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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-21513

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

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

TEXAS 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

7272 PINEMONT
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)

713/996-4700
(Registrant's telephone number, including area code)

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

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 [ ]

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares outstanding of each of the issuer's classes of common
stock, as of May 15, 2001:

Common Stock: 4,071,685

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

ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

MARCH 31, DECEMBER 31,
2001 2000
--------------- ----------------
(UNAUDITED) (AUDITED)
ASSETS

Current assets:
Cash.................................................... $ 456 $ 2,744
Trade accounts receivable, net of allowance for
doubtful accounts of $1,908 and $1,888,
respectively......................................... 23,650 24,377
Inventory............................................... 23,780 23,504
Prepaid expenses and other.............................. 863 578
Deferred income taxes................................... 1,251 1,308
------- -------
Total current assets............................ 50,000 52,511
Property, plant and equipment, net........................ 9,565 9,314
Goodwill, net............................................. 2,523 2,547
Note receivables from officers and employees.............. 813 811
Deferred income taxes..................................... 1,313 1,388
Other assets.............................................. 448 568
------- -------
Total assets.................................... 64,662 67,139
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Trade accounts payable................................... 19,284 18,498
Accrued wages and benefits............................... 1,577 999
Other accrued liabilities................................ 1,107 661
Current portion of long-term debt........................ 9,101 9,675
------- -------
Total current liabilities........................ 31,069 29,833
Long-term debt, less current portion....................... 24,593 28,476
Equity subject to redemption:
Series A preferred stock -- 1,122 shares................. 112 112
Shareholders' Equity:
Series A preferred stock, 1/10th vote per share; $1.00
par value; liquidation preference of $100 per share;
1,000,000 shares authorized;
2,992 shares issued and outstanding:.................. 2 2
Series B convertible preferred stock, 1/10th vote
per share; $1.00 par value; $100 stated value;
liquidation preference of $100 per share; 1,000,000
shares authorized; 17,700 shares
issued, 15,000 shares outstanding and 2,700
shares in treasury stock.............................. 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,257,760 shares issued and 4,071,685
shares are outstanding and 186,075 shares in
treasury stock........................................ 41 41

Paid-in capital.......................................... 2,765 2,765
Retained earnings........................................ 7,956 7,786
Treasury stock........................................... (1,894) (1,894)
-------- -------
Total shareholders' equity....................... 8,888 8,718
------- -------
Total liabilities and shareholders' equity $64,662 $67,139
======= =======

See notes to condensed consolidated financial tatements.

2
3
DXP ENTERPRISES, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
-------- --------

Sales........................................ $ 46,890 $ 45,014
Cost of sales................................ 35,335 34,062
-------- --------
Gross Profit................................. 11,555 10,952
Selling, general and administrative expenses. 10,363 10,464
-------- --------
Operating income............................. 1,192 488
Other income................................. 25 1,744
Interest expense............................. (784) (930)
--------- --------
Income before income taxes................... 433 1,302
Provision for income taxes................... 239 565
-------- --------
Net income................................... $ 194 $ 737
Preferred stock dividend..................... 23 22
-------- --------
Net Income attributable to common shareholders $ 171 $ 715
======== ========
Basic earnings per common share.............. $ .04 $ .18
-------- --------
Common shares outstanding.................... 4,072 4,073
-------- --------
Diluted earnings per share................... $ .04 $ .15
-------- --------
Common and common equivalent shares outstanding 4,072 4,867
-------- --------

See notes to condensed consolidated financial tatements.

