DENALI INC, 424B1, 1997-11-21

DENALI INC
424B1, 1997-11-21
BUSINESS SERVICES, NEC

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-36857

PROSPECTUS

2,100,000 SHARES

[DENALI INCORPORATED LOGO]

COMMON STOCK

All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), of Denali Incorporated, a Delaware corporation ("Denali" or the
"Company"), offered hereby are being sold by the Company. Prior to this offering
(the "Offering"), there has been no public market for the Common Stock of the
Company. See "Underwriting" for information relating to the factors considered
in determining the initial public offering price.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "DNLI".

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

<TABLE>
<CAPTION>
=======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $13.00 $0.91 $12.09
Total(3).......................... $27,300,000 $1,911,000 $25,389,000
=======================================================================================================
</TABLE>

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

(2) Before deducting estimated offering expenses of $1.15 million payable by the
Company.

(3) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
315,000 shares of Common Stock from the Company, solely to cover
over-allotments. If all such shares are purchased by the Underwriters, the
total Price to Public will be $31,395,000, the total Underwriting Discount
will be $2,197,650 and the total Proceeds to Company will be $29,197,350.
See "Underwriting."
---------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the Underwriters' right to withdraw, cancel or modify such offer and reject any
order in whole or in part. It is expected that delivery of the shares of the
Common Stock will be made on or about November 26, 1997.
---------------------

MORGAN KEEGAN & COMPANY, INC. RAUSCHER PIERCE REFSNES, INC.

The date of this Prospectus is November 20, 1997.
<PAGE> 2

[1. Map of United States identifying location of Company facilities]

[2. Ershigs logo and photograph of product with caption: "Ershigs is a
manufacturer of engineered fiberglass reinforced composites for handling
corrosive fluids. Ershigs designs, manufactures and installs stacks, stack
liners, scubbers, tanks, abrasion resistant pipe and fittings, retention
towers, and various types of engineered systems."]

[3. SEFCO logo and photograph of product with caption: "SEFCO is an integrated
manufacturer of engineered field-erected steel tanks and accessories for use
in the water and wastewater, agrochemical and petroleum industries."]

[4. Hoover Containment logo and photograph of product with caption: "Hoover
Containment is a manufacturer of steel rectangular above ground storage
tanks."]

[5. Fluid Containment logo and photograph of product with caption: "Fluid
containment is a manufacturer of fiberglass composite underground storage
tanks. Pictured above is the research tank farm for a major multinational
oil company. The installation pictured at the right shows a double-walled
tank. "]

[6. Photo with caption: "Our Vision. To be the leading provider of solutions for
the critical fluid handling industry."]

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

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including Notes thereto,
appearing elsewhere in this Prospectus. References to pro forma financial
information should be read in conjunction with the Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. As used in this Prospectus, all
references to the "Company" or to "Denali" refer to Denali Incorporated, its
predecessors and subsidiaries.

THE COMPANY

Denali Incorporated is a rapidly growing provider of products and services
for handling critical fluids, which are fluids that are economically valuable or
potentially hazardous to the environment. The Company believes that it is a
leading manufacturer of fiberglass composite underground storage tanks ("USTs"),
steel rectangular aboveground storage tanks ("ASTs") and engineered fiberglass
reinforced composites for handling corrosive fluids. Critical fluids handling
products and services are used in a wide variety of applications, including in
retail petroleum marketing and in petroleum, chemical, pulp and paper, electric
power and other industrial process plants.

BACKGROUND

The Company was formed in 1994 to acquire the fiberglass composite UST
business of Owens Corning. Initially, the Company focused its efforts on
improving profitability, improving responsiveness to customers and developing
new products. The Company's management also realized that the critical fluids
handling industry was highly fragmented and that there would be significant
opportunities to consolidate the industry.

In October 1995, the Company acquired Hoover Containment, Inc. ("Hoover"),
a manufacturer of steel rectangular ASTs, and, in February 1997, the Company
acquired Ershigs, Inc. ("Ershigs"), a manufacturer of engineered fiberglass
reinforced plastic ("FRP") products for handling corrosive fluids.

In October 1997, the Company acquired GL&V LaValley Construction, Inc.
("LaValley"), another manufacturer of engineered FRP products, and SEFCO, Inc.
("SEFCO"), a fabricator of engineered field-erected steel tanks.

Prior to forming the Company, the Company's Chairman and Chief Executive
Officer, Stephen T. Harcrow, was President of EnviroTech, a business unit of
Baker Hughes Incorporated, from 1988 to 1993. EnviroTech was a manufacturer of
equipment for process industries. During Mr. Harcrow's tenure as President,
EnviroTech grew through the acquisition of manufacturers of fluid separation,
pumping and measurement products, with annual revenues increasing from
approximately $365 million up to $680 million. Since the Company's formation,
five other former employees of EnviroTech have joined the Company as executive
officers.

PRODUCTS AND SERVICES

Containment Products. The Company's Containment Products Group specializes
in the manufacture of fiberglass composite USTs and steel rectangular ASTs. The
Company's fiberglass composite USTs, manhole products and oil/water separators
are marketed under the Fluid Containment tradename and its steel rectangular
ASTs are marketed under the Hoover and LubeCube(R) tradenames.

Engineered Products. The Company's Engineered Products Group specializes in
providing custom engineered FRP products and engineered metal products for the
pulp and paper, power, chemical, water and wastewater and other process
industries. The Company markets its engineered FRP products under the Ershigs
tradename and believes that it is a leading domestic provider of engineered FRP
products for corrosion resistant applications. SEFCO is an integrated
manufacturer of engineered field-erected steel tanks and accessories for use in
the water and wastewater, agrochemical and petroleum industries. This group
focuses its operations on complex projects, where custom engineering and special
manufacturing expertise are critical.
3
<PAGE> 4

BUSINESS STRATEGY

The Company's objective is to become the leading provider of a broad range
of products and services for handling critical fluids through strategic
acquisitions and internal growth. The Company believes that the fragmented
nature of the critical fluids handling industry, which is comprised of many
companies with limited product ranges or serving limited geographic areas, will
provide continued acquisition and internal growth opportunities. The Company
also believes that these opportunities provide the Company with the ability to
offer a comprehensive range of specialized solutions for meeting its customers'
critical fluids handling needs.

Acquisition Strategy. Since its founding in 1994, the Company has completed
five acquisitions. The Company's net sales have grown from approximately $17.8
million for fiscal 1995 (a 28-week period ended July 1, 1995) to $71.1 million
for fiscal 1997. Pro forma net sales for fiscal 1997 were approximately $104.9
million, including approximately $17.9 million with respect to the recent
acquisitions of SEFCO and LaValley. Net loss for fiscal 1995 was $43,000 and
increased to net income of $317,000 for fiscal 1997 and was $595,000 for pro
forma first quarter fiscal 1998, excluding a $2.3 million non-recurring
compensation charge. In addition, EBITDA (as defined in "Summary Consolidated
Financial Data") increased from $981,000 for fiscal 1995 to approximately $3.9
million for fiscal 1997 and was $2.3 million for pro forma first quarter fiscal
1998. Key elements of the Company's acquisition strategy include:

- Develop a Comprehensive Range of Products and Services. The Company's
existing products offer a variety of containment and engineered materials
solutions for handling critical fluids. The Company intends to broaden
its product lines to introduce additional critical fluid separation and
measurement products. The Company believes that the ability to offer a
comprehensive range of critical fluids handling products and services
will be a competitive advantage.

- Expand Within Existing Markets. The Company intends to expand its product
offerings within the geographic markets it currently serves. For example,
the SEFCO acquisition is expected to expand the Company's engineered
product capabilities into the field fabrication of tanks.

- Penetrate New Geographic Markets, Including International Markets. The
Company believes that it can expand its operations that are regional in
nature throughout the United States and internationally. For example, the
acquisition of LaValley is expected to strengthen the Company's market
position in the Gulf Coast region for the Company's engineered products.
In addition, the Company intends to pursue license agreements for the
international manufacture of certain products.

Internal Growth Strategy. The Company is also focused on expanding the
scope and profitability of each of the businesses it acquires. Key elements of
this growth strategy are:

- Promote Internal Growth through a Decentralized Structure. The Company
employs a decentralized management and operational structure to
capitalize on market knowledge, product expertise, name recognition and
customer relationships.

- Reduce Product and Administrative Costs. The Company's consolidation
effort has led to raw materials purchasing economies, manufacturing
efficiencies, increased sales coverage and product transportation cost
reductions. In addition, the Company has improved operating margins by
consolidating administrative functions such as finance, insurance and
employee benefits.

- Develop New Products. The Company utilizes the technological expertise,
market knowledge and customer relationships of the businesses it acquires
to develop new products. For example, as a result of the Company's
development efforts, sales of oil/water separators and FRP manhole
products have increased from approximately $500,000 for fiscal 1995 to
more than $2.3 million for fiscal 1997.

- Utilize Available Manufacturing Capacity. The Company also believes new
products, acquired businesses and growth of current product net sales
will increase manufacturing and facility utilization, contributing to
further increases in profitability.

The Company's principal offices are located at 1360 Post Oak Boulevard,
Suite 2470, Houston, Texas 77056, and its telephone number is (713) 627-0933.
4
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company(1)....... 2,100,000 shares
Common Stock to be outstanding after the
Offering(1)(2)............................. 4,284,910 shares
Use of proceeds.............................. To repay outstanding indebtedness, to redeem
shares of preferred stock and to provide
working capital. See "Use of Proceeds."
Nasdaq National Market symbol................ DNLI
</TABLE>

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

(1) Does not include up to 315,000 shares of Common Stock which may be sold by
the Company on the exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."

