DXP ENTERPRISES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 0-21513

DXP ENTERPRISES, INC.

A TEXAS CORPORATION 76-0509661
IRS Employer Identification No.

7272 PINEMONT
Houston, Texas 77040

Telephone Number (713) 996-4700

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Aggregate market value of the registrant's Common Stock held by
non-affiliates of registrant as of March 25, 2002: $2,302,635.

Number of shares of registrant's Common Stock outstanding as of March
25, 2002: 4,071,685

Documents incorporated by reference: Portions of the definitive proxy
statement for the annual meeting of shareholders to be held in 2002 are
incorporated by reference into Part III hereof.

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TABLE OF CONTENTS

DESCRIPTION

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places,
including Item 1. "Business," Item 3. "Legal Proceedings" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates, " "will,"
"should," "plans" or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory requirements
and changing prices and market conditions. This report identifies other factors
that could cause such differences. No assurance can be given that these are all
of the factors that could cause actual results to vary materially from the
forward-looking statements.

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PART I

ITEM 1. BUSINESS

DXP Enterprises, Inc. (DXP or the Company), a Texas corporation, was
incorporated in 1996, to be the successor to a company founded in 1908. Since
that time, we have primarily been engaged in the business of distributing
maintenance, repair and operating ("MRO") products, equipment and service to
industrial customers. We are organized into two segments: MRO and Electrical
Contractor. We sold our Valve segment in July 1999 and no longer compete in the
valve and valve automation business. Sales and operating income for 1999, 2000
and 2001, and indentifiable assets at the close of such years for our business
segments are presented in Note 13 of the Notes to the Consolidated Financial
Statements.

MRO SEGMENT

The MRO segment provides MRO products, equipment and integrated
services, including engineering expertise and logistics capabilities, to
industrial customers. We provide a wide range of MRO products in the fluid
handling equipment, bearing, power transmission equipment, general mill, safety
supply and electrical products categories. We offer our customers a single
source of integrated services and supply on an efficient and competitive basis
by being a first-tier distributor who can purchase products directly from the
manufacturer. We also provide integrated services such as system design,
fabrication, installation, repair and maintenance for our customers. We offer a
wide range of industrial MRO products, equipment and services through a complete
continuum of customized and efficient MRO solutions, ranging from traditional
distribution to fully integrated supply contracts. The integrated solution is
tailored to satisfy our customer's unique needs.

We estimate that annual sales in the United States of MRO products for
industrial customers currently exceed $200 billion, of which we estimate over
$140 billion are in the major product categories of fluid handling equipment,
bearing, power transmission equipment, general mill, safety supply and
electrical products. Based on 2000 sales as reported by industry sources, we
were the 46th largest distributor of MRO products in the United States.

The industrial distribution market is highly fragmented, with the 250
largest distributors accounting for less than 15% of the total United States
market during 2000. 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 store those products at its industrial site until the
products are used.

We believe that the current distribution system for industrial products
in the United States creates inefficiencies at both the customer and the
distributor levels through excess inventory requirements and duplicative cost
structures. To compete more effectively, our customers and other users of MRO
products seek 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:

o 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.

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

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o 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.

We currently serve as a first-tier distributor of more than 170,000
stock keeping units ("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 our MRO segment include mining,
construction, chemical, municipal, food and beverage and pulp and paper. Our MRO
products include a wide range of products in the fluid handling equipment,
bearing, power transmission equipment, general mill, safety products and
electrical products. Our products are distributed from 34 sales offices and two
distribution centers strategically located throughout the United States and sold
through the sales efforts of employees who generally are compensated on a
commission basis.

Our 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. We also provide various pump accessories.
Our bearing products include several types of mounted and unmounted bearings for
a variety of applications. Hose products distributed by us include a large
selection of industrial fittings and stainless steel hoses, hydraulic hoses,
Teflon hoses and expansion joints, as well as hoses for chemical, petroleum, air
and water applications. We distribute seal products for downhole, wellhead,
valve and completion equipment to oilfield service companies. Power transmission
products distributed by us include speed reducers, flexible coupling drives,
chain drives, sprockets, gears, conveyors, clutches, brakes and hoses. We offer
a broad range of general mill supplies, such as abrasives, tapes and adhesive
products, coatings and lubricants, cutting tools, fasteners, hand tools,
janitorial products, pneumatic tools and welding equipment. Our safety products
include eye and face protection products, first aid products, protection
products, hazardous material handling products, instrumentation and respiratory
protection products. We distribute 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.

In addition to distributing products, we provide pumping and power
transmission system design and fabrication services through our engineering
personnel and fabrication facilities. We also provide training services with
respect to the installation and basic applications of our products as well as
around-the-clock field repair services.

SmartSource, our integrated supply program, allows a customer to choose
from a complete continuum of supply options, ranging from traditional
distribution to integrated supply.

Our branch and operations managers support the sales efforts through
direct customer contact and manage the efforts of the outside and direct sales
representatives. We have structured compensation to provide incentives to our
sales representatives to increase sales through the use of commissions. Our
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 our products. Because we offer a broad range of products, our outside
and direct sales representatives are able to use their existing customer
relationships with respect to one product line to cross-sell our other product
lines. In addition, geographic locations in which certain products are sold also
are being utilized to sell products not historically sold at such locations. As
we expand our product lines and geographical presence through hiring experienced
sales representatives, we assess the opportunities and appropriate timing of
introducing existing products to new customers and new products to existing
customers. Prior to implementing such cross-selling efforts, we provide the
appropriate sales training and product expertise to our sales force.

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

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We believe we have increased our competitive advantage through our
traditional and integrated supply programs, designed to address our customers'
specific product and procurement needs. We offer our customers various options
for the integration of their supply needs, ranging from serving as a single
source of supply for all or specific lines of products and product categories to
offering a fully integrated supply package in which we assume the procurement
and management functions, including ownership of inventory, at the customer's
location. Our unique approach to integrated supply allows us to design a program
that best fits the needs of each customer. Customers purchasing a number of
products in large quantities are able to outsource all or most of those needs to
us. For customers with smaller supply needs, we are able to combine our
traditional distribution capabilities with our 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.

We acquire our products through numerous original equipment
manufacturers. We have distribution agreements with these manufacturers, some of
which give us exclusive rights to distribute the manufacturers' products in a
specific geographic area. All of our distribution agreements are subject to
cancellation by the manufacturer upon one year notice or less. One manufacturer
provides products that account for approximately 11% of our revenues. No other
manufacturer provides products that account for 10% or more of our revenues. We
believe that alternative sources of supply could be obtained in a timely manner
if any distribution agreement were canceled. Accordingly, we do not believe that
the loss of any one distribution agreement would have a material adverse effect
on our business, financial condition or results of operations. Representative
manufacturers of our products include Gould's, G&L, Viking, Wilden, National
Oilwell, SKF, Torrington/Fafnir, Timken, NTN, Dodge/Reliance, Falk, Gates,
Martin Sprocket, T. B. Woods, Emerson, Rexnord, Baldor Electric, Union
Butterfield, 3M, Fag Bearing, Tyco, BACOU/DALLOZ, Norton Abrasives, and LaCross
Rainfair Safety Products.

