INNOVATIVE VALVE TECHNOLOGIES INC, S-4/A, 1998-04-22

INNOVATIVE VALVE TECHNOLOGIES INC
S-4/A, 1998-04-22
MISCELLANEOUS REPAIR SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1998
REGISTRATION NO. 333-49283

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1
TO

FORM S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

INNOVATIVE VALVE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 5085, 7699 76-0530346
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NUMBER)
</TABLE>

2 NORTHPOINT DRIVE, SUITE 300
HOUSTON, TEXAS 77060
(281) 925-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INNOVATIVE VALVE TECHNOLOGIES, INC.
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

COPY TO:

JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
3000 ONE SHELL PLAZA
910 LOUISIANA
HOUSTON, TEXAS 77002-4995
(713) 229-1234

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: From time to time after the Registration Statement becomes effective.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

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

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

================================================================================
<PAGE>

SUBJECT TO COMPLETION DATED APRIL __, 1998

PROSPECTUS

[INVATEC LOGO]

COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
------------------
Innovative Valve Technologies, Inc. ("Invatec" and, collectively with its
subsidiaries, the "Company") may offer and issue the 5,000,000 shares of its
common stock, $.001 par value per share (the "Common Stock"), and $50,000,000
aggregate principal amount of convertible subordinated debt securities (the
"Convertible Debt Securities") covered by this Prospectus in business
combination transactions (each, an "Acquisition") involving its acquisition,
directly or indirectly, of businesses or other operating assets. Invatec
anticipates these Acquisitions will consist principally of businesses that
provide maintenance, repair, replacement and value-added distribution services
for industrial valves, piping systems and other process-system components used
in petrochemical and other chemical plants, petroleum refineries, pulp and paper
mills, electric and other utilities and other industrial process facilities.
Invatec expects that (i) it will determine the terms of these Acquisitions by
direct negotiations with the owners or controlling persons of the businesses or
assets to be acquired, (ii) the shares of Common Stock issued will be valued at
prices reasonably related to market prices prevailing either at the time an
acquisition agreement is executed or at or about the time of delivery of the
shares and (iii) the Convertible Debt Securities issued will be valued at prices
reasonably related to their principal amount. It does not expect to pay any
underwriting discounts or commissions, but may pay finder's fees from time to
time with respect to specific Acquisitions. Any person receiving any such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). Invatec will pay all expenses of this
offering.

The Convertible Debt Securities will be convertible into Common Stock at
any time on or after their Convertibility Commencement Date (as defined herein)
and at or before maturity, unless previously redeemed, at their Initial
Conversion Price (as defined herein) as the applicable prospectus supplement or
supplements (each, a "Prospectus Supplement") and pricing supplement or
supplements (each, a "Pricing Supplement") hereto will specify, subject to
adjustment in certain events.

The Convertible Debt Securities will be (i) unsecured obligations of
Invatec, (ii) subordinate to all present and future Senior Indebtedness (as
defined in the Indenture described herein or any applicable supplement to that
Indenture or Prospectus Supplement relating to one or more series of Convertible
Debt Securities) of Invatec and (iii) effectively subordinated to all
indebtedness and other liabilities of subsidiaries of Invatec.

As of April 1, 1998, 8,698,026 shares of Common Stock were issued and
outstanding. The Common Stock is quoted on the Nasdaq National Market under the
symbol "IVTC." On April 1, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $18.25 per share.

Invatec may require persons receiving shares of the Common Stock or any
Convertible Debt Securities offered hereby to hold some portions of those shares
or securities for periods of up to two years. In addition, pursuant to the
provisions of Rule 145 under the Securities Act, the volume limitations and
certain other requirements of Rule 144 under the Securities Act will apply to
resales of those shares of Common Stock or Convertible Debt Securities by
affiliates of the businesses the Company acquires for a period of one year from
the date of acquisition of shares of Common Stock or Convertible Debt
Securities, as applicable (or such shorter period as the Securities and Exchange
Commission (the "SEC") may prescribe).

SEE "RISK FACTORS" AND "FACTORS THAT MAY AFFECT FUTURE RESULTS" ON
PAGES 5 AND 26 OF THIS PROSPECTUS FOR DISCUSSIONS OF CERTAIN RISK AND OTHER
FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE SECURITIES OFFERED
HEREBY.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

The date of this Prospectus is April , 1998.

<PAGE>
PROSPECTUS SUMMARY

THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS QUALIFY THE FOLLOWING SUMMARY IN
ITS ENTIRETY. UNLESS THE CONTEXT OTHERWISE INDICATES, (i) INFORMATION HEREIN
RESPECTING THE COMPANY'S OPERATIONS GIVES EFFECT TO THE COMPANY'S ACQUISITIONS
COMPLETED THROUGH APRIL 1, 1998 AND (ii) REFERENCES HEREIN TO (a) "INVATEC"
MEAN INNOVATIVE VALVE TECHNOLOGIES, INC. AND (b) THE "COMPANY" MEAN INVATEC
AND ITS SUBSIDIARIES.

THE COMPANY

Invatec was formed in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves, piping systems and other
process-system components (collectively, "repair and distribution services")
throughout North America. To achieve this goal, Invatec has embarked on an
aggressive acquisition program and is implementing a national operating strategy
it has designed to enhance internal growth, market share and profitability.

On October 28, 1997, Invatec (i) closed its initial public offering (the
"IPO") of its Common Stock and (ii) consolidated seven established businesses
(the "Initial Acquired Businesses") providing various repair and distribution
services by means of two purchase transactions and a merger (the "SSI Merger")
in which its affiliate, The Safe Seal Company, Inc. ("SSI"), became its
subsidiary. Prior to those transactions, SSI had purchased three Initial
Acquired Businesses in the first half of 1997 and Invatec had purchased one
Initial Acquired Business in July 1997, but otherwise had not conducted any
operations of its own.

A holding company, Invatec conducts its business through its operating
subsidiaries.

Since October 1997 and through April 1, 1998, Invatec purchased seven
additional repair and distribution services businesses (the "Additional
Acquired Businesses" and, together with the Initial Acquired Businesses, the
"Acquired Businesses"). For the year ended December 31, 1997, the Company's
unaudited pro forma combined revenues were as follows (in thousands):

1997
----------
Initial Acquired Businesses............. $ 90,901
Additional Acquired Businesses.......... 71,358
----------
Total Company........................... $ 162,259
==========

The Acquired Businesses have been in business an average of 32 years, and
the Company currently has 52 operating locations in the United States, one in
Canada, two in Europe and one in the Middle East. Its principal executive
offices are located at 2 Northpoint Drive, Suite 300, Houston, Texas 77060, and
its telephone number at that address is (281) 925-0300. Invatec is a Delaware
corporation.

BUSINESS STRATEGIES

To enhance its market position as a leading national provider of repair and
distribution services, the Company is emphasizing growth through acquisitions of
additional repair and distribution services businesses and is implementing a
national operating strategy aimed at increasing internal growth and market share
and enhancing profitability. These growth strategies focus on capitalizing on
certain trends in the Company's targeted industries, including increased
outsourcing, increased focus on reducing economic losses attributable to leaking
valves and increasingly more stringent regulatory requirements applicable to
process-system facilities.

ACQUISITION STRATEGY. The Company has implemented an aggressive
acquisition program to expand into additional markets and enhance its position
in existing markets. Given the large size and fragmentation of the repair and
distribution services industry, the Company believes there are numerous
potential acquisition candidates in both the markets the Company currently
serves and new markets.

2
<PAGE>
The Company seeks to acquire well established repair and distribution
services companies in significant centers of its targeted process industries in
North American markets. It also intends to make tuck-in acquisitions that
provide access to additional customers, specialized services, new products or
other strategic synergies. The Company evaluates the extent to which its
acquisition candidates demonstrate the potential for substantial revenue and
earnings growth when combined with the Company's existing operations. An
important criterion for the Company's acquisition candidates (particularly
candidates in new markets) is high-quality operating management and the desire
of those persons to remain in place and continue running the acquired operations
for an extended period of time. The Company maintains a stock-based compensation
program designed to help the Company retain its operating management personnel,
develop a sense of proprietorship of those persons in the Company and align the
interests of those persons with those of the Company's stockholders generally.

The Company believes it is well positioned to implement its acquisition
strategy because of: (i) its decentralized operating strategy; (ii) its
visibility and access to financial resources as a public company; and (iii) its
ability to provide acquired businesses and their owners with both liquidity and
the opportunity to participate in the Company's growth and expansion. The
Company cannot, however, predict the timing or success of, or the potential
capital commitments associated with, its acquisition program. The Company's
acquisition strategy presents risks that, singly or in any combination, could
have a material adverse effect on its business and financial performance, and
the success of that strategy depends on the extent to which the Company is able
to acquire, successfully integrate and profitably manage additional businesses.

NATIONAL OPERATING STRATEGY. The principal elements of the Company's
national operating strategy are: (i) cross-selling repair and distribution
services; (ii) capitalizing on the Company's geographic diversity to develop
national and regional customer and OEM relationships; (iii) achieving cost
efficiencies and standardizing and implementing "best practices;" and (iv)
increasing internal growth through the roll-out of the Company's proprietary
SafeSeal on-line valve repair system.

RISK FACTORS

The securities offered hereby involve a high degree of risk. See "Risk
Factors" and "Factors That May Affect Future Results."

3
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following summary unaudited pro forma combined statement of operations
derives from the Unaudited Pro Forma Combined Financial Statements of the
Company elsewhere herein and gives effect to various events and transactions,
including the acquisitions of all the Acquired Businesses, the SSI Merger and
the IPO, as if they had occurred on January 1, 1997. See the Unaudited Pro Forma
Combined Financial Statements and the notes thereto elsewhere herein. The
following summary balance sheet information presents (i) historical information
from the Company's audited consolidated balance sheet elsewhere herein and (ii)
that information as adjusted on a pro forma combined basis to give effect to the
Company's purchase of Acquired Businesses in 1998 (through April 1), as if they
had occurred on December 31, 1997.

YEAR ENDED
DECEMBER 31,
1997
------------
STATEMENT OF OPERATIONS INFORMATION
(PRO FORMA COMBINED(1)):
Revenues........................ $162,259
Gross profit.................... 51,882
Selling, general and
administrative expenses........ 40,624
Goodwill amortization(2)........ 1,896
Income from operations.......... 9,362
Interest expense, net........... (3,631)
Other income (expense), net..... 155
Income from continuing
operations..................... $ 3,355
============
Income per share from continuing
operations -- Basic............ $ 0.39
============
Income per share from continuing
operations -- Diluted.......... $ 0.38
============
Shares used in computing pro
forma income per share from
continuing
operations -- Basic........... 8,697(2)
============
Shares used in computing pro
forma income per share from
continuing
operations -- Diluted......... 8,849(2)
============

DECEMBER 31, 1997
-----------------------
PRO FORMA
HISTORICAL COMBINED
---------- ---------
BALANCE SHEET INFORMATION:
Working capital................. $ 21,231 $ 24,793
Total assets.................... 105,432 151,050
Total debt, including current
portion........................ 29,527 56,151
Stockholders' equity............ 59,869 73,097

- ------------
(1) See Note 1 of the Notes to Unaudited Pro Forma Combined Financial Statements
of the Company on page F-6 for information respecting the events and
transactions the pro forma combined information assumes occurred on January
1, 1997 and the other pro forma adjustments the pro forma information also
reflects. This pro forma information (i) is not necessarily indicative of
the results the Company would have obtained had those events and
transactions actually occurred when assumed or of the Company's future
results and (ii) is based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate.

(2) Computed as described in Note 4 of the Notes to Unaudited Pro Forma Combined
Financial Statements.

<PAGE>
RISK FACTORS

PROSPECTIVE INVESTORS IN THE SECURITIES OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS, THE FACTORS DESCRIBED UNDER "FACTORS THAT MAY
AFFECT FUTURE RESULTS" AND THE OTHER INFORMATION THIS PROSPECTUS CONTAINS. THIS
PROSPECTUS CONTAINS STATEMENTS OF MANAGEMENT'S PLANS AND OBJECTIVES AND OTHER
"FORWARD-LOOKING STATEMENTS" THAT INVOLVE A NUMBER OF RISKS, UNCERTAINTIES AND
ASSUMPTIONS. NO ASSURANCE CAN BE GIVEN THAT ACTUAL RESULTS WILL NOT DIFFER
MATERIALLY FROM THESE STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THE
FOLLOWING:

INTRODUCTION

On October 28, 1997, Invatec (i) closed its initial public offering (the
"IPO") of its common stock (the "Common Stock") and (ii) consolidated seven
established businesses (the "Initial Acquired Businesses") providing various
maintenance, repair, replacement and value-added distribution services for
industrial valves, piping systems and other process-system components
(collectively, "repair and distribution services") by means of two purchase
transactions and a merger in which its affiliate, The Safe Seal Company, Inc.
("SSI") became its subsidiary. Prior to those transactions, SSI had purchased
three Initial Acquired Businesses in the first half of 1997 and Invatec had
purchased one Initial Acquired Business in July 1997, but otherwise had not
conducted any operations of its own since its formation in March 1997.

HISTORY OF LOSSES

The Company's financial statements in this Prospectus present SSI as the
"accounting acquirer" in the acquisitions of the other Initial Acquired
Businesses. In 1995 and 1996, SSI incurred historical net losses of $1,505,000
and $415,000, respectively, while the Company incurred an historical net loss of
$7,500,000 during 1997. The loss Invatec incurred in 1997 reflects special
non-cash, non-recurring compensation expenses totaling $7,613,000, but no
assurance can be given the Company will not continue to incur losses in 1998 and
future periods.

LIMITED COMBINED OPERATING HISTORY

Because the Company is consolidating the operations of the Acquired
Businesses and recording their acquisitions in accordance with the purchase
method of accounting, the pro forma information herein may not be indicative of
the Company's future operating results and financial condition. The success of
the Company will depend, in part, on the extent to which the Company is able to
integrate the Acquired Businesses and such additional businesses as it may
hereafter acquire into a cohesive, efficient enterprise. The Company's executive
officers have only limited experience working together, and no assurance can be
given they will be able to manage the Company effectively or successfully
execute the Company's acquisition and operating strategies.

CONCENTRATION OF OWNERSHIP

At April 1, 1998, subsidiaries of Philip Services Corp. (collectively with
its subsidiaries, "Philip") owned approximately 26.9% of the outstanding
Common Stock.

SUBORDINATION OF CONVERTIBLE DEBT SECURITIES; HOLDING COMPANY STRUCTURE

The Convertible Debt Securities will be subordinate in right of payment to
all current and future Senior Indebtedness of Invatec. Senior Indebtedness
includes all indebtedness (whether secured or unsecured) borrowed under the
Company's $60.0 million revolving credit facility (the "Credit Facility") or
successor credit facilities and substantially all other indebtedness of Invatec,
whether existing on or created or incurred after the date the Convertible Debt
Securities are issued, that is not made subordinate to or PARI PASSU with the
Convertible Debt Securities by the instrument creating the indebtedness. As of
April 1, 1998, the aggregate amount of Senior Indebtedness to which the
Convertible Debt Securities would have been subordinated was approximately $50.1
million consisting of secured indebtedness outstanding under the Credit
Facility. The Indenture under which Invatec will issue the Convertible Debt
Securities does not limit the amount of additional indebtedness, including
Senior Indebtedness, which Invatec can create, incur,

5
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assume or guarantee. By reason of the subordination of the Convertible Debt
Securities, if any insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of Invatec occurs, the assets of
Invatec will be available to pay the amounts due on the Convertible Debt
Securities only after all Senior Indebtedness has been paid in full.

Invatec, as a holding company whose principal assets are the shares of
capital stock of its subsidiaries, does not generate any operating revenues of
its own. Consequently, it depends on dividends, advances and payments from its
subsidiaries to fund its activities and meet its cash needs, including its debt
service requirements. The subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Convertible Debt Securities or to make funds available therefore. Their
ability to pay dividends or make other payments or advances to Invatec will
depend on their operating results and will be subject to various business
considerations and to applicable state laws. In addition, holders of the
Convertible Debt Securities are effectively subordinated to the claims of
creditors of Invatec's subsidiaries to the extent of the assets of such
subsidiaries. If any insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of any subsidiary of Invatec occurs,
creditors of that subsidiary generally will have the right to be paid in full
before any distribution is made to Invatec or the holders of the Convertible
Debt Securities. See "Description of the Convertible Debt Securities."

Substantially all the subsidiaries of Invatec have guaranteed the payment
of its obligations under the Credit Facility, and the stock of those
subsidiaries has been pledged by Invatec or their immediate parent corporations
as collateral securing those obligations.

LIMITATIONS ON REPURCHASE IF A REPURCHASE EVENTS OCCURS

If a Repurchase Event, which consists of either a Change in Control or a
Termination of Trading (each as defined herein), occurs, each holder of
Convertible Debt Securities will have the right, at its option, to require
Invatec to repurchase all or a portion of its Convertible Debt Securities at a
purchase price equal to 100% of the principal amount thereof plus accrued
interest to the repurchase date. Invatec's ability to repurchase Convertible
Debt Securities following a Repurchase Event (i) may be limited by the terms of
the Senior Indebtedness and the subordination provisions applicable to the
Convertible Debt Securities and (ii) will depend on the availability of
sufficient funds and compliance with applicable securities laws. Accordingly, no
assurance can be given Invatec will repurchase Convertible Debt Securities
following a Repurchase Event. The term "Repurchase Event" is limited to
certain specified transactions and may not include other events, such as a
highly leveraged business combination or reorganization not involving a
Repurchase Event, that might adversely affect the financial condition of Invatec
or result in a downgrade of the credit rating (if any) of the Convertible Debt
Securities. See "Description of the Convertible Debt Securities."

ABSENCE OF MARKET FOR THE CONVERTIBLE SUBORDINATED DEBT SECURITIES

No market currently exists for the Convertible Debt Securities, and no
assurance can be given a market for the Convertible Debt Securities will
develop, as to the liquidity or sustainability of any market that may develop or
as to the ability of holders of the Convertible Debt Securities to sell them at
any price. Future trading prices of the Convertible Debt Securities will depend
on many factors, including, among others, prevailing interest rates, Invatec's
operating results, the price of the Common Stock and the market for similar
securities.

POSSIBLE VOLATILITY OF COMMON STOCK PRICE

The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock markets experience significant price and volume
volatility from time to time, which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.

6
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

At April 1, 1998, 8,698,026 shares of Common Stock were outstanding
(without giving effect to the potential conversion of convertible subordinated
notes issued in the acquisitions of certain Acquired Businesses (the
"Convertible Notes") into up to 668,959 shares of Common Stock). The 3,852,500
shares sold in the IPO are freely tradable. The remaining shares outstanding may
be resold publicly only following their effective registration under the
Securities Act, or pursuant to an available exemption from the registration
requirements of the Securities Act, such as provided by Securities Act Rule 144.
Under Rule 144, substantially all those shares will be eligible for Rule 144
sales, subject to certain volume limitations and other requirements, after
October 28, 1998. In addition, the holders of a substantial number of those
remaining shares have certain rights to cause the shares of Common Stock held by
or issuable to them to be registered in connection with certain future offerings
pursuant to a registration statement Invatec files with the Securities and
Exchange Commission (the "SEC").

Invatec has filed a registration statement on Form S-8 to register the
shares reserved or to be available for issuance pursuant to its 1997 Incentive
Plan. The shares registered thereby generally will become available for sale in
the open market by holders who are not affiliates of the Company and, subject to
the volume and other limitations of Rule 144, by holders who are affiliates of
the Company.

For information respecting restrictions on sales by Invatec, Philip,
Invatec's management and others, see "Shares Eligible for Future Sale."

Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the securities this
Prospectus covers by affiliates of the businesses the Company acquires for a
period of one year from the date of their acquisition (or such shorter period as
the SEC may prescribe), but otherwise these securities will be freely tradable
by persons not affiliated with Invatec unless Invatec restricts their resale by
contract.

The availability for sale, or sale, of the shares of Common Stock eligible
for future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."

POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK

Invatec's Certificate of Incorporation (the "Charter") authorizes Invatec
to issue, without stockholder approval, one or more classes or series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions) as the Board of Directors of Invatec may
determine. The terms of one or more classes or series of preferred stock could
adversely impact the rights of holders of shares of Common Stock or could have
anti-takeover effects. See " -- Potential Anti-takeover Effects" and
"Description of Capital Stock."

POTENTIAL ANTI-TAKEOVER EFFECTS

Invatec has adopted a stockholder rights plan. This plan and provisions of
the Charter, Invatec's Bylaws and a Delaware General Corporation Law (the
"DGCL") provision may delay, discourage, inhibit, prevent or render more
difficult an attempt to obtain control of Invatec, whether by means of a tender
offer, business combination, proxy contest or otherwise. The provisions include
the authorization of "blank check" preferred stock, classification of the
Board of Directors, a prohibition of stockholder action by less than unanimous
written consent and DGCL restrictions on business combinations with certain
interested parties. See "Description of Capital Stock."

OTHER FACTORS

For information respecting Invatec's dependence on acquisitions for growth,
capital requirements, reliance on customers in historically cyclical industries,
dependence on key personnel and manufacturers, certain factors that may affect
internal growth and the possible effects of operating hazards, competition, and
governmental regulation on future results, see "Factors That May Affect Future
Results."

7
<PAGE>
THE COMPANY

INVATEC

THE ACQUIRED BUSINESSES

INITIAL ACQUIRED BUSINESSES. Concurrently with the closing of the IPO,
Invatec consolidated the seven Initial Acquired Businesses. The Initial Acquired
Businesses are, in addition to SSI, Harley Industries, Inc. ("Harley"), Steam
Supply & Rubber Co., Inc. and three related entities (collectively, "Steam
Supply"), Industrial Controls & Equipment, Inc. and three related entities
(collectively, "ICE/VARCO"), GSV, Inc. ("GSV"), Plant Specialties, Inc.
("Plant Specialties"), and Southern Valve Service, Inc. (collectively with a
related entity, "SVS").

The Initial Acquired Businesses provide various repair and distribution
services from locations in 17 states and Canada to power and other utilities,
petroleum refineries, petrochemical and other chemical plants, pulp and paper
mills and other process industries. With the exception of SSI's on-line leak
sealing and valve-packing restoration services, on-site and in-shop off-line
repair services historically constituted substantially all the repair services
the Initial Acquired Businesses performed.

ADDITIONAL ACQUIRED BUSINESSES. Since the IPO and through April 1, 1998,
the Company purchased seven Additional Acquired Businesses. See Notes 2, 3, and
18 of the Notes to Consolidated Financial Statements of the Company. As a result
of these acquisitions, the Company has expanded its business to include on-line
hot tapping and line stopping services both in the United States and abroad,
repair and replacement of steam turbines and other repair services.

8
<PAGE>
PRICE RANGE OF COMMON STOCK

Since October 1997, the Common Stock has been quoted on the Nasdaq National
Market under the symbol "IVTC." As of April 1, 1998, 8,698,026 shares of
Common Stock were outstanding, and held by approximately 66 stockholders of
record. The number of record holders does not bear any relationship to the
number of beneficial owners of the Common Stock.

The following table sets forth the range of high and low closing prices for
the Common Stock on the Nasdaq National Market for the periods indicated:

HIGH LOW
--------- ---------
1997:
4th quarter (October 23 to
December 31).................... $ 20.25 $ 15.75
1998:
1st quarter (January 1 to
March 31)....................... $ 20.13 $ 15.50

The last reported closing price of the Common Stock on the Nasdaq National
Market on April 1, 1998 was $18.25 per share.

DIVIDEND POLICY

Invatec has not paid or declared any dividends since its formation and
currently intends to retain earnings to finance the expansion of its business.
Any future dividends will be at the discretion of the Board of Directors after
taking into account various factors deemed relevant by the Board of Directors,
including the Company's financial condition and performance, cash needs and
expansion plans, income tax consequences and the restrictions Delaware and other
applicable laws and its credit facilities then impose. The Credit Facility
prohibits the payment of dividends. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 7 of the Notes to Consolidated Financial Statements of the
Company.

9
<PAGE>
CAPITALIZATION

The following table sets forth the short-term and current maturities of
long-term obligations and capitalization as of December 31, 1997 of the Company
on a pro forma combined basis after giving effect to the acquisition of the
Acquired Businesses Invatec purchased in 1998 (through April 1). See Unaudited
Pro Forma Combined Financial Statements and the Notes thereto included herein.

DECEMBER 31, 1997
-------------------------
PRO FORMA
HISTORICAL COMBINED
---------- ----------
Short-term debt and current
maturities of long-term
obligations........................ $ 4,965 $ 4,965
========== ==========
Long-term debt, less current
maturities......................... 319 319
Credit Facility(2)................... 11,750 37,950
Convertible subordinated debt........ 12,493 12,917
Other long-term obligations.......... 1,125 1,125
Stockholders' equity:
Preferred Stock: $0.001 par
value, 5,000,000 shares
authorized; none issued or
outstanding.................... -- --
Common Stock; $0.001 par value,
30,000,000 shares authorized;
7,890,198 shares issued and
outstanding; and 8,698,026
shares issued and outstanding,
pro forma(1)................... 8 9
Additional paid-in capital...... 70,212 83,439
Retained deficit................ (10,351) (10,351)
---------- ----------
Total stockholders'
equity.................. 59,869 73,097
---------- ----------
Total
capitalization..... $ 85,556 $125,408
========== ==========
- ------------
(1) Excludes (i) an aggregate of 668,959 shares of Common Stock issuable on the
conversion of convertible subordinated debt securities that are convertible
at initial conversion prices ranging from $16.90 to $22.52 (ii) and an
aggregate of 1,395,748 shares of Common Stock subject to stock options that
were outstanding at December 31, 1997.

(2) Net borrowings under the Credit Facility at April 1, 1998 were $50.1
million.

10
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)

For financial reporting purposes, SSI is the acquirer in all the
acquisitions by Invatec prior to October 31, 1997. Consequently, the Company's
historical financial statements for periods ended on or before October 31, 1997
are the consolidated historical financial statements of SSI. As used in this
discussion, the "Company" means (i) SSI and its consolidated subsidiaries
prior to October 31, 1997 and (ii) Invatec and its consolidated subsidiaries on
that date and thereafter. The following selected historical financial
information derives from the Company's audited consolidated financial statements
in this Prospectus for each year in the three-year period ended December 31,
1997. The remaining selected historical financial information of the Company
derives from unaudited financial statements of the Company, which the Company
has prepared on the same basis as the audited financial statements. The
following selected unaudited pro forma combined statement of operations derives
from the Company's Unaudited Pro Forma Combined Financial Statements in this
Prospectus and gives effect to various events and transactions, including the
acquisitions of the Acquired Businesses, the SSI Merger and the IPO, as if they
had occurred on January 1, 1997. See the Unaudited Pro Forma Combined Financial
Statements and the notes thereto elsewhere herein. The following selected
balance sheet information presents (i) historical balance sheet information from
the Company's audited consolidated balance sheet and (ii) that information, on a
pro forma combined basis, to give effect to the Company's purchases of Acquired
Businesses in 1998 (through April 1) as if they had occurred on December 31,
1997. The summary financial information below should be read in conjunction with
the historical and unaudited pro forma financial statements and notes thereto
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1993 1994 1995 1996 1997(1)
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS
INFORMATION:
Revenues......................... $ 1,787 $ 2,547 $ 2,852 $ 3,888 $58,621
Gross profit..................... 959 1,276 1,268 1,512 18,800
Selling, general and
administrative expense......... 1,221 1,268 1,853 1,917 16,805
Special compensation
expense(1)..................... -- -- -- 38 7,614
Income (loss) from operations.... (262) 8 (585) (443) (5,619)
Interest income (expense), net... (1) (7) 10 28 (2,901)
Other income (expense), net...... -- (282) (930) -- (3)
Loss before income taxes......... (263) (281) (1,505) (415) (8,523)
Net loss......................... $ (263) $ (281) $ (1,505) $ (415) $(7,500)
Ratio of earnings to fixed
charges(4)..................... N/A N/A N/A N/A N/A
========= ========= ========= ========= =======
</TABLE>

YEAR ENDED
DECEMBER 31, 1997
-----------------
PRO FORMA COMBINED STATEMENT OF
OPERATIONS INFORMATION(2):
Revenue.......................... $ 162,259
Gross Profit..................... 51,882
Selling, general and
administrative expenses......... 40,624
Goodwill amortization............ 1,896
Income from operations........... 9,362
Interest expense, net............ (3,631)
Other income (expense), net...... 155
Income from continuing
operations...................... $ (3,355)
Income per share from continuing
operations -- Basic............. $ 0.39
========
Income per share from continuing
operations -- Diluted........... $ 0.38
========
Shares used in computing pro
forma income per share from
continuing
operations -- Basic............. 8,697(3)
========
Shares used In computing pro
forma income per share from
continuing
operations -- Diluted........... 8,849(3)
========
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------
PRO FORMA
1993 1994 1995 1996 1997 COMBINED(2)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital (deficit)........ $ 163 $ (202) $ 823 $ (13) $ 21,232 $ 24,793
Total assets..................... 623 668 23,109 2,228 105,432 151,050
Total debt, including current
portion........................ 25 93 -- 589 29,527 56,151
Stockholders' equity (deficit)... 44 (75) (1,075) (1,394) 59,869 73,097
</TABLE>

(FOOTNOTES ON FOLLOWING PAGE)

11
<PAGE>
- ------------
(1) Non-cash, non-recurring special compensation expenses of $7.6 million
attributable to certain awards of stock, stock options and certain stock
sales and financing fees of $1.0 million (included in interest expense)
related to guarantees by Philip. See Note 2 of the Notes to Consolidated
Financial Statements of the Company.

(2) See Note 1 of the Notes to Unaudited Pro Forma Combined Financial Statements
of the Company on page F-6 for information respecting the events and
transactions the pro forma combined information assumes occurred on January
1, 1997 and the other pro forma adjustments the pro forma information also
reflects. This pro forma information (i) is not necessarily indicative of
the results the Company would have obtained had those events and
transactions actually occurred when assumed or of the Company's future
results and (ii) is based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate.

(3) Computed as described in Note 3 of the Notes to Unaudited Pro Forma Combined
Financial Statements.

(4) For purposes of calculating this ratio, "earnings" consist of earnings
before fixed charges and income tax, while "fixed charges" consist of
interest expense and one-third of rental expense, which the Company
estimates to be representative of the interest factor therein. As a result
of historical operating losses in the years ended December 31, 1993, 1994,
1995, 1996 and 1997, historical earnings did not cover fixed charges for
those years by $263,000, $293,000, $1,546,000, $607,000 and $8,680,000
respectively.

12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Financial Information"
included elsewhere in this Prospectus. Statements herein regarding future
financial or operational performance and results of the Company or other similar
matters that are not historical facts constitute forward-looking statements and
are subject to numerous risks and uncertainties, including those discussed in
"Factors That May Affect Future Results" herein.

OVERVIEW

The Company derives its revenues principally from (i) its sales of
industrial valves and other process-system components to its process-industry
customers and its commissions manufacturers of these products pay in connection
with their direct sales of their products and (ii) performance of comprehensive,
maintenance, repair, replacement and value-added distribution services of
industrial valves and process-system components for these customers. Cost of
operations consists principally of direct costs of valves and components sold,
coupled with labor and overhead costs connected with the performance of repair
services. Selling, general and administrative expenses consist principally of
compensation and benefits payable to owners and to sales, management and
administrative personnel and insurance, depreciation and amortization and other
related expenses.

Invatec is in the process of integrating the Acquired Businesses and their
operations and administrative functions. This process may present opportunities
to reduce costs through eliminating duplicative functions and operating
locations and developing economies of scale, particularly as a result of the
Company's ability to (i) consolidate insurance programs, (ii) borrow at lower
interest rates than the Acquired Businesses, (iii) obtain greater discounts from
suppliers and (iv) generate savings in other general and administrative areas.
The Company cannot currently quantify these anticipated savings and expects
these savings will be partially offset by incremental costs that the Company
expects to incur, but also cannot currently quantify accurately. These costs
include those associated with corporate management and administration, being a
public company, systems integration and facilities expansions and
consolidations. The expected savings and incremental costs may render historical
operating results not comparable to, or indicative of, future performance.

The Company's financial statements present SSI as the "accounting
acquirer" in the acquisitions Invatec effected through October 31, 1997.
Consequently, the Company's historical financial statements for periods ended on
or before that date are SSI's historical consolidated financial statements, and
in this discussion the term "Company" means (i) SSI and its consolidated
subsidiaries prior to that date and (ii) Invatec and its consolidated
subsidiaries on that date and thereafter.

RESULTS OF OPERATIONS

The following table sets forth selected financial information of the
Company and that information as a percentage of the Company's revenues for the
years indicated (dollars in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 2,852 100% $ 3,888 100% $ 58,621 100%
Cost of operations................... 1,584 56 2,376 61 39,821 68
--------- --- --------- --- --------- ---
Gross profit......................... 1,268 44 1,512 39 18,800 32
Selling, general and administrative
expenses........................... 1,853 65 1,917 49 16,805 29
Special compensation expense......... -- -- 38 1 7,614 13
--------- --- --------- --- --------- ---
Loss from operations................. $ (585) (21) $ (443) (11) $ (5,619) (10)
========= === ========= === ========= ===
</TABLE>
13
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES -- Revenues increased $54.7 million, or 1,408%, from $3.9 million
in 1996 to $58.6 million in 1997. This increase resulted from the inclusion of
the results of the Acquired Businesses purchased in 1997 from their respective
dates of acquisition.

GROSS PROFIT -- Gross profit increased $17.3 million, or 1,143%, from $1.5
million in 1996 to $18.8 million in 1997, primarily as a result of the
incremental gross margins generated by the Acquired Businesses Invatec purchased
in 1997. As a percentage of revenues, gross profit decreased from 39% in 1996 to
32% in 1997. This decrease reflects the expansion of the Company's consolidated
operations to include the off-line distribution and related services operations
of the businesses purchased in 1997 which historically have generated lower
gross margins than SSI's gross margins attributable to its on-line repair
services operations.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- This increase primarily
reflects the incremental selling, general and administrative expenses of the
businesses acquired in 1997 and the building of the Company's corporate
management team. As a percentage of revenues, these expenses decreased from 49%
in 1996 to 29% in 1997 as a result of being spread over a larger revenue base
coupled with the implementation of the Company's cost reduction strategies.

SPECIAL COMPENSATION EXPENSE -- Special compensation expense increased $7.6
million, or 19,937%, from $38,000 in 1996 to $7.6 million in 1997. In 1996,
these non-cash expenses related to the issuance by SSI of its common stock and
options to purchase its common stock under employee benefit programs. In 1997,
these non-cash expenses related to an SSI issuance of shares of its common
stock, sales by Invatec of Common Stock and certain options granted by Invatec
to purchase Common Stock. See Note 2 of the Notes to Consolidated Financial
Statements of the Company in this Prospectus.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES -- Revenues increased $1.0 million, or 36%, from $2.9 million in
1995 to $3.9 million in 1996. This increase resulted primarily from SSI
obtaining, in early 1996, sole-source contracts to provide leak sealing and
related services to two significant petrochemical companies located in the
United States Gulf Coast region. An expansion of SSI's sales force during 1996
also contributed to the increase in revenues in fiscal 1996.

GROSS PROFIT -- Gross profit increased $0.2 million, or 19%, from $1.3
million in 1995 to $1.5 million in 1996. As a percentage of revenues, gross
profits decreased from 44% in 1995 to 39% in 1996, principally as a result of:
(i) aggressive pricing offered by SSI to obtain the sole-source contracts
referred to above; (ii) a marginal increase in the cost of certain raw materials
utilized in its leak sealing business; and (iii) increases in staffing levels in
1996 in preparation for higher future levels of business activity.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses remained consistent at $1.9 million in both 1995 and
1996. As a percentage of revenues, these expenses decreased from 65% in 1995 to
49% in 1996 as a result of being spread over a larger revenue base.

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth selected information from the Company's
statements of cash flows (in millions):

YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
Net cash used in operating
activities......................... $ (1.1) $ (0.9) $ (0.3)
Net cash used in investing
activities......................... -- (0.2) (52.6)
Net cash provided by financing
activities......................... 2.5 -- 55.0
--------- --------- ---------
Net change in cash................... $ 1.4 $ (1.1) $ 2.1
========= ========= =========

14
<PAGE>
For the period from January 1, 1995 through December 31, 1997, the
Company's operations used $2.3 million of cash primarily as a result of its
losses in 1995 and 1996 and the 1997 increase in inventory levels required to
support the Company's internal sales growth programs. Cash used in investing
activities of $52.8 million in the same period consisted primarily of $51.6
million used to purchase the Acquired Businesses in 1997. Cash provided from
financing activities in the same period of $57.5 million primarily reflects net
proceeds from the Company's IPO of $44.0 million and net borrowings under credit
facilities of $11.8 million offset by repayments of debt to Philip of $3.0
million.

The Company's Credit Facility is a three-year revolving credit facility of
up to $60.0 million the Company may use for acquisitions and general corporate
purposes. Invatec's present and future subsidiaries will guarantee the repayment
of all amounts due under the facility, and the facility is secured by the
capital stock of those subsidiaries and the Company's accounts receivable and
inventories. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends by Invatec, restricts the ability of the Company to
incur other indebtedness and requires the Company to comply with certain
financial covenants. See Note 7 of the Notes to Consolidated Financial
Statements of the Company. At April 1, 1998, $50.1 million of borrowings was
outstanding under the Credit Facility.

The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment for at
least the next several years.

The Company intends to pursue attractive acquisition opportunities during
the foreseeable future. The timing, size or success of its acquisition efforts
and the associated potential capital commitments are unpredictable. The Company
expects to fund future acquisitions through the issuance of additional equity as
well as through a combination of cash flow from operations, Convertible Debt
Securities and borrowings, including borrowings under the Credit Facility.

FLUCTUATIONS IN OPERATING RESULTS

The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, seasonal fluctuations in the demand for repair
and distribution services (particularly the demand attributable to scheduled
turnarounds in the power industry, which typically are scheduled for
mild-weather months) and competitive factors. Accordingly, quarterly comparisons
of the Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year.

15
<PAGE>
BUSINESS

GENERAL

INDUSTRY BACKGROUND

OVERVIEW. Petrochemical and other chemical plants, petroleum refineries,
pulp and paper mills, electric and other utilities and other industrial process
facilities use industrial valves to direct and regulate the flow of feedstocks,
intermediates, products and fuels in their process piping systems. Industrial
valves, ranging in diameter from less than 1/2" to over 20 feet, serve as
mechanical control, blocking and pressure-relief devices in piping applications
involving a myriad of liquids, gases, dry materials, slurries and other
substances. The service environments for industrial valves range from relatively
benign to severe, and the useful life of an industrial valve can range from
several hours to 30 years or more depending on the severity of its service and
other factors. These factors include the materials comprising the valve, the
quality of its manufacture and the frequency and quality of its repair.
Classified by how they are powered, industrial valves may be divided into two
broad categories: (i) those powered manually ("standard" valves); and (ii)
those operated by actuators using electric, hydraulic or pneumatic power
("actuated" valves). Actuated valves include those originally installed as
such and standard valves that have been upgraded. Valves of both types include
rising stem valves ("RSVs"), such as globe, gate and diaphragm valves, and
pressure safety, relief and safety-relief valves ("PRVs"). Process industries
use PRVs to relieve excess pressure in process equipment, pressure vessels,
boilers and pipelines in order to prevent explosions or other system damage.
PRVs typically are designed to contain pressure up to a predetermined level
(which is individually set for each valve) and then to open and relieve excess
pressure in a controlled manner. Standard PRVs are self-operating and typically
are spring loaded, while actuated PRVs typically are operated by a pilot
controller that actuates the valve.

Process systems consist of discrete units or trains of units which
generally operate continuously under pressure. In many process industries, these
systems handle corrosive substances and are subject to high cycling rates and
extremes of pressure and temperature. Leaks occur as a result, and a principal
source of leaks are valves using rising stems to direct their opening and
closing. Original equipment manufacturers ("OEMs") use various packing
materials to seal the stem area in RSVs, but these seals are vulnerable to the
effects of friction and pressure and, in many cases, normal packing shrinkage
and deterioration.

The process systems in the industries the Company serves generally require
emergency work and comprehensive scheduled periodic off-line repairs (called
"turnarounds"). Emergency work is performed, if practicable, while the
affected unit remains in operation and under pressure. On-line repairs
historically have consisted of sealing leaking pipes and flanges with various
enclosures and clamps and repacking leaking valves as interim measures pending
the next scheduled turnaround. Turnarounds typically involve the shutdown of an
entire process unit or trains of process units to permit the disassembly, repair
and/or replacement and reassembly of component parts (including industrial
valves), a process that can take from a few days to several months.

The Company believes that the repair and distribution services sectors of
its industry represent a current worldwide annual market of approximately $20.6
billion, of which North America accounts for approximately $9.2 billion,
including approximately $3.7 billion attributable to repair services and
approximately $5.5 billion attributable to distribution services.

16
<PAGE>
Manufacturers ("OEMs") of industrial valves generally sell their products
through various independent distribution channels. The Company believes
independent distributors and independent sales representatives selling directly
to small retailers or to end users account for approximately 75% of new
industrial valve sales in the United States, while direct sales by OEMs account
for the balance. The types of distributors include (i) wholesalers selling
commodity-type valves primarily to retailers, (ii) valve and pipefitting
stocking distributors selling standard RSVs and quarter-turn valves, (iii)
speciality flow control distributors selling actuated valves packaged with other
control products as complete systems and (iv) full-line distributors selling all
types of valves and valve-control systems. Value-added distribution services
include the assembly, testing, sealing and certification of PRVs and customizing
original equipment to meet the customer's specifications.

Repair services include "on-line" repairs of valves, piping systems and
other process-system components that continue to operate under pressure while
the repair is made and "off-line" repairs involving the repair of valves and
other process-system components that have been temporarily removed from a
process system. Off-line repairs are made either at the customer's facility (an
"on-site" repair) or in the repair service company's facility (an "in-shop"
repair).

In the United States, end users, distributors and repair companies perform
most repair and distribution services, while OEMs generally offer these services
only on a limited basis. The Company believes, on the basis of available market
data, that (i) the independent repair and distribution services sectors include
approximately 1,200 companies, consisting predominantly of small businesses
operating in single geographic areas in proximity to their customers, and (ii)
most of these companies have limited access to capital for modernization and
expansion and limited exit strategies for their owners. The Company also
believes that, as part of an overall emphasis on reducing operating costs, many
end users are increasing their outsourcing of various non-revenue-producing
activities, such as plant maintenance (including outsourcing of entire valve
maintenance and management programs).

The Company believes significant opportunities are available in the repair
and distribution services sectors of its industry to a well-capitalized national
company employing professionally trained service technicians and machinists and
providing a full complement of on-line, on-site and in-shop repair services. It
also believes the fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing repair and distribution services businesses.

MARKET ENVIRONMENT AND TRENDS. The Company has targeted selected groups of
end users in the following three categories of process industries in the United
States, Canada and Mexico as its initial primary market for expanding its repair
and distribution services: (i) petrochemical and other chemical plants,
petroleum refineries and pulp and paper mills (process manufacturers); (ii)
conventional and nuclear electric power plants and cogenerators and water and
wastewater utilities (utilities); and (iii) crude oil and natural gas producers,
gas processing plants and oil, gas and products pipelines (resource industries).
The Company believes these targeted groups account for substantially all the
approximately 140 million RSVs the Company believes currently are in service in
North America and are heavy users of PRVs and other valves. These groups also
are characterized by severe service applications in their processes which
require valves that can endure corrosive substances, flammable and explosive
materials, high cycling rates and extremes of pressure and temperature. The
Company believes economic conditions (generally and in these targeted groups),
technological developments and health, safety and environmental concerns drive
the markets for repair services and value-added distribution services in these
groups.

The Company's targeted industries use industrial valves currently ranging
in cost from less than $10 to more than $100,000. Historically, the extent to
which general and specific industry economic conditions or forecasts spurred the
construction of new plants or expansions of existing plant capacities has
determined the demand for new industrial valves. The Company believes that (i)
for a number of years, many companies in these industries lengthened the period
of time between turnarounds to minimize the economic costs associated with
turnarounds and delayed construction of new plant facilities and outlays of
capital expenditures for improvements of existing facilities and, as a result,
(ii) they are using a large population of

17
<PAGE>
aged valves which will require increasing levels of repair and replacement. In
recent years, various factors have led companies in these industries to
undertake capital expenditure programs to retool their existing process
operations with new or improved labor-, time- and other cost-reducing devices.
The Company believes this trend has strengthened both the replacement market for
industrial valves and the market for independent, comprehensive repair services.

Because the Company's targeted industries generally manufacture or produce
commodities, they compete generally on the basis of price with each other and,
in many cases, with overseas companies having lower-cost labor pools or raw
material or other competitive advantages. The downward pressure this competition
places on prices has led to the trend in these industries to attempt to achieve
operating efficiencies as a means of preserving or enhancing operating margins
while remaining competitive in their markets. Also contributing to this trend
are various technological developments that enable these industries to reduce
operating costs by modernizing existing process systems and other plant
operations or replacing existing process systems with new, more efficient
systems. For example, some industries have developed new process technologies
requiring equipment to operate under higher pressures and thus entailing the
replacement or pressure-resetting of installed PRVs. Similarly, automation of
valve and other process control devices and computerized information management
systems enable these industries to use a smaller work force to perform essential
non-revenue-producing services, while the emergence of reliable independent
service providers using new technologies in areas such as valve repair service,
inventory management and turnaround planning enables these industries
increasingly to outsource these services, typically at a net savings. The
Company believes that many companies in these industries have eliminated or
severely reduced the size of their own repair crews and engineering staffs. In
addition, in order to reduce the size of their purchasing departments and the
costs of contract administration, these companies are trending towards using
fewer in-house administrators overseeing a reduced number of vendors performing
an increasing amount of services.

The efforts of the Company's targeted industries to reduce their costs have
led OEMs to design and tool for the manufacture of more energy-efficient and
reliable valves. Because valve design and manufacture is capital intensive and
price is a primary competitive factor in the sale of new valves, the Company
believes that valve OEMs are under pressure to reduce their own costs and
increasingly will evaluate the potential cost savings from outsourcing their
assembly, sales and other functions and reducing the number of distributors they
utilize and are required to monitor.

Another factor driving certain of the Company's targeted industries towards
spending for new valves and related products and new valve repair service
technologies is the mandate of the federal Clean Air Act, as amended in 1990,
that various process industries, including most of those the Company serves, use
the maximum achievable control technology ("MACT") available (i) to minimize
the occurrences of fugitive emissions from their process systems of certain
volatile organic compounds or other hazardous air pollutants and (ii) to control
the emissions that do occur. Regulations promulgated by the United States
Environmental Protection Agency currently require the phase-in (first in newly
constructed, reconstructed or modified process systems and then in existing
unmodified systems) of MACT performance standards for all major source
categories of hazardous air pollutants. To achieve compliance with the
applicable performance standards, federal and state regulations require the
process industries covered thereby to establish leak detection and repair
programs incorporating specified protocols.

The Company believes that increasingly stringent federal and state
regulations and performance standards will increase demand for the Company's
products and services. Industries subject to these standards now can monitor
valves to quantify the amount of feedstock, intermediates, products or fuel
which is being lost attributable to leaking valves and quantify the costs
associated with these leaks. The Company believes these industries increasingly
will seek to prevent and remedy leaking valves as efficiently and expeditiously
as possible.

18
<PAGE>
BUSINESS STRATEGIES

The Company seeks to acquire well established repair and distribution
services companies in significant centers of its targeted process industries in
North American markets. It also intends to make tuck-in acquisitions that
provide access to additional customers, specialized services, new products or
other strategic synergies. The Company evaluates the extent to which its
acquisition candidates demonstrate the potential for substantial revenue and
earnings growth when combined with the Company's existing operations. An
important criterion for the Company's acquisition candidates (particularly
candidates in new markets) is high-quality operating management and the desire
of those persons to remain in place and continue running the acquired operations
for an extended period of time. The Company maintains a stock-based compensation
program designed to help the Company retain its operating management personnel,
develop a sense of proprietorship of those persons in the Company and align the
interests of those persons with those of the Company's stockholders generally.

The consideration for each acquisition varies on a case-by-case basis, with
the major factors being historical operating results, the future prospects of
the business to be acquired and the ability of that business to complement the
services offered by the Company. As consideration for acquisitions, the Company
uses various combinations of Common Stock, cash, Convertible Debt Securities,
and promissory notes. The extent to which the Company will be able or willing to
use Common Stock in making future acquisitions will depend on its market value
from time to time and the willingness of potential sellers to accept it as full
or partial payment. The Company may use the Credit Facility for acquisitions. At
April 1, 1998, outstanding borrowings under the Credit Facility totaled $50.1
million. The Company's ability to finance future acquisitions may be limited by
the extent to which it is able to raise capital for financing acquisitions, as
well as to expand existing operations, through equity or debt financings. See
"Factors That May Affect Future Results."

The Company has not acquired and presently does not intend to acquire any
valve manufacturing operations.

19
<PAGE>
of the Company's proprietary SafeSeal on-line valve repair system. See " --
Repair Services," " -- Distribution Services," " -- Operations" and
" -- Sales and Marketing." Various factors may affect the extent to which the
Company is able to implement this strategy successfully. See "Factors That May
Affect Future Results."

REPAIR SERVICES

The Company provides a variety of off-line repair services (including both
on-site and in-shop repair services) and on-line repair services for valves,
piping systems and other process-system components. These services vary by
industry and by process applications within each industry.

OFF-LINE SERVICES. The Company's off-line services include: diagnosis and
testing of valve performance, including nondestructive examination using dye
penetrants and mag-particle testing; repair, rebuilding and replacement of RSVs,
PRVs and other valves; custom-designing, machining and plating of pressure-
sealed gaskets; repair and upgrading of standard valves of various types; repair
and replacement of actuators and positioners used with actuated valves; and
cleaning of valves used in chlorine, oxygen and other service applications;
inspection, repair and replacement of steam turbine components; and
reconditioning and casting babbitted bearings used as linings between stationary
bearings and rotating shafts. Valve repair services include: replacing broken
stems and other components with OEMs' parts or equivalent parts that the Company
machines and fabricates; blasting valve interiors with metal shot to remove
process residue and corroded material; welding overlays to refinish valve seats
and other worn areas; upgrading standard valves with actuators and related
parts; and modifying existing components to meet OEMs' specifications for
repacking with new, pliable packing materials. In some locations, the Company
also reconditions its customers' used valves, and remanufactures used valves
(other than PRVs) it has purchased, typically at scrap metal value, to equal or
exceed the original OEMs' specifications. It typically sells its remanufactured
valves under a one-year warranty at a discount from the price of a comparable
new valve. The Company intends to expand these services throughout its
operations. As part of the repair process, the Company uses high-pressure air,
steam and liquid lines and related instrumentation to test and certify the
performance capabilities of the valves and other equipment it repairs.

An important part of the Company's repair services is providing detailed
documentation of the sources and types of the materials and components used to
make repairs, the repair methods applied, the design specifications adhered to
and test results. Customers can use this information in connection with their
planning for future turnarounds and repairs. In addition, customers subject to
federal and state fugitive emissions control regulations are required to
maintain this information in their corrective action files.

ON-LINE SERVICES. The Company's on-line services include (i) hot tapping
and line stopping services; (ii) using conventional technologies to seal leaking
pipes, flanges and valves as interim measures pending the affected system's next
scheduled shutdown and turnaround and (iii) in the case of RSVs leaking as a
result of the deterioration of their stem-packing materials, using the SafeSeal
system to restore the packing materials generally to their original performance
capabilities.

Hot tapping involves the use of special equipment to cut into a piping
system operating under pressure in order to connect a new pipe or other
process-system component. Line stopping is a means of stopping flow and
providing a shut-off in a piping system where none exists. This service enables
the customer to isolate piping system lines for repairs, alterations or
relocations. The Company provides these services to offshore pipelines as well
as to onshore plants and pipeline systems.

In performing interim on-line repairs, the Company designs line enclosures
and flange clamps to meet customer-specific technical and engineering objectives
and applicable industry and regulatory code requirements.

In SafeSeal valve restorations, the Company uses a valveless injection
fitting and a combination of specialized tools to inject the appropriate pliable
(or "nonhardening") compound into the valve's packing gland. The compound
supplements the existing packing to stop the leak and restore the sealing
capability of the packing. Except in severe operating conditions, a trained
technician using the SafeSealsystem can complete an on-line restoration in less
than one hour. In certain limited cases, two fittings and injections are

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required to seal the leak. The Company believes the SafeSeal system is safer,
more effective and more cost-efficient than conventional on-line valve-repacking
methods.

OPERATING HAZARDS. The Company performs a significant portion of its
repair services in refineries, chemical plants and other industrial facilities
that process, produce, store, transport or handle potentially hazardous
substances, including highly corrosive, flammable or explosive substances kept
at extremes of temperature and pressure. These services are subject to the usual
hazards associated with providing on-site services in these types of facilities.
See "-- Litigation and Insurance" and "Factors That May Affect Future
Results."

DISTRIBUTION SERVICES

The Company currently sells new valves and related instrumentation and
other process-system components directly to its process-industry customers from
a majority of its sales and service locations. In addition to purchasing valves
from OEMs for resale, the Company also acts as a sales representative for a
number of OEMs. In this capacity, it typically promotes the sale and
distribution of the OEMs' products in designated territories for direct factory
shipment to the customer and is compensated by the OEMs on a commission basis.

At each sales location, the Company maintains inventories of valves and
other equipment typically used by the process industries it serves from that
location. Because customers place many of their orders in connection with new
construction or planned turnarounds, the Company often is able to arrange for
just-in-time deliveries of the original equipment required to fill these orders.

The Company's value-added valve distribution services primarily involve the
assembly, setting, testing and sealing of spring-loaded and pilot-operated PRVs
and also include: assembling other original valves with optional components
supplied by the same or different OEMs; customizing the original equipment for
installation in the customer's process unit; combining two or more valves in
configurations designed for specific process applications; and testing and
calibrating, as applicable, individual components and accessories and complete
equipment packages. As a part of its standard quality assurance program, the
Company supplements the positive material identification information OEMs
furnish to trace all materials they use in manufacturing their valves and other
equipment with its own material certifications, testing certificates and
full-assembly and test reports. Compiling this information (i) enables customers
to comply with applicable internal and regulatory recordkeeping requirements and
to demonstrate compliance with applicable industry and regulatory performance
standards, (ii) facilitates the repair or replacement of component parts, and
the reconditioning of entire valve assemblies, to the original design
specifications and (iii) provides the initial step in a predictive valve
maintenance program that uses actual operating histories to plan turnarounds
and, by isolating the reasons for equipment failures, spurs the use of different
or new materials and technologies.

OPERATIONS

The Company operates on a decentralized basis, and the management of each
operating company and each regional operating group is responsible for its
day-to-day operations, growth and profitability. The Company has centralized and
manages its cash management, auditing and internal control, employee benefits,
financing, financial reporting, risk management and business acquisition
activities at its corporate headquarters. It coordinates the sharing among its
operating locations of financial resources for improved systems and expansion of
services, training programs, financial controls, purchasing information and
operating expertise. The Company's executive management team directs the
development of the Company's marketing strategies and programs and is
responsible for key national supplier and customer relationships. The Company
has established standard reporting mechanisms to enhance its ability to monitor
each local or regional operation and assimilate acquired businesses and is
implementing performance-based incentive plans keyed to defined operational and
productivity measurements and benchmarks. The Company periodically reviews the
operations of the Company and other repair and distribution services businesses
in order to identify the "best practices" the Company will implement
throughout its operations. In order to reduce traditional corporate headquarters
expenses (as a percentage of revenues) and increase efficiencies, the Company
outsources various functions, including various personnel management and other
human resource

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services, legal and tax services, risk management and management information
systems design and implementation.

The Company conducts its repair and distribution services operations
through its local sales and service centers. It typically staffs its service
centers with customer service and order entry personnel, repair coordinators and
inventory, shipping and receiving and office personnel. The Company currently
performs in-shop valve and other equipment assembly, testing and certification
at many of its operating facilities. Most of these locations are authorized by
various OEMs as centers for the assembly, sale and repair of their valves and
other products and maintain various professional certifications by organizations
such as the American Society of Mechanical Engineers ("ASME") and the National
Board of Boiler & Professional Vessel Inspectors.

The Company performs most of its on-site repair services on a scheduled
basis in response to the customer's call. The Company also offers 24-hour
emergency on-line and on-site repair services from many of its service
locations.

The Company operates mobile machine shops that allow its technicians to
perform repair and installation functions at the facilities of its customers.
These shops typically are self-contained trucks or trailers the Company equips
with various combinations of lathes, milling machines, grinders, welding
equipment, drill presses, line stop and hot tap fittings and drilling and other
equipment, test stands, work benches and hand tools. The Company maintains its
mobile shops at various locations, and from time to time it will maintain a shop
indefinitely at a customer's facility if the work so warrants.

The Company utilizes its repair and maintenance personnel to remanufacture
valves for sale at times of decreased demand for repair and maintenance
activities. This incremental activity enables the Company to maintain sufficient
staff to meet the high level of activity associated with turnarounds and to
produce a valuable product in times of decreased activity. The Company has no
significant new manufacturing operations.

SALES AND MARKETING

The Company employs a direct sales force to conduct its marketing and sales
activities. Most product and service orders are awarded by plant maintenance
managers to a small number of pre-approved vendors, with little direct bidding
for each job. More recently, plant owners have begun establishing sole-source
relationships with large, well-insured vendors with reputations for efficient
response, safe technicians and comprehensive service. The Company's sales and
marketing efforts typically focus on one-on-one relationships with plant
maintenance managers and turnaround planners and include regular visits to
customer plants to ensure client satisfaction. Initial visits also typically
involve demonstration of the Company's technical abilities at the plant or the
Company's shop facilities. The Company regularly advertises in trade journals,
participates in trade shows and conducts customer appreciation functions. The
Company also has an organized national accounts program that targets large
multi-location industrial customers.

Many of the Company's customers are regional and national companies in the
petroleum refining, chemical and pulp and paper industries and utilities.

For 1997, none of the Company's customers accounted for 10% or more of the
Company's pro forma combined revenues. While the Company is not dependent on any
one customer, the loss of one of its significant customers could, at least on a
short-term basis, have an adverse effect on the Company's results of operations.

The Company generally seeks to enter into national or regional "blanket"
contracts with its large customers. These contracts function to designate the
Company as an approved service provider for a customer and establish certain
standard terms and conditions for providing service to plants or other
facilities owned or operated by that customer. Although these blanket contracts
generally do not establish the Company as an exclusive provider of repair and
distribution services, the Company believes they are an important consideration
for plant managers and other decision makers in the usual process of selecting a
vendor of the services the Company provides.

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SUPPLIERS

VALVES, PARTS AND FITTINGS. The Company purchases substantially all the
new valves and other process-system components it distributes from OEMs. Its
principal suppliers include Crosby Valve & Gauge Co., a unit of FMC Corporation,
and units of Dresser Industries, Inc.

RELATIONSHIPS WITH OEMS. The success of the Company as a value-added
distributor of new valves and other process-system components and as a
factory-authorized repair service provider depends on its relationships with the
OEMs of these products. Except for its distribution agreements with OEMs, the
Company generally has no contractual repair-services contracts with OEMs.

The typical distribution agreement in the Company's industry specifies the
territory or territories in which the distributor has the right and obligation
to sell the OEM's products and the services (sales, assembly or repair) the
distributor is authorized to, or must, perform. An OEM may (i) assign a
territory on an exclusive or a nonexclusive basis, (ii) limit the range of the
OEM's products the distributor may sell or service, (iii) authorize or restrict
sales or services by the distributor outside the assigned territory, (iv) refuse
to assign the distributor additional territories and (v) reserve to itself the
right to deal exclusively with specified customers or classes of customers (for
example, national accounts or engineering and construction companies) in the
assigned territory. The Company believes the current fragmentation of the
distribution sector of its industry reflects the traditional assignment by OEMs
of territories on generally a local basis to distributors operating from a
single facility.

The typical distribution agreement may limit the distributor's role to that
of sales representative acting on a commission basis or provide for purchases by
the distributor for resales to end users. It also may impose requirements on the
distributor concerning such matters as (i) minimum individual or annual purchase
orders, (ii) maintenance of minimum inventories, (iii) establishment and
maintenance of facilities and equipment to perform specified services and (iv)
training of sales personnel and service technicians. Many OEMs closely monitor
compliance with these requirements. The distribution agreement also typically
(i) grants the distributor the nonexclusive right to use and display the OEM's
trademarks and service marks in the form and manner approved by the OEM and (ii)
prohibits the distributor from offering products that compete with the OEM's
products the distributor is authorized to sell.

The Company's distribution agreements generally have indefinite terms and
are subject to termination by either party on prior notice generally ranging
from 30 to 90 days.

The Company's business strategy could conflict with existing or future OEM
distributor policies or programs. The Company believes, however, that it offers
attractive benefits to OEMs. For large OEMs, it offers a cost-effective
distribution alternative that promotes consistent quality and possesses
significant financial and human resources. For small and mid-sized OEMs, it
offers access to broader markets and expertise in marketing. In addition, the
Company offers to all OEMs (i) a central source of market and usage data,
including complete life histories of valves and other products, and (ii) a means
of reducing their own selling costs through additional outsourcing of their
assembly, testing, repair and certification services, reducing the number of
distributors they are required to monitor and eliminating transition problems
associated with local owner-operated distributorships. Although no assurance can
be given that OEMs will not take actions that could materially adversely affect
the Company's ability to implement its growth strategies and maintain its
existing distribution services business, the Company believes that the
combination of (i) the advantages it offers to OEMs and (ii) the desire of end
users to reduce the number of their vendors should result in these issues being
resolved on a mutually satisfactory basis.

HIRING, TRAINING AND SAFETY

The Company seeks to ensure through its hiring procedures and continuous
training programs and the training programs its OEMs offer that (i) its
product-assembly and service technicians and machinists meet the performance and
safety standards the Company and its OEMs, professional and industry codes and
federal, state and local laws and regulations have established and possess the
required ASME, factory or other certifications and (ii) its sales personnel are
trained thoroughly in the selection, application, adaptation and customization
of the products it distributes and types of repair services it offers.

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Because on-line and on-site repair services often are performed in
emergency situations under dangerous circumstances, the Company provides its
technicians with extensive classroom and field training and supervision and
establishes and enforces strict safety and competency requirements, including
physical exams and periodic drug testing in some cases. The Company's training
programs for its on-site repair technicians must meet requirements of the
Occupational Safety and Health Administration ("OSHA") respecting, among other
matters, release detection procedures, appropriate work practices, emergency
procedures and other measures these technicians can take to protect themselves
and the environment.

COMPETITION

The markets for the Company's repair and distribution services generally
are highly competitive. The Company believes the principal competitive factors
in a distributor's sale of new valves and other process-system components
directly to industries in the distributor's market include price and the ability
of the distributor to offer on a timely basis a wide selection of the new,
better-performing valves and components OEMs have designed to meet the needs of
these industries. Factors affecting delivery time include inventory size and
accessibility and whether, in the case of PRVs and certain other valves, the OEM
or the distributor assembles, sets, tests and seals, or otherwise customizes,
the valve. The Company believes its assembly and testing facilities enable it
generally to deliver valves ready for installation faster than the relevant OEM.
In the case of repair services, the Company believes the principal competitive
factors are quality and availability of service (including emergency service and
documentation of valve histories), price, use of OEM-approved replacement parts,
familiarity with the OEMs' products and local brand equity of the repair
business.

In its distribution operations, the Company competes with the direct sales
forces and distribution networks of OEMs offering the same or comparable lines
of products. The success of the Company as a provider of value-added
distribution services depends on the extent to which the OEMs with which it has
distribution arrangements are able to create a demand for their products in the
territories they assign the Company. Factors affecting this demand include, in
addition to price, product quality and performance (including durability and
safety), delivery time and the relative strengths of the brand name and
marketing ability of the OEM.

The Company competes for repair services business with other repair service
businesses and, to a lesser extent, with OEMs, and customers' in-house
maintenance crews. Some of its competitors may have lower overhead cost
structures and, consequently, may be able to provide their services at lower
rates than the Company. The Company's competitors for on-line repairs include
two national competitors (the Furmanite Division of Kaneb Services, Inc. and
Team, Inc.) and several regional competitors. Competition in the market for
off-line repair services is highly fragmented, although certain competitors may
have dominant positions in some of the local markets they serve.

RESEARCH AND DEVELOPMENT

The Company conducts research and development to improve the quality and
efficiency of its services. Research and development activities include (i)
developing new technologies and compounds for repairs, (ii) both in-house and
extensive field testing of new technology to be used in conjunction with the
Company's repair service operations and (iii) assisting the Company's sales
organization and customers with special projects.

Through its research and development efforts, the Company is developing an
air-driven friction welding device and related processes it intends to market as
the SafeWeld system. Although there can be no assurance the SafeWeld system will
be commercially successful, the Company believes this system will be a
significant enhancement to the SafeSealsystem.

INTELLECTUAL PROPERTY

The Company holds various United States and foreign patents, including some
relating to the Safe Seal system. It does not consider any individual patent to
be presently material to its consolidated business and believes its future
success will depend more on its technological capabilities and the

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<PAGE>
application of know-how in the conduct of that business. The Company enjoys
service and product name recognition, principally through various common law
trademarks.

For information respecting a license to certain of the Company's technology
under certain of its patents pertaining to the SafeSealsystem. See "Factors
That May Affect Future Results."

EMPLOYEES

At December 31, 1997, the Company had approximately 800 full-time
employees. Approximately 15 are members of the United Steelworkers of America,
AFL/CIO union. None of the Company's other employees are represented by a union.
Management believes the Company's relations with its employees are satisfactory.
The Company's future success will depend, in part, on its ability to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel.

The repair services business is characterized by high turnover rates among
field service technicians. Although the Company believes its turnover rate for
field service technicians is below the industry average, the Company's turnover
rate for these employees is high relative to the Company's other employees. The
Company seeks to attract and retain qualified service technicians and other
technical field personnel by providing competitive compensation packages. It has
never experienced a prolonged shortage of qualified personnel in any of its
operations (and does not currently anticipate any such shortage), but if demand
for repair services were to increase rapidly, retention of qualified field
personnel might become more difficult without significant increases in
compensation.

FACILITIES

The Company leases or owns 52 operating facilities in the United States,
one in Canada, two in Europe and one in the Middle East. It holds most of these
facilities under lease. The facilities consist principally of sales and
services, remanufacturing and administrative facilities. The Company believes
its facilities are adequately maintained and sufficient for its planned
operations at each location.

The Company's prinicpal executive and administrative offices are located in
Houston, Texas.

GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS

A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. The
Company's in-shop reconditioning and remanufacturing of used valves frequently
involves the use, handling, storage and contracting for the disposal or
recycling of a variety of substances or wastes considered hazardous or toxic.
Environmental laws are complex and subject to frequent change. These laws impose
"strict liability" in some cases without regard to negligence or fault.
Sanctions for noncompliance may include revocation of permits, corrective action
orders, administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several strict liability for
remediation of spills and releases of hazardous substances. In addition,
businesses may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. These laws and regulations also may expose the Company to
liability for the conduct of or conditions caused by others, or for acts of the
Company which complied with all applicable laws when performed. No assurance can
be given the Company's compliance with amended, new or more stringent laws or
regulations, stricter interpretations of existing laws or the future discovery
of environmental conditions will not require additional, material expenditures
by the Company. OSHA regulations also apply to the Company's business, including
requirements the Company's training programs must meet. See "-- Hiring,
Training and Safety." Future acquisitions by the Company also may be subject to
regulation, including antitrust reviews.