(2) Does not include 538,863 shares of Common Stock issuable upon exercise of
outstanding options under the Company's stock option plans.

RISK FACTORS

Prospective purchasers of the Common Stock offered hereby should carefully
consider the factors as set forth under the caption "Risk Factors."
5
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The summary consolidated financial data for the period December 19, 1994
(date of inception) to July 1, 1995, and the years ended June 29, 1996 and June
28, 1997, have been derived from the Company's Consolidated Financial
Statements, which have been audited by Ernst & Young LLP. The Company operates
on a 52/53 week fiscal year ending on the Saturday closest to June 30. The
summary historical consolidated financial data for the three months ended
September 28, 1996 and September 27, 1997 have been derived from the unaudited
consolidated financial statements of the Company, which in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the periods presented. The results of
operations for the three months ended September 27, 1997 are not necessarily
indicative of the results of operations to be expected for the year. References
to fiscal years by date refer to the fiscal year ending in that calendar year;
for example, "fiscal 1997" refers to the fiscal year ended June 28, 1997.

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------------------------------------------ --------------------------
FOR THE PERIOD
DECEMBER 19,
1994 THREE THREE THREE
(DATE OF MONTHS MONTHS MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28, SEPTEMBER 27,
1995 1996 1997 1996 1997 1997 1997
-------------- ---------- ---------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $17,799 $53,354 $71,101 $17,703 $21,979 $104,928 $26,318
Cost of sales............ 13,473 43,518 57,268 13,949 17,149 85,790 20,253
------- ------- ------- ------- ------- -------- -------
Gross profit............. 4,326 9,836 13,833 3,754 4,830 19,138 6,065
Selling, general and
administrative
expenses............... 3,771 9,604 11,874 2,786 3,825 17,455 4,518
Non-recurring
compensation expense... -- -- -- -- 2,312 -- 2,312
------- ------- ------- ------- ------- -------- -------
Operating income......... 555 232 1,959 968 (1,307) 1,683 (765)
Interest expense......... 671 1,783 2,058 498 607 3,277 809
Interest income.......... -- (65) (111) (25) (20) (111) (20)
Other income, net........ (72) (206) (598) (68) (142) (544) (233)
------- ------- ------- ------- ------- -------- -------
Income (loss) before
income taxes........... (44) (1,280) 610 563 (1,752) (939) (1,321)
Income tax provision
(benefit).............. (1) (446) 293 270 213 (376) 396
------- ------- ------- ------- ------- -------- -------
Net income (loss)........ $ (43) $ (834) $ 317 $ 293 $(1,965) $ (563) $(1,717)
Dividends on Series A
Preferred Stock........ (60) (120) (120) (30) (30) (120) (30)
------- ------- ------- ------- ------- -------- -------
Net Income (loss)
attributable to Common
Stock.................. $ (103) $ (954) $ 197 $ 263 $(1,995) $ (683) $(1,747)
======= ======= ======= ======= ======= ======== =======
Net income (loss) per
common share(2).......... $ (0.05) $ (0.44) $ 0.09 $ 0.12 $ (0.87) $ (0.31) $ (0.76)
======= ======= ======= ======= ======= ======== =======
Weighted average common
shares outstanding(2).... 2,078 2,185 2,198 2,185 2,286 2,198 2,286
======= ======= ======= ======= ======= ======== =======
</TABLE>

6
<PAGE> 7
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------------------------------------------ ------------
FOR THE PERIOD
DECEMBER 19,
1994 THREE THREE
(DATE OF MONTHS MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28,
1995 1996 1997 1996 1997 1997
-------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by (used in)
operating activities.......... $ 3,789 $ (109) $ 625 $(1,493) $ 2,082
Net cash used in investing
activities.................... (7,527) (5,430) (4,631) (331) (166)
Net cash provided by (used in)
financing activities.......... 4,737 4,664 4,212 2,117 (1,796)
OTHER DATA:
Depreciation and amortization... $ 354 $ 913 $ 1,221 $ 285 $ 325 $2,053
EBITDA(3)....................... $ 981 $ 1,416 $ 3,889 $ 1,346 $ 1,492 $4,391

<CAPTION>
PRO FORMA(1)
-------------

THREE
MONTHS
ENDED
SEPTEMBER 27,
1997
-------------
<S> <C>
CASH FLOW DATA:
Net cash provided by (used in)
operating activities..........
Net cash used in investing
activities....................
Net cash provided by (used in)
financing activities..........
OTHER DATA:
Depreciation and amortization... $ 547
EBITDA(3)....................... $2,347
</TABLE>

<TABLE>
<CAPTION>
JUNE 28, SEPTEMBER 27, 1997
1997 ---------------------------------------------
---------- PRO FORMA
HISTORICAL HISTORICAL PRO FORMA(4) AS ADJUSTED(4)(5)
---------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 8,019 $ 6,911 $ 7,708 $ 9,246
Total assets.............................................. 41,084 41,289 52,320 52,320
Total debt................................................ 24,024 22,228 31,228 7,760
Series A Preferred Stock (redeemable)..................... 1,200 1,200 1,200 --
Stockholders' equity (deficit)............................ (541) (224) (224) 24,015
</TABLE>

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

(1) Gives effect to the acquisitions of Ershigs, LaValley and SEFCO, as if such
acquisitions had been consummated as of June 30, 1996, the beginning of the
period presented, and should be read in conjunction with the Pro Forma
Condensed Consolidated Financial Statements included elsewhere in this
Prospectus. The pro forma results of operations are not necessarily
indicative of the results that would have occurred had the acquisitions been
consummated as of the beginning of the period.

(2) Supplemental earnings (loss) per common share, which give effect to this
Offering as if it had occurred at the beginning of the periods presented,
were $0.39 and $(0.38)for the year ended June 28, 1997 and the three months
ended September 27, 1997, respectively. See Notes 2 and 18 to Consolidated
Financial Statements.

(3) EBITDA represents earnings before interest expense, income tax, depreciation
and amortization and non-recurring compensation expense. The Company
believes that EBITDA is a meaningful measure of its operating performance;
however, EBITDA should not be considered in isolation from or as a
substitute for net income or cash flow measures prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. In addition, EBITDA may not be comparable to
similarly titled measures reported by other companies.

(4) Gives effect to the acquisitions of LaValley and SEFCO as if such
acquisitions had been completed on June 28, 1997.

(5) Gives effect to the Offering and the application of the estimated net
proceeds therefrom as set forth under "Use of Proceeds." See
"Capitalization."
7
<PAGE> 8

RISK FACTORS

Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus.

DEPENDENCE ON INDUSTRY SPENDING

The prospects for the Company depend upon the level of capital and
maintenance expenditures by its industrial customers. These industries
historically have been cyclical in nature and vulnerable to general downturns in
the economy. No assurance can be given that the Company will be able to increase
or maintain its level of sales in periods of economic stagnation or downturn.
Decreases in industry spending could have a significant adverse effect upon the
demand for the Company's products and services and the Company's results of
operations.

LIMITED OPERATING HISTORY

The Company commenced operations in December 1994 and has only a limited
operating history upon which investors may base an evaluation of its
performance. The likelihood of success of the Company must be considered in
light of the risks, expenses, difficulties and delays frequently encountered in
connection with the operation and development of new and expanding businesses.

ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY

Since 1994, the Company has completed five acquisitions of businesses in
pursuit of its strategic objectives. The Company plans to continue to pursue
acquisitions that complement its existing products and services. The Company
expects to face competition for acquisition candidates, which may limit the
number of acquisition opportunities and may lead to higher acquisition prices.
There can be no assurance that the Company will be able to identify, acquire or
manage profitably additional businesses or to integrate successfully any
acquired businesses into the Company without substantial costs, delays or other
operational or financial difficulties. Further, acquisitions involve a number of
special risks, including failure of the acquired business to achieve expected
results, diversion of management's attention, failure to retain key personnel of
the acquired business and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that the businesses the Company has acquired or may
acquire in the future will achieve anticipated net sales and earnings. See
"Business -- Strategy."

NEED FOR ADDITIONAL CAPITAL; LEVERAGE AND LIQUIDITY

The Company has experienced and expects to continue to experience
substantial working capital needs to fund it operations. Although the Company
believes that based on its current operations it will be able to meet the
interest and principal obligations on its indebtedness and to fund its capital
expenditures and other operating expenses out of cash flow from operations and
available borrowings under its principal credit facility over the next 12
months, there can be no assurance that the Company's business will continue to
generate cash flow at levels sufficient to meet these requirements. Further, the
Company plans to effect future acquisitions to pursue its business strategy
which may require additional financing. No assurance can be given as to the
availability or terms of any such additional financing that may be required.