At December 31, 2001, the MRO Segment has 495 full-time employees.

ELECTRICAL CONTRACTOR SEGMENT

Our Electrical Contractor segment was formed in 1998 with the
acquisition of substantially all of the assets of two electrical supply
businesses. During August 2001, we sold the majority of the Electrical
Contractor segment assets located in San Antonio, Texas. The Electrical
Contractor segment sells 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, to electrical contractors. The segment has two warehouse and
sales facilities in Memphis, Tennessee.

Our Electrical Contractor segment sells a broad range of products from
over 100 vendors. Significant vendors include Cutler-Hammer, Cooper, Killark,
3M, General Electric and Allied. To meet prompt delivery demands of our
customers, we maintain large inventories. The majority of sales are on open
account.

At December 31, 2001, the Electrical Contractor segment had 16
full-time employees.

MANAGEMENT INFORMATION SYSTEMS

We currently operate using multiple computer systems. During 2002, we
plan to install a common operating and financial system which will be used by
all of our locations. Accordingly, we recorded an impairment of these legacy
systems as of December 31, 2000 (see Note 3 of the Notes to the Consolidated
Financial Statements).

We use technology to benefit customers and to improve our productivity
and efficiency. In addition to traditional functions of inventory control, order
processing, purchasing, accounts receivable, accounts payable and general
ledger, certain of our computer systems have the flexibility to integrate with
the customer's maintenance, accounting and management systems. Certain of our
systems allow 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. Certain of our systems support advanced functions, such as EDI,
customized billing, end user reporting, facsimile transmission, bar coding and
preventative maintenance.

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COMPETITION

Our business is highly competitive. In the MRO segment we compete with
a variety of industrial supply distributors, many of which may have greater
financial and other resources than we do. Many of our competitors are small
enterprises selling to customers in a limited geographic area. We also compete
with larger distributors that provide integrated supply programs and outsourcing
services similar to those offered through our SmartSource program, some of which
may be able to supply their products in a more efficient and cost-effective
manner than us. We also compete with direct mail distributors, large warehouse
stores and, to a lesser extent, manufacturers. While many of our competitors
offer traditional distribution of some of the product groupings we offer, we are
not aware of any major competitor that offers on a non-direct mail basis a
product grouping as broad as what we offer. Further, while certain direct-mail
distributors provide product offerings as broad as ours, those competitors do
not offer the product application, engineering and after-the-sale services which
we provide. In the Electrical Contractor segment we compete against a variety of
suppliers of electrical products, many of which may have greater financial and
other resources than we do.

INSURANCE

We maintain liability and other insurance that we believe 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 us could have a material adverse effect on our financial condition
and results of operations. Additionally, we are self-insured for our group
health plan, subject to per incident and aggregate loss limits.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

We are subject to various laws and regulations relating to our business
and operations, and various health and safety regulations as established by the
Occupational Safety and Health Administration.

Certain of our 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 we believe that we have
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, we could be held liable for any damages that
result, and any such liability could have a material adverse effect on us. We
are not currently aware of any situation or condition that we believe is likely
to have a material adverse effect on our results of operations or financial
condition.

EMPLOYEES

At December 31, 2001, we had 511 full-time employees. We believe that
our relationship with our employees is good.

RISK FACTORS

Ability to Comply with Financial Covenants of Credit Facility

Our loan agreements with our bank lender (the "Credit Facility")
require that we comply with certain specified covenants, restrictions, financial
ratios and other financial and operating tests. Our ability to comply with any
of the foregoing restrictions will depend on our future performance, which will
be subject to prevailing economic conditions and other factors, including
factors beyond our control. A failure to comply with any of these obligations
could result in an event of default under the Credit Facility, which could
permit acceleration of our indebtedness under the Credit Facility. From time to
time we have been unable to comply with some of the financial covenants
contained in the Credit Facility (relating to, among other things, the
maintenance of prescribed financial ratios) and have, when necessary, obtained
waivers or amendments to the covenants from our lender. Although we expect to be
able to comply with the covenants, including the financial covenants, of the
Credit Facility, there can be no assurance that in the future we will be able to
do so or that our lender will be willing to waive such non-compliance or further
amend such covenants.

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Risks Related to Internal Growth Strategy

Our future results will depend in part on our success in implementing
our internal growth strategy, which includes expanding our existing geographic
areas and adding new customers. Our ability to implement this strategy depends
on our success in selling more to existing customers, acquiring new customers,
hiring qualified sales persons, and marketing integrated forms of supply
arrangements such as those being pursued by us through our SmartSource program.
Although we intend to increase sales and product offerings to existing customers
and reduce costs through consolidating certain administrative and sales
functions, there can be no assurance that we will be successful in these
efforts.

Substantial Competition

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

Risk Associated with Default on Subordinated Note Payable

Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the $2.0
million balance of the subordinated note payable we issued as part of the
purchase price. As of July 1, 2000, we suspended principal and interest payments
on the note. The seller notified our bank lender that we were in default on the
subordinated note. Our bank lender notified us that the default on the
subordinated note caused us to be in default on one of its secured lines of
credit that had a $3.2 million balance outstanding at December 31, 2001. Our
bank lender agreed to forebear taking any action on defaults under the
associated $5.8 million secured line of credit. The bank lender may terminate
this forbearance at any time. The $3.2 million balance of the secured line of
credit and the $2.0 million balance of the subordinated note have been included
in current maturities of long-term debt at December 31, 2001.

In our opinion, should the $3.2 million balance outstanding under the
$5.8 million secured line of credit be demanded, we would be able to refinance
the obligation or repay it through the proceeds from asset sales or property
refinancing. We intend to aggressively pursue our claims against the seller
under the provisions of the asset purchase agreement. The subordinated note
provides for an interest rate of prime plus four percent if the note is in
default. We did not accrue any interest on the note during 2001. We believe the
subordinated note will either be repaid using funds obtained from the seller in
settlement of our claims or will be offset against our claims. We are
negotiating with the seller to resolve this dispute; however, there can be no
assurance that we will be successful in collecting the funds due under our
claims against the seller or in offsetting the subordinated note against our
claims.

