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, 2002

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. YesX 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes[ ] NoX

Aggregate market value of the registrant's Common Stock held by
non-affiliates of registrant as of June 28, 2002: $2,150,783.

Number of shares of registrant's Common Stock outstanding as of March
15, 2003: 4,071,685

Documents incorporated by reference: Portions of the definitive proxy
statement for the annual meeting of shareholders to be held in 2003 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 my 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

This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
DXP Enterprises, Inc.'s actual results could differ materially. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Business", "Business-Cautionary Statements", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report on Form 10-K. Unless the context otherwise
requires, references in this Annual Report on Form 10-K to the "Company" or
"DXP" shall mean DXP Enterprises, Inc., a Texas corporation, together with the
Company's subsidiaries.

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
the beginning, 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. Sales and operating income for 2000, 2001 and 2002, 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 exceeds $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 2001 sales as reported by industry sources, we
were the 32nd 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 level through excess inventory requirements and duplicative cost
structures. To compete more effectively, our customers and other users of MRO
products are seeking ways to enhance efficiencies and lower MRO product and
procurement costs. In response to this customer desire, three primary trends
have emerged in the industrial supply industry:

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.

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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.

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 and 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 the customer's
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 the customer. For those customers purchasing a
number of products in large quantities, the customer is able to outsource all or
most of those needs to 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. No one
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, 2002, the MRO Segment has 501 full-time employees.

ELECTRICAL CONTRACTOR SEGMENT

The 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 assets of one of the
two businesses which comprised the Electrical Contractor segment. 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/sales
facilities in Memphis, Tennessee.

The 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 its
customers, this segment maintains large inventories. The majority of sales are
on open account.

At December 31, 2002, the Electrical Contractor segment had 12
full-time employees.

MANAGEMENT INFORMATION SYSTEMS

During 2002, we completed the installation of a common operating and
financial system which is used by all of our locations. We use this computer
system 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, our
computer system has the flexibility to integrate with the customer's
maintenance, accounting and management systems. Our system allows for real-time
reporting of industrial products used by work order, department and individual,
as well as on-line stock inquiry and order-status reports. Our system supports
advanced functions, such as EDI, customized billing, end user reporting,
facsimile transmission, bar coding and preventative maintenance.

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 offered by us,
we are not aware of any major competitor that offers on a non-direct mail basis
a product grouping as broad as that offered by us. Further, while certain
direct-mail distributors provide

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product offerings as broad as ours, these 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 partially self-insured for our
group health plan.

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 it believes is likely
to have a material adverse effect on our results of operations or financial
condition.

EMPLOYEES

At December 31, 2002, we had 513 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")
requires 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.

Risks Related to Internal Growth Strategy

Future results for us 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 will depend 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

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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 us. Our competitors include direct mail suppliers,
large warehouse stores and, to a lesser extent, certain manufacturers.

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 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 43 branch
distribution facilities located in Georgia, Louisiana, Maryland, Montana, New
Mexico, Oklahoma, Tennessee, Texas, and Wyoming. The Electrical Contractor
segment owns one facility in Tennessee. These facilities range from 2,500 square
feet to 138,000 square feet in size. Those facilities that are not owned by us
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 our facilities are suitable and adequate for the
needs of our existing business. 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 owned by us are pledged to secure our
indebtedness.

On March 15, 2000, we completed the sale of a MRO fabrication and
warehouse facility, for approximately $2.8 million in cash. We sold another MRO
warehouse facility during the second quarter of 2000 for $0.7 million.

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.

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

None.

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, 2003, we had approximately 670 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, 2002 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 thereto included elsewhere in this Annual Report on Form
10-K.

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(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 July 17, 1998.

(3) Year ended December 31, 2000 includes non-recurring charges of
$10,791,000; refer to Note 3 of the Notes to the Consolidated Financial
Statements for further information.

(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

Our products and services are marketed in 16 states to over 25,000
customers that are engaged in a variety of industries, many of which may be
counter cyclical to each other. Demand for 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.

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.