The Company believes it has all material permits and licenses required to
conduct its operations and is in substantial compliance with applicable
regulatory requirements relating to its operations. The Company's capital
expenditures relating to environmental matters were not material on a pro forma
combined basis in 1997. The Company does not currently anticipate any material
adverse effect on its business or financial

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<PAGE>
position as a result of its future compliance with existing environmental laws
and regulations controlling the discharge of materials into the environment.

LITIGATION AND INSURANCE

Steam Supply and a Mobil Corp. unit are named defendants in a proceeding
initiated by the City of Long Beach, California in October 1997 in a Long Beach
municipal court. The complaint arises from an in-shop repair Steam Supply
performed in February 1997, alleges the repair involved a release of hydrogen
sulfide gas into the atmosphere in violation of the California Health & Safety
Code and seeks monetary sanctions. Management of the Company believes this
proceeding will not have any material adverse effect on its financial condition
or operating results.

The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage allegedly incurred in connection with its operations. It
currently is not involved in any litigation it believes will have a material
adverse effect on its financial condition or results of operations.

The Company maintains insurance in such amounts and against such risks as
it deems prudent, although no assurance can be given that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's financial condition
and results of operations. Moreover, no assurance can be given that the Company
will be able to maintain adequate insurance in the future at commercially
reasonable rates or on acceptable terms.

YEAR 2000 ISSUE

The Company is reviewing its computer programs and systems to ensure that
the programs and systems will function properly and be Year 2000 compliant. In
this process, the Company expects to replace some existing systems and upgrade
others. The Company presently believes that, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. The
estimated cost of these efforts are not expected to be material to the Company's
financial position or any year's results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Prospectus contains statements of management's plans and objectives
and other "forward-looking" statements that involve a number of risks,
uncertainties and assumptions. No assurance can be given that actual results
will not differ materially from these statements as a result of various factors,
including the following:

The ability of the Company to improve its operating results depends on the
extent to which its business strategies for growth succeed. No assurance can be
given that the Company will not encounter unforeseen costs, delays or
impediments in implementing these strategies, that these strategies will produce
the benefits management expects or that these strategies will be successful.

The Company's business strategies for growth focus primarily on acquiring
additional businesses providing repair and distribution services. This
acquisition strategy presents risks that, singly or in any combination, could
materially adversely affect the Company's business and financial performance.
These risks include (i) the adverse effects on existing operations which could
result from the diversion of management attention and resources to acquisitions,
(ii) the possible loss of acquired customer or supplier bases and key personnel,
including service technicians and machinists, and (iii) the contingent and
latent risks (including environmental risks) associated with the past operations
of and other unanticipated problems arising in the acquired businesses. The
success of the Company's acquisition strategy will depend on the extent to which
the Company is able to acquire, successfully integrate and profitably manage
additional businesses. In this connection, if competition for acquisition
candidates develops, the cost of acquiring businesses could increase materially,
and some competitors may have greater resources than the Company to finance
acquisition opportunities and may be willing to pay higher prices than the
Company for

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<PAGE>
the same opportunities. Acquisitions accounted for as purchases may result in
substantial annual non-cash amortization charges for goodwill and other
intangible assets in the Company's statements of operations.

The Company's acquisition strategy will require substantial capital. The
Company intends to finance future acquisitions with future free cash flow, by
borrowing under the Company's $60 million revolving credit facility (the
"Credit Facility") and through issuances of shares of Common Stock or debt
securities, including the Convertible Debt Securities. Using internally
generated cash or debt to complete acquisitions could substantially limit the
Company's operational and financial flexibility. The extent to which the Company
will be able or willing to use shares of Common Stock to consummate acquisitions
will depend on its market value from time to time and the willingness of
potential sellers to accept it as full or partial payment. No assurance can be
given the Company will be able to obtain the capital it will need to finance a
successful acquisition program and its other cash needs. If the Company is
unable to obtain additional capital on acceptable terms, it may be required to
reduce the scope of the expansion it presently anticipates, which could
materially adversely affect its growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Factors affecting the Company's ability to generate internal growth include
the extent to which it is able to (i) establish efficient centralized financial
and other administrative systems to replace the separate systems the businesses
it acquires have used and otherwise integrate these businesses into a cohesive,
efficient enterprise, (ii) expand the range of repair services of the Acquired
Businesses and other businesses it may acquire, (iii) leverage its relationships
with customers in existing markets into work for those customers in other
markets where they currently use the services of competitors and (iv) reduce
overhead costs of acquired businesses. No assurance can be given the Company
will be able to market its SafeSeal technology successfully as being safer, more
effective and more cost-efficient than other available on-line valve repair
methods. Factors affecting the Company's ability to expand services include the
extent to which it is able to attract and retain qualified operating management,
service technicians and machinists in existing and new areas of operation and
train its technicians to use the SafeSeal technology and other new technologies
that become available.

The businesses of most of the Company's industrial customers, particularly
refineries and chemical, power and pulp and paper plants, tend to be cyclical.
Margins in those industries are highly sensitive to demand cycles, and the
Company's customers in those industries historically have tended to delay large
capital projects, including expensive turnarounds, during down cycles. As a
result, the Company's business and results of operations of the Company may
reflect the cyclical nature of the various industries it serves.

The Company performs a significant portion of its repair services in
refineries, chemical plants and other industrial facilities that process,
produce, store, transport or handle potentially hazardous substances, including
highly corrosive, flammable or explosive substances kept at extremes of
temperature and pressure. These services (i) include sealing leaks and repairing
valves on process units operating under pressure, (ii) typically involve a
combination of individuals and machinery operating in restricted work areas and
(iii) are subject to the usual hazards associated with providing on-site
services in these types of facilities, such as pipeline leaks and ruptures,
explosions, fires, oil and chemical spills, discharges or releases of toxic
substances or gases. These hazards can cause personal injury and loss of life,
severe damage to or destruction of property and equipment and environmental
damage and may result in suspension of operations of all or part of the facility
being serviced. If a catastrophic event occurs at a plant to which the Company
provides services, the Company may have to defend itself against large claims.
It maintains insurance coverage in the amounts and against the risks it believes
accord with industry practice, but this insurance does not cover all types or
amounts of liabilities. No assurance can be given either (i) this insurance will
be adequate to cover all losses or liabilities the Company may incur in its
operations or (ii) the Company will be able to maintain insurance of the types
or at levels it deems necessary or adequate or at rates it considers reasonable.

The markets for the Company's repair and distribution services generally
are highly competitive. Some of the Company's competitors may have lower
overhead cost structures and, consequently, may be able to

27
<PAGE>
provide their services at lower rates than the Company or require the Company to
lower its gross margins. See "Business -- Competition."

The success of the Company may depend in part on its ability to obtain and
protect patents and other intellectual property rights covering its products and
services. One of the Company's customers has a license to certain of the
Company's technology under certain of its patents pertaining to the SafeSeal
system. Although, to the knowledge of the Company, that customer has not pursued
the development of technology that would compete with the SafeSeal system (and
instead has opted to continue outsourcing on-line valve repair service work to
the Company), there can be no assurance it will not elect to do so in the
future. Moreover, there can be no assurance others will not independently
develop substantially equivalent or better technology that would be free of the
Company's patents and other intellectual property rights. See
"Business -- Intellectual Property."

A wide range of federal, state and local regulations relating to health,
safety and environmental matters applies to the Company's business. See
"Business -- Governmental Regulation and Environmental Matters." No assurance
can be given the Company's compliance with current, amended, new or more
stringent laws or regulations, stricter interpretations of existing laws or the
future discovery of environmental conditions will not require additional,
material expenditures by the Company. Future acquisitions by the Company also
may be subject to regulation, including antitrust reviews.

The success of the Company's operations will depend on the continuing
efforts of its executive officers and the senior management of the Acquired
Businesses and likely will depend on the senior management of any significant
businesses the Company acquires in the future. The business or prospects of the
Company could be affected adversely if any of these persons do not continue in
their respective management roles after joining the Company and the Company is
unable to attract and retain qualified replacements. The ability of the Acquired
Businesses (other than SSI) and any additional repair services companies the
Company may acquire to include the SafeSeal system in their services will
require the training of their service technicians in the use of the technology,
and the success of the Company's growth strategy generally, as well as the
Company's current operations, will depend on the extent to which it is able to
retain, recruit and train qualified sales personnel, service technicians and
machinists who meet the Company's standards of service to customers.

The success of the Company as a value-added distributor of new valves and
other process-system components depends on its relationships with the OEMs for
which it distributes products. In these relationships, the Company acts either
as a sales representative on a commission basis for direct sales by the OEM to
the end user or purchases products on a discount basis for resale, generally on
a value-added basis. OEMs typically exercise a great deal of control over their
distributors. An OEM may assign a territory to a distributor on an exclusive or
nonexclusive basis, refuse to assign additional territories to its distributors
and reserve the right to sell directly to customers in an assigned territory.
The typical distribution agreement is terminable at will on relatively short
prior notice and restricts the ability of the distributor to offer similar
products made by another OEM. The Company's business strategy could conflict
with existing or future OEM distributor policies or programs. Actions taken by
OEMs to exploit their bargaining positions with the Company could materially
adversely affect the Company's ability to implement its growth strategies and
maintain its existing distribution services business. See
"Business -- Suppliers -- Relationships With OEMs."

The success of the Company as a value-added distributor also depends on the
extent to which its OEMs are able to create demand for their products in the
markets the Company serves. Factors affecting this demand include, in addition
to price, product quality and performance (including durability and safety) and
delivery time, the relative strengths of the brand names and the marketing
abilities of the OEMs. See "Business -- Competition."

28
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of April 1, 1998
concerning the directors and executive officers of Invatec:

DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------ --- ------------------------------ --------
William E. Haynes(1)(2)(3).... 54 Chairman of the Board, I
President and Chief Executive
Officer
Charles F. Schugart........... 38 Chief Financial Officer,
Senior Vice
President -- Corporate
Development, Treasurer and
Secretary
Denny A. Rigas................ 53 Senior Vice
President -- Technology and
Marketing
Pliny L. Olivier.............. 52 Senior Vice
President -- Operations
Douglas R. Harrington, Jr..... 33 Vice President and Corporate
Controller
John L. King.................. 27 Vice President -- Corporate
Development
Timothy M. LeFevre............ 35 Vice President -- Corporate
Marketing Programs
Frank L. Lombard.............. 54 Vice President -- Corporate
Development
Curry B. Walker............... 62 Vice President -- Quality,
Safety and Engineering
Michael A. Baker(4)(5)........ 51 Director III
Robert M. Chiste(1)(2)(5)..... 50 Director III
Arthur L. French(2)(3)(4)..... 57 Director I
Tommy E. Knight(1)(5)......... 58 Director II
Dr. Pierre R. Latour(3)(4).... 57 Director II
T. Wayne Wren, Jr.(1)......... 48 Director III
- ------------
(1) Member of Board Executive Committee.

(2) Member of Board Nominating Committee.

(3) Member of Board Technology Committee.

(4) Member of Board Audit Committee.

(5) Member of Board Compensation Committee.

Invatec's Board of Directors (the "Board") appoints Invatec's executive
officers annually to serve for the ensuing year or until the Board appoints
their respective successors. The executive officers listed above have had the
business experience indicated below during the last five years.

WILLIAM E. HAYNES has been Chairman of the Board since May 1997 and
President and Chief Executive Officer since March 1997. He also has served as
President and Chief Executive Officer of SSI from November 1996 until March
1997. From July 1992 through December 1995, Mr. Haynes served as President and
Chief Executive Officer of LYONDELL-CITGO Refining Company Ltd. He served in
various executive capacities for Lyondell Petrochemical Company from 1985 to
1993 and in various technical, management and executive positions with Atlantic
Richfield commencing in 1967. Mr. Haynes is a director of Philip Services Corp.,
an industrial and environmental services company.

CHARLES F. SCHUGART has been Chief Financial Officer since March 1997 and
has been Senior Vice President -- Corporate Development since July 1997. He
previously served for over 12 years in a variety of capacities with Arthur
Andersen LLP, including most recently as Senior Manager. Mr. Schugart is a
Certified Public Accountant.

DENNY A. RIGAS has been Senior Vice President -- Technology and Marketing
since May 1997. From 1993 to May 1997, Mr. Rigas served as an executive vice
president and general manager of the Triconex Corporation, a manufacturer of
integrated safety systems for process-system industries. Mr. Rigas has a total
of 30 years of domestic and international experience in the oil and gas
hydrocarbon processing, process, pipeline, power, marine and other industries.
He has served in executive and sales/marketing

29
<PAGE>
management positions in the last 18 years with, among others, a subsidiary of
Rockwell International Corporation, Lummus Crest and Foster Wheeler. Mr. Rigas
is a registered professional engineer in the State of Texas.

PLINY L. OLIVIER has been Senior Vice President -- Operations of Invatec
since March 1998. Prior thereto, Mr. Olivier had been President of GSV since
November 1985. Prior thereto, he had more than 30 years managerial experience in
the chemical and other industries.

DOUGLAS R. HARRINGTON, JR. has been Vice President and Corporate Controller
since March 1997 and has served in the same capacities for SSI since February
1997. Prior to February 1997, he served in various capacities, including most
recently as Controller -- U.S. Operations for Gundle/SLT Environmental, Inc.
from March 1992 through May 1995 and from January 1996 until February 1997. From
May 1995 through December 1995, Mr. Harrington served as Senior
Manager -- Accounting for BSG Consulting, Inc. Mr. Harrington is a Certified
Public Accountant.

JOHN L. KING has been Vice President -- Corporate Development since March
1997. Prior to March 1997, he served for over five years in a variety of
capacities with Arthur Andersen LLP, including most recently as an audit
manager. Mr. King is a Certified Public Accountant.

TIMOTHY M. LEFEVRE has been Vice President -- Corporate Marketing Programs
since June 1997. From 1994 through June 1997, he served as Vice
President -- Corporate Marketing of Triconex Corporation. Prior thereto, Mr.
LeFevre served in a variety of technical and marketing capacities for
Allen-Bradley Company, a subsidiary of Rockwell International Corporation.

FRANK L. LOMBARD has been Vice President -- Corporate Development since
March 1997 and served in the same capacity for SSI from August 1993 until March
1997. From 1982 until joining SSI in 1993, he served as President of Westheimer
Financial Group, Inc., a privately held investment banking and corporate finance
advisory firm in Houston, Texas.

CURRY B. WALKER has been Vice President -- Quality, Safety and Engineering
since July 1997. Prior thereto, Mr. Walker served as President of Plant
Specialties for over 10 years.

MICHAEL A. BAKER was a founder of American Medical Response, Inc., a
Boston-based company engaged in the provision of a national ambulance service
network, and served on its board of directors from February 1992 until it was
acquired in February 1996.

ROBERT M. CHISTE has been President, Industrial Services Group, of Philip
Services Corp. since July 1997. He served as Vice Chairman of Allwaste, Inc.
("Allwaste"), a provider of industrial and environmental services, from May
1997 through July 1997, President and Chief Executive Officer of Allwaste from
October 1994 through July 1997 and a director of Allwaste from January 1995
through August 1997. Philip Services Corp. acquired Allwaste effective July 31,
1997. Prior to October 1994, Mr. Chiste served as Chief Executive Officer and
President of American National Power, Inc. and as Senior Vice President of
Transco Energy Company. Mr. Chiste is a director of Franklin Credit Management
Corp., a New York-based financial services company.

ARTHUR L. FRENCH has served as Chairman of the Board, Chief Executive
Officer and President of Metals USA, Inc., a metals processor and manufacturer
of metal components, since December 1996. Prior thereto, Mr. French served as
Executive Vice President and a director of Keystone International, Inc., a
manufacturer of industrial valves and controls, with responsibility for domestic
and international operations.

TOMMY E. KNIGHT was President and Chief Executive Officer of Brown & Root,
Inc., a subsidiary of Halliburton Company and one of the largest international
construction firms in the world, from June 1992 until his retirement in
September 1996. Mr. Knight is a director of Metals USA, Inc.

PIERRE R. LATOUR, PH.D. is an independent consulting chemical engineer. Dr.
Latour co-founded Setpoint, Inc. and served as a director and a vice president
of consulting, oil refining, central marketing and business development until he
retired in January 1995. He then served as a vice president of business
development for Dynamic Matrix Control Corp. ("Dynamic") and then Aspen
Technology, Inc. after it

30
<PAGE>
acquired both Setpoint, Inc. and Dynamic in January 1996. He retired from Aspen
Technology, Inc. in January 1997.

T. WAYNE WREN, JR. has served as Senior Vice President of PSC Enterprises,
Inc., a subsidiary of Philip Services Corp., since July 1997 and served as
Senior Vice President -- Chief Financial Officer and Treasurer of Allwaste from
March 1996 through July 1997, having served as its Vice President -- Chief
Financial Officer since November 1995. From January 1994 to November 1995, Mr.
Wren was an independent financial consultant. He previously served as Allwaste's
Vice President -- Chief Financial Officer from August 1991 to December 1993. He
also provided financial consulting services to Allwaste pursuant to a consulting
agreement from January 1994 to June 1994.

DIRECTOR COMPENSATION

Invatec pays each director who is not a Company employee (a "Nonemployee
Director") fees of $1,000 for each Board and each Board committee meeting
attended (except for committee meetings held on the same day as Board meetings)
and periodically grants Nonemployee Directors options to purchase shares of
Common Stock pursuant to the Company's 1997 Incentive Plan (the "Incentive
Plan"). It will not pay any additional compensation to its employees for
serving as directors, but will reimburse all directors for out-of-pocket
expenses they incur in connection with attending Board or Board committee
meetings or otherwise in their capacity as directors.

EXECUTIVE COMPENSATION

The following table sets forth information regarding aggregate cash
compensation, restricted stock and stock option awards and other compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers for services rendered to the Company during 1997:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------------------------
------------------------------------- SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
- ------------------------------------- -------- -------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
William E. Haynes ................... $125,000(1) $127,750 $724,700(2) -- 347,966(3) $ --
President and Chief Executive
Officer
Charles F. Schugart ................. 151,042(4) 122,500 150,000(5) -- 138,608(3) --
Senior Vice President and Chief
Financial Officer
Denny A. Rigas ...................... 111,892(4) 25,000 16,113(6) -- 122,710 100,000(7)
Senior Vice President -- Technology
and Marketing
Douglas R. Harrington Jr. ........... 72,958(4) 34,000 15,000(8) -- 61,356 --
Vice President and Corporate
Controller
Frank L. Lombard .................... 81,100 32,040 93,500(9) -- 19,593(3) --
Vice President -- Corporate
Development
</TABLE>
- ------------

(1) Represents salary from May 1997. Mr Haynes did not receive any salary prior
to May 1997.

(2) Represents a one-time $300,000 bonus paid on the closing of the IPO and a
January 1997 award of SSI common stock valued at $424,700 for federal income
tax purposes.

(3) Includes shares subject to options into which previously outstanding options
granted in 1997 to purchase shares of SSI common stock were converted in the
SSI Merger, as follows; Mr. Haynes_-- 250,000; and Mr. Schugart -- 100,000.
Excludes, in the case of Mr. Lombard, options to purchase 38,000 shares of
Common Stock into which previously outstanding options granted prior to 1997
to purchase SSI common stock were converted in the SSI Merger.

(4) Represents salary from date of employment in 1997: Mr. Schugart -- February;
Mr. Rigas -- May; and Mr. Harrington -- February.

(5) Represents a one-time $50,000 bonus and a January 1997 award of SSI common
stock valued at $100,000 for federal income tax purposes.

(6) Includes approximately $6,000 of automobile allowance paid under Mr. Rigas'
Employment Agreement.

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

31
<PAGE>

(7) Represents a one-time reimbursement of moving expenses paid under Mr.
Rigas's employment agreement.

(8) Represents a one-time bonus paid on the closing of the IPO.

(9) Represents a January 1997 award of SSI common stock valued at this amount
for federal income tax purposes.

OPTION GRANTS

The following table sets forth information regarding the options granted
during 1997 to the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------
NAME GRANTED IN 1997 PRICE DATE 5% 10%
- ------------------------------------- ----------- ---------- -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
William E. Haynes.................... 250,000 27.9% (1) October 2004 $ 415,976 $ 1,634,613
97,966 $ 1.00(2) October 2004 39,882 92,942
Charles F. Schugart.................. 100,000 11.1% (1) October 2004 166,390 653,845
38,608 $ 1.00(2) October 2004 15,717 36,628
Denny A. Rigas....................... 100,000 9.8% (1) October 2004 166,390 653,846
22,710 $ 1.00(2) October 2004 9,245 21,545
Douglas R. Harrington, Jr............ 50,000 4.9% (1) October 2004 83,196 326,922
11,356 $ 1.00(2) October 2004 4,623 10,774
Frank L. Lombard..................... 19,593 1.6% $ 1.00(2) October 2004 7,976 18,588
</TABLE>
- ------------

(1) The excercise price per share for 50% of the shares shown is $9.00, and the
exercise price per share for 50% of the shares shown is $13.00. All these
options were granted in tandem prior to the closing of the IPO, and the
Board determined that, as of the respective grant dates of these options,
their per-share exercise prices exceeded the then fair market value of a
share of Common Stock. This presentation assumes the $9.00 exercise price
was that fair market value on the date of grant of each of these options.

(2) The options having an exercise price per share of $1.00 were granted in
August 1997 (prior to the closing of the IPO), and the Board determined
that, as of the date of grant of these options, the exercise price exceeded
the then fair market value of a share of Common Stock. This presentation
assumes the fair market value of the Common Stock on the date of grant of
these options was $1.00 per share.

(3) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the assumed fair market value
on the date of grant, from the date of grant to the end of the option term.

AGGREGATE OPTION HOLDINGS AND YEAR-END VALUES

No options to purchase Common Stock were exercised during 1997. The
following table presents information regarding the value of options outstanding
at December 31, 1997 for each of the executive officers named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William E. Haynes.................... 160,466 187,500 $ 2,463,971 $ 1,734,375
Charles F. Schugart.................. 63,608 75,000 974,454 693,750
Denny A. Rigas....................... 47,710 75,000 668,418 693,750
Douglas R. Harrington Jr............. 23,856 37,500 334,228 346,875
Frank L. Lombard..................... 57,593 -- 766,665 --
</TABLE>
- ------------
(1) The closing price for the Common Stock on the Nasdaq National Market was
$20.25 on December 31, 1997. Value is calculated on the basis of the
difference between the option exercise price and $20.25.

32
<PAGE>
EMPLOYMENT AGREEMENTS

Invatec has employment agreements with Messrs. Haynes, Schugart and Rigas.
Each of these agreements (i) provides for an annual minimum base salary, (ii)
entitles the employee to participate in all the Company's compensation plans (as
defined) in which executive officers of Invatec participate and (iii) has a
continuous term of three (Mr. Haynes) or two (Messrs. Schugart and Rigas) years,
subject to the right of either party to terminate the employee's employment at
any time. If the employee's employment is terminated by reason of the employee's
death or disability (as defined), by the Company without cause (as defined) or
by the employee for good cause (as defined), the employee or his estate will be
entitled to a lump-sum payment equal to a multiple (three for Mr. Haynes and two
for Messrs. Schugart and Rigas) of his highest annual salary and incentive
bonuses. If a change of control (as defined) of the Company occurs, the employee
may terminate his employment at any time during the 460-day period beginning 211
days following that event and receive the same lump-sum payment together with
such amount as may be necessary to hold him harmless from the consequences of
any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended. Each agreement
contains a covenant limiting competition with the Company for two years
following termination of employment. Copies of these agreements are included as
exhibits to the Registration Statement on Form S-4 of which this Prospectus is a
part (the "Acquisition Shelf Registration Statement"). The Company also has
employment agreements with Mr. Harrington and other executive officers of
Invatec.

LOANS TO EXECUTIVE OFFICERS

At April 1, 1998, Invatec had outstanding interest-free loans it has made
to Messrs. Haynes, Schugart and Rigas pursuant to their employment agreements in
the principal amounts of $174,338, $41,050 and $100,000, respectively. The loans
to Messrs. Haynes and Schugart were made to enable them to pay the federal
income taxes attributable to the stock awards made to them in 1997 and reflected
in the Summary Compensation Table above under "Other Annual Compensation."
These loans may be repaid, at the borrower's option, in cash or shares of Common
Stock valued at its market value at the time of payment.

33
<PAGE>
CERTAIN TRANSACTIONS

FINANCING ARRANGEMENTS

Invatec was initially capitalized in March 1997 with $216.12 provided by
Messrs. Haynes, Schugart, and Lombard and Computerized Accounting & Tax
Services, Inc. ("CATS"), a corporation owned by Roger L. Miller, in exchange
for 146,959 shares of Common Stock. In June 1997, Messrs. Haynes, Schugart,
Rigas, Lombard, King and Harrington and CATS purchased an additional 95,880
shares of Common Stock for a total purchase price of $141.00. Philip advanced
funds to Invatec to enable Invatec to pay various expenses incurred in
connection with its efforts to create the Company and effect the IPO. As part of
its funding arrangements with Invatec, Philip also guaranteed the payment of
convertible notes included in the consideration paid for certain Initial
Acquired Businesses and provided cash to pay for acquisitions. Beginning in
October 1995 and continuing through October 31, 1997, Philip advanced funds to
SSI, in the form of equity investments ($10.4 million, including the Philip
subordinated notes described below), loans and credit support for SSI's bank
borrowings, to pay costs related to the acquisitions of Harley, GSV and Plant
Specialties and the IPO.

Philip entered into its funding arrangements with Invatec pursuant to a May
1997 agreement (as subsequently modified, the "1997 Agreement") among SSI,
Philip, Mr. Miller, CATS and The Roger L. Miller Family Trust (the "Miller
Trust" and, collectively with Mr. Miller and CATS, the "Miller Interests").
Mr. Miller, who founded SSI in 1991 and was its President until December 1996,
was then Chairman of the Board of SSI and, as the trustee of the Miller Trust
and the owner of CATS, controlled approximately 47.3% of SSI's outstanding
common stock. In the 1997 Agreement, (i) the parties modified or superseded
prior agreements pursuant to which Philip had been providing financing and
credit support for the expansion of SSI's business and (ii) the Miller Interests
agreed to (a) transfer the voting power of their SSI common stock to a voting
trustee pursuant to a voting trust agreement, (b) cooperate with Invatec and SSI
in facilitating the completion of the IPO and (c) sell to Philip when the IPO
closed at least 25% of the shares of Common Stock they would own immediately
following the SSI Merger. As provided in the 1997 Agreement: (i) Mr. Miller
remained a member of the three-member SSI board of directors until the IPO
closed, but resigned from all other positions he held with SSI and ceased to
participate in all SSI compensation and other benefit arrangements; (ii) CATS
terminated all its arrangements with SSI, including a management services
agreement under which it would have been paid $225,000 during the three-year
period ending December 31, 1999; and (iii) SSI paid $300,000 in cash to CATS in
complete satisfaction of all claims CATS or Mr. Miller had or otherwise might
have for any services rendered or to be rendered for SSI or Invatec.

Immediately before the IPO, Invatec owed Philip approximately $11.6
million, consisting of cash advances made and certain guarantee fees.
Contemporaneously with the IPO, Invatec repaid approximately $8.6 million of
that amount with 1,036,013 shares of Common Stock (valued at the initial IPO
price ($13.00 per share) for this purpose) and $3.0 million in cash.

THE SSI MERGER

Immediately before the SSI Merger, the Miller interests owned 2,289,881
shares of SSI common stock (47.3% of the total shares then outstanding),
including 235,097 shares awarded to CATS in January 1997 and 14,784 shares
purchased by CATS in connection with the June 1997 exercise of an option granted
in 1992 to a former SSI employee to purchase 68,001 shares of SSI common stock
at an exercise price of $3.68 per share, for which the Miller Interests received
a total of 1,144,941 shares of Common Stock as a result of the SSI Merger.

Also immediately before the SSI Merger, Philip owned all the outstanding
SSI preferred stock (20,000 shares), for which it paid $2.0 million ($100 per
share) in October 1995, and 1,701,713 shares of SSI common stock, which it
acquired as follows: (i) in October 1995 it purchased 286,960 shares from SSI
for $500,000 (approximately $1.74 per share); (ii) in January 1997 it exercised
warrants it had received in October 1995 and July 1996 to purchase 1,361,536
shares; and (iii) in June 1997 it purchased 53,217 shares in connection with the
exercise of the 1992 employee stock option referred to above. It had purchased
the

34
<PAGE>
1995 warrant for $100,000 and guaranteed the repayment of a $2.0 million
revolving line of credit to SSI in exchange for the 1996 warrant. Together, the
warrants entitled Philip to purchase at $3.68 per share such number of shares as
would be necessary to afford it ownership, on a fully diluted basis, of 36.5% of
the SSI common stock outstanding after their exercise. To facilitate SSI's
acquisition of Harley, Philip and SSI agreed in September 1996 that Philip would
exercise the warrants at an exercise price of $3.16 per share. The total
exercise price consisted of (i) $3.3 million aggregate principal amount of
subordinated 8% promissory notes issued by Philip and paid as partial
consideration in the Harley acquisition and (ii) approximately $1.0 million in
cash.

As a result of the SSI Merger, Philip received: (i) for the SSI preferred
stock it owned, 153,847 shares of Common Stock; and (ii) for the SSI common
stock it owned, 850,856 shares of Common Stock.

Individuals who are directors or executive officers of Invatec received the
following number of shares of Common Stock in the SSI Merger for their shares of
SSI common stock: Mr. Haynes -- 72,199; Mr. Schugart -- 17,000; and Mr.
Lombard -- 15,902. In addition, Messrs. Haynes and Schugart received the 1997
Incentive Plan options shown for them in the table under "Management -- Option
Grants," Mr. Lombard received a 1997 Incentive Plan option to purchase 38,000
shares of Common Stock at an exercise price of $10.00 per share and T. Wayne
Wren, Jr., a director of Invatec, received a 1997 Incentive Plan option to
purchase 15,000 shares of Common Stock at an exercise price of $10.00 per share
in exchange for a warrant he acquired in 1995 to purchase SSI common stock.

CERTAIN MANAGEMENT FEES

The Company paid management fees of $120,000, $108,000 and $353,000 during
each of the years ended December 31, 1995, 1996 and 1997, respectively, to CATS.

CONSULTING AGREEMENT

In March 1997, Invatec entered into a consulting agreement with Wasatch
Capital Corporation, an affiliate of Michael A. Baker, who became a director of
Invatec when the IPO closed. The consulting agreement, effective on September 1,
1997, provides for an initial three-year term (which may be extended for
successive one-year periods), during which acquisition consulting and related
services are to be provided by or under the direction of Mr. Baker. The
consulting agreement provides for annual consulting fees (payable pro rata on a
monthly basis) of $100,000 for the first year of the term, $80,000 for the
second year of the term and $60,000 for the third year and any extension year.
The consulting agreement also provides for bonuses that may be granted at the
discretion of Invatec's President (subject to the approval of the Executive
Committee of the Board) and reimbursement of ordinary and necessary expenses
incurred in the performance of the consulting services.

35
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 31, 1998, the "beneficial
ownership" (as defined by the SEC) of the Common Stock of (i) each person known
to beneficially own more than 5% of the outstanding shares of common stock, (ii)
each of Invatec's directors and executive officers and (iii) all directors and
executive officers of Invatec as a group.

SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ------------------------------------- --------- --------
Philip Services Corp.(2)............. 2,340,716 26.9%
100 King Street
P.O. Box 2440, LCD 1
Hamilton, Ontario Canada L8N 4J6
TCW Group, Inc. (3)
865 South Figuerda Street
Los Angeles, CA 90017........... 524,000 6.0
Robert Day (3)....................... 524,000 6.0
William E. Haynes.................... 307,131 3.5
Charles F. Schugart.................. 121,408 1.4
Denny A. Rigas....................... 81,710 1.1
Pliny L. Olivier..................... 10,000 *
Douglas R. Harrington, Jr. .......... 40,856 *
John L. King......................... 40,856 *
Timothy M. LeFevre................... 11,000 *
Frank L. Lombard..................... 88,388 1.0
Curry B. Walker(5)................... 189,171 2.2
T. Wayne Wren........................ 15,000 *
Executive officers and directors as a
group (10 persons)................. 905,520 9.9
Roger L. Miller(4)................... 889,621 10.2
The Roger L. Miller Family
Trust(4)........................... 694,000 8.0
- ------------
* Less than 1%.

(1) Shares shown include shares subject to currently exercisable options, as
follows: Mr. Haynes -- 160,466; Mr. Schugart -- 63,608; Mr. Rigas -- 47,710;
Mr. Olivier -- 10,000; Mr. Harrington -- 23,856; Mr. King -- 23,856; Mr.
LeFevre -- 11,000; Mr. Lombard -- 57,593; Mr. Walker -- 10,000; Mr.
Wren -- 15,000; and all executive officers and directors as a group 423,089.

(2) Shares shown are directly owned by wholly owned subsidiaries of Philip
Services Corp., a public company, as follows: Allwaste, Inc. -- 1,489,859
shares; and Allwaste Environmental Services, Inc. -- 850,856 shares. The
address of both Philip Services Corp. subsidiaries is 5151 San Felipe, Suite
1600, Houston, Texas 77056-3609. Allen Fracassi, the president and chief
executive officer of Philip Services Corp., has sole voting and investment
power respecting the shares of which Philip Services Corp. is the
"beneficial owner," subject to the direction of that corporation's board
of directors. Mr. Fracassi disclaims "beneficial ownership" of those
shares.

(3) The TCW Group, Inc. ("TCW") is the direct beneficial owner of 524,000
shares. Robert Day, as an individual deemed to control TCW, is the
"beneficial owner" of the shares it owns. Mr. Day and TCW have the same
address.

(4) Mr. Miller is the direct beneficial owner of 51,000 shares and, as the
trustee of The Roger L. Miller Family Trust (the "Miller Trust") and the
owner of Computerized Accounting and Tax Services, Inc. ("CATS"), is the
"beneficial owner" of the shares they own. The address of Mr. Miller, the
Miller Trust and CATS is P.O. Box 572843, Houston, Texas 77257.

(5) Shares shown include 179,171 shares issuable on the conversion of a
convertible subordinated note at an initial conversion price of $16.90 per
share.

Except as otherwise indicated, the address of each person listed in the
above tables is c/o Innovative Valve Technologies, Inc., 2 Northpoint Drive,
Suite 300, Houston, Texas 77060. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.

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DESCRIPTION OF THE CONVERTIBLE DEBT SECURITIES

Invatec will issue the Convertible Debt Securities offered hereby (the
"Convertible Securities") under an Indenture (the "Indenture") between
Invatec and the trustee party thereto (the "Trustee"). The following
description of the Convertible Securities summarizes certain general terms and
provisions of the Convertible Securities to which any Prospectus Supplement
(including any Pricing Supplement) may relate (the "Offered Convertible
Securities"). A Prospectus Supplement relating to the Offered Convertible
Securities will describe the particular terms of the Offered Convertible
Securities and the extent to which the general terms and provisions of the
Indenture will apply. The terms of the Offered Convertible Securities also will
include those made a part of the Indenture by the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act"). The statements under this caption
relating to the Convertible Securities and the Indenture are summaries only, do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Indenture, including the
definitions therein of certain terms, and the Trust Indenture Act. Certain terms
defined in the Indenture are capitalized herein. The Indenture is an exhibit to
the Acquisition Shelf Registration Statement and is incorporated herein by this
reference.

GENERAL

The Indenture will provide that Invatec may issue Convertible Securities
from time to time thereunder in one or more series, each in such aggregate
principal amount as Invatec may authorize from time to time. All Convertible
Securities of one series need not be issued at the same time and, unless a
Prospectus Supplement with respect to any series provides otherwise, Invatec may
reopen that series, without the consent of the holders of that series, and issue
additional Convertible Securities of that series. The Indenture will not limit
either (i) the aggregate principal amount of Convertible Securities which
Invatec can issue thereunder or (ii) the amount of other indebtedness or
liabilities, secured or unsecured, which Invatec or its subsidiaries may incur.

Unless a Prospectus Supplement with respect to one or more series indicates
otherwise, the Convertible Securities will not benefit from any covenant or
other provision that would provide protection to Holders of the Convertible
Securities against any sudden and dramatic decline in credit quality of the
Company resulting from any takeover or highly leveraged transaction, including a
recapitalization or similar restructuring, except as described below under
" -- Certain Rights To Require Repurchase of Convertible Securities."

The Convertible Securities are unsecured obligations of Invatec.

Unless a Prospectus Supplement with respect to one or more series indicates
otherwise, Invatec will pay principal of, and any premium or interest on, the
Convertible Securities at the office of the Trustee and the Convertible
Securities may be surrendered for registration of transfer, exchange or
conversion at that office. Invatec may, at its option, pay any interest on the
Convertible Securities by check mailed to the address of each person entitled
thereto as it appears in the applicable Securities Register for the Convertible
Securities on the Regular Record Date for that interest payment.

No service charge will be made for any registration of transfer or exchange
of the Convertible Securities, but Invatec may require payment of a sum
sufficient to cover any tax or other governmental charge and any other expenses
(including the fees and expenses of the Trustee) payable in connection
therewith. If a Prospectus Supplement provides for the redemption of a series of
Convertible Securities, Invatec will not be required (i) to issue, register the
transfer of or exchange any of those Convertible Securities during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption and ending at the close of business on the day of that
mailing or (ii) to register the transfer of or exchange any of those Convertible
Securities selected for redemption in whole or in part, except the unredeemed
portion of those Convertible Securities it is redeeming in part.

All monies Invatec pays to the Trustee or any Paying Agent, or Invatec
holds in trust, for the payment of principal of and any premium and interest on
any Convertible Security which remain unclaimed for two years after that
principal, premium or interest becomes due and payable may be repaid to Invatec
or released

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from trust, as the case may be. Thereafter, the Holder of that Convertible
Security may, as an unsecured general creditor, look only to Invatec for payment
thereof.

The applicable Prospectus Supplement sets forth the following terms of the
Offered Convertible Securities: (i) the title and aggregate principal amount of
the Offered Convertible Securities; (ii) the date or dates, or the method for
determining the date or dates, Invatec will issue the Offered Convertible
Securities (each an "Original Issue Date") and the date or dates on which the
Offered Convertible Securities will mature; (iii) the rate or rates (which may
be fixed or variable) per annum, if any, at which the Offered Convertible
Securities will bear interest or the method of determining such rate or rates;
(iv) the date or dates from which that interest, if any, will accrue and the
date or dates on which that interest, if any, will be payable; (v) the terms for
redemption or early payment, if any, including any mandatory or optional sinking
fund or analogous provision; (vi) the date or dates (each, a "Convertibility
Commencement Date") on which the Offered Convertible Securities first become
convertible into Common Stock and their Initial Conversion Price; (vii) whether
Invatec will issue the Offered Convertible Securities in fully registered form
or bearer form or any combination thereof; (viii) whether Invatec will issue the
Offered Convertible Securities in the temporary or permanent form of one or more
global securities; (ix) if other than U.S. dollars, the currency, currencies or
currency unit or units in which the Offered Convertible Securities will be
denominated and in which Invatec will pay the principal of, and premium and
interest, if any, on, the Offered Convertible Securities; (x) whether the Senior
Indebtedness to which the Indenture will subordinate Offered Convertible
Securities will be as the Indenture defines or that Prospectus Supplement
defines and the terms on which the Offered Securities will be subordinated to
that Senior Indebtedness, if those differ from the subordination provisions in
the Indenture; (xi) whether, and the terms and conditions on which, Invatec or a
Holder may elect that, or the other circumstances under which, Invatec will pay
principal of, or premium or interest, if any, on the Offered Convertible
Securities in a currency or currencies or currency unit or units other than that
in which the Offered Convertible Securities are denominated; and (xii) any other
specific terms of the Offered Convertible Securities. That Prospectus Supplement
also contains information with respect to the additional covenants, if any,
Invatec includes in the terms of the Offered Convertible Securities.

Invatec may issue the Convertible Securities as Original Issue Discount
Securities. An Original Issue Discount Security is a Security Invatec issues at
a price lower than the amount it will pay on the Stated Maturity thereof and
which provides that, on redemption or acceleration of the maturity thereof, an
amount less than the amount payable on the Stated Maturity thereof and
determined in accordance with the terms of the Convertible Security may become
due and payable.

CONVERSION RIGHTS

Each Convertible Security will be convertible into Common Stock, at the
option of its Holder, at any time on or after its Convertibility Commencement
Date and prior to its redemption (if redeemable) or final maturity, initially at
its Initial Conversion Price per share, subject to adjustment as described
below. The right to convert Convertible Securities that the applicable
Prospectus Supplement provides are subject to redemption will, with respect to
those Convertible Securities that have been called for redemption, terminate at
the close of business on the second business day preceding the Redemption Date
therefore unless Invatec defaults in making the payment due on that redemption.

The applicable Prospectus Supplement will set forth, or describe the method
for determining, the first date on which a Convertible Security may be converted
into Common Stock (the "Convertibility Commencement Date"). In the case of
Convertible Securities Invatec issues as purchase consideration in any
acquisition for which the seller seeks installment-sale treatment for federal
income tax purposes, their Convertibility Commencement Date will be the first
day following the first anniversary of the closing of the acquisition, unless
the Prospectus Supplement provides otherwise. The applicable Prospectus
Supplement also will set forth, or describe the method for determining, the
initial conversion price of each Convertible Security on the assumption that the
Convertible Security is convertible at any time following its Original Issue
Date (or the Original Issue Date of its earliest Predecessor Security) (the
"Initial Conversion Price").

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The conversion price of each Convertible Security will be subject to
adjustment as and when any of the following events occurs after its Original
Issue Date (or the Original Issue Date of any of its Predecessor Securities):
(i) the subdivision, combination or reclassification of outstanding shares of
Common Stock; (ii) the payment of a dividend or distribution on the Common Stock
exclusively in Common Stock or any other class of capital stock of Invatec which
includes Common Stock; (iii) the issuance of rights or warrants to all holders
of Common Stock entitling them to acquire shares of Common Stock (or securities
convertible into Common Stock) at a price per share less than the then Current
Market Price; (iv) the distribution to all holders of Common Stock of shares of
capital stock of Invatec other than Common Stock, evidences of indebtedness of
Invatec, cash or assets (including securities, but excluding (a) dividends or
distributions paid exclusively in cash, (b) dividends or distributions provided
for in clause (ii) above and (c) rights and warrants provided for in clause
(iii) above); (v) a distribution consisting exclusively of cash (excluding any
cash distributions referred to in clause (iv) above) to all holders of Common
Stock in an aggregate amount that, together with (a) all other cash
distributions (excluding any cash distributions referred to in clause (iv)
above) made within the 12 months preceding the record date for that distribution
and (b) any cash and the fair market value of other consideration paid in
respect of any tender offer subject to the provisions of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), made by Invatec or a subsidiary
of Invatec for Common Stock and consummated within the 12 months preceding that
distribution, exceeds the greater of (1) 12.5% of Invatec's market
capitalization (being at any time the product of the then Current Market Price
times the number of shares of Common Stock then outstanding) on that record date
and (2) the Company's consolidated retained earnings on that record date
(determined without giving effect to that distribution); and (vi) the
consummation of a tender offer made by Invatec or any subsidiary of Invatec for
Common Stock which involves an aggregate consideration that, together with (a)
any cash and other consideration payable in respect of any tender offer made by
Invatec or a subsidiary of Invatec for Common Stock and consummated within the
12 months preceding the last time on which tenders of Common Stock may be made
pursuant to the current tender offer (the "Expiration Time") and (b) the
aggregate amount of all cash distributions (excluding any cash distributions
referred to in clause (iv) above) to all holders of Common Stock within the 12
months preceding the consummation of that tender offer, exceeds the greater of
(1) 12.5% of Invatec's market capitalization immediately prior to that
Expiration Time (determined using all then tendered shares) and (2) the
Company's consolidated retained earnings at the Expiration Time (determined
without giving effect to the purchase of tendered shares). No adjustment of any
conversion price will be required to be made until cumulative adjustments amount
to at least 1.0% of that conversion price, as last adjusted. Any adjustment that
would otherwise be required to be made will be carried forward and taken into
account in any subsequent adjustment.

Invatec will have the right to reduce the conversion price of any
Convertible Security by such amount as it considers to be advisable in order
that any event treated for federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of Common Stock or, if that is
not possible, to diminish any income taxes that are otherwise payable because of
that event. In the case of any consolidation or merger of Invatec with or into
any other corporation (other than one in which no change is made in the
outstanding Common Stock), or the sale or transfer of all or substantially all
the properties and assets of Invatec, the Holder of any Convertible Security
then Outstanding will, with certain exceptions, have the right thereafter to
convert that Convertible Security only into the kind and amount of securities,
cash and other property receivable on that consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which that
Convertible Security might have been converted immediately prior to that
consolidation, merger, sale or transfer; and adjustments will be provided for
events subsequent thereto which are as nearly equivalent as practical to the
conversion price adjustments described above.

Invatec will not issue fractional shares of Common Stock on conversion of
any Convertible Security, but, in lieu thereof, will pay a cash adjustment based
on the Closing Price at the close of business on the day of conversion. If any
Convertible Security is surrendered for conversion during the period from the
close of business on any Regular Record Date therefor through and including the
next succeeding Interest Payment Date therefor (except any such Convertible
Security called for redemption on a Redemption Date, or repurchasable on a
Repurchase Date occurring within that period), that Convertible Security when

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surrendered for conversion must be accompanied by payment in New York Clearing
House funds, or other funds acceptable to Invatec, of an amount equal to the
interest thereon which the registered Holder on that Regular Date is to receive.
Except as described in the preceding sentence, Invatec will not pay any interest
on converted Convertible Securities with respect to any Interest Payment Date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends will be made on conversion of any Convertible Security.

SUBORDINATION

Unless a Prospectus Supplement with respect to a series of the Convertible
Securities otherwise provides, the following are the subordination provisions
under the Indenture with respect to that series.

The payment of the principal of and any premium or interest on the
Convertible Securities and any other payment obligations of Invatec in respect
of the Convertible Securities (including any obligation to repurchase the
Convertible Securities) are, to the extent set forth in the Indenture,
subordinated in right of payment to the prior payment in full in cash or cash
equivalents of all Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter incurred. If there is a payment or distribution of
assets to creditors on any liquidation, dissolution, winding up, receivership,
reorganization, assignment for the benefit of creditors, marshaling of assets
and liabilities or any bankruptcy, insolvency or similar case or proceeding of
Invatec, the holders of all Senior Indebtedness will be entitled to receive
payment in full in cash or cash equivalents of all Obligations due or to become
due in respect of that Senior Indebtedness (including interest after the
commencement of any such case or proceeding, notwithstanding that Invatec may be
excused as a result of that case or proceeding from the obligation to pay all or
any part of the interest otherwise payable in respect of any Senior
Indebtedness) before the Holders of the Convertible Securities will be entitled
to receive any payment in respect of the principal of or any premium or interest
on the Convertible Securities, and until all Obligations with respect to the
Senior Indebtedness are paid in full in cash or cash equivalents, any
distribution to which the Holders of the Convertible Securities would be
entitled must be made to the holders of the Senior Indebtedness. Invatec also
may not make any payment (whether by redemption, purchase, retirement,
defeasance or otherwise) on or in respect of the Convertible Securities if (i) a
default in the payment of the principal of or any premium or interest on any
Designated Senior Indebtedness (a "Payment Default") occurs or (ii) any other
default occurs and is continuing with respect to any Designated Senior
Indebtedness which permits holders of Designated Senior Indebtedness as to which
that default relates to accelerate its maturity (a "Nonpayment Default") and
the Trustee receives notice of that default (a "Payment Blockage Notice") from
(a) if that Nonpayment Default shall have occurred under the Credit Facility or
any other secured debt facility with banks or other lenders which provides
revolving credit loans, term loans, receivables financing (including through the
sale of receivables) or letters of credit (each an "Other Debt Facility"), the
representative of the Credit Facility or that Other Debt Facility, as the case
may be, or (b) if that Nonpayment Default shall have occurred with respect to
any other issue of Designated Senior Indebtedness, the holders, or a
representative of the holders, of at least 20% of that Designated Senior
Indebtedness. The payments on or in respect of the Convertible Securities will
be resumed (i) in the case of a Payment Default respecting Designated Senior
Indebtedness, on the date on which that default is cured or waived, and (ii) in
the case of a Nonpayment Default respecting Designated Senior Indebtedness, the
date the applicable Prospectus Supplement specifies.

If the Maturity of any Convertible Securities is accelerated because of an
Event of Default with respect thereto, (i) the Indenture requires Invatec to
promptly notify holders of Designated Senior Indebtedness of that event and (ii)
the Holders of those Convertible Securities will, to the extent permitted by
law, be prohibited for the period the applicable Prospectus Supplement specifies
thereafter from making any bankruptcy filing with respect to Invatec or, to the
extent permitted by law, from filing suit to enforce their rights under the
Indenture.

Unless a Prospectus Supplement provides otherwise for one or more series of
Convertible Securities, the Indenture's definition of "Senior Indebtedness"
will apply to the Convertible Securities. The Indenture will define "Senior
Indebtedness" as the principal of and premium, if any, and interest on and
other Obligations in respect of (i) all secured indebtedness of Invatec for
money borrowed (including any secured

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indebtedness under the Credit Facility and any successor thereto and any secured
indebtedness under all Other Debt Facilities, whether outstanding on the date of
execution of the Indenture or thereafter created, incurred or assumed, and (ii)
any amendments, renewals, extensions, modifications, refinancings and refundings
of any of the foregoing. For purposes of this definition, "indebtedness for
money borrowed" when used with respect to Invatec means (i) any obligation of,
or any obligation guaranteed by, Invatec for the repayment of borrowed money
(including fees, penalties and other obligations in respect thereof), whether or
not evidenced by bonds, debentures, notes or other written instruments, (ii) any
deferred payment obligation of, or any such obligation guaranteed by, Invatec
for the payment of the purchase price of property or assets evidenced by a note
or similar instrument and (iii) any obligation of, or any such obligation
guaranteed by, Invatec for the payment of rent or other amounts under a lease of
property or assets, which obligation is required to be classified and accounted
for as a capitalized lease on the balance sheet of Invatec under generally
accepted accounting principles. For a description of the Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". As used in the Indenture: (i)
"Obligations" in respect of the Senior Indebtedness include any principal,
interest, premiums, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any such indebtedness; and
(ii) "Designated Senior Indebtedness" means (a) Obligations under the Credit
Facility and all secured Other Debt Facilities and (b) any other Senior
Indebtedness the principal amount of which is $25.0 million or more that Invatec
has designated to be "Designated Senior Indebtedness." The Prospectus
Supplement relating to any series of Convertible Securities may provide that the
"Senior Indebtedness" to which the Indenture subordinates Convertible
Securities of that series will include all indebtedness of Invatec for money
borrowed, whether secured or unsecured, except any such indebtedness that, by
the terms of the instrument or instruments by which it was created or incurred,
expressly provides that it (i) is junior in right of payment to those
Convertible Securities or (ii) ranks pari passu in right of payment with those
Convertible Securities.

The Convertible Securities will be obligations exclusively of Invatec.
Invatec currently conducts its operations through its subsidiaries, which are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due in respect of the Convertible Securities or to
make any funds available therefor, whether by dividends, loans or other
payments. The ability of any subsidiary of Invatec to loan or advance funds or
pay dividends to Invatec (i) may be subject to contractual or statutory
restrictions, (ii) will be contingent on the subsidiary's earnings and cash
flows and (iii) will be subject to various business considerations.

The Convertible Securities will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of subsidiaries of Invatec. Any right of Invatec to receive
assets of any of its subsidiaries on the liquidation or reorganization of that
subsidiary (and any consequent right of the Holders of the Convertible
Securities to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors, except to the extent that Invatec is
itself recognized as a creditor of that subsidiary, in which case the claims of
Invatec would still be subordinated to any security in the assets of that
subsidiary and any indebtedness of that subsidiary senior to that held by
Invatec.

The Indenture does not limit or prohibit the incurrence of (i) Senior
Indebtedness or (ii) indebtedness, liabilities or other commitments by Invatec
or its subsidiaries. As of April 1, 1998, the aggregate amount of Senior
Indebtedness to which the Convertible Securities would have been subordinated
was approximately $50.1 million. At the same date, the Convertible Securities
would have ranked PARI PASSU (equally) with $12.9 million aggregate principal
amount of then outstanding Convertible Notes. Invatec expects to incur Senior
Indebtedness from time to time in the future, including Senior Indebtedness
under the Credit Facility. See "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Indenture provides that Invatec will not consolidate with or merge into
any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one

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transaction or a series of related transactions, or permit any single Person to
consolidate with or merge into Invatec, unless (i) if applicable, the Person
formed by such consolidation or into which Invatec is merged or the Person or
corporation which acquires the properties and assets of the Company
substantially as an entirety is a corporation, limited liability company,
partnership or trust organized and validly existing under the laws of the United
States or any state thereof or the District of Columbia and expressly assumes
payment of the principal of and any premium and interest on the Convertible
Securities and the performance or observance of each obligation of Invatec under
the Indenture, (ii) immediately after giving effect to that transaction, no
Event of Default will have occurred and be continuing, (iii) that consolidation,
merger, conveyance, transfer or lease does not adversely affect the validity or
enforceability of the Convertible Securities and (iv) Invatec has delivered to
the Trustee an Officer's Certificate and an Opinion of Counsel, each stating
that the consolidation, merger, conveyance, transfer or lease complies with the
provisions of the Indenture.

CERTAIN RIGHTS TO REQUIRE REPURCHASE OF CONVERTIBLE SECURITIES

If any Repurchase Event (as defined below) occurs on or prior to Maturity
of any Affected Convertible Security (as defined below), each Holder of Affected
Convertible Securities will have the right, at the Holder's option, to require
Invatec to repurchase all or any part of the Holder's Affected Convertible
Securities on the date (the "Repurchase Date") that is 30 days after the date
Invatec gives notice of the Repurchase Event as described below at a price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together
with accrued and unpaid interest to the Repurchase Date. On or prior to the
Repurchase Date, Invatec must deposit with the Trustee or a Paying Agent an
amount of money sufficient to pay the Repurchase Price of the Affected
Convertible Securities to be repurchased on the Repurchase Date.

Failure by Invatec (i) to provide timely notice of a Repurchase Event to
Holders of Affected Convertible Securities or (ii) to repurchase Affected
Convertible Securities when required will result in an Event of Default under
the Indenture whether or not the subordination provisions of the Indenture
permit that repurchase.

On or before the 15th day after a Repurchase Event occurs, Invatec must
mail to the Holders of all Affected Convertible Securities a notice of that
occurrence which states the event constituting the Repurchase Event and the date
thereof, the Repurchase Date, the date by which the repurchase right must be
exercised, the Repurchase Price and the procedures a Holder must follow to
exercise its repurchase right. To exercise this right, a Holder must deliver to
Invatec or its designated agent and to the Trustee, on or before the close of
business on the Repurchase Date, written notice of the Holder's exercise of that
right, together (in the case of written notice to the Trustee) with the
certificates evidencing the Affected Convertible Securities to be repurchased,
duly endorsed for transfer to Invatec. Any such notice will be irrevocable.

A "Repurchase Event" will be the occurrence of a Change in Control or a
Termination of Trading. A "Change in Control" will occur when: (i) all or
substantially all the assets of the Company or of the Company and its
subsidiaries, taken as a whole, are sold in one transaction or any series of
related transactions as an entirety to any Person or related group of Persons;
(ii) any consolidation or merger of Invatec occurs (a) in which Invatec is not
the continuing or surviving corporation (other than a consolidation or merger
with a wholly owned subsidiary of Invatec in which all shares of Common Stock
outstanding immediately prior to the effectiveness thereof are changed into or
exchanged for the same consideration) or (b) pursuant to which the Common Stock
would be converted into cash, securities or other property, in each case other
than a consolidation or merger of Invatec in which the holders of the Common
Stock immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the total voting power of all classes of
capital stock entitled to vote generally in the election of directors of the
continuing or surviving corporation immediately after such consolidation or
merger in substantially the same proportion as their ownership of Common Stock
immediately before such transaction; (iii) any Person, or any Persons acting
together that would constitute a "group" for purposes of Section 13(d) of the
Exchange Act, together with any affiliates thereof, shall beneficially own (as
defined in Exchange Act Rule 13d-3) at least 50% of the total voting power of
all classes of capital stock of Invatec entitled to vote generally in the
election of directors of Invatec; (iv) at any time during any consecutive
two-year period,

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individuals who at the beginning of that period constituted the Board of
Directors (together with any new directors whose election by the Board or whose
nomination for election by the stockholders of Invatec was approved by a vote of
66 2/3% of the directors then still in office who were either directors at the
beginning of that period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board then in office; or (v) Invatec is liquidated or dissolved or adopts a plan
of liquidation or dissolution.

A "Termination of Trading" will occur if the Common Stock (or other
common stock into which the Convertible Securities are then convertible) is
neither listed for trading on a national securities exchange in the United
States nor approved for trading on an established automated over-the-counter
trading market in the United States.

If a Repurchase Event occurs, the then Outstanding Convertible Securities
will be the "Affected Convertible Securities" whose Holders will have the
repurchase right described above.

The right of Holders to require Invatec to repurchase Affected Convertible
Securities if a Repurchase Event occurs could create an Event of Default under
Senior Indebtedness, as a result of which the Indenture's subordination
provisions could block any repurchase. See " -- Subordination." Failure by
Invatec to repurchase the Affected Convertible Securities when required will
result in an Event of Default with respect to the Affected Convertible
Securities whether or not those subordination provisions permit the repurchase.
Financial or other covenants of Invatec respecting Senior Indebtedness may
restrict its ability to pay cash to the Holders of Affected Convertible
Securities if a Repurchase Event occurs.

If a Repurchase Event occurs and Holders exercise their rights to require
Invatec to repurchase Affected Convertible Securities, Invatec intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
and 14e-1, as then in effect, with respect to any repurchase.

The foregoing provisions (i) may not afford Holders protection in the event
of highly leveraged or other transactions involving Invatec which may adversely
affect Holders and (ii) may discourage open market purchases of the Common Stock
or a non-negotiated tender or exchange offer for such stock and, accordingly,
may limit a stockholder's ability to realize a premium over the market price of
the Common Stock in connection with any such transaction.

EVENTS OF DEFAULT

Unless a Prospectus Supplement with respect to any series of the
Convertible Securities otherwise provides, the following are Events of Default
under the Indenture with respect to that series: (i) default in the payment of
principal of or any premium on any Convertible Security when due (even if the
Indenture's subordination provisions prohibit that payment); (ii) default in the
payment of any interest on any Convertible Security of that series when due,
which default continues for 30 days (even if the Indenture's subordination
provisions prohibit that payment); (iii) failure to provide timely notice of a
Repurchase Event to Holders of Affected Convertible Securities of that series as
required by the Indenture; (iv) default in the payment of the Repurchase Price
in respect of any Affected Convertible Security of that series on the Repurchase
Date therefor (even if the Indenture's subordination provisions prohibit that
payment); (v) default in the performance or breach of any other covenant or
warranty of Invatec in the Indenture (other than a covenant the Indenture
includes for one or more series of Convertible Securities other than Convertible
Securities of that series) which continues for 60 days after written notice as
the Indenture provides; (vi) default under one or more bonds, debentures, notes
or other evidences of indebtedness for money borrowed by Invatec or any of its
consolidated subsidiaries or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by Invatec or any of its
consolidated subsidiaries, whether that indebtedness now exists or is hereafter
created, which default individually or in the aggregate constitutes a failure to
pay the principal of indebtedness in excess of $10 million when due and payable
after the expiration of any applicable grace period with respect thereto or
results in indebtedness in excess of $10 million becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without that indebtedness having been discharged, or that acceleration
having

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been rescinded or annulled, within a period of 30 days after there shall have
been given to Invatec by the Trustee or to Invatec and the Trustee by Holders of
at least 25% in aggregate principal amount of the Outstanding Convertible
Securities a written notice specifying such default and requiring Invatec to
cause such indebtedness to be discharged or cause such acceleration to be
rescinded or annulled; (vii) certain events in bankruptcy or reorganization of
or similar events respecting Invatec or any of its Significant Subsidiaries; and
(viii) any other Event of Default as the applicable Prospectus Supplement may
specify with respect to the Convertible Securities of that series.

If an Event of Default with respect to any Outstanding series of
Convertible Securities occurs and is continuing, the Trustee or Holders of not
less than 25% in aggregate principal amount of the Outstanding Convertible
Securities of that series (if the Event of Default is one of the types described
in clause (i), (ii) or (viii) above) or at least 25% in aggregate principal
amount of all Outstanding Convertible Securities (if the Event of Default is of
any other type) may declare the principal of and any premium and interest on all
the Outstanding Convertible Securities of the applicable series (or of all
Outstanding Convertible Securities, as the case may be) to be due and payable
immediately, but if a majority in principal amount of Holders of Outstanding
Convertible Securities of the applicable series (or of all Outstanding
Convertible Securities, as the case may be) waive any past default (except the
nonpayment of any premium or interest on or principal of any Convertible
Security and subject to certain other limitations), then such default will cease
to exist and any Event of Default arising therefrom will be deemed cured for
every purpose of the Indenture; but no such waiver will extend to any subsequent
or other default. If an Event of Default occurs and is continuing as a result of
an event of bankruptcy or reorganization of Invatec or any of its Significant
Subsidiaries, the principal of and any premium and accrued and unpaid interest
on all Outstanding Convertible Securities will automatically become due and
payable without any declaration or other act on the part of the Trustee or any
Holder of any Convertible Securities. Invatec must furnish to the Trustee
annually a statement as to the performance by Invatec of certain of its
obligations under the Indenture and as to any default in that performance. The
Indenture provides that the Trustee may withhold notice to Holders of the
Convertible Securities of any series of any continuing default (except in the
case of a default in payment of the principal of or any premium or interest on
those Convertible Securities), if the Trustee considers it in the interest of
those Holders to do so.

MODIFICATIONS AND AMENDMENTS

Invatec and the Trustee may modify or amend the Indenture without the
consent of Holders to: (i) set forth the terms of the Convertible Securities of
any series, including for purposes of that series any change in the definition
of Senior Indebtedness; (ii) evidence the succession of another Person to
Invatec and the assumption by any such successor of the covenants of Invatec in
the Indenture and the Convertible Securities; (iii) for the benefit of the
Holders of Convertible Securities of any or all series, add to the covenants of
Invatec, add an additional Event of Default or surrender any right or power
conferred on Invatec; (iv) secure the Convertible Securities; (v) make provision
with respect to the conversion rights of Holders if a consolidation, merger or
sale of assets involving Invatec occurs, as required by the Indenture; (vi)
evidence and provide for the acceptance of appointment by a successor Trustee or
successor Trustees with respect to the Convertible Securities; or (vii) cure any
ambiguity in or omission from, or correct or supplement any provision in, the
Indenture or the Convertible Securities which may be defective or inconsistent
with any other provision or make any other provisions with respect to matters or
questions arising under the Indenture which are not inconsistent with the
provisions of the Indenture; provided, however, that no such modification or
amendment described in this clause (vii) may adversely affect the interest of
Holders of Securities of any series in any material respect.

Invatec and the Trustee may modify or amend the Indenture with the consent
of the Holders of a majority in principal amount of the Outstanding Convertible
Securities affected thereby; provided, that no such amendment or modification
may, without the consent of the Holder of each Outstanding Convertible Security
affected thereby, (i) change the stated maturity date of the principal of, or
any installment of principal or interest on, that Convertible Security or reduce
the principal amount thereof or the rate of interest thereon or any premium
payable on the redemption thereof, or change the coin or currency in which

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that Convertible Security or any premium or interest thereon is payable, or
impair the right to institute suit for the enforcement of any payment on or with
respect to that Convertible Security, (ii) reduce the percentage in principal
amount of the Outstanding Convertible Securities the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose Holders is
required for any waiver of compliance with certain provisions of the Indenture
or certain defaults thereunder and their consequences or (iii) modify any
Indenture provisions relating to the subordination of the Outstanding
Convertible Securities in a manner adverse to their Holders.

SATISFACTION AND DISCHARGE

Invatec may discharge its obligations under the Indenture while Convertible
Securities remain Outstanding, subject to certain conditions, if all Outstanding
Convertible Securities have become due and payable or will become due and
payable at their scheduled maturity or for any other reason within one year, if
Invatec has deposited with the Trustee an amount in cash sufficient (without any
consideration of any investment of that cash) to pay and discharge all
Outstanding Convertible Securities on the date of their scheduled maturity or
the scheduled date of other payment.

MEETINGS OF HOLDERS

The Indenture provides for meetings of the Holders of Convertible
Securities of any series. The Trustee, Invatec or the holders of at least 10% in
principal amount of the Outstanding Convertible Securities of any series may
call for a meeting of Holders of that series at any time, in any such case on
notice given as the Indenture provides. Except for any consent that must be
given by the Holder of each Outstanding Convertible Security affected thereby,
as described above under " -- Modifications and Amendments," any resolution
presented at a meeting or adjourned meeting at which a quorum is present may be
adopted by the affirmative vote of the Holders of a majority in principal amount
of the Outstanding Convertible Securities of that series; provided, however,
that, except for any consent that must be given by the Holder of each
Outstanding Convertible Security affected thereby, any resolution with respect
to any request, demand, authorization, direction, notice, consent, waiver or
other action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority in principal amount of the Outstanding
Convertible Securities of a series, may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Convertible Securities of that series. Subject to the proviso set forth above,
any resolution passed or decision taken at any meeting of Holders of Convertible
Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Convertible Securities of that series. The quorum at
any meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Convertible Securities of a series.

FORM, DENOMINATION AND REGISTRATION

Unless the applicable Prospectus Supplement provides otherwise, the
Convertible Securities will be issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiples thereof.

GOVERNING LAW

The Indenture and the Convertible Securities will be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to that state's conflict of laws principles.

INFORMATION CONCERNING THE TRUSTEE

The Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions,
except that, if it acquires any conflicting interest (as defined), it must
eliminate that conflict or resign.

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Invatec and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.

DESCRIPTION OF CAPITAL STOCK

Invatec's Charter authorizes Invatec to issue 30,000,000 shares of Common
Stock and 5,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At April 1, 1998, 8,698,026 shares of Common Stock were
issued and outstanding and no shares of Preferred Stock had been issued. The
following summary is qualified in its entirety by reference to the Charter,
which is an exhibit to the Acquisition Shelf Registration Statement.

COMMON STOCK

Each share of Common Stock (i) has one vote in the election of each
director and on other corporate matters, (ii) affords no cumulative voting or
preemptive rights and (iii) is not convertible, redeemable, assessable or
entitled to the benefits of any sinking fund. Holders of Common Stock are
entitled to dividends in such amounts and at such times as the Board may in its
discretion declare out of funds legally available therefore.

PREFERRED STOCK

The Board may direct Invatec to issue shares of Preferred Stock from time
to time. Subject to certain Charter provisions and applicable law, it may,
without any action by holders of the Common Stock, (i) adopt resolutions to
issue the shares in one or more classes or series, (ii) fix the number of shares
and change the number of shares constituting any class or series and (iii)
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including dividend rights and rates, redemption terms
and prices, repurchase obligations, conversion rights and liquidation
preferences, of the shares constituting any class or series.

The Board could cause Invatec to issue shares of, or rights to purchase,
Preferred Stock the terms of which might (i) discourage an unsolicited proposal
to acquire the Company, (ii) facilitate a particular business combination
involving the Company or (iii) adversely affect the voting power of holders of
the Common Stock. Any such action could discourage a transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over its then market
price.

STOCKHOLDER RIGHTS PLAN

Each share of Common Stock outstanding or offered hereby includes one right
("Right") to purchase from Invatec a unit consisting of one one-hundredth of a
share (a "Fractional Share") of Series A Junior Participating Preferred Stock,
par value $.001 per share of Invatec (the "Junior Participating Preferred
Stock"), at a purchase price of $48.00 per Fractional Share, subject to
adjustment in certain events (the "Purchase Price"). The following summary
description of the Rights is qualified in its entirety by reference to the
Rights Agreement between Invatec and a Rights Agent (the "Rights Agreement"),
the form of which is filed as an exhibit to the Acquisition Shelf Registration
Statement.

Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur on the earlier of (i)
10 days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
Common Stock (the date of the announcement being the "Stock Acquisition Date")
or (ii) 10 business days following the commencement of a tender or exchange
offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as Philip (including, for purposes of the
Rights Agreement, its wholly owned subsidiaries), together with all its
affiliates and associates, remains the beneficial owner of

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15% or more of the outstanding shares of Common Stock, Philip shall not be or
become an Acquiring Person. In certain circumstances, the Distribution Date may
be deferred by the Board. Certain inadvertent acquisitions will not result in a
person's becoming an Acquiring Person if the person promptly divests itself of
sufficient Common Stock. Until the Distribution Date, (i) the Rights will be
evidenced by the Common Stock certificates and will be transferred with and only
with those certificates, (ii) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.

The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 30, 2007, unless earlier redeemed or
exchanged by Invatec as described below.

As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board, no other shares of
Common Stock issued after the Distribution Date will be issued with Rights.

In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board determines to be fair to and otherwise in the best
interests of Invatec and its stockholders (a "Permitted Offer")), each holder
of a Right will thereafter have the right to receive, on exercise of that Right,
a number of shares of Common Stock (or, in certain circumstances, cash, property
or other securities of Invatec) having a Current Market Price (as defined in the
Rights Agreement) equal to two times the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any Triggering Event
(as defined below), all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights are
no longer redeemable by Invatec as set forth below.

In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) Invatec is acquired in a merger or
other business combination transaction (other than certain mergers that follow a
Permitted Offer) or (ii) 50% or more of the Company's assets or earning power is
sold or transferred, each holder of a Right (except Rights that previously have
been voided as set forth above) shall thereafter have the right to receive, on
exercise of such Right, a number of shares of common stock of the acquiring
company having a Current Market Price equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."

The number of outstanding Rights associated with a share of Common Stock,
or the number of Fractional Shares of Junior Participating Preferred Stock
issuable upon exercise of a Right and the Purchase Price, are subject to
adjustment in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Common Stock occurring prior to the Distribution Date.
The Purchase Price payable, and the number of Fractional Shares of Junior
Participating Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution in the event of certain transactions affecting the Junior Participating
Preferred Stock.

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Junior Participating Preferred Stock that are not
integral multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Junior Participating Preferred Stock on the last trading date prior to the date
of exercise. Pursuant to the Rights Agreement, Invatec reserves the right to
require prior to the occurrence of a Triggering Event that, on any exercise of
Rights, a

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number of Rights be exercised so that only whole shares of Junior Participating
Preferred Stock will be issued.

At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, Invatec may redeem the Rights in whole,
but not in part, at a price of $.01 per Right, payable, at the option of
Invatec, in cash, shares of the Common Stock or such other consideration as the
Board may determine. Immediately on the effectiveness of the action of the Board
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.01 redemption price.

At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding or the occurrence of a Flip-Over Event, Invatec may, at its option,
exchange the Rights (other than Rights owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person, which will have become void)
in whole or in part, at an exchange ratio of one share of Common Stock, and/or
other equity securities deemed to have the same value as one share of Common
Stock, per Right, subject to adjustment.

Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board as long as the Rights are redeemable.
Thereafter, the provisions of the Rights Agreement other than the redemption
price may be amended by the Board only in order to cure any ambiguity, defect or
inconsistency, to make changes that do not materially adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment to lengthen the time period governing
redemption shall be made at such time as the Rights are not redeemable. Until a
Right is exercised, the holder thereof, as such, will have no rights to vote or
receive dividends or any other rights as a stockholder of Invatec.

The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Board. As a result, the overall effect of the Rights
may be to render more difficult or discourage any attempt to acquire the
Company, even if such acquisition may be favorable to the interests of the
Company's stockholders. Because the Board can redeem the Rights or approve a
Permitted Offer, the Rights should not interfere with a merger or other business
combination approved by the Board. The Rights are being issued to protect
Invatec's stockholders from coercive or abusive takeover tactics and to afford
the Board more negotiating leverage in dealing with prospective acquirers.

STATUTORY BUSINESS COMBINATION PROVISION

As a Delaware corporation, Invatec is subject to Section 203 of the DGCL.
In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a Delaware corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with the
corporation for three years following the date such person became an interested
stockholder unless: (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) on consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination was approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a

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person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.

OTHER MATTERS

Delaware law authorizes Delaware corporations to limit or eliminate the
personal liability of their directors to them and their stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors of Delaware corporations are accountable to those corporations and
their stockholders for monetary damages for conduct constituting gross
negligence in the exercise of their duty of care. Delaware law enables Delaware
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Charter limits the liability of directors of Invatec to
Invatec or its stockholders to the fullest extent permitted by Delaware law.
Specifically, no member of the Board will be personally liable for monetary
damages for breach of the member's fiduciary duty as a director, except for
liability (i) for any breach of the member's duty of loyalty to Invatec or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) for any transaction from which the member
derived an improper personal benefit. This Charter provision could have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited Invatec and its stockholders.
Invatec's Bylaws (the "Bylaws") provide indemnification to Invatec's officers
and directors and certain other persons with respect to certain matters, and
Invatec has entered into agreements with each of its directors and executive
officers providing for indemnification with respect to certain matters.

The Charter provides that stockholders may act only at an annual or special
meeting of stockholders and may not act by written consent. The Bylaws provide
that only the Chairman of the Board, the President or a majority of the Board
may call a special meeting of stockholders.

The Charter provides that the Board will consist of three classes of
directors serving for staggered terms, and Invatec currently contemplates that
approximately one-third of the Board will be elected each year. This Charter
provision could prevent a party who acquires control of a majority of the
outstanding voting stock of Invatec from obtaining control of the Board until
the second annual stockholders' meeting following the date that party obtains
that control.

The Charter provides that the number of directors will be as determined by
the Board from time to time, but will not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least a majority of all outstanding voting stock
entitled to vote. This provision, in conjunction with the Charter provisions
authorizing the Board to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.

STOCKHOLDER PROPOSALS

The Bylaws contain advance-notice and other procedural requirements that
apply to stockholder nominations of persons for election to the Board at any
annual or special meeting of stockholders and to stockholder proposals that any
other action be taken at any annual meeting. In the case of any annual meeting,
a stockholder proposing to nominate a person for election to the Board or
proposing that any other action be taken must give the Secretary of Invatec
written notice of the proposal not less than 90 days before the anniversary date
of the immediately preceding annual meeting (subject to certain exceptions if
the pending annual meeting date differs by more than specified periods from that
anniversary date). If a special

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meeting is called for the election of directors, a stockholder proposing to
nominate a person for that election must give the Secretary of Invatec written
notice of the proposal no later than the close of business on the 10th day
following the first to occur of (i) the day on which notice of the date of the
special meeting was mailed to stockholders or (ii) the day public disclosure of
the date of the special meeting was made. The Bylaws prescribe the specific
information any advance written stockholder notice must contain. The foregoing
summary is qualified in its entirety by reference to the Bylaws, which are an
exhibit to the Registration Statement.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

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SHARES ELIGIBLE FOR FUTURE SALE

At April 1, 1998, 8,698,026 shares of Common Stock were outstanding. The
3,852,500 shares sold in the IPO are freely tradable by the public. The
remaining outstanding shares of Common Stock (collectively, the "Restricted
Shares") have not been registered under the Securities Act and may be resold
publicly only following their effective registration under that act or pursuant
to an available exemption from the registration requirements of that act (such
as Rule 144 thereunder).

Invatec has filed a registration statement on Form S-8 under the Securities
Act to register the shares of Common Stock reserved or to be available for
issuance pursuant to the Incentive Plan. Shares of Common Stock issued pursuant
to the Incentive Plan generally will be available for sale in the open market by
holders who are not affiliates of the Company and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of the Company.

In general, under Rule 144 if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from the Issuer or
from an affiliate of the issuer, a person (or persons whose shares of Common
Stock are aggregated), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Common Stock that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (I.E., 86,980 shares at April 1, 1998) and
(ii) the average weekly trading volume during a preceding period of four
calendar weeks. Sales under Rule 144 are also subject to certain provisions as
to the manner of sale, notice requirements and the availability of current
public information about the Company. In addition, under Rule 144(k), if a
period of at least two years has elapsed since the later of the date restricted
securities were acquired from the Company or the date they were acquired from an
affiliate of the Company, a stockholder who is not an affiliate of the Company
at the time of sale and has not been an affiliate for at least three months
prior to the sale would be entitled to sell shares of Common Stock in the public
market immediately without compliance with the foregoing requirements under Rule
144. Rule 144 does not require the same person to have held the securities for
the applicable periods. The foregoing summary of Rule 144 is not intended to be
a complete description thereof. The SEC has proposed certain amendments to Rule
144 that would, among other things, eliminate the manner of sale requirements
and revise the notice provisions of that rule. The SEC has also solicited
comments on other possible changes to Rule 144, including possible revisions to
the one-and two-year holding periods and the volume limitations referred to
above.

Invatec has agreed not to offer or sell any shares of Common Stock until
after April 20, 1998 (the "Lockup Period") without the prior written consent
of NationsBanc Montgomery Securities, LLC, except that Invatec may issue shares
of Common Stock in connection with acquisitions or pursuant to the conversion of
the convertible notes issued to acquire certain Acquired Businesses and the
exercise of options outstanding when the IPO closed. Philip and the Miller
Interests have agreed not to sell the shares of Common Stock they owned when the
IPO closed until October 29, 1999 (provided that the Miller Interests may sell
shares of Common Stock after April 20, 1998 with the prior written consent of
NationsBanc Montgomery Securities, LLC). In addition, the stockholders of SVS
and the directors and executive officers of Invatec have agreed not to sell the
shares of Common Stock they owned when the IPO closed until after October 28,
1998. Invatec has agreed that it will not waive any of those contractual
prohibitions without the prior written consent of NationsBanc Montgomery
Securities, LLC.

Invatec has granted "piggyback" registration rights to Philip, Messrs.
Haynes, Schugart, Rigas and Wren and the holders of the convertible notes issued
to purchase certain Acquired Businesses such that, following the applicable
restricted period, they may include any shares of Common Stock owned by them in
certain types of registrations by Invatec under the Securities Act of any Common
Stock for its own account for cash, subject to certain exceptions, Invatec is
generally required to pay the costs associated with any such offering other than
underwriting discounts and commissions and transfer taxes attributable to the
shares sold on behalf of the selling stockholders. The registration rights
agreements provide that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter or Invatec's financial advisor, as the case may be,
determines that

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market conditions so require. Invatec will indemnify the selling stockholders
thereunder, and those stockholders will indemnify Invatec, against certain
liabilities in respect of any registration statement or offering that includes
shares pursuant to the registration rights agreements.

Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the shares of Common
Stock and Convertible Debt Securities this Prospectus covers by affiliates of
the businesses the Company acquires for a period of one year from the date of
their acquisition (or such shorter period as the SEC may prescribe), but
otherwise these securities will be freely tradable after their issuance by
persons not affiliated with the Company unless the Company contractually
restricts their sale, and sales of these securities during the Lockup Period
would require the prior written consent of NationsBanc Montgomery Securities,
LLC.

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following summarizes the material United States federal income tax
consequences under generally applicable current law of the acquisition,
ownership, conversion and disposition of Convertible Securities and Common Stock
acquired from Invatec in connection with the direct and indirect acquisition of
businesses, properties or securities in a business combination transaction (a
"Business Combination") and the acquisition, ownership, conversion and
disposition of Common Stock acquired on the conversion of one or more
Convertible Securities acquired from Invatec in a Business Combination by
persons who hold those Convertible Securities and any such Common Stock as
capital assets. It does not, however, discuss the effect of (i) special rules,
such as those applicable to tax-exempt organizations, insurance companies,
financial institutions, persons who hold the Convertible Securities or Common
Stock in connection with a straddle, individuals who expatriate from the United
States or dealers, (ii) rules that may permit (a) gain realized on the receipt
of Convertible Securities in exchange for property transferred to Invatec in a
Business Combination to be reported on the installment method or (b) the receipt
of Convertible Securities or Common Stock in a Business Combination without
recognition of gain or loss or (iii) any foreign, state or local tax law.
Accordingly, each person who is considering the acquisition of Convertible
Securities or Common Stock in a Business Combination pursuant to this Prospectus
should consult his or her own tax advisor regarding the matters discussed herein
in light of his or her particular circumstances and the application of state,
local and foreign tax laws.

The following statements are based on the Internal Revenue Code of 1986, as
amended (the "Code"), existing regulations thereunder and the current judicial
and administrative interpretations thereof.

OWNERSHIP BY U.S. PERSONS

The following applies to a person who is a citizen or resident of the
United States (a "U.S. Holder"), a corporation or partnership created or
organized in the United States or any state thereof or a trust that is described
in Section 7701(a)(30) of the Code or an estate that is not a foreign estate
within the meaning of Section 7701(a)(31) of the Code.

INTEREST ON CONVERTIBLE SECURITIES. The portion of any stated interest on
a Convertible Security which is qualified stated interest will be taxable as
ordinary income at the time that interest is paid or accrued in accordance with
the U.S. Holder's method of accounting for United States federal income tax
purposes. The portion of the stated interest on a Convertible Security which is
not qualified stated interest and, in certain circumstances, a portion of the
stated principal on a Convertible Security will be classified as original issue
discount. Any such original issue discount will be included in income at times
that generally precede the payment of that original issue discount. The effect
of the foregoing principles on a particular Convertible Security will depend, in
part, on the terms of the Convertible Security. A person who is considering the
acquisition of a Convertible Security in a Business Combination pursuant to this
Prospectus should consult with his or her tax advisor regarding the amount of
any such original issue discount with respect to that Convertible Security and
the effect thereof on such person.

CONVERSION OF CONVERTIBLE SECURITIES. A U.S. Holder not using the
installment method to report income on the receipt of a Convertible Security in
a Business Combination will generally not recognize gain or loss on the
conversion of that Convertible Security into Common Stock except for the capital
gain or loss resulting from the receipt of cash in lieu of a fractional share
equal to that amount of cash reduced by the basis of the portion of the
Convertible Security in respect of which that cash was paid. The basis of the
Common Stock received on the conversion will be the adjusted basis of the
converted Convertible Security at the time of conversion increased by any gain
that is recognized, decreased by any loss that is recognized and decreased by
any cash that is received. The holding period of that Common Stock will include
the holding period of the converted Convertible Security.

Rev. Rul. 72-264 provides that (i) a U.S. Holder using the installment
method to report income on the receipt of a Convertible Security (any such
Convertible Security is referred to herein as an "Installment Method
Convertible Security") in a Business Combination will recognize gain or loss on
the conversion of that Installment Method Convertible Security into Common Stock
and (ii) the amount of that gain or loss

53
<PAGE>
will be the amount of cash received in lieu of a fractional share increased by
the fair market value of the Common Stock received and reduced by the basis (as
defined in Section 453B(b) of the Code) of that Convertible Security. Any gain
or loss so recognized will be considered to result from the sale or exchange of
the property in exchange for which the Installment Method Convertible Security
was received.

CONSTRUCTIVE DIVIDEND. A distribution to holders of Common Stock may cause
a deemed distribution (which will be a dividend to the extent of the current or
accumulated earnings and profits of Invatec) to the holders of Convertible
Securities if the conversion price or conversion ratio of the Convertible
Securities is adjusted to reflect that distribution.

SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK. Gain or loss
will be recognized on the sale or exchange of Convertible Securities or of
Common Stock in an amount equal to the difference between (i) the amount of cash
and the fair market value of any other property received by the U.S. Holder
(excluding, in the case of Convertible Securities, any amount representing
accrued, but theretofore unrecognized, interest, which will be taxable as such)
and (ii) the Holder's adjusted basis in the property sold or exchanged. If the
Convertible Security is an Installment Method Convertible Security, any gain or
loss recognized on the sale or exchange thereof will be considered to result
from the sale or exchange of the property in exchange for which the Installment
Method Convertible Security was received. If the Convertible Security is not an
Installment Method Convertible Security, any such gain (other than gain
characterized as interest under the market discount rules) or loss with respect
to that Convertible Security will be a capital gain or loss if the Convertible
Securities are held as capital assets. Gain or loss recognized on the sale or
exchange of Common Stock will be a capital gain or loss if the Common Stock is
held as a capital asset.

DIVIDENDS ON COMMON STOCK. Distributions on the Common Stock will be
dividends to the extent of the current or accumulated earnings and profits of
Invatec, then a nontaxable return of capital reducing the Holder's adjusted
basis in the Common Stock until such adjusted basis is reduced to zero and
finally an amount received in exchange for the Common Stock. Dividends paid to
domestic corporations may qualify for the dividends-received deduction subject
to certain limiting provisions.

OWNERSHIP BY NON-U.S. HOLDERS

The following applies to a person who is not a U.S. Holder (a "Non-U.S.
Holder") and to the income received thereby, such as interest, dividends and
gain or loss on disposition, with respect to Convertible Securities and Common
Stock which is not effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States. Any such effectively connected
items of income generally will be subject to the United States federal income
tax that applies to U.S. Holders, and, in the case of such a Non-U.S. Holder
that is a foreign corporation, those items also will be subject to the branch
profits tax.

INTEREST ON CONVERTIBLE SECURITIES. Interest paid on Convertible
Securities to a Non-U.S. Holder will not be subject to United States federal
income tax or to withholding under the portfolio interest exemption in respect
thereof if: (i) the beneficial owner (or, if certain requirements are satisfied,
a member of a class of financial institutions) certifies, under penalties of
perjury, that the beneficial owner is not a U.S. Holder and provides the
beneficial owner's name and address; (ii) the Non-U.S. Holder does not own
actually or constructively 10% or more of the total voting power of all classes
of stock of Invatec entitled to vote (Common Stock into which a Convertible
Security can be converted is constructively owned for these purposes); (iii) the
Non-U.S. Holder is not a controlled foreign corporation with respect to which
Invatec is a "related person" within the meaning of Section 864(d)(4) of the
Code; and (iv) the Non-U.S. Holder is not a bank holding the Convertible
Securities as a result of an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business. Accrued
market discount on a Convertible Security is not treated for these purposes as
interest income.

If the foregoing conditions are not satisfied, then the interest generally
will be subject to United States federal income tax withholding at a rate of 30%
(or any lower rate provided by any applicable treaty).

SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK; CONVERSION OF
CONVERTIBLE SECURITIES. A Non-U.S. Holder generally will not be subject to
United States federal income tax on gain

54
<PAGE>
recognized on the sale or exchange of Convertible Securities or Common Stock or
on the conversion of a Convertible Security unless (i) the Holder is an
individual who is present in the United States for 183 or more days in the
taxable year and certain other conditions are satisfied or (ii) Invatec is (as
is not expected) a "United States real property holding corporation," as
defined in Section 897 of the Code, and certain exceptions do not apply.
Notwithstanding the foregoing, if any Convertible Security is received in
exchange for property used in the conduct of a trade or business in the United
States and the gain that was realized on the receipt of that Convertible
Security was reported on the installment method, any gain that is realized on
the collection, conversion, sale, exchange or other disposition of that
Convertible Security may be subject to United States income tax as though the
Non-U.S. Holder were a citizen or resident of the United States.

DIVIDENDS ON COMMON STOCK. Any distribution on Common Stock to a Non-U.S.
Holder will be subject to United States federal income tax withholding at a rate
of 30% (or any lower rate provided by any applicable treaty).

ESTATE TAX. An individual Non-U.S. Holder of a Convertible Security will
not be required to include the value of that Convertible Security in his gross
estate for United States federal estate tax purposes, if (i) interest received
at the time of death would have been exempt from income tax under the portfolio
interest exemption (which is discussed above) (ii) the required statement that
the beneficial owner is not a U.S. person has been filed and, at the time of the
Holder's death, (iii) payments of interest on that Convertible Security would
not have been effectively connected with the conduct by the Holder of a trade or
business in the United States.

BACKUP WITHHOLDING; INFORMATION REPORTING

U.S. HOLDERS. A noncorporate U.S. Holder who owns Convertible Securities
will be subject to backup withholding at the rate of 31% as well as information
reporting with respect to both interest paid on the Convertible Securities and
the proceeds of any sale, exchange or redemption thereof if the payee fails to
furnish a taxpayer identification number and in certain other circumstances.

NON-U.S. HOLDERS. A noncorporate Non-U.S. Holder who delivers the
statement discussed above to establish the availability of the portfolio
interest exemption in respect of interest on a Convertible Security is not
subject to backup withholding or information reporting in respect of the
interest paid on that Convertible Security.

A Non-U.S. Holder will be exempt from backup withholding and from
information reporting with respect to a payment of proceeds from the sale or
exchange of a Convertible Security through a broker if such Non-U.S. Holder is
an "exempt foreign person", and provides the broker with a statement to that
effect, or the payment is made through a foreign office of certain foreign
brokers. A Non-U.S. Holder should consult with its own advisers as to the
exemptions discussed in this paragraph.

CREDITS AND REFUNDS OF BACKUP WITHHOLDING. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against the
Holder's United States federal income tax liability if certain information is
furnished to the Internal Revenue Service.

PLAN OF DISTRIBUTION

This Prospectus covers the offer and sale of up to 5,000,000 shares of
Common Stock and $50,000,000 aggregate principal amount of Convertible Debt
Securities which Invatec may issue from time to time in connection with future
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions.

Invatec expects that (i) it will determine the terms on which it may issue
the shares of Common Stock and Convertible Debt Securities covered hereby by
direct negotiations with the owners or controlling persons of the businesses or
assets to be acquired, (ii) the shares of Common Stock issued will be valued at
prices reasonably related to market prices prevailing either at the time an
acquisition agreement is executed or at or about the time of delivery of those
shares and (iii) the Convertible Debt Securities issued will be valued at prices
reasonably related to their principal amount.

55
<PAGE>
LEGAL MATTERS

Certain legal matters in connection with the issuance of the Common Stock
and the Convertible Debt Securities offered hereby are being passed on for
Invatec by Baker & Botts, L.L.P., Houston, Texas.

EXPERTS

Except as noted below, the audited financial statements included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The consolidated financial statements of Harley as of October 31, 1995 and
1996 and for each of the three years in the period ended October 31, 1996 and
the financial statements of GSV, Inc. as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996, and the
statements of operations, stockholders' equity, and cash flows of GSV, Inc. for
the two months ended February 28, 1997, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.

The financial statements of Cypress Industries, Inc. as of December 31,
1997 and for the year then ended included in this Prospectus have been audited
by Crowe Chizek and Company LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

Invatec is subject to the reporting requirements of the Exchange Act, and,
in accordance therewith, files reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information, once filed,
may be inspected, without charge, at the public reference facilities of the SEC
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and its regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any portion of
these documents can be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains an Internet web site
that contains reports, proxy statements and other information regarding issuers
(including Invatec) that file electronically with the SEC. The address of that
site is http://www.sec.gov.

Invatec has filed the Acquisition Shelf Registration Statement on Form S-4
under the Securities Act with the SEC with respect to this offering. This
Prospectus, filed as a part of the Acquisition Shelf Registration Statement,
does not contain all the information set forth therein, or the exhibits and
schedules thereto, in accordance with the rules and regulations of the SEC, and
reference hereby is made to that omitted information. The statements in this
Prospectus concerning documents filed or incorporated by reference as exhibits
to the Acquisition Shelf Registration Statement accurately describe the material
provisions of those documents and are qualified in their entirety by reference
to those exhibits for complete statements of their provisions. The Acquisition
Shelf Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the principal office of the SEC in Washington, D.C., as
described above, and are also available at the SEC's Internet web site described
above.

56
<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
------
Innovative Valve Technologies,
Inc. and Acquired Businesses
Unaudited Pro Forma Combined
Financial Statements
Pro Forma Combined Balance
Sheet as of December 31,
1997 (unaudited)........... F-3
Pro Forma Combined
Statement of Operations for
the Year Ended December 31,
1997 (unaudited)........... F-4
Pro Forma Consolidated
Statement of Operations for
the Year Ended December 31,
1997 (unaudited)........... F-5
Notes to Unaudited Pro
Forma Combined Financial
Statements................. F-6
Innovative Valve Technologies,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-9
Consolidated Balance
Sheets..................... F-10
Consolidated Statements of
Operations................. F-11
Consolidated Statements of
Stockholders' Equity
(Deficit).................. F-12
Consolidated Statements of
Cash Flows................. F-13
Notes to Consolidated
Financial Statements....... F-14

Innovative Valve Technologies,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-26
Consolidated Balance
Sheet...................... F-27
Consolidated Statement of
Operations................. F-28
Consolidated Statement of
Stockholders' Deficit...... F-29
Consolidated Statement of
Cash Flows................. F-30
Notes to Consolidated
Financial Statements....... F-31
The Safe Seal Company, Inc. and
Subsidiaries
Report of Independent
Public Accountants......... F-35
Consolidated Balance
Sheets..................... F-36
Consolidated Statements of
Operations................. F-37
Consolidated Statements of
Stockholders' Equity
(Deficit).................. F-38
Consolidated Statements of
Cash Flows................. F-39
Notes to Consolidated
Financial Statements....... F-40

Harley Industries, Inc. and
Subsidiaries
Independent Auditors'
Reports.................... F-48
Consolidated Balance
Sheets..................... F-50
Consolidated Statements of
Operations................. F-51
Consolidated Statements of
Stockholders' Equity....... F-52
Consolidated Statements of
Cash Flows................. F-53
Notes to Consolidated
Financial Statements....... F-54

Steam Supply Group
Report of Independent
Public Accountants......... F-63
Combined Balance Sheets.... F-64
Combined Statements of
Operations................. F-65
Combined Statements of
Stockholders' Equity
(Deficit).................. F-66
Combined Statements of Cash
Flows...................... F-67
Notes to Combined Financial
Statements................. F-68

F-1
<PAGE>

PAGE
------
ICE/VARCO Group
Report of Independent
Public Accountants......... F-75
Combined Balance Sheets.... F-76
Combined Statements of
Operations................. F-77
Combined Statements of
Stockholders' Deficit...... F-78
Combined Statements of Cash
Flows...................... F-79
Notes to Combined Financial
Statements................. F-80
GSV, Inc.
Independent Auditors'
Report..................... F-86
Balance Sheets............. F-87
Statements of Operations... F-88
Statements of Stockholders'
Equity..................... F-89
Statements of Cash Flows... F-90
Notes to Financial
Statements................. F-91
Plant Specialties, Inc.
Report of Independent
Public Accountants......... F-95
Balance Sheets............. F-96
Statements of Operations... F-97
Statements of Stockholders'
Equity..................... F-98
Statements of Cash Flows... F-99
Notes to Financial
Statements................. F-100
Southern Valve Group
Report of Independent
Public Accountants......... F-105
Combined Balance Sheets.... F-106
Combined Statements of
Operations................. F-107
Combined Statements of
Stockholders' Equity....... F-108
Combined Statements of Cash
Flows...................... F-109
Notes to Combined Financial
Statements................. F-110
Dalco, Inc.
Report of Independent
Public Accountants......... F-114
Balance Sheets............. F-115
Statements of Operations... F-116
Statements of Stockholders'
Equity..................... F-117
Statements of Cash Flows... F-118
Notes to Financial
Statements................. F-119
Cypress Industries, Inc.
Report of Independent
Public Accountants......... F-123
Balance Sheet.............. F-124
Statement of Income........ F-125
Statement of Stockholders'
Equity..................... F-126
Statement of Cash Flows.... F-127
Notes to Financial
Statements................. F-128

IPS Holding, Ltd. and
Subsidiaries
Report of Independent
Public Accountants......... F-131
Consolidated Balance
Sheets..................... F-132
Consolidated Statements of
Operations................. F-133
Consolidated Statements of
Stockholders' Equity....... F-134
Consolidated Statements of
Cash Flows................. F-135
Notes to Consolidated
Financial Statements....... F-136

F-2
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
THE
COMPANY OTHER PRO FORMA PRO FORMA
HISTORICAL CYPRESS IPSCO ACQUISITION ADJUSTMENTS COMBINED
---------- -------- -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................. $ 2,544 $ 25 $ 187 $ 62 $(28,895)(a) $ 123
26,200(b)
Accounts receivable, net............. 17,681 3,199 4,440 340 -- 25,660
Inventories.......................... 15,988 349 2,352 -- -- 18,689
Prepaids and other................... 1,171 256 675 138 -- 2,240
Deferred income tax asset............ 3,723 -- -- -- -- 3,723
---------- -------- -------- ------------ ------------ ----------
Total current assets............. 41,107 3,829 7,654 540 (2,695) 50,435
PROPERTY AND EQUIPMENT............... 11,475 3,602 3,310 194 -- 18,581
GOODWILL, net........................ 48,388 -- -- -- 28,674(a) 77,062
PATENT COSTS, net.................... 682 -- -- -- -- 682
OTHER NONCURRENT ASSETS.............. 3,780 283 115 62 50(a) 4,290
---------- -------- -------- ------------ ------------ ----------
$ 105,432 $7,714 $ 11,079 $ 796 $ 26,029 $151,050
========== ======== ======== ============ ============ ==========
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt...................... $ 4,661 $1,800 $ 1,700 $ -- $ (3,500)(a) $ 4,661
Current maturities of long-term
debt............................... 304 640 1,266 172 (2,078)(a) 304
Accounts payable and accrued
expenses........................... 14,911 1,187 4,238 341 -- 20,677
---------- -------- -------- ------------ ------------ ----------
Total current liabilities........ 19,876 3,627 7,204 513 (5,578) 25,642
LONG TERM DEBT, net.................. 319 2,137 625 489 (3,251)(a) 319
CREDIT FACILITY...................... 11,750 -- -- -- 26,200(b) 37,950
CONVERTIBLE SUBORDINATED DEBT........ 12,493 -- -- -- 424(a) 12,917
OTHER LONG TERM LIABILITIES.......... 1,125 -- 350 -- (350)(a) 1,125
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock......................... 8 1,500 20 5 (1,524)(a) 9
Additional paid in capital........... 70,212 -- 380 -- 12,847(a) 83,439
Retained earnings.................... (10,351) 450 2,500 452 (3,402)(a) (10,351)
Treasury stock....................... -- -- -- (663) 663(a) --
---------- -------- -------- ------------ ------------ ----------
Total stockholders' equity
(deficit)...................... 59,869 1,950 2,900 (206) 8,584 73,097
---------- -------- -------- ------------ ------------ ----------
$ 105,432 $7,714 $ 11,079 $ 796 $ 26,029 $151,050
========== ======== ======== ============ ============ ==========

</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.

F-3
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH MARCH 31, 1998)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THE
COMPANY
PRO OTHER PRO FORMA PRO FORMA
FORMA CYPRESS IPSCO ACQUISITIONS ADJUSTMENTS COMBINED
-------- -------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $116,670 $ 20,061 $22,895 $2,633 $-- $162,259
COST OF OPERATIONS................... 79,790 14,791 14,100 1,696 -- 110,377
-------- -------- ------- ------------ ----------- ----------
Gross profit.................... 36,880 5,270 8,795 937 -- 51,882
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 30,434 4,440 7,119 856 (1,034)(aa) 42,520
705(bb)
-------- -------- ------- ------------ ----------- ----------
Income from operations.......... 6,446 830 1,676 81 329 9,362
OTHER INCOME (EXPENSE):
Interest, net................... (1,383) (475) (397) 9 (1,385)(cc) (3,631)
Other........................... (20) 6 161 8 -- 155
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 5,043 361 1,440 98 (1,056) 5,886
PROVISION FOR INCOME TAXES........... 2,168 15 590 27 (269) (dd) 2,531
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS.... $ 2,875 $ 346 $ 850 $ 71 $ (787) $ 3,355
======== ======== ======= ============ =========== ==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS -- BASIC..... $ 0.39
==========
PRO FORMA INCOME PER SHARE
FROM CONTINUING
OPERATIONS -- DILUTED.............. $ 0.38
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATIONS -- BASIC................ 8,697(ee)
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATONS -- DILUTED............... 8,849(ee)
==========
</TABLE>

See accompanying notes to unaudited pro forma combined financial statements.

F-4
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH DECEMBER 31, 1997)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ICE/VARCO
PLANT STEAM JANUARY
THE HARLEY GSV SPECIALTIES SUPPLY 1 -
COMPANY JANUARY 1 - JANUARY 1 - JANUARY 1 - JANUARY 1 - OCTOBER
HISTORICAL JANUARY 31 FEBRUARY 28 MAY 31 JULY 31 31
---------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 58,621 $ 1,853 $ 1,637 $ 5,087 $ 9,592 $12,446
COST OF OPERATIONS................... 39,821 1,338 1,258 3,061 6,671 9,227
---------- ----------- ----------- ----------- ----------- ---------
Gross profit..................... 18,800 515 379 2,026 2,921 3,219
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 16,805 640 243 1,203 2,782 2,811
SPECIAL COMPENSATION EXPENSE......... 7,613 -- -- -- -- --
---------- ----------- ----------- ----------- ----------- ---------
Income (loss) from operations.... (5,618) (125) 136 823 139 408
OTHER INCOME (EXPENSE):
Interest, net.................... (2,901) (52) (17) (110) (223) (3)
Other............................ (3) -- (3) 12 9 16
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (8,522) (177) 116 725 (75) 421
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (1,022) (69) -- 272 (29) --
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (7,500) $ (108) $ 116 $ 453 $ (46) $ 421
========== =========== =========== =========== =========== =========

SVS DALCO OTHER THE
JANUARY 1 - JANUARY 1 - SUBSEQUENT PRO FORMA COMPANY
OCTOBER 31 NOVEMBER 30 ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- ----------
REVENUES............................. $ 3,545 $ 8,830 $15,059 $-- $116,670
COST OF OPERATIONS................... 2,458 6,327 9,629 -- 79,790
----------- ----------- ------------- ----------- ----------
Gross profit..................... 1,087 2,503 5,430 -- 36,880
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 826 1,713 4,256 (1,239)(ff) 30,434
724(gg)
(330)(hh)
SPECIAL COMPENSATION EXPENSE......... -- -- -- (7,613)(ii) --
----------- ----------- ------------- ----------- ----------
Income (loss) from operations.... 261 790 1,174 8,458 6,446
OTHER INCOME (EXPENSE):
Interest, net.................... (135) 12 (206) 2,252(jj) (1,383)
Other............................ -- (30) (21) -- (20)
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 126 772 947 10,710 5,043
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 54 46 356 2,560(kk) 2,168
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 72 $ 726 $ 591 $ 8,150 $ 2,875
=========== =========== ============= =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.

F-5
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

Innovative Valve Technologies, Inc. ("Invatec") was incorporated in
Delaware in March 1997 to create the leading single-source provider of
comprehensive maintenance, repair, replacement and value-added distribution
services for industrial valves and related process-system components throughout
North America. Except for its purchase of Steam Supply and Rubber Co., Inc. and
three related entities (collectively, "Steam Supply") in July 1997, Invatec
conducted no operations of its own prior to the closing on October 28, 1997 of
(i) its initial public offering (the "IPO") of its common stock, par value
$.001 per share ("Common Stock"), (ii) its purchase of Industrial Controls &
Equipment, Inc. and three related entities (collectively, "ICE/VARCO") and
Southern Valve Services, Inc. and a related entity (collectively, "SSV") and
(iii) a merger (the "SSI Merger") in which The Safe Seal Company, Inc.
("SSI") became its subsidiary. Earlier in 1997, SSI had purchased Harley
Industries, Inc. ("Harley"), GSV, Inc. ("GSV") and Plant Specialties, Inc.
("PSI"). SSI and its subsidiaries were affiliates of Invatec prior to the SSI
Merger.

For financial reporting purposes, SSI is presented as the "accounting
acquirer" of Steam Supply, ICE/VARCO, SVS, Harley, GSV and PSI (collectively,
the "Initial Acquired Businesses"), and, as used herein, the term "Company"
means (i) SSI and its consolidated subsidiaries prior to October 31, 1997 and
(ii) Invatec and its consolidated subsidiaries (including SSI) on that date and
thereafter.

For accounting purposes, the effective dates of the acquisitions of the
Initial Acquired Businesses in 1997 are as follows: (i) Harley -- January 31;
(ii) GSV -- February 28; (iii) PSI -- May 31, (iv) Steam Supply -- July 31, and
(v) ICE/VARCO and SVS -- October 31. Following the IPO, the Company acquired
Dalco, Inc. ("Dalco") and three other additional businesses in 1997. The
effective date of the acquisitions of Dalco and the three other additional
businesses acquired in 1997 is November 30, 1997. In the first quarter of 1998,
the Company acquired three businesses, including Cypress Industries Inc.
("Cypress") and IPS Holding, Ltd., ("IPSCO") (together with the Initial
Acquired Businesses, Dalco and the other businesses acquired during 1997, the
"Acquired Businesses"). The Company accounted for the Acquired Businesses in
accordance with the purchase method of accounting. The allocation of the
purchase prices paid to the assets acquired and the liabilities assumed in the
acquisitions of the Acquired Businesses has been recorded initially on the basis
of preliminary estimates of fair value and may be revised as additional
information concerning the valuation of those assets and liabilities become
available.

The unaudited pro forma consolidated statement of operations on page F-5
present historical information as adjusted to give effect to the following
events and transactions as if they had occurred on January 1, 1997: (i) the
formation and organizational financing of Invatec; (ii) the SSI Merger; (iii)
the acquisitions of the Acquired Businesses and the financing of those
acquisitions; (iv) reverse stock splits of the outstanding Common Stock and the
SSI common stock effected in connection with the IPO; (v) the IPO and Invatec's
application of its net proceeds therefrom; and (vi) the issuance of shares of
Common Stock to repay indebtedness the Company owed to subsidiaries of Philip
Services Corp. (collectively with its subsidiaries, "Philip"). The unaudited
pro forma combined statement of operations on page F-4 condenses the unaudited
pro forma consolidated statement of operations information on page F-5 under the
caption "The Company" and adjusts that information to give effect to the
acquisitions of Acquired Businesses in 1998 (through March 31) and the financing
of these acquisitions. Both pro forma statements convert the results of
operations of the Acquired Businesses whose historical fiscal periods were not
on a calendar-year basis and include pro forma adjustments consisting
principally of the following: (i) the adjustments to selling, general and
administrative expenses described below; (ii) adjustments for pro forma goodwill
amortization using a 40-year estimated life; (iii) eliminations of historical
interest expense resulting from the application of

F-6
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds from the IPO and the use of Common Stock to retire outstanding
indebtedness; and (iv) adjustments to federal and state income tax provisions.

The unaudited pro forma combined statements of operations include
preliminary pro forma adjustments to selling, general and administrative
expenses to reflect: (i) salary differentials associated with certain owners and
managers of the Acquired Businesses; (ii) the elimination of certain excess
administrative support service fees charged by ICE/VARCO's former parent
company: and (iii) the reversal of the special non-cash, non-recurring
compensation expense attributable to certain stock awards made by SSI and
certain sales of Common Stock and issuances of options to purchase Common Stock
by Invatec.

The integration of the Acquired Businesses may present opportunities to
reduce other costs through the elimination of duplicative functions and
operating locations and the development of economies of scale, particularly as a
result of the Company's ability to (i) consolidate insurance programs, (ii)
borrow at lower interest rates than the Acquired Businesses, (iii) obtain
greater discounts from suppliers and (iv) generate savings in other general and
administrative areas. The Company cannot currently quantify these anticipated
savings and expects these savings will be partially offset by incremental costs
that the Company expects to incur, but also cannot currently quantify
accurately. These costs include those associated with corporate management and
administration, being a public company, systems integration and facilities
expansions and consolidations. The unaudited pro forma financial information
herein reflects neither unquantifiable expected savings nor unquantifiable
expected incremental costs.

The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate.

2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:

(a) Records the consideration for acquisition of (i) $28.9 million in cash
(including $8.8 million used to repay assumed indebtedness of Acquired
Businesses purchased in 1998) (ii) the issuance of 807,828 shares of Common
Stock and (iii) the issuance of $0.4 million of convertible subordinated notes,
resulting in $28.7 million of goodwill based on a preliminary allocation of the
total consideration for these acquisitions.

(b) Records the borrowing of $26.2 million under the Credit Facility used
to finance the cash portion of purchase consideration of the Acquisitions
purchased in 1998.

3. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (FOR BUSINESSES ACQUIRED
THROUGH MARCH 31, 1998)

(aa) Adjusts selling, general and administrative expenses to reflect the
decrease in salaries and benefits associated with certain owners and managers of
the Acquired Businesses who either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed
prospectively to the decrease prior to acquisition of their Acquired Businesses.

(bb) Records pro forma goodwill amortization expense over 40 years.

(cc) Records the adjustment to interest expense resulting from borrowings
under the Credit Facility and pro forma adjustments to debt.

F-7
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(dd) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.

(ee) Pro forma weighted average shares outstanding for 1997 are computed
as follows (in thousands):

Shares outstanding at December 31,
1997................................. 7,890
Shares issued in 1998 acquisitions... 807
---------
Shares used in computing pro forma
income per share from continuing
operations--basic.................. 8,697
Dilutive effect of stock options and
warrant, net of assumed repurchases
of common shares................... 152
---------
Shares used in computing pro forma
income per share from continuing
operations--diluted................ 8,849
=========

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (FOR BUSINESSES
ACQUIRED THROUGH
DECEMBER 31, 1997)

(ff) Adjusts selling, general and administrative expenses to reflect (i)
the decrease in salaries and benefits associated with certain owners of the
Acquired Businesses who either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed to
prospectively to the decrease prior to acquisition of their Acquired Businesses,
and (ii) the elimination of certain excess administrative support service fees
charged by ICE/VARCO's former parent.

(gg) Records pro forma goodwill amortization expense over 40 years.

(hh) Records the elimination of non-recurring IPO bonuses.

(ii) Records the elimination of non-cash, non-recurring special
compensation expense of $7.6 million attributable to certain awards of stock,
stock options and certain stock sales.

(jj) Records the pro forma adjustment to interest expense resulting from
(i) the application of the net proceeds of the IPO, (ii) borrowings under the
Credit Facility and, (iii) the elimination of certain financing fees paid to
Philip.

(kk) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.

F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Innovative Valve Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Innovative
Valve Technologies, Inc. and subsidiaries, (a Delaware corporation), as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements 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 Innovative Valve Technologies, Inc. and Subsidiaries, as of December 31,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 10, 1998

F-9
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31
-------------------------------
1996 1997
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 396,637 $ 2,544,450
Accounts receivable, net of
allowance of $25,000 and
$1,079,857....................... 535,647 17,680,697
Inventories, net................... 36,140 15,987,765
Prepaid expenses and other current
assets........................... 111,638 1,171,090
Deferred tax asset................. -- 3,723,448
-------------- ---------------
Total current assets..... 1,080,062 41,107,450
PROPERTY AND EQUIPMENT, net............. 140,449 11,474,701
GOODWILL, net........................... -- 48,387,981
PATENT COSTS, net....................... 741,611 682,436
OTHER NONCURRENT ASSETS, net............ 325,993 3,780,115
-------------- ---------------
$ 2,288,115 $ 105,432,683
============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)

CURRENT LIABILITIES:
Short-term debt.................... $ -- $ 4,660,924
Current maturities of long-term
debt............................. -- 304,310
Accounts payable and accrued
expenses......................... 1,092,891 14,910,638
-------------- ---------------
Total current
liabilities........... 1,092,891 19,875,872
LONG TERM DEBT, net of current
maturities............................ 588,970 318,911
CREDIT FACILITY......................... -- 11,750,000
CONVERTIBLE SUBORDINATED DEBT........... -- 12,493,178
OTHER LONG TERM LIABILITIES............. -- 1,125,417
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 2,000,000 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value,
30,000,000 shares authorized,
1,481,919 and 7,890,198 issued
and outstanding.................. 1,482 7,890
Additional paid-in capital......... 1,298,471 70,212,035
Retained deficit................... (2,693,699) (10,350,620)
-------------- ---------------
Total stockholders'
equity (deficit)...... (1,393,746) 59,869,305
-------------- ---------------
$ 2,288,115 $ 105,432,683
============== ===============

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

F-10
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1996 1997
-------------- ------------ --------------
<S> <C> <C> <C>
REVENUES................................ $ 2,852,356 $ 3,887,761 $ 58,620,946
COST OF OPERATIONS...................... 1,583,940 2,375,245 39,820,941
-------------- ------------ --------------
Gross profit.................. 1,268,416 1,512,516 18,800,005
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,852,895 1,917,063 16,805,309
SPECIAL COMPENSATION EXPENSE............ -- 38,048 7,613,386
-------------- ------------ --------------
Loss from operations.......... (584,479) (442,595) (5,618,690)
OTHER INCOME (EXPENSE):
Patent defense costs............... (880,068) -- --
Interest income (expense), net..... 10,181 27,703 (2,901,039)
Other.............................. (50,126) 393 (2,957)
-------------- ------------ --------------
(920,013) 28,096 (2,903,996)
-------------- ------------ --------------
LOSS BEFORE INCOME TAXES................ (1,504,492) (414,499) (8,522,686)
BENEFIT FOR INCOME TAXES................ -- -- (1,022,722)
-------------- ------------ --------------
NET LOSS................................ $ (1,504,492) $ (414,499) $ (7,499,964)
============== ============ ==============

NET LOSS BEFORE DIVIDENDS APPLICABLE TO
PREFERRED STOCK....................... (1,504,492) (414,499) (7,499,964)
PREFERRED STOCK DIVIDENDS............... (41,123) (191,854) (156,957)
-------------- ------------ --------------
NET LOSS APPLICABLE TO COMMON SHARES.... $ (1,545,615) $ (606,353) $ (7,656,921)
============== ============ ==============
Loss Per Share:
Basic and Diluted............. $ (1.17) $ (0.42) $ (2.25)
============== ============ ==============
Weighted average common shares
outstanding -- Basic and
Diluted.......................... 1,320,439 1,441,135 3,397,980
============== ============ ==============

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-11
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 1,288,451 $ 1,288 $ 465,117 $ (541,731) $ (75,326)
SSI preferred stock dividends... -- -- -- (41,123) (41,123)
Sale of SSI common stock
warrant....................... -- -- 100,000 -- 100,000
Issuance of SSI common stock.... 144,500 145 445,355 -- 445,500
Net loss........................ -- -- -- (1,504,492) (1,504,492)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1995........... 1,432,951 1,433 1,010,472 (2,087,346) (1,075,441)
SSI preferred stock dividends... -- -- -- (191,854) (191,854)
Issuances of SSI common stock... 60,868 61 357,987 -- 358,048
Retirement of SSI common
stock......................... (11,900) (12) (69,988) -- (70,000)
Net loss........................ -- -- -- (414,499) (414,499)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1996........... 1,481,919 1,482 1,298,471 (2,693,699) (1,393,746)
SSI preferred stock dividends... -- -- -- (156,957) (156,957)
Issuances of SSI common stock... 222,650 223 2,604,782 -- 2,605,005
Exercise of SSI common stock
warrant and options........... 714,769 715 4,554,141 -- 4,554,856
Issuance of common stock to
certain executives............ 242,839 243 5,008,675 -- 5,008,918
Public offering, net of offering
costs......................... 3,852,500 3,853 44,018,053 -- 44,021,906
Issuances of common stock in
acquisitions.................. 185,661 185 2,129,794 -- 2,129,979
Redemption of SSI redeemable
preferred stock and payment of
indebtedness to Philip........ 1,189,860 1,189 10,598,119 -- 10,599,308
Net loss........................ -- -- -- (7,499,964) (7,499,964)
---------- -------- ----------- ------------ --------------
BALANCE, December 31, 1997........... 7,890,198 $ 7,890 $70,212,035 $(10,350,620) $ 59,869,305
========== ======== =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-12
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (1,504,492) $ (414,499) $ (7,499,964)
Adjustments to reconcile net loss
to net cash
used in operating activities --
Depreciation and
amortization................ 28,525 31,183 1,235,940
Deferred taxes................. -- -- 4,982,917
Special compensation expense... -- 38,048 7,613,386
Gain on sale of property and
equipment................... (1,879) -- --
(Increase) decrease in --
Accounts receivable......... (145,835) (49,736) (1,219,537)
Inventories................. -- (13,660) (4,187,410)
Prepaid expenses and other
current assets............ 35,402 (66,161) 424,535
Other noncurrent assets,
net....................... -- (324,246) 1,141,616
Increase (decrease) --
Accounts payable and accrued
expenses.................. 493,084 (91,195) (2,806,726)
------------ ------------ -------------
Net cash used in operating
activities.............. (1,095,195) (890,266) (315,243)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (7,530) (128,309) (1,062,366)
Additions to patent costs.......... (3,384) (46,030) --
Proceeds from sale of property and
equipment........................ 10,500 -- 17,137
Business acquisitions, net of cash
acquired of $499,436............. -- -- (51,555,833)
------------ ------------ -------------
Net cash used in investing
activities.............. (414) (174,339) (52,601,062)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt................. -- 265,000 29,348,272
Repayments of debt................. (93,333) -- (27,981,507)
Net borrowings under Credit
Facility......................... -- -- 11,750,000
Payments on non-compete
obligations...................... -- -- (152,662)
Repayment of debt to Philip........ -- -- (2,981,789)
Proceeds from sale/exercise of SSI
common stock warrant............. 100,000 -- 1,216,855
Proceeds from sale of common stock,
net of offering costs............ 445,500 -- 44,021,906
SSI common stock repurchases....... -- (70,000) --
Proceeds from sale of redeemable
SSI preferred stock.............. 2,000,000 -- --
Preferred stock dividends.......... -- (191,854) (156,957)
------------ ------------ -------------
Net cash provided by
financing activities.... 2,452,167 3,146 55,064,118
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH...... 1,356,558 (1,061,459) 2,147,813
CASH, beginning of period............ 101,538 1,458,096 396,637
------------ ------------ -------------
CASH, end of period.................. $ 1,458,096 $ 396,637 $ 2,544,450
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-13
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Innovative Valve Technologies, Inc. ("Invatec" or the "Company") was
incorporated in Delaware in March 1997 to create the leading single-source
provider of comprehensive maintenance, repair, replacement and value-added
distribution services for industrial valves and related process-system
components throughout North America. Except for its purchase of Steam Supply &
Rubber Co., Inc. and three related entities (collectively, "Steam Supply") in
July 1997, Invatec conducted no operations of its own prior to the closing on
October 28, 1997 of (i) its initial public offering (the "IPO") of its common
stock, par value $.001 per share ("Common Stock"), (ii) its purchase of
Industrial Controls & Equipment, Inc. and three related entities (collectively,
"ICE/VARCO") and Southern Valve Services, Inc. and a related entity
(collectively, "SVS") and (iii) a merger (the "SSI Merger") in which The
Safe Seal Company, Inc. ("SSI") became its subsidiary. Earlier in 1997, SSI
had purchased Harley Industries, Inc. ("Harley"), GSV, Inc. ("GSV") and
Plant Specialities, Inc. ("PSI"). SSI and its subsidiaries were affiliates of
Invatec prior to the SSI Merger.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

For accounting purposes, the effective dates of the acquisitions of the
Initial Acquired Businesses in 1997 are as follows: (i) Harley -- January 31;
(ii) GSV -- February 28; (iii) PSI -- May 31; (iv) Steam Supply -- July 31, and
(v) ICE/VARCO and SVS -- October 31. Following the IPO, the Company acquired
Dalco, Inc. ("Dalco") and three other additional businesses (together with the
Initial Acquired Businesses, the "Acquired Businesses") in 1997. The Company
accounted for the Acquired Businesses in accordance with the purchase method of
accounting. The allocation of the purchase prices paid to the assets acquired
and the liabilities assumed in the acquisitions of the Acquired Businesses has
been recorded initially on the basis of preliminary estimates of fair value and
may be revised as additional information concerning the valuation of those
assets and liabilities becomes available.

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

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment are sold or retired, the cost and related accumulated depreciation are
removed and the resulting gain or loss is included in results of operations.

GOODWILL

Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1997, accumulated
amortization was approximately $467,000.

F-14
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash flows as well as other factors, such as business trends and prospects and
market and economic conditions.

DEBT ISSUE COSTS

Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1997, accumulated
amortization was approximately $31,000.

EARNINGS PER SHARE

The Company adopted SFAS No. 128 in 1997, and all earnings per share
previously reported have been restated. Basic earnings per share is computed by
dividing net income by the weighted average common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. Common Share
equivalents including options to purchase 1,395,748 shares of Common Stock and
$12.5 million of subordinated debt convertible into Common Shares at prices
ranging between $16.90 and $22.90 per share, outstanding at December 31, 1997
were not included in the computation of diluted EPS as their effect on EPS was
antidilutive.

STOCK-BASED COMPENSATION

In accordance with SFAS No. 123, the Company has elected to use the method
APB Opinion No. 25 prescribes to measure its compensation costs attributable to
stock-based compensation and to include in Note 12 of these Notes the pro forma
effect on those costs using the fair value approach that SFAS No. 123 would
have.

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.

Prior to the Acquisitions, certain Acquired Businesses' stockholders were
taxed under the provisions of subchapter S of the Internal Revenue Code. Under
these provisions, the stockholders paid income taxes on their proportionate
share of their companies' earnings. Because the stockholders were taxed
directly, their businesses paid no federal income tax and only certain state
income taxes.

The Company intends to file a consolidated federal income tax return that
will include the operations of the Acquired Businesses for periods subsequent to
their respective acquisitions dates.

REVENUE RECOGNITION

Revenue is recognized as products are sold and as services are performed.

CASH

Cash payments for interest during 1995, 1996 and 1997 were approximately
$8,000, $4,000, and $1,954,000 respectively. Cash payments for taxes during
1995, 1996 and 1997 were $0, $0, and $306,000, respectively. Noncash activities
for the year ended December 31, 1997 consisted of approximately $10.6 million of
obligations and preferred stock owned by a related party which were converted
into Common Stock.

USE OF ESTIMATES

F-15
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Actual results could differ from those estimates.

SPECIAL COMPENSATION EXPENSE

In 1996, the SSI recorded a special non-cash compensation expense of
$38,048 related to the issuance of 4,513 shares of its common stock, $0.01 par
value ("SSI Common Stock"), and options to purchase 1,955 shares of that stock
under employee benefit programs.

In 1997, SSI recorded a special non-cash compensation expense of
approximately $2.6 million related to the issuance of 221,595 shares of Common
Stock to three members of executive management and to Computerized Accounting &
Tax Services, Inc. ("CATS"), a related party, to attract such individuals and
CATS to effect the IPO. For financial statement presentation purposes, these
shares were valued at approximately $11.70 per share.

During 1997, Invatec recorded a special non-cash compensation expense of
approximately $5.0 million related to (i) its issuance of 242,839 shares of
Common Stock to six members of executive management and CATS to attract them to
effect the IPO and (ii) its grant to certain of its officers of options to
purchase 202,589 shares of Common Stock at an exercise price of $1.00 per share.
For financial statement presentation purposes, the shares were valued at
approximately $11.70 per share and the options were valued at approximately
$10.70 per option share.

NEW ACCOUNTING PRONOUNCEMENT

SFAS No. 130, "Reporting Comprehensive Income" issued in June 1997,
establishes standards for the reporting of comprehensive income in a company's
financial statements. Comprehensive Income includes all changes in the equity of
a company during the period which result from the Company's transactions with
its stockholders. For the Company, SFAS No. 130 will be effective for the year
beginning January 1, 1998. The Company has not completed its analysis of the
impact of this new pronouncement. On the basis of a preliminary review, the
Company believes implementation of SFAS No. 130 will not have a material effect
on its financial statements.

3. ACQUISITIONS:

In November 1996, the Company acquired The Spin Safe Corporation, Inc.
("Spin Safe") in exchange for 54,400 shares of Common Stock, valued at $5.88
per share, and noninterest-bearing notes payable of $400,000 and an agreement to
pay certain royalties. The notes are due in four equal annual installments
beginning January 15, 1998. Additionally, the Company entered into an agreement
with the former stockholders of Spin Safe, pursuant to which the Company will
make royalty payments to them based on the number of times in excess of a
specified base the Safe SealE system is used by the Company through 2011. The
cost of this acquisition is recorded as patent costs.

The aggregate consideration paid by the Company to purchase Acquired
Businesses in 1997 (as described in Note 1) was $52.2 million in cash and
assumed debt, $17.2 million in the form of short-term notes and subordinated
notes convertible into common shares and 185,661 shares of Common Stock.

Of the total purchase price paid for the Acquisitions, $23.2 million has
been allocated to net assets acquired, and the remaining $48.9 million has been
recorded as goodwill. On the basis of management's preliminary analysis, the
Company expects the historical carrying values of the Acquired Businesses'
assets and liabilities will approximate fair value, but this analysis is subject
to revision as more information regarding asset and liability valuations becomes
available.

F-16
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company as if the IPO, the SSI Merger, the Company's 1997
acquisitions of Acquired Businesses and certain other events and transactions
discussed under " -- Unaudited Pro Forma Combined Statements of Operations" in
Note 2 also had taken place on January 1, 1996. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of the results of operations the Company would have obtained had these events
and transactions actually taken place when assumed, has obtained since the dates
of acquisition or may obtain in the future.

1996 1997
---------- ----------
(UNAUDITED AND IN
THOUSANDS)
Revenues............................. $ 102,110 $ 116,670
Income before income taxes........... 4,352 5,043
Net income........................... 2,481 2,875
Basic income per share............... $ .31 $ .36
========== ==========
Diluted income per share............. $ .31 $ .35
========== ==========

See discussion of the pro forma adjustments, reflected in the above amounts
in Note 2 under "Unaudited Pro Forma Combined Statements of Operations."

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

DECEMBER 31
ESTIMATED ---------------------------
USEFUL LIVES 1996 1997
------------ ---------- ---------------
Land............................... -- $ -- $ 1,616,660
Buildings.......................... 30 years -- 4,232,884
Leasehold improvements............. 30 years -- 988,561
Furniture and fixtures............. 3-5 years 126,262 3,175,375
Machinery and equipment............ 5 years 60,650 16,632,340
---------- ---------------
186,912 26,645,820
Less -- Accumulated
depreciation................ (46,463) (15,171,119)
---------- ---------------
Property and equipment, net... $ 140,449 $ 11,474,701
========== ===============

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following:

DECEMBER 31
----------------------------------
1995 1996 1997
--------- --------- ------------
Balance, at beginning of year........ $ 25,000 $ 25,000 $ 25,000
Additions............................ -- -- 102,243
Deductions........................... -- -- (80,810)
Allowance for doubtful accounts at
acquisition dates.................. -- -- 1,033,424
--------- --------- ------------
Balance, at end of year.............. $ 25,000 $ 25,000 $ 1,079,857
========= ========= ============

F-17
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

DECEMBER 31
----------------------------
1996 1997
------------ --------------
Accounts payable, trade.............. $ 287,165 $ 8,553,604
Accrued compensation and benefits.... 120,567 1,904,116
Accrued insurance.................... -- 1,277,637
Accrued legal fees................... 170,696 140,696
Due to Philip........................ 287,195 --
Other accrued expenses............... 227,268 3,034,585
------------ --------------
$ 1,092,891 $ 14,910,638
============ ==============

6. SHORT-TERM DEBT:

In connection with the Company's purchase of Dalco, two short-term notes
totalling $4.7 million were issued to the former owners of Dalco. The notes bore
interest at a rate of 5.5% per annum, were unsecured and were repaid on January
2, 1998.

7. CREDIT FACILITY:

Contemporaneously with the closing of the IPO, Invatec entered into a new
revolving credit facility (the "Credit Facility") with a syndicate of
commercial banks. The Credit Facility replaced SSI's commercial credit
facilities theretofore in effect.

The Credit Facility is a three-year revolving credit facility pursuant to
which Invatec may borrow up to $60.0 million to finance acquisitions and for
general corporate purposes, including refinancing of borrowed-money indebtedness
of businesses acquired and funding working capital needs. Loans under the Credit
Facility will bear interest at a designated variable base rate plus a margin
ranging from 0 to 100 basis points depending on the ratio of the Company's
borrowed money and certain other indebtedness to its trailing pro forma
consolidated earnings before interest, income taxes, depreciation and
amortization. At Invatec's option, loans may bear interest based on a designated
London interbank offering rate plus a margin ranging from 100 to 275 basis
points depending on the same ratio. The margin is subject to being reset from
time to time. Commitment fees of 25 to 50 basis points per annum are payable on
the unused portion of the line of credit. The Credit Facility has a $5.0 million
sublimit for standby letters of credit. It requires the consent of the lenders
for any acquisition involving a purchase price of greater than $5.0 million,
prohibits the payment of dividends by Invatec, limits the amount of indebtedness
the Company may incur and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding, if
any, thereunder, will be due and payable in September 2000. The Company's
subsidiaries have guaranteed the repayment of, and the capital stock of those
subsidiaries and the Company's accounts receivable and inventories will be
collateral security for, all amounts owed under the Credit Facility. At December
31, 1997, the Company had $11,750,000 outstanding under the Credit Facility at
an interest rate of 8.5%.

F-18
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT:

Long-term debt consists of the following at December 31:

1996 1997
---------- ----------
Revolving line of credit payable to a
bank, due June 30, 2002, with
interest due monthly at 1.25% over
cost (as defined) (6.75% at
December 31, 1996), secured by
assignment of all assets. The
available borrowing capacity at
December 31, 1996 was
$1,735,000......................... $ 265,000 --
Notes payable to former stockholders
of Spin Safe, with annual
installments of $100,000 beginning
January 15, 1998, non-interest
bearing, due January 15, 2001,
unsecured.......................... 323,970 358,125
Installment notes payable; interest
ranging from 6.06% to 10%, payable
in monthly installments through
2001; secured by certain assets.... -- 265,096
---------- ----------
588,970 623,221
Less: current maturities............. -- 304,310
---------- ----------
$ 588,970 $ 318,911
========== ==========

9. CONVERTIBLE SUBORDINATED DEBT:

At December 31, 1997, outstanding convertible subordinated debt consisted
of approximately $5.1 million aggregate principal amount of 5.0% notes due in
2002, $2.8 million aggregate principal amount of 5.5% notes due in 2004 and,
$4.6 million aggregate principal amount of 5.0% notes due in 2002. These notes
are convertible at initial conversion prices ranging from $16.90 to $22.20 per
share at the option of the holder in whole at any time.

10. INCOME TAXES:

The provision (benefit) for income taxes consisted of:

YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ -------------- --------------
Current:
U.S. Federal................ $ -- $ -- $ (1,026,565)
State....................... -- -- 513,854
------------ -------------- --------------
Total current provision..... -- -- (512,711)
Deferred:
U.S. Federal................ -- -- (478,127)
State....................... -- -- (31,884)
------------ -------------- --------------
Total deferred provision.... -- -- (510,011)
------------ -------------- --------------
Total income tax provision....... $ -- $ -- $ (1,022,722)
============ ============== ==============

F-19
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:

YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Statutory federal income tax
benefit............................ (34)% (34)% (34)%
Special compensation charge.......... -- -- 22%
Nondeductible goodwill............... -- -- 2%
Nondeductible expenses............... -- -- 3%
State taxes, net of federal benefit
of 34%............................. -- -- 4%
Other................................ -- -- 1%
Valuation allowance.................. 34 34 (10)%
--- --- ---
Effective income tax rate............ 0% 0% (12)%
=== === ===

Net deferred tax assets consist of the following:

DECEMBER 31
--------------------------
1996 1997
------------ ------------
Current deferred tax assets:
Accrued liabilities and
valuation allowances not
currently deductible.......... $ 160,910 $ 3,723,448
------------ ------------
160,910 3,723,448
Noncurrent deferred tax assets:
Net operating losses............ 686,316 172,893
Special compensation charge..... -- 802,050
Amortization of intangibles..... -- 149,871
Other........................... -- 266,210
------------ ------------
686,316 1,391,024
Valuation allowance.................. (847,226) --
------------ ------------
Total deferred tax assets............ $ -- $ 5,114,472
============ ============
Noncurrent deferred tax
liabilities........................ -- (131,555)
------------ ------------
Net deferred tax assets.............. $ -- $ 4,982,917
============ ============

The Company records a valuation allowance for deferred tax assets when
management believes it is more likely than not the asset will not be realized.
Management believes that the Company's deferred tax asset will be fully realized
due to its acquisition strategy and therefore has eliminated the valuation
allowance for this asset as of December 31, 1997.

F-20
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:

YEAR ENDED DECEMBER 31
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Deferred tax provision during the
year
Net operating loss.............. $ 304,600 $ 107,301 $ 644,022
Special compensation charge..... -- -- (802,050)
Depreciation.................... 53,093 (2,520) 128,843
Accrued expenses not deductible
for tax......................... 95,065 25,168 366,400
Valuation allowance............. (452,758) (129,949) (847,226)
------------ ------------ ------------
Total...................... $ -- $ -- $ (510,011)
============ ============ ============

Certain deferred tax assets and liabilities were recorded with respect to
purchase accounting for the Acquired Business during the year ended December 31,
1997.

11. STOCKHOLDERS' EQUITY:

SSI COMMON STOCK

In 1995, the Company implemented an employee benefit award program. Under
this program, the Company awarded 4,726 shares of Common Stock to employees. In
1996, employees forfeited 816 of these shares and the Company recorded non-cash
compensation expense of $11,500 with respect to the 1,955 of these shares that
had vested. The Company discontinued the program in 1997 and cancelled the
remaining unvested shares.

REVERSE STOCK SPLIT

Prior to the SSI Merger, SSI and Invatec each effected a 0.68-for-one
reverse stock split of its outstanding common stock. The accompanying financial
statements have been prepared as if these splits had been effected as of the
beginning of the earliest period presented.

SSI MERGER

As a result of the SSI Merger: (i) the shares of SSI Common Stock and
redeemable preferred stock outstanding as of October 31, 1997 were converted
into shares of Common Stock; (ii) outstanding options and a warrant to purchase
shares of SSI Common Stock were converted into options to purchase Common Stock;
and (iii) SSI's authorized capital stock became 1,000 shares of SSI Common
Stock, par value $1.00 per share, all of which have been issued and are
outstanding and owned by Invatec. All share and per share information for the
periods shown, except authorized shares, have been restated to reflect the
merger as of the beginning of the earliest period presented.

INVATEC COMMON STOCK

Invatec sold 3,852,500 shares of Common Stock in the IPO. The initial price
to the public in the IPO was $13.00, and Invatec's proceeds from the IPO, net of
an underwriting discount of $3.5 million and IPO expenses of $2.6 million,
including approximately $1.5 million of expenses which were initially funded
through advances obtained from Philip, totaled $44.0 million.

At December 31, 1997, the Company had reserved 650,140 shares of Common
Stock for issuance on conversion of its outstanding convertible subordinated
notes described in Note 9 and 1,395,748 shares of Common Stock for issuance on
the exercise of stock options then outstanding under Invatec's 1997

F-21
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Incentive Plan, of which options to purchase a total of 533,873 shares then were
exercisable at exercise prices ranging from $1.00 per share to $13.00 per share.

Invatec's certificate of incorporation authorizes the issuance of up to
30.0 million shares of Common Stock, of which 7,890,198 shares were issued and
outstanding as of December 31, 1997, and 5.0 million shares of preferred stock,
none of which has been issued.