Risks of Economic Trends

Demand for our products is subject to changes in the United States
economy in general and economic trends affecting our 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, we may experience changes in demand for our products as
changes occur in the markets of our customers.

Dependence on Key Personnel

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

7

failure to attract and retain such persons could materially adversely affect our
financial condition and results of operations.

Dependence on Supplier Relationships

We have distribution rights for certain product lines and depend on
these distribution rights for a substantial portion of our business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. Although we believe that we could
obtain alternate distribution rights in the event of such a cancellation, the
termination or limitation by any key supplier of its relationship with our
company could result in a temporary disruption on our business and, in turn,
could adversely affect results of operations and financial condition.

Risks Associated With Hazardous Materials

Certain of our 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 we believe that we have
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, we could be held liable for any damages that
result and any such liability could have a material adverse effect on our
financial condition and results of operations.

ITEM 2. PROPERTIES

We own our headquarters facility in Houston, Texas which has 45,000
square feet of office space. The MRO segment owns or leases 38 branch
distribution facilities located in Arkansas, Colorado, Georgia, Idaho,
Louisiana, Montana, Nevada, New Mexico, North Dakota, Oklahoma, Texas, and
Wyoming. The Electrical Contractor segment owns one facility and leases one
facility in Tennessee. These facilities range from 2,500 square feet to 138,000
square feet in size. Those facilities that we do not own are leased for terms
generally ranging from one to five years. The leases provide for periodic
specified rental payments and certain leases are renewable at our option. We
believe that if the leases for any of our facilities were not renewed, other
suitable facilities could be leased with no material adverse effect on our
business, financial condition or results of operations. All of the facilities we
own are pledged to secure our indebtedness.

ITEM 3. LEGAL PROCEEDINGS

From time to time we are party to various legal proceedings arising in
the ordinary course of our business. We believe that the outcome of any of these
proceedings will not have a material adverse effect on our business, financial
condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock trades on The Nasdaq SmallCap Market under the symbol
"DXPE".

The following table sets forth on a per share basis the high and low
sales prices for our common stock as reported by Nasdaq for the periods
indicated.

On March 15, 2002, we had approximately 730 holders of record for
outstanding shares of our common stock.

We anticipate that future earnings will be retained to finance the
continuing development of our business. In addition, the Credit Facility
prohibits us from declaring or paying any dividends or other distributions on
our capital stock except for limited dividends on our preferred stock.
Accordingly, we do not anticipate paying cash dividends on our common stock in
the foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, the success of our business activities, regulatory and capital
requirements, our general financial condition and general business conditions.

ITEM 6. SELECTED FINANCIAL DATA

The selected historical consolidated financial data set forth below for
each of the years in the five-year period ended December 31, 2001 have been
derived from our audited consolidated financial statements. 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 included elsewhere in this Annual Report on Form 10-K.

9

(1) Year ended December 31, 1998 includes a one-time charge to professional
fees and travel costs of $474,000 associated with our decision to
discontinue an offering of additional common stock.

(2) 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 that
became effective July 17, 1998.

(3) Year ended December 31, 2000 includes non-recurring charges of
$10,791,000 relating to write-offs or impairments of (a) goodwill and
other assets from acquired businesses, (b) replaced computer systems,
and (c) closed facilities.

(4) Year ended December 31, 2000 includes one-time gains of $2.0 million
from the sale of two MRO warehouse facilities.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related notes contained elsewhere
in this Annual Report on Form 10-K.

GENERAL

We market our products and services in 16 states to over 25,000
customers that are engaged in a variety of industries, many of which may be
counter cyclical to each other. Demand for our products generally is subject to
changes in the United States economy and economic trends affecting our 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 and the construction industry, are
cyclical and materially affected by changes in the economy. As a result, we may
experience changes in demand within particular markets, segments and product
categories as changes occur in our customers' respective markets.

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Our growth strategy in the past focused on a combination of
acquisitions, such as the acquisition of the Electrical Contractor segment, and
internal growth. We have curtailed our acquisition efforts and are focusing on
internal growth. Key elements of our internal growth strategy include leveraging
existing customer relationships, expanding product offerings to new and existing
customers, reducing costs through consolidated purchasing programs and
centralized product distribution centers, centralizing certain customer service
and inside sales functions, reducing costs by converting selected branches from
full warehouse and customer service operations to sales centers, designing and
implementing innovative solutions to address the procurement and supply needs of
our customers and using our traditional distribution and integrated supply
capabilities to increase sales in each area. Results will be dependent on our
success in executing our internal growth strategy and, to the extent we complete
any acquisitions, our ability to integrate such acquisitions.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

SALES. Sales for 2001 decreased $8.2 million, or 4.5%, to approximately
$174.4 million from $182.6 million in 2000. Sales for the MRO segment decreased
$4.5 million, or 2.6% primarily due to slowing of the overall economy. Sales for
the Electrical Contractor segment decreased by $3.7 million, or 31%, when
compared to 2000. This decrease is the result of the sale, during August 2001,
of the majority of the assets of a business in San Antonio, Texas, which
accounted for approximately two thirds of the sales of the Electrical Contractor
segment; combined with a slow down in the construction business for electrical
contractors.

GROSS PROFIT. Gross profit as a percentage of sales was 25.1% for 2001,
up from 24.9% for 2000. Gross profit as a percentage of sales for the MRO
segment increased to 25.2% for 2001, up from 25.0% in 2000. This increase can be
primarily attributed to increased margins in fluid handling equipment sold by
the MRO segment. Gross profit as a percentage of sales for the Electrical
Contractor segment decreased to 23.5% for 2001, down from 24.4% for the
comparable period of 2000. This decline resulted from lower margin sales
associated with a slowdown in the construction business for electrical
contractors.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for 2001 declined $2.7 million, or 6.3%, to approximately
$39.8 million from $42.5 million in 2000. As a percentage of revenue, the 2001
expense declined to 22.8% from 23.3% for 2000. This decrease is primarily
attributable to reduced payroll and payroll related expenses.

OPERATING INCOME. Excluding the $10.8 million of non-recurring
operating charges recorded in the fourth quarter of 2000, operating income for
2001 increased $1.0 million, $0.2 million for the Electrical Contractor segment
and $0.8 million for the MRO segment, to $4.0 million when compared to $3.0
million for 2000. This improved operating income for the MRO segment is
primarily the result of reduced selling, general and administrative expenses.
The operating loss for the Electrical Contractor segment decreased to $0.3
million for 2001, from $0.5 million for 2000, excluding the $4.5 million of
non-recurring charges in 2000. The reduced operating loss for the Electrical
Contractor segment results from the sale during August 2001 of the majority of
the assets of a business which was not profitable.