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RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

SALES. Revenues for 2002 decreased $26.3 million, or 15.1%, to
approximately $148.1 million from $174.4 million in 2001. Sales for the MRO
segment decreased $20.9 million, or 12.6% primarily due to slowing of the
overall economy. Reduced sales of bearing products accounted for approximately
one half of the decline in sales for the MRO segment. Sales for the Electrical
Contractor segment decreased by $5.4 million, or 65.8%, when compared to 2001.
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 increased by
approximately 0.5% for 2002, when compared to 2001. The increase can be
primarily attributed to increased margins for the Electrical Contractor segment.
Gross profit as a percentage of sales for the Electrical Contractor segment
increased to 37.5% for 2002, up from 23.5% in 2001. This increase resulted from
the sale of the business in San Antonio, Texas which had lower gross profit
margins. Gross profit as a percentage of sales for the MRO segment increased to
25.4% for 2002, up from 25.2% for 2001. This increase can be primarily
attributed to increased margins in fluid handling products sold by the MRO
segment.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for 2002 decreased by approximately $5.9 million, or
14.8%, when compared to 2001. This decrease is primarily attributable to reduced

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litigation costs, communication expenses, bad debt expense, payroll and payroll
related expenses. As a percentage of revenue, the 2002 Selling, general and
administrative expense increased by approximately 0.1% to 22.9% from 22.8% for
2001. This increase is primarily attributable to non-variable costs being spread
over a smaller revenue amount.

OPERATING INCOME. Operating income for 2002 increased by approximately
$0.1 million, or 2.1%, when compared to 2001. This increase is the net of a $0.2
million decrease in operating income for the MRO segment and a $0.3 million
improvement in operating income for the Electrical Contractor segment. The
reduced operating income for the MRO segment is the result of lower sales and
gross profit partially offset by reduced selling, general and administrative
expenses. The improvement for the Electrical Contractor segment is primarily the
result of the sale during August 2001 of the business in San Antonio, Texas,
which was not profitable.

INTEREST EXPENSE. Interest expense for 2002 decreased by $0.9 million
to $1.6 million from $2.5 million for 2001. This decline results from lower
interest rates for 2002 when compared to 2001 as well as a lower average debt
balance.

INCOME TAXES. As of December 31, 2002, we have recorded net deferred
tax assets of $1.4 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 as these reserves are recovered and
reduce 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.

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 which comprised 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 the comparable period of
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 compensation related expenses resulting from reduced
headcount.

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, $0.3 million for the Electrical Contractor segment
and $0.7 million for the MRO segment, when compared to the same period in 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 $0.2 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.

INTEREST EXPENSE. Interest expense for 2001 decreased by $1.3 million
to $2.5 million from $3.7 million for 2000. This decline results from lower
interest rates as well as a lower average debt balance for 2001 when compared to
2000.

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.

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.

12

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.

The Credit Facility 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. Interest accrues at
prime plus 1/2% on approximately $30.5 million of the Credit Facility, and prime
plus 1 1/2% on the term portion of the Credit Facility. The prime rate at
December 31, 2002, was 4.25%. 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 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, 2002,
we were in compliance with these covenants. 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
$1.2 million of cash at December 31, 2002, we had $2.5 million available for
borrowings under the amended credit facility at December 31, 2002.

We generated cash in operating activities of approximately $2.5 million
in 2002 as compared to $7.1 million in cash provided during 2001. This change
between the two years is primarily attributable to accounts receivable
decreasing by $1.2 million in 2002, versus accounts receivable declining by $5.6
million in 2001.

We used cash in investing activities of approximately $0.4 million
during 2002 as compared to approximately $0.5 million in cash generated in 2001.
This decrease is primarily attributed to the sale of certain assets of the
Electrical Contractor segment for $1.1 million in cash in 2001. We had capital
expenditures of approximately $0.4 million for the fiscal year ended December
31, 2002, as compared to $0.7 million during 2001. Capital expenditures during
2002 were related primarily to computer equipment. 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 2003. 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 accounting
principles generally accepted in the United States of America 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

13

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.