STOCK OPTIONS

In 1996, the Company began a management stock option program that was
discontinued in 1997. Under this program, the Company granted both shares of
Common Stock and options to purchase shares of Common Stock to certain members
of management. The options vested monthly and were exercisable at any time
following the six-month period ending June 30 or December 31 in which the
options were earned. The Company had reserved 200,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 4,513 shares of
Common Stock and options to purchase 71,899 shares of Common Stock. The options
had an exercise price of $10.00 per share and are exercisable through July 1,
2001. In 1996, the Company recorded non-cash compensation expense of $26,548 for
the 4,513 shares issued with a fair market value of $5.88 per share. No
compensation expense was recorded for the options granted in 1996 because their
exercise price exceeded the fair market value of the underlying shares ($5.88
per share). Prior to 1996, the Company had, from time to time, granted options
to key employees at or above the market value of the Common Stock. The options
granted had exercise prices ranging from $5.00 to $20.00 per share. All but
50,000 options expired in 1996. The remaining options were exercised in June
1997.

1997 INCENTIVE PLAN

The Company has adopted an incentive plan (the "Incentive Plan") that
provides for the granting or awarding of stock options and other
performance-based awards to key employees, nonemployee directors and independent
contractors of the Company and its subsidiaries. The Incentive Plan aims to
attract and retain the services of key employees and qualified independent
directors and contractors by making stock option and other performance-based
awards tied to the growth and performance of the Company. At December 31, 1997,
Invatec had reserved 1,500,000 shares of Common Stock for use under the
Incentive Plan. Beginning in the second quarter of 1998, the number of shares
available for that use will be the greater of 1,500,000 or 15% of the number of
shares of Common Stock outstanding on the last day of the preceding quarter.

F-22
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the stock options outstanding at December
31, 1997 and changes during the three years then ended:

WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------- ---------------
Balance at December 31, 1994......... 121,000 $ 13.18
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 121,000 13.18
Granted......................... 71,899 10.00
Exercised....................... -- --
Cancelled....................... (71,000) 18.94
-------------
Balance at December 31, 1996......... 121,899 7.94
Warrants converted to options... 15,000 10.00
Granted......................... 1,310,389 9.97
Exercised....................... (50,000) 5.00
Cancelled....................... (1,540) 10.00
-------------
Balance at December 31, 1997......... 1,395,748 9.97
=============
Available for grant at December 31,
1997............................... 104,252
=============
Options exercisable at December 31,
1997............................... 533,873 7.03
=============

The options outstanding at December 31, 1997 have exercise prices from
$1.00 to $17.125 per share, with a weighted average exercise price of $9.97 and
a weighted average remaining contractual life of 6.92 years.

The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense (other than described in Note 2) has been
recognized. The Company's pro forma compensation expense for 1996 is zero as
options were determined to be without value under SFAS No. 123, "Accounting for
Stock-Based Compensation," using the minimum value option method.

If the Company had recorded 1997 compensation cost for option grants
consistent with SFAS No. 123, 1997 net loss and loss per share would have been
increased by the following pro forma amounts (in thousands, except per share
data):

YEAR ENDED
DECEMBER 31, 1997
------------------
Net Loss:
As Reported..................... $ (7,499,964)
Pro forma....................... $ (8,350,661)
Loss Per Share:
Basic
As Reported..................... $ (2.25)
Pro forma....................... $ (2.50)

The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.

F-23
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 grants in 1997: dividend yield of 0%; expected volatility
of 48.43%; risk-free interest rate of 6.09%; and expected lives of 6.92 years.

WARRANTS

During 1997, Philip exercised warrants to purchase 680,768 shares of SSI
Common Stock at an exercise price of $6.32 per share. Consideration for the
exercise consisted of approximately $3.3 million of Philip promissory notes and
approximately $1.2 million in cash. The Company used the Philip notes as part of
the consideration it paid for Harley.

STOCK REPURCHASES

In December 1996, the Company purchased 11,900 shares of SSI Common Stock
from certain stockholders for $70,000 ($5.88 per share). It subsequently
canceled these shares.

12. REDEEMABLE PREFERRED STOCK:

In 1995, SSI issued and sold 20,000 shares of its redeemable preferred
stock to Philip for $2.0 million ($100 per share). In the SSI Merger, these
shares, together with accrued dividends thereon, converted into 154,958 shares
of Common Stock.

13. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases warehouse space, office facilities and vehicles under
noncancelable leases. Rental expense for 1995, 1996 and 1997 was approximately
$90,300, $162,400, and $822,400 respectively. The following represents future
minimum rental payments under noncancelable operating leases:

Year ending December 31 --
1998............................... $ 910,403
1999............................... 760,615
2000............................... 656,017
2001............................... 519,120
2002............................... 325,011
Thereafter......................... 500,275
------------
$ 3,671,441
============

LITIGATION

In the ordinary course of its business, the Company has become involved in
various legal actions. Management, after consultation with legal counsel, does
not believe that the outcome of these legal actions will have a material effect
on the Company's financial position or results of operations.

14. CERTAIN TRANSACTIONS:

The Company had a management agreement with CATS, an entity then related by
common ownership. Management fee expense for 1995, 1996, and 1997 was
approximately $120,000, $108,000, and $353,000, respectively. This agreement
terminated in 1997.

F-24
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. EMPLOYEE BENEFIT PLANS:

The Company maintains certain 401(k) plans which allow eligible employees
to defer a portion of their income through contributions to the plans. No
contributions were required or made to these plans during 1995 or 1996. The
Company contributed approximately $59,000 to its plans during the year ended
December 31, 1997.

16. RELATIONSHIP WITH PHILIP:

In 1996, Philip agreed to make certain advances to SSI to enable SSI, or
its successors, to pursue a possible initial public offering. As a result of
Philip's financial support of SSI's acquisition of Harley, Philip became a
related party of the Company for financial statement presentation purposes
effective January 31, 1997. In June 1997, Invatec entered into a funding
arrangement with Philip pursuant to which Philip advanced funds to Invatec to
pay costs related to the IPO and Invatec assumed SSI's obligation to repay the
Philip advances and the related deferred offering costs funded with these
advances.

In connection with the IPO, Invatec issued 1,036,013 shares of Common Stock
to Philip as payment of $8.6 million of indebtedness owed to Philip. Immediately
after the IPO, Invatec repaid the remaining $3.0 million of indebtedness owed to
Philip in cash.

17. SERVICE AND DISTRIBUTION AGREEMENTS:

The Company purchases, sells and services various products under service
and distribution agreements with its major suppliers. In general, these
agreements are cancelable by the suppliers upon 30 to 60 days' notice.
Management does not anticipate cancelation of these agreements.

18. SUBSEQUENT EVENTS:

During the first quarter of 1998 (through March 24) the Company purchased
three additional businesses providing services in its industry for a total
consideration (subject to certain adjustments) consisting of approximately $20.0
million in cash, $9.2 million aggregate principal amount of assumed debt,
807,828 shares of Common Stock, and $0.4 million aggregate principal amount of
convertible subordinated notes. The Company used borrowings under the Credit
Facility to fund the cash portions of the purchase prices.

F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Innovative Valve Technologies, Inc.:

We have audited the accompanying consolidated balance sheet of Innovative
Valve Technologies, Inc. and subsidiaries (a Delaware corporation), as of
September 30, 1997, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the period from inception (March 16,
1997) through September 30, 1997. These 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
Innovative Valve Technologies, Inc. and subsidiaries, as of September 30, 1997,
and the results of their operations and their cash flows for the period from
inception (March 16, 1997) through September 30, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 10, 1998

F-26
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- SEPTEMBER 30, 1997

ASSETS
CURRENT ASSETS:
Trade accounts receivable, net of
allowance of $46,578.............. $ 2,717,617
Inventories, net................... 1,647,347
Prepaid expenses and other......... 138,876
--------------
Total current assets.......... 4,503,840
PROPERTY AND EQUIPMENT, net............. 1,379,245
RECEIVABLE FROM THE SAFE SEAL COMPANY,
INC................................... 6,414,636
GOODWILL, net........................... 7,959,884
OTHER NONCURRENT ASSETS................. 2,085,042
--------------
$ 22,342,647
==============

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt.................... $ 4,791,764
Current maturities of long-term
debt.............................. 818,993
Credit facility.................... 2,522,895
Accounts payable and accrued
expenses.......................... 9,904,055
--------------
Total current liabilities..... 18,037,707
CONVERTIBLE SUBORDINATED DEBT........... 6,143,180
OTHER LONG-TERM LIABILITIES............. 710,528
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value,
30,000,000 shares authorized,
242,839 shares issued and
outstanding....................... 243
Additional paid-in capital......... 5,008,672
Retained deficit................... (7,557,683)
--------------
Total stockholders' deficit... (2,548,768)
--------------
$ 22,342,647
==============

The accompanying notes are an integral part of this consolidated financial
statement.

F-27
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997

REVENUES............................. $ 2,414,324
COST OF OPERATIONS................... 1,749,628
--------------
Gross profit.................... 664,696
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,564,748
SPECIAL COMPENSATION EXPENSE......... 5,008,381
--------------
LOSS FROM OPERATIONS................. (6,908,433)
INTEREST EXPENSE..................... 638,638
OTHER EXPENSE........................ 10,612
--------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES.............................. (7,557,683)
PROVISION FOR INCOME TAXES........... --
--------------
NET LOSS............................. $ (7,557,683)
==============

The accompanying notes are an integral part of this consolidated financial
statement.

F-28
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, March 16, 1997.............. -- $ -- $ -- $ -- $ --
Issuance of Common Stock........ 242,839 243 2,840,973 -- 2,841,216
Issuance of stock options to
certain executives............ -- -- 2,167,699 -- 2,167,699
Net loss........................ -- -- -- (7,557,683) (7,557,683)
------- ------- ----------- ----------- -----------
BALANCE, September 30, 1997.......... 242,839 $ 243 $ 5,008,672 $(7,557,683) $(2,548,768)
======= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.

F-29
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 16, 1997)
THROUGH SEPTEMBER 30, 1997

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................ $ (7,557,683)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and amortization...... 91,044
Special compensation expense....... 5,008,558
(Increase) decrease in --
Receivable from The Safe Seal
Company, Inc. ............... 362,612
Trade accounts receivable..... (974,753)
Inventories................... (285,565)
Prepaid expenses and other
current assets............... 79,924
Other noncurrent assets....... (3,135,829)
Accounts payable and accrued
expenses..................... 7,980,650
------------
Net cash provided by operating
activities................... 1,568,958
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment......................... (549,812)
Net proceeds from property and
equipment sales................... (9,095)
Business acquisitions.............. (6,809,946)
------------
Net cash used in investing
activities................... (7,368,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of debt................. 4,976,689
Borrowings under credit facility... 2,522,895
Proceeds from the issuance of
common stock...................... 357
Funding of deferred offering
costs............................. (1,700,046)
------------
Net cash provided by financing
activities................... 5,799,895
NET CHANGE IN CASH...................... --
CASH, beginning of period............... --
------------
CASH, end of period..................... $ --
============

The accompanying notes are an integral part of this consolidated financial
statement.

F-30
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

BACKGROUND

Innovative Valve Technologies, Inc. (the "Company" or "Invatec") was
established as a Delaware corporation on March 16, 1997, to create the leading
single-source provider of comprehensive maintenance, repair and value-added
distribution services for industrial valves and related process-system
components throughout North America. Except for its purchase of Steam Supply &
Rubber Co., Inc. and three related entities (collectively, "Steam Supply") in
July 1997, Invatec conducted no operations of its own prior to the closing on
October 28, 1997 of (i) its initial public offering (the "IPO") of its common
stock, par value $.001 per share ("Common Stock"), (ii) its purchase of two
value repair and distribution companies and (iii) a merger (the "SSI Merger")
in which The Safe Seal Company, Inc. ("SSI") became its subsidiary. Pursuant
to the SSI Merger each outstanding share of SSI common stock will be converted
into 1/2 of a share of Common Stock and the redemption of SSI preferred stock
for shares of Common Stock at the initial offering price of $13. Prior to the
SSI Merger, Invatec and SSI were under the common voting control of the trustee
of a voting trust establish in May 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

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

PROPERTY AND EQUIPMENT

GOODWILL

The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.

INCOME TAXES

Invatec follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. Invatec has recorded
a full valuation allowance against all deferred tax assets due to the
uncertainty of ultimate realizability. Accordingly, no income tax benefit has
been recorded for current year losses.

SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE

The Company recorded a special non-cash compensation expense of
approximately $2.8 million related to the issuance of 242,839 shares of Common
Stock to six members of executive management and a

F-31
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related party to attract such individuals and that party to effect the IPO (see
Note 1). For financial statement presentation purposes, these shares were valued
at approximately $11.70 per share.

SUPPLEMENTAL CASH FLOW INFORMATION

During the period from inception (March 16, 1997) through September 30,
1997, the Company had non-cash activities consisting of the assumption of
approximately $6,777,000 of notes issued by SSI in connection with SSI's
acquisition of Plant Specialties, Inc. ("Plant Specialties") and assumption of
the indebtedness (including accrued interest) owed to Philip.

The Company did not pay taxes or interest during the period from inception
through September 30, 1997.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.

3. PROPERTY AND EQUIPMENT:

Property and equipment at September 30, 1997 consist of the following:

ESTIMATED DECEMBER 31,
USEFUL LIVES 1996
------------ --------------
Land................................. -- $ 167,095
Buildings............................ 30 years 610,952
Leasehold improvements............... 30 years 57,843
Furniture and fixtures............... 3-5 years 2,424,264
Machinery and equipment.............. 5 years 397,095
--------------
3,657,249
Less -- Accumulated
depreciation.................. (2,278,004)
--------------
Property and equipment, net..... $ 1,379,245
==============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts payable and accrued expenses at September 30, 1997 consist of the
following:

Accrued interest..................... 1,031,057
Accounts payable, trade.............. 6,851,078
Accrued compensation and benefits.... 441,075
Other accrued expenses............... 1,580,845
------------
$ 9,904,055
============

5. DEBT:

In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip advanced funds to Invatec (the "Philip Advances") to
pay costs related to the IPO and Invatec assumed SSI's obligation to repay the
Philip Advances and the related deferred offering costs funded with the Philip
Advances. Pursuant to this arrangement, $2,128,935 of short-term debt and
$484,000 of accrued financing charges incurred by SSI prior to the funding
arrangement were transferred to Invatec. The Philip Advances

F-32
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

have been included in short-term debt and bear interest at 8% per annum and may
be converted into Common Stock. The Philip Advances were due at the closing of
the IPO, and were repaid with Common Stock valued at the IPO initial offering
price of $13.

Long-term debt consists of a $853,186 note payable to a former stockholder
of Plant Specialties issued in connection with SSI's acquisition of Plant
Specialties. The note was assumed from SSI by Invatec in June 1997. The note
bears interest at 9.0% per annum and is secured by real estate. Principal and
interest was paid monthly and the note was paid in full in December 1997.

6. CONVERTIBLE SUBORDINATED NOTES PAYABLE:

At September 30, 1997, outstanding convertible subordinated debt consisted
of approximately $3.3 million aggregate principal amount of 5.0% notes due in
2002 (issued by SSI as part of the purchase price for PSI and thereafter assumed
by Invatec) and $2.8 million aggregate principal amount of 5.5% notes due in
2004 (issued by Invatec as part of the purchase price for Steam Supply). As a
result of the IPO, these notes are convertible into Common Stock, at the option
of the holders, at an initial conversion price of $16.90 per share.

7. CAPITAL STOCK AND STOCK OPTIONS:

COMMON STOCK

In connection with the organization and initial capitalization of Invatec,
Invatec issued and sold 242,839 shares of Common Stock in March and June 1997 to
certain members of its management and a related party for $357. For financial
statement presentation purposes, this Common Stock was valued at $11.70 per
share, resulting in a special non-cash compensation expense of $2,840,859.

PREFERRED STOCK

Invatec's charter authorizes the issuance of up to 5,000,000 shares of
preferred stock. As of September 30, 1997, no shares of preferred stock had been
issued.

1997 INCENTIVE PLAN

The Company has adopted an incentive plan (the "Plan") that provides for
the granting or awarding of stock options and other performance-based awards to
key employees, nonemployee directors and independent contractors of the Company
and its subsidiaries. In general, the terms of the options awards (including
vesting schedules) granted after the IPO will be established by the Compensation
Committee of the Company's board of directors. In August 1997, options to
purchase 202,589 shares of Common Stock were granted to certain members of
management at an exercise price of $1.00 per share, resulting in a special
non-cash non-recurring charge of approximately $2.2 million. As of October 27,
1997 Plan options to purchase approximately 1.3 million shares of Common Stock
were outstanding.

8. ACQUISITION OF STEAM SUPPLY:

In July 1997, Invatec acquired Steam Supply & Rubber Co., Inc. and three of
its affiliated companies (collectively, "Steam Supply") for total
consideration of $10.6 million, comprised of $2.7 million of cash, $2.8 million
aggregate principal amount of Invatec's seven-year 5.5% convertible subordinated
notes and the assumption of $5.1 million of debt and other non-current
liabilities. Invatec is accounting for this acquisition in accordance with the
purchase method of accounting, and the effective date of this acquisition is
July 31, 1997 for financial statement presentation purposes.

On June 29, 1997, in connection with the acquisition of Steam Supply, the
Company borrowed $2.0 million from Philip and paid the proceeds into escrow
pursuant to the definitive agreement to purchase Steam Supply. The note due to
Philip bears interest at Philip's borrowing rate plus 10.0% (approximately 18%
at June 30, 1997) and was paid upon the closing of the IPO.

F-33
<PAGE>
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. NEW ACCOUNTING PRONOUNCEMENT:

SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities
to choose between a new fair-value-based method of accounting for employee stock
options or similar equity instruments and the current intrinsic-value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. The Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.

10. ACQUISITIONS:

The Company has signed definitive agreements to acquire Industrial Controls
& Equipment, Inc. and three affiliated companies (collectively, "ICE/VARCO")
and Southern Valve Service, Inc. and one affiliated company (collectively,
"SVS"). The aggregate consideration the Company will pay in these acquisitions
is $11.1 million, comprised of $9.6 million in cash and assumed debt and $1.5
million in Common Stock valued for this purpose at the initial public offering
price per share in the IPO. The closings of these acquisitions are conditioned
on the completion of the IPO. The total consideration payable in each
acquisition is subject to an increase in total consideration contingent on the
operating results achieved in the first 12 months after acquisition. The
contingent payment for ICE/VARCO would consist of options to purchase 40,000
shares of Common Stock at an exercise price per share equal to the initial
public offering price of $13 per share, while the contingent payment for SVS
would be payable in a combination of Common Stock and cash in an amount that is
not presently determinable.

11. SUBSEQUENT EVENTS:

REVERSE STOCK SPLIT

In October 1997, Invatec effected a 0.68-for-one reverse stock split of
each share of Common Stock then outstanding. The accompanying financial
statements have been prepared as if such reverse split had been effected at
inception (March 16, 1997).

IPO AND MERGER

On October 28, 1997, Invatec (i) closed its IPO of its Common Stock and
(ii) consolidated seven established businesses providing various repair and
distribution services by means of two purchase transactions and a merger in
which its affiliate, SSI became its subsidiary.

F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Safe Seal Company, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of The Safe
Seal Company, Inc. (a Texas corporation) and subsidiaries, as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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

ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997

F-35
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31
-------------------------
1995 1996
----------- ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 1,458,096 $ 396,637
Accounts receivable, net of
allowance of $25,000 and
$25,000........................... 485,911 535,647
Inventories........................ 17,480 36,140
Prepaid expenses and other current
assets............................ 45,477 111,638
----------- ------------
Total current assets..... 2,006,964 1,080,062
PROPERTY AND EQUIPMENT, net............. 32,502 140,449
GOODWILL, net........................... -- --
PATENT COSTS, net....................... 56,833 741,611
OTHER NONCURRENT ASSETS, net............ 12,346 325,993
----------- ------------
$ 2,108,645 $ 2,288,115
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)

CURRENT LIABILITIES:
Short-term debt.................... $ -- $ --
Current maturities of long-term
debt.............................. -- --
Accounts payable and accrued
expenses.......................... 1,184,086 1,092,891
Other current liabilities.......... -- --
----------- ------------
Total current
liabilities.......... 1,184,086 1,092,891
LONG TERM DEBT, net of current
maturities............................ -- 588,970
PAYABLE TO INNOVATIVE VALVE
TECHNOLOGIES, INC..................... -- --
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 2,000,000 2,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value,
10,000,000 shares authorized,
2,865,902 shares and 2,963,838
shares issued and outstanding..... 28,659 29,638
Additional paid-in capital......... 983,246 1,270,315
Retained deficit................... (2,087,346) (2,693,699)
----------- ------------
Total stockholders'
equity (deficit)..... (1,075,441) (1,393,746)
----------- ------------
$ 2,108,645 $ 2,288,115
=========== ============

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

F-36
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
----------- ------------ -----------
REVENUES................................ $ 2,547,360 $ 2,852,356 $ 3,887,761
COST OF OPERATIONS...................... 1,270,788 1,583,940 2,375,245
----------- ------------ -----------
Gross profit................... 1,276,572 1,268,416 1,512,516
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,267,899 1,852,895 1,917,063
SPECIAL COMPENSATION EXPENSE ON COMMON
STOCK ISSUANCE........................ -- -- 38,048
----------- ------------ -----------
Income (loss) from
operations................... 8,673 (584,479) (442,595)
OTHER INCOME (EXPENSE):
Patent defense costs................ (168,705) (880,068) --
Interest income (expense), net...... (7,048) 10,181 27,703
Other............................... (113,635) (50,126) 393
----------- ------------ -----------
(289,388) (920,013) 28,096
----------- ------------ -----------
LOSS BEFORE INCOME TAXES................ (280,715) (1,504,492) (414,499)
PROVISION (BENEFIT) FOR INCOME TAXES.... -- -- --
----------- ------------ -----------
NET LOSS................................ $ (280,715) $ (1,504,492) $ (414,499)
=========== ============ ===========

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

F-37
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,463,424 $ 24,634 $ 268,801 $ (249,016) $ 44,419
Preferred stock dividends....... -- -- -- (12,000) (12,000)
Issuance of common stock........ 62,478 625 22,345 -- 22,970
Conversion of redeemable
preferred stock to common
stock......................... 51,000 510 149,490 -- 150,000
Net loss........................ -- -- -- (280,715) (280,715)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1994........... 2,576,902 25,769 440,636 (541,731) (75,326)
Preferred stock dividends....... -- -- -- (41,123) (41,123)
Sale of common stock warrant.... -- -- 100,000 -- 100,000
Issuance of common stock........ 289,000 2,890 442,610 -- 445,500
Net loss........................ -- -- -- (1,504,492) (1,504,492)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1995........... 2,865,902 28,659 983,246 (2,087,346) (1,075,441)
Preferred stock dividends....... -- -- -- (191,854) (191,854)
Issuances of common stock....... 121,736 1,217 356,831 -- 358,048
Retirement of stock............. (23,800) (238) (69,762) -- (70,000)
Net loss........................ -- -- -- (414,499) (414,499)
--------- -------- ----------- ----------- --------------
BALANCE, December 31, 1996........... 2,963,838 $ 29,638 $ 1,270,315 $(2,693,699) $ (1,393,746)
========= ======== =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-38
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (280,715) $ (1,504,492) $ (414,499)
Adjustments to reconcile net loss
to net cash
provided by (used in) operating
activities --
Depreciation and
amortization................ 27,179 28,525 31,183
Special compensation expense on
issuance of common stock.... -- -- 38,048
(Gain) loss on sale of property
and equipment............... 13,196 (1,879) --
(Increase) decrease in --
Accounts receivable......... (87,683) (145,835) (49,736)
Inventories................. -- -- (13,660)
Prepaid expenses and other
current assets............ (23,767) 35,402 (66,161)
Other noncurrent assets..... (39,544) -- (324,246)
Increase (decrease) --
Accounts payable and accrued
expenses.................. 399,318 493,084 (91,195)
Payable to Innovative Valve
Technologies, Inc......... -- -- --
----------- ------------ -----------
Net cash provided by (used
in) operating
activities.............. 7,984 (1,095,195) (890,266)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (28,593) (7,530) (128,309)
Additions to patent costs.......... (75,570) (3,384) (46,030)
Proceeds from sale of property and
equipment........................ 40,000 10,500 --
Proceeds from sale of
investments...................... 53,107 -- --
Business acquisitions, net of cash
acquired of $135,109............. -- -- --
----------- ------------ -----------
Net cash used in investing
activities.............. (11,056) (414) (174,339)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt................. 100,000 -- 265,000
Repayments of debt................. (31,667) (93,333) --
Proceeds from sale/exercise of
common stock warrant............. -- 100,000 --
Proceeds from sale of common
stock............................ -- 445,500 --
Stock repurchases.................. -- -- (70,000)
Proceeds from sale of redeemable
preferred stock.................. -- 2,000,000 --
Preferred stock dividends.......... (12,000) -- (191,854)
----------- ------------ -----------
Net cash provided by (used
in) financing
activities.............. 56,333 2,452,167 3,146
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH...... 53,261 1,356,558 (1,061,459)
CASH, beginning of period............ 48,277 101,538 1,458,096
----------- ------------ -----------
CASH, end of period.................. $ 101,538 $ 1,458,096 $ 396,637
=========== ============ ===========

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

F-39
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

The Safe Seal Company, Inc. (the "Company" or "SSI") was incorporated
in the State of Texas in January 1991 and is principally engaged in the business
of providing on-line leak sealing and valve maintenance and repair services to
industrial customers in the Gulf Coast area of the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

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

PROPERTY AND EQUIPMENT

INCOME TAXES

REVENUE RECOGNITION

Revenue is recognized as products are sold and as services are performed.

CASH

Cash payments for interest during 1994, 1995 and 1996 were approximately
$7,000, $8,000 and $4,000, respectively.

USE OF ESTIMATES

SPECIAL COMPENSATION EXPENSE ON COMMON STOCK ISSUANCE

In 1996, the Company recorded a special compensation expense of $38,048
related to the issuance of its common stock, $0.01 par value (the "Common
Stock"), and options to purchase Common Stock under employee benefit programs.
See Note 8 for further discussion.

In the six months ended June 30, 1997, the Company recorded a special
non-cash compensation expense of approximately $2.6 million on common stock
issuance related to the issuance of 443,190 shares of Common Stock to three
members of executive management and to Computerized Accounting & Tax Services,
Inc. ("CATS"), a related party owned by Roger L Miller (see Note 11), to
attract such individuals and CATS to effect the Offering (see Note 13). For
financial statement presentation purposes, these shares were valued at
approximately $5.85 per share.

F-40
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.

3. ACQUISITION OF THE SPIN SAFE CORPORATION, INC.:

In November 1996, the Company acquired The Spin Safe Corporation, Inc.
("Spin Safe") in exchange for 108,800 shares of Common Stock, valued at $2.94
per share, and noninterest-bearing notes payable of $400,000. The notes are due
in four equal annual installments beginning January 15, 1998. Additionally, the
Company entered into an agreement with the former stockholders of Spin Safe,
pursuant to which the Company will make royalty payments to them based on the
number of times in excess of a specified base the Safe SealTM system is used by
the Company through 2011. The cost of this acquisition is recorded as patent
costs.

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

DECEMBER 31
ESTIMATED ----------------------
USEFUL LIVES 1995 1996
------------ ---------- ----------
Vehicles............................. 5 years $ -- $ 5,904
Furniture and fixtures............... 3-5 years 41,423 126,262
Machinery and equipment.............. 5 years 17,180 54,746
---------- ----------
58,603 186,912
Less -- Accumulated
depreciation.................. (26,101) (46,463)
---------- ----------
Property and equipment, net..... $ 32,502 $ 140,449
========== ==========

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following:

DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance, at beginning of year........ $ 25,000 $ 25,000 $ 25,000
Additions............................ -- -- --
Deductions........................... -- -- --
--------- --------- ---------
Balance, at end of year.............. $ 25,000 $ 25,000 $ 25,000
========= ========= =========

F-41
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

DECEMBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade.............. $ 278,457 $ 287,165
Accrued compensation and benefits.... 74,583 120,567
Accrued legal fees................... 593,311 170,696
Accrued dividends.................... 65,123 47,500
Accrued royalties.................... 56,833 70,117
Due to Philip Services Corp.
subsidiary ........................ -- 287,195
Other accrued expenses............... 115,779 109,651
------------ ------------
$ 1,184,086 $ 1,092,891
============ ============

6. LONG-TERM DEBT:

Long-term debt consists of the following at December 31, 1996:

Revolving line of credit payable to a
bank, due June 30, 2002, with
interest due monthly at 1.25% over
cost (as defined) (6.75% at
December 31, 1996), secured by
assignment of all assets. The
available borrowing capacity at
December 31, 1996 was
$1,735,000......................... $ 265,000
Notes payable to former stockholders
of Spin Safe, with annual
installments of $100,000 beginning
January 15, 1998, non-interest
bearing, due January 15, 2001,
unsecured.......................... 323,970
----------
$ 588,970
==========

7. INCOME TAXES:

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:

YEAR ENDED DECEMBER 31
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Statutory federal income tax
benefit............................ (34)% (34)% (34)%
Valuation allowance.................. 34 34 34
--- --- ---
Effective income tax rate............ 0% 0% 0%
=== === ===

Net deferred tax assets consist of the following:

DECEMBER 31
--------------------------
1995 1996
------------ ------------
Current deferred tax assets.......... $ 135,741 $ 160,910
Noncurrent deferred tax assets....... 581,536 686,316
Valuation allowance.................. (717,277) (847,226)
------------ ------------
Total deferred tax
assets.................. $ -- $ --
============ ============

The Company records a valuation allowance for deferred tax assets when
management believes it is more likely than not the asset will not be realized.
Because of the Company's history of generating significant taxable losses, a
valuation allowance equal to its deferred tax assets has been established.

F-42
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
---------- ------------ ------------
Depreciation and amortization........ $ (15,235) $ 53,093 $ (2,520)
Net operating loss................... 74,051 304,600 107,301
Accrued expenses not deducted for
tax................................ -- 95,065 25,168
Change in valuation allowance........ (58,816) (452,758) (129,949)
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============

8. STOCKHOLDERS' EQUITY:

COMMON STOCK

In 1995, the Company implemented an employee benefit award program. Under
this program, the Company awarded 9,452 shares of Common Stock to employees. The
shares vested 50 percent at December 31, 1996, and the remainder were to become
fully vested on December 31, 1997. The Company recorded compensation expense,
equal to the fair value of the shares, on the date the shares vested. During
1996, 1,632 shares were forfeited by employees. In 1996, the Company recorded
non-cash compensation expense of $11,500 for the 3,910 shares that vested
related to this program, which was discontinued in 1997, and all remaining
unvested shares were cancelled.

STOCK OPTIONS

In 1996, the Company began a management stock option program that was
discontinued in 1997. Under this program, the Company granted both shares of
Common Stock and options to purchase shares of Common Stock to certain members
of management. The options vested monthly and were exercisable at any time
following the six-month period ending June 30 or December 31 in which the
options were earned. The Company had reserved 400,000 shares of Common Stock for
issuance in this program. During 1996, the Company granted 9,026 shares of
Common Stock and options to purchase 143,798 shares of Common Stock. The options
had an exercise price of $5.00 per share and are exercisable through July 1,
2001. In 1996, the Company recorded non-cash compensation expense of $26,548 for
the 9,026 shares issued with a fair market value of $2.94 per share. No
compensation expense was recorded for the options granted in 1996 because their
exercise price exceeded the fair market value of the underlying shares ($2.94
per share). Prior to 1996, the Company had, from time to time, granted options
to key employees at or above the market value of the Common Stock. The options
granted had exercise prices ranging from $2.50 to $10.00 per share. All but
100,000 options expired in 1996. The remaining options were exercised in June
1997.

The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense has been recognized. The Company's pro forma
compensation expense is zero as options were determined to be without value
under SFAS No. 123, "Accounting for Stock-Based Compensation," using the
minimum value option method with the following assumptions, as prescribed by
SFAS No. 123:

Remaining life.......................... 4.5 years
Exercise price.......................... $5.00/share
Risk-free rate of return................ 7%

F-43
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the stock options at December 31, 1996 and changes during the
three years then ended is presented in the table and narrative below:

WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------- ---------------
Balance at December 31, 1993......... 27,000 $ 10.00
Granted......................... 215,000 6.16
-------------
Balance at December 31, 1994......... 242,000 6.59
Granted......................... -- --
Exercised....................... -- --
-------------
Balance at December 31, 1995......... 242,000 6.59
Granted......................... 143,798 5.00
Exercised....................... -- --
Cancelled....................... (142,000) 9.47
-------------
Balance at December 31, 1996......... 243,798 3.97
=============
Available for grant at December 31,
1996............................... 256,202
=============
Shares exercisable at December 31,
1996............................... 243,798 3.97
=============

The options outstanding at December 31, 1996 have exercise prices from
$2.50 to $5.00 per share, with a weighted average exercise price of $3.97 and a
weighted average remaining contractual life of three years. All these options
are exercisable.

WARRANTS

In 1995, the Company sold to a subsidiary of Philip Services Corp.
(collectively with its subsidiaries, "Philip") a warrant entitling Philip to
purchase newly issued shares of Common Stock in such number as would equal 35
percent of the outstanding Common Stock, on a fully diluted basis, at $3.68 per
share. During 1996, the Company granted Philip a warrant to purchase additional
newly issued shares of Common Stock in such number as would equal 1.5 percent of
outstanding Common Stock, on a fully diluted basis, at $3.68 per share. The
warrants were exercisable, at Philip's discretion, through January 8, 1999. In
September 1996, the Company agreed to adjust the warrants' exercise price to
$3.16 in return for accelerated exercise and on January 31, 1997, Philip
exercised the warrants. Consideration for the exercise of the warrants consisted
of the issuance of approximately $3.3 million of promissory notes issued by
Philip (the "Philip Notes") and cash of approximately $1,216,855 paid during
the six months ended June 30, 1997. The exercise of these warrants and issuance
of the promissory notes occurred concurrently with the Company's purchase of
Harley Industries, Inc. ("Harley") (see Note 12), in connection with which the
Company assigned the Philip Notes to the sellers of Harley.

In 1995, the Company granted a consultant a warrant entitling its holder to
purchase 15,000 shares of Common Stock at $10.00 per share. The warrant is
exercisable, at the option of its holder, through the year 2000. The consultant
subsequently became an officer of Philip and a director of the Company.

STOCK REPURCHASES

In December 1996, the Company purchased 23,800 shares of Common Stock from
certain stockholders for total cash consideration of $70,000 ($2.94 per share).
The shares repurchased by the Company were subsequently canceled.

F-44
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. REDEEMABLE PREFERRED STOCK:

In 1995, the Company authorized the issuance of 1,000,000 shares of
preferred stock with a par value of $0.01 per share. Of the authorized shares,
20,000 were designated as Class A redeemable preferred stock (the "Class A
Preferred Stock"). Holders of Class A Preferred Stock are entitled to receive
preferential dividends, in cash or Common Stock (with an agreed value of $1.84
per common share), at an annual rate of $9.50 per share. The Company is required
to redeem the Class A Preferred Stock at $100 per share by October 12, 1999. The
Company sold the Class A Preferred Stock in 1995 for $2,000,000 to Philip.

10. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases warehouse space, office facilities and vehicles under
noncancelable leases. Rental expense for 1994, 1995 and 1996 was approximately
$91,700, $90,300 and $162,400, respectively. The following represents future
minimum rental payments under noncancelable operating leases:

Year ending December 31 --
1997............................... $ 133,900
1998............................... 102,300
1999............................... 52,400
2000............................... 28,800
2001............................... 24,000
Thereafter......................... --
----------
$ 341,400
==========

LITIGATION

In the ordinary course of its business, the Company has become involved in
various legal actions. Management does not believe that the outcome of these
legal actions will have a material effect on the Company's financial position or
results of operations.

11. CERTAIN TRANSACTIONS:

The Company has had a management agreement with CATS, an entity related by
common ownership. Management fee expense for 1994, 1995 and 1996 was
approximately $119,000, $120,000 and $108,000, respectively. This agreement was
terminated in 1997.

12. ACQUISITION OF HARLEY:

Effective January 31, 1997, the Company acquired all the outstanding stock
of Harley in a purchase transaction. Concurrent with the purchase of Harley, the
Company sold a division of Harley ("Harley Equipment") for $1.9 million in
cash and a receivable of $1.9 million, subject to final adjustment. The total
purchase price for Harley was $14.0 million of cash and assumed debt, including
a contingent cash payment of $1.0 million due upon the completion of the
Offering and $3.3 million of notes issued by Philip (see Note 8) and excluding
$3.8 million in cash and notes received from the sale of Harley Equipment.
Harley is principally engaged in the repair and distribution of valves, gauges,
measurement instruments and related parts for chemical manufacturing and power
industries located primarily in the midwestern and southeastern United States.

F-45
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. SUBSEQUENT EVENTS (UNAUDITED):

REVERSE STOCK SPLIT

In October 1997, the Company effected a 0.68-for-one reverse stock split of
the outstanding Common Stock. The accompanying financial statements have been
prepared as if such reverse split had been effected as of the beginning of the
earliest period presented.

ACQUISITIONS

Effective February 28, 1997, SSI acquired all the outstanding stock of GSV,
Inc. ("GSV") in a purchase transaction for approximately $7.3 million of cash
and debt assumed. GSV machines, repairs and sells valves and valve components in
Florida.

Effective May 31, 1997, SSI acquired all the outstanding stock of Plant
Specialties, Inc. ("Plant Specialties") and certain assets and real estate
owned by a former stockholder of Plant Specialties in a purchase transaction for
total consideration of $7.6 million, which consisted of $3.4 million in cash and
assumed debt, the issuance of $3.3 million of convertible notes and the issuance
of a $0.9 million note secured by real property. In June 1997, Innovative Valve
Technologies, Inc. ("Invatec"), a related party (see below), assumed the
Company's obligations on these notes. Plant Specialties sells and repairs valves
and instrumentation and provides engineering services to petrochemical and
oilfield industries in Louisiana and the Gulf Coast area.

The following table reflects, on an unaudited pro forma basis, the combined
operations of SSI, Harley, GSV and Plant Specialties, as if the acquisition of
these companies (the "Acquisitions") had taken place on January 1, 1996.
Adjustments have been made to reflect the accounting basis used in recording the
Acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
the Company would have obtained had the Acquisitions taken effect on January 1,
1996, has obtained since the date of acquisition or may obtain in the future.

YEAR ENDED
DECEMBER 31,
1996
------------
(UNAUDITED
AND IN
THOUSANDS)
Revenues............................. $ 45,670
Income before income taxes........... 2,551
Net income........................... 1,036

To partially fund the Acquisitions, the Company entered into two separate
credit facilities (the "Facilities"). One of the Facilities provides for loans
of approximately $17.5 million, consisting of $7.5 million of fixed-term loans
($4.8 million of which have been guaranteed by Philip) and up to $10.0 million
of revolving credit loans keyed to a borrowing base of, and secured by, accounts
receivable and inventories. The other Facility is a $7.0 million advancing line
of credit which has been guaranteed by Philip. As of June 30, 1997,
approximately $19.1 million was outstanding under the Facilities, including
approximately $1.4 million of current maturities. The Company anticipates that
the Facilities will be replaced with a new credit facility after the Merger and
Offering described below.

RELATIONSHIP WITH INVATEC

In March 1997, certain holders of the outstanding Common Stock organized
Invatec to become the Company's parent corporation by means of a merger (the
"Merger") to be effected concurrently with the closing by Invatec of an
initial public offering (the "Offering") of its common stock (the "Invatec
Common Stock"). As a result of the Merger, the outstanding Class A Preferred
Stock and Common Stock will be converted into the right to receive shares of
Invatec Common Stock.

F-46
<PAGE>
THE SAFE SEAL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Since May 1997, the Company and Invatec have been under the common control
of a voting trustee pursuant to voting trust agreements covering a majority of
the outstanding Common Stock and most outstanding shares of Invatec Common
Stock.

RELATIONSHIP WITH PHILIP

In 1996, Philip agreed to make certain advances (the "Philip Advances")
to the Company to enable the Company, or its successors, to pursue a possible
initial public offering. At December 31, 1996, the Company owed Philip $287,195
under this agreement, and the Company's other noncurrent assets included
$259,929 representing deferred offering costs funded with the Philip Advances.

As a result of Philip's financial support of the Company's acquisition of
Harley, Philip became a related party of the Company for financial statement
presentation purposes effective January 31, 1997.

In June 1997, Invatec entered into a funding arrangement with Philip
pursuant to which Philip has advanced funds to Invatec to pay costs related to
the Offering and Invatec has assumed the Company's obligation to repay the
Philip Advances and the related deferred offering costs funded with the Philip
Advances. Pursuant to that agreement, $2,128,935 of short-term debt and $484,000
of accrued financing charges were transferred to Invatec.

14. SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION:

Concurrently with the Merger and the closing of the Offering, Invatec
acquired in separate purchase transactions (i) Industrial Controls & Equipment,
Inc. and three affiliated companies (collectively, "ICE/VARCO") and (ii)
Southern Valve Service, Inc. and one affiliated company (collectively, "SVS").
In July 1997, Invatec acquired in a purchase transaction Steam Supply & Rubber
Co., Inc. and three of its affiliates (collectively, "Steam Supply" and,
together with ICE/VARCO, SVS, Harley, GSV and Plant Specialties, the "Acquired
Businesses"). For financial statement presentation purposes, the Company is the
"accounting acquirer" of the Acquired Businesses, and the following
supplemental unaudited pro forma combined financial information gives effect to
the acquisitions as if they had taken place on January 1, 1996 and as restated
to convert the results of operations of Acquired Businesses whose historical
fiscal periods were not on a calendar year basis to a calendar year basis. The
combined results of operations for the periods presented below do not purport to
be comparable to and may not be indicative of the Company's post-combination
results of operations because (i) SSI and the Acquired Businesses were not under
common control or management and (ii) a new basis of accounting was established
to record the purchase of the Acquired Businesses under the purchase method of
accounting.

YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED AND
IN THOUSANDS)
Revenues............................. $77,508
Cost of operations................... 54,613
-----------------
Gross profit......................... 22,895
Selling, general and administrative
expenses........................... 19,307
-----------------
Income from operations............... $ 3,588
=================

15. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)

On October 28, 1997, Invatec (i) closed its initial public offering of its
common stock and (ii) consolidated seven established businesses providing
various repair and distribution services by means of two purchase transactions
and a merger in which its affiliate SSI, became its subsidiary.

F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Harley Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Harley
Industries, Inc. and subsidiaries as of October 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Harley Industries, Inc. and
subsidiaries as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.

As discussed in Note 2, in December 1996 the Company's stockholders entered
into agreements for the sale of the Company's outstanding common stock.

Deloitte & Touche LLP
Tulsa, Oklahoma
January 17, 1997
(January 31, 1997 as to Notes 2 and 7)

F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Harley Industries, Inc.:

We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Harley Industries, Inc. and subsidiaries
for the period from November 1, 1996 through January 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Harley Industries, Inc. and subsidiaries for the period from November 1, 1996
through January 31, 1997, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 1998

F-49
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

OCTOBER 31
------------------------------
1995 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,738 $ 37,250
Accounts receivable, less allowance
for doubtful accounts of $100,000
and $117,000...................... 3,394,506 4,391,442
Inventories........................ 3,612,653 3,258,243
Prepaid expenses and other current
assets............................ 40,141 33,358
Deferred income tax assets......... 151,000 315,000
-------------- --------------
Total current assets.......... 7,220,038 8,035,293

NET ASSETS OF DISCONTINUED OPERATIONS... 3,876,294 3,114,979
PROPERTY, PLANT AND EQUIPMENT -- Net.... 1,731,368 2,630,489
OTHER ASSETS............................ 1,710,279 1,825,809
-------------- --------------
$ 14,537,979 $ 15,606,570
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 1,731,291 $ 2,424,408
Current portion of long-term
debt.............................. 445,528 477,309
Current portion of non-compete
obligations....................... 142,617 151,504
-------------- --------------
Total current liabilities..... 2,319,436 3,053,221
LONG-TERM DEBT.......................... 7,653,798 8,245,087

OBLIGATIONS UNDER NON-COMPETE
AGREEMENTS............................ 267,490 112,809
-------------- --------------
Total liabilities............. 10,240,724 11,411,117
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value:
Authorized, 3,000,000 shares;
issued and outstanding, 780,428
shares.......................... 7,804 7,804
Additional paid-in capital......... 5,555,273 5,555,273
Accumulated deficit................ (1,265,822) (1,367,624)
-------------- --------------
Total stockholders' equity.... 4,297,255 4,195,453
-------------- --------------
$ 14,537,979 $ 15,606,570
============== ==============

See notes to consolidated financial statements.

F-50
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED OCTOBER 31 ENDED
---------------------------------------------- JANUARY 31,
1994 1995 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 16,621,198 $ 18,990,013 $ 21,391,102 $5,987,992
COST OF OPERATIONS...................... 12,325,705 14,024,693 15,447,669 4,415,807
-------------- -------------- -------------- --------------
Gross profit....................... 4,295,493 4,965,320 5,943,433 1,572,185
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,530,176 4,383,840 5,563,334 1,845,477
-------------- -------------- -------------- --------------
Income (loss) from operations...... (234,683) 581,480 380,099 (273,292)
INTEREST EXPENSE........................ 408,518 539,215 527,188 152,660
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... (643,201) 42,265 (147,089) (425,952)
PROVISION (BENEFIT) FOR INCOME TAXES.... (270,000) 15,000 (57,000) (150,212)
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................ (373,201) 27,265 (90,089) (275,740)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF PROVISION (BENEFIT)
FOR TAXES OF $180,800, $35,000,
$(9,000) and $(33,991)................ 265,044 58,719 (11,713) (53,166)
-------------- -------------- -------------- --------------
NET INCOME (LOSS)....................... $ (108,157) $ 85,984 $ (101,802) $ (328,906)
============== ============== ============== ==============

See notes to consolidated financial statements.

F-51
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993............ 786,428 $7,864 $ 5,781,034 $ (1,243,649) $ 4,545,249

Purchase and retirement of
treasury stock................ (6,000) (60) (30,761) -- (30,821)

Capital distributions........... -- -- (60,000) -- (60,000)

Net loss........................ -- -- -- (108,157) (108,157)
--------- ------ ------------ -------------- -------------

BALANCE, OCTOBER 31, 1994............ 780,428 7,804 5,690,273 (1,351,806) 4,346,271

Capital distributions........... -- -- (135,000) -- (135,000)

Net income...................... -- -- -- 85,984 85,984
--------- ------ ------------ -------------- -------------

BALANCE, OCTOBER 31, 1995............ 780,428 7,804 5,555,273 (1,265,822) 4,297,255

Net loss........................ -- -- -- (101,802) (101,802)
--------- ------ ------------ -------------- -------------

BALANCE, OCTOBER 31, 1996............ 780,428 7,804 5,555,273 (1,367,624) 4,195,453

Net loss........................ -- -- -- (328,906) (328,906)
--------- ------ ------------ -------------- -------------

BALANCE, JANUARY 31, 1997............ 780,428 $7,804 $ 5,555,273 $ (1,696,530) $ 3,866,547
========= ====== ============ ============== =============

See notes to consolidated financial statements.

F-52
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS
YEARS ENDED OCTOBER 31 ENDED
------------------------------------------ JANUARY 31,
1994 1995 1996 1997
------------ ------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (108,157) $ 85,984 $ (101,802) $ (328,906)
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Discontinued operations........... (265,044) (58,719) 11,713 53,166
Depreciation and amortization..... 493,708 519,793 535,212 156,135
(Gain) loss on sale of property,
plant and equipment............ -- 610 (15,187) --
Deferred taxes.................... (214,000) 15,000 (166,000) (64,000)
Changes in operating assets and
liabilities:
Accounts receivable............ (558,983) (465,426) (996,936) 904,159
Inventories.................... (80,862) 120,375 322,954 (344,443)
Prepaid expenses and other
current assets............... 35,680 31,060 6,783 (77,331)
Other non-current assets....... -- (22,620) 7,870 (37,220)
Accounts payable and accrued
expenses..................... 44,271 237,673 693,117 (775,557)
------------ ------------- ------------- --------------
Net cash provided by (used
in) operating activities of:
Continuing operations...... (653,387) 463,730 297,724 (513,997)
Discontinued operations.... (150,395) (264,084) 669,702 (803,582)
------------ ------------- ------------- --------------
Net cash provided by
(used in) operating
activities............ (803,782) 199,646 967,426 (1,317,579)
------------ ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business................ -- -- (1,382,470) --
Capital expenditures................ (488,195) (156,373) (73,694) (1,275)
Proceeds from sale of property,
plant, and equipment.............. -- 23,952 26,974 3,599
------------ ------------- ------------- --------------
Net cash provided by (used in)
investing activities......... (488,195) (132,421) (1,429,190) 2,324
------------ ------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
revolving credit agreements....... 1,126,050 168,233 1,071,827 1,354,949
Principal payments on other
long-term debt.................... (1,595,682) (363,045) (448,757) --
Borrowings under term loan
agreements........................ 1,988,573 400,000 -- --
Principal payments on non-compete
obligations....................... (131,001) (138,175) (145,794) (37,694)
Purchase and retirement of treasury
stock............................. (30,821) -- -- --
Capital distributions............... (60,000) (135,000) -- --
------------ ------------- ------------- --------------
Net cash provided by (used in)
financing activities......... 1,297,119 (67,987) 477,276 1,317,255
------------ ------------- ------------- --------------
INCREASE (DECREASE) IN CASH............. 5,142 (762) 15,512 2,000
CASH, BEGINNING OF PERIOD............... 17,358 22,500 21,738 37,250
------------ ------------- ------------- --------------
CASH, END OF PERIOD..................... $ 22,500 $ 21,738 $ 37,250 $ 39,250
============ ============= ============= ==============
</TABLE>

See notes to consolidated financial statements.

F-53
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED JANUARY 31, 1997

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Harley
Industries, Inc. (the "Company") and its operative divisions, Harley Equipment
and Harley Valve and Instrument Company ("Harley Valve"), and other minor
subsidiaries. All material intercompany profits, transactions and balances have
been eliminated.

DESCRIPTION OF BUSINESS

The Company conducts its business activities through two operating
divisions, Harley Equipment and Harley Valve. Harley Equipment sells, customizes
and repairs engines, industrial vehicles, pumps and related parts. Harley Valve
customizes, repairs, tests and sells valves, gauges, measurement instruments and
related parts. The Company's principal customers are in the aircraft, chemical
manufacturing and power industries located primarily in the midwestern and
southeastern United States. The majority of sales of products and service
billings are made on account to customers based on pre-approved unsecured credit
terms determined by the Company. Allowances for uncollectible accounts are
established based on several factors which include, but are not limited to,
analysis of specific customers, historical trends, current economic conditions
and other information.

BASIS OF PRESENTATION

Due to the transactions described in Note 2, the accompanying consolidated
financial statements reflect the Company's Harley Equipment division as a
discontinued operation.

CASH

Cash consists of cash on hand and on deposit in banks.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be sold or utilized within one year are
recorded at estimated net realizable values and are included in the financial
statements as non-current assets.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are reported at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method based on
the estimated useful lives of the related assets, which are 15 to 30 years for
buildings, 7 years for machinery and equipment, 3 to 5 years for furniture and
fixtures and 3 years for other assets. During 1996 the Company determined the
estimated useful lives of certain of its buildings should be extended from 15
years to 30 years. The effect of this change in estimate was to decrease
depreciation expense and the net loss for the year ended October 31, 1996 by
approximately $52,000 and $31,200, respectively.

INTANGIBLE ASSETS

Intangible assets are reported at cost, net of accumulated amortization.
The costs of non-compete agreements entered into in connection with acquisitions
of businesses are amortized on the straight-line basis over their ten- and
five-year terms. Other intangible assets consist of the excess of cost over the
fair value of the net assets of acquired businesses, which is amortized on the
straight-line basis over 40 years. Management periodically evaluates the
recoverability of intangible asset carrying values based on projected operations
and other relevant factors of the acquired businesses. No valuation reserves
have been provided as a result of these evaluations. Amortization expense was
$171,720, $179,220, $172,426 and $40,431 for the years ended October 31, 1994,
1995, 1996 and the three months ended January 31, 1997, respectively.

F-54
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NEW ACCOUNTING STANDARD

The Company has adopted, effective November 1, 1995, the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other assets, may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.

REVENUE RECOGNITION

Revenue on sales of products is recognized upon shipment to customers.
Revenue on service work is recognized upon completion of the service.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenue and expenses during the reporting period. Actual
results will be determined based on the outcome of future events and could
differ from the estimates.

2. SUBSEQUENT EVENTS AND DISCONTINUED OPERATIONS

In December 1996, the Company's stockholders entered into agreements with
The Safe Seal Company, Inc. ("Safe Seal") under which Safe Seal acquired 100%
of the outstanding common stock of the Company effective January 31, 1997 for
cash and notes of approximately $8,600,000, including a $1,000,000 cash payment
due upon the successful completion of a public stock offering by Safe Seal or
its successor company. Concurrent with the acquisition, Safe Seal entered into
an agreement to transfer certain assets and certain liabilities to Harley
Equipment and sell the stock of Harley Equipment for cash and notes to an
employee/minority stockholder of the Company. The Company's primary bank debt,
which was recorded on the records of Harley Equipment, was transferred to Harley
Valve and refinanced by Safe Seal (Note 7) in conjunction with the sale and
purchase transactions described above. The ultimate Harley Equipment purchase
price, estimated to be $3,100,000 to $3,800,000, will be based on the historical
carrying values of such assets and liabilities as of January 31, 1997 and is
subject to adjustment by the parties. Subsequent to January 31, 1997, the
parties entered into discussions to determine the final adjustments to the
purchase price. The Company believes that the ultimate adjustment made to the
purchase price will not have a material impact on the Company's financial
position or results of operation. For financial reporting purposes, the net
assets, results of operations and cash flows of Harley Equipment are included in
the Company's consolidated financial statements as discontinued operations.
Harley Equipment had revenues of $10,240,000, $10,318,000, $11,301,000 and
$2,518,000 for the years ended October 31, 1994, 1995,

F-55
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 and the three months ended January 31, 1997, respectively. Net assets of
these discontinued operations at October 31, 1995 and 1996 are as follows:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Current assets.......................... $ 3,245,417 $ 3,581,497
Property, plant and equipment -- net.... 630,563 583,052
Other assets............................ 751,241 635,227
------------ ------------
Total assets.................. 4,627,221 4,799,776
Current liabilities..................... 750,927 1,684,797
------------ ------------
Net assets.................... $ 3,876,294 $ 3,114,979
============ ============

This historical financial information may not necessarily be indicative of
the conditions that would have existed if Harley Equipment had been operated as
an unaffiliated entity.

Interest expense has been allocated to discontinued operations based on the
ratio of net assets of discontinued operations to consolidated net assets.
Interest expense of $163,431, $245,057, $208,491 and $75,966 has been allocated
to discontinued operations in 1994, 1995, 1996 and the three months ended
January 31, 1997, respectively. Interest payments for the Company were $552,095,
$787,795, $735,632 and $164,826 in 1994, 1995, 1996 and the three months ended
January 31, 1997, respectively. In addition, certain additional compensation of
$475,000 (Note 13), which will be paid from the assets of Harley Equipment, has
been allocated to discontinued operations in 1996.

The Company's stockholders have indemnified Safe Seal for various
contingencies, including environmental and income tax matters. The stockholders
have also entered into agreements not-to-compete with Safe Seal.

3. PURCHASE OF VALVE BUSINESS

Effective June 4, 1996, the Company acquired certain assets of Henze
Services, Inc. for cash and direct acquisition costs of $1,382,470. The assets
acquired consisted of six branches primarily engaged in repair and servicing of
used valves and related products. Management subsequently consolidated two
locations into the operations of existing Harley Valve facilities. The
acquisition was accounted for using purchase accounting. The purchase price was
allocated to equipment acquired based on independent appraisals. In conjunction
with the acquisition, an escrow fund of $150,000 has been established pending
resolution of certain matters. The escrow fund is included in other noncurrent
assets pending its resolution. The results of operations of the Henze locations
are included in the accompanying consolidated statement of operations from the
acquisition date. The following pro forma information has been prepared assuming
that this acquisition had taken place as of November 1, 1994. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the purchase, depreciation based on the purchase price
allocation, and related income tax effects. The pro forma financial information
is not necessarily indicative of the results of operations that would have been
reported had the transaction been effected on November 1, 1994 (000's omitted).

YEAR ENDED OCTOBER 31
-----------------------
1995 1996
--------- ---------
Revenues................................ $ 33,557 $ 27,382
Loss from continuing operations......... (396) (381)
Net loss................................ (337) (393)

F-56
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVENTORIES

Inventories consist of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Gauges, valves, measurement instruments
and related parts..................... $ 3,883,361 $ 3,461,662
Work in process......................... -- 98,745
------------ ------------
3,883,361 3,560,407
Less: amount classified as non-current
assets................................ 270,708 302,164
------------ ------------
Inventories classified as current
assets................................ $ 3,612,653 $ 3,258,243
============ ============

Inventories are stated net of valuation reserves of $295,000 and $374,000
at October 31, 1995 and 1996, respectively. Management estimates that
inventories of $270,708 and $302,164 at October 31, 1995 and 1996, respectively,
are in excess of Harley Valve's current sales and service work requirements.
Such inventories include used valves, replacement parts and other items which
are reported as non-current assets. Management has developed programs to reduce
these inventories to desired levels over the near term and believes the carrying
values of such inventories, net of valuation reserves, will ultimately be
recovered.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

OCTOBER 31
------------------------------
1995 1996
-------------- --------------
Land.................................... $ 347,625 $ 347,625
Buildings............................... 1,027,956 1,008,375
Machinery and equipment................. 1,726,616 3,017,651
Furniture and fixtures.................. 361,957 328,169
Other................................... 282,398 282,264
-------------- --------------
3,746,552 4,984,084
Less accumulated depreciation........... (2,015,184) (2,353,595)
-------------- --------------
$ 1,731,368 $ 2,630,489
============== ==============

Depreciation expense was $321,988, $340,573, $362,786 and $115,704 for the
years ended October 31, 1994, 1995, 1996, and the three months ended January 31,
1997, respectively.

F-57
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. OTHER ASSETS

Other assets consist of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Non-current inventories, net............ $ 270,708 $ 302,164
Non-compete agreements, net of
accumulated amortization of $389,097
and $542,510.......................... 385,918 232,505
Other intangible assets, net of
accumulated amortization of $192,398
and $211,411.......................... 733,033 714,020
Escrow fund............................. -- 150,000
Other non-current assets................ 22,620 47,120
Deferred income tax assets.............. 298,000 380,000
------------ ------------
$ 1,710,279 $ 1,825,809
============ ============

7. DEBT

Debt consists of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving credit agreement.............. $ 5,889,000 $ 6,960,827
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $40,821 through April
1, 2000 when the remaining balance is
due................................... 1,493,806 1,127,719
Term note agreement; interest at New
York prime rate plus .75% (9% at
October 31, 1996), payable in monthly
installments of $7,734 through June 1,
1996 and $5,067 through April 1, 2000
when the remaining balance is due..... 447,566 407,695
Note payable to bank; interest at the
bank's base rate plus 1.5% (9.75% at
October 31, 1996), payable in monthly
installments of $2,020 through October
2000 when the remaining balance is
due; secured by first mortgage on land
and building with a carrying value of
$316,000.............................. 186,380 154,452
Note payable to individual; interest at
9%, payable in monthly installments
through October 2001; secured by real
estate with a carrying value of
$177,000.............................. 82,574 71,703
------------ ------------
8,099,326 8,722,396
Less current portion of long-term
debt.................................. (445,528) (477,309)
------------ ------------
Long-term debt.......................... $ 7,653,798 $ 8,245,087
============ ============

REVOLVING CREDIT AND TERM NOTE AGREEMENT

In May 1995, the Company restructured its borrowing facilities and executed
an amendment to its revolving credit and term note agreement (the "Agreement")
with a bank. The amended Agreement provides for two term notes, original
principal amounts totaling $2,102,356, and borrowings under a revolving facility
to the lesser of $7,000,000 or the Company's borrowing base (as defined) of
qualified accounts receivable and inventories. In July 1996, the Company
increased the borrowings under the revolving facility up to the lesser of
$7,500,000 or the Company's borrowing base. At October 31, 1996, remaining
borrowing capacity under the revolving facility was $539,000. The revolving
facility provides for

F-58
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest at the New York prime rate plus .625% (8.875% at October 31, 1996), and
is due for renewal on March 1, 1997. The assets of the Company and 681,506
shares of Company common stock are pledged as collateral under the Agreement.
The Agreement contains various restrictive financial covenants including
maintaining net worth of $4.1 million, working capital of $3 million, a current
ratio of 1.25 to 1.0, maximum liabilities to tangible net worth of 3.25 to 1.0,
and minimum cash flow, as defined, of 1.4 to 1.0. In addition, the agreement
prohibits dividends, limits salaries and bonuses and requires bank consent on
ownership changes. As of October 31, 1996, the Company was not in compliance
with the working capital, current ratio, liabilities to net worth or cash flow
financial covenants, exceeded the salary and bonus limits and had entered into
agreements for ownership changes as described in Note 2. The bank has
temporarily waived these covenant violations contingent upon the transfer of
ownership.

The borrowings under the Company's revolving credit agreement and term
notes were repaid on January 31, 1997 in conjunction with the transfer of
ownership and replaced with bank debt issued by The Safe Seal Company, Inc. (See
Note 2). The borrowings under the Company's revolving credit agreement and term
notes have been classified based on their original maturities as of October 31,
1996 in the accompanying consolidated financial statements.

Principal payments on long-term debt (based on the original maturities) and
non-compete obligations (Note 8) are as follows:

YEAR ENDING LONG-TERM NON-COMPETE
OCTOBER 31 DEBT OBLIGATIONS TOTAL
- -------------------------------- ---------- ------------- ------------
1997.......................... $ 477,309 $ 151,504 $ 628,813
1998.......................... 7,482,904 86,537 7,569,441
1999.......................... 366,957 15,255 382,212
2000.......................... 379,872 11,017 390,889
2001.......................... 15,354 -- 15,354
---------- ------------- ------------
$8,722,396 $ 264,313 $ 8,986,709
========== ============= ============

8. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS

In connection with the acquisitions of businesses, Harley Valve assumed
certain obligations under non-compete agreements and entered into additional
agreements whereby the former owners agreed not to compete with Harley Valve for
a five-year period. The agreements require monthly payments totaling $13,508 at
various maturities through 2000. At October 31, 1995 and 1996, the obligations
consist of the following:

1995 1996
------------ ------------
Total obligations, net of imputed
interest of $22,608 and $13,577
at 6% at October 31, 1995 and 1996,
respectively.......................... $ 410,107 $ 264,313
Current portion......................... (142,617) (151,504)
------------ ------------
Long-term portion....................... $ 267,490 $ 112,809
============ ============

F-59
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

The provision (benefit) for income taxes associated with continuing
operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------------- THREE MONTHS ENDED
1994 1995 1996 JANUARY 31, 1997
------------ --------- ---------- ------------------
<S> <C> <C> <C> <C>
Current:
Federal............................ $ (42,000) $ -- $ 29,000 $ (70,000)
State.............................. (14,000) -- 7,000 (16,000)
------------ --------- ---------- ------------------
(56,000) -- 36,000 (86,000)
Deferred expense (benefit).............. (214,000) 15,000 (93,000) (64,000)
------------ --------- ---------- ------------------
Provision (benefit) for income taxes.... $ (270,000) $ 15,000 $ (57,000) $ (150,000)
============ ========= ========== ==================
</TABLE>
The provisions (benefits) for income taxes vary from federal statutory
rates on earnings before income taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
------------------------------- THREE MONTHS ENDED
1994 1995 1996 JANUARY 31, 1997
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Income tax provision (benefit) at U.S.
Federal statutory rate, considering
surtax exemptions..................... (34.0)% 34.0% (34.0)% (34.0)%
State taxes, net of Federal tax
benefit............................... (5.0)% 5.0% (5.0)% (4.0)%
Amortization of goodwill................ 1.0% -- -- --
Other, net.............................. (4.0)% (3.5)% -- 2.7%
--------- --------- --------- ------
Effective tax rate...................... (42.0)% 35.5% (39.0)% (35.3)%
========= ========= ========= ======
</TABLE>

The sources of deferred income tax assets consist of available net
operating loss carryforwards and temporary differences between the financial and
tax bases of assets and liabilities, as follows:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------- THREE MONTHS ENDED
1995 1996 JANUARY 31, 1997
---------- ---------- ------------------
<S> <C> <C> <C>
Loss carryforwards................... $ 72,000 $ -- $ --
Accounts receivable reserves......... 39,000 46,000 70,000
Inventories.......................... 100,000 170,000 200,000
Property, plant and equipment........ 78,000 80,000 145,000
Intangible assets.................... 126,000 155,000 122,000
Accrued expenses and other........... 34,000 244,000 192,000
---------- ---------- ------------------
Deferred tax assets.................. $ 449,000 $ 695,000 $729,000
========== ========== ==================
Classified as:
Current......................... $ 151,000 $ 315,000 $262,000
Non-current..................... 298,000 380,000 467,000
---------- ---------- ------------------
$ 449,000 $ 695,000 $729,000
========== ========== ==================
</TABLE>

At October 31, 1995 and 1996, there are no material deferred tax
liabilities. Realization of the deferred tax assets is dependent on generating
sufficient taxable income in the future. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if

F-60
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimates of future taxable income during the carryforward period are reduced or
should tax authorities disallow tax deductions.

The Company utilized $326,000, $326,000, and $254,000 of net operating loss
carryforwards in 1994, 1995, and 1996, respectively, to reduce taxable income
and current income tax liabilities. Utilization of net operating loss
carryforwards was limited to $326,000 annually due to the purchase of the
Company's preferred stock in 1991. The Company made income tax payments of
$31,840, $3,531, and $16,488 in 1994, 1995, and 1996, respectively.

The Company's 1993 and 1994 Federal income tax returns are currently being
examined by the Internal Revenue Service (the "IRS"). The Company and the IRS
are disputing certain purchase price allocations related to a 1993 acquisition.
The Company believes its positions are sustainable and additional taxes,
penalties or interest, if any, should not be material.

10. STOCKHOLDERS' EQUITY

The Company has authorized 1,950,000 shares of preferred stock, none of
which is issued or outstanding.

Options for the purchase of 20,000 shares of common stock at $4.45 have
been granted to a key employee. As of October 31, 1996, none of these options
have been exercised. The effects of these options are not material. These
options were terminated in conjunction with the transfers of ownership described
in Note 2.

In 1994, the Company purchased 6,000 shares of the Company's common stock
from an officer for approximately $31,000 and retired the shares.

11. RETIREMENT PLAN

The Company has a defined contribution retirement savings plan (the
"Retirement Plan") covering substantially all employees who meet certain
eligibility requirements as to age and length of service. The Retirement Plan
incorporates the salary reduction provisions of Section 401(k) of the Internal
Revenue Code and employees may contribute up to 15% of their compensation. The
Company may elect to match a percentage of the employees' contributions. There
were no Company contributions for the years ended October 31, 1996 and 1994.
Contributions charged to operations were $8,180 for the year ended October 31,
1995.

12. SERVICE AND DISTRIBUTION AGREEMENTS

Harley Valve purchases, sells and services various products under service
and distribution agreements with its major suppliers. The agreement with one key
supplier has a five-year term through April 1998. Approximately 50% of revenues
during each of the years ended October 31, 1994, 1995, and 1996 were derived
from sales of products purchased or services rendered under the agreement with
this supplier. Other agreements with major suppliers are generally cancelable by
the suppliers upon thirty to sixty days' notice. Management does not anticipate
cancellation of these agreements.

13. RELATED PARTY TRANSACTIONS

At October 31, 1995 and 1996, other assets of Harley Equipment include
notes receivable of $150,000 from the Company's president/majority stockholder.
The President's notes bear interest at the statutory rate required by the
Internal Revenue Service and are payable on demand. Interest income on the
President's notes totaled $9,375, $10,200, $10,200 and $0 for the years ended
October 31, 1994, 1995, 1996 and the three months ended January 31, 1997,
respectively.