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INTEREST EXPENSE. Interest expense for 2001 decreased by $1.2 million
to $2.5 million from $3.7 million for 2000. This decline results from lower
interest rates, a lower average debt balance for 2001 when compared to 2000 and
suspension of recording interest on the $2.0 million subordinated note.

OTHER INCOME. Other income was approximately $2.4 million lower in 2001
than in 2000 due primarily to $2.0 million of gains on the sale of two warehouse
facilities during 2000.

INCOME TAXES. As of December 31, 2001, we have recorded net deferred
tax assets of $1.5 million representing the future tax benefits of certain
accruals not currently deductible. We believe it is more likely than not that
the deferred tax assets will be realized through future taxable income. For
information concerning the provision for current and deferred income taxes as
well as information regarding differences between the effective tax rates and
statutory rates, see Note 8 of the Notes to the Consolidated Financial
Statements.

NET INCOME. Excluding the non-recurring charges and the gains on the
sale of two warehouse facilities in 2000, net income increased by approximately
$1.6 million in 2001 from a loss of approximately $0.7 million in 2000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

SALES. Revenues for 2000 decreased 1.1% to approximately $182.6 million
from $184.7 million in 1999. The Valve segment, which was sold during the third
quarter of 1999, generated revenues in 1999 of $3.7 million. Excluding these
revenues, current year revenues actually increased by $1.6 million when compared
to 1999. Sales for the MRO segment increased $3.0 million, or 1.8%, primarily
due to an improvement in the oil and gas industry. Sales for the Electrical
Contractor segment declined by $1.4 million, or 10%, as a result of employee
turnover and continued loss of market share to competitors.

GROSS PROFIT. Gross profit as a percentage of sales declined by
approximately 0.5% for 2000 when compared to 1999, both on a consolidated basis
and for the MRO segment. The majority of this decline occurred at a one location
operation, which was acquired prior to 1999. This operation serves primarily one
customer. Gross profit as a percentage of sales for the Electrical Contractor
segment remained relatively constant for 2000, when compared to 1999, as the
segment maintained gross margin but lost market share..

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for 2000 declined by approximately $1.5 million when
compared to 1999. As a percentage of revenue, the 2000 expense declined by
approximately 0.5% to 23.3% from 23.8% for 1999.

NON-RECURRING OPERATING CHARGES. In the fourth quarter of 2000, we
recorded $10.8 million of non-recurring operating charges. These charges consist
of an $8.5 million charge for the impairment of goodwill and other assets
associated with acquisitions completed before 1999, a $2.0 million charge to
write-off fixed assets of computer systems which are being replaced and
facilities which have been closed, and $0.3 million of accruals primarily
associated with future rent on closed facilities. Approximately $4.5 million and
$6.3 million of this charge pertained to the Electrical Contractor segment and
MRO segment, respectively.

As a result of increasingly poor financial results for the acquired
operations, we evaluated our recoverability of goodwill and other assets
recorded in connection with all of our acquisitions. All of our acquisitions
were completed prior to 1999. These operations have been experiencing declining
revenues and declining operating margins. We determined that the expected future
undiscounted cash flows of four acquisitions were below their carrying value. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of", during the fourth quarter
of 2000, we adjusted the carrying value of these assets to their estimated fair
value, which resulted in a non-cash impairment charge of approximately $8.5
million.

OPERATING INCOME. Excluding the $10.8 million of nonrecurring operating
charges, operating income for 2000 increased $0.1 million when compared to 1999.
This increase is the net of a $0.5 million increase in operating income for the
MRO segment, a $0.1 million increase in operating loss for the Electrical
Contractor segment and a $0.3 million decline in operating income resulting from
the sale

12

of the Valve segment. The improved operating income, exclusive of nonrecurring
charges, for the MRO segment is the result of increased sales and reduced
selling, general and administrative expenses. The increased loss for the
Electrical Contractors segment is the result of the continued loss of market
share and a 10% decrease in sales.

INTEREST EXPENSE. Interest expense for 2000 remained constant when
compared to 1999. Although our average outstanding debt balance between the two
years was lower in 2000 compared to 1999, the increased interest rates we paid
as a result of amending the Credit Facility combined with the market increase in
interest rates resulted in interest expense remaining relatively constant.

OTHER INCOME. Other income for 2000 was approximately $1.3 million
higher than in 1999 due primarily to the sale of two MRO facilities during 2000
for approximately $3.5 million. Gains on the sale of these properties were
approximately $2.0 million.

LIQUIDITY AND CAPITAL RESOURCES

General

As a distributor of MRO products and electrical contractor products, we
require significant amounts of working capital to fund inventories and accounts
receivable. Additional cash is required for capital items such as information
technology and warehouse equipment. We also require cash to pay our lease
obligations and to service our debt.

Under the Credit Facility, all available cash is generally applied to
reduce outstanding borrowings, with operations funded through borrowings under
the Credit Facility. The Credit Facility consists of three secured lines of
credit and a term loan with various of our subsidiaries.

Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the $2.0
million balance of the subordinated note payable we issued as part of the
purchase price. As of July 1, 2000, we suspended principal and interest payments
on the note. The seller has notified our bank lender that we were in default on
the subordinated note. Our bank lender notified us that the default on the
subordinated note caused us to be in default on one of our secured lines of
credit that had an outstanding balance of $3.2 million at December 31, 2001. Our
bank lender agreed to forebear taking any action on defaults under the
associated $5.8 million secured line of credit. The bank lender may terminate
the forbearance at any time. The $3.2 million outstanding balance of the secured
line of credit and the $2.0 million balance of the subordinated note have been
included in current maturities of long-term debt at December 31, 2001. In our
opinion, should payment of the $3.2 million balance outstanding under the $5.8
million secured line of credit be demanded, we would be able to refinance the
obligation or repay it through the proceeds from asset sales or property
refinancing.

During January, 2001, we filed suit against the seller to collect the
purchase price adjustment. In February, 2001, the seller filed a counterclaim
against us to collect the balance of the subordinated note and accrued interest.
We attended a court mandated mediation meeting during the fourth quarter of 2001
without resolution. We intend to aggressively pursue our claims against the
seller under the provisions of the asset purchase agreement. The subordinated
note provides for an interest rate of prime plus four percent if the note is in
default. We did not accrue any interest on the subordinated note during 2001. We
believe the subordinated note will either be repaid using funds obtained from
the seller in settlement of our claims or will be offset against our claims. We
are negotiating with the seller to resolve this litigation; however, there can
be no assurance that we will be successful in collecting the funds due under our
claims against the seller or in offsetting the subordinated note against our
claims..