At November 1, 1997, after giving effect to the issuance of the Common
Stock offered hereby and the application of the net proceeds therefrom to repay
indebtedness and to redeem certain shares of the Company's Series A Preferred
Stock, the Company would have had total indebtedness of approximately $9.8
million and debt as a percentage of total capitalization of 28.7%. Although the
Company's current amount of indebtedness, as adjusted, is relatively low, the
Company has been highly leveraged in the past and may increase the level of its
indebtedness in the future to fund its current operations or to finance
additional acquisitions. The degree to which the Company will be leveraged could
have important consequences, including the following: (i) the possible
impairment of the Company's ability to obtain financing in the future for
potential acquisitions, working capital, capital expenditures and general
corporate purposes; (ii) the

8
<PAGE> 9

necessity for a substantial portion of the Company's cash flow from operations
to be dedicated to the payment of principal and interest on its indebtedness;
and (iii) the potential for increased vulnerability of the Company to economic
downturns and possible limitation of its ability to withstand competitive
pressures. The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.

RISKS RELATED TO INTERNAL GROWTH STRATEGY

Key elements of the Company's strategy are to improve the profitability of
its businesses and any businesses it may subsequently acquire and to continue to
expand the net sales of such businesses. Although the Company intends to seek to
improve the profitability of such businesses by various means, including
reducing administrative and other costs, there can be no assurance that the
Company will be able to do so. The Company's ability to increase the net sales
of such businesses will be affected by various factors, including demand for
products, the Company's ability to expand the range of products and services
offered by each of such businesses and the Company's ability to successfully
enter new markets. Many of these factors are beyond the control of the Company,
and there can be no assurance that the Company's strategies will be successful
or that it will be able to generate cash flow adequate for its operations and to
support internal growth. See "Business -- Business Strategy."

COMPETITION

The markets for the Company's products are fragmented and highly
competitive. Although none of the Company's competitors is considered dominant,
there are competitors that have significantly greater resources than the
Company, which, among other things, could be a competitive disadvantage to the
Company in securing certain projects. See "Business -- Competition."

INTERNATIONAL EXPANSION

The Company's successful expansion into global markets will depend on
numerous factors, many of which are beyond its control. In addition, global
expansion may increase the Company's exposure to certain risks inherent in doing
business outside the United States, including currency fluctuations,
restrictions on the repatriation of profits, compliance with foreign laws and
standards and political risks. Although the majority of the Company's contracts
with respect to international sales to date have been denominated in United
States dollars, no assurance can be made that future contracts will be
denominated in United States dollars; therefore, the Company may be subject to
foreign exchange risks in the future. The Company does not presently hedge
exchange rate fluctuations, but, in the future, may hedge economic exposures.

POTENTIAL FOR PRODUCT LIABILITY CLAIMS

Certain of the Company's products are used in handling potentially
hazardous materials. Based on the Company's operating experience and
consultation with its independent insurance risk advisor, the Company carries
insurance in amounts that it considers adequate. However, catastrophic
occurrences at locations where the Company's products are used could in the
future result in significant product liability claims against the Company. In
addition, a number of the Company's products are used to store regulated
substances such as petroleum. The release or leakage of such substances from
these products could also result in liability claims against the Company.

GOVERNMENTAL REGULATION

The Company is subject to various foreign, federal, state and local laws
and regulations relating to the protection of health, safety and the
environment. The Company's business involves environmental and health and safety
management issues typically associated with manufacturing operations. Since
formation of the Company, the Company's cost of complying with such laws and
regulations has not been material. However, future laws and regulations may
become more stringent and may require the Company to incur significant
additional costs. See "Business -- Governmental Regulation."

9
<PAGE> 10

SEASONALITY

The Company's operations are subject to seasonal variations in weather
conditions. Because most of the Company's customers' construction activities
take place outdoors, the number of projects generally declines in the winter
months due to an increase in rainy and cold conditions. In addition, its
customers often schedule the completion of their projects during the summer
months in order to take advantage of the milder weather for the installation of
their equipment and systems. As a result, a disproportionate amount of the
Company's net income, net sales and gross profit has historically been earned
during the first and fourth quarters of the fiscal year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RELIANCE ON PRINCIPAL SUPPLIER

The principal raw materials used by the Company in its manufacture of
fiberglass composite USTs are fiberglass and resin. Although resin is available
in adequate supply from a variety of sources, substantial manufacturers of
fiberglass are more limited in number. Because of this limited market supply,
the Company has entered into a supply contract with Owens Corning pursuant to
which the Company has agreed to purchase, and Owens Corning has agreed to
supply, at least 80% of the Company's fiberglass composite UST requirements
through December 31, 1997. The Company has entered into a supply contract with
Owens Corning beginning January 1, 1998 to supply at least 90% of the Company's
fiberglass requirements through December 31, 2000. In addition, this contract
contains certain pricing stabilization terms. As a result of this arrangement,
the Company remains significantly dependent upon Owens Corning to deliver
quality product in accordance with and, as required by, the Company's needs.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon a limited number of key management, technical
and sales personnel. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified personnel. The Company faces
competition for such personnel from other companies and organizations, and there
can be no assurance that the Company will be successful in hiring or retaining
qualified personnel. The Company does not have written employment agreements
with its officers providing for specific terms of employment, and officers and
other key personnel could leave the Company's employ with little or no prior
notice. The Company's loss of key personnel, especially if the loss is without
advance notice, or the Company's inability to hire or retain key personnel,
could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company does not carry any key man life
insurance.

CONTINUED CONTROL BY CURRENT OFFICERS, DIRECTORS AND AFFILIATED ENTITIES

Upon completion of this Offering, the Company's current executive officers,
directors and entities affiliated with them will beneficially own, in the
aggregate, approximately 39.4% (36.8% if the Underwriters' over-allotment option
is exercised in full) of the Company's outstanding Common Stock. If they were to
act together, these stockholders would be able to control substantially all
matters requiring approval by the Company's stockholders, including the election
of directors, the adoption or amendment of provisions in the Company's
Certificate of Incorporation or Bylaws and the approval of mergers or other
business combination transactions. Such ownership of Common Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
and may affect the outcome of the voting and other rights of the other
stockholders. See "Principal Stockholders."

REDEMPTION OF PREFERRED STOCK HELD BY COMPANY DIRECTORS

The Company intends to use a portion of the net proceeds from the Offering
to redeem in full the Company's Series A Preferred Stock. As of September 30,
1997, such redemption amount totaled $1,410,000 (including $210,000 in accrued
and unpaid dividends). Approximately 75% of the Series A Preferred Stock is
beneficially owned by members of the Company's Board of Directors. See "Certain
Transactions" and "Use of Proceeds."

10
<PAGE> 11

ABSENCE OF DIVIDENDS

The Company anticipates that earnings will be retained for the development
of the Company's business and that no cash dividends will be declared on the
Common Stock in the foreseeable future. See "Dividend Policy."

ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or, if one develops, that it will be sustained. The initial
public offering price for the shares of Common Stock offered hereby has been
determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors and may not be indicative of the market
price of the Common Stock after this Offering. See "Underwriting." The market
price of the Common Stock may be volatile and could be adversely affected by
fluctuations in the Company's operating results or the operating results of the
Company's competitors, the failure of the Company's operating results to meet
the expectations of market analysts and investors, changes in environmental or
other laws and regulations, actions by regulatory authorities, developments in
respect of patents or proprietary rights, changes in market analyst
recommendations, general market conditions or other events and factors.

EFFECT OF ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW

The Company has not elected to be excluded from the provisions of Section
203 of the Delaware General Corporation Law, which imposes certain restrictions
on transactions between a corporation and "interested stockholders" (as defined
in Section 203). These restrictions could operate to delay or prevent a change
in control of the Company and to discourage, impede or prevent a merger, tender
offer or proxy contest involving the Company. See "Description of Capital
Stock -- Anti-Takeover Provisions of Delaware Law."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. The 2,184,910 shares of Common Stock outstanding prior to the Offering
are not registered under the Securities Act of 1933, as amended (the "Securities
Act"), and, therefore, are not freely tradable unless subsequently registered
under the Securities Act or exempted from such registration. All of such shares
may be sold pursuant to the requirements of Rule 144 promulgated under the
Securities Act, subject to certain holding period requirements and volume
limitations relating to the sale of securities. In addition, the Company has
adopted a 1996 Incentive Stock Option Plan (the "1996 Plan") and a 1997
Incentive Stock Option Plan (the "1997 Plan") pursuant to which the Company may
grant options to its officers and employees, and shares of Common Stock issuable
upon exercise of options granted under such plans will become available for
future sale in the public market. As of June 28, 1997, there were outstanding
options to acquire 113,190 shares granted under the 1996 Plan, all of which are
currently exercisable. In connection with a merger of Containment Solutions,
Inc., a wholly-owned subsidiary of the Company ("CSI"), with and into the
Company in September 1997, options to acquire an additional 254,643 shares of
Common Stock under the 1996 Plan were issued in exchange for options to acquire
1,400 shares of common stock of CSI, all of which options are immediately
exercisable. Pursuant to the 1997 Plan, the Company has granted, effective as of
the date of this Prospectus, options to acquire 171,030 shares of Common Stock,
of which options to acquire 56,845 shares shall be immediately exercisable. The
Company, all of its executive officers and directors, and certain stockholders
and their affiliates have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any right to purchase or
acquire Common Stock without the prior written consent of the Underwriters for a
period of 180 days after the date of this Prospectus. See "Shares Eligible for
Future Sale" and "Underwriting."

11
<PAGE> 12

DILUTION

The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. New investors purchasing Common
Stock in this Offering accordingly will experience immediate and substantial
dilution in net tangible book value per share. See "Dilution."