In conjunction with the sale of the Company described in Note 2, additional
compensation totaling approximately $475,000 for various employees and fees
related to the sale of $150,000 charged to the

F-61
<PAGE>
HARLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company by a stockholder were incurred. The additional compensation is to be
paid from the assets of Harley Equipment and has been allocated to discontinued
operations. In November 1996, certain assets of Harley Equipment were sold to a
stockholder for $150,000, which represented their carrying values at October 31,
1996.

The Company has also entered into a contingent incentive award agreement
with a key Harley Valve employee which provides for a $50,000 payment upon
consummation of the sale of the Company and $50,000 payable ratably over the
following six months. No amounts related to this agreement were recorded by the
Company as of October 31, 1996.

14. LEASES

Harley Valve leases certain equipment and office and warehouse facilities.
Minimum rental commitments for Harley Valve under all operating leases with
noncancelable terms in excess of one year at October 31, 1996 were payable as
follows:

YEAR ENDING OCTOBER 31,
- -----------------------
1997............................... $ 450,564
1998............................... 140,528
1999............................... 56,756
2000............................... 51,286
2001............................... 36,000
----------
$ 735,134
==========

Commencing in the year ended October 31, 1996, Harley Valve subleased
certain of its facilities to a third party under short-term leases.

Total rental expense amounted to approximately $281,000, $216,000, $274,000
and $92,000 for the years ended October 31, 1994, 1995, 1996 and the three
months ended January 31, 1997, respectively. Sublease income was approximately
$44,000 and $33,000 for the year ended October 31, 1996 and the three months
ended January 31, 1997, respectively.

15. ENVIRONMENTAL CONTINGENCIES

The Company is investigating various of its facilities for potential
environmental contamination and remediation, including an underground storage
tank at its Norfolk, Virginia location. Based on soil samples completed through
January 10, 1997, minimal contamination is indicated. Management believes costs,
if any, for environmental remediation at the Norfolk or other facilities will
not be material.

F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Steam Supply Group:

We have audited the accompanying combined balance sheets of Steam Supply
Group (as defined in Note 1) as of October 31, 1995 and 1996, and the related
combined statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended October 31, 1996 and for the
nine months ended July 31, 1997. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Steam
Supply Group as of October 31, 1995 and 1996, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended October 31, 1996 and for the nine months ended July 31, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 10, 1998

F-63
<PAGE>
STEAM SUPPLY GROUP
COMBINED BALANCE SHEETS

OCTOBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ -- $ --
Accounts receivable, net of
allowance of $15,000 and $9,080... 1,854,097 2,007,558
Inventories........................ 1,843,530 2,083,181
Prepaid expenses................... 241,574 277,174
Current portion of related-party
notes receivable.................. 22,266 25,500
------------ ------------
Total current assets.......... 3,961,467 4,393,413
PROPERTY AND EQUIPMENT, net............. 787,592 1,123,146
RELATED-PARTY NOTES RECEIVABLE, net of
current portion....................... 587,731 647,871
OTHER NONCURRENT ASSETS, net............ 329,465 379,490
------------ ------------
$ 5,666,255 $ 6,543,920
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................... $ 2,432,000 $ 2,062,683
Current maturities of long-term
debt.............................. 148,000 245,400
Accounts payable and accrued
expenses.......................... 1,409,478 1,341,730
------------ ------------
Total current liabilities..... 3,989,478 3,649,813
LONG-TERM DEBT, net of current
maturities............................ 916,160 2,131,891
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.............. 710,528 710,528
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock....................... 173 173
Additional paid-in capital......... 17,958 17,958
Retained earnings.................. 31,958 33,557
------------ ------------
Total stockholders' equity.... 50,089 51,688
------------ ------------
$ 5,666,255 $ 6,543,920
============ ============

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

F-64
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 NINE MONTHS
---------------------------------------------- ENDED
1994 1995 1996 JULY 31, 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 14,777,360 $ 15,407,681 $ 15,078,741 $ 11,790,649
COST OF OPERATIONS................... 9,702,561 10,092,443 9,573,560 8,218,844
-------------- -------------- -------------- -------------
Gross profit.................... 5,074,799 5,315,238 5,505,181 3,571,805
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,022,066 4,825,535 5,107,379 3,475,888
-------------- -------------- -------------- -------------
Income from operations.......... 52,733 489,703 397,802 95,917
OTHER INCOME (EXPENSE):
Interest, net................... (244,611) (282,004) (303,482) (245,997)
Other........................... (52,512) 7,121 (9,881) (72,982)
-------------- -------------- -------------- -------------
(297,123) (274,883) (313,363) (318,979)
-------------- -------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.... (244,390) 214,820 84,439 (223,062)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 2,185 97,900 33,100 (85,711)
-------------- -------------- -------------- -------------
NET INCOME (LOSS).................... $ (246,575) $ 116,920 $ 51,339 $ (137,351)
============== ============== ============== =============
</TABLE>

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

F-65
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS (DEFICIT) TOTAL
------ --------- ------------------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... $ 173 $ 17,958 $ 261,167 $ 279,298
Preferred dividends................ -- -- (49,817) (49,817)
Net loss........................... -- -- (246,575) (246,575)
------ --------- ------------------- ------------
BALANCE, October 31, 1994............... 173 17,958 (35,225) (17,094)
Preferred dividends................ -- -- (49,737) (49,737)
Net income......................... -- -- 116,920 116,920
------ --------- ------------------- ------------
BALANCE, October 31, 1995............... 173 17,958 31,958 50,089
Preferred dividends................ -- -- (49,740) (49,740)
Net income......................... -- -- 51,339 51,339
------ --------- ------------------- ------------
BALANCE, October 31, 1996............... 173 17,958 33,557 51,688
Preferred dividends................ -- -- (49,737) (49,737)
Net loss........................... -- -- (137,351) (137,351)
------ --------- ------------------- ------------
BALANCE, July 31, 1997.................. $ 173 $ 17,958 $(153,531) $ (135,400)
====== ========= =================== ============
</TABLE>

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

F-66
<PAGE>
STEAM SUPPLY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 NINE MONTHS
------------------------------------ ENDED
1994 1995 1996 JULY 31, 1997
---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................ $ (246,575) $ 116,920 $ 51,339 $(137,351)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 278,954 270,111 208,304 125,448
(Increase) decrease in --
Accounts receivable....... (173,560) (138,995) (153,461) 161,512
Inventories............... 175,605 56,528 (239,651) 348,144
Prepaid expenses and other
assets.................. (79,395) 81,422 (85,625) 104,073
Accounts payable and accrued
expenses.................. 165,685 123,792 (67,748) (306,068)
---------- ------------ ---------- ---------------
Net cash provided by
(used in) operating
activities......... 120,714 509,778 (286,842) 295,758
---------- ------------ ---------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (133,067) (117,445) (543,852) (68,906)
Advances on notes receivable..... (16,044) (138,334) (60,000) --
Collections on notes
receivable..................... 119,416 24,207 23,221 72,066
---------- ------------ ---------- ---------------
Net cash provided by
(used in) investing
activities......... (29,695) (231,572) (580,631) 3,160
---------- ------------ ---------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt............... 819,633 831,681 1,215,683 --
Repayments of debt............... (848,570) (1,072,415) (298,470) (249,181)
Preferred dividends paid......... (49,817) (49,737) (49,740) (49,737)
---------- ------------ ---------- ---------------
Net cash provided by
(used in) financing
activities......... (78,754) (290,471) 867,473 (298,918)
---------- ------------ ---------- ---------------
NET CHANGE IN CASH................... 12,265 (12,265) -- --
CASH, beginning of period............ -- 12,265 -- --
---------- ------------ ---------- ---------------
CASH, end of period.................. $ 12,265 $ -- $ -- $ --
========== ============ ========== ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.

F-67
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS

1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:

The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Puget Investments, Inc.
("Puget"), Steam Supply & Rubber Co., Inc. ("Steam Supply"), Flickinger
Company and Flickinger-Benicia, Inc. ("Benicia"). Steam Supply and Flickinger
Company are wholly owned subsidiaries of Puget and are consolidated with the
accounts of Puget. Benicia is owned directly by the stockholders of Puget. As
Puget and Benicia (together, "Steam Supply Group" or the "Company") have
common ownership and management, the financial statements of each entity have
been combined for financial reporting reasons. All intercompany balances and
transactions have been eliminated.

Steam Supply Group services, repairs, sells and distributes industrial
valves and instruments. Steam Supply Group's customers primarily are
petrochemical, electric power and pulp and paper industries located in the
western continental United States and Alaska.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH

Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $272,878, $312,643 and $336,432, respectively. Cash payments for
taxes during fiscal 1995 and 1996 were approximately $65,286 and $107,310,
respectively. During fiscal 1994, the Company received $86,157 in income tax
refunds.

INVENTORIES

Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method ("LIFO") and primarily consist of industrial valves,
valve parts and instrumentation. The excess of current costs determined using
the first-in, first-out method basis over the carrying values of LIFO
inventories was approximately $559,963 and $614,769 at October 31, 1995 and
1996, respectively.

PROPERTY AND EQUIPMENT

OTHER NONCURRENT ASSETS

Other noncurrent assets primarily consist of a noncompete covenant with a
former stockholder, which is being amortized on a straight-line basis over 10
years. Accumulated amortization as of October 31, 1995 and 1996 was $130,625 and
$159,125, respectively.

REVENUE RECOGNITION

Service revenue is recognized upon performance of the service, and product
sales revenue is recognized as products are shipped or delivered.

INCOME TAXES

Puget files a consolidated income tax return and follows the liability
method of accounting for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. Under this method, deferred income
taxes are recorded based upon differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the underlying assets or liabilities are
recovered or settled. Benicia is an S Corporation for federal

F-68
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

income tax purposes and, in accordance with the S Corporation provisions of the
Internal Revenue Code, the earnings of Benicia are included in the personal tax
returns of its stockholders. Accordingly, no federal income tax expense is
recorded in the financial statements relative to Benicia. Benicia does record
California state income tax expense.

STOCKHOLDERS' EQUITY

The common stock ownership of the Company as of October 31, 1995 and 1996
includes the following:

PAR VALUE SHARES SHARES
PER SHARE AUTHORIZED OUTSTANDING
---------- ---------- -----------
Puget................................ $ 1.00 500 173
Benicia.............................. -- 50,000 20,000

USE OF ESTIMATES

NEW ACCOUNTING PRONOUNCEMENT

Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation of an asset is
required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a writedown to
market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

OCTOBER 31
ESTIMATED --------------------------
USEFUL LIVES 1995 1996
------------ ------------ ------------
Land................................ $ 167,095 $ 167,095
Buildings........................... 30 years 609,949 609,949
Office and shop equipment........... 7 years 1,105,165 1,128,581
Computer equipment.................. 5 years 338,578 698,583
Vehicles............................ 5 years 301,212 384,970
Furniture and fixtures.............. 7 years 185,340 186,572
Leasehold improvements.............. 20 years 10,410 50,481
------------ ------------
2,717,749 3,226,231
Less -- Accumulated depreciation.... 1,930,157 2,103,085
------------ ------------
Property and equipment, net......... $ 787,592 $ 1,123,146
============ ============

F-69
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts for fiscal 1994,
1995 and 1996 consists of the following:

1994 1995 1996
--------- --------- ---------
Balance at beginning of fiscal
year................................. $ 15,000 $ 15,000 $ 15,000
Amounts charged (credited) to results
of operations...................... -- -- (5,920)
--------- --------- ---------
Balance at end of fiscal year........ $ 15,000 $ 15,000 $ 9,080
========= ========= =========

Accounts payable and accrued expenses as of October 31, 1995 and 1996
consist of the following:

1995 1996
------------ ------------
Accounts payable..................... $ 1,167,042 $ 1,170,774
Bank overdraft....................... 167,710 106,332
Accrued expenses..................... 74,726 64,624
------------ ------------
$ 1,409,478 $ 1,341,730
============ ============

5. RELATED-PARTY NOTES RECEIVABLE:

The Company's related-party notes receivable consist of the following:

OCTOBER 31
----------------------
1995 1996
---------- ----------
Unsecured notes receivable from
stockholders, balloon payment,
including accrued interest at prime
(8.25% at October 31, 1996), due
October 1999.......................... $ 306,842 $ 393,440
Note receivable from King-Ries
Partnership ("KRP"), an affiliate
related through common ownership, due
in monthly installments of $2,800
including interest at 12.5%,
collateralized by a second mortgage on
certain real estate, due November
1998.................................. 209,822 202,012
Unsecured note receivable from KRP, due
in monthly installments of $1,370
including interest at prime, due April
2002.................................. 81,876 72,019
Unsecured note receivable from KRP due
in monthly installments of $508
including interest at 6%, due October
1997.................................. 11,457 5,900
---------- ----------
609,997 673,371
Less -- Current portion................. 22,266 25,500
---------- ----------
$ 587,731 $ 647,871
========== ==========

Interest income on these related-party notes totaled $44,000, $54,000 and
$60,000 for fiscal 1994, 1995 and 1996, respectively.

6. PREFERRED STOCK:

Puget has 896 shares of $793 par value cumulative preferred stock
outstanding. The preferred shares yield a 7 percent dividend. The shares are
callable and redeemable at a 10 percent premium over par value. The shares can
be called or redeemed at any time by Puget. The preferred shares have no voting
rights, except in the event of nonpayment of dividends for two years, in which
case the preferred stock shall vote with the common stock on a one share, one
vote basis.

F-70
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT:

SHORT-TERM DEBT

The Company's short-term debt consists of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Revolving line of credit with Union Bank
of California, N.A. ("Union Bank"),
bearing interest at prime plus 0.50%
(8.75% at October 31, 1996), $2.2
million facility, collateralized by
substantially all the Company's assets
and guaranteed by stockholders,
expired April 1997 (See Note 11)...... $ 1,532,000 $ 2,062,683
Note payable to Union Bank with interest
payable monthly at prime plus 0.75%
(9.00% at October 31, 1996),
collateralized
by real estate and guaranteed by
stockholders, refinanced as
long-term debt during 1996............ 900,000 --
------------ ------------
$ 2,432,000 $ 2,062,683
============ ============

The Company's long-term debt consists of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Note payable to Union Bank in monthly
installments of $9,640 including
interest at prime plus 0.75% (9.00% at
October 31, 1996), collateralized by
real estate and guaranteed by
stockholders, due May 2003............ $ -- $ 1,094,907
Note payable to Union Bank in monthly
installments of $8,860 plus interest
at prime plus 0.75% (9.00% at October
31, 1996), collateralized by computer
equipment and guaranteed by
stockholders, due July 1, 2000........ -- 398,420
Note payable to Union Bank in monthly
installments of $4,200 plus interest
at prime plus 0.50% (8.75% at October
31, 1996), collateralized by
substantially all assets and
guaranteed by stockholders, due April
1998.................................. 124,800 74,400
Note payable to West One Bank, due in
monthly installments of $3,425
including interest at 9.25%,
collateralized by real estate,
refinanced with Union Bank during
1996.................................. 148,204 --
Note payable to former stockholder in
monthly installments of $9,463
including interest at 10%,
collateralized by common stock,
subordinated to notes payable to Union
Bank, due June 2001................... 484,314 416,124
Unsecured notes payable to stockholders,
subordinated to notes payable to Union
Bank, balloon payment including
interest at prime, due October 1999... 306,842 393,440
------------ ------------
1,064,160 2,377,291
Less -- Current portion................. 148,000 245,400
------------ ------------
$ 916,160 $ 2,131,891
============ ============

F-71
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Maturities of the Company's long-term debt are as follows:

Year ending October 31 --
1997............................... $ 245,400
1998............................... 228,200
1999............................... 607,800
2000............................... 197,840
2001............................... 84,300
Thereafter......................... 1,013,751
------------
$ 2,377,291
============

Interest expense totaled $288,922, $336,041 and $363,030 in fiscal 1994,
1995 and 1996, respectively. Management estimates that the fair value of its
debt obligations approximates the carrying value at October 31, 1996.

At October 31, 1996, the Company's debt with Union Bank was subject to a
credit agreement that included certain restrictive covenants relating to such
matters as dividends and capital expenditures. This credit agreement also
required the Company to maintain minimum levels of profitability, net worth and
working capital ratios. At October 31, 1996, the Company was in compliance with
or had received waivers of noncompliance with respect to all restrictive
covenants.

On May 1, 1997, the Company and Union Bank entered into an amended and
restated credit agreement. The amended and restated credit agreement modified
the repayment terms and covenants of the Company's debt. See Note 11 for
additional information respecting the amended and restated credit agreement.

8. INCOME TAXES:

The Company's income tax provision included the following:

YEAR ENDED OCTOBER 31
---------------------------------
1994 1995 1996
---------- ---------- ---------
Federal, current........................ $ -- $ 88,100 $ 25,900
State, current.......................... 2,185 9,800 7,200
---------- ---------- ---------
$ 2,185 $ 97,900 $ 33,100
========== ========== =========

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:

YEAR ENDED OCTOBER 31
------------------------
1994 1995 1996
---- ---- ----
Statutory federal income tax rate....... (34)% 34% 34%
Valuation allowance..................... 34 -- --
Effect of federal graduated tax rate.... -- (5) (5)
State and local taxes................... (1) 3 5
Effect of nondeductible meals and
entertainment......................... -- 4 11
Effect of excluding S Corporation....... -- 11 (8)
Other................................... -- (1) 2
---- ---- ----
Effective income tax rate............... (1)% 46% 39%
==== ==== ====

F-72
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes consist of the following:

OCTOBER 31
----------------------
1995 1996
---------- ----------
Current deferred tax assets.......... $ 24,400 $ 29,600
Noncurrent deferred tax assets....... 36,800 33,800
Valuation allowance.................. (52,200) (52,200)
---------- ----------
Total deferred tax
assets.................. 9,000 11,200
---------- ----------
Current deferred tax liabilities..... -- (3,100)
Noncurrent deferred tax
liabilities.......................... (9,000) (8,100)
---------- ----------
Total deferred tax
liabilities............. (9,000) (11,200)
---------- ----------
Net deferred tax
liabilities............. $ -- $ --
========== ==========

9. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases warehouse space, office facilities and vehicles under
noncancelable operating leases which expire at various dates. Future minimum
lease payments at October 31, 1996 are as follows:

1997................................. $ 247,200
1998................................. 214,700
1999................................. 121,600
2000................................. 114,000
2001................................. 114,000

Rent expense for fiscal 1994, 1995 and 1996 was $247,600, $240,300 and
$259,200, respectively.

The Company leases certain facilities from stockholders and KRP under
operating leases. Rental expense related to these leases was $138,800 for fiscal
1994 and 1995 and $139,200 for fiscal 1996.

EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions, whereby eligible employees
may elect to defer a portion of their annual compensation. The Company matches
50 percent of each employee's contribution up to 4 percent of employee
compensation. Additional contributions by the Company are discretionary. The
Company contributed approximately $50,600, $28,400 and $28,800 for fiscal 1994,
1995 and 1996, respectively.

LITIGATION

In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's combined financial
position or results of operations.

10. DISTRIBUTION AGREEMENTS:

The Company purchases, sells and services various products under service
and distribution agreements with its major suppliers. Approximately 39 percent
of revenues during each of fiscal 1994, 1995 and 1996 was derived from sales of
products purchased or services rendered under the agreement with one supplier.
The agreements with major suppliers are generally cancelable by the suppliers
upon 30 to 60 days' notice. Management does not anticipate cancellation of these
agreements.

F-73
<PAGE>
STEAM SUPPLY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS:

DEBT REFINANCING

On May 1, 1997, the Company entered an agreement to amend and restate its
credit agreement with Union Bank. This new credit facility provides a line of
credit due November 1, 1997, which is subject to a borrowing base with maximum
borrowings of $2,500,000. Interest accrues at Union Bank's reference rate. This
new credit facility has certain restrictive covenants similar to the previous
credit facility.

SALE OF COMMON SHARES

Effective August 1, 1997, the stockholders of the Company sold the common
equity ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.

F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ICE/VARCO Group:

We have audited the accompanying combined balance sheets of ICE/VARCO Group
(as defined in Note 1) as of September 30, 1996 and 1997 and the related
combined statements of operations, stockholder's deficit and cash flows each of
the three years in the period ended September 30, 1997 and for the month ended
October 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of ICE/VARCO
Group as of September 30, 1996 and 1997, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended September 30, 1997 and for the month ended October 31, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998

F-75
<PAGE>
ICE/VARCO GROUP
COMBINED BALANCE SHEETS

SEPTEMBER 30
--------------------------
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 46,117 $ 136,429
Accounts receivable, net of
allowance of $47,713 and
$38,494........................ 1,747,859 1,600,972
Inventories..................... 1,275,325 1,369,258
Prepaid expenses and other
current assets.................. 16,350 24,738
------------ ------------
Total current assets....... 3,085,651 3,131,397
PROPERTY AND EQUIPMENT, net.......... 979,926 952,760
INTANGIBLES AND OTHER NONCURRENT
ASSETS, net........................ 238,450 212,532
------------ ------------
$ 4,304,027 $ 4,296,689
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 769,300 $ 1,371,553
Current maturities of long-term
debt............................ 203,961 85,205
Accounts payable and accrued
expenses........................ 1,695,637 1,603,252
------------ ------------
Total current
liabilities.................. 2,668,898 3,060,010
AMOUNTS DUE TO AFFILIATES, net....... 1,284,288 1,136,246
LONG-TERM DEBT, net of current
maturities......................... 457,229 202,144
STOCKHOLDER'S DEFICIT................ (106,388) (101,711)
------------ ------------
$ 4,304,027 $ 4,296,689
============ ============

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

F-76
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED ENDED
SEPTEMBER 30 OCTOBER 31
-------------------------------------------- ----------
1995 1996 1997 1997
------------ -------------- -------------- ----------
<S> <C> <C> <C> <C>
REVENUES................................ $ 9,128,032 $ 12,744,465 $ 14,395,081 $1,390,773
COST OF OPERATIONS...................... 6,517,438 9,452,991 11,075,524 1,125,676
------------ -------------- -------------- ----------
Gross profit....................... 2,610,594 3,291,474 3,319,557 265,097
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,346,117 2,858,694 3,240,315 225,401
------------ -------------- -------------- ----------
Income (loss) from operations...... 264,477 432,780 79,242 39,696
OTHER INCOME (EXPENSE):
Interest, net...................... (117,886) (112,105) (144,435) (2,917)
Other.............................. 11,123 (13,861) 73,697 6,669
------------ -------------- -------------- ----------
(106,763) (125,966) (70,738) 3,752
------------ -------------- -------------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... 157,714 306,814 8,504 43,448
PROVISION (BENEFIT) FOR INCOME TAXES.... 70,100 138,359 3,827 19,552
------------ -------------- -------------- ----------
NET INCOME.............................. $ 87,614 $ 168,455 $ 4,677 $ 23,896
============ ============== ============== ==========
</TABLE>

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

F-77
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF STOCKHOLDER'S DEFICIT

BALANCE, September 30, 1995............. $ (274,843)
Net income......................... 168,455
------------
BALANCE, September 30, 1996............. (106,388)
Net income......................... 4,677
------------
BALANCE, September 30, 1997............. (101,711)
Net income......................... 23,896
------------
BALANCE, October 31, 1997............... $ (77,815)
============

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

F-78
<PAGE>
ICE/VARCO GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED ENDED
SEPTEMBER 30 OCTOBER 31
---------------------------------------- -----------
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 87,614 $ 168,455 $ 4,677 $ 23,896
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 131,635 147,011 203,295 16,832
(Increase) decrease in --
Accounts receivable........... (376,087) 60,629 146,887 (397,807)
Inventories................... (433,685) (212,374) (93,933) (122,709)
Prepaid expenses and other
assets..................... (29,490) 2,435 6,751 (3,306)
Increase (decrease) in --
Accounts payable and accrued
expenses................... 446,100 (35,671) (92,385) 252,427
Amounts due to affiliates,
net........................ (254,719) 259,758 (148,042) 2,033,964
------------ ------------ ------------ -----------
Net cash provided by (used
in) operating
activities............... (428,632) 390,243 27,250 1,803,297
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (99,181) (214,915) (165,350) (3,233)
Business acquisition, net of cash
acquired........................... -- 45,516 -- --
------------ ------------ ------------ -----------
Net cash used in investing
activities............... (99,181) (169,399) (165,350) (3,233)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 552,940 3,856 602,253 (1,371,553)
Repayments of debt.................... (47,721) (198,144) (373,841) (217,824)
------------ ------------ ------------ -----------
Net cash provided by (used
in) financing
activities............... 505,219 (194,288) 228,412 (1,589,377)
------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH......... (22,594) 26,556 90,312 210,687
CASH, beginning of period............... 42,155 19,561 46,117 136,429
------------ ------------ ------------ -----------
CASH, end of period..................... $ 19,561 $ 46,117 $ 136,429 $ 347,116
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.

F-79
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS

1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:

The accompanying combined balance sheets and related combined statements of
operations, stockholder's deficit and cash flows include Industrial Controls &
Equipment, Inc. ("ICE"), Valve Actuation & Repair Company, Inc. ("VARCO")
and BAS Technical Services Inc. ("BAS"). ICE, VARCO and BAS (collectively,
"ICE/VARCO Group" or the "Company") are wholly owned subsidiaries of
Synergistic Partners Inc. ("SPI"), a Pennsylvania corporation. As ICE/VARCO
Group has common ownership and management, the financial statements of these
entities have been combined for financial reporting purposes. All significant
intercompany transactions and balances have been eliminated in combination.

ICE (a Pennsylvania corporation) and VARCO (a West Virginia corporation)
are principally engaged in the business of repairing, testing and distributing
manual, control and safety relief valves, related parts and instrumentation to
the pulp and paper, chemical, power generation and petrochemical industries in
Pennsylvania and West Virginia. BAS (a West Virginia corporation), acquired in
August 1996 in a purchase transaction, provides value-added electrical and
mechanical engineering services and electrical panel construction, primarily to
the same customer base served by ICE and VARCO.

In July 1997, pursuant to a definitive agreement, SPI agreed to sell the
entire equity ownership of the Company to Innovative Valve Technologies, Inc.
("Invatec"), for total consideration in excess of the recorded amounts of the
Company's net assets. Among other customary matters, the definitive agreement
provides for the removal of the Company's guarantees of debt obligations of SPI,
its affiliates and subsidiaries. The closing of the transaction was completed on
the successful consummation of Invatec's initial public offering in October
1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH

Cash payments for interest during fiscal 1995, 1996 and 1997 were
approximately $108,000, $96,000 and $144,000, respectively.

INVENTORIES

Inventories are valued at the lower of cost or market utilizing the
average-cost method applied on a first-in, first-out ("FIFO") basis and
primarily consist of valves, valve parts and related instrumentation.

PROPERTY AND EQUIPMENT

INCOME TAXES

The Company was included in SPI's consolidated federal income tax returns
for 1995, 1996, and 1997. The Company follows the liability method of accounting
for income taxes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
income taxes are recorded based upon differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the underlying assets or liabilities
are recovered or settled.

F-80
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLES AND OTHER NONCURRENT ASSETS

Intangibles and other noncurrent assets primarily consists of goodwill and
is amortized using the straight-line method over 15 years. Accumulated
amortization at September 30, 1996 and 1997 was $7,883 and $22,811,
respectively. There was no accumulated amortization at September 30, 1995.

REVENUE RECOGNITION

Service revenue is recognized upon performance, and sales revenue is
recognized as products are shipped or delivered.

USE OF ESTIMATES

NEW ACCOUNTING PRONOUNCEMENT

Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other noncurrent assets, may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if a write-down
to market value or discounted cash flow value is necessary. Adoption of this
standard did not have a material effect on the combined financial position or
results of operations of the Company.

3. ACQUISITION OF BAS:

In August 1996, SPI acquired BAS in a purchase transaction. The financial
results of the acquisition have been included in the combined financial
statements of the Company from the date of acquisition. The pro forma effect of
the acquisition was not material to the results of operations or financial
position of the Company. The fair value of assets acquired is summarized as
follows:

Cash.................................... $ 45,516
Accounts receivable..................... 144,869
Property and equipment.................. 57,593
Intangible assets....................... 223,926
Accounts payable........................ (67,707)
Accrued liabilities..................... (86,031)
Debt assumed............................ (218,166)
------------
Net assets acquired................ 100,000
Less -- Debt issued..................... (100,000)
------------
Cash paid for acquisition.......... $ --
============

F-81
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
ESTIMATED ----------------------------------------
USEFUL LIVES 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Buildings............................... 31 years $ 193,047 $ 193,047 $ 193,047
Vehicles................................ 3-5 years 129,295 162,797 211,813
Furniture and fixtures.................. 5-7 years 129,573 148,007 150,352
Office equipment........................ 5-7 years 237,757 344,993 402,612
Machinery and equipment................. 5-7 years 299,163 325,798 345,921
Leasehold improvements.................. 7-31 years 317,456 385,900 422,147
------------ ------------ ------------
1,306,291 1,560,542 1,725,892
Less -- Accumulated depreciation........ (455,806) (580,616) (773,132)
------------ ------------ ------------
Property and equipment, net............. $ 850,485 $ 979,926 $ 952,760
============ ============ ============
</TABLE>

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts for the years
ended September 30, 1995, 1996 and 1997 consists of the following:

1995 1996 1997
--------- --------- ---------
Balance at beginning of year......... $ 17,000 $ 40,000 $ 47,713
Additions charged to results of
operations........................... 23,000 7,713 (9,219)
--------- --------- ---------
Balance at end of year............... $ 40,000 $ 47,713 $ 38,494
========= ========= =========

Accounts payable and accrued expenses as of September 30, 1995, 1996 and
1997 consist of the following:

1995 1996 1997
------------ ------------ ------------
Accounts payable..................... $ 1,243,559 $ 1,252,390 $ 1,147,221
Accrued salaries, bonuses and
profit-sharing..................... 297,344 335,292 363,153
Income and other taxes payable....... 36,667 107,955 92,878
------------ ------------ ------------
$ 1,577,570 $ 1,695,637 $ 1,603,252
============ ============ ============

6. SHORT-TERM DEBT:

The Company had three revolving credit arrangements. ICE and VARCO had
revolving credit facilities with a bank which was secured by accounts receivable
and inventory. These facilities bore interest, payable monthly, at a rate of
prime plus 0.50% (9.25% at September 30, 1996). A total of approximately
$733,000 and $594,000 was drawn for the two facilities at September 30, 1995 and
1996, respectively. BAS was party to a $200,000 commercial revolving note
agreement, which was secured by accounts receivable and bore interest, due
monthly, at prime plus 1.50% (9.75% at September 30, 1996). At September 30,
1996, approximately $175,000 was drawn on the line.

In July 1997, SPI refinanced its revolving credit arrangements, including
the Company's revolving facilities. The new facilities have terms similar to the
previous revolving credit agreements. The new facilities mature in July 1999,
bear interest at prime plus 0.25% (8.75% at September 30, 1997) and are secured
by accounts receivable and inventory.

F-82
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the purchase of the Company by Invatec in October 1997,
certain debt of the Company was paid and replaced with borrowings from Invatec.
These borrowings with Invatec are classified as amounts due to affiliates at
October 31, 1997.

7. LONG-TERM DEBT:

Long-term debt consists of the following:

SEPTEMBER 30
--------------------------------------
1995 1996 1997
------------ ------------ ----------
Note payable to former SPI
stockholder, monthly installments
of principal and interest in the
amount of $4,805, bearing interest
at 9.50%, secured by general
Company assets..................... $ 150,000 $ 127,861 $ 80,312
Note payable to a bank, monthly
principal installments of $3,300,
bearing interest at 7.75% secured
by general Company assets.......... 192,500 152,900 --
Note payable to a government agency,
monthly installments of principal
and interest of $1,592, bearing
interest at 5.01% secured by
general Company assets............. 139,702 128,643 115,618
Notes payable, due in monthly
installments, bearing interest from
8.00% to 9.50%, secured by certain
vehicles and certain equipment..... 89,308 146,786 23,000
Unsecured note payable to
employee-consultant and former
owner of BAS, annual installments
of principal and interest in the
amount of $13,011, bearing interest
at 8.00%........................... -- 75,000 68,419
Unsecured note payable to former
employee, noninterest-bearing...... -- 30,000 --
------------ ------------ ----------
571,510 661,190 287,349
Less -- Current maturities........... (116,155) (203,961) (85,205)
------------ ------------ ----------
Total long-term debt............ $ 455,355 $ 457,229 $ 202,144
============ ============ ==========

Management estimates that the fair value of its debt obligations
approximates the historical value at September 30, 1995, 1996 and 1997.

Maturities of long-term debt are as follows:

Year ending September 30 --
1998............................ $ 85,205
1999............................ 61,963
2000............................ 23,977
2001............................ 25,463
2002............................ 27,044
Thereafter...................... 63,697
----------
$ 287,349
==========

F-83
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES:

The Company is included in the consolidated federal income tax return of
SPI. SPI pays the federal income tax liability for all its subsidiaries for any
period in which an amount is due. Each subsidiary, including each company within
ICE/VARCO Group, pays to SPI the amount of federal income tax liability it would
have owed on a stand-alone basis, and SPI pays to each subsidiary the amount of
any federal income tax benefit attributable to each such subsidiary.

Federal and state income tax provision (benefit) are as follows:

YEAR ENDED SEPTEMBER 30
---------------------------------
1995 1996 1997
---------- ---------- ---------
Federal --
Current............................ $ 69,500 $ 108,592 $ 2,917
Deferred........................... (13,200) 3,157 336
State --
Current............................ 16,600 26,053 515
Deferred........................... (2,800) 557 59
---------- ---------- ---------
$ 70,100 $ 138,359 $ 3,827
========== ========== =========

Actual income tax provision differs from income tax provision computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:

YEAR ENDED
SEPTEMBER 30
-------------------------------
1995 1996 1997
--------- --------- ---------
Statutory federal income tax rate....... 34% 34% 34%
State and local taxes................... 6 6 6
Effect of nondeductible meals and
entertainment......................... 4 5 5
----- ---- ----
Effective income tax rate............... 44% 45% 45%
===== ==== ====

Deferred income taxes consist of the following:

YEAR ENDED SEPTEMBER 30
----------------------------------
1995 1996 1997
---------- ---------- ----------
Current deferred tax assets............. $ 16,000 $ 12,286 $ 11,891
Noncurrent deferred tax assets.......... -- -- --
---------- ---------- ----------
Net deferred tax assets............ $ 16,000 $ 12,286 $ 11,891
========== ========== ==========

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

GUARANTEES OF AFFILIATED COMPANIES' DEBT

The Company's assets are pledged as collateral under certain credit
arrangements entered into by SPI and certain of its other subsidiaries, and the
Company is jointly and severally liable for any defaults under those
arrangements. SPI's new credit facilities include covenants requiring that
certain financial ratios be maintained. Management does not believe, if the
Company were required to perform under such guarantees,

F-84
<PAGE>
ICE/VARCO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

any losses from these agreements would be material. To date, the Company has not
been required to perform under these guarantees.

In connection with the purchase of the Company by Invatec in October 1997,
the guarantees referred to above were terminated.

LEASES

Aggregate minimum rental commitments under significant noncancelable
operating leases with lease terms in excess of one year as of September 30, 1997
are as follows:

Year ending September 30 --
1998............................... $ 85,200
1999............................... 85,200
2000............................... 85,200
2001............................... 85,200
2002............................... 85,200
Thereafter......................... 619,300
------------
$ 1,045,300
============

The Company incurred total rental expense of approximately $132,000,
$131,000 and $135,000 for fiscal 1995, 1996 and 1997, respectively.

EMPLOYEE BENEFITS

The Company participates in a profit sharing plan offered by SPI to all
salaried employees who have met certain length-of-service requirements.
Employees can contribute up to 4 percent of their salary, which is matched 100
percent by the Company. For fiscal 1995, 1996 and 1997 the Company also made
discretionary contributions. The Company's total contributions for fiscal 1995,
1996 and 1997 were $92,000, $133,000 and $119,000, respectively.

10. RELATED-PARTY TRANSACTIONS:

As described in Note 1, the Company is a wholly owned part of an affiliated
group of companies owned by SPI operating in the valve repair and distribution
services business. Certain selling, general and administrative expenses incurred
by SPI have been allocated to the Company for fiscal 1995, 1996 and 1997 in the
amounts of approximately $228,000, $263,000 and $548,000, respectively. The
Company also purchases and sells valve and valve repair parts, materials and
services from other subsidiaries of SPI. During fiscal 1996 and 1997, its total
purchases from the other SPI subsidiaries approximated $311,000 and $506,000,
respectively. Total sales by the Company to the other SPI subsidiaries
approximated $1,527,000 and $1,917,000.

11. SIGNIFICANT CUSTOMER:

During fiscal 1995, 1996 and 1997, the Company had one customer that
accounted for approximately 13%, 19% and 13%, respectively, of the Company's
combined revenues.

F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholders of
GSV, Inc.:

We have audited the accompanying balance sheets of GSV, Inc. (the Company)
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. We have also audited the statements of operations,
stockholders' equity, and cash flows of GSV, Inc. for the two months ended
February 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, and for the two months
ended February 28, 1997, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Orlando, Florida
February 20, 1998

F-86
<PAGE>
GSV, INC.
BALANCE SHEETS

DECEMBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 11,059 $ 10,084
Accounts receivable............. 1,509,218 1,612,693
Inventories..................... 833,332 1,079,493
Prepaid expenses and other
current assets................. 27,883 32,213
------------ ------------
Total current assets....... 2,381,492 2,734,483
------------ ------------
PROPERTY AND EQUIPMENT -- Net........ 1,058,170 1,177,044
------------ ------------
OTHER NONCURRENT ASSETS.............. 43,976 27,869
------------ ------------
$ 3,483,638 $ 3,939,396
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank............ $ 362,000 $ 426,000
Accounts payable................ 615,484 494,688
Accrued expenses and other
current liabilities............ 402,669 253,444
Stockholders' distributions
payable........................ -- 200,500
Current maturities of long-term
debt........................... 183,378 193,372
------------ ------------
Total current
liabilities.................. 1,563,531 1,568,004
------------ ------------
LONG-TERM DEBT -- Less current
portion............................ 384,214 267,899
------------ ------------
Total liabilities.......... 1,947,745 1,835,903
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value,
5,000,000 shares authorized,
3,865,489 shares issued........ 386,549 386,549
Additional paid-in capital...... 765,211 765,211
Retained earnings............... 384,133 951,733
Treasury stock -- at cost,
10,000 shares.................. -- --
------------ ------------
Total stockholders'
equity....................... 1,535,893 2,103,493
------------ ------------
$ 3,483,638 $ 3,939,396
============ ============

See notes to financial statements.

F-87
<PAGE>
GSV, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 TWO MONTHS
------------------------------------------ ENDED
1994 1995 1996 FEBRUARY 28, 1997
------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,922,688 $ 8,653,737 $ 10,227,117 $ 1,636,716
COST OF OPERATIONS................... 7,190,890 6,661,559 7,688,077 1,258,288
------------ ------------ -------------- -----------------
Gross profit............... 1,731,798 1,992,178 2,539,040 378,428
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,521,956 1,481,704 1,276,112 243,132
------------ ------------ -------------- -----------------
INCOME FROM OPERATIONS............... 209,842 510,474 1,262,928 135,296
OTHER INCOME (EXPENSES):
Interest expense................ (92,558) (98,073) (78,365) (17,040)
Other, net...................... 9,740 (31,130) 5,817 (3,209)
------------ ------------ -------------- -----------------
Other income (expenses),
net........................ (82,818) (129,203) (72,548) (20,249)
------------ ------------ -------------- -----------------
NET INCOME........................... $ 127,024 $ 381,271 $ 1,190,380 $ 115,047
============ ============ ============== =================
</TABLE>

See notes to financial statements.

F-88
<PAGE>
GSV, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
---------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................ $ 386,549 $ 765,211 $ 1,162 $ -- $ 1,152,922
Net income......................... -- -- 127,024 -- 127,024
Distributions to stockholders...... -- -- (125,324) -- (125,324)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1994.............. 386,549 765,211 2,862 -- 1,154,622
Net income......................... -- -- 381,271 -- 381,271
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1995.............. 386,549 765,211 384,133 -- 1,535,893
Net income......................... -- -- 1,190,380 -- 1,190,380
Distributions to stockholders...... -- -- (622,780) -- (622,780)
---------- ---------- ------------ -------- -------------
BALANCE, DECEMBER 31, 1996.............. $ 386,549 $ 765,211 $ 951,733 -- 2,103,493
Net income......................... -- -- 115,047 -- 115,047
Distributions to stockholders...... -- -- (24,500) -- (24,500)
Purchase of treasury stock......... -- -- -- (20,000) (20,000)
---------- ---------- ------------ -------- -------------
BALANCE, FEBRUARY 28, 1997.............. $ 386,549 $ 765,211 $ 1,042,280 $(20,000) $ 2,174,040
========== ========== ============ ======== =============
</TABLE>
See notes to financial statements.

F-89
<PAGE>
GSV, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 TWO MONTHS
----------------------------------- ENDED
1994 1995 1996 FEBRUARY 28, 1997
---------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 127,024 $ 381,271 $ 1,190,380 $ 115,047
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 419,723 433,441 186,986 34,106
(Gain) loss on sale of property
and equipment............... 3,504 -- (789) 4,873
(Increase) decrease in accounts
receivable.................. (287,517) 136,231 (103,475) 267,138
(Increase) decrease in
inventories................. 65,160 (58,546) (246,161) (393,423)
(Increase) decrease in prepaid
expenses and other current
assets...................... 9,770 10,700 (4,330) (46,668)
Increase (decrease) in accounts
payable..................... 422,422 (351,578) (2,539) 328,227
Increase (decrease) in accrued
expenses and other current
liabilities................. 85,247 (26,427) 68 24,703
---------- ---------- ----------- -----------------
Net cash provided by
operating activities...... 845,333 525,092 1,020,140 334,003
---------- ---------- ----------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (616,772) (143,234) (292,414) (53,003)
Proceeds from sale of property
and equipment.................. 3,596 -- 3,450 --
Purchase of intangible assets.... (32,062) -- -- (3,010)
---------- ---------- ----------- -----------------
Net cash used in investing
activities................ (645,238) (143,234) (288,964) (56,013)
---------- ---------- ----------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash
overdrafts..................... (255,355) 232,375 (118,257) 165,243
Loan proceeds.................... 463,115 -- 83,704 --
Principal payments on long-term
debt........................... (165,263) (201,776) (190,025) (36,026)
Payments under covenant
obligations.................... (348,354) (116,118) (149,293) (82,944)
Net change in demand note payable
to bank........................ 181,000 (164,000) 64,000 (86,000)
Stockholder distributions........ (75,194) (125,324) (422,280) (225,000)
Purchase of treasury stock....... -- -- -- (20,000)
---------- ---------- ----------- -----------------
Net cash used in financing
activities................ (200,051) (374,843) (732,151) (284,727)
---------- ---------- ----------- -----------------
NET INCREASE (DECREASE) IN CASH...... 44 7,015 (975) (6,737)
CASH, BEGINNING OF PERIOD............ 4,000 4,044 11,059 10,084
---------- ---------- ----------- -----------------
CASH, END OF PERIOD.................. $ 4,044 $ 11,059 $ 10,084 $ 3,347
========== ========== =========== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Cash paid during the
period for interest................ $ 87,465 $ 102,711 $ 78,573 $ 15,008
========== ========== =========== =================
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING AND INVESTING
ACTIVITIES -- Accrual of
distributions payable to
stockholders....................... $ 125,324 $ -- $ 200,500 $ --
========== ========== =========== =================
</TABLE>
See notes to financial statements.

F-90
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND OPERATIONS

GSV, Inc. (the "Company") is incorporated in the State of Florida and is
comprised of three operating divisions: Gould Machine, Southern Valve, and Ash
Tool. Gould Machine provides contract machining, Southern Valve repairs and
sells valves, and Ash Tool sells certain parts primarily associated with the
industries serviced by the other divisions. All interdivisional transactions and
balances have been eliminated from the financial statements. The Company's main
office is located in Tampa, Florida. On April 26, 1994, the Company purchased a
new facility and moved the Southern Valve Division to this facility in September
of 1994. Costs incurred in moving this division were charged to operations and
amounted to $60,931 for the year ended December 31, 1994. Each division's
business activity is primarily in the State of Florida.

ACCOUNTS RECEIVABLE

There is no allowance for doubtful accounts at December 31, 1995 or 1996.

INVENTORIES

Inventories at December 31, 1995 and 1996 consist of the following:

1995 1996
---------- ------------
Raw materials........................... $ 691,950 $ 791,056
Work-in-process......................... 51,792 206,206
Tool division supplies.................. 89,590 82,231
---------- ------------
Total.............................. $ 833,332 $ 1,079,493
========== ============

Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-process inventories are comprised of direct materials, direct
labor, and manufacturing overhead.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
both accelerated and straight-line methods, using useful lives ranging from 3 to
40 years.

CASH OVERDRAFTS

Accounts payable in the accompanying balance sheets are inclusive of cash
overdrafts of approximately $316,900 and $198,700 as of December 31, 1995 and
December 31, 1996, respectively.

REVENUE RECOGNITION

Revenue is recognized as services are performed and products are shipped.

INCOME TAXES

The stockholders of the Company elected in 1990 to be taxed under the
Subchapter S provisions of the Internal Revenue Code. Under this section,
taxable income and applicable tax credits are deemed to flow to the individual
stockholders, and no state or federal income taxes are imposed on the Company.
Accordingly, no provision has been made for income taxes.

Under current tax law, whenever an enterprise converts from a taxable C
corporation status to S status, the enterprise may be subject to a corporate
level tax if certain built-in gains present at the date of conversion are
realized within a ten-year period following the conversion elections. The
built-in gain remaining as of February 28, 1997 from the Company's conversion to
S status was approximately $907,000. Management does not presently anticipate
that the assets subject to built-in gains tax will be sold or disposed of within
the ten-year period.

F-91
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management of the Company believes that the carrying value of its financial
instruments is a reasonable estimate of their fair value.

USE OF ESTIMATES

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Accordingly, in the event that
facts and circumstances indicate that property and equipment, and intangible or
other assets, may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undisclosed cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
necessary. Adoption of Statement 121 did not have an effect on the financial
position or results of operations of the Company.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 1995 and
1996:

1995 1996
-------------- --------------
Land and building.................... $ 384,634 $ 521,918
Machinery and equipment.............. 2,105,916 2,160,202
Vehicles............................. 505,767 536,012
Leasehold improvements............... 349,976 349,976
Office furniture and equipment....... 168,705 175,735
-------------- --------------
Total cost........................... 3,514,998 3,743,843
Less accumulated depreciation........ (2,456,828) (2,566,799)
-------------- --------------
Total........................... $ 1,058,170 $ 1,177,044
============== ==============

Property and equipment depreciation and amortization expense for the years
ended December 31, 1994, 1995, 1996 and for the two months ended February 28,
1997, amounted to $164,631, $180,311, $170,879 and $32,197, respectively.

3. OTHER ASSETS

COVENANTS NOT-TO-COMPETE

On December 19, 1990, the Company entered into four covenants
not-to-compete with four former shareholders, who are also current employees.
Under the terms of the agreements, total noncompete payments amounting to
$1,161,181 are payable to the employees under a cash available formula. Each
agreement was for a sixty-month period which expired December 31, 1995.
Amortization of the covenants, which is included in selling, general, and
administrative expenses in the statements of operations, is computed on the
straight-line method over the covenant period, and amounted to $232,236,
$232,237, $-0-and $-0- for the years ended December 31, 1994, 1995, 1996 and for
the two months ended February 28, 1997, respectively.

F-92
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. NOTE PAYABLE TO BANK

The Company has available two lines of credit from a financial institution
in the total maximum amount of $600,000, payable on demand and renewable
annually. Draws under the lines are limited to the lesser of 75% of accounts
receivable with balances outstanding less than 90 days or $600,000. The lines
bear interest at the prime rate plus 1% (9.25% at December 31, 1996), with
interest payable monthly. The lines are collateralized by accounts receivable,
inventory, and an unconditional guarantee from the Company's president. The
balances outstanding at December 31, 1995 and 1996 amounted to $362,000 and
$426,000, respectively.

5. LONG-TERM DEBT

Long-term debt at December 31, 1995 and 1996 consists of the following:

1995 1996
---------- ----------
Note payable in the original amount
of $535,000, interest at prime plus
.5% (8.75% at December 31, 1996),
collateralized by all equipment,
inventory, a life insurance policy,
and a cross-collateralization which
was secured in favor of the line of
credit, payable in monthly
principal installments of $8,925
plus interest, final principal
payment due in full on or before
February 15, 1999.................. $ 339,150 $ 232,050
Mortgage note payable in the original
amount of $168,000, interest at 7%,
collateralized by land and
buildings with a carrying amount of
approximately $503,000 at December
31, 1996, payable in monthly
installments of principal and
interest of $3,327 through May
1999............................... 120,994 88,516
Installment loans, interest at
varying rates of 7.5% to 11.3%
collateralized by vehicles with a
carrying amount of approximately
$159,000 at December 31, 1996,
payable in monthly installments of
principal and interest totaling
$7,891 through October 2000, when
final payment is due on the last
installment note................... 107,448 140,705
---------- ----------
567,592 461,271
Less current maturities.............. 183,378 193,372
---------- ----------
$ 384,214 $ 267,899
========== ==========
Maturities of long-term debt are as
follows:
1997............................ $ 193,372
1998............................ 193,033
1999............................ 64,158
2000............................ 10,708
----------
Total........................... $ 461,271
==========

F-93
<PAGE>
GSV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. OPERATING LEASE COMMITMENTS

The Company is obligated under an operating lease agreement for its
facility in Tampa which expires in June 2001. The Company is obligated on
various equipment leases which expire from 1997 to 2000. At December 31, 1996,
the future minimum rental payments required under the leases are as follows:

YEAR ENDING
DECEMBER 31,
- ---------------
1997.................................. $ 67,711
1998.................................. 68,028
1999.................................. 69,433
2000.................................. 70,006
2001.................................. 34,000
----------
$ 309,178
==========

Total rent expense charged to operations under these agreements amounted to
$64,172, $61,786, $62,634 and $12,253 during 1994, 1995, 1996 and for the two
months ended February 28, 1997, respectively.

7. EMPLOYEE BENEFIT PLANS

401(K) SAVINGS PLAN

The Company sponsors a participant directed cash deferred 401(k) plan (the
Plan). Employees who are employed for one full year and complete 1,000 hours of
service may elect to participate in the Plan. The Company elected to match
employee deferrals at a rate of 40% on the first 6% during 1994, 33 1/3% on the
first 6% during 1995 and 50% on the first 6% deferred during 1996 and 1997,
which amounted to $38,553, $27,046, $45,288 and $8,588 during 1994, 1995, 1996
and for the two months ended February 28, 1997, respectively.

HEALTH INSURANCE PLAN

On November 1, 1995, the Company began providing certain benefits to
employees under a health insurance plan. Prior to November 1, 1995, the Company
provided healthcare benefits under a plan that was primarily self-funded except
for two reinsurance policies. Healthcare expenses incurred under these plans
amounted to $173,254, $234,019, $116,175 and $23,109 during 1994, 1995, 1996 and
for the two months ended February 28, 1997, respectively.

8. COMMITMENTS AND CONTINGENCIES

On November 20, 1992, the Company was notified by the EPA of its potential
liability for the generation of potentially hazardous waste under the Bay Drum
Superfund Site. Management believes that the Company is a de micromis potential
responsible party at the site, and any liability of the Company related to this
matter is insignificant. The Company is one of hundreds of parties which have
been identified with the site. The Company received no correspondence from any
parties regarding this matter during 1994, 1995, 1996 or 1997.

9. SIGNIFICANT CUSTOMERS

No customers generated greater than 10% of the Company's revenue for the
years ended December 31, 1994 and 1995. Two customers generated revenue to the
Company representing 11% and 10%, respectively, of total revenues for the year
ended December 31, 1996. One customer generated revenue to the Company
representing 11.7% of total revenues for the two months ended February 28, 1997.

10. SUBSEQUENT EVENT

Effective March 1, 1997, the entire equity ownership of the Company was
acquired by The Safe Seal Company for total consideration in excess of the
recorded amounts of the Company's net assets.

F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Plant Specialties, Inc.:

We have audited the accompanying balance sheets of Plant Specialties, Inc.
(a Louisiana corporation), as of October 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended October 31, 1996 and for the period from
November 1, 1996 through May 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Plant Specialties, Inc., as
of October 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996 and for
the period from November 1, 1996 through May 31, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 10, 1998

F-95
<PAGE>
PLANT SPECIALTIES, INC.
BALANCE SHEETS

OCTOBER 31
--------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 6,019 $ 18,811
Accounts receivable, net of
allowance of $24,924 and
$21,168........................... 2,484,846 2,111,448
Inventories........................ 1,485,546 1,681,887
Prepaid expenses and other current
assets............................ 76,220 87,291
------------ ------------
Total current assets.......... 4,052,631 3,899,437
PROPERTY AND EQUIPMENT, net............. 2,102,708 2,003,345
OTHER NONCURRENT ASSETS................. 147,917 160,960
------------ ------------
$ 6,303,256 $ 6,063,742
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 1,300,821 $ 1,061,771
Short-term debt.................... 1,809,984 1,428,453
Current maturities of long-term
debt.............................. 163,230 112,392
------------ ------------
Total current liabilities..... 3,274,035 2,602,616
LONG-TERM DEBT, net of current
maturities............................ 579,149 916,332
DEFERRED INCOME TAXES................... 102,830 89,233
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding....................... 8,500 8,500
Retained earnings.................. 2,338,742 2,447,061
------------ ------------
Total stockholders' equity.... 2,347,242 2,455,561
------------ ------------
$ 6,303,256 $ 6,063,742
============ ============

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

F-96
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 SEVEN MONTHS
------------------------------------------ ENDED
1994 1995 1996 MAY 31, 1997
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 9,687,963 $ 11,526,424 $ 8,500,741 $6,699,460
COST OF OPERATIONS...................... 6,429,080 7,377,424 5,620,159 4,058,814
------------ -------------- ------------ ------------
Gross profit.................. 3,258,883 4,149,000 2,880,582 2,640,646
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,590,125 2,991,155 2,489,494 1,659,679
------------ -------------- ------------ ------------
Income (loss) from
operations................. 668,758 1,157,845 391,088 980,967
OTHER INCOME (EXPENSE):
Interest, net...................... (149,556) (186,706) (188,116) (143,638)
Other.............................. 22,010 23,768 29,622 13,892
------------ -------------- ------------ ------------
(127,546) (162,938) (158,494) (129,746)
------------ -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES....... 541,212 994,907 232,594 851,221
PROVISION FOR INCOME TAXES.............. 202,590 374,605 124,275 321,612
------------ -------------- ------------ ------------
NET INCOME.............................. $ 338,622 $ 620,302 $ 108,319 $ 529,609
============ ============== ============ ============
</TABLE>

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

F-97
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1993............... 1,000 $8,500 $1,379,818 $ 1,388,318
Net income......................... -- -- 338,622 338,622
------ ------ ---------- ------------
BALANCE, October 31, 1994............... 1,000 8,500 1,718,440 1,726,940
Net income......................... -- -- 620,302 620,302
------ ------ ---------- ------------
BALANCE, October 31, 1995............... 1,000 8,500 2,338,742 2,347,242
Net income......................... -- -- 108,319 108,319
------ ------ ---------- ------------
BALANCE, October 31, 1996............... 1,000 8,500 2,447,061 2,455,561
Net income......................... -- -- 529,609 529,609
------ ------ ---------- ------------
BALANCE, May 31, 1997................... 1,000 $8,500 $2,976,670 $ 2,985,170
====== ====== ========== ============
</TABLE>

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

F-98
<PAGE>
PLANT SPECIALTIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED OCTOBER 31 SEVEN MONTHS
----------------------------------------------- ENDED
1994 1995 1996 MAY 31, 1997
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 338,622 $ 620,302 $ 108,319 $ 529,609
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 351,000 384,430 412,725 237,721
(Increase) decrease in --
Accounts receivable, net...... (438,502) (453,231) 373,398 (654,025)
Inventories................... 3,142 (222,584) (196,341) (208,337)
Prepaid expenses and other
assets..................... (151,791) 141,405 (24,114) (189,046)
Increase (decrease) in accounts
payable, accrued expenses and
deferred income taxes......... (42,259) 190,620 (252,647) (93,672)
-------------- --------------- -------------- -------------
Net cash provided by (used in)
operating activities....... 60,212 660,942 421,340 (377,750)
-------------- --------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (571,036) (993,985) (313,564) (166,129)
-------------- --------------- -------------- -------------
Net cash used in investing
activities................. (571,036) (993,985) (313,564) (166,129)
-------------- --------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 220,618 651,231 947,966 72,333
Repayments of debt.................... (278,202) (424,756) (661,620) (65,562)
Borrowings (repayments) on line of
credit facility.................... 566,953 107,586 (381,330) 653,406
-------------- --------------- -------------- -------------
Net cash provided by (used in)
financing activities....... 509,369 334,061 (94,984) 660,177
-------------- --------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH......... (1,455) 1,018 12,792 116,298
CASH, beginning of period............... 6,456 5,001 6,019 18,811
-------------- --------------- -------------- -------------
CASH, end of period..................... $ 5,001 $ 6,019 $ 18,811 $ 135,109
============== =============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-99
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Plant Specialties, Inc. (the "Company"), was incorporated in the State of
Louisiana in 1972 and is principally engaged in the business of selling new
valves, instrumentation automation, engineering services and repair services for
valves and instrumentation to the petrochemical and oil field industries. The
Company's fiscal year-end is October 31.

On June 16, 1997, the stockholders of the Company sold the entire equity
ownership of the Company to Innovative Valve Technologies, Inc. for total
consideration in excess of the recorded amounts of the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PROPERTY AND EQUIPMENT

INCOME TAXES

REVENUE RECOGNITION

Revenue is recognized as services are completed and products are shipped.

INVENTORIES

Inventories are valued at the lower of cost or market utilizing the
last-in, first-out method and primarily consist of raw materials and finished
goods. If the first-in, first-out method had been used for costing inventories,
the valuation assigned to inventories would have been approximately $1,700,000
and $1,902,000 as of October 31, 1995 and 1996, respectively.

CASH

Cash payments for interest during fiscal 1994, 1995 and 1996 were
approximately $155,000, $231,000 and $208,000, respectively. Cash payments for
taxes during fiscal 1994, 1995 and 1996 were approximately $172,000, $206,000
and $159,000, respectively.

USE OF ESTIMATES

F-100
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENT

Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31
USEFUL ------------------------------
LIVES 1995 1996
----------- -------------- --------------
<S> <C> <C> <C>
Buildings............................... 15-30 years $ 381,056 $ 896,422
Vehicles................................ 5 years 405,073 411,527
Furniture and fixtures.................. 3-5 years 22,957 22,957
Machinery and equipment................. 5 years 1,872,871 2,554,336
Leasehold improvements.................. 20 years 614,615 649,508
Construction in progress................ -- 925,114 --
-------------- --------------
4,221,686 4,534,750
Less -- Accumulated depreciation........ (2,118,978) (2,531,405)
-------------- --------------
Property and equipment, net............. $ 2,102,708 $ 2,003,345
============== ==============
</TABLE>

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following:

OCTOBER 31
--------------------------------
1994 1995 1996
--------- ---------- ---------
Balance at beginning of year............ $ 16,022 $ 19,728 $ 24,924
Additions (recovery) charged (credited)
to results of operations.............. 3,706 89,654 (1,019)
Deductions for uncollectible accounts
written off........................... -- (84,458) (2,737)
--------- ---------- ---------
$ 19,728 $ 24,924 $ 21,168
========= ========== =========

Inventories at LIFO consist of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Raw material and work in process........ $ 1,422,617 $ 850,733
Finished goods.......................... 62,929 831,154
------------ ------------
$ 1,485,546 $ 1,681,887
============ ============

F-101
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Accounts payable, trade................. $ 603,877 $ 484,945
Accrued compensation and benefits....... 137,575 69,329
Accrued insurance....................... 49,963 56,463
Income taxes............................ 262,210 195,410
Other accrued expenses.................. 247,196 255,624
------------ ------------
$ 1,300,821 $ 1,061,771
============ ============

5. SHORT- AND LONG-TERM DEBT:

Short-term debt consists of a revolving credit facility with a bank, due
May 20, 1997, with interest due monthly at prime (8.25% at October 31, 1996).
The revolving debt is secured by accounts receivable and inventory. The
available borrowing capacity at October 31, 1996 was $2,000,000.

Long-term debt consists of the following:

OCTOBER 31
--------------------------
1995 1996
------------ ------------
Notes payable, monthly installments of
principal and interest of $34,000,
bearing interest at 7.50% to 11.00%,
collateralized by land, vehicles and
equipment............................. $ 742,379 $ 1,028,724
Less -- Current maturities......... (163,230) (112,392)
------------ ------------
Long-term debt.......................... $ 579,149 $ 916,332
============ ============

Pursuant to the revolving credit facility agreement, the Company is subject
to financial covenants relating to net worth, leverage ratios and debt service
coverage. At October 31, 1995 and 1996, the Company was in compliance with these
covenants.

The aggregate maturities of the long-term debt as of October 31, 1996 are
as follows:

1997................................. $ 112,392
1998................................. 108,358
1999................................. 110,997
2000................................. 86,527
2001................................. 610,450
Thereafter........................... --
------------
$ 1,028,724
============

Interest expense recorded pursuant to these debt agreements totaled
approximately $155,000, $192,000 and $213,000 in fiscal 1994, 1995 and 1996,
respectively. Management estimates that the fair value of its debt obligations
approximates historical value at October 31, 1996.

F-102
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES:

The Company's provision (benefit) for income taxes is as follows:

YEAR ENDED OCTOBER 31
----------------------------------
1994 1995 1996
---------- ---------- ----------
Federal --
Current......................... $ 190,004 $ 362,993 $ 112,912
Deferred........................ (1,810) (15,138) (11,252)
State --
Current......................... 14,534 27,758 23,679
Deferred........................ (138) (1,008) (1,064)
---------- ---------- ----------
$ 202,590 $ 374,605 $ 124,275
========== ========== ==========

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
tax as follows:

YEAR ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--- --- ---
Statutory federal income tax rate.... 34% 34% 34%
State and local taxes................ 3 3 3
Effect of nondeductible meals and
entertainment........................ -- -- 10
Other................................ -- 1 6
--- --- ---
Effective income tax rate............ 37% 38% 53%
=== === ===

Deferred income taxes consist of the following:

OCTOBER 31
---------------------
1995 1996
---------- ---------
Current deferred tax assets............. $ 8,000 $ 6,403
Noncurrent deferred tax assets.......... -- --
---------- ---------
Total deferred tax assets..... 8,000 6,403
---------- ---------
Current deferred tax liabilities........ -- --
Noncurrent deferred tax liabilities..... 102,830 89,233
---------- ---------
Total deferred tax
liabilities................ 102,830 89,233
---------- ---------
Net deferred tax
liabilities................ $ 94,830 $ 82,830
========== =========

7. EMPLOYEE BENEFIT PLANS:

The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. The plan allows employee contributions under Section 401(k) of the
Internal Revenue Code. Eligible employees may elect to contribute up to 20
percent of eligible compensation on a pretax basis, subject to IRS limits. The
Company provides matching contributions of 50 percent of employee contributions
up to 6 percent of employee compensation. The Company contributed approximately
$36,000, $39,000 and $38,000 for fiscal 1994, 1995 and 1996, respectively.

F-103
<PAGE>
PLANT SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases warehouse, office facilities and vehicles under
operating leases which expire at various dates through 1999. Future minimum
lease payments at October 31, 1996 are as follows:

1997.................................... $ 140,943
1998.................................... 42,535
1999.................................... 24,813

Rent expense for fiscal 1994, 1995 and 1996 was approximately $289,000,
$361,000 and $240,000, respectively.

The Company leases its facilities from its president and majority
stockholder under an operating lease requiring monthly payments of approximately
$16,000 expiring April 30, 1997. The Company is responsible for all taxes,
insurance and maintenance. Rent expense pursuant to this lease for fiscal 1994,
1995 and 1996 was $191,000, $197,000 and $197,000, respectively.

LITIGATION

9. RELATED-PARTY TRANSACTIONS:

As of October 31, 1995 and 1996, the Company had a note receivable from the
president and majority stockholder of the Company in the amount of $80,080 and
$82,237, respectively. The note bears interest at 7 percent, payable in monthly
installments of $1,000.

10. REVENUES FROM SIGNIFICANT CUSTOMERS:

During fiscal 1996, five customers accounted for approximately 54 percent
of the Company's revenues. During fiscal 1995, five customers accounted for
approximately 67 percent of the Company's revenues. During fiscal 1994, four
customers accounted for approximately 77 percent of the Company's revenues.

F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Southern Valve Group:

We have audited the accompanying combined balance sheet of Southern Valve
Group (as defined in Note 1) as of October 31, 1996, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended October 31, 1997. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Southern
Valve Group as of October 31, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended October 31, 1997
in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1998

F-105
<PAGE>
SOUTHERN VALVE GROUP
COMBINED BALANCE SHEETS

OCTOBER 31,
1996
-----------
ASSETS
CURRENT ASSETS:
Cash............................... $ 21,874
Accounts receivable, net of
allowance of $11,861.............. 473,581
Inventories........................ 1,301,987
Notes receivable................... 168,779
Prepaid expenses and other current
assets............................ 22,362
-----------
Total current assets.......... 1,988,583
PROPERTY AND EQUIPMENT, net............. 1,055,716
-----------
$ 3,044,299
===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 517,105
Accounts payable and accrued
expenses.......................... 309,570
Note payable to stockholder........ 76,994
-----------
Total current liabilities..... 903,669
LONG-TERM DEBT, net of current
maturities............................ 1,363,166
DEFERRED INCOME TAXES................... 12,913
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10.00 par value,
1,000 shares authorized, 1,000
shares issued and outstanding..... 10,000
Additional paid-in capital......... 5,860
Retained earnings.................. 748,691
-----------
Total stockholders' equity.... 764,551
-----------
$ 3,044,299
===========

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

F-106
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF OPERATIONS

YEAR ENDED
OCTOBER 31
----------------------------
1996 1997
------------ -----------
REVENUES............................. $ 4,404,717 $ 4,033,016
COST OF OPERATIONS................... 2,962,337 2,712,458
------------ -----------
Gross profit.................... 1,442,380 1,320,558
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,175,487 1,180,360
------------ -----------
Income from operations.......... 266,893 140,198
OTHER INCOME (EXPENSE), net:
Interest........................... (177,123) (170,790)
Other.............................. 45,571 (38,500)
------------ -----------
(131,552) (209,290)
------------ -----------
INCOME BEFORE INCOME TAXES........... 135,341 (69,092)
PROVISION FOR INCOME TAXES........... 29,056 (14,510)
------------ -----------
NET INCOME (LOSS).................... $ 106,285 $ (54,582)
============ ===========

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

F-107
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1995............ 1,000 $10,000 $5,860 $ 642,406 $ 658,266
Net income...................... -- -- -- 106,285 106,285
------ ------- ---------- --------- ----------
BALANCE, October 31, 1996............ 1,000 10,000 5,860 748,691 764,551
Net loss........................ -- -- -- (54,582) (54,582)
------ ------- ---------- --------- ----------
BALANCE, October 31, 1997............ 1,000 $10,000 $5,860 $ 694,109 $ 709,969
====== ======= ========== ========= ==========
</TABLE>

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

F-108
<PAGE>
SOUTHERN VALVE GROUP
COMBINED STATEMENTS OF CASH FLOWS

YEAR ENDED
OCTOBER 31
--------------------------
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 106,285 $ (54,582)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization.... 155,874 143,750
Loss on disposal of assets....... -- 38,500
Change in deferred income
taxes........................... 2,589 --
(Increase) decrease in --
Accounts receivable........... (188,676) 32,534
Inventories................... 60,920 (320,820)
Notes receivable.............. (10,957) 118,731
Prepaid expenses and other
current assets............ 17,094 (20,658)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 96,166 (72,238)
------------ ------------
Net cash provided by (used in)
operating activities............ 239,295 (134,783)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment... (308,362) (6,420)
------------ ------------
Net cash used in investing
activities...................... (308,362) (6,420)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.................... 738,512 482,814
Repayments of debt.................... (752,633) (121,838)
------------ ------------
Net cash provided by (used in)
financing activities............ (14,121) 360,976
------------ ------------
NET INCREASE (DECREASE) IN CASH......... (83,188) 219,773
CASH, beginning of period............... 105,062 21,874
------------ ------------
CASH, end of period..................... $ 21,874 $ 241,647
============ ============

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

F-109
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

The accompanying combined balance sheets and related combined statements of
operations, stockholders' equity and cash flows include Southern Valve Service,
Inc. ("Southern Valve") and 55 Leasing and Sales Company, Inc. ("55
Leasing"). As Southern Valve and 55 Leasing (together, "Southern Valve Group"
or the "Company") have common ownership and management, the financial
statements of each entity have been consolidated for financial reporting
purposes. All intercompany transactions and balances have been eliminated.

