has entered into this Agreement in reliance upon
the foregoing representations of the Executive.

4.7 Counterpart Execution. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.

4.8 Company. For the purposes of this Agreement, Company shall
include any parent, subsidiary division of the Company, or any entity, who
directly or indirectly, controls, is controlled by, or is under common control
with the Company.

ARTICLE V.
ARBITRATION

5.1 Resolution of Disputes. In any dispute between the Parties,
the Parties shall cooperate in good faith to resolve the dispute. If the
parties cannot resolve the dispute between themselves, they shall each, within
ten (10) days, select one mediator to help resolve the dispute. If a resolution
of the dispute does not occur through mediation within thirty (30) days after
the selection of the two mediators, any Party may demand binding arbitration.

5.2 Arbitration. In the event any dispute cannot be resolved
through mediation the Parties agree to submit such dispute to binding
arbitration. Any such arbitration arising hereunder shall be conducted in
Houston, Texas in accordance with the rules of the American Arbitration
Association then in effect. The costs of arbitration shall be borne equally by
the Parties. However, each Party shall be responsible for such Party's own
attorneys' fees.

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<PAGE> 10
ARTICLE VI.
CONFIDENTIALITY

6.1 Confidentiality. This Agreement is confidential, and the
substance may be disclosed only as mutually agreed by the Parties or as may be
required by law.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written effective as of the Effective Date.

THE COMPANY:

SEPCO INDUSTRIES, INC., a Texas corporation

By: /s/ DAVID R. LITTLE
----------------------------------------
Printed Name: DAVID R. LITTLE
-------------------------
Title: Chairman & CEO
--------------------------------

EXECUTIVE:

By: /s/ JERRY J. JONES
----------------------------------------
JERRY J. JONES
Senior Vice President

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<PAGE> 11

EXHIBIT "A"
TO
EMPLOYMENT AGREEMENT

NAME: Jerry J. Jones

POSITION: Senior Vice President

MONTHLY BASE: $10,833.42

BONUS: Two percent (2%) of the monthly
profit before tax of DXP
Enterprises, Inc., excluding sales
of fixed assets and extra-ordinary
items, as determined by DXP, which
shall be payable monthly in
accordance with the Company's
regular bonus practices

NON-COMPETE PERIOD: Twelve (12) months

HOME ADDRESS: 507 Timber Circle
Houston, TX 77079

TERMINATION BONUS: The sum equal to the total of twelve
(12) previous monthly bonus payments
made to Employee in accordance with
Section 1.4(b) of this Agreement

<PAGE> 12
AMENDMENT TO EMPLOYMENT AGREEMENT

WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation
("the Company") and JERRY J. JONES (THE "EXECUTIVE") entered into that one
certain Employment Agreement (the "Agreement");

WHEREAS, the Company and the Executive desire to amend said Employment
Agreement pursuant to the provisions hereof.

NOW, THEREFORE, in consideration of the covenants, and agreements set out
below, the parties agree as follows:

1. All terms defined in the Agreement, which are used in this First
Amendment, shall have the same meaning as set forth in the Agreement
except as specifically changed or modified hereby.

2. The Company has become a wholly owned subsidiary of DXP Enterprises,
Inc., a Texas corporation ("DXP"). Therefore the Company shall, for
the purposes of the Agreement, be DXP.

3. Section 1.3 is hereby amended by adding the following as the last
sentence:

"This Agreement shall terminate June 30, 1998, if the Company and
Executive execute a new Employment Agreement."

4. The Bonus Section in Exhibit A to the Agreement is hereby amended by
adding the following as the last sentence:

"Notwithstanding the foregoing, the annual total of the monthly bonus
shall not exceed twice the annual base salary."

Page 1 of 2 Pages

<PAGE> 13
5. Except as herein amended and modified, the Agreement shall remain in full
force and effect.

EXECUTED effective the 21st day of May, 1998.

DXP EXTERPRISES, INC.