3
4

DXP ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
---------- ----------

OPERATING ACTIVITIES:
Net income........................................ $ 194 $ 737
Adjustments to reconcile net income to
net cash Provided by (used in) operating
activities
Depreciation and amortization..................... 332 539
Provision (benefit) for deferred income taxes..... 132 (28)
(Gain) on sale of property and
equipment....................................... -- (1,692)
Changes in operating assets and liabilities:
Trade accounts receivable....................... 727 (1,211)
Inventories..................................... (276) (382)
Prepaid expenses and other...................... (167) (412)
Accounts payable and accrued liabilities........ 1,796 2,864
--------- ----------
Net cash provided by operating activities....... 2,738 415

INVESTING ACTIVITIES:
Purchase of property and equipment................ (546) (364)
Net proceeds on the sale of assets................ -- 2,585
--------- ----------
Net cash provided by/(used in)investing
activities.................................... (546) 2,221

FINANCING ACTIVITIES:
Proceeds from debt................................ 41,242 29,754
Principal payments on revolving line of credit,
long-term and subordinated debt, and notes

payable to bank................................. (45,699) (34,454)
Dividends paid.................................... (23) (22)
--------- ----------
Net cash used in financing activities......... (4,480) (4,722))
--------- ----------
DECREASE IN CASH.................................. (2,288) (2,086)
CASH AT BEGINNING OF PERIOD....................... 2,744 2,991
========= ==========
CASH AT END OF PERIOD............................. $ 456 $ 905
========= ==========

See notes to condensed consolidated financial statements.

4
5

DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

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

The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 2000, filed with
the Securities and Exchange Commission.

NOTE 2: THE COMPANY

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 Contractor.

NOTE 3: RECENT OPERATIONS AND LIQUIDITY

The Company sustained a net loss of approximately $7.4 million during
fiscal year 2000 primarily from non-recurring operating charges of $10.8
million. This operating loss coupled with a default on a subordinated note
payable caused the Company to be in violation of covenants under the Credit
Facility with its bank lender; consequently, the Company reclassified the
subordinated note and a portion of its debt under the Credit Facility to a
current liability in 2000, as well as for the quarter ended March 31, 2001 (see
Note 6 below for further discussion).

For first quarter of 2001, the Company generated $433,000 in income
before taxes. Revenues and gross profit increased from the comparable period in
2000, resulting from improved sales and margins in its MRO segment.
Additionally, sales, general and administrative expenses are lower when compared
to the first and fourth quarter of 2000 (see "Management's Discussion and
Analysis of Financial Condition and Result of Operations" for further
information). The Company was in compliance with its financial covenants for the
first quarter of 2001. In addition to $0.5 million of cash on hand, the Company
has approximately $3.5 million available for additional borrowings under its
Credit Facility at March 31, 2001.

NOTE 4: INVENTORY

The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 61 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:

MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(IN THOUSANDS)

Finished goods...... $ 25,257 $25,770
Work in process..... 1,915 985
-------- -------
Inventories at FIFO. 27,172 26,755
Less - LIFO allowance (3,392) (3,251)
-------- -------
Inventories......... $ 23,780 $23,504
======== =======

5
6

NOTE 5: DIVESTITURES

During the first quarter of 2000, the Company sold a warehouse facility
for approximately $2.8 million in cash. A gain of approximately $1.7 million was
recorded as other income as a result of the sale.

NOTE 6: LONG-TERM DEBT

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 outstanding $2.0 million balance of the associated subordinated note
payable. 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 with an
outstanding balance of $4.1 million at March 31, 2001. However, the Company and
the bank lender have entered into a forbearance agreement whereby the bank
lender agreed to forebear taking any action on defaults under the secured line
of credit. The bank lender can terminate the forbearance agreement at anytime.
The $4.1 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 March 31, 2001.

In management's opinion, should the $4.1 million balance of the secured
line of credit be demanded upon termination of the forebearance agreement, the
Company would be able to refinance the obligation or liquidate it through the
proceeds from asset sales or property refinancing. 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 4% if the note is in default. The Company did not accrue
interest or penalty interest on the subordinated note for the three months ended
March 31, 2001. Management believes the subordinated note will either be paid
off using funds obtained from the seller in settlement of the Company's claims
or the subordinated note will be offset against its claims. However, there can
be no assurance that the Company will be successful in collecting the funds due
under its claims or in offsetting the subordinated note against its claims.