Southern Valve was incorporated in the State of Alabama in 1984 and is
principally engaged in the business of repairing, testing and selling manual,
control and safety relief valves to customers in the pulp and paper, chemical,
power generation and petrochemical industries in Alabama, Mississippi and
Georgia.

55 Leasing is an Alabama S Corporation organized in 1995 primarily to lease
equipment to Southern Valve.

In June 1997, pursuant to a definitive agreement, the stockholders of the
Company agreed to sell the entire equity ownership of the Company to Innovative
Valve Technologies, Inc. (Invatec), for total consideration in excess of the
recorded amounts of the Company's net assets. The transaction closed on the
consummation of Invatec's initial public offering.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The costs of major improvements are capitalized. Expenditures for maintenance,
repairs and minor improvements are expensed as incurred. When property and
equipment is sold or retired, the cost and related accumulated depreciation is
removed and the resulting gain or loss is included in results of operations.

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled. 55 Leasing is an S
Corporation for federal income tax purposes and, in accordance with the S
Corporation provisions of the Internal Revenue Code, the earnings of 55 Leasing
are included in the personal tax returns of its stockholders. Accordingly, no
federal or state income tax expense is recorded in the accompanying consolidated
financial statements for 55 Leasing.

REVENUE RECOGNITION

Service revenue is recognized upon completion of the service, and product
sales revenue is recognized as products are shipped or delivered.

CASH

Cash payments for interest during fiscal 1996 were approximately $178,000.
Cash payments for taxes during fiscal 1996 were approximately $15,000.

INVENTORIES

Inventories are valued at the lower of cost or market utilizing the
first-in, first-out method and primarily consist of valves and valve parts.

F-110
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

NEW ACCOUNTING PRONOUNCEMENT

Effective November 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a writedown to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

ESTIMATED OCTOBER 31,
USEFUL LIVES 1996
------------ -----------
Land.................................... -- $ 171,682
Buildings and improvements.............. 18-40 years 533,015
Vehicles................................ 5 years 433,900
Furniture and fixtures.................. 5-10 years 180,782
Machinery and equipment................. 5-10 years 688,398
-----------
2,007,777
Less -- Accumulated depreciation........ (952,061)
-----------
$ 1,055,716
===========

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts for the year
ended October 31, 1996, consists of the following:

Balance at beginning of year....... $ 8,759
Additions charged to results of
operations........................ 3,102
---------
Balance at end of year............. $ 11,861
=========

Accounts payable and accrued expenses as of October 31, 1996, consist of
the following:

Accounts payable................... $ 177,383
Customer deposits.................. 30,943
Accrued employee compensation and
benefits........................... 27,447
Other accrued expenses............. 73,797
----------
$ 309,570
==========

F-111
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. DEBT:

As of October 31, 1996, debt consists of the following:

Lines of credit, aggregate borrowing
capacity of $350,000 with a commercial
bank, bearing interest at prime plus
1.00% (9.25% at October 31, 1996),
collateralized by inventory and
accounts receivable................... $ 190,000
Notes payable to banks, monthly
installments of principal and interest
in the amount of $34,264, bearing
interest at 7.00% to 10.00%,
collateralized by accounts receivable,
inventory, land, equipment and
vehicles.............................. 1,690,271
Unsecured demand note, payable to
stockholder, bearing interest at
8.00%................................. 76,994
------------
1,957,265
Less -- Current maturities.............. (594,099)
------------
Total long-term debt, net of
current maturities................ $ 1,363,166
============

In January 1997, the Company refinanced its notes payable to banks. The
refinanced debt is payable to one bank, bearing interest of 8.50% with monthly
installments of principal and interest. There was no significant change in
amount of the debt financed and no gain or loss on debt extinguishment to be
recognized. In addition, the Company's lines of credit have been replaced by a
$300,000 line of credit; as of April 18, 1997, there was no outstanding balance
due under the line of credit.

The aggregate maturities of the refinanced debt and unsecured demand note
are as follows:

For the Year Ending October 31 --
1997............................... $ 105,064
1998............................... 151,856
1999............................... 993,226
2000............................... 92,545
2001............................... 46,637
Thereafter......................... 465,145
------------
$ 1,854,473
============

Interest expense recorded pursuant to these debt agreements totaled
approximately $177,000 in fiscal 1996. Management estimates that the fair value
of its debt obligations approximates the historical value at October 31, 1996.

6. INCOME TAXES:

The income tax provision for fiscal 1996 is as follows:

Federal --
Current............................ $ 22,366
Deferred........................... 2,243
State --
Current............................ 4,101
Deferred........................... 346
---------
$ 29,056
=========

F-112
<PAGE>
SOUTHERN VALVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes for fiscal 1996, as follows:

Statutory federal income tax rate....... 34%
Effect of federal graduated tax rate.... (12)
State and local taxes................... 3
Effect of S Corporation election........ (7)
Effect of nondeductible meals and
entertainment......................... 2
Other................................... 2
---
Effective income tax rate............... 22%
===

Deferred income taxes as of October 31, 1996, consist of the following:

Current deferred tax assets.......... $ 7,143
----------
Total deferred tax
assets................ 7,143
----------
Noncurrent deferred tax
liabilities........................ (12,913)
----------
Total deferred tax
liabilities........... (12,913)
----------
Net deferred tax
liabilities........... $ (5,770)
==========

7. COMMITMENTS AND CONTINGENCIES:

LITIGATION

In the ordinary course of its business, the Company has become involved in
various legal matters. Management does not believe that the outcome of these
legal matters will have a material effect on the Company's consolidated
financial position or results of operations.

8. RELATED-PARTY TRANSACTIONS:

As of October 31, 1996, the Company had a note receivable from a
stockholder in the amount of $161,279. The note receivable bears interest
equivalent to the short-term federal treasury rate and is payable on demand.

9. SIGNIFICANT CUSTOMERS:

For fiscal 1996, the Company had two customers that comprised approximately
19% and 12%, respectively, of total revenues.

F-113
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Dalco, Inc.:

We have audited the accompanying balance sheets of Dalco, Inc. (a Kentucky
corporation), as of October 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended October 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dalco, Inc., as of October
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 1997 in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
December 23, 1997

F-114
<PAGE>
DALCO, INC.
BALANCE SHEETS

OCTOBER 31
--------------------------
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash............................... $ 68,547 $ 240,810
Accounts receivable................ 1,362,091 1,281,887
Inventories........................ 976,790 1,142,249
Prepaid expenses and other current
assets.......................... 8,168 7,993
------------ ------------
Total current assets....... 2,415,596 2,672,939
PROPERTY AND EQUIPMENT, net.......... 375,782 308,496
OTHER NONCURRENT ASSETS, net......... 35,783 45,542
------------ ------------
Total assets............... $ 2,827,161 $ 3,026,977
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................ $ 643,068 $ 696,593
Line of credit..................... 187,000 100,000
Current maturities of long-term
debt............................ 72,787 78,801
Current portion of obligations
under capital leases............ 19,856 21,670
------------ ------------
Total current
liabilities.................. 922,711 897,064
------------ ------------
LONG-TERM DEBT, net of current
maturities......................... 124,288 45,493
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 58,209 36,541
------------ ------------
182,497 82,034
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000
shares authorized, 300 shares
issued and outstanding.......... 1,050 1,050
Treasury stock..................... (22,054) (22,054)
Retained earnings.................. 1,742,957 2,068,883
------------ ------------
Total stockholders'
equity....................... 1,721,953 2,047,879
------------ ------------
Total liabilities and
stockholders' equity... $ 2,827,161 $ 3,026,977
============ ============

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

F-115
<PAGE>
DALCO, INC.
STATEMENTS OF OPERATIONS

YEAR ENDED OCTOBER 31
--------------------------
1996 1997
------------ ------------
REVENUES................................ $ 8,832,810 $ 9,620,492
COST OF OPERATIONS...................... 6,429,440 6,816,752
------------ ------------
Gross profit.................. 2,403,370 2,803,740
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,717,885 1,777,291
------------ ------------
Income from operations........ 685,485 1,026,449
OTHER INCOME (EXPENSE):
Interest expense................... (40,688) (28,557)
Other.............................. 7,020 5,435
------------ ------------
INCOME BEFORE INCOME TAXES.............. 651,817 1,003,327
PROVISION FOR INCOME TAXES.............. 5,428 12,372
------------ ------------
NET INCOME.............................. $ 646,389 $ 990,955
============ ============

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

F-116
<PAGE>
DALCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- TREASURY RETAINED
SHARES AMOUNT STOCK EARNINGS TOTAL
------ ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1995............... 300 $1,050 $(22,054) $1,497,954 $ 1,476,950
Stockholder distributions.......... -- -- -- (401,386) (401,386)
Net income......................... -- -- -- 646,389 646,389
------ ------ -------- ---------- ------------
BALANCE, October 31, 1996............... 300 1,050 (22,054) 1,742,957 1,721,953
Stockholder distributions.......... -- -- -- (665,029) (665,029)
Net income......................... -- -- -- 990,955 990,955
------ ------ -------- ---------- ------------
BALANCE, October 31, 1997............... 300 $1,050 $(22,054) $2,068,883 $ 2,047,879
====== ====== ======== ========== ============
</TABLE>

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

F-117
<PAGE>
DALCO, INC.
STATEMENTS OF CASH FLOWS

YEAR ENDED OCTOBER 31
--------------------------
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 646,389 $ 990,955
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............ 123,814 107,203
Gain on disposal of
property and
equipment............... (1,723) --
(Increase) decrease in --
Accounts receivable........ (227,699) 80,204
Inventories................ (66,602) (165,459)
Prepaid expenses and other
current assets.......... 664 175
Other noncurrent assets.... 5,694 (9,759)
Accounts payable and
accrued expenses........ (73,806) 53,525
------------ ------------
Net cash provided by
operating
activities......... 406,731 1,056,844
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (22,091) (39,917)
Proceeds from sale of property
and equipment.................. 3,000 --
------------ ------------
Net cash used in
investing
activities......... (19,091) (39,917)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
line of credit................. 67,000 (87,000)
Payments on capital leases...... (14,490) (19,856)
Repayments of long-term debt.... (67,130) (72,779)
Stockholder distributions....... (401,386) (665,029)
------------ ------------
Net cash used in
financing
activities......... (416,006) (844,664)
------------ ------------
NET INCREASE (DECREASE) IN CASH...... (28,366) 172,263
CASH, beginning of year.............. 96,913 68,547
------------ ------------
CASH, end of year.................... $ 68,547 $ 240,810
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid................... $ 42,750 $ 29,161
Income taxes paid............... 3,691 6,328

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

F-118
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Dalco, Inc. ("Dalco" or the "Company") was incorporated in Kentucky in
1971. Dalco assembles, distributes and repairs industrial valves (including
pressure relief valves and control valves) and related products (including
pneumatic and electric actuators and controls). The Company serves industrial
customers throughout Kentucky and the southern regions of Indiana and Ohio.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets, primarily using accelerated methods.
Leasehold improvements to the Company's facility, which is leased from the
stockholders, are amortized over the estimated useful life as used for federal
income tax purposes. The costs of major improvements are capitalized.
Expenditures for maintenance, repairs and minor improvements are expensed as
incurred. When property and equipment are sold or retired, the cost and related
accumulated depreciation are removed and the resulting gain or loss is included
in results of operations.

Leases having the substance of financing transactions have been capitalized
and the related lease obligations have been included in obligations under
capital leases. The leased assets are depreciated over their estimated useful
lives. Accumulated amortization of equipment under capital leases was $50,188
and $78,101 at October 31, 1996 and 1997, respectively.

INCOME TAXES

The stockholders of the Company elected to be taxed under the Subchapter S
provisions of the Internal Revenue Code. Under these provisions, taxable income
and applicable tax credits are attributed directly to the stockholders, and no
federal income taxes are imposed on the Company. Accordingly, a provision for
federal and state income taxes has not been established. The income tax
provision consists of local income taxes. The Company has filed to terminate its
S Corporation status effective November 1, 1998.

REVENUE RECOGNITION

Revenue is recognized as products are sold and as services are performed.

CASH

The Company considers all short-term debt securities purchased with a
maturity of three months or less to be cash equivalents.

INVENTORY

Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting.

USE OF ESTIMATES

F-119
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

OCTOBER 31
----------------------
1996 1997
---------- ----------
Machinery and equipment................. $ 375,821 $ 388,117
Leasehold improvements.................. 158,817 158,817
Vehicles................................ 109,678 124,955
Office furniture and equipment.......... 112,572 124,916
Equipment under capital leases.......... 106,674 106,674
---------- ----------
863,562 903,479
Less -- Accumulated depreciation and
amortization.......................... 487,780 594,983
---------- ----------
$ 375,782 $ 308,496
========== ==========

Depreciation and amortization expense was $123,814 and $107,203 for the
years ended October 31, 1996 and 1997, respectively.

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

OCTOBER 31
----------------------
1996 1997
---------- ----------
Accounts payable........................ $ 448,383 $ 517,034
Accrued profit-sharing contribution..... 115,000 78,055
Accrued payroll......................... 74,951 91,095
Other................................... 4,734 10,409
---------- ----------
$ 643,068 $ 696,593
========== ==========

5. LINE OF CREDIT:

The Company has a credit agreement with a bank. The agreement allows the
Company to borrow up to $750,000. Borrowings bear interest at prime (8.5 percent
at October 31, 1997), with interest payable monthly. The line of credit is
unsecured. Borrowings under this line were $187,000 and $100,000 at October 31,
1996 and 1997, respectively.

F-120
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT:

Long-term debt consists of the following:

OCTOBER 31
----------------------
1996 1997
---------- ----------
Notes payable to bank --
Notes due in monthly installments of
$6,254, with interest due monthly
at 8.75% through June 1999; secured
by inventory....................... $ 168,840 $ 106,264
Notes due in monthly installments of
$538, with interest due monthly at
8.24% through June 1999; secured by
vehicle............................ 15,405 10,020
Notes due in monthly installments of
$475, with interest due monthly at
8.2% through April 1999; secured by
vehicle............................ 12,830 8,010
---------- ----------
197,075 124,294
Less -- Current maturities........... 72,783 78,801
---------- ----------
$ 124,292 $ 45,493
========== ==========

Principal payments on long-term debt are due as follows:

Year ending October 31 --
1998............................ $ 78,801
1999............................ 45,493
----------
$ 124,294
==========

At October 31, 1997, the note payable secured by inventory was subject to a
credit agreement that requires the Company to maintain minimum levels of net
worth and working capital and to maintain minimum ratios of interest coverage
and net worth. At October 31, 1997, the Company was in compliance with respect
to all covenants.

Management estimates that the fair value of its debt obligations
approximates the historical value at October 31, 1997 and 1996.

7. OBLIGATIONS UNDER CAPITAL LEASES:

The Company leases certain telephone and computer equipment under capital
leases. The following is a schedule of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of October 31, 1997:

1998................................. $ 25,876
1999................................. 23,753
2000................................. 15,590
----------
Total minimum lease payments.... 65,219
Less -- Amount representing
interest........................... 7,009
----------
Present value of net minimum
lease payments................ $ 58,210
==========

8. PROFIT-SHARING PLAN:

The Company has a profit-sharing plan covering all employees who meet
certain requirements as to service and age. Profit-sharing contributions are
made at the discretion of the Company. Profit-sharing contributions for the
years ended October 31, 1996 and 1997, were $115,000 and $115,000, respectively.

F-121
<PAGE>
DALCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. SERVICE AND DISTRIBUTION AGREEMENTS:

The Company purchases, sells and services various products under service
and distribution agreements with certain suppliers. These agreements are
generally cancelable upon 30 to 60 days notice.

10. COMMITMENTS AND CONTINGENCIES:

The Company leases its facilities and certain vehicles under operating
leases. The Company's headquarters in Louisville is leased from the Company's
two stockholders. Rental commitments under noncancelable operating leases are as
follows:

LEASE WITH
STOCKHOLDERS OTHER TOTAL
------------ ---------- ------------
Year ending October 31 --
1998............................ $ 81,996 $ 29,439 $ 111,435
1999............................ 81,996 25,490 107,486
2000............................ 81,996 18,812 100,808
2001............................ 81,996 18,240 100,236
2002............................ 81,996 18,240 100,236
Thereafter...................... 757,164 -- 757,164
------------ ---------- ------------
$ 1,167,144 $ 110,221 $ 1,277,365
============ ========== ============

Rent expense under the above leases was $89,304 for each of the years ended
October 31, 1996 and 1997, including $60,000 paid in each of those years to the
Company's two stockholders.

11. SIGNIFICANT CUSTOMER:

During fiscal 1996 and 1997, one customer accounted for approximately 34
percent of the Company's revenues.

12. SUBSEQUENT EVENT:

On December 17, 1997, Innovative Valve Technologies, Inc. ("Invatec")
acquired all the outstanding stock of Dalco through a merger of Dalco with an
Invatec subsidiary. The total consideration was in excess of the recorded
amounts of the Company's net assets.

F-122
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors
Cypress Industries, Inc.
Schaumburg, Illinois

We have audited the accompanying balance sheet of Cypress Industries, Inc.
as of December 31, 1997 and the related statements of income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Industries, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.

Crowe, Chizek and Company LLP

Oak Brook, Illinois
February 12, 1998

F-123
<PAGE>
CYPRESS INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31, 1997

ASSETS
Current assets
Cash............................... $ 24,803
Accounts receivable, less allowance
for doubtful accounts of
$165,000........................ 3,198,719
Accounts receivable -- other....... 39,159
Inventories........................ 348,930
Costs in excess of billings on
uncompleted contracts........... 216,499
------------
Total current assets....... 3,828,110
Property and equipment, net (Note
2)................................... 3,602,181
Other assets
Deposits........................... 10,779
Organizational costs, less
accumulated amortization of
$107,661........................ 272,339
------------
283,118
------------
$ 7,713,409
============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit (Note 3)............ $ 1,800,000
Checks written in excess of bank
balance......................... 88,821
Current portion of long-term debt
(Note 4)........................ 640,029
Accounts payable................... 413,796
Accrued expenses................... 683,659
------------
Total current
liabilities.................. 3,626,305
Long-term debt, less current
maturities (Note 4).................. 2,136,823
Shareholders' equity
Common stock -- no par value; 300
shares authorized; 200 shares
issued and outstanding.......... 1,500,000
Retained earnings.................. 450,281
------------
Total shareholders'
equity....................... 1,950,281
------------
$ 7,713,409
============

See accompanying notes to financial statements.

F-124
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997

Revenues................................ $ 20,061,164
Cost of services........................ 14,790,576
--------------
GROSS PROFIT............................ 5,270,588
General and administrative expenses..... 4,439,881
--------------
INCOME FROM OPERATIONS.................. 830,707
Other income (expense)
Gain on sale of fixed assets.......... 5,953
Interest expense...................... (477,332)
Interest income....................... 2,728
--------------
(468,651)
--------------
INCOME BEFORE PROVISION FOR STATE
REPLACEMENT TAXES..................... 362,056
Provision for state replacement taxes... 15,000
--------------
Net income.............................. $ 347,056
==============

See accompanying notes to financial statements.

F-125
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997

TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
---------- --------- --------------
Balance, December 31, 1996.......... $1,500,000 $ 266,225 $1,766,225
Distributions to shareholders....... -- (163,000) (163,000)
Net income.......................... -- 347,056 347,056
---------- --------- --------------
Balance, December 31, 1997.......... $1,500,000 $ 450,281 $1,950,281
========== ========= ==============

See accompanying notes to financial statements.

F-126
<PAGE>
CYPRESS INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997

Cash flows from operating activities
Net income......................... $ 347,056
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation and amortization... 754,126
Provision for bad debts......... 43,000
Gain on sale of fixed assets.... (5,953)
Net changes in assets and
liabilities
Receivables................... 900,445
Inventories and jobs in
progress....................... (111,513)
Checks written in excess of
bank balance................. (72,627)
Accounts payable.............. (205,671)
Accrued expenses.............. (472,454)
--------------
Net cash from operating
activities................ 1,176,409
Cash flows from investing activities
Capital expenditures............... (161,540)
Proceeds on sale of fixed assets... 13,077
--------------
Net cash from investing
activities................ (148,463)
Cash flows from financing activities
Net payments on lines of credit.... (300,000)
Principal payments on long-term
debt............................... (584,811)
Distributions to shareholders...... (163,000)
--------------
Net cash from financing
activities................ (1,047,811)
--------------
Net change in cash................... (19,865)
Cash, beginning of year.............. 44,668
--------------
Cash, end of year.................... $ 24,803
==============
Supplemental disclosures of cash flow
information
Cash paid during the year for
interest........................ $ 489,958

See accompanying notes to financial statements.

F-127
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF COMBINATION: The financial statements of Cypress Industries,
Inc. (the Company) include the divisions of Continental Field Machinery Co.,
Inc. (CFM); New PME, Inc. (PME); and VR-TESCO, Inc. (VR-TESCO) (the Companies).
The nature and summary of the significant accounting policies followed by the
Company are as follows:

NATURE OF OPERATIONS: CFM, located in Schaumburg, Illinois and Atlanta,
Georgia, provides on-site machining for utility, steel mill, and other heavy
industry companies primarily located in the United States. The location in
Atlanta was closed during 1997. PME, which is located in Atlanta, Georgia and
Cincinnati, Ohio, repairs babbitt bearings for utility, steel mill, electric
motor, marine, and other heavy industry companies located primarily in the
eastern half of the United States. VR-TESCO, which is located in Schaumburg,
Illinois, provides valve repair and specialty welding services for utility,
petro chemical, steel, and other heavy industry companies which are primarily
located in the continental United States.

BASIS OF ACCOUNTING: Income from contracts in which the price is firm is
recognized on the completed contract method. This method is used because the
typical firm contract is completed in two months or less and the financial
position and results of operations do not vary significantly from those which
would result from using the percentage-of-completion method. A contract is
considered complete when all costs except insignificant items have been incurred
and the installation is operating according to specifications or has been
accepted by the customer. Income from contracts in which the price is based on
time and materials is recognized on the percentage-of-completion method. Under
this method, revenues are recognized based on contract valuation rates assigned
to the costs incurred. The rates vary depending on the type of cost, such as
labor and materials. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Cost of services
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred.

ACCOUNTS RECEIVABLE: Accounts receivable consists primarily of amounts due
on completed contracts.

INVENTORY: The inventory is valued at the lower of cost (determined on a
first-in, first-out method) or market. CFM inventory consists of carbide steel,
cast iron, carbon, and other machine repair materials and supplies. VR-TESCO
inventory consists of safety valve test systems and other valve testing
materials. PME inventory consists of babbitt tin chips and other babbitt
remanufacturing materials.

CONCENTRATION OF CREDIT RISK: For the year ended December 31, 1997, 28% of
the Company's sales were to one customer. At December 31, 1997, 22% of the
Company's accounts receivable were from one customer.

PROPERTY AND EQUIPMENT: Property and equipment (including major renewals
and betterments) are capitalized in the accounts and valued at cost.
Depreciation is computed using both straight-line and accelerated methods over
the estimated useful life of the asset. Leasehold improvements are amortized
over the remaining life of the lease. Depreciation methods are the same for both
financial reporting and income tax purposes.

ORGANIZATIONAL COSTS: Costs incurred in connection with the organization
of the Company are being amortized over a period of sixty months. Amortization
for the year ended December 31, 1997 totaled $75,996.

INCOME TAXES: The Company has elected to be taxed as an S corporation for
federal income tax purposes. Under the small business provisions of the Internal
Revenue Code, the Company's net income is reflected in the shareholders'
individual income tax returns. Consequently, no provision for federal income
taxes has been made.

F-128
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

NOTE 2 -- PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows at December 31, 1997:

Machinery and equipment.............. $ 4,211,109
Transportation equipment............. 17,788
Furniture and fixtures............... 118,003
Leasehold improvements............... 120,110
Computer equipment and software...... 61,283
------------
4,528,293
Accumulated depreciation............. 926,112
------------
$ 3,602,181
============

NOTE 3 -- REVOLVING LINE OF CREDIT

The Company has a bank line of credit, which expires May 1, 1998, providing
for maximum borrowings of $4,000,000 secured by accounts receivable,
inventories, and machinery and equipment. Borrowings under the line were
$1,800,000 at December 31, 1997. The notes bear interest at the bank's prime
rate which was 8.5% at December 31, 1997. Borrowings under the line have been
guaranteed by the Company's shareholders.

NOTE 4 -- LONG-TERM DEBT

Long-term debt consists of a 9% term note, payable in quarterly
installments of $217,962 including interest, with a final payment due August 1,
2001. This note is secured by accounts receivable, inventory, and machinery and
equipment as described in the loan and security agreement dated August 1, 1996.
Borrowings under this agreement have been guaranteed by the Company's
shareholders.

Long-term debt payments for the years subsequent to December 31, 1997 are
as follows:

1998................................. $ 640,029
1999................................. 700,461
2000................................. 766,271
2001................................. 670,091
------------
$ 2,776,852
============

The loan agreement contains certain covenants, including provisions setting
forth requirements that the Company maintain tangible net worth plus
subordinated debt of not less than $750,000, an unsubordinated debt to tangible
net worth ratio of not greater than 10 to 1, after-tax net income of not less
than $100,000, a debt coverage ratio of not less than 1.25 to 1, and capital
expenditures of not greater than $1,000,000. At December 31, 1997, the Company
was in compliance with these covenants.

NOTE 5 -- LEASE OBLIGATIONS

At December 31, 1997, the Company was obligated under various operating
leases for office space, shop facilities, and certain equipment which expire on
various dates through 2004. Future minimum lease payments for all leases as of
December 31, 1997 are as follows:

F-129
<PAGE>
CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

YEAR ENDING
DECEMBER 31,
- ------------
1998................................. $ 382,585
1999................................. 324,773
2000................................. 258,268
2001................................. 46,720
2002................................. 48,160
Thereafter........................... 85,120
------------
Total minimum lease payments.... $ 1,145,626
============

The Company also leases equipment used on a job-by-job basis. Rent expense,
including short-term equipment leases, for the year ended December 31, 1997 was
$638,343.

NOTE 6 -- 401(K) PLAN

The Company sponsors a 401(k) plan in which all full-time employees are
eligible to participate. Employees may make a voluntary contribution to the plan
as limited by current IRS regulations. The Company contributes 25% of the
employee's contribution up to the first $3,000 contributed for a maximum company
matching of $750 per participant. The Company's contribution for the year ended
December 31, 1997 was $47,395.

NOTE 7 -- WORKERS' COMPENSATION INSURANCE

The Company funds workers' compensation insurance for employee claims
through the use of a third-party administrator who provides aggregate stop loss
coverage. However, the Company is responsible for paying workers' compensation
claims subject to certain maximum aggregate policy limits per claim year.
Provision for losses expected under this program is recorded based upon the
Company's estimates of the aggregate liability for claims incurred. This amount
could vary significantly depending on the actual amount of claim settlements.

NOTE 8 -- COMMITMENTS

The Company has a non-compete/consulting agreement with the former
principal stockholder and chief executive officer of Continental Field Machining
Co., Inc., New PME, Inc., and VR-TESCO, Inc. The agreement provides for monthly
payments of $10,000 through July 31, 2006.

Additionally, the Company is to provide medical and dental coverage to this
individual through July 31, 2006. In consideration, this individual will provide
assistance to the Company through July 31, 2001 with respect to large projects
and to projects wherein his technical expertise or his relationship with
customers will be particularly beneficial to the Company. Additionally, this
individual commits not to directly compete with the Company through July 31,
2006.

NOTE 9 -- SUBSEQUENT EVENT

Subsequent to December 31, 1997, the Company's shareholders began
negotiating the sale of the Company's stock, or all of its net operating assets,
with a third party.

F-130
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To IPS Holding, Ltd.:

We have audited the accompanying consolidated balance sheets of IPS
Holding, Ltd. (a Delaware corporation) and subsidiaries, as of March 31, 1997
and February 28, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended March 31, 1997 and for
the eleven months ended February 28, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 IPS Holding, Ltd. and subsidiaries, as of March 31, 1997 and February 28,
1998, and the results of their operations and their cash flows for the year
ended March 31, 1997 and for the eleven months ended February 28, 1998, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
April 8, 1998

F-131
<PAGE>

IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

MARCH 31, 1997 FEBRUARY 28, 1998
--------------- ------------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 130,695 $ 63,915
Accounts receivable, net of
allowances of $61,314 and
$81,046......................... 3,112,540 4,100,520
Inventories..................... 2,358,675 2,737,145
Prepaid expenses................ 95,035 132,997
Other current assets............ 178,598 150,742
--------------- ------------------
Total current assets....... 5,875,543 7,185,319
PROPERTY AND EQUIPMENT, net.......... 2,678,529 3,081,493
RELATED-PARTY NOTES RECEIVABLE....... 19,376 19,376
OTHER NONCURRENT ASSETS, net......... 128,507 36,000
--------------- ------------------
$ 8,701,955 $ 10,322,188
=============== ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................ $ 2,263,822 $ 2,335,997
Line of credit.................. 1,392,657 2,417,014
Current maturities of long-term
debt............................ 345,977 1,197,338
Accrued compensation............ 375,130 386,050
Income taxes payable............ 390,637 295,163
Current portion of obligations
under capital leases............ 72,897 70,751
--------------- ------------------
Total current
liabilities................ 4,841,120 6,702,313
LONG-TERM DEBT, net of current
maturities........................... 1,535,436 586,777
DEFERRED INCOME TAXES................ 90,154 40,435
RELATED PARTY PAYABLE................ 12,763 --
OBLIGATIONS UNDER CAPITAL LEASES..... 103,413 92,081
MINORITY INTEREST.................... 266,059 367,707
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value,
21,025 shares authorized,
20,000 issued and
outstanding................... 20,000 20,000
Additional paid-in capital...... 380,000 380,000
Cumulative translation
adjustment.................... (27,730) (28,964)
Retained earnings............... 1,480,740 2,161,839
--------------- ------------------
Total stockholders'
equity..................... 1,853,010 2,532,875
--------------- ------------------
$ 8,701,955 $ 10,322,188
=============== ==================

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

F-132
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
REVENUES............................. $ 20,869,489 $21,440,702
COST OF OPERATIONS................... 12,818,247 13,164,086
-------------- -----------------
Gross profit.................... 8,051,242 8,276,616
SELLING, GENERAL AND ADMINSISTRATIVE
EXPENSES........................... 6,557,493 6,680,309
-------------- -----------------
Income from operations.......... 1,493,749 1,596,307
OTHER INCOME (EXPENSE):
Interest expense................ (308,551) (378,605)
Other........................... 189,530 66,156
-------------- -----------------
INCOME BEFORE INCOME TAXES........... 1,374,728 1,283,858
PROVISION FOR INCOME TAXES........... 485,986 521,546
-------------- -----------------
NET INCOME BEFORE MINORITY
INTEREST........................... 888,742 762,312
MINORITY INTEREST.................... 101,839 81,213
-------------- -----------------
NET INCOME........................... $ 786,903 $ 681,099
============== =================

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

F-133
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996.............. 20,000 $20,000 $ 380,000 -- $ 693,837 $ 1,093,837
Net income...................... -- -- -- -- 786,903 786,903
Translation adjustment.......... -- -- -- $ (27,730) -- (27,730)
------ ------- ---------- ----------- ---------- ------------
BALANCE, March 31, 1997.............. 20,000 20,000 380,000 (27,730) 1,480,740 1,853,010
Net income...................... -- -- -- -- 681,099 681,099
Translation adjustment.......... -- -- -- (1,234) -- (1,234)
------ ------- ---------- ----------- ---------- ------------
BALANCE, February 28, 1998........... 20,000 $20,000 $ 380,000 $ (28,964) $2,161,839 $ 2,532,875
====== ======= ========== =========== ========== ============
</TABLE>

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

F-134
<PAGE>

IPS HOLDING, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 786,903 $ 681,099
Adjustments to reconcile net income
to net cash
Provided by (used in)
operating activities --
Depreciation and
amortization............... 403,592 423,022
Loss on disposal of assets.... 17,205 24,182
Minority interest............. 101,839 81,213
(Increase) decrease in--
Accounts receivable...... 413,267 (987,980)
Inventories.............. (868,698) (378,470)
Prepaid expenses and
other assets.......... (290,272) 82,401
Increase (decrease) in --
Accounts payable and
accrued expenses...... (108,797) 8,462
Accrued compensation..... 155,054 10,920
Income taxes payable..... 49,843 (95,474)
-------------- -----------------
Net cash provided by
(used in) operating
activities............ 659,936 (150,625)
-------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (932,681) (907,578)
Proceeds from sale of property and
equipment........................ 34,313 57,407
-------------- -----------------
Net cash (used in) investing
activities................. (898,368) (850,171)
-------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit... 369,153 1,024,357
Borrowings of debt................. 360,282 1,281,625
Repayments of debt................. (324,338) (1,346,119)
Payments on capital leases......... (70,206) (46,282)
Contribution by minority
shareholder in subsidiary........ -- 20,435
-------------- -----------------
Net cash provided by
financing
activities............ 334,891 934,016
-------------- -----------------
NET INCREASE (DECREASE) IN CASH......... 96,459 (66,780)
CASH, beginning of period............... 34,236 130,695
-------------- -----------------
CASH, end of period..................... $ 130,695 $ 63,915
============== =================

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

F-135
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 BUSINESS AND ORGANIZATION:

The consolidated balance sheets and related consolidated statements of
operations, stockholders' equity and cash flows include IPS Holding, Ltd. ("IPS
Holding"), IPSCO U.S., Corp. ("IPSCO U.S."), IPSCO Gmbh ("IPSCO Gmbh") and
IPSCO U.K., Ltd. ("IPSCO U.K.") (collectively, "IPS Holding, Ltd." or the
"Company"). The Company has operations located in the United States, Europe
and the Middle East.

IPS Holding, Ltd. is principally engaged in the business of on-line repair
services and specializing in the provision of hot tapping and line stopping
equipment and services to municipal water and industrial customers in order to
prevent shutdowns or outages during maintenance, retrofitting alterations,
emergencies and new construction.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
IPS Holding, Ltd. and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Minority interest expense
reflects the minority shareholders' interest in the net income of certain
subsidiaries.

CASH

Cash includes all highly liquid debt instruments with an original maturity
of three months or less. Cash payments for interest during the year ended March
31, 1997 and the eleven months ended February 28, 1998 were approximately
$194,000 and $361,000. Cash payments for taxes during the year ended March 31,
1997 and the eleven months ended February 28, 1998 were approximately $396,000
and $542,000.

INVENTORIES

Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.

REVENUE RECOGNITION

Service revenue is recognized on performance, and sales revenue is
recognized as products are shipped or delivered.

USE OF ESTIMATES

F-136
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION

The Company's financial statements of foreign subsidiaries are reported in
U.S. dollars. Foreign subsidiaries using the local currency as their functional
currency translate their financial statements into U.S. dollars using the
current rate method. Assets and liabilities are translated at the rates of
exchange in effect at year-end, common stock and additional paid-in capital are
translated using historical rates and revenue and expense accounts are
translated at the average rates of exchange in effect during the year.
Translation adjustments are recorded as a separate component of stockholders'
equity rather than directly to operations.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

ESTIMATED MARCH 31, FEBRUARY 28,
USEFUL LIVES 1997 1998
-------------- -------------- ------------
Land........................... -- $ 226,780 $ 226,780
Buildings...................... 31 - 40 years 822,679 822,679
Vehicles....................... 5 - 7 years 831,316 914,800
Field service equipment........ 5 - 7 years 423,674 593,394
Furniture and fixtures......... 5 - 7 years 391,018 654,481
Machinery and equipment........ 5 - 7 years 1,439,844 1,507,837
Leasehold improvements......... 5 - 20 years 30,671 210,270
-------------- ------------
4,165,982 4,930,241
Less -- Accumulated
depreciation................. (1,487,453) (1,848,748)
-------------- ------------
Property and equipment, net.... $ 2,678,529 $ 3,081,493
============== ============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts as of March 31,
1997 and February 28, 1998 consists of the following:

MARCH 31, FEBRUARY 28,
1997 1998
--------- ------------
Balance at beginning of period....... $ 54,756 $ 61,314
Amounts charged to results of
operations........................... 103,672 83,488
Deductions for uncollectible accounts
written off.......................... (97,114) (63,756)
--------- ------------
Balance at end of period............. $ 61,314 $ 81,046
========= ============

Accounts payable and accrued expenses as of March 31, 1997 and February 28,
1998 consist of the following:

MARCH 31, FEBRUARY 28,
1997 1998
---------- ------------
Accounts payable..................... $1,818,965 $ 1,757,873
Accrued commissions.................. 68,085 101,847
Other accrued expenses............... 376,772 476,277
---------- ------------
$2,263,822 $ 2,335,997
========== ============

F-137
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LINE OF CREDIT:

The Company has credit agreements with banks. The agreements allow the
Company to borrow up to $4,000,000. Borrowings bear interest at prime (8.50% at
February 28, 1998), with interest payable monthly. The line of credit is secured
by accounts receivable and inventory. The available borrowing capacity at
February 28, 1998 was $1,583,000.

6. LONG-TERM DEBT:

Long-term debt consists of the following:

MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -----------------
Notes payable secured by vehicles,
interest at 8.25% to 10.5%, payable in
monthly installments of $458 to $626,
including interest, final installments
April 1998 through May 2000........... $ 143,829 $ 126,438
Note payable to bank secured by
equipment, interest at 8.5%, payable
in monthly installments of $5,180
including interest, until March
1998.................................. 106,200 49,245
Note payable on equipment, interest at
8.0%, payable in monthly installments
of $1,667 plus interest, until July
1998.................................. 29,301 8,455
Note payable on equipment, interest at
8.64%, payable in monthly installments
of $5,718 including interest, until
August 2000........................... -- 153,491
Note payable to bank secured by
equipment, interest at 8.18%, payable
in monthly installments of $4,036 plus
interest, until January 2000.......... 154,966 108,863
Mortgage payable on building, interest
at 8.53%, payable in monthly
installments of $2,703, including
interest, until September 2005........ 256,971 247,423
Mortgage payable on building, interest
at 9.0%, payable in monthly
installments of $730 including
interest, until June 2006............. 54,888 51,249
Mortgage payable on building, interest
at 3.0% above base rate (8.5% at
February 28, 1998), payable in monthly
installments of $5,666 including
interest, until May 2000.............. 158,086 123,323
Mortgage payable on building, interest
at 2.5% above base rate (8.0% at
February 28, 1998), payable in monthly
installments of $1,569 including
interest, until September 2008........ 106,568 97,260
Notes payable to stockholders, due on
demand, interest payable in monthly
installments.......................... 870,604 818,368
-------------- -----------------
1,881,413 1,784,115
Less -- Current maturities.............. 345,977 1,197,338
-------------- -----------------
$1,535,436 $ 586,777
============== =================

F-138
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Principal payments on long-term debt are due as follows:

Twelve months ending February 28 --
1999.......................... $ 1,197,338
2000.......................... 239,971
2001.......................... 86,829
2002.......................... 30,161
2003.......................... 32,046
Thereafter.................... 197,770
------------
$ 1,784,115
============

7. RELATED-PARTY TRANSACTIONS:

The Company is owed $19,376 from a shareholder-related entity at March 31,
1997 and February 28, 1998. The Company owed $12,763 to a shareholder who is
also an officer of the Company at March 31, 1997. The Company leases its
facilities in Illinois from a shareholder-related entity.

8. INSURANCE CAPTIVE INVESTMENT:

The Company is a shareholder in a captive insurance affiliate. The
obligations of the captive insurance affiliate are secured by reinsurance
contracts with the Zurich American Insurance Group. The Company has issued a
letter of credit in the amount of $145,080 to the insurance affiliate as
security for its proportionate share of the affiliate's obligations under the
reinsurance contracts.

9. INCOME TAXES:

The Company and its subsidiaries file a consolidated federal income tax
return, excluding a subsidiary owned less than the statutory percentage for
inclusion, which files a separate federal income tax return. No provision has
been made for U.S. income taxes on unremitted earnings of foreign subsidiaries.
It is the present intention of management to reinvest a major portion of such
unremitted earnings in foreign operations.

The provision (benefit) for income taxes consisted of:

ELEVEN MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
--------------- ------------------
Current:
U.S. Federal.................... $ 274,628 $ 416,568
State........................... 73,347 101,829
Foreign......................... 160,733 (42,219)
--------------- ------------------
Total current provision.... $ 508,708 $ 476,178
--------------- ------------------
Deferred:
U.S. Federal.................... $ (25,113) $ 34,780
State........................... (6,935) 8,695
Foreign......................... 9,326 1,893
--------------- ------------------
Total deferred provision
(benefit).................. $ (22,722) $ 45,368
--------------- ------------------
Total income tax
provision.................. $ 485,986 $ 521,546
=============== ==================

F-139
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate to income before income
taxes as follows:

YEAR ENDED ELEVEN MONTHS ENDED
MARCH 31, 1997 FEBRUARY 28, 1998
-------------- -------------------
Statutory federal income tax rate....... 34.0% 34.0%
Nondeductible expenses.................. 1.0 1.8
State taxes, net of federal tax benefit
of 34%................................ 3.2 5.7
Other................................... (2.8) (0.9)
-------------- -----
Effective income tax rate............... 35.4% 40.6%
============== =====

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The primary source of temporary differences is depreciation on
property and equipment.

10. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases its facilities and certain vehicles under operating
leases. Rental commitments under noncancellable operating leases are as follows:

Twelve months ending February 28 --
1999............................ $ 312,973
2000............................ 317,536
2001............................ 258,431
2002............................ 231,725
2003............................ 236,326
Thereafter...................... 1,081,884
------------
$ 2,438,875
============

Rent expense under the above leases was $315,000 and $392,000 for the year
ended March 31, 1997 and for the eleven months ended February 28, 1998,
respectively.

CAPITAL LEASES

The Company leases certain equipment under capital leases. The following is
a schedule of future minimum lease payments required under the leases:

Twelve months ending February 28--
1999............................ $ 83,114
2000............................ 30,840
2001............................ 28,602
2002............................ 26,369
2003............................ 24,132
----------
Total minimum lease
payments................ $ 193,057
Less--Amount representing
interest...................... 30,225
----------
Present value of net minimum
lease payments................ $ 162,832
==========

F-140
<PAGE>
IPS HOLDING, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS:

On March 16, 1998, Innovative Valve Technologies, Inc. ("Invatec")
acquired all the outstanding stock of IPS Holding, Ltd. and subsidiaries. The
total consideration was in excess of the recorded amounts of the Company's net
assets. In conjunction with the acquisition, certain notes payable and the line
of credit were paid off.

F-141

<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

PAGE
-----
Prospectus Summary................... 2
Risk Factors......................... 5
The Company.......................... 8
Price Range of Common Stock.......... 9
Dividend Policy...................... 9
Capitalization....................... 10
Selected Financial Information....... 11
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 13
Business............................. 16
Factors That May Affect Future
Results............................ 26
Management........................... 29
Certain Transactions................. 34
Security Ownership of Certain
Beneficial Owners and
Management......................... 36
Description of the Convertible Debt
Securities......................... 37
Description of Capital Stock......... 46
Shares Eligible for Future Sale...... 51
Certain United States Federal Income
Tax Consequences................... 53
Plan of Distribution................. 55
Legal Matters........................ 56
Experts.............................. 56
Additional Information............... 56
Index to Financial Statements........ F-1

[LOGO]

INVATEC

COMMON STOCK
CONVERTIBLE SUBORDINATED
DEBT SECURITIES

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

April __, 1998

================================================================================
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

DELAWARE GENERAL CORPORATION LAW

Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.

Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.

Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.

Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.

Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be

II-1
<PAGE>
determined that he is not entitled to be indemnified by the corporation as
authorized in Section 145. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.

Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.

Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.

Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.

CERTIFICATE OF INCORPORATION

The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) or any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.

BYLAWS

The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in proceeding if such person is a party to and is successful,
on the merits or otherwise, in such proceeding, or if unsuccessful in the
proceeding, but successful as to a matter in such proceeding, the expenses
attributable to such matter and provided further that the Company may, but is
not required to, indemnify such persons who are serving as a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise at the written request of the Company
for the expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding. The Bylaws further
provide that, in the event of

II-2
<PAGE>
any threatened, or pending action, suit or proceeding in which any of the
persons referred to above is a party or is involved and that may give rise to a
right of indemnification under the Bylaws, following written request by such
person, the Company will promptly pay to such person amounts to cover expenses
reasonably incurred by such person in such proceeding in advance of its final
disposition upon the receipt by the Company of (i) a written undertaking
executed by or on behalf of such person providing that such person will repay
the advance if it is ultimately determined that such person is not entitled to
be indemnified by the Company as provided in the Bylaws and (ii) satisfactory
evidence as to the amount of such expenses.

INDEMNIFICATION AGREEMENTS

The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.

The Company maintains liability insurance for the benefit of its directors
and officers.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
2.1* -- Stock Purchase Agreement dated as of December 28, 1996 by and among The Safe Seal Company,
Inc. ("SSI"), certain stockholders of Harley Industries, Inc. ("Harley") and Harley
(Form S-1 (Reg. No. 333-31617), Ex. 2.1).

2.2* -- Stock Transfer Agreement dated as of January 24, 1997 by and among SSI, an individual
stockholder of Harley, Harley and Harley Equipment Corporation (Form S-1 (Reg. No.
333-31617), Ex. 2.2).

2.3* -- Stock Purchase Agreement entered into on June 23, 1997 by and among Invatec, Puget
Investments, Inc., Flickinger-Benicia Inc. and the stockholders named therein (Form S-1
(Reg. No. 333-31617), Ex. 2.3).

2.4* -- Stock Purchase Agreement dated as of July 15, 1997 by and among Invatec, Industrial
Controls & Equipment, Inc., Valve Actuation & Repair Co., Rickco Acquisition, Inc., BAS
Technical Employment Placement Company and the stockholders named therein (Form S-1 (Reg.
No. 333-31617), Ex. 2.4).

2.5* -- Stock Purchase Agreement dated as of February 26, 1997 by and among SSI and the
stockholders of GSV, Inc. (Form S-1 (Reg. No. 333-31617), Ex. 2.5).

2.6* -- Stock and Real Estate Purchase Agreement dated as of May 22, 1997 by and among SSI, Plant
Specialties, Inc. and the stockholders named therein (Form S-1 (Reg. No. 333-31617), Ex.
2.6).

2.7* -- Agreement and Plan of Reorganization dated as of June 27, 1997 by and among Invatec, SVSI
Acquisition, Inc., Southern Valve Service, Inc. and the stockholders named therein (Form
S-1 (Reg. No. 333-31617), Ex. 2.7).

2.8* -- Stock Redemption and Purchase Agreement dated as of June 27, 1997 by and among Invatec,
Lee Roy Jordan, Ralph Buffkin and 55 Leasing and Sales, Inc. (Form S-1 (Reg. No.
333-31617), Ex. 2.8).

2.9* -- Agreement and Plan of Merger dated as of June 27, 1997 by and among Invatec, IVT
Acquisition, Inc. and SSI, as amended as of August 15, 1997 (Form S-1 (Reg. No.
333-31617), Ex. 2.9).

2.10* -- Uniform Provisions for Acquisitions (incorporated into the agreements incorporated herein
as Exhibits 2.3, 2.4 and 2.7) (Form S-1 (Reg. No. 333-31617), Ex. 2.10).

2.11* -- Merger Agreement dated as of December 17, 1997 by and among Invatec, DIVT Acquisition,
LLC, Dalco, Inc. and the stockholders named therein (Form 8-K dated December 17, 1997
(File No. 000-23231), Ex. 2).

2.12* -- Stock Purchase Agreement dated as of February 27, 1998 by and among Invatec, Cypress
Industries, Inc. and the Stockholders named therein (Form 8-K dated February 27, 1998
(File No. 000-23231), Ex. 2).

II-3
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
2.13* -- Merger Agreement, dated as of March 16, 1998, by and among Invatec, IPSCO Acquisition,
Inc., IPS Holding, Ltd. ("IPS") and the subsidiaries and stockholders of IPS named
therein (Form 8-K dated March 16, 1998 (File No. 000-23231), Ex. 2).
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to the
agreements filed or incorporated by reference as Exhibits 2.1 through 2.13 (all of which
are listed therein) have been omitted. Invatec hereby agrees to furnish supplementally a
copy of any such omitted item to the SEC on request.

3.1* -- Certificate of Incorporation of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 3.1).

3.2* -- Bylaws of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 3.2).

4.1* -- Form of Certificate representing Common Stock (Form S-1 (Reg. No. 333-31617), Ex. 4.1).

4.2* -- Registration Rights Agreement dated as of June 9, 1997 by and among Invatec and the
stockholders listed on the signature pages thereto (Form S-1 (Reg. No. 333-31617), Ex.
4.2).

4.3* -- Registration Rights Agreement dated as of June 12, 1997 by and among Invatec and the
persons listed on the signature pages thereto (Form S-1 (Reg. No. 333-31617), Ex. 4.3).

4.4* -- Addendum to Registration Rights Agreement dated as of July 28, 1997 by and among Invatec
and the holders listed on the signature pages thereto (Form S-1 (Reg. No. 333-31617), Ex.
4.4).

4.5* -- Rights Agreement by and between the Company and ChaseMellon Shareholder Services, L.L.C.,
including form of Rights Certificate attached as Exhibit B thereto (Form 10-Q for the
quarterly period ended September 30, 1997 (File No. 000-23231), Ex. 4.5).

4.6* -- Loan Agreement among Invatec, Chase Bank of Texas, National Association, as Agent and as a
lender, and the other lenders referred to therein (Form 10-Q for the quarterly period
ended September 30, 1997 (File No. 000-23231), Ex. 4.6).

4.7 -- Form of Indenture dated as of April , 1998 from Invatec to , as
trustee, relating to the Convertible Debt Securities.
Invatec and certain of its subsidiaries are parties to certain debt instruments under
which the total amount of securities authorized does not exceed 10% of the total assets of
Invatec and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Regulation S-K, Invatec agrees to furnish a copy of those instruments to
the SEC on request.

5.1 -- Opinion of Baker & Botts, L.L.P.

10.1* -- 1997 Incentive Plan of Invatec (Form S-1 (Reg. No. 333-31617), Ex. 10.1).

10.2* -- Form of Employment Agreement dated as of January 27, 1997, between SSI and William E.
Haynes (Form S-1 (Reg. No. 333-31617), Ex. 10.2).

10.3* -- Form of Employment Agreement dated as of January 27, 1997, between SSI and Charles F.
Schugart (Form S-1 (Reg. No. 333-31617), Ex. 10.3).

10.4* -- Form of Employment Agreement dated as of May 6, 1997, between Invatec and Denny A. Rigas
(Form S-1 (Reg. No. 333-31617), Ex. 10.4).

10.5* -- Consulting Agreement dated as of March 27, 1997 by and between Wasatch Capital Corporation
and Invatec (Form S-1 (Reg. No. 333-31617), Ex. 10.5).

10.6* -- Form of Indemnification Agreement between Invatec and each of its directors and officers
(Form S-1 (Reg. No. 333-31617), Ex. 10.6).

21.1* -- List of Subsidiaries (Form 10-K for the year ended December 31, 1997 (File No. 000-23231),
Ex. 21.1).

23.1 -- Consent of Arthur Andersen LLP.

23.2 -- Consents of Deloitte & Touche LLP.

23.3 -- Consent of Crowe, Chizek and Company LLP.

23.4 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1).
</TABLE>
- ------------
* Incorporated by reference.

II-4
<PAGE>

ITEM 22. UNDERTAKINGS.

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

(b) The undersigned registrant hereby undertakes:

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

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;

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

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

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

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

(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.

(5) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415 under the Securities Act, will be filed as part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the Company being acquired involved therein, that
was not subject of and included in the registration statement when it became
effective.

II-5
<PAGE>

SIGNATURES

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

INNOVATIVE VALVE TECHNOLOGIES, INC.

By: /s/ WILLIAM E. HAYNES
WILLIAM E. HAYNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities indicated on April 22, 1998.

SIGNATURE TITLE
- -------------------------------------------------------------------------------
/s/WILLIAM E. HAYNES Chairman of the Board, President and
WILLIAM E. HAYNES Chief Executive Officer (Principal
Executive Officer)

/s/CHARLES F. SCHUGART Chief Financial Officer and Senior
CHARLES F. SCHUGART Vice President-Corporate Development,
Treasurer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)

/s/MICHAEL A. BAKER Director
MICHAEL A. BAKER

/s/ROBERT M. CHISTE Director
ROBERT M. CHISTE

------------------- Director
ARTHUR L. FRENCH

------------------- Director
TOMMY E. KNIGHT

/s/PIERRE R. LATOUR Director
PIERRE R. LATOUR

------------------- Director
T. WAYNE WREN

II-6

EXHIBIT 4.7

INNOVATIVE VALVE TECHNOLOGIES, INC.

to
[_________________________________]

as Trustee

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

INDENTURE

Dated as of April __, 1998

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

Convertible Subordinated Debt Securities

- --------------------------------------------------------------------------------
<PAGE>
INDENTURE, dated as of April __, 1998, between INNOVATIVE VALVE
TECHNOLOGIES, INC., a corporation duly organized and existing under the laws of
the State of Delaware (herein called the "Company"), and [_____________________
____________] a national banking association, as Trustee (herein called the
"Trustee").

RECITALS OF THE COMPANY

The Company has duly authorized the execution and delivery of
this Indenture to provide for the issuance from time to time of its unsecured
convertible subordinated debentures, notes or other evidences of indebtedness
(herein called the "Securities"), to be issued in one or more series as in this
Indenture provided.

This Indenture is subject to the provisions of the Trust
Indenture Act and the rules and regulations of the Commission promulgated
thereunder which are required to be part of this Indenture and, to the extent
applicable, shall be governed by such provisions.

All things necessary to make this Indenture a valid agreement of
the Company in accordance with its terms have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:

ARTICLE I

DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION

SECTION 1.01. DEFINITIONS.

For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:

(a) the terms defined in this Article I have the meanings
assigned to them in this Article I and include the plural as well as the
singular;

(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;

- 1 -
<PAGE>
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein expressly
provided, the term "generally accepted accounting principles" with
respect to any computation required and permitted hereunder shall mean
such accounting principles as are generally accepted and adopted by the
Company at the date of this Indenture; and

(d) the words "herein", "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision; and references herein
to "Articles" and "Sections" are to Articles and Sections of this
Indenture unless otherwise specified.

Certain terms used in Articles V, XII, XIII and XIV are defined
in those Articles.

"Act," when used with respect to any Holder, has the meaning
specified in Section 1.04.

"Additional Amounts" means any additional amounts that are
required by the express terms of a Security or by or pursuant to a Board
Resolution, under circumstances specified therein or pursuant thereto, to be
paid by the Company with respect to certain taxes, assessments or other
governmental charges imposed on certain Holders and that are owing to those
Holders.

"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the specified Person. For purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of the specified Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.

"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.

"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.

"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in Houston, Texas or
New York, New York are authorized or obligated to close by law or executive
order.

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"Change in Control" has the meaning specified in Section 14.06.

"Commission" means the Securities and Exchange Commission as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this Instrument that Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing those duties at such time.

"Common Stock" includes any stock of any class of the Company
which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding-up of
the Company and which is not subject to redemption by the Company. However,
subject to the provisions of Section 13.11, shares issuable on conversion of
Securities shall include only shares of the class designated as Common Stock of
the Company at the date of this Indenture or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which are not subject to redemption by the Company; PROVIDED, that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.

"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean that successor Person.

"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its
President or one of its Vice Presidents, and by its Chief Financial Officer, its
Controller, its Treasurer, one of its Assistant Treasurers, its Secretary or one
of its Assistant Secretaries, and delivered to the Trustee.

"Consolidated Subsidiary" means a Subsidiary whose financial
statements are included in the most recent annual consolidated financial
statements of the Company and its Subsidiaries.

"Convertibility Commencement Date," when used with respect to any
Security, means the date fixed by or pursuant to this Indenture as the first
date on which that Security can be converted pursuant to Article XIII.

"Corporate Trust Office" means the office of the Trustee in New
York, New York at which at any particular time its corporate trust business
principally shall be administered.

"corporation" means a corporation, association, company,
joint-stock company or business trust.

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"Credit Facility" means, in each case as amended, restated,
modified, renewed, extended, increased, refunded, replaced or refinanced in
whole or in part from time to time: (a) the Loan Agreement executed as of
October 23, 1997, to be effective as of October 17, 1997, between the Company
and Chase Bank of Texas, National Associaton as Agent and as a Lender, and the
other lenders party thereto from time to time; [AND (B) ONE OR MORE DEBT
FACILITIES WITH BANKS OR OTHER LENDERS PROVIDING FOR REVOLVING CREDIT LOANS,
TERM LOANS, RECEIVABLES FINANCING (INCLUDING THROUGH THE SALE OF RECEIVABLES TO
SUCH LENDERS OR TO SPECIAL PURPOSE ENTITIES FORMED TO BORROW FROM SUCH LENDERS
AGAINST SUCH RECEIVABLES) OR LETTERS OF CREDIT.]

"Current Market Price" has the meaning specified in Section
13.04.

"Defaulted Interest" has the meaning specified in Section 3.07.

"Designated Senior Indebtedness" means (a) the Credit Facility
and (b) any other Senior Indebtedness of the Company the principal amount of
which is [___________] or more and that has been designated by the Company as
"Designated Senior Indebtedness."

"Dollar" or "$" means at any time a dollar or other equivalent
unit in such coin or currency of the United States as at that time shall be
legal tender for the payment of public and private debts.

"Event of Default" has the meaning specified in Section 5.01.

"Exchange Act" means the Securities Exchange Act of 1934, as
amended.

"Holder" means a Person in whose name a Security of any series is
registered in the Security Register for that series.

"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including the terms of one or more series of Securities established as
contemplated by Section 3.01 and, for all purposes of this instrument and any
such supplemental indenture, the provisions of the Trust Indenture Act that are
deemed to be a part of and to govern this instrument and any such supplemental
indenture, respectively.

"Initial Conversion Price," when used with respect to any
Security to be converted, means the initial price per share of Common Stock
which is fixed for the conversion of that Security by or pursuant to this
Indenture, subject to adjustment after its issuance (or the earliest issuance of
any of its Predecessor Securities) pursuant to Article XIII.

"Interest Payment Date," when used with respect to any Security,
means the Stated Maturity of an installment of interest on that Security.

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"Maturity," when used with respect to any Security, means the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.

"Obligations" in respect of Senior Indebtedness means any
principal, interest, premiums, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documents governing any such
indebtedness.

"Officers' Certificate" means a certificate, in form reasonably
satisfactory to the Trustee, signed by the Chairman of the Board, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, Controller, the Treasurer or an Assistant Treasurer, the Secretary or
an Assistant Secretary, of the Company, and delivered to the Trustee.

"Opinion of Counsel" means a written opinion, in form and
substance reasonably satisfactory to the Trustee, of counsel, who may be counsel
for or an employee of the Company, and who shall be reasonably acceptable to the
Trustee.

"Original Issue Discount Security" means any Security that
provides for an amount less than the principal amount thereof to be due and
payable on a declaration of acceleration of the Maturity thereof pursuant to
Section 5.02.

"Outstanding," when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:

(a) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;

(b) Securities, or portions thereof, for the payment or
redemption of which moneys in the necessary amount have been theretofore
deposited with the Trustee or any Paying Agent (other than the Company)
in trust or set aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the Holders of those
Securities; PROVIDED, that if those Securities, or portions thereof, are
to be redeemed, notice of that redemption has been duly given pursuant
to this Indenture or provision therefor satisfactory to the Trustee has
been made; and

(c) Securities that have been paid pursuant to Section 3.06 or in
exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a
bona fide purchaser in whose hands such Securities are valid obligations
of the Company;

PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or

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waiver hereunder, Securities owned by the Company or any other obligor on the
Securities or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying on any such request, demand,
authorization, direction, notice, consent or waiver, only Securities that the
Trustee knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor on the Securities or any Affiliate of the Company or of such other
obligor.

"Paying Agent" means any Person, which may include the Company,
authorized by the Company to pay the principal of and premium, if any, or
interest on any one or more series of Securities on behalf of the Company.

"Person" means any individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.

"Place of Payment," when used with respect to the Securities of
any series, means the place or places where the principal of (and premium, if
any) and interest on the Securities of that series are payable as specified in
accordance with Section 3.01, subject to the provisions of Section 10.02.

"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by that particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.

"Record Date" means either a Regular Record Date or a Special
Record Date, as applicable.

"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.

"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture on the applicable Redemption Date.

"Regular Record Date" for the interest payable on any Interest
Payment Date means the date specified for that purpose as contemplated by
Section 3.01, or, if not so specified, the last day of the calendar month
preceding that Interest Payment Date if that Interest Payment Date is the 15th
day of the calendar month or the 15th day of the calendar month preceding that
Interest

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Payment Date if that Interest Payment Date is the first day of a calendar month,
whether or not that day is a Business Day.

"Representative" means the indenture trustee or other trustee,
agent or representative for any Senior Indebtedness.

"Repurchase Date" has the meaning specified in Section 14.01.

"Repurchase Event" has the meaning specified in Section 14.06.

"Repurchase Price" has the meaning specified in Section 14.01.

"Responsible Officer" means, when used with respect to the
Trustee, the chairman of the Board of Directors, any vice chairman of the Board
of Directors, the chairman of the trust committee, the chairman of the executive
committee, any vice chairman of the executive committee, the president, any vice
president (whether or not designated by numbers or words added before or after
the title "vice president"), the cashier, the secretary, the treasurer, any
trust officer, any assistant trust officer, any assistant cashier, any assistant
secretary, any assistant treasurer, or any other officer or assistant officer of
the Trustee customarily performing functions similar to those performed by the
Persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.

"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.05.

"Senior Indebtedness" means the principal of and premium, if any,
and interest on (a) all secured indebtedness of the Company for money borrowed
under any Credit Facility, whether outstanding on the date of execution of this
Indenture or thereafter created, incurred or assumed, and (b) all secured
indebtedness of the Company for money borrowed, whether outstanding on the date
of execution of this Indenture or thereafter created, incurred or assumed, and
any amendments, renewals, extensions, modifications, refinancings, replacements
and refundings of any or all thereof. For the purposes of this definition,
"indebtedness for money borrowed" when used with respect to the Company means
(a) any obligation of, or any obligation guaranteed by, the Company for the
repayment of borrowed money (including without limitation fees, penalties or
other obligations in respect thereof), whether or not evidenced by bonds,
debentures, notes or other written instruments, (b) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument, and (c) any obligation of, or any such obligation guaranteed by, the
Company for the payment of rent or other amounts under a lease of property or
assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.

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"Significant Subsidiary" means at any time a Subsidiary that is
at that time a "significant subsidiary" of the Company within the meaning of
Rule 1.02(w) of Regulation S-X under the Securities Act of 1933, as amended and
in effect on the date of this Indenture.

"Special Record Date" for the payment of any Defaulted Interest
on the Securities of any series means a date fixed by the Trustee pursuant to
Section 3.07.

"Stated Maturity," when used with respect to any Security or any
installment of interest thereon, means the date specified in that Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.

"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock that ordinarily
has voting power in the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.

"Termination of Trading" has the meaning specified in Section
14.06.

"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this Indenture was executed; PROVIDED, HOWEVER,
that in the event the Trust Indenture Act of 1939 is amended after that date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.

"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.

"Vice President," when used with respect to the Company, means
any vice president, whether or not designated by a number or a word or words
added before or after the title "vice president."

"Yield to Maturity," when used with respect to any Original Issue
Discount Security, means the yield to maturity, if any, set forth on the face
thereof.

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SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS.

On any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company shall furnish
to the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by officers of the Company, or an Opinion
of Counsel, if to be given by counsel, and shall comply with the requirements of
the Trust Indenture Act and any other requirement set forth in this Indenture.

Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:

(a) a statement that each individual or firm signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;

(b) a brief statement as to the nature and scope of the
examination or investigation on which the statements or opinions
contained in such certificate or opinion are based;

(c) a statement that, in the opinion of each such individual or
such firm, he has or they have made such examination or investigation as
is necessary to enable him or them to express an informed opinion as to
whether or not such covenant or condition has been complied with; and

(d) a statement as to whether, in the opinion of each such
individual or such firm, such condition or covenant has been complied
with.

SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.

In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any Person may certify or
give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, on a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters on which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, on a certificate of public officials or on a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the

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possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

SECTION 1.04. ACTS OF HOLDERS; RECORD DATES.

(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section. The record of any
meeting of Holders shall be proved in the manner provided in Section 15.06.

(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.

(c) The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining the
Holders entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action, or to vote on any action, authorized or
permitted to be given or taken by Holders. If not set by the Company prior to
the first solicitation of a Holder made by any Person in respect of any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section 7.01)
prior to such first solicitation or vote, as the case may be. With regard to any
record date, only the Holders on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.
Notwithstanding the foregoing, the Company shall not set a record date for, and
the provisions of this paragraph shall not apply with respect to, any Act by the
Holders pursuant to Section 5.01, 5.02 or 5.12.

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(d) The ownership of Securities of any series shall be proved by
the Security Register for that series.

(e) Any Act of the Holder of any Security shall bind every future
Holder of the same Security and the Holder of every Security issued on the
registration of transfer therefor or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.

(f) Without limiting the foregoing, a Holder entitled hereunder
to give or take any action hereunder with regard to any particular Security may
do so with regard to all or any part of the principal amount of such Security or
by one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any different part of such principal amount.

SECTION 1.05. NOTICES, ETC., TO TRUSTEE AND COMPANY.

Any Act of Holders or other documents provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with,

(a) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its [_______________________
_________________________________________________________________
_______________] or at such superseding address has been previously
furnished in

writing to the Holders and the Company by the Trustee; or

(b) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company, addressed to it at 2 Northpoint Drive, Suite
300, Houston, Texas 77060 or at such superseding address as has been
previously furnished in writing to the Trustee by the Company.

All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, registered or certified with postage prepaid, if
mailed; when answered back if telexed; when receipt acknowledged, if telecopied;
and the next Business Day after timely delivery to the courier, if sent by
nationally recognized overnight air courier guaranteeing next day delivery.

SECTION 1.06. NOTICE TO HOLDERS; WAIVER.