POSSIBLE ISSUANCE OF PREFERRED STOCK

In addition to the Common Stock, the Company's Certificate of Incorporation
authorizes the issuance of up to 1,000,000 shares of preferred stock.
Immediately following redemption of all of the shares of the Company's Series A
Preferred Stock with a portion of the net proceeds of the Offering, no shares of
preferred stock of the Company will be outstanding, and the Company has no
current plans to issue any shares of preferred stock. However, because the
rights and preferences for any series of preferred stock may be set by the Board
of Directors in its sole discretion, those rights and preferences may be
superior to the rights of holders of the Common Stock and thus may adversely
affect the rights of holders of Common Stock. See "Description of Capital
Stock -- Preferred Stock."

USE OF PROCEEDS

The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be $24.2 million ($28.0 million if the over-allotment
option is exercised in full), at an initial public offering price of $13.00 per
share and after deducting the estimated underwriting discount and offering
expenses payable by the Company.

Approximately $14.8 million of the net proceeds to the Company will be used
to repay a portion of the borrowings of the Company incurred under its credit
facility (the "Credit Facility") and $0.2 million for unrelated term debt. The
Credit Facility bears interest per annum at varying rates of LIBOR plus a margin
ranging from 2.75% to 3.00% or the prime rate plus .50%. The Credit Facility has
a five year term. The Credit Facility was used to finance an aggregate of $9.0
million for the Company's acquisitions of LaValley and SEFCO. In addition,
approximately $6.7 million of the net proceeds will be used to repay the
Company's outstanding indebtedness to Owens Corning, which indebtedness was
incurred in connection with the Company's acquisition of the fiberglass
composite UST business of Owens Corning. The indebtedness to Owens Corning bears
interest at 10.0% per annum and is scheduled to mature on December 31, 1999.
Approximately $1.1 million (including accrued interest) of the net proceeds will
be used to repay the Company's outstanding indebtedness to Praxair, Inc., which
indebtedness was incurred in connection with the acquisition of Ershigs. The
indebtedness to Praxair, Inc. bears interest at a rate of 10.0% per annum and is
scheduled to mature in February 1998. A portion of the proceeds equal to
approximately $1.4 million will be used to redeem all of the shares of the
Company's Series A Preferred Stock (including accrued and unpaid dividends
through the date of redemption). The Company's Directors beneficially own
approximately 75% of the Series A Preferred Stock. The remaining net proceeds,
if any, are intended to be used by the Company for general working capital
purposes. See "Business -- Business Strategy."

12
<PAGE> 13

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
currently expects that it will retain future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. With respect to dividends for the Company's Series A
Preferred Stock, see "Use of Proceeds."

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 27, 1997, on a (i) historical basis, (ii) pro forma basis to give
effect to the acquisitions of LaValley and SEFCO, and (iii) pro forma as
adjusted basis to give effect to the sale of Common Stock offered hereby and
application of the net proceeds therefrom. See "Use of Proceeds." This
information is qualified in its entirety by, and should be read in conjunction
with, the Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Statements of the Company appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
-------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt....................... $ 1,403 $ 1,694 $ 1,694
Long-term debt, net of current portion.................. 19,607 28,316 6,066
Series A Preferred Stock, redeemable at $250 per share,
$.01 par value, authorized 16,000, issued and
outstanding 4,800 shares.............................. 1,200 1,200 --
Stockholders' equity
Common stock, $.01 par value; authorized 30,000,000
shares, issued and outstanding 2,184,910 shares;
issued and outstanding 4,284,910 shares, as
adjusted(1)........................................ 22 22 43
Additional paid-in capital............................ 2,609 2,609 26,827
Retained deficit...................................... (2,855) (2,855) (2,855)
------- ------- -------
Total stockholders' equity (deficit).......... (224) (224) 24,015
------- ------- -------
Total capitalization.......................... $21,986 $30,986 $31,775
======= ======= =======
</TABLE>

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

(1) Excludes shares of Common Stock issuable upon exercise of outstanding
options under the Company's stock option plans. See "Management -- Stock
Option Plans."

13
<PAGE> 14

DILUTION

Dilution is the reduction in the value of a purchaser's investment in
Common Stock measured by the difference between the purchase price per share and
the net tangible book value per share of the Common Stock after the purchase.
The net tangible book value per share of the Common Stock represents the net
tangible book value of the Company, its total assets less its total liabilities
and intangible assets (consisting primarily of goodwill), divided by the number
of shares of Common Stock outstanding. At September 27, 1997, the net tangible
book value of the Common Stock before giving effect to the Offering was $(1.27)
per share. After giving effect to the sale of the shares of Common Stock offered
in the Offering and after deducting estimated underwriting discounts and
offering expenses of approximately $3.1 million, the net tangible book value of
the Company at September 27, 1997 would have been approximately $4.87 per share.
This represents an immediate dilution of $8.13 per share to new investors and an
increase in the net tangible book value of approximately $6.14 per share to
existing stockholders, as illustrated by the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $13.00
Net tangible book value per share at September 27, 1997..... $(1.27)
Increase per share attributable to new stockholders......... $ 6.14
Adjusted net tangible book value per share after the Offering....... $ 4.87
Dilution of net tangible book value per share to new stockholders... $ 8.13
</TABLE>

The following table sets forth, as of September 27, 1997, the number of
shares of Common Stock purchased or to be purchased from the Company, the total
consideration paid or to be paid and the average price per share paid or to be
paid by existing stockholders and the new investors:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PURCHASE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 2,184,910 51.0% $ 318,500 1.2% $ .15
New investors.............. 2,100,000 49.0% 27,300,000 98.8% 13.00
--------- ----- ----------- -----
Total............ 4,284,910 100% $27,618,500 100%
========= ===== =========== =====
</TABLE>

The foregoing information does not include 538,863 shares of Common Stock
issuable upon the exercise of stock options currently granted or expected to be
offered at the time of the Offering under the Company's 1996 and 1997 Incentive
Stock Option Plans. See "Management -- Incentive Stock Option Plans."

14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the period December 19, 1994
(date of inception) to July 1, 1995 and the fiscal years ended June 29, 1996 and
June 28, 1997 have been derived from the Company's Consolidated Financial
Statements, which have been audited by Ernst & Young LLP, independent auditors.
The selected consolidated financial data for the three months ended September
28, 1996 and September 27, 1997 have been derived from the unaudited
consolidated financial statements of the Company, which in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the periods presented. The results of
operations for the three months ended September 27, 1997 are not necessarily
indicative of the results of operations to be expected for the year. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19,
1994 (DATE OF THREE MONTHS THREE MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
-------------- ---------- ---------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $17,799 $53,354 $71,101 $17,703 $21,979
Cost of sales................... 13,473 43,518 57,268 13,949 17,149
------- ------- ------- ------- -------
Gross profit.................... 4,326 9,836 13,833 3,754 4,830
Selling, general and
administrative expenses....... 3,771 9,604 11,874 2,786 3,825
Non-recurring compensation
expense....................... -- -- -- -- 2,312
------- ------- ------- ------- -------
Operating income................ 555 232 1,959 968 (1,307)
Interest expense................ 671 1,783 2,058 498 607
Interest income................. -- (65) (111) (25) (20)
Other income, net............... (72) (206) (598) (68) (142)
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (44) (1,280) 610 563 (1,752)
Income tax provision
(benefit)..................... (1) (446) 293 270 213
------- ------- ------- ------- -------
Net income (loss)............... $ (43) $ (834) $ 317 $ 293 $(1,965)
Dividends on Series A Preferred
Stock......................... (60) (120) (120) (30) (30)
------- ------- ------- ------- -------
Net income (loss) attributable
to Common Stock............... $ (103) $ (954) $ 197 $ 263 $(1,995)
======= ======= ======= ======= =======
Net income (loss) per common
share(1)...................... $ (0.05) $ (0.44) $ 0.09 $ 0.12 $ (0.87)
======= ======= ======= ======= =======
Weighted average common shares
outstanding(1)................ 2,078 2,185 2,198 2,185 2,286
======= ======= ======= ======= =======
CASH FLOW DATA:
Net cash provided by (used in)
operating activities.......... $ 3,789 $ (109) $ 625 $(1,493) $ 2,082
Net cash used in investing
activities.................... (7,527) (5,430) (4,631) (331) (166)
Net cash provided (used in) by
financing activities.......... 4,737 4,664 4,212 2,117 (1,796)
OTHER DATA:
Depreciation and amortization... $ 354 $ 913 $ 1,221 $ 285 $ 325
EBITDA(2)....................... 981 1,416 3,889 1,346 1,492
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
AS OF
----------------------------------------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 27,
1995 1996 1997 1997
------------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 3,192 $ 5,649 $ 8,019 $ 6,911
Total assets............................. 21,814 30,318 41,084 41,289
Total debt............................... 13,810 18,661 24,024 22,228
Series A Preferred Stock (redeemable).... 1,200 1,200 1,200 1,200
Stockholders' equity (deficit)........... $ 216 $ (738) $ (541) $ (224)
</TABLE>

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

(1) Supplemental earnings (loss) per common share, which give effect to this
Offering as if it had occurred at the beginning of the periods presented,
were $0.39 and $(0.38)for the year ended June 28, 1997 and the three months
ended September 27, 1997, respectively. See Notes 2 and 18 to Consolidated
Financial Statements.

(2) EBITDA represents earnings before consolidated net income, interest expense,
income tax, depreciation and amortization and non-recurring compensation
expense. The Company believes that EBITDA is a meaningful measure of its
operating performance; however, EBITDA should not be considered in isolation
from or as a substitute for net income or cash flow measures prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. In addition, EBITDA may not be
comparable to similarly titled measures reported by other companies.