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.

Allowance 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.

Income Taxes

In accordance with SFAS 109, Accounting for Income Taxes, we have
recorded a net deferred tax asset of $1.4 million as of December 31, 2002. We
believe it is more likely than not that this net deferred tax asset will be
realized based primarily on the assumption of future taxable income.

Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed above,
these factors may significantly impact the Company's results of operations from
period-to-period.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 of the Notes to the Consolidated Financial Statements for
discussion of recent accounting pronouncements.

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 exposure to interest rate risk relates primarily to our debt
portfolio. To limit interest rate risk on borrowings, we target a portfolio
within certain parameters for fixed and floating rate loans taking into
consideration the interest rate environment and our forecasted cash flow. This
policy limits exposure to rising interest rates and allows us to benefit during
periods of falling interest rates. Our interest rate exposure is generally
limited to our Credit Facility. See "Liquidity and Capital Resources."

14

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITOR'S REPORT

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. and Subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. 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 audit.

We conducted our audit 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 audit provides 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, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

/s/ HEIN + ASSOCIATES LLP

March 14, 2003
Houston, Texas

15

This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with DXP Enterprises, Inc.'s 2001 consolidated financial statements
previously filed on Form 10-K. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.

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,
2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two 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 audit 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 audit provides 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, 2001, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

March 22, 2002
Houston, Texas

16

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.

17

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.

18

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

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

19

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

Noncash activities:

Changes in inventories and principal payments on debt excludes the $1.9
million noncash reduction of inventory cost and debt associated with a
litigation settlement recorded in 2002. See Note 7.

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

20

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. 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.

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.

INVENTORIES

Inventories consist 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 inventories for estimated obsolescence based upon the aging of the
inventories and market trends.

PROPERTY 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 and equipment
is computed using the straight-line method and certain accelerated methods for
financial reporting purposes. Useful lives assigned to property 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 consisted of goodwill which, prior to January 1, 2002, was
amortized over 35 years using the straight-line method.

FEDERAL INCOME TAXES

The Company utilizes the asset and liability method of 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.

CASH AND CASH EQUIVALENTS

The Company's presentation of cash includes cash equivalents. Cash
equivalents are defined as short-term investments with maturity dates of ninety
days or less at time of purchase.

21

FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary of the carrying and the fair value of financial instruments
at December 31, 2001 and 2002, 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.

STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized for the stock option plans. SFAS No. 148, "Accounting for Stock-
Based Compensation--Transition and Disclosure," requires disclosure of pro forma
net income and pro forma earnings per share amounts as if compensation expense
was recognized.

Pursuant to SFAS No. 148, the Company, for purposes of its pro forma
disclosure in Note 9, determined its compensation expense in accordance with the
Black-Scholes option-pricing model.

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 2000 and 2001 amounts have been reclassified to conform with
the 2002 presentation. These include preferred stock previously classified as
"temporary" equity outside of shareholders' equity (not mandatorily redeemable)
and notes receivable from shareholders previously presented as an asset. None of
the reclasses affected the Company's operating results.

2. NEW ACCOUNTING PRONOUNCEMENTS:

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 $5.1 million; an increase in cost of sales of $5.1 million; a decrease
in selling, general and administrative expenses of, $1.0 million; and a decrease
in other income of $1.0 million in the year ended December 31, 2000.

22

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 are to be separately recognized and amortized. The statement is effective
for fiscal years beginning after December 15, 2001. All of the Company's
goodwill pertained to one reporting unit as defined in SFAS 142. The goodwill
was tested for impairment during the first quarter of 2002 as required by SFAS
142 upon adoption based upon the expected present value of future cash flows
approach. As a result of this valuation process as well as the application of
the remaining provisions of SFAS 142, the Company recorded a transitional
impairment loss of $2.5 million before income taxes ($1.7 million after income
taxes). This write-off was reported as a cumulative effect of a change in
accounting principle in the Company's consolidated statement of operations as of
January 1, 2002. This adoption of the statement has resulted in the elimination
of approximately $79,000 of annual goodwill amortization subsequent to December
31, 2001.