Where this Indenture provides for notice to Holders of Securities
of any series of any event, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if made, given, furnished or filed in
writing to each Holder affected by such event, at his address as it appears in
the Security Register for that series, not later than the latest date (if any),
and not earlier than the

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earliest date (if any), prescribed for the giving of such notice. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance on such
waiver. All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, registered or certified with postage
prepaid, if mailed; when answered back if telexed; when receipt acknowledged, if
telecopied; and the next Business Day after timely delivery to the courier, if
sent by nationally recognized overnight air courier guaranteeing next day
delivery.

In the case of any notice this Indenture provides shall be given
by mail, if, by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.

SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT.

If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act or another provision that would be required
or deemed under such Act to be a part of and govern this Indenture if this
Indenture were subject thereto, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or to be excluded, as the case
may be.

SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS.

The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.

SECTION 1.09. SUCCESSORS AND ASSIGNS.

All covenants and agreements in this Indenture by the Company and
the Trustee shall bind each of their respective successors and assigns, whether
so expressed or not.

SECTION 1.10. SEPARABILITY CLAUSE.

In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

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SECTION 1.11. BENEFITS OF INDENTURE.

Nothing in this Indenture or in the Securities, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, the Holders of Securities and, with respect to Article
XII, the holders of Senior Indebtedness, any benefit or any legal or equitable
right, remedy or claim under this Indenture.

SECTION 1.12. GOVERNING LAW.

THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
BUT WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.

SECTION 1.13. LEGAL HOLIDAYS.

In any case where any Interest Payment Date, Redemption Date or
Stated Maturity of any Security or the last date on which a Holder has the right
to convert his Securities shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Securities) payment of interest or
principal and premium, if any, or conversion of the Securities need not be made
on such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date or Redemption Date, or
at the Stated Maturity, or on such last day for conversion; PROVIDED, that no
interest shall accrue for the period from and after such Interest Payment Date,
Redemption Date or Stated Maturity, as the case may be, to the next succeeding
Business Day.

SECTION 1.14. NO SECURITY INTEREST CREATED.

Nothing in this Indenture or in the Securities, express or implied,
shall be construed to constitute a security interest under the Uniform
Commercial Code or similar legislation, as now or hereafter enacted and in
effect in any jurisdiction where property of the Company or its Subsidiaries is
or may be located.

SECTION 1.15. LIMITATION ON INDIVIDUAL LIABILITY.

No recourse under or on any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, either directly or through the Company,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever shall attach
to, or is or shall be incurred by, the incorporators, shareholders, officers or
directors, as such, of the Company or any

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<PAGE>
successor Person, or any of them, because of the creation of the indebtedness
hereby authorized, or under or by reason of the obligations, covenants or
agreements contained in this Indenture or in any Security or implied therefrom;
and that any and all such personal liability of every name and nature, either at
common law or in equity or by constitution or statute, of, and any and all such
rights and claims against, every such incorporator, shareholder, officer or
director, as such, because of the creation of the indebtedness hereby
authorized, or under or by reason of the obligations, covenants or agreements
contained in this Indenture or in any Security or implied therefrom, are hereby
expressly waived and released as a condition of, and as a consideration for, the
execution of this Indenture and the issuance of such Security.

ARTICLE II

SECURITY FORMS

SECTION 2.01. FORMS GENERALLY.

The Securities of each series shall be in substantially such form
or forms as shall be established by or pursuant to a Board Resolution or in one
or more indentures supplemental hereto, in each case with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of the Securities. A copy of the Board
Resolution establishing the form or forms of Securities or of any series of
Securities shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the Company
Order contemplated by Section 3.03 for the authentication and delivery of those
Securities.

The definitive Securities shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing those Securities, as evidenced by their
execution thereof.

SECTION 2.02. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTIFICATION.

The Trustee's certificate of authentification shall be in
substantially the following form:

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"This is one of the Securities of the series designated, described or
provided for in the within-mentioned Indenture.

[__________________________________]

AS TRUSTEE

By__________________________
AUTHORIZED SIGNATORY".

ARTICLE III

THE SECURITIES

SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES.

The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall
be established in or pursuant to a Board Resolution, and set forth in an
Officers' Certificate, or established in one or more indentures supplemental
hereto, prior to the issuance of Securities of any series,

(a) the title of the Securities of the series (which shall
distinguish the Securities of the series from the Securities of all
other series);

(b) any limit on the aggregate principal amount of the Securities
of the series which may be authenticated and delivered under this
Indenture (except for Securities authenticated and delivered on
registration of transfer of, or in exchange for, or in lieu of, other
Securities of the series pursuant to Section 3.04, 3.05, 3.06, 9.06,
11.07, 13.02 or 14.05);

(c) the date or dates on which the principal of and any premium
on the Securities of the series is payable or the method of
determination thereof;

(d) the rate or rates (which may vary among Securities of the
series), or the method of determination thereof, at which the Securities
of the series shall bear interest, if any, whether and under what
circumstances Additional Amounts with respect to such Securities shall
be payable, the date or dates from which that interest shall accrue, the
Interest

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<PAGE>
Payment Dates on which that interest shall be payable and, if other than
as set forth in Section 1.01, the Regular Record Date for the interest
payable on such Securities on any Interest Payment Date;

(e) the place or places where, subject to the provisions of
Section 10.02, the principal of, any premium or interest on and any
Additional Amounts with respect to the Securities of the series shall be
payable;

(f) the period or periods within which, the price or prices
(whether denominated in cash, securities or otherwise) at which and the
terms and conditions on which (which period or periods, price or prices
and terms and conditions may vary among Securities of the series)
Securities of the series may be redeemed, in whole or in part, at the
option of the Company, if the Company is to have that option, and the
manner in which the Company must exercise any such option;

(g) the obligation, if any, of the Company to redeem or purchase
Securities of the series pursuant to any sinking fund or analogous
provisions or at the option of a Holder thereof and the period or
periods within which, the price or prices (whether denominated in cash,
securities or otherwise) at which and the terms and conditions on which
(which period or periods, price or prices and terms and conditions may
vary among Securities of the series) Securities of the series shall be
redeemed or purchased in whole or in part pursuant to that obligation;

(h) the denomination in which any Securities of the series shall
be issuable, if other than denominations of $1,000 and any integral
multiple thereof;

(i) the currency or currencies (including composite currencies)
in which payment of the principal of, any premium or interest on and any
Additional Amounts with respect to the Securities of the series shall be
payable if other than Dollars;

(j) if the principal of, any premium or interest on or any
Additional Amounts with respect to the Securities of the series are to
be payable, at the election of the Company or a Holder thereof, in a
currency or currencies (including composite currencies) other than that
in which the Securities are stated to be payable, the currency or
currencies (including composite currencies) in which payment of the
principal of or any premium or interest on or any Additional Amounts
with respect to Securities of the series as to which such election is
made shall be payable, and the periods within which and the terms and
conditions on which that election is to be made;

(k) if the amount of payments of principal of, any premium or
interest on or any additional amounts with respect to the Securities of
the series may be determined with reference to any commodities,
currencies or indices, or values, rates or prices, the manner in which
those amounts shall be determined;

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(l) if other than the entire principal amount thereof, the
portion of the principal amount of Securities of the series which shall
be payable on declaration of acceleration of the Maturity thereof
pursuant to Section 5.02;

(m) any additional means of satisfaction and discharge of this
Indenture with respect to Securities of the series pursuant to Section
4.01 and any additional conditions to discharge pursuant to Section
4.01;

(n) any deletions or modifications of or additions to the Events
of Default set forth in Section 5.01 or covenants of the Company set
forth in Article X pertaining to the Securities of the series;

(o) if the Securities of the series are to be subordinated
pursuant to Article XII to unsecured indebtedness or other liabilities,
the modification for purposes only of the series of the definition of
"Senior Indebtedness" herein; and

(p) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture).

All Securities of any one series shall be substantially
identical, except as to denomination and except as is otherwise provided in this
Section 3.01 or may otherwise be provided in or pursuant to the Board Resolution
referred to above and (subject to Section 3.03) set forth, or determined in the
manner provided, in the Officers' Certificate referred to above or in any such
indenture supplemental hereto.

At the option of the Company, interest on the Securities of any
series that bears interest may be paid by mailing a check to the address of any
Holder as such address shall appear in the Security Register.

If any of the terms of the series are established by action taken
pursuant to a Board Resolution, a copy of an appropriate record of that action
together with that Board Resolution shall be certified by the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Officers' Certificate setting forth the terms of the series.

SECTION 3.02. DENOMINATIONS.

The Securities of each series shall be issuable in such
denominations as shall be specified as contemplated by Section 3.01. In the
absence of any such provisions with respect to the Securities of any series, the
Securities of that series denominated in Dollars shall be issuable in
denominations of $1,000 and any integral multiple thereof. Unless otherwise
provided as contemplated by Section 3.01 with respect to any series of
Securities, any Securities of a series denominated in a currency other than
Dollars shall be issuable in denominations that are the equivalent, as
determined by the Company by reference to the noon buying rate in The City of
New

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York for cable transfers for such currency, as such rate is reported or
otherwise made available by the Federal Reserve Bank of New York, on the
applicable issue date for such Securities, of $1,000 and any integral multiple
thereof.

SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.

The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President, its Chief
Financial Officer or one of its Vice Presidents, under its corporate seal or a
facsimile thereof reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.

Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities of any series
executed by the Company to the Trustee for authentication, together with a
Company Order for the authentication and delivery of those Securities; and the
Trustee in accordance with such Company Order shall either at one time or from
time to time pursuant to such instructions as may be described therein
authenticate and deliver such Securities as in this Indenture provided and not
otherwise. Such Company Order shall specify (or will state that an Officers'
Certificate will specify) the amount of Securities to be authenticated and the
date on which the original issue of Securities is to be authenticated, and shall
certify (or a related Officers' Certificate shall certify) that all conditions
precedent to the issuance of such Securities contained in this Indenture have
been complied with.

If the form or terms of the Securities of any series have been
established in or pursuant to one or more Board Resolutions as permitted by
Sections 2.01 and 3.01, in authenticating those Securities, and accepting the
additional responsibilities under this Indenture in relation to those
Securities, the Trustee shall be entitled to receive, and (subject to Section
6.01) shall be fully protected in relying on, an Opinion of Counsel stating:

(a) if the form of those Securities has been established by or
pursuant to Board Resolution as permitted by Section 2.01, that such
form has been established in conformity with the provisions of this
Indenture;

(b) if the terms of those Securities have been established by or
pursuant to Board Resolution as permitted by Section 3.01, that such
terms have been established in conformity with the provisions of this
Indenture; and

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<PAGE>
(c) that those Securities, when authenticated and delivered by
the Trustee and issued by the Company in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute legal,
valid and binding obligations of the Company, enforceable in accordance
with their terms, except as such enforcement is subject to the effect of
(i) bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally, (ii) general
principles of equity (regardless of whether that enforcement is
considered in a proceeding in equity or at law) and (iii) any implied
covenant of good faith and fair dealing.

If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose unless there appears on such Security
a certificate of authentication substantially in the form provided for herein
duly executed by the Trustee by manual signature, and such certificate on any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder and is entitled to the
benefits of the Indenture. Notwithstanding the foregoing, if any Security shall
have been authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such Security to the Trustee for
cancellation as provided in Section 3.09 together with a written statement
(which need not comply with Section 1.03 and need not be accompanied by an
Opinion of Counsel) stating that such Security has never been issued and sold by
the Company, for all purposes of this Indenture such Security shall be deemed
never to have been authenticated and delivered hereunder and shall never be
entitled to the benefits of this Indenture.

The Trustee may appoint an Authenticating Agent pursuant to the
terms of Section 6.14.

SECTION 3.04. TEMPORARY SECURITIES.

Pending the preparation of definitive Securities of any series,
the Company may execute, and on Company Order the Trustee shall authenticate and
deliver, temporary Securities of that series which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the officers executing those Securities may determine, as
evidenced by their execution of those Securities. Every such temporary Security
shall be executed by the Company and shall be authenticated and delivered by the
Trustee on the same conditions and in substantially the same manner, and with
the same effect, as the definitive Security or Securities in lieu of which it is
issued.

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<PAGE>
If temporary Securities of any series are issued, the Company
will cause definitive Securities of that series to be prepared without
unreasonable delay. After the preparation of definitive Securities of any
series, the temporary Securities of that series shall be exchangeable for those
definitive Securities on surrender of the temporary Securities at any office or
agency of the Company designated pursuant to Section 10.02, without charge to
the Holder. On surrender for cancellation of any one or more temporary
Securities of any series, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor one or more definitive Securities
of the same series and of like tenor, of any authorized denominations and of a
like aggregate principal amount. Until so exchanged the temporary Securities of
any series shall in all respects be entitled to the same benefits under this
Indenture as definitive Securities of that series.

SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.

(a) The Company shall cause to be kept for each series of
Securities at one of the offices or agencies maintained pursuant to Section
10.02 a register (the register maintained in such office and in any other office
or agency of the Company in a Place of Payment being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities of that series. The
Trustee is hereby initially appointed "Security Registrar" for the purpose of
registering Securities and transfers of Securities as herein provided.

(b) On surrender for registration of transfer of any Security of
any series at the office or agency in a Place of Payment for that series, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Securities of
the same series and of like tenor, of any authorized denominations and of a like
aggregate principal amount.

At the option of the Holder, Securities of any series may be
exchanged for other Securities of the same series and of like tenor, of any
authorized denominations and of a like aggregate principal amount, on surrender
of the Securities to be exchanged at such office or agency. Whenever any
Securities are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Securities that the Holder making
the exchange is entitled to receive.

(c) All Securities issued on any registration of transfer or
exchange of Securities shall be the valid obligations of the Company, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered on such registration of transfer or exchange.

(d) Every Security presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Trustee) be
duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.

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<PAGE>
(e) No service charge shall be made for any registration of
transfer or exchange of Securities, except as provided in Section 3.06. The
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Securities, other than exchanges pursuant to Section
3.04, 9.06, 11.07, 13.02 or 14.05 not involving any transfer.

(f) The Company shall not be required (i) to issue, register the
transfer of or exchange Securities of any series during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption of Securities of that series selected for redemption and ending at
the close of business on the day of the mailing of the relevant notice of
redemption or (ii) to register the transfer of or exchange any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part.

SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.

If any mutilated Security of any series is surrendered to the
Trustee, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a new Security of the same series and of like tenor
and principal amount and bearing a number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (a)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (b) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same series and of like tenor and principal amount and bearing a number
not contemporaneously outstanding. The Trustee may charge the Company for the
Trustee's expenses in replacing such Security.

In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.

On the issuance of any new Security under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security of any series issued pursuant to this Section
3.06 in lieu of any destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued
hereunder.

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The provisions of this Section are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.

Interest on any Security which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the Person
in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest. Unless otherwise provided with respect to the Securities of any
series, payment of interest may be made at the option of the Company by check
mailed or delivered to the address of any Person entitled thereto as such
address shall appear in the Securities Register.

Any interest on any Security of any series which is payable, but
is not punctually paid or duly provided for, on any Interest Payment Date
(herein called "Defaulted Interest") shall forthwith cease to be payable to the
Holder on the relevant Regular Record Date by virtue of having been such Holder,
and such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (a) or (b) below:

(a) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) of that series are registered at the
close of business on a Special Record Date for the payment of such
Defaulted Interest which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Security and the date of the
proposed payment, and at the same time the Company shall deposit with
the Trustee an amount of money equal to the aggregate amount proposed to
be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder of Securities of
that series at his address as it appears in the Security Register, not
less than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so mailed, such Defaulted Interest shall be paid to
the Persons in whose names the Securities (or their respective
Predecessor Securities) of that series are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to the following clause (b).

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(b) The Company may make payment of any Defaulted Interest on the
Securities of any series in any other lawful manner not inconsistent
with the requirements of any securities exchange on which those
Securities may be listed, and upon such notice as may be required by
such exchange, if, after notice given by the Company to the Trustee of
the proposed payment pursuant to this clause (b), such manner of payment
shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section 3.07, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.

In the case of any Security of any series which is converted
after any Regular Record Date and on or prior to the next succeeding Interest
Payment Date (other than any Security whose Maturity is prior to such Interest
Payment Date), interest on that Security whose Stated Maturity is on such
Interest Payment Date shall be payable on such Interest Payment Date
notwithstanding such conversion, and such interest (whether or not punctually
paid or duly provided for) shall be paid to the Person in whose name that
Security (or one or more of its Predecessor Securities) is registered at the
close of business on such Regular Record Date, PROVIDED, HOWEVER, that
Securities of any series so surrendered for conversion shall (except in the case
of those Securities or portions thereof called for redemption) be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Company of an amount equal to the interest payable on such Interest Payment Date
on the principal amount being surrendered for conversion. Except as otherwise
expressly provided in the immediately preceding sentence, in the case of any
Security of any series which is converted, interest whose Stated Maturity is
after the date of conversion of that Security shall not be payable.

SECTION 3.08. PERSONS DEEMED OWNERS.

Prior to due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name that Security is registered as the owner of
that Security for the purpose of receiving payment of principal of and premium,
if any, and (subject to Section 3.07) interest on that Security and for all
other purposes whatsoever, whether or not that Security be overdue, and neither
the Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.

SECTION 3.09. CANCELLATION.

All Securities surrendered for payment, redemption, registration
of transfer, exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee and shall be promptly canceled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly

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canceled by the Trustee. No Securities shall be authenticated in lieu of or in
exchange for any Securities canceled as provided in this Section, except as
expressly permitted by this Indenture. All canceled Securities held by the
Trustee shall be disposed of as directed by a Company Order.

SECTION 3.10. COMPUTATION OF INTEREST.

Except as otherwise specified as contemplated by Section 3.01 for
Securities of any series, interest on the Securities of each series shall be
computed on the basis of a 360-day year of twelve 30-day months.

ARTICLE IV

SATISFACTION AND DISCHARGE

SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE.

This Indenture shall on Company Request cease to be of further
effect (except as expressly provided for in this Article IV), and the Trustee,
at the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when

(a) either

(i) all Securities theretofore authenticated and delivered
(other than (A) Securities that have been destroyed, lost or
stolen and which have been replaced or paid as provided in
Section 3.06 and (B) Securities for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have
been delivered to the Trustee for cancellation; or

(ii) all those Securities not theretofore delivered to the
Trustee for cancellation

(A) have become due and payable, or

(B) will become due and payable at their Stated
Maturity within one year, or

(C) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name,
and at the expense, of the Company, or

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(D) are delivered to the Trustee for conversion in
accordance with Article XIII,

and the Company, in the case of (A), (B), (C) or (D) above, has
irrevocably deposited or caused to be deposited with the Trustee as
trust funds in trust for the purpose of paying an amount in cash
sufficient (without consideration of any investment of such cash) to pay
and discharge the entire indebtedness on those Securities not
theretofore delivered to the Trustee for cancellation for principal and
premium, if any, and interest and Additional Amounts, if any, to the
date of such deposit (in the case of Securities that have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may
be; PROVIDED that the Trustee is irrevocably instructed to apply such
amount to said payments with respect to those Securities;

(b) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and

(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture,
the following rights or obligations under the Securities and this Indenture
shall survive until otherwise terminated or discharged hereunder: (a) Article
XIII, Article XIV and the Company's obligations under Sections 3.04, 3.05, 3.06,
10.02 and 10.03, in each case with respect to any Securities described in
subclause (ii) of clause (a) of this Section 4.01, (b) this Article IV, (c) the
rights, powers, trusts, duties and immunities of the Trustee hereunder,
including the obligations of the Company to the Trustee under Section 6.07, and
the obligations of the Trustee or the Company to any Authenticating Agent under
Section 6.14 and (d) if money shall have been deposited with the Trustee
pursuant to subclause (ii) of clause (a) of this Section 4.01, the rights of
Holders of any Securities described in that subclause (ii) to receive, solely
from the trust fund described in that subclause (ii), payments in respect of the
principal of, and premium (if any) and interest on and Additional Amounts (if
any) with respect to, those Securities when such payments are due.

SECTION 4.02. APPLICATION OF TRUST MONEY.

Subject to the provisions of the last paragraph of Section 10.03,
all money deposited with the Trustee pursuant to Section 4.01 shall be held in
trust and applied by it, in accordance with the provisions of the Securities and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal, premium, if any,
interest and Additional Amounts, if any, for whose payment such money has been
deposited with the Trustee. All moneys deposited with the Trustee pursuant to
Section 4.01 (and held by it or any Paying Agent) for the

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<PAGE>
payment of Securities subsequently converted shall be returned to the Company on
Company Request.

SECTION 4.03. REINSTATEMENT.

If the Trustee or the Paying Agent is unable to apply any money
in accordance with this Article IV by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article IV until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust with respect to the Securities;
PROVIDED, HOWEVER, that if the Company makes any payment of principal of, any
premium or interest on or any Additional Amounts with respect to any Security
following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of the Securities to receive such payment from the
money so held in trust.

ARTICLE V

REMEDIES

SECTION 5.01. EVENTS OF DEFAULT.

"Event of Default," wherever used herein with respect to
Securities of any series, means any one of the following events (whatever the
reason for that Event of Default and whether it shall be occasioned by the
provisions of Article XII or be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body),
unless it either is inapplicable to a particular series of Securities or is
specifically deleted or modified in or pursuant to the supplemental indenture or
Board Resolution establishing that series or in the form of the Security for
that series;

(a) default in the payment of the principal of or premium, if
any, on any Security of that series at its Maturity, whether or not such
payment is prohibited by the provisions of Article XII; or

(b) default in the payment of any interest on or any Additional
Amounts with respect to any Security of that series when it becomes due
and payable, whether or not such payment is prohibited by the provisions
of Article XII, and continuance of such default for a period of 30 days;
or

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<PAGE>
(d) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section 5.01 specifically dealt with or which has been expressly
included in this Indenture solely for the benefit of one or more series
of Securities other than that series), and continuance of such default
or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of that series a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or

(e) default under one or more bonds, notes, debentures or other
evidences of indebtedness for money borrowed by the Company or any
Consolidated Subsidiary or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company
or any Consolidated Subsidiary, whether such indebtedness now exists or
shall hereafter be created, which default individually or in the
aggregate shall constitute a failure to pay the principal of
indebtedness in excess of $10,000,000 when due and payable after the
expiration of any applicable grace period with respect thereto or shall
have resulted in the principal of indebtedness in excess of $10,000,000
becoming or being declared due and payable prior to the date on which it
would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or
annulled, within a period of 30 days after there shall have been given,
by registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of that series a written notice
specifying such default and requiring the Company to cause such
indebtedness to be discharged or cause such acceleration to be rescinded
or annulled and stating that such notice is a "Notice of Default"
hereunder; or

(f) the filing or commencement of an involuntary case or other
proceeding against the Company or any Significant Subsidiary of the
Company seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law
now or thereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 90
days; or an order for relief shall be entered against the Company or any
Significant Subsidiary of the Company under the federal bankruptcy laws
as now or hereafter in effect; or

(g) the filing or commencement by the Company or any Significant
Subsidiary of the Company of a voluntary case or other proceeding
seeking liquidation, reorganization or other similar relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver,

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liquidator, custodian or other similar official of it or any substantial
part of its property, or the Company or any Significant Subsidiary of
the Company shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment for
the benefit of creditors; or

(h) any other Event of Default provided with respect to
Securities of that series as contemplated by Section 3.01.

Notwithstanding the foregoing provisions of this Section 5.01, if
the principal of, any premium or any interest on or any Additional Amounts with
respect to the Securities of any series is payable in a currency or currencies
(including a composite currency) other than Dollars and such currency (or
currencies) is (or are) not available to the Company for making payment thereof
because of the imposition of exchange controls or other circumstances beyond the
control of the Company (a "Conversion Event"), the Company will be entitled to
satisfy its obligations to Holders of the Securities of that series by making
such payment in Dollars in an amount equal to the Dollar equivalent of the
amount payable in such other currency currencies, as determined by the Company
by reference to the noon buying rate in The City of New York for cable transfers
for such currency ("Exchange Rate"), as such Exchange Rate is certified for
customs purposes by the Federal Reserve Bank of New York on the date of such
payment, or, if such rate is not then available, on the basis of the most
recently available Exchange Rate. Notwithstanding the foregoing provisions of
this Section 5.01, any payment made under such circumstances in Dollars where
the required payment is in a currency or currencies other than Dollars will not
constitute an Event of Default under this Indenture.

Promptly after the occurrence of a Conversion Event respecting
Securities of any series, the Company shall give written notice thereof to the
Trustee; and the Trustee, promptly after receipt of such notice, shall give
notice thereof in the manner provided in Section 1.06 to the Holders of those
Securities. Promptly after the making of any payment in Dollars as a result of a
Conversion Event respecting Securities of any series, the Company shall give
notice in the manner provided in Section 1.06 to the Holders of those
Securities, setting forth the applicable Exchange Rate and describing the
calculation of such payments.

SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.

If an Event of Default with respect to any Outstanding Securities
of any series occurs and is continuing, then in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Securities of (a) the series affected by such default (in the case of an Event
of Default described in clause (a), (b), or (h) of Section 5.01) or (b) all
series of Securities (subject to the immediately following sentence, in the case
of other Events of Default) may declare the principal amount (or, if any such
Securities are Original Issue Discount Securities, such portion of the principal
amount as may be specified in the terms of that series) of all the Securities of
the series affected by such default or all series, as the case may be, to be due
and

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payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), and on any such declaration such principal amount (or
specified amount) shall become immediately due and payable. If an Event of
Default described in clause (f) or (g) of Section 5.01 shall occur, the
principal amount of the Outstanding Securities of all series IPSO FACTO shall
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.

At any time after such a declaration of acceleration with respect
to Securities of any series (or of all series, as the case may be) has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as hereinafter in this Article V provided, the Holders of a
majority in principal amount of the Outstanding Securities of that series (or of
all series, as the case may be), by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if

(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay

(i) all overdue interest on, and any Additional Amounts
with respect to, all Securities of that series (or of all series,
as the case may be),

(ii) the principal of (and premium, if any, on) any
Securities of that series (or of all series, as the case may be)
which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate or rates prescribed
therefor in such Securities (in the case of Original Issue
Discount Securities, the Securities' Yield to Maturity),

(iii) to the extent that payment of such interest is
lawful, interest on overdue interest and any Additional Amounts
at the rate or rates prescribed therefor in such Securities (in
the case of Original Issue Discount Securities, the Securities'
Yield to Maturity) and

(iv) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel;

and

(b) all Events of Default with respect to Securities of that
series (or of all series, as the case may be), other than the
non-payment of the principal of Securities of that series (or of all
series, as the case may be) which have become due solely by such
declaration of acceleration, have been cured or waived as provided in
Section 5.13.

No such rescission shall affect any subsequent default or impair any right
consequent thereon.

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SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.

The Company covenants that if

(a) default is made in the payment of any interest on or any
Additional Amounts with respect to any Security of any series when such
interest or Additional Amounts shall have become due and payable and
such default continues for a period of 30 days, or

(b) default is made in the payment of the principal of or
premium, if any, on any Security of any series at the Maturity thereof,

the Company will, on demand of the Trustee, pay to it, for the benefit of the
Holders of the Securities of that series, the whole amount then due and payable
on those Securities for principal and premium, if any, and interest and any
Additional Amounts, and, to the extent that payment of such interest shall be
legally enforceable, interest on any overdue principal and premium, if any, and
on any overdue interest and Additional Amounts, at the rate borne by those
Securities (or in the case of Original Issue Discount Securities, the Yield to
Maturity of those Securities), and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee and
each predecessor Trustee, their respective agents and counsel, and any other
amounts due the Trustee or any predecessor Trustee under Section 6.07.

If the Company fails to pay such amounts forthwith on such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and unpaid
and may prosecute any such proceeding to judgment or final decree, and may
enforce the same against the Company (or any other obligor on those Securities)
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Company (or any other obligor on those
Securities), wherever situated.

If an Event of Default with respect to Securities of any series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of those Securities by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.

SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM.

In case of any judicial proceeding relative to the Company (or
any other obligor on the Securities of any series), its property or its
creditors, the Trustee shall be entitled and empowered, by intervention in such
proceeding or otherwise, to take any and all actions authorized under the Trust
Indenture Act in order to have the claims of the applicable Holders and the
Trustee allowed in any such proceeding. In particular, the Trustee shall be
authorized to collect and receive any

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moneys or other property payable or deliverable on any such claims and to
distribute the same; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each applicable Holder to make such payments to the Trustee and,
in the event that the Trustee shall consent to the making of such payments
directly to the applicable Holders, to pay to the Trustee any amount due it and
each predecessor Trustee for the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, and any other amounts due the Trustee under
Section 6.07.

No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder of
Securities of any series any plan of reorganization, arrangement, adjustment or
composition affecting those Securities or the rights of any Holder thereof or to
authorize the Trustee to vote in respect of the claim of that Holder in any such
proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the Holders of
those Securities, vote for the election of a trustee in bankruptcy or similar
official and may be a member of the Creditors' Committee.

SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.

All rights of action and claims under this Indenture or the
Securities of any series may be prosecuted and enforced by the Trustee without
the possession of any of those Securities or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee and each
predecessor Trustee and their respective agents and counsel, be for the ratable
benefit of the Holders of the Securities in respect of which such judgment has
been recovered.

SECTION 5.06. APPLICATION OF MONEY COLLECTED.

Any money collected by the Trustee pursuant to this Article V
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
of, premium, if any, or interest on or any Additional Amounts with respect to
the Securities of any series, on presentation of those Securities and the
notation thereon of the payment if only partially paid and on surrender thereof
if fully paid:

FIRST: Subject to Article XII, to the holders of Senior
Indebtedness;

SECOND: To payment of all amounts due the Trustee under Section
6.07;

THIRD: To the payment of the amounts then due and unpaid for
principal of, premium, if any, and interest on and any Additional Amounts with
respect to the Securities in respect of which or for the benefit of which such
money has been collected, ratably,

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without preference or priority of any kind, according to the amounts due
and payable on those Securities for principal, premium, if any, interest
and Additional Amounts, respectively; and

FOURTH: The balance, if any, to the Company or any other Person
or Persons determined to be entitled thereto.

To the fullest extent allowed under applicable law, if for the
purpose of obtaining judgment against the Company in any court it is necessary
to convert the sum due in respect of the principal of or any premium or interest
on or any Additional Amounts with respect to the Securities of any series (the
"Required Currency") into a currency in which a judgment will be rendered (the
"Judgment Currency"), the rate of exchange used will be the rate at which in
accordance with normal banking procedures the Trustee could purchase in The City
of New York the Required Currency with the Judgment Currency on the New York
Business Day next preceding that on which final judgment is given. Neither the
Company nor the Trustee will be liable for any shortfall nor will either the
Company or the Trustee it benefit from any windfall in payments to Holders of
Securities under this Section 5.06 caused by a change in exchange rates between
the time the amount of a judgment against the Company is calculated as above and
the time the Trustee converts the Judgment Currency into the Required Currency
to make payments under this Section 5.06 to Holders of Securities, but payment
of that judgment will discharge all amounts owed by the Company on the claim or
claims underlying that judgment.

SECTION 5.07. LIMITATION ON SUITS.

No Holder of any Security of any series will have any right to
institute any proceeding, judicial or otherwise, with respect to this Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless

(a) an Event of Default with respect to Securities of that series
has occurred and is continuing and that Holder has previously given
written notice to the Trustee of that continuing Event of Default;

(b) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;

(c) such Holder or Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities
to be incurred in compliance with such request;

(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and

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<PAGE>
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that
series;

it being understood and intended that no one or more of those Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
those Holders, or to obtain or to seek to obtain priority or preference over any
other of those Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all those
Holders.

SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM,
INTEREST AND TO CONVERT.

Notwithstanding any other provision in this Indenture, the Holder
of any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and premium, if any, and (subject to Section
3.07) interest on and any Additional Amounts with respect to such Security on
the respective Stated Maturities expressed in that Security (or, in the case of
redemption, on the Redemption Date or, in the case of a repurchase pursuant to
Article XIV, on the Repurchase Date) and to convert such Security in accordance
with Article XIII and to institute suit for the enforcement of any such payment
and right to convert, and such rights shall not be impaired without the consent
of that Holder.

SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES.

If the Trustee or any Holder of Securities of any series has
instituted any proceeding to enforce any right or remedy under this Indenture
and that proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee or to that Holder, then and in every
such case, subject to any determination in that proceeding, the Company, the
Trustee and the Holders of Securities of that series shall be restored severally
and respectively to their former positions hereunder and thereafter all rights
and remedies of the Trustee and those Holders shall continue as though no such
proceeding had been instituted.

SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.

Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in Section 3.06, no
right or remedy herein conferred on or reserved to the Trustee or to the Holders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

SECTION 5.11. DELAY OR OMISSION NOT WAIVER.

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<PAGE>
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing on any Event of Default with
respect to that Security shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein. Every right and
remedy given by this Article V or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.

SECTION 5.12. CONTROL BY HOLDERS.

With respect to Securities of any series, the Holders of a
majority in principal amount of the Outstanding Securities of that series shall
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee relating to or arising under an Event of Default
described in clause (a), (b) or (h) of Section 5.01, and with respect to all
Securities the Holders of a majority in principal amount of all Outstanding
Securities shall have the right to direct the time, method and place of
conducting any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee, not relating to or arising under such an Event of
Default; PROVIDED, that:

(a) such direction shall not be in conflict with any rule of
law or with this Indenture;

(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and

(c) subject to the provisions of Section 6.01, the Trustee shall
have the right to decline to follow any such direction if the Trustee in
good faith shall determine that the action so directed would involve the
Trustee in personal liability or would be unduly prejudicial to Holders
not joining in such direction.

SECTION 5.13. WAIVER OF PAST DEFAULTS.

The Holders of not less than a majority in principal amount of
the Outstanding Securities of any series may on behalf of the Holders of all the
Securities of that series waive any past default hereunder with respect to that
series and its consequences, and the Holders of a majority in principal amount
of all Outstanding Securities may on behalf of the Holders of all Securities
waive any other past default hereunder and its consequences, except in each case
a default

(a) in the payment of the principal of or premium, if any, or
interest on or any Additional Amounts with respect to any Security, or

(b) in respect of a covenant or provision hereof which under
Article IX cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.

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On any such waiver, the waived default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.

SECTION 5.14. UNDERTAKING FOR COSTS.

All parties to this Indenture agree, and each Holder of any
Security by his acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for any
action taken or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the Outstanding Securities of any series, or to any suit instituted by
any Holder for the enforcement of the payment of the principal of, or premium,
if any, or interest on or any Additional Amounts with respect to any Security on
or after the Stated Maturity or Maturities expressed in such Security (or, in
the case of redemption, on or after the Redemption Date).

ARTICLE VI

THE TRUSTEE

SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.

The duties and responsibilities of the Trustee shall be as
provided by this Indenture and the Trust Indenture Act for securities issued
pursuant to indentures qualified thereunder. Except as otherwise provided
herein, notwithstanding the foregoing, no provision of this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur any
financial liability or risk in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity
satisfactory to it against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section
6.01. The Trustee shall not be liable (a) for any error of judgment made in good
faith by a Responsible Officer or Responsible Officers of the Trustee, unless it
shall be proved that the Trustee was negligent in ascertaining the pertinent
facts or (b) with respect to any action taken or omitted to be taken by it in
good faith in accordance with the direction of the Holders of not less than a
majority in aggregate principal amount of the then Outstanding Securities of any
series or all series, determined as provided in Section 5.12, relating to the
time, method and place of conducting any

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proceeding or any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee, under this Indenture with respect to those
Securities. Prior to the occurrence of an Event of Default with respect to
Securities of any series and after the curing or waiving of all Events of
Default with respect to all series which may have occurred: (a) the duties and
obligations of the Trustee shall be determined solely by the express provisions
of this Indenture and in the Trust Indenture Act, and the Trustee shall not be
liable except for the performance of such duties and obligations as are
specifically set forth in this Indenture and in the Trust Indenture Act, and no
implied covenants or obligations shall be read in to this Indenture against the
Trustee; and (b) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions therein, on any statements, certificates or opinions
furnished to the Trustee and conforming to the requirements of this Indenture
and believed by the Trustee to be genuine and to have been signed or presented
by the proper party or parties; but in the case of any such statements,
certificates or options which by any provisions hereof are specifically required
to be furnished to the Trustee, the Trustee shall be under a duty to examine the
same to determine whether or not they conform on their face to the requirements
of this Indenture. If a default or an Event of Default with respect to
Securities of any series has occurred and is continuing, the Trustee shall
exercise the rights and powers vested in it by this Indenture and use the same
degree of care and skill in its exercise thereof as a prudent person would
exercise or use under the circumstances in the conduct of his own affairs.

SECTION 6.02. NOTICE OF DEFAULTS.

The Trustee shall give the Holders of Securities of each series
notice of any default hereunder with respect to the Securities of that series
known to it as and to the extent provided by the Trust Indenture Act; PROVIDED,
HOWEVER, that in the case of any default with respect to the Securities of that
series of the character specified in Section 5.01(d), no such notice to those
Holders shall be given until at least 30 days after the occurrence thereof; and
PROVIDED, FURTHER, that, except in the case of a default in payment of principal
of, premium, if any, or interest on or any Additional Amounts with respect to
any Securities of any series, the Trustee may withhold notice to the Holders of
those Securities if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of those
Holders. For the purpose of this Section 6.02, the term "default" with respect
to the Securities of any series means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to those
Securities.

SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE.

Subject to the provisions of Section 6.01:

(a) the Trustee may rely and shall be protected in acting or
refraining from acting on any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties;

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(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;

(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely on an Officers' Certificate;

(d) the Trustee may consult with counsel and the written advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;

(e) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or
indemnity satisfactory to it against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or
direction;

(f) before the Trustee acts or refrains from acting with respect
to any matter contemplated by this Indenture, it may require an
Officers' Certificate or an Opinion of Counsel, which shall conform to
the provisions of Section 1.02, and the Trustee shall be protected and
shall not be liable for any action it takes or omits to take in good
faith and without gross negligence in reliance on such certificate or
opinion;

(g) the Trustee shall not be required to give any bond or surety
in respect of the performance of its power and duties hereunder;

(h) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney; and

(i) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents
or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due
care by it hereunder.

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SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.

The statements and recitals contained herein and in the
Securities and in any other document in connection with the sale of the
Securities, except the Trustee's certificate of authentication, shall be taken
as the statements of the Company, and the Trustee and any Authenticating Agent
assume no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities. The Trustee and any Authenticating Agent shall not be accountable
for the use or application by the Company of Securities or the proceeds thereof.

SECTION 6.05. MAY HOLD SECURITIES.

The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 6.08 and 6.13, may otherwise deal with the Company or any Affiliate of
the Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.

SECTION 6.06. MONEY HELD IN TRUST.

Money held by the Trustee or any Paying Agent in trust hereunder
need not be segregated from other funds except to the extent required by law.
The Trustee or any Paying Agent shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company.

SECTION 6.07. COMPENSATION AND REIMBURSEMENT.

The Company agrees:

(a) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (including its
services as Security Registrar or Paying Agent, if so appointed by the
Company) as may be mutually agreed on in writing by the Company and the
Trustee (which compensation shall not be limited by any provision of law
in regard to the compensation of a trustee of an express trust);

(b) except as otherwise expressly provided herein, to reimburse
the Trustee and each predecessor Trustee promptly on its request for all
reasonable expenses, disbursements and advances incurred or made by or
on behalf of it in connection with the performance of its duties under
any provision of this Indenture (including the reasonable compensation
and the expenses and disbursements of its agents and counsel and all
other persons not regularly in its employ) except to the extent any such
expense, disbursement or advance may be attributable to its negligence
or bad faith; and

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(c) to indemnify the Trustee and each predecessor Trustee (each,
an "indemnitee") for, and to hold the indemnitee harmless against, any
loss, liability or expense incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or
administration of this Indenture or the trusts hereunder and its duties
hereunder (including its services as Security Registrar or Paying Agent,
if so appointed by the Company), including enforcement of this Indenture
(including this Section 6.07) and including the costs and expenses of
defending itself against or investigating any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder. The Company shall defend any claim or threatened claim
asserted against an indemnitee for which it may seek indemnity, and the
indemnitee shall cooperate in the defense unless, in the reasonable
opinion of the indemnitee's counsel, the indemnitee has an interest
adverse to the Company or a potential conflict of interest exists
between the indemnitee and the Company, in which case the indemnitee may
have separate counsel and the Company shall pay the reasonable fees and
expenses of such counsel; PROVIDED that the Company shall only be
responsible for the reasonable fees and expenses of one law firm (in
addition to local counsel) in any one action or separate substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, such law firm to be designated by the
indemnitee.

As security for the performance of the obligations of the Company
under this Section 6.07, the Trustee shall have a lien prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the benefit of the Holders of particular Securities, and
the Securities are hereby subordinated to such prior lien. The obligations of
the Company under this Section to compensate and indemnify the Trustee and any
predecessor Trustee and to pay or reimburse the Trustee and any predecessor
Trustee for expenses, disbursements and advances, and any other amounts due the
Trustee or any predecessor Trustee under this Section 6.07, shall constitute an
additional obligation hereunder and shall survive the satisfaction and discharge
of this Indenture.

When the Trustee or any predecessor Trustee incurs expenses or
renders services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default specified in Section 5.01(f) or (g)
occurs, those expenses and the compensation for those services are intended to
constitute expenses of administration under any applicable bankruptcy,
insolvency or other similar federal or state law to the extent provided in
Section 503(b)(5) of Title 11 of the United States Code, as now or hereafter in
effect.

SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS.

(a) If the Trustee has or shall acquire any conflicting interest,
as defined in this Section 6.08, with respect to the Securities of any series,
it shall, within 90 days after ascertaining that it has such conflicting
interest, either eliminate that conflicting interest or resign with respect

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to the Securities of that series in the manner and with the effect hereinafter
specified in this Article VI.

(b) In the event that the Trustee shall fail to comply with the
provisions of paragraph (a) of this Section 6.08 with respect to the Securities
of any series, the Trustee shall, within 10 days after the expiration of the
90-day period referred to in that paragraph (a), transmit by mail to all Holders
of Securities of that series, as their names and addresses appear in the
Security Register for that series, notice of that failure.

(c) For the purposes of this Section, the term "conflicting
interest" shall have the meaning specified in Section 310(b) of the Trust
Indenture Act and the Trustee shall comply with Section 310(b) of the Trust
Indenture Act; PROVIDED, that there shall be excluded from the operation of
Section 310(b)(1) of the Trust Indenture Act with respect to the Securities of
any series any indenture or indentures under which other securities, or
certificates of interest or participation in other securities, of the Company
are outstanding, if the requirements for such exclusion set forth in Section
310(b)(1) of the Trust Indenture Act are met. For purposes of the preceding
sentence, the optional provision permitted by the second sentence of Section
310(b)(9) of the Trust Indenture Act shall be applicable.

SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.

There shall at all times be a Trustee hereunder which shall be a
Person that (i) is eligible pursuant to the Trust Indenture Act to act as such,
(ii) has (or, in the case of a corporation included in a bank holding company
system, whose related bank holding company has) a combined capital and surplus
of at least $50,000,000 and (iii) has a Corporate Trust Office in the Borough of
Manhattan, The City of New York, or a designated agent. If such Person publishes
reports of conditions at least annually, pursuant to law or to the requirements
of a Federal or state supervising or examining authority, then for the purposes
of this Section 6.09, the combined capital and surplus of such Person shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section 6.09, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article VI.

SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.

(a) No resignation or removal of the Trustee and no appointment
of a successor Trustee pursuant to this Article VI shall become effective until
the acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.11.

(b) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If the instrument of acceptance by a successor Trustee for those
Securities which is required by Section 6.11 shall not have been delivered to
the resigning Trustee within 30 days after the giving of such notice of
resignation, the

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resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee for those Securities.

(c) The Trustee may be removed at any time with respect to the
Securities of any series by an Act of the Holders of a majority in principal
amount of the Outstanding Securities of that series delivered to the Trustee and
to the Company.

(d) If at any time:

(i) the Trustee shall fail to comply with Section 6.08
with respect to the Securities of any series after written request
therefor by the Company or by any Holder who has been a bona fide Holder
of a Security of that series for the last six months, or

(ii) the Trustee shall cease to be eligible under Section
6.09 with respect to the Securities of any series and shall fail to
resign after written request therefor by the Company or by any Holder
who has been a bona fide Holder of a Security of that series for the
last six months, or

(iii) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the Trustee
or of its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation,

then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Securities of all series, or (ii) subject to Section
5.14, any Holder who has been a bona fide Holder of a Security for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee or Trustees.

(e) If the Trustee shall resign, be removed or become incapable
of acting, or if a vacancy shall occur in the office of Trustee for any cause
with respect to the Securities of one or more series, the Company, by a Board
Resolution, shall promptly appoint a successor Trustee or Trustees with respect
to those Securities (it being agreed that any such successor Trustee may be
appointed with respect to the Securities of one or more or all of those series
and that at any time there shall be only one Trustee with respect to the
Securities of any particular series) and such successor Trustee or Trustees
shall comply with the applicable requirements of Section 6.11. If no successor
Trustee with respect to the Securities of any series shall have been so
appointed by the Company and accepted appointment in the manner required by
Section 6.11, any Holder who has been a bona fide Holder of a Security of that
series for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities of that
series.

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(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any series
to all Holders of the Securities of that series in the manner provided in
Section 1.06. Each notice shall include the name of the successor Trustee and
the address of its Corporate Trust Office.

SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.

(a) In case of the appointment hereunder of a successor Trustee
with respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on request of
the Company or the successor Trustee, such retiring Trustee shall, on payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder.

(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each such successor Trustee so appointed shall execute and
deliver an indenture supplemental hereto wherein each such successor Trustee
shall accept such appointment and which (i) shall contain such provisions as
shall be necessary or desirable to transfer and confirm to, and to vest in, each
such successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates, (ii) if the retiring Trustee is
not retiring with respect to all Securities, shall contain such provisions as
shall be deemed necessary or desirable to confirm that all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or those series as to which the retiring Trustee is not retiring shall continue
to be vested in the retiring Trustee and (iii) shall add to or change any of the
provisions of this Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee; and on the
execution and delivery of such supplemental indenture, the resignation or
removal of the retiring Trustee shall become effective to the extent provided
therein and each such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of that or those series
to which the appointment of such successor Trustee relates; but, on request of
the Company or any such successor Trustee, such retiring Trustee shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder with respect to the Securities of that
or those series to which the appointment of such successor Trustee relates.

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(c) On request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts referred
to in paragraph (a) or (b) of this Section 6.11, as the case may be.

(d) No successor Trustee shall accept its appointment unless, at
the time of that acceptance, that successor Trustee shall be qualified and
eligible under this Article VI.

SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.

Any corporation into which the Trustee may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article VI, without the execution or filing of any paper or any further act on
the part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated those Securities.

SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.

If and when the Trustee shall be or become a creditor of the
Company (or any other obligor on the Securities), the Trustee shall be subject
to the provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).

SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT.

The Trustee may appoint an Authenticating Agent or Agents
acceptable to and at the expense of the Company which shall be authorized to act
on behalf of the Trustee to authenticate Securities issued on original issue and
on exchange, registration of transfer, partial conversion or partial redemption
or pursuant to Section 3.06, and Securities so authenticated shall be entitled
to the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having (or, in the case of a corporation included in a bank holding
company system, whose related bank holding company has) a combined capital and
surplus of not less than $50,000,000 and subject

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to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section 6.14, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 6.14, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this Section 6.14.

Any Person into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Person resulting from any
merger, conversion or consolidation to which such Authenticating Agent shall be
a party, or any Person succeeding to the corporate agency or corporate trust
business of an Authenticating Agent, shall continue to be an Authenticating
Agent, provided such Person shall be otherwise eligible under this Section 6.14,
without the execution or filing of any paper or any further act on the part of
the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. On receiving such a notice of
resignation or on such a termination, or in case at any time such Authenticating
Agent shall cease to be eligible in accordance with the provisions of this
Section 6.14, the Trustee may appoint a successor Authenticating Agent
acceptable to the Company and shall mail notice of such appointment by
first-class mail, postage prepaid, to all Holders of Securities for which such
successor Authenticating Agent has been appointed as their names and addresses
appear in the Security Register. Any successor Authenticating Agent on
acceptance of its appointment under this Section 6.14 shall become vested with
all the rights, powers and duties of its predecessor hereunder, with like effect
as if originally named as an Authenticating Agent. No successor Authenticating
Agent shall be appointed unless eligible to act as such under the provisions of
this Section 6.14.

Any Authenticating Agent by the acceptance of its appointment
shall be deemed to have represented to the Trustee that it is eligible for
appointment as Authenticating Agent under this Section 6.14 and to have agreed
with the Trustee that: it will perform and carry out the duties of an
Authenticating Agent as herein set forth, including, among other duties, the
duties to authenticate Securities when presented to it in connection with the
original issuance and with exchanges, registrations of transfer or redemptions
or conversions thereof or pursuant to Section 3.06; it will keep and maintain,
and furnish to the Trustee from time to time as requested by the Trustee,
appropriate records of all transactions carried out by it as Authenticating
Agent and will furnish the Trustee such other information and reports as the
Trustee may reasonably require; and it will notify the Trustee promptly if it
shall cease to be eligible to act as Authenticating Agent in accordance with the
provisions of this Section 6.14. Any Authenticating Agent by the acceptance of
its appointment shall be deemed to have agreed with the Trustee to indemnify the
Trustee against any loss, liability or expense incurred by the Trustee and to
defend any claim asserted against the Trustee by reason

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of any acts or failures to act of such Authenticating Agent, but such
Authenticating Agent shall have no liability for any action taken by it in
accordance with the specific written direction of the Trustee.

The Trustee shall not be liable for any act or any failure of the
Authenticating Agent to perform any duty either required herein or authorized
herein to be performed by such person in accordance with this Indenture.

The Company agrees to pay to each Authenticating Agent from time
to time reasonable compensation for its services under this Section.

If an appointment is made pursuant to this Section, the
Securities may have endorsed thereon, in addition to the Trustee's certificate
of authentication, an alternative certificate of authentication in the following
form:

"This is one of the Securities of the series designated,
described or provided for in the within-mentioned Indenture.

[__________________________________]

AS TRUSTEE

AS AUTHENTICATING AGENT

AUTHORIZED SIGNATORY"

Notwithstanding any provision of this Section 6.14 to the
contrary, if at any time any Authenticating Agent appointed hereunder with
respect to any series of Securities shall not also be acting as the Security
Registrar hereunder with respect to that series of Securities, then, in addition
to all other duties of an Authenticating Agent hereunder, such Authenticating
Agent shall also be obligated: (a) to furnish to the Security Registrar for that
series of Securities promptly all information necessary to enable that Security
Registrar to maintain at all times an accurate and current Security Register for
that series of Securities; and (b) prior to authenticating any Security of that
series denominated in a foreign currency, to ascertain from the Company the
units of such foreign currency that are required to be determined by the Company
pursuant to Section 3.02.

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ARTICLE VII

HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY

SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.

The Company will furnish or cause to be furnished to the Trustee
with respect to each series of Securities:

(a) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require,
of the names and addresses of the Holders of the Securities of that
series as of such Regular Record Date and

(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished.

Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
no such list shall be required to be furnished.

SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS.

(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders of Securities of each
series contained in the most recent list furnished to the Trustee as provided in
Section 7.01 and the names and addresses of Holders of those Securities received
by the Trustee in its capacity as Security Registrar. The Trustee may destroy
any list furnished to it as provided in Section 7.01 on receipt of a new list so
furnished.

(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.

(c) Every Holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act or otherwise in accordance with this Indenture.

SECTION 7.03. REPORTS BY TRUSTEE.

(a) Not later than 60 days following each May 15, the Trustee
shall transmit to Holders such reports concerning the Trustee and its actions
under this Indenture as may be required pursuant to the Trust Indenture Act at
the times and in the manner provided pursuant thereto.

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(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange on
which the Securities of any series are listed, with the Commission and with the
Company. The Company will notify the Trustee when the Securities are listed on
any stock exchange.

SECTION 7.04. REPORTS BY COMPANY.

The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant to the Trust Indenture Act; PROVIDED,
that any such information, documents or reports required to be filed with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed
with the Trustee within 15 days after the same is so required to be filed with
the Commission.

ARTICLE VIII

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.

The Company shall not consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person in one transaction or a series of related
transactions, and the Company shall not permit any Person to consolidate with or
merge into the Company, unless:

(a) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one transaction or a
series of related transactions, the Person formed by such consolidation
or into which the Company is merged or the Person which acquires by
conveyance or transfer, or which leases, the properties and assets of
the Company substantially as an entirety shall be a corporation,
partnership, limited liability company or trust, shall be organized and
validly existing under the laws of the United States of America, any
State thereof or the District of Columbia and shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, the due and punctual payment of the
principal of, premium, if any, and interest on and any Additional
Amounts with respect to all the Securities and the performance or
observance of every covenant of this Indenture on the part of the
Company to be performed or observed and shall have provided for
conversion rights in accordance with Section 13.11;

(b) immediately after giving effect to such transaction, no Event
of Default with respect to Securities of any series, and no event which,
after notice or lapse of time or both,

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would become an Event of Default with respect to Securities of any
series, shall have occurred and be continuing;

(c) such consolidation, merger, conveyance, transfer or lease
does not adversely affect the validity or enforceability of the
Securities of any series; and

(d) the Company or the successor Person has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article VIII and that all
conditions precedent herein provided for relating to such transaction
have been complied with.

SECTION 8.02. SUCCESSOR SUBSTITUTED.

On any consolidation of the Company with, or merger of the
Company into, any other Person or any conveyance, transfer or lease the
properties and assets of the Company substantially as an entirety to any Person
in one transaction or a series of related transactions in accordance with
Section 8.01, the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, transfer or lease is made
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and thereafter, except in the case
of a transfer by lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.

ARTICLE IX

SUPPLEMENTAL INDENTURES

SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.

Without the consent of any Holders, the Company, when authorized
by a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:

(a) to set forth the terms of the Securities of any unissued
series, including the additional indebtedness or other liabilities to
which the Securities of that series will be subordinated as contemplated
by Section 3.01; or

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(b) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company
herein and in the Securities; or

(c) for the benefit of the Holders of Securities of any or all
series, to add to the covenants of the Company, add an additional Event
of Default or surrender any right or power conferred herein or in the
Securities of any series on the Company (and if any such covenant, Event
of Default or surrender is to be for the benefit of Holders of
Securities of less than all series, stating that such covenants, Event
of Default or surrender is or are being included solely for the benefit
of the Holders of Securities of those series referred to in the
supplemental indenture); or

(d) to secure the Securities of any or all series; or

(e) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 13.11; or

(f) to change or eliminate any of the provisions of this
Indenture, PROVIDED that any such change or elimination shall become
effective only when there is no Security Outstanding of any series
created prior to the execution of such supplemental indenture which is
adversely affected by such change in or elimination of such provision;
or

(g) to supplement any of the provisions of this Indenture to such
extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Section 4.01;
PROVIDED, HOWEVER, that any such action shall not adversely affect the
interest of the Holders of Securities of such series or any other series
of Securities in any material respect; or

(h) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one
or more series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee,
pursuant to the requirements of Section 6.11(b); or

(i) to cure any ambiguity or omission, to correct or supplement
any provision herein or in the Securities of any or all series which may
be defective or inconsistent with any other provision herein or in the
Securities of any or all series, or to make any other provisions with
respect to matters or questions arising under this Indenture which shall
not be inconsistent with the provisions of this Indenture; PROVIDED,
that such action pursuant to this clause (i) shall not adversely affect
the interests of the Holders of Securities of any series in any material
respect and the Trustee may rely on an Opinion of Counsel to that
effect.

SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.

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With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Company and the Trustee, or, if the rights of one or more, but less than
all, series of Outstanding Securities are to be affected, then with the consent
of the Holders of not less than a majority in principal amount of all the series
of Outstanding Securities so to be affected, by Act of said Holders (acting as
one class) delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any manner the rights of the Holders under this Indenture;
PROVIDED, HOWEVER, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby,

(a) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Security, or reduce the
principal amount thereof or the rate of interest thereon, any Additional
Amounts with respect thereto or any premium payable on the redemption
thereof, or reduce the amount of the principal of any Original Issue
Discount Security that would be due and payable on a declaration of
acceleration of the Maturity thereof pursuant to Section 5.02, or change
any Place of Payment where, or the coin or currency or currencies
(including composite currencies) in which, any Security or any premium
or any interest thereon or Additional Amount with respect thereto is
payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the
case of redemption, on or after the Redemption Date), or adversely
affect the right to convert any Security as provided in Article XIII
(except as permitted by Section 9.01(e)), or modify the provisions of
Article XIV, or the provisions of this Indenture with respect to the
subordination of the Securities (except as contemplated by Section 3.01
and permitted by Section 9.01(a)), in a matter adverse to the Holders;
or

(b) reduce the percentage in principal amount of Outstanding
Securities the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture; or

(c) modify any of the provisions of this Section 9.02, Section
5.13 or Section 10.06, except to increase any percentage provided herein
or therein or to provide with respect to any particular series the right
to condition the effectiveness of any supplemental indenture as to that
series on the consent of the Holders of a specified percentage of the
aggregate principal amount of Outstanding Securities of that series
(which provision may be made pursuant to Section 3.01 without the
consent of any Holder) or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the
Holder of each Outstanding Security affected thereby, PROVIDED, HOWEVER,
that this clause (c) shall not be deemed to require the consent of any
Holder with respect to changes in the references

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to "the Trustee" and concomitant changes in this Section 9.02 and
Section 10.06, or the deletion of this proviso, in accordance with the
requirements of Sections 6.11(b) and 9.01(g).

A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.

It shall not be necessary for any Act of Holders under this
Section 9.02 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if that Act approves the substance
thereof.

The determination of the Trustee as to the series of Securities
the rights of which are to be affected pursuant to this Section 9.02 shall be
conclusive, and the Trustee in making that determination shall be protected in
relying on an Opinion of Counsel.

SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES.

In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article IX or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 6.01) shall be fully protected in relying on,
an Officers' Certificate and an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture that adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise.

SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.

On the execution of any supplemental indenture under this Article
IX, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.

SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.

Every supplemental indenture executed pursuant to this Article IX
shall conform to the requirements of the Trust Indenture Act.

SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.

Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article IX may, and
shall if required by the Trustee, bear a

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notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Company shall so determine, new Securities of any
series so modified as to conform, in the opinion of the Trustee and the Company,
to any such supplemental indenture may be prepared and executed by the Company
and (at the specific direction of the Company) authenticated and delivered by
the Trustee in exchange for Outstanding Securities of that series.

SECTION 9.07. NOTICE OF SUPPLEMENTAL INDENTURE.

Promptly after the execution by the Company and the Trustee of
any supplemental indenture pursuant to Section 9.02, the Company shall transmit
to the Holders of Securities of all series affected thereby a notice setting
forth the substance of that supplemental indenture.

ARTICLE X

COVENANTS

SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.

The Company covenants and agrees for the benefit of each series
of Securities that it will duly and punctually pay the principal of, premium, if
any, and interest on and any Additional Amounts with respect to the Securities
of that series in accordance with the terms of those Securities and this
Indenture.

SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY.

The Company will maintain in each Place of Payment for each
series of Securities an office or agency where Securities of that series may be
presented or surrendered for payment, where Securities of that series may be
surrendered for registration of transfer, where Securities of that series may be
surrendered for exchange or conversion and where notices and demands to or on
the Company in respect of the Securities of that series and this Indenture may
be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of any such office or agency. If at
any time the Company shall fail to maintain any such required office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.

The Company may also from time to time designate one or more
other offices or agencies where the Securities of one or more series may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; PROVIDED, HOWEVER, that no such designation or
rescission shall in any manner relieve the Company of its obligation to maintain
an office or agency in each Place of Payment for Securities of any series for
such purposes. The

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Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.

SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.

If the Company shall at any time act as its own Paying Agent with
respect to any series of Securities, it will, on or before each due date of the
principal of, premium, if any, or interest on or any Additional Amounts with
respect to any of the Securities of that series, segregate and hold in trust for
the benefit of the Persons entitled thereto a sum sufficient to pay the entire
amount so becoming due until such sum shall be paid to such Persons or otherwise
disposed of as herein provided and will promptly notify the Trustee of its
action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any
series of Securities, it will, on or prior to each due date of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to any
Securities of that series, deposit with a Paying Agent a sum sufficient to pay
the entire amount so becoming due, such sum to be held as provided by the Trust
Indenture Act, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.

The Company will cause each Paying Agent other than the Trustee
or the Company for each series of Securities to execute and deliver to the
Trustee an instrument in which such Paying Agent shall agree with the Trustee,
subject to the provisions of this Section 10.03, that such Paying Agent will:
(a) comply with the provisions of the Trust Indenture Act and this Indenture
applicable to it as a Paying Agent and hold all sums held by it for the payment
of principal of or any premium or interest on or any Additional Amounts with
respect to the Securities of that series in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to those Persons or otherwise
disposed of as herein provided; (b) give the Trustee notice of any default by
the Company (or any other obligor on the Securities) in the making of any
payment in respect of the Securities of that series; and (c) at any time during
the continuance of any default by the Company (or any other obligor on the
Securities of that series) in the making of any payment in respect of the
Securities of that series, on the written request of the Trustee, forthwith pay
to the Trustee all sums held in trust by such Paying Agent for payment in
respect of the Securities of that series, and account for any funds disbursed.

The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
on the same trusts as those on which such sums were held by the Company or such
Paying Agent; and, on such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.

Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on or any

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Additional Amounts with respect to any Security of any series and remaining
unclaimed for two years after that principal, premium, if any, interest or
Additional Amounts, if any, has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of that Security shall thereafter, as an
unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereon cease;
PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in New York, New York,
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such publication,
any unclaimed balance of such money then remaining will be repaid to the
Company.

SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT.

The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of this Indenture (without regard to
any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.

SECTION 10.05. EXISTENCE.

Subject to Article VIII, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its
existence, rights (charter and statutory) and franchises and the existence,
rights (charter and statutory) and franchises of each Subsidiary; PROVIDED,
HOWEVER, that the Company shall not be required to preserve any such right or
franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company and
that the loss thereof is not disadvantageous in any material respect to the
Holders of Securities of any series.

SECTION 10.06. WAIVER OF CERTAIN COVENANTS.

The Company may omit in any particular instance to comply with
any covenant or condition set forth in Section 10.05, or any covenant added for
the benefit of any series of Securities as contemplated by Section 3.01 (unless
otherwise specified pursuant to Section 3.01) if before or after the time for
such compliance the Holders of a majority in principal amount of the Outstanding
Securities of all series affected by that omission (acting as one class) shall,
by Act of such Holders, either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the

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Company and the duties of the Trustee in respect of any such covenant or
condition shall remain in full force and effect.

SECTION 10.07. ADDITIONAL AMOUNTS.

If the Securities of a series expressly provide for the payment
of Additional Amounts, the Company will pay to the Holder of any Security of
that series Additional Amounts as expressly provided therein. Whenever in this
Indenture there is mentioned, in any context, the payment of the principal of or
any premium or interest on, or in respect of, any Security of any series or the
net proceeds received on the sale or exchange of any Security of any series,
such mention shall be deemed to include mention of the payment of Additional
Amounts provided for in this Section 10.07 to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
the provisions of this Section 10.07 and express mention of the payment of
Additional Amounts (if applicable) in any provisions hereof shall not be
construed as excluding Additional Amounts in those provisions hereof where such
express mention is not made.

If the Securities of a series provide for the payment of
Additional Amounts, at least 10 days prior to the first Interest Payment Date
with respect to that series of Securities (or if the Securities of that series
will not bear interest prior to Maturity, the first day on which a payment of
principal and any premium is made), and at least 10 days prior to each date of
payment of principal and any premium or interest if there has been any change
with respect to the matters set forth in the below-mentioned Officers'
Certificate, the Company shall furnish the Trustee and the Company's principal
Paying Agent or Paying Agents, if other than the Trustee, with an Officers'
Certificate instructing the Trustee and such Paying Agent or Paying Agents
whether such payment of principal of and any premium or interest on the
Securities of that series shall be made to Holders of Securities of that series
who are United States Aliens without withholding for or on account of any tax,
assessment or other governmental charge described in the Securities of that
series. If any such withholding shall be required, then such Officers'
Certificate shall specify by country the amount, if any, required to be withheld
on such payments to such Holders of Securities and the Company will pay to such
Paying Agent the Additional Amounts required by this Section. The Company
covenants to indemnify the Trustee and any Paying Agent for, and to hold them
harmless against any loss, liability or expense reasonably incurred without
negligence or bad faith on their part arising out of or in connection with
actions taken or omitted by any of them in reliance on any Officers' Certificate
furnished pursuant to this Section 10.07.

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ARTICLE XI

REDEMPTION OF SECURITIES

SECTION 11.01. APPLICABILITY OF ARTICLE.

Securities of any series which are redeemable before their Stated
Maturity shall be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 3.01 for Securities of any
series) in accordance with this Article XI.

SECTION 11.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE.

The election of the Company to redeem any Securities shall be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company of less than all the Securities of any series, the Company shall, at
least 60 days prior to the Redemption Date fixed by the Company (unless a
shorter period shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Securities of that series to be
redeemed. In case of any redemption at the election of the Company of all the
Securities of any series, the Company shall, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter period shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date.

SECTION 11.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.

If less than all the Securities of any series are to be redeemed,
the particular Securities of that series to be redeemed shall be selected not
more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of that series not previously called for redemption, by
lot or pro rata or by such other method as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to the minimum authorized denomination for Securities of that series or
any integral multiple thereof) of the principal amount of Securities of that
series of a denomination larger than the minimum authorized denomination for
Securities of that series.

If any Security selected for partial redemption is converted in
part before termination of the conversion right with respect to the portion of
the Security so selected, the converted portion of such Security shall be deemed
(so far as may be) to be the portion selected for redemption. Securities of any
series which have been converted during a selection of Securities of that series
to be redeemed shall be treated by the Trustee as Outstanding for the purpose of
such selection. In any case where more than one Security of the same series is
registered in the same name, the Trustee in its discretion may treat the
aggregate principal amount so registered as if it were represented by one
Security of that series.

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The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.

For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.

SECTION 11.04. NOTICE OF REDEMPTION.

Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption
Date, to the Trustee and to each Holder of Securities to be redeemed, at his
address appearing in the Security Register.

All notices of redemption shall state:

(a) the Redemption Date,

(b) the Redemption Price,

(c) if less than all the Outstanding Securities of any series are
to be redeemed, the identification (and, in the case of partial
redemption of any Securities, the principal amounts) of the particular
Securities to be redeemed,

(d) that on the Redemption Date the Redemption Price will become
due and payable on each such Security to be redeemed and that (unless
the Company shall default in payment of the Redemption Price) interest
thereon will cease to accrue on and after said date,

(e) that the redemption is for a sinking fund, if that is the
case,

(f) the conversion price, the date on which the right to convert
the Securities to be redeemed will terminate and the place or places
where such Securities may be surrendered for conversion, and

(g) the place or places where such Securities are to be
surrendered for payment of the Redemption Price.

Notice of redemption of Securities to be redeemed at the election
of the Company shall be given by the Company or, at the Company's request
received by the Trustee at least 25 days prior to the Redemption Date, by the
Trustee in the name and at the expense of the Company.

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SECTION 11.05. DEPOSIT OF REDEMPTION PRICE.

At or prior to 10:00 a.m. (Houston, Texas time) on any Redemption
Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if
the Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.03) an amount of money sufficient to pay the Redemption
Price of, and (except if the Redemption Date shall be an Interest Payment Date)
accrued interest on, and any Additional Amounts with respect to, all the
Securities or portions thereof which are to be redeemed on that date other than
any Securities called for redemption on that date which have been converted
prior to the date of such deposit.

If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 3.07) be paid to the Company on
Company Request or, if then held by the Company, shall be discharged from such
trust.