By:/s/ DAVID R. LITTLE
-------------------------------------
DAVID R. LITTLE
Chairman and Chief Executive Officer

/s/ JERRY J. JONES
-------------------------------------
JERRY J. JONES

Page 2 of 2 Pages

<PAGE> 1
EXHIBIT 10.10

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement) by and between SEPCO
INDUSTRIES, INC., a Texas corporation (the "Company"), and BRYAN H. WIMBERLY
(the "Executive") is made and entered into as of the Effective Date set forth
in Section 1.3 below:

RECITALS

A. The Company desires to employ the Executive in the capacity
set forth on Exhibit A pursuant to the provisions of this
Agreement; and

B. The Executive desires employment as an employee of the Company
pursuant to the provisions of this Agreement.

ARTICLE I.
TERMS OF EMPLOYMENT

The terms of employment are as follows:

1.4 Compensation. The Company shall pay the Executive, as
"Compensation" for services rendered by the Executive under this Agreement the
following Salary plus Bonus.

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<PAGE> 2

(b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus").

1.5 Employment Benefits. In addition to the Salary payable to the
Executive hereunder, the Executive shall be entitled to the following benefits:

(c) Automobile Allowance. During the term of this
Agreement, the Company shall provide Executive with a vehicle in
accordance with the Company's vehicle policy.

ARTICLE II.
TERMINATION

(1) Conviction of the Executive by a court of
competent jurisdiction of a felony or a crime involving moral
turpitude;

(2) The Executive's failure or refusal to comply
with the Company's policies, standards, and regulations of the
Company, which from time to time may be established;

(4) The Executive's failure to faithfully and
diligently perform the duties required hereunder or to comply
with the provisions of this Agreement.

(2) The failure of the Company to obtain an
agreement, from any successor to assume and agree to perform
this Agreement; or

2.2 Compensation upon Termination.

2.4 Offset. The Company shall have the right to deduct from any
amounts due the Executive hereunder any obligations owed by the Executive to
the Company.

ARTICLE III.
PROTECTION OF INFORMATION AND NON-COMPETITION

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not limited to, the Company's operations, the marketing of the
Company's products, the Company's customers, suppliers, or others with
whom the Company has a business relationship, the Company's
arrangements with such parties, and the Company's pricing and
expansion policies and strategy, are, and shall continue to be, the
sole and exclusive property of the Company, and shall, together with
all copies thereof and all advertising literature, be returned and
delivered to the Company by the Executive immediately, without demand,
upon the termination of this Agreement, or at any time upon the
Company's demand.

(c) Covenant Not to Compete. The Executive hereby
covenants and agrees that during the term of this Agreement and for
the period set forth in Exhibit "A" following the termination of this
Agreement ("Non-Compete Period"), he will not, directly or
indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder (other than through ownership of
publicly-traded capital stock of a corporation which represents less
than five percent (5%) of the outstanding capital stock of such
corporation), corporate officer, director, investor, financier or in
any other individual or representative capacity, engage or participate
in any business competitive with the business conducted by the Company
within Texas, Oklahoma or Louisiana.

ARTICLE IV.
GENERAL PROVISIONS

If to the Executive: As set forth in Exhibit "A"

If to the Company: Sepco Industries, Inc.
6500 Brittmoore
Houston, Texas 77041
ATTN: David R. Little

Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.

ARTICLE V.
ARBITRATION

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<PAGE> 10
ARTICLE VI.
CONFIDENTIALITY

6.1 Confidentiality. This Agreement is confidential, and the
substance may be disclosed only as mutually agreed by the Parties or as may be
required by law.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written effective as of the Effective Date.

THE COMPANY:

SEPCO INDUSTRIES, INC., a Texas corporation

By: /s/ DAVID R. LITTLE
----------------------------------------
Printed Name: David R. Little
---------------------------
Title: Chairman & CEO
----------------------------------

EXECUTIVE:

By: /s/ BRYAN WIMBERLY
----------------------------------------
Bryan Wimberly
President and Chief Operating
Officer

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<PAGE> 11
AMENDMENT TO EMPLOYMENT AGREEMENT

WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation ("the
Company") and BRYAN H. WIMBERLY (the "Executive") entered into that one certain
Employment Agreement (the "Agreement");

WHEREAS, the Company and the Executive desire to amend said Employment
Agreement pursuant to the provisions hereof.

NOW, THEREFORE, in consideration of the covenants, and agreements set out
below, the parties agree as follows:

1. All terms defined in the Agreement, which are used in this First
Amendment, shall have the same meaning as set forth in the Agreement
except as specifically changed or modified hereby.