The following table discloses the Company's net income (loss), assuming
it excluded goodwill amortization (in thousands, except per share data):

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 adopted SFAS No. 144 on January 1, 2002. The adoption did not have a
material effect on the Company's financial statements.

23

3. NON-RECURRING OPERATING CHARGES IN 2000::

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.

4. DIVESTITURES:

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. INVENTORIES:

The Company uses the LIFO method of inventory valuation for
approximately 80 percent of its inventories. Remaining inventories are accounted
for using the FIFO method. The reconciliation of FIFO inventory to LIFO basis is
as follows:

6. PROPERTY AND EQUIPMENT:

Property and equipment are comprised of the following:

7. LONG-TERM DEBT:

Long-term debt consisted 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.

25

The Credit Facility 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. Interest accrues at
prime plus 1/2% on approximately $30.5 million of the Credit Facility, and prime
plus 1 1/2% on the term portion of the Credit Facility. The prime rate averaged,
9.23%, 6.91%, and 4.62% during 2000, 2001, and 2002, respectively, and at
December 31, 2002, was 4.25%. The Credit Facility is secured by receivables,
inventories, 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, 2002, the Company was in compliance with these covenants. In
addition to the $1.2 million of cash at December 31, 2002, the Company had $2.5
million available for borrowings under the Credit Facility at December 31, 2002.
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):

2003...................................................................... $ 1 ,625
2004...................................................................... 21,015
2005...................................................................... 135
2006...................................................................... 91
2007...................................................................... 97
Thereafter.............................................................. 2,148
--------
$ 25,111
========

On May 13, 2002, the Company finalized the settlement of the dispute
regarding the adjustment of the purchase price paid to the seller of a MRO
business acquired by the Company in 1997. Under the terms of the settlement
agreement, the Company paid $0.1 million to the seller, the Company retained
ownership of the inventory acquired in 1997 remaining on hand, and the $2.0
million subordinated note payable by the Company to the seller was cancelled.
From September 30, 2000 through December 31, 2001, the balances outstanding
under the subordinated note and a $5.8 million secured line of credit were in
default and included in current maturities of long-term debt. Since March 31,
2002, the balance outstanding under the $5.8 million secured line of credit is
included in long-term debt. The balance of the subordinated note, less the $0.1
million settlement payment, was recorded as of March 31, 2002, as a reduction of
the cost of the inventory acquired in 1997 remaining on hand.

8. INCOME TAXES:

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

26

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 tax balances are
as follows:

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, 2002 in the amount of $1.4 million will be realized
based primarily on the assumption of future taxable income. The Company has
certain state tax net operating loss carryforwards aggregating approximately
$7.6 million, which expire in years 2003 through 2020. 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

27

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 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 2000, 2001 and 2002 with respect
to the stock options follows:

The outstanding options at December 31, 2002, expire between February
2003 and September 2012, or 90 days after termination of full-time employment.
The weighted average remaining contractual life was 5.0 years, 4.8 years, and
4.4 years at December 31, 2000, 2001 and 2002, respectively.

28

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 before cumulative effect of a change in accounting principle for the years
ended December 31, 2000, 2001, and 2002.

For 2000, stock options and the 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 APB No. 25, and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 148 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. No compensation
expense was recognized under APB No.25 during the three years ended December 31,
2002.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 148 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 2000, 2001 and 2002: risk-free interest
rates of 6.4 percent for 2000, 5.0% for 2001, and 3.9% for 2002; expected lives
of five to ten years, assumed volatility of 140% for 2000, 122% for 2001, and
82% for 2002; and no expected dividends.

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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. 148 had been applied.

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, 2002, for non-cancelable leases are as follows (in thousands):

2003 ...................... 1,356
2004 ...................... 1,214
2005 ...................... 920
2006 ...................... 578
2007 ...................... 407
Thereafter ..................... 619
------
$5,094
======

Rental expense for operating leases was $2,550,909, $1,717,145, and
$1,438,478 for the years ended December 31, 2000, 2001, and 2002, 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.