We amended the Credit Facility with our bank lender effective August
14, 2001. The Credit Facility now provides for borrowings up to an aggregate of
the lesser of (i) a percentage of the collateral value based on a formula set
forth therein or (ii) $35.0 million, and matures April 1, 2004, except for the
$5.8 million secured line of credit which is in default and may be accelerated
anytime as discussed above. Interest accrues at prime plus 1/2% on approximately
$20.6 million of the Credit Facility, prime plus 1 1/2% on the $5.8 million line
of credit which is in default, and prime plus 1 1/2% on the term portion of the
Credit Facility. The prime rate at December 31, 2001, was 4.75%. The Credit
Facility is secured by receivables, inventory, real estate and machinery and
equipment. The Credit Facility contains customary

13

affirmative and negative covenants as well as financial covenants that are
measured monthly and require that we maintain a certain cash flow and other
financial ratios. From time to time we have not been in compliance with certain
covenants under the Credit Facility, including the monthly minimum earnings
requirement and the monthly fixed charge coverage ratio. At December 31, 2001,
we were in compliance with these covenants. All past violations of the covenants
have been waived. Although we expect to be able to comply with the covenants of
the Credit Facility, there can be no assurance that in the future we will be
able to do so or that our lender will be willing to waive such non-compliance or
further amend such covenants. In addition to the $2.3 million of cash at
December 31, 2001, we had $3.6 million available for borrowings under the
amended credit facility at December 31, 2001.

We generated cash in operating activities of approximately $7.2 million
in 2001 as compared to $0.3 million in cash used during 2000. This change
between the two years is primarily attributable to accounts receivable declining
in 2001, thus providing cash versus accounts receivable increasing in 2000, thus
using cash.

We generated cash through investing activities of approximately $0.5
million during 2001 as compared to approximately $2.0 million in cash generated
in 2000. This decrease is primarily attributable to the sales of two warehouse
properties in 2000, for approximately $3.5 million in cash. In 2001 we sold
certain assets of the Electrical Contractor segment for $1.1 million in cash. We
also had capital expenditures of approximately $0.7 million for the fiscal year
ended December 31, 2001, as compared to $1.2 million during 2000. Capital
expenditures during 2000 were related primarily to leasehold improvements
associated with the relocation of two of our MRO facilities ($0.5 million),
computer equipment and the development of an e-commerce website ($0.7 million)
which was subsequently written off. Capital expenditures during 2001 were
primarily related to computer software and computer equipment.

Our internal cash flow projections indicate our cash generated from
operations and available under our Credit Facility will meet our normal working
capital needs during 2002. However, we will require additional debt or equity
financing to meet our future debt service obligations, which may include
additional bank debt or the public or private sale of equity or debt securities.
In connection with such financing, we may be required to issue securities that
substantially dilute the interest of our shareholders. As described above, all
of our Credit Facility matures on or before April 1, 2004. We will need to
extend the maturity of, or replace our Credit Facility on or before April 1,
2004. However, we may not be able to renew and extend or replace the Credit
Facility. Any extended or replacement facility may have higher interest costs,
less borrowing capacity, more restrictive conditions and could involve equity
dilution. Our ability to obtain a satisfactory credit facility may depend, in
part, upon the level of our asset base for collateral purposes, our future
financial performance and our ability to obtain additional equity.

We would require additional capital to fund any future acquisitions. At
this time, we do not plan to grow through acquisitions unless the market price
of our common stock rises to levels that will make acquisitions accretive to our
earnings or we generate excess cash flow. We also may pursue additional equity
or debt financing to fund future acquisitions, although we may not be able to
obtain additional financing on attractive terms.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
significant estimates made by us in the accompanying financial statements relate
to reserves for accounts receivable collectibility, inventory valuations and
self-insured medical claims. Actual results could differ from those estimates.

Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's subjective or complex judgments. Below is a discussion of
what we believe are our critical accounting policies. Also, see Note 1 of the
Notes to the consolidated Financial Statements.

14

Revenue Recognition

We recognize revenues when an agreement is in place, price is fixed,
title for product passes to the customer or services have been provided, and
collectibility is reasonably assured.

Assurance for Doubtful Accounts

Provisions to the allowance for doubtful accounts are made monthly and
adjustments are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts.

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. Reserves are provided against
inventory for estimated obsolescence based upon the aging of the inventory and
market trends.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities (SFAS No. 133)". This statement
requires the fair value of derivatives be recorded as assets or liabilities.
Gains or losses resulting from changes in the fair values of derivatives would
be accounted for currently in earnings or comprehensive income depending on the
purpose of the derivatives and whether they qualify for hedge accounting
treatment. SFAS No. 133, as amended, was effective for us beginning January 1,
2001. We adopted the statement effective January 1, 2001; there was no impact on
our financial results as we were not a party to any derivative instruments.

In 2000, the Emerging Issues Task Force of the FASB reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue
00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues").
We adopted the Issues in the fourth quarter of 2000 and have restated our
quarterly and annual financial statements to conform to the requirements of the
Issues. There was no effect on net income as a result of the adoption of the
Issues. The net effect of the adoption of the Issues was an increase in net
sales of $4.8 million and $5.1 million; an increase in cost of sales of $4.7
million and $5.1 million; a decrease in selling, general and administrative
expenses of $0.6 million and $1.0 million; and a decrease in other income of
$0.7 million and $1.0 million in the years ended December 31, 1999 and 2000,
respectively.

In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only acceptable method. The statement was
effective beginning June 30, 2001. Management has reviewed the requirements of
the statement and does not believe it will have a material impact on the
financial position or results of operations of the Company.

In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, and instead requiring, at least annually, an assessment for impairment
by applying a fair-value based test. However, other identifiable intangible
assets with determinable lives are to be separately recognized and amortized.
The statement is effective for fiscal years beginning after December 15, 2001.
The adoption of the statement will result in the elimination of approximately
$79,000 of goodwill amortization, annually, subsequent to December 31, 2001. The
new requirements for assessing whether goodwill assets have been impaired
involve market-based information. Based on a preliminary review of the new
standards, we believe that we will record a noncash, pre-tax goodwill impairment
charge of $2.5 million in the first quarter of 2002 when the new standard
becomes effective. This charge will be reflected as a cumulative effect of a
change in accounting principle.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting for asset retirement obligations and related
costs in the financial statements

15

and provide more information about future cash outflows, leverage and liquidity
regarding retirement obligations and the gross investment in long-lived assets.
This statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company will implement SFAS No. 143 on
January 1, 2003. The impact of such adoption is not anticipated to have a
material effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion), This Statement also amends Accounting Research Board
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for subsidiaries for which control is likely to be temporary. The
Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of such
adoption is not anticipated to have a material effect on the Company's financial
statements.