16
<PAGE> 17

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

The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
included elsewhere in this document.

OVERVIEW

Since inception in 1994, the Company has acquired five businesses. Due to
the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of current or
future periods. Each of the acquisitions has been accounted for under the
purchase method of accounting. Accordingly, the acquired businesses have been
included in the Company's results of operations from the date of acquisition.

The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite UST business of Owens
Corning, including five manufacturing facilities. The purchase price was $16.6
million, consisting of $5.6 million in cash, $9.3 million in notes payable and
approximately $1.7 million in acquisition costs. The Company significantly
restructured the operations of this business at the time of purchase. Two of the
five manufacturing facilities of the business were closed, resulting in a
significant reduction in fixed manufacturing overhead. Operating costs were
significantly reduced throughout the Company, in part through the elimination of
approximately 20 management positions. The Company sold the two closed and idle
manufacturing facilities in fiscal 1996 for $1.5 million in cash (before selling
expenses) and an $850,000 note receivable.

In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover, a manufacturer of steel rectangular ASTs. The purchase
price of $5.5 million consisted of $5.4 million in cash and acquisition costs of
approximately $100,000. The Company eliminated certain operating costs through
the sharing of certain general and administrative functions within the acquired
businesses. The addition of the steel rectangular AST product line enabled the
Company to offer a broader line of containment products and to expand its
customer base. These two businesses form the Company's Containment Products
Group.

The Company has modernized and expanded its manufacturing capabilities for
its steel rectangular AST business through construction of a new,
built-for-purpose facility, consolidating three manufacturing and administrative
office locations in Maryland. Expenses of approximately $50,000 associated with
this consolidation impacted fiscal 1997 results; however, the Company believes
this move has positioned the Company to more effectively and efficiently meet
market demand beyond fiscal 1997.

In February 1997, the Company acquired Ershigs, a manufacturer of
engineered FRP products, as the first of the Company's Engineered Products
Group. The $6.1 million purchase price consisted of $5.0 million in cash, $1.0
million in a note payable and acquisition costs of approximately $80,000.
Substantial operational changes were made upon the purchase of Ershigs,
including the closing of one of Ershigs' three manufacturing plants and the
restructuring most of Ershig's sales, general and administrative functions,
which enabled the Company to enhance profitability.

In October 1997, the Company acquired SEFCO for approximately $4.9 million
in net cash and $100,000 in direct acquisition costs. SEFCO is a manufacturer of
engineered field-erected aboveground steel tanks. In October 1997, the Company
also acquired LaValley for $3.9 million in cash and $100,000 in direct
acquisition costs. LaValley manufactures engineered FRP products. LaValley and
SEFCO, together with Ershigs, form the Company's Engineered Products Group.

The acquisitions of LaValley and SEFCO accounted for $17.9 million of the
Company's pro forma 1997 net sales of $104.9 million.

17
<PAGE> 18

The following table indicates the Company's net sales by product line for
fiscal 1995, 1996, 1997 and the three month periods ended September 28, 1996 and
September 27, 1997, and pro forma results for fiscal 1997 and the three months
ended September 27, 1997:

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(4)
-------------------------------------------------------------------- ------------------------
FOR THE PERIOD THREE THREE THREE
DECEMBER 19, YEAR YEAR MONTHS MONTHS YEAR MONTHS
1994 (DATE OF ENDED ENDED ENDED ENDED ENDED ENDED
INCEPTION) TO JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28, SEPTEMBER 27,
JULY 1, 1995 1996 1997 1996 1997 1997 1997
-------------- -------- -------- ------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales by Product Line:
CONTAINMENT PRODUCTS:
Fiberglass composite
USTs(1)................. $17.8 $38.2 $39.7 $11.3 $11.3 $ 39.7 $11.3
Steel rectangular
ASTs(2)................. -- 15.2 25.1 6.4 6.7 25.1 6.7
ENGINEERED PRODUCTS:
Engineered FRP
products(3)(4).......... -- -- 6.3 -- 4.0 30.1 6.0
Engineered field-erected
steel tanks(4).......... -- -- -- -- -- 10.0 2.3
----- ----- ----- ----- ----- ------ -----
Total net sales.... $17.8 $53.4 $71.1 $17.7 $22.0 $104.9 $26.3
===== ===== ===== ===== ===== ====== =====
</TABLE>

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

(1) Reflects 28 weeks of results in fiscal 1995 and 52 weeks of results in
fiscal 1996 and fiscal 1997.

(2) Reflects 35 weeks of results in fiscal 1996 and 52 weeks of results in
fiscal 1997.

(3) Reflects 17 weeks of results in fiscal 1997.

(4) See footnotes to the Pro Forma Condensed Consolidated Financial Statements
for a description of the LaValley and SEFCO acquisitions. The pro forma
results of operations are not necessarily indicative of the results that
would have occurred had the acquisitions been completed as of the beginning
of the period.

RESULTS OF OPERATIONS

The following table sets forth for fiscal 1995, 1996, 1997 and the three
month periods ended September 28, 1996 and September 27, 1997, the percentage
relationship to net sales of certain expenses and earnings:

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
--------------------------------------------------------------------
FOR THE PERIOD THREE THREE
DECEMBER 19, YEAR YEAR MONTHS MONTHS
1994 (DATE OF ENDED ENDED ENDED ENDED
INCEPTION) TO JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
JULY 1, 1995 1996 1997 1996 1997
-------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 75.7 81.6 80.5 78.8 78.0
----- ----- ----- ----- -----
Gross profit.............................. 24.3 18.4 19.5 21.2 22.0
----- ----- ----- ----- -----
Selling, general and administrative
expenses................................ 21.2 18.0 16.7 15.7 17.4
Non-recurring compensation expense........ -- -- -- -- 10.5
----- ----- ----- ----- -----
Operating income.......................... 3.1 0.4 2.8 5.5 (5.9)
Interest expense.......................... 3.8 3.3 2.9 2.8 2.8
Interest income........................... -- (0.1) (0.2) (0.1) (0.1)
Other income, net......................... (0.4) (0.4) (0.8) (0.4) (0.6)
----- ----- ----- ----- -----
Income (loss) before income taxes......... (0.3) (2.4) 0.9 3.2 (8.0)
Income tax provision (benefit)............ -- (0.8) 0.4 1.5 0.9
----- ----- ----- ----- -----
Net income (loss)......................... (0.3)% (1.6)% 0.5% 1.7% (8.9)%
===== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 28, 1996

Net sales increased $4.3 million, or 24%, to $22 million in the first
quarter of fiscal 1998 from $17.7 million in the same quarter of fiscal 1997.
Most of the increase ($4.0 million) was attributable to the inclusion of Ershigs
sales in the fiscal 1998 period following the February 1997 acquisition by the
Company. The Containment Products Group sales increased 1.6% from the prior year
period.

18
<PAGE> 19

Gross profit increased $1.1 million, or 29%, to $4.8 million in the fiscal
1998 period from $3.7 million in fiscal 1997. Most of the increase ($1.0
million) was related to the inclusion of Ershigs in the fiscal 1998 period at a
25.7% margin. Gross margin for the Company increased to 22% from 21.2% in the
prior year quarter due to Ershigs' higher margin products. The Containment
Products Group margin of 21.1% in the fiscal 1998 period was slightly lower than
the 21.2% margin in the prior year quarter.

Selling, general and administrative expenses for the fiscal 1998 first
quarter totaled $3.8 million (17.4% of revenues), compared with $2.8 million
(15.7% of revenues) for the prior year quarter. Most of the increase ($835,000)
was attributable to the inclusion of Ershigs in the fiscal 1998 period. The
remainder of the increase was attributable primarily to higher sales and
marketing expenses in the Containment Products Group.

The Company recognized a $2.3 million non-recurring compensation charge in
the first quarter of fiscal 1998 due to the exchange of subsidiary stock options
for Denali stock options.

Interest expense for the fiscal 1998 period increased $109,000 to $607,000
from $498,000 in the prior year quarter. The increase was due to increased debt
resulting from the February 1997 Ershigs acquisition.

The Company's provision for income taxes, which includes the effects of the
non-recurring charge for compensation expense, differs from the U.S. statutory
rate of 34% due to the non-recurring compensation charge being non-deductible
for income tax purposes. In addition, the Company's provision for income taxes
differs from the U.S. statutory rate due to state income taxes and other
permanent differences.

Due to the factors described above, the net loss for the first quarter of
fiscal 1998 was $2 million, or $(0.87) per share, compared with net income of
$263,000, or $0.12 per share, for the first quarter of fiscal 1997. Net income
and earnings per share for the first quarter of fiscal 1998 before the $2.3
million non-recurring compensation charge were $317,000 and $0.14, respectively.

FISCAL 1997 COMPARED WITH FISCAL 1996

The Company's results of operations for fiscal 1997 were greatly impacted
by the inclusion of 17 weeks of results of Ershigs, which was acquired in
February 1997, and the inclusion of the results of Hoover, which was acquired in
October 1995, for a full fiscal year as compared to 35 weeks reflected in fiscal
1996.

Net sales for fiscal 1997 increased $17.7 million, or 33%, to $71.1
million, from $53.4 million in fiscal 1996. This increase primarily resulted
from $6.3 million of sales at Ershigs and a $10.0 million increase in sales at
Hoover.