11. EMPLOYEE BENEFIT PLANS:

Prior to 2002 DXP provided an employee stock ownership plan (ESOP) to
substantially all employees. The Company did not make any contributions to the
ESOP during the three years ended December 31, 2002. The ESOP distributed all
assets of the ESOP, including 862,000 shares of the Company's common stock, to
participants during 2002. 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 $386,000, $365,000, and $338,000 to the 401(k) plan in the
years ended December 31, 2000, 2001,and 2002, respectively.

12. RELATED-PARTY TRANSACTIONS:

The chief executive officer (the "CEO") 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 the CEO's children are
pledged to secure the Credit Facility.

In previous years, the Board of Directors of the Company had approved
the Company making advances and loans to the CEO. The total outstanding balance
of such loans and advances including accrued interest was $763,897 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 CEO, who then
retired his personal loan with the lender. During 2001 the advances and loans
were

30

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 was $1,251,238 at December 31, 2001 and 2002. 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. This note
receivable is reflected as a reduction of shareholders' equity.

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. 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.

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.

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14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for the years ended December
31, 2000, 2001 and 2002 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.

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

Arthur Andersen LLP ("Andersen") served as independent auditors for the
fiscal years ended December 31, 1997 through 2001. In response to Andersen's
legal problems, on June 3, 2002 the Audit Committee decided, with the approval
of the Board of Directors, that effective June 6, 2002 DXP would no longer
engage Andersen as independent auditors and that as of June 6, 2002 Hein +
Associates LLP would be appointed as independent auditors for the year ended
December 31, 2002.

The reports of Andersen on DXP consolidated financial statements for
the past two years did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.

During DXP's two most recent fiscal years and through June 6, 2002,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused it to make
reference thereto in connection with its report on DXP's consolidated financial
statements for such years; and there were no reportable events as such term is
used in Item 304 (a) (1) (v) of Regulation S-K.

DXP provided Andersen with a copy of the foregoing disclosures. A
letter from Andersen was included as Exhibit 16 to Form 8-K, filed June 6, 2002,
stating its agreement with such statements.

32

During DXP's two most recent fiscal years and through June 6, 2002, DXP
did not consult Hein + Associates LLP with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matters or reportable events as
set forth in Items 304 (a) (2) (i) and (ii) of Regulation S-K.

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 2003 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.

ITEM 14 CONTROLS AND PROCEDURES

Based on their evaluations as of a date within 90 days of the filing
date of this report, the chief executive officer and chief financial officer of
the Company have concluded that the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
(the "Enchange Act"))are effective to ensure that information required to be
disclosed by the Company in reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities Exchange Commission.

There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation described in the preceding paragraph.

ITEM 15. 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:

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.

33

C) EXHIBITS:

Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 38), 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.

INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders
DXP Enterprises, Inc.
Houston, Texas

We have audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated financial statements of DXP
Enterprises, Inc. and Subsidiaries included in this Form 10-K and have issued
our report thereon dated March 14, 2003. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
financial statement schedule listed in Item 15 herein ( Schedule II-Valuation
and Qualifying Accounts) is the responsibility of the Company's management and
is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
financial statement schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion, is
fairly stated in all material respects with the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.

/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP

Houston, Texas
March 14, 2003

(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 24, 2003

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

CERTIFICATIONS

I, David R. Little, the Chief Executive Officer of DXP Enterprises, Inc.,
certify that:

1. I have reviewed this annual report on Form 10-K of DXP Enterprises, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

March 24, 2003

/s/ David R. Little
David R. Little
Chief Executive Officer

36

I, Mac McConnell, the Chief Financial Officer of DXP Enterprises, Inc., certify
that:

1. I have reviewed this annual report on Form 10-Q of DXP Enterprises,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly presents in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date this annual report (the "Evaluation Date");
and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

March 24, 2003

/s/ Mac McConnell
Mac McConnell
Chief Financial Officer

37

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.

43