During April of 2001, the Company and its bank amended the Credit
Facility effective December 31, 2000, which 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, 2002,
except for the $4.1 million balance of the secured line of credit which is in
default and callable at anytime under the forebearance agreement previously
discussed. Interest accrues at prime plus 1/2% on the revolving portion of the
Credit Facility and prime plus 1 1/2% on the term portion of the Credit
Facility. The prime rate at March 31, 2001, was 8.0%. 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 March 31, 2001, the Company was in compliance with these
covenants. In addition to the $0.5 million of cash on hand at March 31, 2001 the
Company had $3.5 million available for borrowings under the amended credit
facility at March 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 the Company will be able to do so
or that the lender will be willing to waive such non-compliance or further amend
such covenants.

6
7

NOTE 7: EARNINGS PER SHARE DATA

The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.

THREE MONTHS ENDED MARCH 31,
2001 2000

Basic:
Average shares outstanding 4,071,685 4,072,718
Net income attributable to common shareholders $ 171,000 $ 715,000
Per share amount $ .04 $ .18

Diluted:
Average shares outstanding 4,071,685 4,072,718
Net effect of dilutive stock options--
based on the treasury stock method -- 374,375
Assumed conversion of Class B convertible
preferred stock -- 420,000

Total 4,071,685 4,867,093
Net income for diluted earnings per share $ 171,000 $ 737,000
Per share amount $ .04 $ .15

For the three months ended March 31, 2001, the Class B convertible preferred
stock is anti-dilutive and is excluded from the computation of diluted earnings
per share.

NOTE 8: SEGMENT REPORTING

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, bearings,
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.

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:

ELECTRICAL
MRO CONTRACTOR TOTAL
--- ---------- -----

2001
Sales $ 43,958 $ 2,932 $ 46,890
Operating income 1,317 (125) 1,192

2000
Sales $ 42,223 $ 2,791 $ 45,014
Operating income (loss) 550 (62) 488

7
8

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000

SALES. Revenues for the quarter ended March 31, 2001, increased $1.9
million, or 4.2%, to approximately $46.9 million from $45.0 million in 2000.
Sales for the MRO Segment increased $1.7 million, or 4.0%, primarily due to an
improvement in the oil and gas industry. Sales for the Electrical Contractor
segment increased by $0.1 million, or 5.0%, for the current quarter when
compared to same period in 2000. This increase is the result of an effort to
increase sales.

GROSS PROFIT. Gross profit as a percentage of sales increased by
approximately 0.3% for the first quarter of 2001, when compared to the same
period 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 19.0% in
the three months ended March 31, 2001, down from 26.5% in the comparable period
of 2000. This decline resulted from lower margin sales associated with the
effort to increase sales.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the quarter ended March 31, 2001, decreased by
approximately $0.1 million when compared to the same period in 2000. As a
percentage of revenue, the 2001 expense declined by approximately 1.1% to 22.1%
from 23.2% for 2000. This decrease is primarily attributable to a decrease in
depreciation and amortization expense during the current quarter resulting from
the write-off of certain fixed assets and intangible assets in the fourth
quarter of 2000.

OPERATING INCOME. Operating income for the first three months of 2001
increased $0.7 million when compared to the same period in 2000. This increase
is the net of an $0.8 million increase in operating income for the MRO Segment
and a $0.1 million increase in the operating loss for the Electrical Contractor
Segment. The improved operating income for the MRO segment is the result of
increased sales and gross profit combined with reduced selling, general and
administrative expenses. The increased loss for the Electrical Contractor
Segment is the result of lower gross margins, partially offset by reduced
amortization expense due to the write-off of intangibles in the fourth quarter
of 2000.

INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2001
decreased by $0.1 million to $0.8 million from $0.9 million during the same
period in 2000. This decline results from a lower average debt balance for the
first three months of 2001 when compared to the first quarter of 2000 as well as
lower interest rates.