Gross profit increased $4.0 million, or 41%, to $13.8 million in fiscal
1997 from $9.8 million in fiscal 1996. Gross profit margins were 19.5% and 18.4%
for fiscal 1997 and 1996, respectively. The Containment Products Group's gross
profit margin improved to 19.6% in fiscal 1997 as compared to 18.4% in fiscal
1996. This improvement resulted primarily from a lower cost of fiberglass and
resin used in the manufacture of fiberglass composite USTs. In fiscal 1996,
demand for fiberglass and resin exceeded supply, and the Company's principal
suppliers of fiberglass and resin increased prices. By fiscal 1997, additional
capacity was provided in the marketplace and prices declined. The gross profit
margin for the Company's Engineered Products Group was 18.2% in fiscal 1997.

Selling, general and administrative expenses increased $2.3 million, or
24%, to $11.9 million in fiscal 1997 from $9.6 million in fiscal 1996. This
increase was attributable to the inclusion of the Ershigs business and a full 12
months of the Hoover business as discussed above. This increase was partially
offset by savings resulting from a reduction and consolidation of workforce for
the Company's fiberglass composite UST business. Selling, general and
administrative expenses decreased as a percentage of net sales from 18.0% in
fiscal 1996 to 16.7% in fiscal 1997.

Interest expense in fiscal 1997 was $2.1 million compared to $1.8 million
in fiscal 1996. The increase was primarily a result of increased borrowings
required to finance the purchase of Ershigs and a full year of interest for
borrowings in connection with the acquisition of Hoover.

Other income increased $392,000 to $598,000 in fiscal 1997 from $206,000 in
fiscal 1996. This increase resulted primarily from a gain on the sale of idle
equipment to international licensees for the manufacture of fiberglass composite
USTs.

19
<PAGE> 20

The increase in income tax expense for fiscal 1997 compared to fiscal 1996
resulted from higher pre-tax earnings related to increased profitability of the
Containment Products Group.

Due to the factors described above, net income for fiscal 1997 was
$197,000, or $0.09 per share, compared with a net loss of $954,000 or $(0.44)
per share for fiscal 1996.

FISCAL 1996 COMPARED WITH FISCAL 1995

The Company was incorporated on December 19, 1994. Consequently, fiscal
1995 represented the results of operations for the 28-week period from December
19, 1994 through July 1, 1995.

Net sales increased $35.6 million, or 200%, to $53.4 million in fiscal 1996
from $17.8 million in fiscal 1995. The increase in net sales was directly
attributable to the increased reporting period from 28 weeks to 52 weeks for the
fiberglass composite UST business acquired from Owens Corning in December 1994,
and to the inclusion of 35 weeks for the Hoover business, acquired in October
1995, reflected in fiscal 1996 whereas there were none in fiscal 1995.

Gross profit increased $5.5 million, or 128%, to $9.8 million in fiscal
1996 from $4.3 million in fiscal 1995. Gross profit margins were 18.4% and 24.3%
for fiscal 1996 and 1995, respectively. The decrease in margin was primarily
attributable to increased prices for fiberglass and resin used in the
manufacture of the fiberglass composite UST products. In fiscal 1996, demand for
fiberglass and resin exceeded supply, and the Company's principal suppliers of
fiberglass and resin increased prices. By fiscal 1997, additional capacity was
provided in the marketplace and prices declined.

Selling, general and administrative expenses increased $5.8 million, or
153%, in fiscal 1996 to $9.6 million from $3.8 million in fiscal 1995. Selling,
general and administrative expenses as a percentage of net sales decreased to
18.0% for fiscal 1996 compared to 21.2% for fiscal 1995 primarily due to the
Company's reduction and consolidation of its workforce.

Interest expense in fiscal 1996 was $1.8 million compared to $671,000 in
fiscal 1995. Approximately $300,000 of the increased interest expense in 1996
was attributable to increased borrowings arising from the acquisition of Hoover.
The remaining increase resulted from the inclusion of a full year of interest
expense for the Company. In addition, the level of borrowings for the fiberglass
composite UST business increased $1.2 million during fiscal 1996 to fund general
working capital requirements.

Due to the factors described above, the net loss for fiscal 1996 was
$954,000, or $(0.44) per share, compared with a net loss of $103,000, or $(0.05)
per share for fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 28, 1997, was $8.0 million, as compared to $5.6
million at June 29, 1996. Cash provided by operating activities was $625,000 for
fiscal 1997 and cash used in operating activities was $109,000 in fiscal 1996.
The improvement in cash provided by operating activities resulted primarily from
a $1.2 million improvement in net income from an $834,000 loss in fiscal 1996 to
a $317,000 profit in fiscal 1997. Capital expenditures totaled $600,000 and
$942,000 in fiscal years 1997 and 1996, respectively. Working capital at
September 27, 1997, was $6.9 million as compared to $8.3 million at September
28, 1996. Cash provided by operating activities was $2.1 million for the three
months ended September 27, 1997 and cash used in operating activities was $1.5
million for the three months ended September 28, 1996. The improvement in cash
provided by operating activities resulted primarily from changes in working
capital. Capital expenditures totaled $208,000 and $71,000 for the three months
ended September 27, 1997 and September 28, 1996, respectively. The Company
anticipates that its operating cash flows and available line of credit after
application of the net proceeds of this Offering will be adequate to fund future
capital commitments and working capital requirements for the next 12 months. The
Company estimates that its capital expenditures for fiscal 1998 will be
approximately $1.2 million.

As further described in Note 7 to the Denali Incorporated Consolidated
Financial Statements, the Company refinanced its credit facilities in October
1997. In connection with the extinguishment of its old credit facility upon
funding of a new credit facility in October 1997, the Company paid prepayment
penalties of $323,000. In addition, the Company charged to expense unamortized
debt origination costs of $295,000 in

20
<PAGE> 21

October 1997. These charges will be recognized in the Company's consolidated
financial statements as an extraordinary loss, net of tax, of $383,000 in the
quarter ended December 27, 1997.

The Company's Credit Facility with its principal lender provides for
revolving lines of credit and secured term loans of up to an aggregate of $29.7
million. As of November 1, 1997, the Company had outstanding indebtedness of
$10.7 million under the term loans and $13.4 million under the revolving lines
of credit. Borrowings under this Credit Facility are secured by liens on
substantially all of the Company's assets. See Note 7 of Notes to the
Consolidated Financial Statements for certain information regarding the Credit
Facility. The Credit Facility bears interest per annum at varying rates of LIBOR
plus a margin ranging from 2.75% to 3.00% or the prime rate plus .50%. The
Credit Facility has a five year term.

In connection with its acquisition of the fiberglass composite UST business
of Owens Corning, the Company issued to Owens Corning a $7.5 million note which
bears interest at an annual rate of 10.0% and matures on December 31, 1999, and
is to be repaid with a portion of the net proceeds of this Offering. The Company
anticipates that the early repayment of this indebtedness to Owens Corning will
result in extraordinary gains, net of tax, of approximately $416,000 in the
second quarter of fiscal 1998 and $242,000 in the fourth quarter of fiscal 1998.
The extraordinary gain in the fourth quarter is contingent upon satisfactory
performance through June 1998 by the Company under the Owens Corning supply
agreement. Pursuant to the supply agreement, there is no minimum volume of
fiberglass that must be purchased by the Company; however, the Company is
obligated to purchase from Owens Corning at least 90% of its fiberglass
requirements during this period. Although no assurances can be made, the Company
expects to satisfy the percentage purchase requirement. As a result, the Company
believes that it is likely that such extraordinary gain will occur in the fourth
quarter of fiscal 1998.

The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business. The IRBs bear interest at 9.9% per annum, mature in February 2001 and
are secured by the Company's Conroe, Texas manufacturing facility.

The Company's capital requirements primarily relate to acquisitions of
businesses in the critical fluids handling industry. The Company has made cash
payments net of cash acquired for acquisitions of approximately $26.5 million in
the aggregate since inception in December 1994. The source of this cash
primarily has been bank debt along with proceeds from the sale of idle assets
and use of net working capital. The Company's acquisition program will require
significant additional capital. The Company intends to seek additional capital
as necessary to fund such acquisitions through one or more funding sources that
may include borrowings under the Credit Facility, or offerings of debt and/or
equity securities of the Company. Cash provided by operating activities may also
be used to fund a portion of future acquisitions. Although management believes
that the Company will be able to obtain sufficient capital to fund acquisitions,
there can be no assurances that such capital will be available to the Company at
the time it is required or on terms acceptable to the Company.

QUARTERLY RESULTS AND SEASONALITY

The Company has experienced significant fluctuations in its quarterly
results of operations. These fluctuations have been attributable to timing of
acquisitions and seasonality. The Company's quarterly operating results are
affected by the annual construction season slowdown resulting from winter
weather especially in the period December through March. The fiberglass
composite UST business is especially impacted during the winter months. The
following table represents the Company's selected unaudited quarterly
consolidated statements of operations for each quarter in fiscal 1996 and 1997:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 29, 1996 FISCAL YEAR ENDED JUNE 28, 1997
---------------------------------------- ----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $10,507 $14,342 $12,377 $16,128 $17,703 $16,970 $13,906 $22,522
Operating income(loss)......... 142 2 (577) 665 968 666 (542) 867
Net income (loss).............. (173) (177) (643) 159 293 130 (487) 381
</TABLE>

21
<PAGE> 22

BUSINESS
THE COMPANY

The Company is a rapidly growing provider of products and services for
handling critical fluids, which are fluids that are economically valuable or
potentially hazardous to the environment. The Company believes that it is a
leading manufacturer of fiberglass composite USTs, steel rectangular ASTs and
fiberglass reinforced composites for handling corrosive fluids. Critical fluids
handling products and services are used in a wide variety of applications,
including in retail petroleum marketing and in petroleum, chemical, pulp and
paper, electric power and other industrial process plants.