2. The Company has become a wholly owned subsidiary of DXP Enterprises,
Inc., a Texas corporation ("DXP"). Therefore the Company shall, for
the purposes of the Agreement, be DXP.

3. Section 1.3 is hereby amended by adding the following as the last
sentence:

"This Agreement shall terminate June 30, 1998, if the Company and
Executive execute a new Employment Agreement."

4. The Bonus Section in Exhibit A to the Agreement is hereby amended by
adding the following as the last sentence:

"Notwithstanding the foregoing, the annual total of the monthly
bonus shall not exceed twice the annual base salary."

Page 1 of 2 Pages
<PAGE> 12
5. Except as herein amended and modified, the Agreement shall remain in
full force and effect.

EXECUTED effective the 21st day of May, 1998.

DXP ENTERPRISES, INC.

By: /s/ DAVID R. LITTLE
------------------------------------
DAVID R. LITTLE
Chairman and Chief Executive Officer

/s/ BRYAN H. WIMBERLY
------------------------------------
BRYAN H. WIMBERLY

Page 2 of 2 Pages

<PAGE> 1
EXHIBIT 10.11

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement) by and between SEPCO
INDUSTRIES, INC., a Texas corporation (the "Company"), and GARY A. ALLCORN (the
"Executive") is made and entered into as of the Effective Date set forth in
Section 1.3 below:

RECITALS

A. The Company desires to employ the Executive in the capacity
set forth on Exhibit A pursuant to the provisions of this
Agreement; and

B. The Executive desires employment as an employee of the Company
pursuant to the provisions of this Agreement.

ARTICLE I.
TERMS OF EMPLOYMENT

The terms of employment are as follows:

1.4 Compensation. The Company shall pay the Executive, as
"Compensation" for services rendered by the Executive under this Agreement the
following Salary plus Bonus.

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<PAGE> 2

(b) Bonus: A bonus as set forth in Exhibit "A" ("Bonus").

1.5 Employment Benefits. In addition to the Salary payable to the
Executive hereunder, the Executive shall be entitled to the following benefits:

(c) Automobile Allowance. During the term of this
Agreement, the Company shall provide Executive with a vehicle in
accordance with the Company's vehicle policy.

(d) Limitations. Company shall not by reason of this
Article 1.5 be obligated to institute, maintain, or refrain from
changing, amending, or discontinuing, any such incentive
compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees similarly
situated.

ARTICLE II.
TERMINATION

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<PAGE> 3

upon written notice to the Executive without any further liability
hereunder to the Executive except as set forth in Section 2.2(b)
hereof. For purposes of this Agreement, the Executive shall be deemed
to have become disabled when the Board of Directors of the Company,
upon the written report of a qualified physician designated by the
Board of Directors of the Company or by its insurers, shall have
determined that the Executive has become mentally, physically and/or
emotionally incapable of performing Executive's duties and services
under this Agreement.

(1) Conviction of the Executive by a court of
competent jurisdiction of a felony or a crime involving moral
turpitude;

(2) The Executive's failure or refusal to comply
with the Company's policies, standards, and regulations of the
Company, which from time to time may be established;

(4) The Executive's failure to faithfully and
diligently perform the duties required hereunder or to comply
with the provisions of this Agreement.

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<PAGE> 4

the extent set forth in Section 2.2(e) hereof. For purposes of this
Agreement, the term "Good Reason" shall mean, without the Executive's
express written consent, the occurrence of any of the following
circumstances:

(2) The failure of the Company to obtain an
agreement, from any successor to assume and agree to perform
this Agreement; or

2.2 Compensation upon Termination.

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<PAGE> 5

to pay the Executive any accrued, but unpaid, Salary and any vacation
or sick leave benefits, which have accrued as of the date of
termination of this Agreement, but were then unpaid or unused. Any
amount due the Executive hereunder shall be paid in a lump sum in cash
within sixty (60) days after the termination of the Executive's
employment hereunder.

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<PAGE> 6

appropriate written assumption agreement to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
agreement prior to or contemporaneously with the effectiveness of any such
successor shall be a breach of the Agreement and shall entitle the Executive,
as his or her sole remedy, to terminate Executive's employment and this
Agreement for Good Reason.