INFLATION

We do not believe the effects of inflation have any material adverse
effect on our results of operations or financial condition. We attempt to
minimize inflationary trends by passing manufacturer price increases on to the
customer whenever practicable.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk results from volatility in interest rates. This risk is
monitored and managed. Our interest rate exposure is generally limited to our
Credit Facility. See "Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

The table below provides information about the Company's market
sensitive financial instruments and constitutes a forward-looking statement.

16

Based on our capital structure as of December 31, 2001, a 100 basis
point change in interest rates would result in an estimated $0.3 million change
in interest expense.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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,
2000 and 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. 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.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DXP Enterprises, Inc., and Subsidiaries at December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

March 22, 2002
Houston, Texas

17

DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

18

DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

19

DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

20

DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

21

DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

DXP Enterprises, Inc. and subsidiaries (DXP or the Company), a Texas
corporation, was incorporated on July 26, 1996, to be the successor to SEPCO
Industries, Inc. (SEPCO). The Company is organized into two segments:
Maintenance, Repair and Operating (MRO) and Electrical Contracting The Company
sold the Valve segment in 1999. See Note 13 for discussion of the business
segments.

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 to and has trade receivables from 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 regular basis, but does not require collateral.
Provisions to the allowance for doubtful accounts are made monthly and
adjustments are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts. No customer represents more than
10% of consolidated sales.

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. Reserves are provided against
inventory for estimated obsolescence based upon the aging of the inventory and
market trends.

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 of property, plant and
equipment is computed using the straight-line method and certain accelerated
methods for financial reporting purposes. Useful lives assigned to property,
plant and equipment range from 3 to 39 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.

INTANGIBLES

Intangibles consist of goodwill which is amortized over 35 years using
the straight-line method. See Note 2 for discussion of SFAS No. 142 which
changes the treatment of goodwill.

FEDERAL INCOME TAXES

The Company utilizes the asset and liability method prescribed by SFAS
No. 109 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.

22

FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary of the carrying and the fair value of financial instruments
at December 31, 2000 and 2001, is as follows (in thousands):

The carrying value of the long-term debt approximates fair value based
upon the current rates and terms available to the Company for instruments with
similar remaining maturities.

REVENUE RECOGNITION

The Company recognizes revenue when an agreement is in place, price is
fixed, title for product passes to the customer or services have been provided,
and collectibility is reasonably assured.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by the Company in the
accompanying financial statements relate to the allowance for doubtful accounts,
reserves for inventory valuations and self-insured medical claims. Actual
results could differ from those estimates.

RECLASSIFICATIONS

Certain 1999 and 2000 amounts have been reclassified to conform with
the 2001 presentation.

2. NEW ACCOUNTING PRONOUNCEMENTS:

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities (SFAS No. 133)". This statement
requires the fair value of derivatives be recorded as assets or liabilities.
Gains or losses resulting from changes in the fair values of derivatives would
be accounted for currently in earnings or comprehensive income depending on the
purpose of the derivatives and whether they qualify for hedge accounting
treatment. SFAS No. 133, as amended, was effective for the Company beginning
January 1, 2001. The Company adopted the statement effective January 1, 2001;
there was no impact as the Company was not a party to any derivative
instruments.

In 2000, the Emerging Issues Task Force of the FASB reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue
00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues").
The Company adopted the Issues in the fourth quarter of 2000 and has restated
its quarterly and annual financial statements to conform to the requirements of
the Issues. There was no effect on net income as a result of the adoption of the
Issues. The net effect of the adoption of the Issues was an increase in net
sales of $4.8 million and $5.1 million; an increase in cost of sales of $4.7
million and $5.1 million; a decrease in selling, general and administrative
expenses of, $0.6 million and $1.0 million; and a decrease in other income of
$0.7 million and $1.0 million in the years ended December 31, 1999 and 2000,
respectively.

In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only acceptable method. The statement was
effective beginning June 30, 2001. Management has reviewed the requirements of
the statement and does not believe it will have a material impact on the
financial position or results of operations of the Company.

23

In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, and instead requiring, at least annually, an assessment for impairment
by applying a fair-value based test. However, other identifiable intangible
assets with determinable lives are to be separately recognized and amortized.
The statement is effective for fiscal years beginning after December 15, 2001.
The adoption of the statement will result in the elimination of approximately
$79,000 of goodwill amortization, annually, subsequent to December 31, 2001. The
new requirements for assessing whether goodwill assets have been impaired
involve market-based information. Based on a preliminary review of the new
standards, the Company believes that it will record a noncash, pre-tax goodwill
impairment charge of $2.5 million in the first quarter of 2002 when the new
standard becomes effective. This charge will be reflected as a cumulative effect
of a change in accounting principle.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting for asset retirement obligations and related
costs in the financial statements and provide more information about future cash
outflows, leverage and liquidity regarding retirement obligations and the gross
investment in long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
will implement SFAS No. 143 on January 1, 2003. The impact of such adoption is
not anticipated to have a material effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion), This Statement also amends Accounting Research Board
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for subsidiaries for which control is likely to be temporary. The
Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of such
adoption is not anticipated to have a mutual effect on the Company's financial
statements.

3. NON-RECURRING 2000 OPERATING CHARGES:

The non-recurring operating charges recorded at December 31, 2000,
consist of an $8.5 million charge for the impairment of goodwill and other
assets associated with acquisitions completed before 1999, a $2.0 million charge
to write-off fixed assets of computer systems which are being replaced and
facilities which have been closed, and $0.3 million of accruals primarily
associated with future rent on closed facilities. Approximately $4.5 million and
$6.3 million of this charge pertained to the Electrical Contracting segment and
the MRO segment, respectively.

As a result of increasingly poor financial results of certain acquired
operations, as of December 31, 1999, the Company evaluated the recoverability of
goodwill and other assets recorded in connection with all of the Company's
acquisitions. All of the Company's acquisitions were completed prior to 1999.
The Company determined that the expected future undiscounted cash flows of four
acquisitions were below their carrying value. These operations have been
experiencing declining revenues and margins. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
be Disposed Of", during the fourth quarter of 2000, the Company adjusted the
carrying value of these assets to their estimated fair value, which resulted in
a non-cash impairment charge of approximately $8.5 million.

24

4. DIVESTITURES:

On July 16, 1999, the Company completed the sale of its Valve segment
for approximately $2.6 million; this sale price consisted of $2.0 million in
cash, a $0.5 million promissory note and the assumption of a $0.1 million note
payable. As a result, the Company no longer competes in the valve and valve
automation business. There was no gain or loss on the sale since the
consideration was equal to the net book value of the assets sold.