BACKGROUND

In October 1995, the Company acquired Hoover, a manufacturer of steel
rectangular ASTs, and, in February 1997, the Company acquired Ershigs, a
manufacturer of engineered FRP products for handling corrosive fluids.

In October 1997, the Company acquired LaValley, another manufacturer of FRP
products, and SEFCO, a fabricator of engineered field-erected steel tanks.

PRODUCTS AND SERVICES

Containment Products. The Company's Containment Products Group specializes
in the manufacture of fiberglass composite USTs and rectangular steel ASTs. The
Company's fiberglass composite USTs, manhole products and oil/water separators
are marketed under the Fluid Containment tradename and its steel rectangular
ASTs are marketed under the Hoover and LubeCube(R) tradenames.

BUSINESS STRATEGY

22
<PAGE> 23

Internal Growth Strategy. The Company is also focused on expanding the
scope and profitability of each of the businesses it acquires. Key elements of
this growth strategy are:

23
<PAGE> 24

The following table sets forth certain information concerning the
businesses which the Company has acquired:

<TABLE>
<CAPTION>
PRIMARY INDUSTRIES
COMPANY DATE ACQUIRED PRINCIPAL PRODUCT SERVED
------- ------------- ----------------- ------------------
<S> <C> <C> <C>
Fluid Containment(1).......................... December 1994 Fiberglass Composite USTs Petroleum Marketing
Hoover........................................ October 1995 Steel Rectangular ASTs Petroleum Marketing
Ershigs....................................... February 1997 Engineered FRP Products Pulp and Paper,
Power, Chemical,
Water and Wastewater
LaValley Construction......................... October 1997 Engineered FRP Products Pulp and Paper,
Chemical, Power
SEFCO......................................... October 1997 Field-Erected Steel Tanks Water and Wastewater,
and Agrochemical
</TABLE>

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

(1) Formerly the fiberglass composite UST business of Owens Corning.

OPERATIONS

The Company is organized to capitalize on focused core competencies and
expertise. Its operations are currently split into two groups: the Containment
Products Group and the Engineered Products Group. As part of the Company's
growth strategy, the Company also anticipates creating two additional product
groups to include critical fluid separation and measurement product lines. For a
discussion of certain industry segment data, see Note 17 of Notes to the
Consolidated Financial Statements.

CONTAINMENT PRODUCTS

The Containment Products Group of the Company focuses its operations on the
manufacture of fiberglass composite USTs and steel rectangular ASTs.

FIBERGLASS COMPOSITE UNDERGROUND STORAGE TANKS. The Company believes that
it is a leading manufacturer of fiberglass composite USTs and markets its
products under the Fluid Containment tradename. The Company manufactures and
markets single wall and double wall fiberglass composite USTs; leak detection
systems; oil/water separators; ReTank(R) retrofit systems; storage tank anchor
systems; and fiberglass manhole and wetwell products. The Company is the
successor to the fiberglass composite UST business of Owens Corning, which
invented the fiberglass composite UST.

Prior to the Company's acquisition of the tank business of Owens Corning,
Owens Corning completed over 235,000 fiberglass composite UST installations
during a 30-year period, and helped write and maintain the Underwriters'
Laboratory ("UL") 1316 specification. Since the acquisition, the Company has
completed almost 15,000 installations of its own fiberglass composite UST
products. The Company has a comprehensive training program for installers of the
Company's products. The Company also has experienced field service groups
located in California, Texas, Indiana, Pennsylvania, Florida and South Carolina
that support both the installers and their customers.

Each fiberglass composite UST comes with a 30-year corrosion warranty and
is guaranteed not to rust. The corrosion resistant nature of fiberglass
reinforced composite is the chief advantage the Company's fiberglass composite
USTs have in the market. The Company continues to strengthen its position in the
UST industry through research and development and a continual upgrading of its
manufacturing processes and investment in its employees.

Market. The Company believes that its fiberglass composite UST business is
growing primarily because of increased geographic coverage programs by petroleum
marketers and increased scope of service station offerings by the major oil
companies. Most of these fiberglass composite UST sales are for new locations
and developments and not for replacement and rehabilitation programs. An
important market for the Company is the newer, larger stations, known as
"super-c" stores, that combine the traditional self-service station with a fast
food store and a convenience store. According to an August 1995 report of the
Fiberglass Tank and Pipe

24
<PAGE> 25

Institute, an industry organization with principal offices located in Houston,
Texas, over 90% of all major petroleum marketing companies in the United States,
which includes all of the major integrated oil companies, specify fiberglass
composite USTs at all of their new construction sites. The Company believes that
growth in this area will continue to expand.

The Environmental Protection Agency ("EPA") has established certain minimum
requirements for UST systems installed before December 22, 1988. A majority of
the USTs currently in place in the United States were installed prior to that
date. The EPA requirements call for spill protection, overfill protection and
corrosion protection. A site with a UST of this age must either (1) add spill,
overfill and corrosion protection by December 22, 1998; (2) close the existing
UST by December 22, 1998; or (3) replace the closed existing UST with a new UST
meeting current regulatory standards. The EPA has announced that it intends to
enforce these minimum requirements and that failure of UST owners to adhere to
these requirements by the specified date could result in the UST owner being
cited for violations and fined. To date, the Company's fiberglass composite UST
business does not appear to have been significantly impacted by the
implementation of these EPA requirements and there can be no assurance that
these requirements ultimately will be enforced by the EPA and, if enforced, that
the Company will realize an increase in its fiberglass composite UST net sales
as a result of such enforcement activity.

Competition. The UST market is highly competitive and fragmented, with
entrants from both steel tank suppliers and another major fiberglass composite
UST supplier. Steel tanks account for a majority of the United States UST
market, in terms of net sales. The remainder of this market is divided fairly
evenly between two fiberglass composite UST suppliers, the Company and Xerxes,
Inc., a company headquartered in Minneapolis, Minnesota that has six
manufacturing facilities in the United States. Although steel USTs are less
expensive than fiberglass composite USTs, fiberglass composite USTs are not
subject to corrosion and do not expose the customer to corrosion leaks and
related environmental problems. When determining which product to acquire, one
of these two factors will generally control the purchase decision. Although over
100 manufacturers of UL listed steel USTs are located in the United States, most
of these manufacturers are small, independent operations. Several of the UST
manufacturers, however, are divisions or subsidiaries of larger corporations
with financial resources greater than that of the Company. Transportation costs
are important in the overall cost of product for this market. As a result, local
manufacturers have a distinct advantage of shipping products to the customer.
The Company believes that its quality of manufacturing, manufacturing control,
product design, testing procedures, history of performance and reliability,
delivery capability, customer responsiveness and experienced personnel are
competitive advantages in the UST market.

Marketing and Customers. The Company takes a multifaceted approach to
marketing its fiberglass composite UST products and services. The Company's
sales staff primarily supports an extensive network of Petroleum Equipment
Industry ("PEI") distributors and contractors. For significant national
accounts, i.e. a major oil company, the Company generally sells directly to the
end user, filling orders through its distributors and contractors. The Company's
largest fiberglass composite UST customers are super-regional distribution
houses and major oil companies; however, the overall customer base is diverse,
with no one customer accounting for more than 4% of the Company's fiberglass
composite UST net sales in fiscal 1997. The Company's top eight fiberglass
composite UST customers, a mix of PEI distributors and major oil companies,
accounted for 22% of the Company's fiberglass composite UST net sales in fiscal
1997. The Company has license agreements with companies outside the United
States to produce fiberglass composite USTs using the Company's technology and
continues to expand this presence.

STEEL RECTANGULAR ABOVEGROUND STORAGE TANKS. The Company believes that it
is a leading manufacturer of steel rectangular ASTs. The AST market includes
both rectangular and cylindrical configurations and is defined by the Company as
steel constructions intended for stationary aboveground storage of flammable and
combustible liquids at atmospheric pressure. Part of this market includes tanks
called vault tanks which are constructed with an insulation system that is
designed to reduce the heat transferred to the primary tank in the event the
construction were to be exposed to a hydrocarbon pool fire. The term "AST" also
refers to tanks manufactured and then transported as a completed unit to the
customer. For the purposes of this Prospectus, the term "AST" does not include
tanks certified as "large aboveground storage tanks" by the American

25
<PAGE> 26

Petroleum Institute (tanks with a capacity in excess of 1,000 barrels). The
Containment Products Group does not manufacture these large aboveground storage
tanks.

The Company sells its steel rectangular AST products under the Hoover name
and has two primary product lines: lubricant tanks (Lube Cube(R)) and vault
tanks. Lube Cube(R) tanks are designed and built to hold oil and waste oil
products in a service station-type environment, are available in standard sizes
up to 12,000 gallons and may be custom designed according to the customer's
needs. All Lube Cubes(R) meet NFPA (National Fire Protection Association)-30 for
storage of flammable and combustible liquids and are manufactured, tested and
labeled according to UL-142 as well as Underwriters' Laboratories of Canada.