2.4 Offset. The Company shall have the right to deduct from any
amounts due the Executive hereunder any obligations owed by the Executive to
the Company.

ARTICLE III.
PROTECTION OF INFORMATION AND NON-COMPETITION

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<PAGE> 7

not limited to, the Company's operations, the marketing of the
Company's products, the Company's customers, suppliers, or others with
whom the Company has a business relationship, the Company's
arrangements with such parties, and the Company's pricing and
expansion policies and strategy, are, and shall continue to be, the
sole and exclusive property of the Company, and shall, together with
all copies thereof and all advertising literature, be returned and
delivered to the Company by the Executive immediately, without demand,
upon the termination of this Agreement, or at any time upon the
Company's demand.

(e) Remedies. In the event of breach or threatened breach
by the Executive of any provision of this Article III, the Company
shall be entitled to relief by temporary restraining order, temporary
injunction, or permanent injunction or otherwise, in addition to other
legal and equitable relief to which it may be entitled, including any
and all monetary damages which the Company may incur as a result of
said breach, violation or threatened breach or violation. The Company
may pursue any remedy available to it concurrently or consecutively in
any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not
be deemed an election of remedies or waiver of the right to pursue any
other of such remedies as to such breach, violation, or threatened
breach or violation, or as to any other breach, violation, or
threatened breach or violation.

-7-
<PAGE> 8

The Executive hereby acknowledges that the Executive's agreement to be
bound by the protective covenants set forth in this Article III was a material
inducement for the Company entering into this Agreement and agreeing to pay the
Executive the compensation and benefits set forth herein. Further, Executive
understands the foregoing restrictions may limit his or her ability to engage
in certain businesses during the period of time provided for, but acknowledges
that Executive will receive sufficiently high remuneration and other benefits
under this Agreement to justify such restriction.

ARTICLE IV.
GENERAL PROVISIONS

If to the Executive: As set forth in Exhibit "A"

If to the Company: Sepco Industries, Inc.
6500 Brittmoore
Houston, Texas 77041
ATTN: David R. Little

Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.

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<PAGE> 9

representations, understandings and agreements, both oral and written, are
hereby terminated. This Agreement may not be modified, altered or amended
except by written agreement of all the parties hereto.

ARTICLE V.
ARBITRATION

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<PAGE> 10
ARTICLE VI.
CONFIDENTIALITY

6.1 Confidentiality. This Agreement is confidential, and the
substance may be disclosed only as mutually agreed by the Parties or as may be
required by law.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written effective as of the Effective Date.

THE COMPANY:

SEPCO INDUSTRIES, INC., a Texas corporation

By: /s/ DAVID R. LITTLE
-----------------------------------------
Printed Name: DAVID R. LITTLE
----------------------
Title: Chairman & CEO
-----------------------------

EXECUTIVE:

By: /s/ GARY A. ALLCORN
-----------------------------------------
GARY A. ALLCORN
Senior Vice President and
Chief Financial Officer

-10-
<PAGE> 11
EXHIBIT "A"
TO
EMPLOYMENT AGREEMENT

<TABLE>
<S> <C>
NAME: Gary A. Allcorn

POSITION: Senior Vice President
Chief Financial Officer

MONTHLY BASE: $9,425.00

BONUS: One percent (1%) of the monthly profit before tax of DXP
Enterprises, Inc., excluding sales of fixed assets and extra-
ordinary items, as determined by DXP, which shall be payable
monthly in accordance with the Company's regular bonus
practices

NON-COMPETE PERIOD: Twelve (12) months

HOME ADDRESS: 23210 Gate Creek Court
Katy, TX 77494

TERMINATION BONUS: The sum equal to the total of twelve (12) previous monthly bonus
payments made to Employee in accordance with Section 1.4(b) of this
Agreement

</TABLE>

<PAGE> 12
AMENDMENT TO EMPLOYMENT AGREEMENT

WHEREAS, on July 1, 1996, SEPCO INDUSTRIES, INC., a Texas corporation
("the Company") and GARY A. ALLCORN (THE "EXECUTIVE") entered into that one
certain Employment Agreement (the "Agreement");