During the first quarter of 2000, the Company completed the sale of a
MRO fabrication and warehouse facility for approximately $2.8 million in cash. A
gain of approximately $1.7 million was recorded as a result of the sale. The
Company sold an additional MRO warehouse facility during the second quarter of
2000 for approximately $0.7 million, resulting in a gain of approximately $0.3
million. These gains are included in other income.

During August 2001, the Company sold the majority of the assets of one
of the two businesses which comprised the Electrical Contractor segment for
approximately $1.1 million in cash. There was no gain or loss on the sale since
the consideration was equal to the net book value of the assets sold.

5. INVENTORY:

The Company uses the LIFO method of inventory valuation for
approximately 60 percent of its inventories. Remaining inventories are accounted
for using the FIFO method. The reconciliation of FIFO inventory to LIFO basis is
as follows:

During 1999, the Company liquidated certain inventories valued using
the LIFO method; these inventories had been carried at cost substantially lower
than their FIFO costs and resulted in cost of goods sold being decreased by
approximately $950,000 with a corresponding increase in income before taxes. No
such liquidation of inventory occurred in 2000 or 2001.

6. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are comprised of the following:

25

7. LONG-TERM DEBT:

Long-term debt consists of the following:

Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the Credit Facility.
The Credit Facility consists of three secured lines of credit with various
subsidiaries of the Company and a term loan.

Under the terms of the asset purchase agreement associated with the
acquisition of a MRO business in 1997, the Company can require the seller to
adjust the purchase price for certain inventory remaining unsold as of July 1,
2000. The Company notified the seller that the adjustment of the purchase price
exceeds the $2.0 million balance of the subordinated note payable the Company
issued as part of the purchase price. As of July 1, 2000, the Company suspended
principal and interest payments on the note. The seller has notified the
Company's bank lender that the Company is in default on the subordinated note.
The Company's bank lender notified the Company that the default on the
subordinated note caused the Company to be in default on one of its secured
lines of credit that had a $3.2 million balance outstanding at December 31,
2001. The bank lender agreed to forebear taking any action on defaults under the
associated $5.8 million secured line of credit. The bank lender may terminate
this forbearance at anytime. The $3.2 million balance of the secured line of
credit and the $2.0 million balance of the subordinated note have been included
in current maturities of long-term debt at December 31, 2001. In management's
opinion, should the $3.2 million balance outstanding under the $5.8 million
secured line of credit be demanded, the Company would be able to refinance the
obligation or repay it through the proceeds from asset sales or property
refinancing.

During January 2001, the Company filed suit against the seller to
collect the purchase price adjustment. In February 2001, the seller filed a
counterclaim against the Company to collect the balance of the subordinated note
and accrued interest. The Company attended a court mandated mediation meeting
during the fourth quarter of 2001 without resolution. The Company intends to
aggressively pursue the Company's claims against the seller under the provisions
of the asset purchase agreement. The subordinated note provides for an interest
rate of prime plus four percent if the note is in default. The Company did not
accrue any interest on the note during 2001. Management believes the
subordinated note will either be repaid using funds obtained from the seller in
settlement of the Company's claims or will be offset against its claims. The
Company is negotiating with the seller to resolve this litigation; however,
there can be no assurance that the Company will be successful in collecting the
funds due under its claims against the seller or in offsetting the subordinated
note against its claims.

The Company and its bank amended the Credit Facility effective August
14, 2001. The Credit Facility now provides for borrowings up to an aggregate of
the lesser of (i) a percentage of the collateral value based on a formula set
forth therein or (ii) $35.0 million, and matures April 1, 2004, except for the
$5.8 million secured line of credit which is in default and may be accelerated
at anytime as described above. Interest accrues at prime plus 1/2% on
approximately $20.6 million of the Credit Facility, prime plus 1 1/2% on the
$5.8 million line of credit which is in default, and prime plus 1 1/2% on the
term portion of the Credit Facility. The prime rate averaged, 8.00%, 9.23%, and
6.91% during 1999, 2000, and 2001,

26

respectively, and at December 31, 2001, was 4.75%. The Credit Facility is
secured by receivables, inventory, real estate and machinery and equipment. The
Credit Facility contains customary affirmative and negative covenants as well as
financial covenants that are measured monthly and require the Company to
maintain a certain cash flow and other financial ratios. The Company from time
to time has not been in compliance with certain covenants under the Credit
Facility including the minimum earnings requirement and the fixed charge
coverage ratio. At December 31, 2001, the Company was in compliance with these
covenants. All past violations of these covenants have been waived. In addition
to the $2.3 million of cash at December 31, 2001, the Company had $3.6 million
available for borrowings under the Credit Facility at December 31, 2001.
Although the Company expects to be able to comply with the covenants, including
the financial covenants, of the Credit Facility, there can be no assurance that
in the future it will be able to do so or that its lender will be willing to
waive such non-compliance or further amend such covenants.

The maturities of long-term debt for the next five years and thereafter
are as follows (in thousands):

8. INCOME TAXES:

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

The difference between income taxes computed at the federal statutory
income tax rate of 34% and the provision (benefit) for income taxes is as
follows:

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

27

Deferred tax liabilities and assets were comprised of the following:

The Company believes it is more likely than not that the net deferred
income tax asset as of December 31, 2001 in the amount of $1.5 million will be
realized based primarily on the assumption of future taxable income. The Company
has certain state tax net operating loss carryforwards through 2000 aggregating
approximately $6.4 million, which expire in years 2002 through 2020. The losses
are from operations which were acquired prior to 1999. A valuation allowance has
been recorded to offset the deferred tax asset related to these state tax net
operating loss carryforwards.

9. SHAREHOLDERS' EQUITY:

SERIES A AND B 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 $.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.

STOCK BONUS PLAN

On December 28, 1999, the Company issued 46,750 shares of common stock
to employees, other than officers, pursuant to an Employee Stock Bonus Plan
approved by the Board of Directors. No stock was issued in 2000 or 2001.

STOCK OPTIONS

The DXP Enterprises, Inc. 1999 Employee Stock Option Plan, the DXP
Enterprises, Inc. Long-term Incentive Plan and the DXP Enterprises, Inc.
Director Stock Option Plan authorize the grant of options to purchase 500,000,
330,000 and 200,000 shares of the Company's shares, respectively. In accordance
with these stock option plans which were approved by the Company's shareholders,
options are granted to key personnel for the purchase of the Company's shares at
prices not less than the fair market value of the shares on the dates of grant.
Most options may be exercised not earlier than twelve months nor later than ten
years from the date of grant. Activity during 1999, 2000 and 2001 with respect
to the stock options follows:

28

The outstanding options at December 31, 2001, expire between January
2003 and July 2011, or 90 days after termination of full-time employment. The
weighted average remaining contractual life was 3.8 years, 5.0 years, and 4.8
years at December 31, 1999, 2000, and 2001 respectively.