SECTION 11.06. SECURITIES PAYABLE ON REDEMPTION DATE.

Notice of redemption having been given as aforesaid, the
Securities so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified, and from and after such date
(unless the Company shall default in the payment of the Redemption Price and
accrued interest and any Additional Amounts) such Securities shall cease to bear
interest or be entitled to any Additional Amounts. On surrender of any such
Security for redemption in accordance with said notice, such Security shall be
paid by the Company at the Redemption Price, together with accrued interest and
any Additional Amounts to the Redemption Date; PROVIDED, HOWEVER, that
installments of interest whose Maturity is on or prior to the Redemption Date
shall be payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such at the close of business on the relevant Record
Dates according to their terms and the provisions of Section 3.07.

If any Security called for redemption shall not be so paid on
surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.

SECTION 11.07. SECURITIES REDEEMED IN PART.

Any Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company maintained for that purpose
pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities of the same series, of any authorized
denomination as requested by such Holder, in an aggregate principal

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amount equal to and in exchange for the unredeemed portion of the principal of
the Security so surrendered.

ARTICLE XII

SUBORDINATION OF SECURITIES

SECTION 12.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.

The Company covenants and agrees, and each Holder of a Security,
by his acceptance thereof, likewise covenants and agrees, that, at all times and
in all respects, the indebtedness represented by the Securities and the payment
of the principal of, premium, if any, and interest on and any Additional Amounts
with respect to each and all of the Securities are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness. Obligations in respect of Senior Indebtedness will not be
deemed to have been paid in full unless the holders thereof shall have received
payment in full in cash or cash equivalents with respect thereto.

Each Holder of the Securities by its acceptance thereof
acknowledges and agrees that the subordination provisions included herein are,
and are intended to be, an inducement and a consideration to each holder of any
Senior Indebtedness, whether such Senior Indebtedness was created or acquired
before or after the issuance of Securities, to acquire and/or continue to hold
such Senior Indebtedness, and such holder of Senior Indebtedness shall be deemed
conclusively to have relied on such subordination provisions in acquiring and/or
continuing to hold such Senior Indebtedness.

SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.

In the event of (a) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding, relative to the Company or to its creditors, as such, or to
a substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations due
or to become due on or in respect of all Senior Indebtedness before the Holders
of the Securities are entitled to receive any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, and to that end the holders of Senior Indebtedness
shall be entitled to receive, for application to the payment thereof, any
payment or distribution of any kind or character, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, which may be payable or deliverable in respect of the Securities in
any such case,

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proceeding, dissolution, liquidation or other winding up or event. In
furtherance of the foregoing, but not by way of limitation thereof, in the event
of any case or proceeding described in clause (a) above in or as a result of
which the Company is excused from the obligation to pay all or any part of the
interest otherwise payable in respect of any Senior Indebtedness during the
period subsequent to the commencement of any such case or proceeding, all or
such part, as the case may be, of such interest shall be payable out of, and to
that extent shall diminish and be at the expense of, reorganization dividends or
other distributions in respect of the Securities.

In the event that, notwithstanding the foregoing provisions of
this Section 12.02, the Trustee or the Holder of any Security shall have
received any payment or distribution of any kind or character in respect of the
Securities, whether in cash, property or securities, including any such payment
or distribution which may be payable or deliverable by reason of the payment of
any other indebtedness of the Company being subordinated to the payment of the
Securities, before all Senior Indebtedness is paid in full, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is prohibited by this Section 12.02) or by such
Holder (in trust) for the holders of Senior Indebtedness, and shall be paid
forthwith over and delivered to, the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.

To the extent any payment of or distribution in respect of Senior
Indebtedness (whether by or on behalf of the Company, as proceeds of security or
enforcement of any right of set off or otherwise) is declared to be fraudulent
or preferential, set aside or required to be paid to any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
if such payment or distribution is recovered by, or paid over to, such receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person, the
Senior Indebtedness or part thereof originally intended to be satisfied shall be
deemed to be reinstated and outstanding as if such payment has not occurred.

For purposes of this Article XII only, (a) a "distribution" may
consist of cash, securities or other property, by set-off or otherwise and (b)
the words "cash, property or securities" shall not be deemed to include
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment, which securities are subordinated in right of payment to all
Senior Indebtedness which may at the time be outstanding to substantially the
same extent as, or to a greater extent than, the Securities are so subordinated
as provided in this Article XII. The consolidation of the Company with, or the
merger of the Company into, another Person or the liquidation or dissolution of
the Company following the conveyance or transfer of its properties and assets
substantially as an entirety to another Person on the terms and conditions set
forth in Article VIII shall not be deemed a dissolution, winding up,
liquidation, reorganization, general assignment for the benefit of creditors or
marshaling of assets and liabilities of the Company for the purposes of this
Section 12.02 if the

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Person formed by such consolidation or into which the Company is merged or which
acquires by conveyance or transfer such properties and assets substantially as
an entirety, as the case may be, shall, as a part of such consolidation, merger,
conveyance or transfer, comply with the conditions set forth in Article VIII.

SECTION 12.03. PRIOR PAYMENT TO SENIOR INDEBTEDNESS ON ACCELERATION OF
SECURITIES.

If any Securities are declared due and payable before their
Stated Maturity, the Company shall promptly notify all holders of Senior
Indebtedness of such event. In the event that any Securities are declared due
and payable before their Stated Maturity, then and in such event the holders of
Senior Indebtedness shall be entitled to receive payment in full of all
Obligations in respect of Senior Indebtedness before the Holders of the
Securities are entitled to receive any payment or other distribution (including
any payment which may be payable by reason of the payment of any other
indebtedness of the Company being subordinated to the payment of the Securities)
on account of the principal of, premium, if any, or interest on or any
Additional Amounts with respect to the Securities or on account of the purchase
or other acquisition of Securities, and on any such event the Holders of the
Securities shall, to the extent permitted by law, be prohibited for a period of
180 days thereafter from making any bankruptcy filing with respect to the
Company or from filing suit to enforce their rights under this Indenture
(PROVIDED, HOWEVER, that if the acceleration of Securities is rescinded or
annulled prior to the expiration of such 180-day period, such prohibition shall
terminate on such earlier date as the acceleration of such Securities is
rescinded or annulled), subject to the rights, if any, under this Article XII of
the holders, from time to time, of Senior Indebtedness to receive the cash,
property or securities receivable on the exercise of such rights.

In the event that, notwithstanding the foregoing, the Company
shall make any payment or distribution to the Trustee or the Holder of any
Security prohibited by the foregoing provisions of this Section 12.03, such
payment or distribution shall be held by the Trustee (if the Trustee has
knowledge that such payment or distribution is so prohibited) or by such Holder
(in trust) for the holders of Senior Indebtedness, and shall be paid forthwith
over and delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case, for application to the
payment of all Obligations with respect to Senior Indebtedness remaining unpaid
to the extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.

The provisions of this Section 12.03 shall not apply to any
payment with respect to which Section 12.02 would be applicable.

SECTION 12.04. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.

The Company may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) to the Trustee or any Holder on
account of the principal of,

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premium, if any, or interest on or any Additional Amounts with respect to the
Securities and may not acquire from the Trustee or any Holder any Securities
(other than payments and other distributions made from any defeasance trust
created pursuant to Section 4.01 if the applicable deposit does not violate
Article IV or this Article XII) until all principal and other Obligations with
respect to the Senior Indebtedness of the Company have been paid in full if:

(a) a default in the payment of any principal of, premium, if
any, or interest on Designated Senior Indebtedness occurs; or

(b) a default, other than a payment default, on Designated Senior
Indebtedness occurs and is continuing that then permits holders of the
Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of the default
(a "Payment Blockage Notice") from a Person who is a Representative of
the holders of such Designated Senior Indebtedness, PROVIDED, that if
such Designated Senior Indebtedness is of the type referred to in clause
(b) of the definition thereof, the Payment Blockage Notice shall be
given by a Representative of the holders of at least 20% of such
Designated Senior Indebtedness. If the Trustee receives any such Payment
Blockage Notice, no subsequent Payment Blockage Notice shall be
effective for purposes of this Section 12.04 unless and until 360 days
shall have elapsed since the date of commencement of the payment
blockage period resulting from the immediately prior Payment Blockage
Notice. No nonpayment default in respect of any Designated Senior
Indebtedness that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for subsequent Payment Blockage Notices.

The Company shall resume payments on and distributions in respect
of the Securities and may acquire Securities on:

(a) in the case of a default referred to in subparagraph (a) of
the preceding paragraph, the date on which the default is cured or
waived, or

(b) in the case of a default referred to in subparagraph (b) of
the preceding paragraph, the earliest of (i) the date on which such
nonpayment default is cured or waived, (ii) the date the applicable
Payment Blockage Notice is retracted by written notice to the Trustee
from the Person who is a Representative of the holders of the relevant
Designated Senior Indebtedness and (iii) 179 days after the date on
which the applicable Payment Blockage Notice is received unless (A) any
of the events described in subparagraph (a) of the preceding paragraph
has occurred and is continuing or (B) a Default or Event of Default
under clause (f) or (g) of Section 5.01 has occurred,

if this Article XII otherwise permits the payment, distribution or acquisition
at the time of such payment or acquisition.

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In the event that, notwithstanding the foregoing, the Company
shall make any payment or distribution to the Trustee or the Holder of any
Security prohibited by the foregoing provisions of this Section 12.04, such
payment or distribution shall be held by the Trustee (if the Trustee has
knowledge that such payment or distribution is so prohibited) or by such Holder
(in trust) for the holders of Senior Indebtedness, and shall be paid forthwith
over and delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case for application to the payment
of all Obligations with respect to Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.

The provisions of this Section 12.04 shall not apply to any
payment with respect to which Section 12.02 would be applicable.

SECTION 12.05. PAYMENT PERMITTED IF NO DEFAULT.

Nothing contained in this Article XII or elsewhere in this
Indenture or in any of the Securities shall prevent (a) the Company, at any time
except under the circumstances referred to in Section 12.02 or under the
conditions described in Section 12.03 or 12.04, from making payments at any time
of principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, or (b) the application by the Trustee of any money
deposited with it hereunder to the payment of or on account of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities if, at the time of such application by the Trustee, it did not have
knowledge within the meaning of Section 12.10 that such payment would have been
prohibited by the provisions of this Article XII.

SECTION 12.06. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.

Subject to the payment in full of all Obligations in respect of
Senior Indebtedness, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of Senior
Indebtedness pursuant to the provisions of this Article XII (equally and ratably
with the holders of all indebtedness of the Company which by its express terms
is subordinated to other indebtedness of the Company to substantially the same
extent as the Securities are subordinated and is entitled to like rights of
subrogation) to the rights of the holders of Senior Indebtedness to receive
payments and distributions applicable to the Senior Indebtedness until the
principal of, premium, if any, and interest on and any Additional Amounts with
respect to the Securities shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article XII, and no payments over
pursuant to the provisions of this Article XII to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Securities, be deemed to be a payment or distribution by the Company to
or on account of the Senior Indebtedness.

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SECTION 12.07. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.

The provisions of this Article XII are and are intended solely
for the purpose of defining the relative rights of the Holders of the Securities
on the one hand and the holders of Senior Indebtedness on the other hand.
Nothing contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall: (a) impair, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Securities, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Securities the principal of, premium, if any, and
interest on and any Additional Amounts with respect to the Securities as and
when the same shall become due and payable in accordance with their terms; (b)
affect the relative rights against the Company or the Holders of the Securities
and creditors of the Company other than the holders of Senior Indebtedness; or
(c) prevent the Trustee or the Holder of any Security from exercising all
remedies otherwise permitted by applicable law on default under this Indenture,
subject to the rights, if any, under this Article XII of the holders of Senior
Indebtedness to receive distributions otherwise payable or deliverable to the
Trustee or such Holder.

SECTION 12.08. TRUSTEE TO EFFECTUATE SUBORDINATION.

Each holder of a Security by his acceptance thereof authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article XII and
appoints the Trustee his attorney-in-fact for any and all such purposes.

SECTION 12.09. NO WAIVER OF SUBORDINATION PROVISIONS.

No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.

Without in any way limiting the generality of the preceding
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Trustee or the Holders of
the Securities and without impairing or releasing the subordination provided in
this Article XII or the obligations hereunder of the Trustee or the Holders of
the Securities to the holders of Senior Indebtedness, do any one or more of the
following: (a) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (c) release any Person liable in any
manner for the collection of Senior Indebtedness; and (d) exercise or refrain
from exercising any rights against the Company and any other Person.

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SECTION 12.10. NOTICE TO TRUSTEE.

The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Securities. Notwithstanding the provisions
of this Article XII or any other provision of this Indenture, the Trustee shall
not be charged with knowledge of the existence of any facts that would prohibit
the making of any payment to or by the Trustee in respect of the Securities,
unless and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any Representative therefor;
and, prior to the receipt of any such written notice, the Trustee, subject to
the provisions of Section 6.01, shall be entitled in all respects to assume that
no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have
received the notice provided for in this Section 12.10 at least two Business
Days prior to the date on which by the terms hereof any money may become payable
for any purpose (including, without limitation, the payment of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to any
Security), then, anything herein contained to the contrary notwithstanding, the
Trustee shall have full power and authority to receive such money and to apply
the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary which may be received by it within two
Business Days prior to such date.

Subject to the provisions of Section 6.01, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a Representative
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a Representative therefor). In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Article XII, the Trustee may request
such Person to furnish evidence to the reasonable satisfaction of the Trustee as
to the amount of Senior Indebtedness held by such Person, the extent to which
such Person is entitled to participate in such payment or distribution and any
other facts pertinent to the rights of such Person under this Article XII, and
if such evidence is not furnished, the Trustee may defer any payment to such
Person pending judicial determination as to the right of such Person to receive
such payment.

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SECTION 12.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.

On any payment or distribution in respect of the Securities or
Senior Indebtedness referred to in this Article XII, the Trustee, subject to the
provisions of Section 6.01, and, so long as the provisions of this Article XII
have been brought to the attention of the court, tribunal, trustee or other
Person making the payment or distribution, the Holders of the Securities shall
be entitled to rely on any order or decree entered by any court of competent
jurisdiction in which such insolvency, bankruptcy, receivership, liquidation,
reorganization, dissolution, winding up or similar case or proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article XII.

SECTION 12.12. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS.

The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall, absent gross negligence or wilful misconduct, mistakenly pay over or
distribute to Holders of Securities or to the Company or to any other Person
cash, property or securities to which holders of Senior Indebtedness shall be
entitled by virtue of this Article XII or otherwise. With respect to the holders
of Senior Indebtedness, the Trustee undertakes to perform or to observe only
such of its covenants and obligations as are specifically set forth in this
Article XII, and no implied covenants or obligations with respect to the holders
of Senior Indebtedness shall be read into this Article XII against the Trustee.

SECTION 12.13. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS;
PRESERVATION OF TRUSTEE'S RIGHTS.

The Trustee in its individual capacity shall be entitled to all
the rights set forth in this Article XII with respect to any Senior Indebtedness
which may at any time be held by it, to the same extent as any other holder of
Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of
any of its rights as such holder.

Nothing in this Article XII shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 6.07.

SECTION 12.14. ARTICLE APPLICABLE TO PAYING AGENTS.

In case at any time any Paying Agent other than the Trustee shall
have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article XII shall in such case (unless the context
otherwise requires) be construed as extending to and including such

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Paying Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article XII in addition to or in place of the
Trustee; PROVIDED, HOWEVER, that Section 12.13 shall not apply to the Company or
any Affiliate of the Company if it or such Affiliate acts as Paying Agent.

SECTION 12.15. CERTAIN CONVERSIONS DEEMED PAYMENT.

For the purposes of this Article XII only, (a) the issuance and
delivery of junior securities on conversion of Securities in accordance with
Article XIII shall not be deemed to constitute a payment or distribution on
account of the principal of, premium, if any, or interest on or any Additional
Amounts with respect to Securities or on account of the purchase or other
acquisition of Securities, and (b) the payment, issuance or delivery of cash,
property or securities (other than junior securities) on conversion of a
Security shall be deemed to constitute payment on account of the principal of
such Security. For the purposes of this Section 12.15, the term "junior
securities" means (a) shares of any class of capital stock of the Company and
(b) securities of the Company which are subordinated in right of payment to all
Senior Indebtedness which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article XII.
Nothing contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than holders of Senior Indebtedness and the Holders of the Securities, the
right, which is absolute and unconditional, of the Holder of any Security to
convert such Security in accordance with Article XIII.

SECTION 12.16. NO SUSPENSION OF REMEDIES.

Except as provided in Section 12.03, nothing contained in this
Article XII shall limit the right of the Trustee or the Holders of the
Securities of any series to take any action to accelerate the maturity of the
Securities of that series pursuant to the provisions described under Article V
and as set forth in this Indenture or to pursue any rights or remedies hereunder
or under applicable law, subject to the rights, if any, under this Article XII
of the holders, from time to time, of Senior Indebtedness to receive the cash,
property or securities receivable on the exercise of such rights or remedies.

ARTICLE XIII

CONVERSION OF SECURITIES

SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE.

Subject to and on compliance with the provisions of this Article
XIII, at the option of the Holder thereof, any Security of any series or any
portion of the principal amount thereof which equals $1,000 or any integral
multiple thereof may be converted at any time on or following the

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Convertibility Commencement Date for that Security at the principal amount
thereof, or of such portion thereof, into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100 of a share) of Common
Stock, at the conversion price for that Security, determined as hereinafter
provided, in effect at the time of conversion. Such conversion right shall
expire at the close of business on the Stated Maturity of the final payment of
principal of that Security. In case a Security or portion thereof is called for
redemption, such conversion right in respect of the Security or portion so
called shall expire at the close of business on the second business day
preceding the applicable Redemption Date, unless the Company defaults in making
the payment due on redemption.

The price at which shares of Common Stock shall be delivered on
conversion of any Security (herein called the "conversion price") shall be
initially the Initial Conversion Price per share of Common Stock which is fixed
for that Security by or pursuant to this Indenture. The conversion price shall
be adjusted in certain instances as provided in paragraphs (a), (b), (c), (d),
(e), (f) and (i) of Section 13.04.

SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE.

In order to exercise the conversion privilege, the Holder of any
Security of any series shall surrender that Security, duly endorsed or assigned
to the Company or in blank, at any office or agency of the Company maintained
pursuant to Section 10.02 for that series, accompanied by written notice to the
Company in the form provided in the Security (or such other notice as is
acceptable to the Company) at such office or agency that the Holder elects to
convert that Security or, if less than the entire principal amount thereof is to
be converted, the portion thereof to be converted. Securities surrendered for
conversion during the period from the opening of business on any Regular Record
Date for that Security next preceding any Interest Payment Date for that
Security to the close of business on that Interest Payment Date (except in the
case of Securities or portions thereof which have been called for redemption on
a Redemption Date, or which are repurchaseable on a Repurchase Date, occurring,
in either case, within such period) must be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Company of an amount equal
to the interest payable on that Interest Payment Date on the principal amount of
Securities being surrendered for conversion. Except as provided in the
immediately preceding sentence and subject to the last paragraph of Section
3.07, no payment or adjustment shall be made on any conversion on account of any
interest accrued on the Securities surrendered for conversion or on account of
any dividends on the Common Stock issued on conversion.

Securities shall be deemed to have been converted immediately
prior to the close of business on the day of their surrender for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of those Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable on conversion of those Securities
shall be treated for all purposes as having become the record holder or holders
of such Common Stock as and after such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at such
office or agency a certificate or certificates for the number of full shares of

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Common Stock issuable on conversion, together with payment in lieu of any
fraction of a share, as provided in Section 13.03.

In the case of any Security of any series which is converted in
part only, on such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Security or Securities of the same series and like tenor and of authorized
denominations in an aggregate principal amount equal to the unconverted portion
of the principal amount of such Security.

SECTION 13.03. FRACTIONS OF SHARES.

No fractional share of Common Stock shall be issued on conversion
of Securities of any series. If more than one Security of the same series shall
be surrendered for conversion at one time by the same Holder, the number of full
shares which shall be issuable on conversion thereof shall be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable on conversion of any Security or Securities (or
specified portions thereof), the Company shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the Closing Price
(as hereinafter defined) at the close of business on the day of conversion (or,
if such day is not a Trading Day (as hereafter defined), on the Trading Day
immediately preceding such day).

SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE.

(a) In case the Company shall pay or make a dividend or other
distribution on the Common Stock exclusively in Common Stock or shall pay or
make a dividend or other distribution on any other class of capital stock of the
Company which dividend or distribution includes Common Stock, each conversion
price in effect for the Securities of each series at the opening of business on
the day following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be reduced by multiplying
that conversion price by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective immediately after the opening
of business on the day following the date fixed for such determination. For the
purpose of this paragraph (a), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company. The
Company shall not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Company.

(b) Subject to paragraph (g) of this Section 13.04, in case the
Company shall pay or make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights or warrants entitling the holders thereof to subscribe for or
purchase shares of Common Stock at a price per share less than the Current

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Market Price (determined as provided in paragraph (h) of this Section 13.04) on
the date fixed for the determination of stockholders entitled to receive such
rights or warrants, each conversion price in effect for the Securities of each
series at the opening of business on the day following the date fixed for such
determination shall be reduced by multiplying that conversion price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such Current Market Price and the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the number of shares of
Common Stock so offered for subscription or purchase, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. For the purposes of this paragraph (b), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company shall not issue any
rights or warrants in respect of shares of Common Stock held in the treasury of
the Company.

(c) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, each conversion
price in effect for the Securities of each series at the opening of business on
the day following the day on which such subdivision becomes effective shall be
proportionately reduced, and, conversely, in case outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common Stock, each
conversion price in effect for the Securities of each series at the opening of
business on the day following the day on which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day on which subdivision or combination becomes effective.

(d) Subject to the last sentence of this paragraph (d) and to
paragraph (g) of this Section 13.04, in case the Company shall, by dividend or
otherwise, distribute to all holders of the Common Stock evidences of its
indebtedness, shares of any class of its capital stock, cash or other assets
(including securities, but excluding any rights or warrants referred to in
paragraph (b) of this Section 13.04, excluding any dividend or distribution paid
exclusively in cash and excluding any dividend or distribution referred to in
paragraph (a) of this Section 13.04), each conversion price for the Securities
of each series shall be reduced by multiplying that conversion price as it was
in effect immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to such distribution by a fraction of
which the numerator shall be the Current Market Price (determined as provided in
paragraph (h) of this Section 13.04) on such date less the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) on such date of the portion of the
evidences of indebtedness, shares of capital stock, cash and other assets to be
distributed applicable to one share of Common Stock and the denominator shall be
such Current Market Price, such reduction to become effective immediately prior
to the opening of business on the day following such date. If the Board of
Directors determines the fair market value of any distribution for purposes of
this paragraph (d) by reference to the actual or when-issued trading market for
any securities comprising part or all of such distribution, it must

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in doing so consider the prices in such market over the same period used in
computing the Current Market Price pursuant to paragraph (h) of this Section
13.04, to the extent possible. For purposes of this paragraph (d), any dividend
or distribution that includes shares of Common Stock, rights or warrants to
subscribe for or purchase shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock shall be deemed to be (i) a dividend
or distribution of the evidences of indebtedness, cash, assets or shares of
capital stock other than such shares of Common Stock, such rights or warrants or
such convertible or exchangeable securities (making any conversion price
reduction required by this paragraph (d)) immediately followed by (ii) in the
case of such shares of Common Stock or such rights or warrants, a dividend or
distribution thereof (making any further conversion price reduction required by
paragraphs (a) and (b) of this Section 13.04, except any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding at
the close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this Section 13.04), or (iii) in the case of such
convertible or exchangeable securities, a dividend or distribution of the number
of shares of Common Stock as would then be issuable on the conversion or
exchange thereof, whether or not the conversion or exchange of such securities
is subject to any conditions (making any further conversion price reduction
required by paragraph (a) of this Section 13.04, except the shares deemed to
constitute such dividend or distribution shall not be deemed "outstanding at the
close of business on the date fixed for such determination" within the meaning
of paragraph (a) of this Section 13.04).

(e) In case the Company shall, by dividend or otherwise, at any
time distribute to all holders of the Common Stock cash (excluding any cash that
is distributed as part of a distribution referred to in paragraph (d) of this
Section 13.04 or in connection with a transaction to which Section 13.11
applies) in an aggregate amount that, together with (i) the aggregate amount of
any other distributions to all holders of the Common Stock made exclusively in
cash within the 12 months preceding the date fixed for the determination of
stockholders entitled to such distribution and in respect of which no conversion
price adjustment pursuant to this paragraph (e) has been made previously and
(ii) the aggregate of any cash plus the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution) as of such date of determination of any other consideration
payable in respect of any tender offer by the Company or a Subsidiary for all or
any portion of the Common Stock consummated within the 12 months preceding such
date of determination and in respect of which no conversion price adjustment
pursuant to paragraph (f) of this Section 13.04 has been made previously,
exceeds the greater of (A) 12.5% of the product of the Current Market Price
(determined as provided in paragraph (h) of this Section) on such date of
determination times the number of shares of Common Stock outstanding on such
date or (B) the Company's consolidated retained earnings on the date fixed for
determining the stockholders entitled to such distribution (determined without
giving effect to such distribution), each conversion price for the Securities of
each series shall be reduced by multiplying that conversion price as it was in
effect immediately prior to the close of business on such date of determination
by a fraction of which the numerator shall be the Current Market Price
(determined as provided in paragraph (h) of this Section 13.04) on such date
less the amount of such cash previously distributed or to be distributed at such
time applicable to one share of Common Stock and

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the denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following such
date.

(f) In case a tender offer made by the Company or any Subsidiary
for all or any portion of the Common Stock shall be consummated and such tender
offer shall involve an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) as of the last time (the "Expiration Time")
that tenders may be made pursuant to such tender offer (as it shall have been
amended) that, together with (i) the aggregate of the cash plus the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) as of the Expiration Time of the
other consideration paid in respect of any other tender offer by the Company or
a Subsidiary for all or any portion of the Common Stock consummated within the
12 months preceding the Expiration Time and in respect of which no conversion
price adjustment pursuant to this paragraph (f) has been made previously and
(ii) the aggregate amount of any distributions to all holders of the Common
Stock made exclusively in cash within the 12 months preceding the Expiration
Time and in respect of which no conversion price adjustment pursuant to
paragraph (e) of this Section 13.04 has been made previously, exceeds the
greater of (A) 12.5% of the product of the Current Market Price (determined as
provided in paragraph (h) of this Section 13.04) immediately prior to the
Expiration Time times the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time or (B) the Company's
consolidated retained earnings as of the Expiration Time (determined without
giving effect to the purchase of tendered shares), each conversion price for the
Securities of each series shall be reduced by multiplying that conversion price
as it was in effect immediately prior to the Expiration Time by a fraction of
which the numerator shall be (1) the product of the Current Market Price
(determined as provided in paragraph (h) of this Section 13.04) immediately
prior to the Expiration Time times the number of shares of Common Stock
outstanding (including any tendered shares at the Expiration Time) minus (2) the
fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders on consummation of such tender offer and the denominator
shall be the product of (1) such Current Market Price times (2) such number of
outstanding shares at the Expiration Time minus the number of shares accepted
for payment in such tender offer (the "Purchased Shares"), such reduction to
become effective immediately prior to the opening of business on the day
following the Expiration Time; PROVIDED, that if the number of Purchased Shares
or the aggregate consideration payable therefor has not been finally determined
by such opening of business, the adjustment required by this paragraph (f)
shall, pending such final determination, be made based on the preliminarily
announced results of such tender offer, and, after such final determination
shall have been made, the adjustment required by this paragraph (f) shall be
made based on the number of Purchased Shares and the aggregate consideration
payable therefor as so finally determined.

(g) The reclassification of Common Stock into securities that
include securities other than Common Stock (other than any reclassification on a
consolidation or merger to which Section 13.11 applies) shall be deemed to
involve (i) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall

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be deemed to be "the date fixed for the determination of stockholders entitled
to such distribution" within the meaning of paragraph (d) of this Section
13.04), and (ii) a subdivision or combination, as the case may be, of the number
of shares of Common Stock outstanding immediately prior to such reclassification
into the number of shares of Common Stock outstanding immediately thereafter
(and the effective date of such reclassification shall be deemed to be "the day
on which such subdivision becomes effective" or "the day on which such
combination becomes effective", as the case may be, and "the day on which such
subdivision or combination becomes effective" within the meaning of paragraph
(c) of this Section 13.04).

Rights or warrants issued by the Company to all holders of the
Common Stock entitling the holders thereof to subscribe for or purchase shares
of Common Stock (either initially or under certain circumstances), which rights
or warrants (i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, in each case in clauses (i) through (iii) until the
occurrence of a specified event or events ("Trigger Event"), shall for purposes
of this Section 13.04 not be deemed issued until the occurrence of the earliest
Trigger Event. If any such rights or warrants, including any such existing
rights or warrants distributed prior to the date of this Indenture, are subject
to subsequent events, on the occurrence of each of which such rights or warrants
shall become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event shall be
deemed to be such date of issuance and record date with respect to new rights or
warrants (and a termination or expiration of the existing rights or warrants
without exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of such rights or warrants, or any Trigger
Event with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to any conversion price under this
Section 13.04 was made, (i) in the case of any such rights or warrants that
shall all have been redeemed or repurchased without exercise by any holders
thereof, that conversion price shall be readjusted on such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (ii) in the case of such rights or warrants that shall have
expired or been terminated without exercise by any holders thereof, that
conversion price shall be readjusted as if such rights and warrants had not been
issued.

Notwithstanding any other provision of this Section 13.04 to the
contrary, rights, warrants, evidences of indebtedness, other securities, cash or
other assets (including, without limitation, any rights distributed pursuant to
any stockholder rights plan) shall be deemed not to have been distributed for
purposes of this Section 13.04 if the Company makes proper provision so that
each holder of Securities of each series who converts a Security (or any portion
thereof) of that series after the date fixed for determination of stockholders
entitled to receive such distribution shall be entitled to receive on such
conversion, in addition to the shares of Common Stock issuable on such
conversion, the amount and kind of such distributions which that holder would
have been entitled

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to receive if such holder had, immediately prior to such determination date,
converted that Security into Common Stock.

(h) For the purpose of any computation under this paragraph (h)
and paragraphs (b), (d) and (e) of this Section 13.04, the current market price
per share of Common Stock (the "Current Market Price") on any date shall be
deemed to be the average of the daily Closing Prices for the five consecutive
Trading Days selected by the Company commencing not more than 20 Trading Days
before, and ending not later than, the date in question; PROVIDED, HOWEVER, that
(i) if the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to any conversion price
pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04
occurs on or after the 20th Trading Day prior to the date in question and prior
to the "ex" date for the issuance or distribution requiring such computation,
the Closing Price for each Trading Day prior to the "ex" date for such other
event shall be adjusted by multiplying such Closing Price by the same fraction
by which that conversion price is so required to be adjusted as a result of such
other event, (ii) if the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this
Section 13.04 occurs on or after the "ex" date for the issuance or distribution
requiring such computation and on or prior to the date in question, the Closing
Price for each Trading Day on and after the "ex" date for such other event shall
be adjusted by multiplying such Closing Price by the reciprocal of the fraction
by which that conversion price is so required to be adjusted as a result of such
other event, and (iii) if the "ex" date for the issuance or distribution
requiring such computation is on or prior to the date in question, after taking
into account any adjustment required pursuant to clause (ii) of this proviso,
the Closing Price for each Trading Day on or after such "ex" date shall be
adjusted by adding thereto the amount of any cash and the fair market value on
the date in question (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of paragraph (d) or
(e) of this Section 13.04, whose determination shall be conclusive and described
in a Board Resolution) of the evidences of indebtedness, shares of capital stock
or assets being distributed applicable to one share of Common Stock as of the
close of business on the day before such "ex" date. For the purpose of any
computation under paragraph (f) of this Section 13.04, the Current Market Price
on any date shall be deemed to be the average of the daily Closing Prices for
the five consecutive Trading Days selected by the Company commencing on or after
the latest (the "Commencement Date") of (i) the date 20 Trading Days before the
date in question, (ii) the date of commencement of the tender offer requiring
such computation and (iii) the date of the last amendment, if any, of such
tender offer involving a change in the maximum number of shares for which
tenders are sought or a change in the consideration offered, and ending not
later than the Expiration Time of such tender offer; PROVIDED, HOWEVER, that if
the "ex" date for any event (other than the tender offer requiring such
computation) that requires an adjustment to any conversion price pursuant to
paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04 occurs on or
after the Commencement Date and prior to the Expiration Time for the tender
offer requiring such computation, the Closing Price for each Trading Day prior
to the "ex" date for such other event shall be adjusted by multiplying such
Closing Price by the same fraction by which the conversion price is so required
to be adjusted as a result of such other event. The closing price for any
Trading Day (the "Closing Price") shall be the last reported

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sales price regular way or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular way, in
either case on the New York Stock Exchange or, if the Common Stock is not listed
or admitted to trading on such exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if the Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on the Nasdaq National Market, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected from time to time
by the Company for that purpose. For purposes of this paragraph, the term
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are generally not traded on the applicable
securities exchange or in the applicable securities market and the term "`ex'
date," (i) when used with respect to any issuance or distribution, means the
first date on which the Common Stock trades regular way on the relevant exchange
or in the relevant market from which the Closing Prices were obtained without
the right to receive such issuance or distribution, (ii) when used with respect
to any subdivision or combination of shares of Common Stock, means the first
date on which the Common Stock trades regular way on such exchange or in such
market after the time at which such subdivision or combination becomes effective
and (iii) when used with respect to any tender offer means the first date on
which the Common Stock trades regular way on such exchange or in such market
after the last time that tenders may be made pursuant to such tender offer (as
it shall have been amended).

(i) The Company may make such reductions in any conversion price
for any Security, in addition to those required by paragraphs (a), (b), (c),
(d), (e) and (f) of this Section 13.04, as it considers to be advisable (as
evidenced by a Board Resolution) in order that any event treated for federal
income tax purposes as a dividend of stock or stock rights shall not be taxable
to the recipients or, if that is not possible, to diminish any income taxes that
are otherwise payable because of such event.

(j) No adjustment in any conversion price for any Security shall
be required unless such adjustment (plus any other adjustments not previously
made by reason of this paragraph (j)) would require an increase or decrease of
at least 1% in that conversion price; PROVIDED, HOWEVER, that any adjustments
which by reason of this paragraph (j) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment of that
conversion price.

(k) Notwithstanding any other provision of this Section 13.04, no
adjustment to any conversion price for any Security shall reduce that conversion
price below the then par value per share of the Common Stock, and any such
purported adjustment shall instead reduce that conversion price to that par
value. The Company hereby covenants not to take any action to increase the par
value per share of the Common Stock.

SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.

Whenever any conversion price is adjusted as herein provided:

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(a) the Company shall compute the adjusted conversion price in
accordance with Section 13.04 and shall prepare an Officers' Certificate
signed by the Treasurer of the Company setting forth the adjusted
conversion price and showing in reasonable detail the facts on which
such adjustment is based, and such certificate shall forthwith be filed
(with a copy to the Trustee) at each office or agency maintained
pursuant to Section 10.02 for the purpose of conversion of the
Securities to which the adjusted conversion price applies; and

(b) a notice stating that the conversion price has been adjusted
and setting forth the adjusted conversion price shall forthwith be
prepared, and as soon as practicable after it is prepared, such notice
shall be mailed by the Company to all Holders of Securities to which the
adjusted conversion price applies at their last addresses as they shall
appear in the Security Register.

SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION.

In case:

(a) the Company shall declare a dividend (or any other
distribution) on the Common Stock payable (i) otherwise than exclusively
in cash or (ii) exclusively in cash in an amount that would require any
conversion price adjustment pursuant to paragraph (e) of Section 13.04;
or

(b) the Company shall authorize the granting to the holders of
the Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any other rights (excluding
shares of capital stock or options for capital stock issued pursuant to
a benefit plan for employees, officers or directors of the Company); or

(c) of any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock),
or of any consolidation, merger or share exchange to which the Company
is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all the
assets of the Company; or

(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or

(e) the Company or any Subsidiary shall commence a tender offer
for all or a portion of the outstanding shares of Common Stock (or shall
amend any such tender offer to change the maximum number of shares being
sought or the amount or type of consideration being offered therefor);

then the Company shall cause to be filed at each office or agency maintained
pursuant to Section 10.02, and shall cause to be mailed to all Holders at their
last addresses as they shall appear in the

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Security Register, at least 21 days (or 11 days in any case specified in clause
(a), (b) or (e) above) prior to the applicable record, effective or expiration
date hereinafter specified, a notice stating (i) the date on which a record is
to be taken for the purpose of such dividend, distribution or granting of rights
or warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record who will be entitled to such dividend,
distribution, rights or warrants are to be determined, (ii) the date on which
such reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable on such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up, or (iii) the
date on which such tender offer commenced, the date on which such tender offer
is scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto). Neither
the failure to give any such notice nor any defect therein shall affect the
legality or validity of any action described in clauses (a) through (e) of this
Section 13.06.

SECTION 13.07. COMPANY TO RESERVE COMMON STOCK.

The Company shall at all times reserve and keep available, free
from preemptive and other rights, out of the authorized but unissued Common
Stock or out of the Common Stock held in the treasury of the Company, for the
purpose of effecting the conversion of Securities, the full number of shares of
Common Stock then issuable on the conversion of all outstanding Securities.
Shares of Common Stock issuable on conversion of outstanding Securities shall be
issued out of the Common Stock held in the treasury of the Company to the extent
available.

SECTION 13.08. TAXES ON CONVERSIONS.

The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
Securities pursuant hereto. The Company shall not, however, be required to pay
any tax that may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.

SECTION 13.09. COVENANT AS TO COMMON STOCK.

The Company covenants that all shares of Common Stock which may
be issued on conversion of Securities will on issue be fully paid and
nonassessable and, except as provided in Section 13.08, the Company will pay all
taxes, liens and charges with respect to the issue thereof.

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SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES.

All Securities delivered for conversion shall be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 3.09.

SECTION 13.11. PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS.

In case of any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
any sale or transfer of all or substantially all the assets of the Company
(other than to a wholly-owned Subsidiary), the Person formed by such
consolidation or resulting from such merger or which acquires such assets, as
the case may be, shall execute and deliver to the Trustee a supplemental
indenture providing that the Holder of each Security then Outstanding shall have
the right thereafter, during the period such Security shall be convertible as
specified in or pursuant to this Indenture, to convert such Security only into
the kind and amount of securities, cash and other property, if any, receivable
on such consolidation, merger, sale or transfer by a holder of the number of
shares of Common Stock into which such Security might have been converted
immediately prior to such consolidation, merger, sale or transfer, assuming such
holder of Common Stock (i) is not a Person with which the Company consolidated
or into which the Company merged or which merged into the Company or to which
such sale or transfer was made, as the case may be (a "Constituent Person"), or
an Affiliate of a Constituent Person and (ii) failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable on such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash and other property receivable on
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock held immediately prior to such consolidation, merger, sale or
transfer by other than a Constituent Person or an Affiliate thereof and in
respect of which such rights of election shall not have been exercised
("nonelecting share"), then for the purpose of this Section 13.11 the kind and
amount of securities, cash and other property receivable on such consolidation,
merger, sale or transfer by each nonelecting share shall be deemed to be the
kind and amount so receivable per share by a plurality of the nonelecting
shares). Such supplemental indenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental indenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article XIII. The above provisions of this Section 13.11 shall similarly
apply to successive consolidations, mergers, sales or transfers.

SECTION 13.12. TRUSTEE'S DISCLAIMER.

The Trustee has no duty to determine when an adjustment under
this Article XIII should be made, how it should be made or what such adjustment
should be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying on, the Officers' Certificate with
respect thereto which the Company is obligated to file with the Trustee pursuant
to Section 13.05. The Trustee makes no representation as to the validity or
value of any

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securities or assets issued on conversion of Securities, and the Trustee shall
not be responsible for the Company's failure to comply with any provisions of
this Article XIII.

The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any supplemental indenture
executed pursuant to Section 13.11, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying on, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 1.02 in connection with that supplemental indenture.

ARTICLE XIV

RIGHT TO REQUIRE REPURCHASE

SECTION 14.01. RIGHT TO REQUIRE REPURCHASE.

In the event that there shall occur a Repurchase Event (as
defined in Section 14.06), then each Holder of each then Outstanding Security
shall have the right, at such Holder's option, to require the Company to
purchase, and on the exercise of such right, the Company shall, subject to the
provisions of Section 12.03, purchase, all or any part of such Holder's then
Outstanding Securities on the date (the "Repurchase Date") that is 30 days after
the date the Company gives notice of the Repurchase Event as contemplated in
Section 14.02(a) at a price (the "Repurchase Price") equal to 100% of the
principal amount thereof, together with accrued and unpaid interest to the
Repurchase Date.

SECTION 14.02. NOTICE; METHOD OF EXERCISING REPURCHASE RIGHT.

(a) On or before the 15th day after the occurrence of a
Repurchase Event, the Company, or at the request of the Company received by the
Trustee at least 40 days prior to the Repurchase Date, the Trustee (in the name
and at the expense of the Company), shall give notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof by first-class mail, postage prepaid, to the Trustee and to each
Holder of the Securities that were Outstanding when the Repurchase Event
occurred at such Holder's address appearing in the Security Register. The
Company shall also deliver a copy of such notice of a repurchase right to the
Trustee.

Each notice of a repurchase right shall state:

(i) the event constituting the Repurchase Event and the date
thereof,

(ii) the Repurchase Date,

(iii) the date by which the repurchase right must be exercised,

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(iv) the Repurchase Price and

(v) the instructions a Holder must follow to exercise a
repurchase right.

No failure of the Company to give the foregoing notice shall
limit any Holder's right to exercise a repurchase right. The Trustee shall have
no affirmative obligation to determine if there shall have occurred a Repurchase
Event.

(b) To exercise a repurchase right, a Holder shall deliver to the
Company (or an agent designated by the Company for such purpose in the notice
referred to in (a) above) and to the Trustee on or before the close of business
on the Repurchase Date (i) written notice of the Holder's exercise of such
right, which notice shall set forth the name of the Holder, the principal amount
of the Security or Securities (or portion of a Security) to be repurchased and a
statement that an election to exercise the repurchased right is being made
thereby, and, together with the written notice to the Trustee, (ii) the Security
or Securities with respect to which the repurchase right is being exercised,
duly endorsed for transfer to the Company. Such written notice shall be
irrevocable.

In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall on the Repurchase Date pay or cause to
be paid in cash to the Holder thereof the Repurchase Price of the Security or
Securities as to which the repurchase right has been exercised. In the event
that a repurchase right is exercised with respect to less than the entire
principal amount of a surrendered Security of any series, the Company shall
execute and deliver to the Trustee and the Trustee shall authenticate for
issuance in the name of the Holder a new Security or Securities of that series
in the aggregate principal amount of the unrepurchased portion of such
surrendered security.

SECTION 14.03. DEPOSIT OF REPURCHASE PRICE.

On or prior to the Repurchase Date, the Company shall deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 10.03) an
amount of money sufficient to pay the Repurchase Price of the Securities which
are to be repaid on the Repurchase Date.

SECTION 14.04. SECURITIES NOT REPURCHASED ON REPURCHASE DATE.

If the Repurchase Price of any Security surrendered for
repurchase shall not be paid on the Repurchase Date therefor, the principal
shall, until paid, bear interest to the extent permitted by applicable law from
that Repurchase Date at the rate per annum borne by that Security.

SECTION 14.05. SECURITIES REPURCHASED IN PART.

Any Security of any series which is to be repurchased only in
part shall be surrendered at any office or agency of the Company designated for
that purpose pursuant to Section

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10.02 (with, if the Company or the Trustee so requires, due endorsement by, or
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or his attorney duly authorized in
writing), and the Company shall execute, and the Trustee shall authenticate and
deliver to the Holder of that Security without service charge, a new Security or
Securities of that series and of like tenor and any authorized denomination as
requested by such Holder, in an aggregate principal amount equal to and in
exchange for the unrepurchased portion of the principal of the Security so
surrendered.

SECTION 14.06. CERTAIN DEFINITIONS.

For purposes of this Article:

(a) With respect to any Security, a "Repurchase Event" shall have
occurred on the occurrence of a Change in Control or a Termination of
Trading after the date that Security (or its earliest Predecessor
Security) is issued and on or prior to the Stated Maturity of the final
payment of principal of that Security.

(b) A "Change in Control" shall occur when:

(i) all or substantially all the assets of the Company or of the
Company and its subsidiaries, taken as a whole, are sold in one
transaction or any series of related transactions as an entirety to any
Person or related group of Persons;

(ii) there shall be consummated any consolidation or merger of
the Company (A) in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly owned
subsidiary of the Company in which all shares of Common Stock
outstanding immediately prior to the effectiveness thereof are changed
into or exchanged for the same consideration) or (B) pursuant to which
the Common Stock would be converted into cash, securities or other
property, in each case, other than a consolidation or merger of the
Company in which the holders of the Common Stock immediately prior to
the consolidation or merger have, directly or indirectly, at least a
majority of the total voting power of all classes of capital stock
entitled to vote generally in the election of directors of the
continuing or surviving corporation immediately after such consolidation
or merger in substantially the same proportion as their ownership of
Common Stock immediately before such transaction;

(iii) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act
(a "Group"), together with any Affiliates thereof, shall beneficially
own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of
the total voting power of all classes of capital stock of the Company
entitled to vote generally in the election of directors of the Company;

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(iv) at any time during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election
by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 % of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or

(v) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.

(c) A "Termination of Trading" shall occur if the Common Stock
(or other common stock into which the Securities are then convertible) is
neither listed for trading on a U.S. national securities exchange nor approved
for trading on an established automated over-the-counter trading market in the
United States.

ARTICLE XV

MEETINGS OF HOLDERS OF SECURITIES

SECTION 15.01. PURPOSES FOR WHICH MEETINGS MAY BE CALLED.

A meeting of Holders of Securities of any or all series may be
called at any time and from time to time pursuant to this Article XV to make,
give or take any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be made, given or taken by
Holders of Securities of such series.

SECTION 15.02. CALL, NOTICE AND PLACE OF MEETINGS.

(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 15.01, to be held
at such time and at such place in Houston, Texas, or in any other location, as
the Trustee shall determine. Notice of every meeting of Holders of Securities of
any series, setting forth the time and the place of such meeting and in general
terms the action proposed to be taken at such meeting, shall be given, in the
manner provided in Section 1.06, not less than 20 nor more than 180 days prior
to the date fixed for the meeting.

(b) In case at any time the Company, pursuant to a Board
Resolution, or the Holders of at least 10% in aggregate principal amount of the
Outstanding Securities of any series, shall have requested the Trustee for that
series to call a meeting of the Holders of Securities of that series for any
purpose specified in Section 15.01, by written request setting forth in
reasonable detail the action proposed to be taken at the meeting, and the
Trustee shall not have made the first publication of the notice of that meeting
within 30 days after receipt of such request or shall not

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thereafter proceed to cause the meeting to be held as provided herein, then the
Company or the Holders of Securities of that series in the amount above
specified, as the case may be, may determine the time and the place in Houston,
Texas, for such meeting and may call such meeting for such purposes by giving
notice thereof as provided in Subsection (a) of this Section 15.02.

SECTION 15.03. PERSONS ENTITLED TO VOTE AT MEETINGS.

To be entitled to vote at any meeting of Holders of Securities of
any series, a Person shall be (a) a Holder of one or more Outstanding Securities
of that series or (b) a Person appointed by an instrument in writing as proxy
for a Holder or Holders of one or more Outstanding Securities of that series by
such Holder or Holders. The only Persons who shall be entitled to be present or
to speak at any meeting of Holders of Securities of any series shall be the
Persons entitled to vote at such meeting and their counsel, any representatives
of the Trustee and its counsel and any representatives of the Company and its
counsel.

SECTION 15.04. QUORUM; ACTION.

The Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of a series shall constitute a quorum for a
meeting of Holders of Securities of that series. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of Securities of that series, be
dissolved. In any other case, the meeting may be adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such meeting. In the absence of a quorum at any such adjourned
meeting, such adjourned meeting may be further adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such adjourned meeting. Subject to Section 15.05(d), notice of
the reconvening of any adjourned meeting shall be given as provided in Section
15.02(a), except that such notice need be given only once not less than five
days prior to the date on which the meeting is scheduled to be reconvened.
Notice of the reconvening of an adjourned meeting shall state expressly that
Persons entitled to vote a majority in principal amount of the Outstanding
Securities of that series shall constitute a quorum.

Except as limited by the proviso to Section 9.02, any resolution
presented to a meeting or adjourned meeting duly reconvened at which a quorum is
present as aforesaid may be adopted by the affirmative vote of the Holders of a
majority in aggregate principal amount of the Outstanding Securities of that
series; PROVIDED, HOWEVER, that, except as limited by the proviso to Section
9.02, any resolution with respect to any request, demand, authorization,
direction, notice, consent or waiver which this Indenture expressly provides may
be made, given or taken by the Holders of a specified percentage that is less
than a majority in aggregate principal amount of the Outstanding Securities of a
series may be adopted at a meeting or an adjourned meeting duly reconvened and
at which a quorum is present as aforesaid by the affirmative vote of the Holders
of such specified percentage in aggregate principal amount of the Outstanding
Securities of that series.

- 83 -
<PAGE>
Except as limited by the proviso to Section 9.02, any resolution
passed or decision taken at any meeting of Holders of Securities of any series
duly held in accordance with this Section 15.04 shall be binding on all the
Holders of Securities of that series, whether or not present or represented at
the meeting.

SECTION 15.05. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF
MEETINGS.

(a) The holding of Securities shall be proved in the manner
specified in Section 1.04 and the appointment of any proxy shall be proved in
the manner specified in Section 1.04 or by having the signature of the Person
executing the proxy witnessed or guaranteed by any trust company, bank or banker
deemed by the Trustee to be satisfactory. Such regulations may provide that
written instruments appointing proxies, regular on their face, may be presumed
valid and genuine without the proof specified in Section 1.04 or other proof.

(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by Holders of Securities as provided in Section 15.02(b), in
which case the Company or the Holders of Securities of the series calling the
meeting, as the case may be, shall appoint a temporary chairman. A permanent
chairman and a permanent secretary of the meeting shall be elected by vote of
the Persons entitled to vote a majority in aggregate principal amount of the
Outstanding Securities of all series represented at the meeting.

(c) At any meeting each Holder of a Security of each series
represented at the meeting and each proxy shall be entitled to one vote for each
$1,000 principal amount of the Outstanding Securities of that series held or
represented by him; PROVIDED, HOWEVER, that no vote shall be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled
by the chairman of the meeting to be not Outstanding. The chairman of the
meeting shall have no right to vote, except as a Holder of a Security of a
series represented at the meeting or as a proxy.

(d) Any meeting of Holders of Securities of any series duly
called pursuant to Section 15.02 at which a quorum is present may be adjourned
from time to time by Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of all series represented at the meeting;
and the meeting may be held as so adjourned without further notice.

SECTION 15.06. COUNTING VOTES AND RECORDING ACTION OF MEETINGS.

The vote on any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of that series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of that series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record, at least in

- 84 -
<PAGE>
duplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to such record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that such notice was given as provided in Section 15.02 and, if
applicable, Section 15.04. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.

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

This Indenture may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.

- 85 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture
to be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.

INNOVATIVE VALVE TECHNOLOGIES, INC.

By___________________________________
William E. Haynes
President and Chief Executive Officer

Attest:
____________________________________
Charles F. Schugart
Chief Financial Officer, Senior Vice
President - Corporate Development,
Treasurer and Secretary

[__________________________________]
as Trustee

By_________________________________

Attest:
____________________________________
Name:
Title:

- 86 -
<PAGE>
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )

On the ___ day of ___________ 1998, before me personally came William E.
Haynes, to me known, who, being by me duly sworn, did depose and say that he is
President and Chief Executive Officer of Innovative Valve Technologies, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation; and that he signed his name thereto
by like authority.

-------------------------------
Notary Public

STATE OF ___________ )
) ss.:
COUNTY OF _________ )

On the __ day of _______, 1998, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he is a ________________ of [__________________________________] a national
banking association, described in and which executed the foregoing instrument;
that he knows the seal of said corporation; that the seal affixed to said
instrument is such seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.

---------------------------------
Notary Public

- 87 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I Definitions and Other Provisions................................1
SECTION 1.01. Definitions.....................................................1
SECTION 1.02. Compliance Certificates and Opinions............................9
SECTION 1.03. Form of Documents Delivered to Trustee..........................9
SECTION 1.04. Acts of Holders; Record Dates..................................10
SECTION 1.05. Notices, etc., to Trustee and Company..........................11
SECTION 1.06. Notice to Holders; Waiver......................................11
SECTION 1.07. Conflict With Trust Indenture Act..............................12
SECTION 1.08. Effect of Headings and Table of Contents.......................12
SECTION 1.09. Successors and Assigns.........................................12
SECTION 1.10. Separability Clause............................................12
SECTION 1.11. Benefits of Indenture..........................................13
SECTION 1.12. GOVERNING LAW..................................................13
SECTION 1.13. Legal Holidays.................................................13
SECTION 1.14. No Security Interest Created...................................13
SECTION 1.15. Limitation on Individual Liability.............................13

ARTICLE II Security Forms.................................................14
SECTION 2.01. Forms Generally................................................14
SECTION 2.02. Form of Trustee's Certificate of Authentification..............14

ARTICLE III The Securities.................................................15
SECTION 3.01. Amount Unlimited; Issuable in Series...........................15
SECTION 3.02. Denominations..................................................17
SECTION 3.03. Execution, Authentication, Delivery and Dating.................18
SECTION 3.04. Temporary Securities...........................................19
SECTION 3.05. Registration, Registration of Transfer and Exchange............20
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities...............21
SECTION 3.07. Payment of Interest; Interest Rights Preserved.................22
SECTION 3.08. Persons Deemed Owners..........................................23
SECTION 3.09. Cancellation...................................................23
SECTION 3.10. Computation of Interest........................................24

ARTICLE IV Satisfaction and Discharge.....................................24
SECTION 4.01. Satisfaction and Discharge of Indenture........................24
SECTION 4.02. Application of Trust Money.....................................25
SECTION 4.03. Reinstatement..................................................26

ARTICLE V Remedies.......................................................26
SECTION 5.01. Events of Default..............................................26
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.............28

- i -

<PAGE>
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee........................................................30

SECTION 5.04. Trustee May File Proofs of Claim...............................30
SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities....31
SECTION 5.06. Application of Money Collected.................................31
SECTION 5.07. Limitation on Suits............................................32
SECTION 5.08. Unconditional Right of Holders To Receive Principal, Premium,
Interest and To Convert......................................................33
SECTION 5.09. Restoration of Rights and Remedies.............................33
SECTION 5.10. Rights and Remedies Cumulative.................................33
SECTION 5.11. Delay or Omission Not Waiver...................................33
SECTION 5.12. Control by Holders.............................................34
SECTION 5.13. Waiver of Past Defaults........................................34
SECTION 5.14. Undertaking for Costs..........................................35

ARTICLE VI The Trustee....................................................35
SECTION 6.01. Certain Duties and Responsibilities............................35
SECTION 6.02. Notice of Defaults.............................................36
SECTION 6.03. Certain Rights of Trustee......................................36
SECTION 6.04. Not Responsible for Recitals or Issuance of Securities.........38
SECTION 6.05. May Hold Securities............................................38
SECTION 6.06. Money Held in Trust............................................38
SECTION 6.07. Compensation and Reimbursement.................................38
SECTION 6.08. Disqualification; Conflicting Interests........................39
SECTION 6.09. Corporate Trustee Required; Eligibility........................40
SECTION 6.10. Resignation and Removal; Appointment of Successor..............40
SECTION 6.11. Acceptance of Appointment by Successor.........................42
SECTION 6.12. Merger, Conversion, Consolidation or Succession to
Business.......................................................43

SECTION 6.13. Preferential Collection of Claims Against Company..............43
SECTION 6.14. Appointment of Authenticating Agent............................43

ARTICLE VII Holders' Lists and Reports by Trustee and Company..............46
SECTION 7.01. Company To Furnish Trustee Names and Addresses of

Holders........................................................46

SECTION 7.02. Preservation of Information; Communication to Holders..........46
SECTION 7.03. Reports by Trustee.............................................46
SECTION 7.04. Reports by Company.............................................47

ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease...........47
SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms...........47
SECTION 8.02. Successor Substituted..........................................48

ARTICLE IX Supplemental Indentures........................................48
SECTION 9.01. Supplemental Indentures Without Consent of Holders.............48

- ii -
<PAGE>
SECTION 9.02. Supplemental Indentures With Consent of Holders................49
SECTION 9.03. Execution of Supplemental Indentures...........................51
SECTION 9.04. Effect of Supplemental Indentures..............................51
SECTION 9.05. Conformity With Trust Indenture Act............................51
SECTION 9.06. Reference in Securities to Supplemental Indentures.............51
SECTION 9.07. Notice of Supplemental Indenture...............................52

ARTICLE X Covenants......................................................52
SECTION 10.01. Payment of Principal, Premium and Interest.....................52
SECTION 10.02. Maintenance of Office or Agency................................52
SECTION 10.03. Money for Security Payments To Be Held in Trust................53
SECTION 10.04. Statement by Officers as to Default............................54
SECTION 10.05. Existence......................................................54
SECTION 10.06. Waiver of Certain Covenants....................................54
SECTION 10.07. Additional Amounts.............................................55

ARTICLE XI Redemption of Securities.......................................56
SECTION 11.01. Applicability of Article.......................................56
SECTION 11.02. Election To Redeem; Notice to Trustee..........................56
SECTION 11.03. Selection by Trustee of Securities To Be Redeemed..............56
SECTION 11.04. Notice of Redemption...........................................57
SECTION 11.05. Deposit of Redemption Price....................................58
SECTION 11.06. Securities Payable on Redemption Date..........................58
SECTION 11.07. Securities Redeemed in Part....................................58

ARTICLE XII Subordination of Securities....................................59
SECTION 12.01. Securities Subordinated to Senior Indebtedness.................59
SECTION 12.02. Payment Over of Proceeds Upon Dissolution, etc.................59
SECTION 12.03. Prior Payment to Senior Indebtedness On Acceleration of
Securities.....................................................61
SECTION 12.04. No Payment When Senior Indebtedness in Default.................61
SECTION 12.05. Payment Permitted If No Default................................63
SECTION 12.06. Subrogation to Rights of Holders of Senior Indebtedness........63
SECTION 12.07. Provisions Solely To Define Relative Rights....................64
SECTION 12.08. Trustee To Effectuate Subordination............................64
SECTION 12.09. No Waiver of Subordination Provisions..........................64
SECTION 12.10. Notice to Trustee..............................................65
SECTION 12.11. Reliance on Judicial Order or Certificate of Liquidating
Agent..........................................................66
SECTION 12.12. Trustee Not Fiduciary for Holders of Senior Indebtedness.......66
SECTION 12.13. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights...............................66
SECTION 12.14. Article Applicable to Paying Agents............................66
SECTION 12.15. Certain Conversions Deemed Payment.............................67
SECTION 12.16. No Suspension of Remedies......................................67

- iii -
<PAGE>
ARTICLE XIII Conversion of Securities.......................................67
SECTION 13.01. Conversion Privilege and Conversion Price......................67
SECTION 13.02. Exercise of Conversion Privilege...............................68
SECTION 13.03. Fractions of Shares............................................69
SECTION 13.04. Adjustment of Conversion Price.................................69
SECTION 13.05. Notice of Adjustments of Conversion Price......................75
SECTION 13.06. Notice of Certain Corporate Action.............................76
SECTION 13.07. Company To Reserve Common Stock................................77
SECTION 13.08. Taxes on Conversions...........................................77
SECTION 13.09. Covenant as to Common Stock....................................77
SECTION 13.10. Cancellation of Converted Securities...........................78
SECTION 13.11. Provisions of Consolidation, Merger or Sale of Assets..........78
SECTION 13.12. Trustee's Disclaimer...........................................78

ARTICLE XIV Right To Require Repurchase....................................79
SECTION 14.01. Right To Require Repurchase....................................79
SECTION 14.02. Notice; Method of Exercising Repurchase Right..................79
SECTION 14.03. Deposit of Repurchase Price....................................80
SECTION 14.04. Securities Not Repurchased on Repurchase Date..................80
SECTION 14.05. Securities Repurchased in Part.................................80
SECTION 14.06. Certain Definitions............................................81

ARTICLE XV Meetings of Holders of Securities..............................82
SECTION 15.01. Purposes for Which Meetings May Be Called......................82
SECTION 15.02. Call, Notice and Place of Meetings.............................82
SECTION 15.03. Persons Entitled To Vote at Meetings...........................83
SECTION 15.04. Quorum; Action.................................................83
SECTION 15.05. Determination of Voting Rights; Conduct and Adjournment
of Meetings....................................................84
SECTION 15.06. Counting Votes and Recording Action of Meetings................84
</TABLE>
- iv -
<PAGE>
Certain Sections of this Indenture relating to Sections
310 through 318 of the Trust Indenture Act of 1939:

Section 310(a)(1) 609
(a)(2) 609
(a)(3) Not Applicable
(a)(4) Not Applicable
(a)(5) 609
(b) 608
Section 311(a) 613
(b) 613

Section 312(a) 701
702(a)
(b) 702(b)
(c) 702(c)

Section 313(a) 703(a)
(b) 703(a)
(c) 703(a)
(d) 703(b)
Section 314(a) 704
(a)(4) 1004
(b) Not Applicable
(c)(1) 102
(c)(2) 102
(c)(3) Not Applicable
(d) Not Applicable
(e) 102
Section 315(a) 601
(b) 602
(c) 601
(d) 601
(e) 514
Section 316(a)(1)(A) 502
512
(a)(1)(B) 513
(a)(2) Not Applicable
(b) 508
(c) 104(c)

Section 317(a)(1) 503
(a)(2) 504
(b) 1003
Section 318(a) 107
- ------------------------

Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.

- v -

EXHIBIT 5

[Letterhead of Baker & Botts, L.L.P.]

April 22, 1998

Innovative Valve Technologies, Inc.
2 Northpoint Drive, Suite 300
Houston, Texas 77060

Gentlemen:

As set forth in the Registration Statement on Form S-4 filed with
the Securities and Exchange Commission (the "Commission") on April 2, 1998 (the
"Registration Statement") by Innovative Valve Technologies, Inc., a Delaware
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Act"), relating to 5,000,000 shares of common stock, par value $.001 per share,
of the Company, including the rights to purchase Series A Junior Participating
Preferred Stock associated therewith ("Common Stock"), $50,000,000 aggregate
principal amount of Convertible Subordinated Debt Securities ("Convertible Debt
Securities") and the shares of Common Stock issuable on conversion thereof (the
"Conversion Shares") to be issued and sold by the Company from time to time
pursuant to Rule 415 under the Act, certain legal matters in connection with the
aforementioned securities are being passed on for the Company by us.

In our capacity as counsel for the Company, we have examined the
Registration Statement, the Certificate of Incorporation and Bylaws of the
Company, each as amended to date, the form of Indenture to be entered into by
the Company and a bank or trust company, as trustee (the "Trustee"), relating to
the Convertible Debt Securities and filed as an exhibit to the Registration
Statement (the "Form of Indenture"), and the originals, or copies certified or
otherwise identified, of corporate records of the Company, certificates of
public officials and of representatives of the Company, statutes and other
instruments and documents as a basis for the opinions hereafter expressed.

In connection with this opinion, we have assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective; and (ii) the Convertible Debt
Securities and Common Stock will be sold in compliance with applicable federal
and state securities laws and in the manner stated in the Registration Statement
and any appropriate prospectus supplement.

On the basis of and subject to the foregoing, we are of the
opinion that:

1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware.
<PAGE>
Innovative Valve Technologies, Inc. -2- April 22, 1998

2. With respect to the shares of Common Stock, when (i) the Board
of Directors of the Company or, to the extent permitted by Section
141(c) of the General Corporation Law of the State of Delaware, a duly
constituted and acting committee thereof (such Board of Directors or
committee being hereinafter referred to as the "Board"), has taken all
necessary corporate action to approve the issuance of and the terms of
the offering of the shares of Common Stock and related matters and (ii)
certificates representing the shares of Common Stock have been duly
executed, countersigned, registered and delivered in accordance with the
applicable agreement and plan of reorganization or definitive purchase
or similar agreement approved by the Board on payment of the
consideration therefor (not less than the par value of the Common Stock)
provided for therein, the shares of Common Stock will be duly
authorized, validly issued, fully paid and nonassessable.

3. With respect to the Convertible Debt Securities of any series,
when (i) the Board has taken all necessary corporate action to approve
the execution and delivery of an indenture in substantially the form of
the Form of Indenture (an "Indenture") and the issuance of and the terms
of the offering of the Convertible Debt Securities of that series and
related matters, (ii) an Indenture has been duly executed and delivered
by the Company and the Trustee or a successor Trustee, (iii) the Trustee
or a successor trustee has been duly qualified under the Trust Indenture
Act of 1939, as amended, and (iv) forms of securities complying with the
applicable terms of the Indenture and representing the Convertible Debt
Securities of that series have been duly executed and delivered by the
Company and authenticated by the Trustee or its duly appointed agent in
the form approved by the Board and in accordance with the Indenture and
the applicable agreement and plan of reorganization or definitive
purchase or similar agreement on payment of the consideration therefor
provided for therein, the Convertible Debt Securities of that series
will be duly authorized, validly issued, and constitute valid and
binding obligations of the Company entitled to the benefits of the
Indenture and enforceable against the Company in accordance with their
terms, except as such enforcement is subject to (a) any applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting creditors' rights generally, (b) general
principles of equity (regardless of whether that enforceability is
considered in a proceeding in equity or at law) and (c) any implied
covenants of good faith and fair dealing.

4. The Conversion Shares have been duly authorized and reserved
for issuance on conversion of the Convertible Debt Securities of any
series and when (i) the Convertible Debt Securities of that series have
been issued in compliance with clauses (i) through (iv) of the preceding
paragraph and (ii) certificates representing the Conversion Shares have
been duly executed, countersigned, registered and delivered in
accordance with the terms of the Convertible Debt Securities of that
series and the Indenture on conversion of the Convertible
<PAGE>
Innovative Valve Technologies, Inc. -3- April 22, 1998

Debt Securities of that series, the Conversion Shares will be duly
authorized, validly issued, fully paid and non-assessable.

The opinion set forth above is limited in all respects to matters
of the laws of the States of New York and Texas, the General Corporation Law of
the State of Delaware and the federal laws of the United States of America, to
the extent applicable.

We hereby consent to the filing of this opinion of counsel as
Exhibit 5 to the Registration Statement. We also consent to the reference to our
name under the heading "Legal Matters" in the prospectus forming a part of the
Registration Statement.

Very truly yours,

BAKER & BOTTS, L.L.P.

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
Registration Statement (No. 333-49283).

ARTHUR ANDERSEN LLP
Houston, Texas
April 17, 1998

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-49283 of Innovative Valve Technologies, Inc. of our report dated January 17,
1997 (January 31, 1997 as to Notes 2 and 7) on the consolidated financial
statements of Harley Industries, Inc. as of October 31, 1995 and 1996 and for
each of the three years in the period ended October 31, 1996 appearing in the
Prospectus, which is the part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.

DELOITTE & TOUCHE LLP

Tulsa, Oklahoma
April 17, 1998

EXHIBIT 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report dated February 12, 1998 with respect to the December 31, 1997 financial
statements of Cypress Industries, Inc. and to reference to our firm, under the
heading "Experts", included in this registration statement.

CROWE, CHIZEK AND COMPANY LLP

Oak Brook, Illinois
April 17, 1998