OTHER INCOME. Other income was approximately $1.7 million lower in 2001
than in 2000 due to a $1.7 million gain on the sale of a warehouse facility
during 2000.

INCOME TAXES. The effective tax rate for the quarter ended March 31,
2001, of 55% increased from 43% for the same period in 2000 because of the
higher 2000 income before tax resulting from the $1.7 million gain on the sale
of the warehouse facility. The amount of permanent differences between tax and
book income for the two periods was approximately the same.

NET INCOME. Excluding the gain on the sale of the warehouse facility in
2000, net income increased by $0.6 million in 2001 from a loss of $0.4 million
in 2000.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

As a distributor of MRO and Electrical 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

8
9

and warehouse equipment. We also require cash to pay our lease obligations and
to service our debt.

Under the loan agreements with our bank lender, all available cash is
generally applied to reduce outstanding borrowings, with operations funded
through borrowings under the Credit Facility. Our policy is to maintain low
levels of cash and cash equivalents and to use borrowings under our line of
credit for working capital. We had approximately $3.5 million available for
borrowings under the revolving portion of the Credit Facility at March 31, 2001.
Working capital at March 31, 2001 and December 31, 2000 was approximately $18.9
million and $22.7 million, respectively. During the first three months of 2001
and 2000, we collected trade receivables in approximately 51 and 47 days,
respectively. For the three months ended March 31, 2001 and 2000, we turned our
inventory approximately five and four times, respectively, on an annualized
basis.

Under the terms of the asset purchase agreement associated with the
acquisition of a MRO 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
outstanding $2.0 million balance of the associated subordinated note payable. 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 with an
outstanding balance of $4.1 million at March 31, 2001. However, we have entered
into a forbearance agreement with our bank lender whereby the bank lender agreed
to forebear taking any action on defaults under the secured line of credit. The
bank lender can terminate the forbearance agreement at anytime. The $4.1 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
March 31, 2001.

In our opinion, should the $4.1 million balance of the secured line of
credit be demanded upon termination of the forebearance agreement, we would be
able to refinance the obligation or liquidate 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 4% if the note is
in default. The Company did not accrue interest or penalty interest on the
subordinated note for the three months ended March 31, 2001. We believe the
subordinated note will either be paid off using funds obtained from the seller
in settlement of our claims or the subordinated note will be offset against our
claims. However, there can be no assurance that we will be successful in
collecting the funds due under our claims or in offsetting the subordinated note
against our claims.

During April of 2001, we amended the Credit Facility with our bank
lender effective December 31, 2000, which 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, 2002,
except for the $4.1 million balance of the secured line of credit which is in
default and callable at anytime under the forebearance agreement previously
discussed. Interest accrues at prime plus 1/2% on the revolving portion of the
Credit Facility and prime plus 1 1/2% on the term portion of the Credit
Facility. The prime rate at March 31, 2001, was 8.0%. 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
certain cash flow and other financial ratios. We have, from time to time, not
been in compliance with certain covenants under the Credit Facility including
the minimum earnings requirement and the fixed charge coverage ratio. At March
31, 2001, we are in compliance with these covenants. In addition to the $0.5
million of cash on hand at March 31, 2001, we had $3.5 million available for
borrowings under the amended credit facility at March 31, 2001. 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

We generated cash through operating activities of approximately $2.7
million in the first three months of 2001 as compared to $0.4 million during the
first three months of 2000. This increase is primarily attributable to improved
operating income and to a decrease in accounts receivable in 2001 compared to an
increase in accounts receivable in 2000. In the first quarter of 2001, sales
increased approximately $0.3 million from the fourth quarter of 2000; for the
comparable period in 2000, sales increased approximately $3.0 million from the
fourth quarter of 1999.