EARNINGS PER SHARE

Basic earnings per share is computed based on weighted average shares
outstanding and excludes dilutive securities. Diluted earnings per share is
computed including the impacts of all potentially dilutive securities. The
following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1999, 2000 and 2001:

29

For 1999 and 2000, stock options and the Class B convertible stock would be
anti-dilutive and are excluded from the computation of diluted earnings per
share.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"),
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, no compensation expense is
recognized if the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant. Compensation
expense recognized under APB 25 was $39,000, $0, and $0 in 1999, 2000 and 2001,
respectively.

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 1999, 2000 and 2001: risk-free interest
rates of 6.0% for 1999, 6.4% for 2000, and 5.0% for 2001; expected lives of five
to ten years, assumed volatility of 18.4% for 1999, 140% for 2000, and 122% for
2001; 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.

10. COMMITMENTS AND CONTINGENCIES:

The Company leases equipment, automobiles and office facilities under
various operating leases. The future minimum rental commitments as of December
31, 2001, for noncancelable leases are as follows (in thousands):

2002................................................................ 2,063
2003................................................................ 957
2004................................................................ 786
2005................................................................ 498
2006................................................................ 266
Thereafter.......................................................... 861
----------
$ 5,431
==========

Rental expense for operating leases was $2,143,067, $2,550,909, and
$1,717,145 for the years ended December 31, 1999, 2000 and 2001, respectively.

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

30

11. EMPLOYEE BENEFIT PLANS:

DXP provides an employee stock ownership plan (ESOP) to substantially
all employees. Employer contributions are at the discretion of the board of
directors. The ESOP held 862,000 shares of the Company's common stock at
December 31, 2001. The Company expensed contributions to the ESOP of $150,000 in
1999. The Company also offers a 401(k) plan which is eligible to substantially
all employees. The Company matches employee contributions at a rate of 50
percent up to 4 percent of salary deferral. The Company contributed $132,000,
$386,000, and $365,000 to the 401(k) plan in the years ended December 31, 1999,
2000, and 2001, respectively.

12. RELATED-PARTY TRANSACTIONS:

An executive officer of the Company has personally guaranteed up to
$500,000 of the obligations of the Company under the Credit Facility.
Additionally, certain shares held in trust for this executive officer's children
are pledged to secure the Credit Facility.

The Board of Directors of the Company has approved the Company making
advances to this same executive. As of December 31, 2000 the outstanding
advances amounted to $537,973. In previous years, the Company made two loans to
an executive officer totaling $208,647. The total outstanding balance of such
loans including accrued interest was $225,924 at December 31, 2000. During April
2001, the Company's bank lender for the Credit Facility loaned $455,000 to the
Company, which in turn was advanced to the executive officer, who then retired
his personal loan with the lender. During 2001 the advances and loans were
consolidated into three notes receivable, each bearing interest at 3.97 percent
per annum and due December 30, 2010. Accrued interest is due annually. The total
balance of the notes including accrued interest was $1,251,238 at December 31,
2001. The notes are partially secured by 224,100 shares of the Company's common
stock, options to purchase 800,000 shares of the Company's common stock and real
estate.

13. SEGMENT DATA:

The MRO segment is engaged in providing maintenance, repair and
operating products, equipment and integrated services, including engineering
expertise and logistics capabilities, to industrial customers. The Company
provides a wide range of MRO products in the fluid handling equipment, bearing,
power transmission equipment, general mill, safety supply and electrical
products categories. The Electrical Contractor segment sells 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, to electrical contractors. The
Company began offering electrical products to electrical contractors following
its acquisition of the assets of two electrical supply businesses in 1998.
During August 2001, the Company sold the majority of the assets of one of the
two businesses which comprised the Electrical Contractor segment. Historically,
the business which was sold accounted for approximately two thirds of the sales
of the Electrical Contractor segment. The assets of the Valve segment were sold
in July, 1999. As a result, the Company no longer competes in the valve and
valve automation business. The Valve segment sold pneumatic, hydraulic and
electric actuators for remote, critical or high-pressure service applications to
operators of refineries and pipelines. All business segments operate primarily
in the United States.

The high degree of integration of the Company's operations necessitates
the use of a substantial number of allocations and apportionments in the
determination of business segment information. Sales are shown net of
intersegment eliminations.

31

Financial information relating the Company's segments is as follows:

Operating income for 2000 for the MRO segment and the Electrical Contractor
segment include non-recurring operating charges of $6.3 million and $4.5
million, respectively.

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for the years ended December
31, 1999, 2000 and 2001 is as follows:

The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each quarter's computation is
based on the weighted average number of shares outstanding during the quarter,
the weighted average stock price during the quarter and the dilutive effects of
the convertible preferred stock in each quarter.

32

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

The information required by Part III, Items 10 through 13, inclusive,
of Form 10-K is hereby incorporated by reference from the Company's Definitive
Proxy Statement for the 2002 Annual Meeting of Shareholders, which shall be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year to which this Annual Report on Form 10-K relates.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS INCLUDED IN THIS REPORT:

1. Financial Statements (included under Item 8):

2. Financial Statement Schedules:

Report of Independent Public Accountants on Supplementary Data

Schedule II - Valuation and Qualifying Accounts.

All other schedules have been omitted since the required
information is not significant or is included in the Consolidated
Financial Statements or notes thereto or is not applicable.

(b) REPORTS ON FORM 8-K:

None.

(c) EXHIBITS:

Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 36), which index is incorporated herein by
reference.

The Company undertakes to furnish to any stockholder so requesting a
copy of any of the following exhibits upon payment to the Company of the
reasonable costs incurred by the Company in furnishing any such exhibit.

33

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY DATA

To DXP Enterprises, Inc.:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of DXP Enterprises, Inc.
and subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated March 22, 2002. Our audit was made for the purpose of
forming an opinion on those financial statements taken as a whole. The schedule
listed below is the responsibility of the company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. The schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as whole.

ARTHUR ANDERSEN LLP

Houston, Texas
March 22, 2002

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DXP ENTERPRISES, INC.
DECEMBER 31, 2001
(in thousands)

(1) Uncollectible accounts written off, net of recoveries

34

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DXP ENTERPRISES, INC.
(Registrant)

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

Dated: March 26, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

35

EXHIBIT INDEX

Exhibits designated by the symbol * are filed with this Annual Report on Form
10-K. All exhibits not so designated are incorporated by reference to a prior
filing as indicated.

+ Indicates a management contract or compensation plan or arrangement.

41