9
10

We used cash from investing activities of approximately $0.5 million in
the first three months of 2001 as compared to generating $2.2 million in cash
during the first three months of 2000. This decrease results from the first
quarter 2000 sale of a warehouse facility for approximately $2.8 million in
cash. Fixed asset purchases of $0.5 during the first quarter of 2001 related
primarily to computer software. Capital expenditures of $0.4 million during the
first three months of 2000 were related primarily to computer equipment and
developing an e-commerce website, which we subsequently wrote-off during the
fourth quarter of 2000.

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 the next twelve months. However, we will require additional
debt or equity financing to meet our future debt service obligations. Such
financing 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,
2002. 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 may also pursue additional equity
or debt financing to fund future acquisitions, although we may not be able to
obtain additional financing on attractive terms.

RECENTLY ISSUED ACCOUNTING STANDARDS

On December 8, 1999, the United States Securities and Exchange Commission
("SEC") staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition", to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. We reviewed our revenue
recognition procedures and are satisfied that we are in compliance with this
SAB.

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 are
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, is 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 $1.3 million, an increase in cost of sales of $1.3 million, a decrease
in selling, general and administrative expenses of $0.2 million and a decrease
in other income of $0.2 million for the quarter ended March 31, 2000.

ITEM 3: 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."

10
11

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the results
of operations or financial condition of the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

CAUTIONARY STATEMENTS

Our expectations with respect to future results of operations that may
be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of our realization of such expectations. Our actual
results could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below.

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.

Risk of Being Delisted From the Nasdaq SmallCap Market

We have been notified by Nasdaq Staff, in a letter dated April 17,
2001, that we have failed to comply with the minimum bid price and market value
of public float requirements for continued listing as set forth in Marketplace
Rule 4310, and that our common stock, therefore, is subject to delisting from
the Nasdaq SmallCap Market. We have requested a hearing before a Nasdaq Listing
Qualifications Panel to review Nasdaq Staff's determination and have been
granted a hearing on June 6, 2001. DXP's common stock will continue to be listed
on the Nasdaq SmallCap Market pending the results of the hearing. There can be
no assurance that the Nasdaq Panel will grant our request for continued listing.

11
12

If DXP's common stock is delisted from the Nasdaq SmallCap Market, we
expect our common stock will be available for quotation on the OTC Bulletin
Board electronic quotation system, and shareholders will be able to access
current trading information, including the last trade, bid and ask quotations,
and share volume.

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 existing
product lines and adding new product lines. Our ability to implement this
strategy will depend on our success in acquiring and integrating new product
lines and marketing integrated 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, improve our business to business
e-commerce capability through outsourcing our website 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 us. 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
outstanding $2.0 million balance of the associated subordinated note payable. 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 with an
outstanding balance of $4.1 million at March 31, 2001. However, we have entered
into a forbearance agreement with our bank lender whereby the bank lender agreed
to forebear taking any action on defaults under the secured line of credit. The
bank lender can terminate the forbearance agreement at any time. The $4.1
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 March 31, 2001.

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.

12
13

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. See
"Business--Suppliers".

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 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

3.1 -- Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
Commission on August 20, 1998)

3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg.
No. 333-10021), filed with the Commission on August 12, 1996).

10.1 -- April 2001 Amendment to Second Amended and Restated Loan and
Security Agreement and Modification to Other Agreements Dated
April 16, 2001 by and among Sepco Industries, Inc., Bayou Pump,
Inc., American MRO, Inc. and Fleet Capital Corporation

(b) Reports on Form 8-K.

None.

13
14

SIGNATURES

Pursuant to the requirements 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/ MAC McCONNELL
-------------------------------------
Mac McConnell
Senior Vice-President/Finance and
Chief Financial Officer

Dated: May 15, 2001

14
15
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-61953), filed with Commission on
August 20, 1998)

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-10021), filed with
the Commission on August 12, 1996).

10.1 -- April 2001 Amendment to Second Amended and Restated Loan and
Security Agreement and Modification to Other Agreements Dated
April 16, 2001 by and among Sepco Industries, Inc., Bayou Pump,Inc.,
American MRO, Inc. and Fleet Capital Corporation