The Company's vault tanks, sometimes referred to as insulated tanks, are
steel rectangular ASTs designed to hold highly combustible fuels, whether
gasoline, diesel or other. These tanks meet all national fire code requirements
for "fire rated" ASTs. Vault tanks are labeled according to UL-2085 "Protected
Secondary Containment" for ASTs containing flammable liquids. The Company's
vault tanks utilize a patented double wall tank design with insulating material
surrounding the inner tank. A pressure testable second steel tank surrounds the
insulating material, providing protection to the material and secondary leak
containment for the primary tank. In addition to the UL listed tanks, the
Company also offers factory-installed equipment packages, including steps,
platforms, pumps and electronics for fuel dispensing, standby generators, used
oil and lubricating oil.

Market. The Company believes that its base market for its steel rectangular
AST products is growing. The Lube Cube(R) tank market is tied to the growth in
number and size of quick-change oil stations and full service centers for auto
repair. The vault tank business continues to grow as the market accepts
aboveground alternatives to historically underground storage. The vault tank
product line has experienced some sales activity associated with the EPA tank
upgrade deadline described above; however, the Company believes that its steel
rectangular AST growth will be driven by factors other than regulatory
compliance.

Competition. The Company's steel rectangular ASTs are sold in highly
fragmented and competitive markets. Most AST manufacturers produce cylindrical
steel tanks that compete against the Company's steel rectangular AST products.
Over 240 steel AST manufacturers operate in North America, and over 75 of these
companies manufacture vault tanks. Several competitors of the Company are
divisions or subsidiaries of larger companies with financial and other resources
greater than those of the Company. However, the Company believes that the
majority of its competitors in this market are local, individually owned
manufacturing facilities because of the cost to transport ASTs significant
distances. The Company believes that it is the only national manufacturing
company in this market, operating facilities in Maryland and California and
having subcontracting agreements with quality manufacturing companies in
Virginia, North Carolina, Indiana, Kansas, Nebraska, Idaho, Maryland and New
York. Almost half of the Company's steel rectangular AST net sales relate to
products manufactured by its subcontractors, providing the flexibility to
cost-effectively service its customers. The Company's national presence reduces
transportation costs for products relative to single plant competitors that
compete on a national basis. However, local manufacturers have a competitive
advantage in transportation costs. The Company believes that its broad product
lines, product design, delivery capability, customer responsiveness and
experienced personnel are competitive advantages in the AST market.

Marketing and Customers. The Company uses its sales staff and outside sales
representative to market its steel rectangular AST products to the end-user
through a network of PEI distributors and contractors. The customer base for its
steel rectangular ASTs is broad, having over 900 accounts. In fiscal 1997, no
customer accounted for greater than 4% of the Company's steel rectangular AST
net sales except for the United States government, which accounted for
approximately 8% of the Company's steel rectangular AST net sales.

ENGINEERED PRODUCTS

The Company's Engineered Products Group believes that it is a leading
manufacturer of engineered FRP products for corrosion resistant applications and
engineered field-erected steel tanks for the municipal and industrial markets.

26
<PAGE> 27

ENGINEERED COMPOSITE PRODUCTS. The Company markets its engineered FRP
products for corrosion resistant applications under the Ershigs name and is a
professional engineering, manufacturing and construction organization that has
been serving the industry since 1921. The Company acquired Ershigs in February
1997. The Company focuses its operations in corrosion resistant applications on
complex projects, where engineering and manufacturing expertise is critical. The
Company designs, manufactures and installs stacks, stack liners, scrubbers,
tanks, abrasion resistant pipe and fittings, retention towers and various types
of engineered systems. For large diameter structures, the Company employs a
proven on-site manufacturing process that eliminates most handling,
transportation and remote access concerns. The Company has produced seamless
tanks in excess of 100 feet in diameter using this method.

Market. The Company serves a variety of industries, including pulp and
paper, power, chemical, water and wastewater and other process industries. The
Company's business is affected by these industries' capital expenditures, which
are driven primarily by economic conditions as they relate to the need for new
construction, expansion or rehabilitation. Key drivers that the Company believes
will affect growth in this area are the implementation of new, more stringent
EPA emission regulations for the pulp and paper industry and for the power
industry and increasing prices of alternative materials, particularly corrosion
resistant grades of stainless steel. Certain capital expenditures in these
industries have been postponed pending the release of the new EPA regulations.
The EPA has announced that such regulations should be published by November
1998; however, there can be no assurance that such regulations will be released
by that date and, even if published by then, that the Company's corrosion
resistant engineered products net sales will experience growth as a result of
the implementation of such regulations.

Competition. The Company participates in a highly fragmented market where
it believes that most of its competitors are small regional fabrication
businesses. Field-erection capabilities and the Company's performance warranty
are believed by the Company to provide competitive advantages. RTP ("Reinforced
Thermoset Plastics")-1 certification is a competitive advantage in this market
and the Company is RTP-1 certified. RTP-1 certification is earned through
process audits administered by the American Society of Mechanical Engineers.
Such certification denotes quality manufacturing practices, adherence to
standardized procedures and a process to qualify material and tank design
according to prescribed tests of physical properties. The Company believes that
its engineering capabilities, quality reputation, history of performance and
effective customer service are competitive advantages in the engineered FRP
products market.

Marketing and Customers. The Company generally sells its engineered FRP
products through a combination of direct field sales and a sales representative
network. The scope of the work performed by the Company is large in nature and,
unless characterized as a special situation, has long lead times to order. The
experienced sales force works closely with the customer in designing the correct
solution for the customer's need. The customer base of the Company varies from
year to year due to the project-oriented nature of the Company's work in this
area. The Company has also entered into a license agreement with an
international company to provide technology, equipment and expertise.

ENGINEERED METAL PRODUCTS. In October 1997, the Company acquired SEFCO, a
manufacturer of engineered field-erected steel tanks and accessories for use in
the municipal, agrochemical and petroleum industries. The Company is vertically
integrated with services ranging from engineering design, materials procurement,
fabrication, site preparation, piping, foundation work, erection and painting,
both in shop and on site. The Company also offers tank inspection, maintenance
and repair and operates primarily in Oklahoma, Missouri, Arkansas and Kansas.

Market. The Company participates in the municipal and industrial markets.
These markets are dependent on customers' needs for new installations,
expansions and rehabilitation of existing facilities. The municipal market is
less cyclical than the industrial segment, and it historically represents
approximately 70% of the Company's engineered metal products net sales. The
Company deals with a select group of industrial customers that are primarily in
the chemical and petrochemical industries. In the region served, the Company
believes that both of these markets are growing.

Competition. The market in which the Company competes for engineered metal
products is highly competitive and characterized by numerous small competitors
in the municipal market and several large,

27
<PAGE> 28

public companies with financial resources greater than those of the Company in
the industrial market. The Company believes that it is able to achieve
differentiation by taking advantage of the levels of service, reliability and
quality control afforded by vertical integration. Generally, the Company's
competitors in the engineered metal products industry are reliant on outside
suppliers and local contractors to fulfill the complete scope of projects. The
Company believes that this difference between the Company and its competitors
provides the Company major advantages in bidding, quality control and
scheduling.

Marketing and Customers. Marketing activities in this area are limited. The
Company's engineered metal product customer focus has been the municipal water
industry. It has been the Company's experience that most municipal projects are
awarded on a price-based bid with attendant requirements for bid bonding. The
municipal customers are generally broad based with no known customers
representing over 20% of the Company's business activity in this area.
Alternatively, the Company believes that industrial client contracts are awarded
based upon a combination of bids and private negotiations. The Company believes
that it can differentiate itself in all engineered metal product markets in its
region as a result of the extensive services it offers through vertical
integration of its services.

FACILITIES

The Company operates facilities throughout the United States and considers
them to be in good operating condition and adequate for their present uses. The
Company believes that it has sufficient capacity to meet its current and
anticipated manufacturing requirements for its operations. The Company owns a
facility in Gatesville, Texas that is currently held for sale and is not used as
an operations base. The following table sets forth the Company's principal
manufacturing plants and offices:

<TABLE>
<CAPTION>
APPROXIMATE LEASED
AREA OR
(SQ.FT.) OWNED USES
----------- ------ ----
<S> <C> <C> <C>
Fiberglass Composite Underground Storage Tanks
Conroe, TX(1)................................. 130,000 Owned Manufacturing plant and Containment
Products Group headquarters
Mount Union, PA(2)............................ 110,000 Owned Manufacturing plant and administrative
offices
Bakersfield, CA(3)............................ 73,000 Owned Manufacturing plant and administrative
offices
Steel Rectangular Aboveground Storage Tanks
Baltimore, MD................................. 63,000 Leased(4) Manufacturing plant and administrative
offices
Mira Loma, CA................................. 54,000 Leased(5) Manufacturing plant and administrative
offices
Engineered Fiberglass Reinforced Composite
Products
Bellingham, WA................................ 63,000 Owned Manufacturing plant and Engineered
Products Group headquarters
Wilson, NC.................................... 47,000 Owned Manufacturing plant and administrative
offices
Biloxi, MS.................................... 29,000 Owned Manufacturing plant and administrative
offices
Engineered Field-Erected Steel Tanks
Tulsa, OK(6).................................. 33,000 Owned Manufacturing plant and administrative
offices
Denali Incorporated
Houston, TX................................... 4,600 Leased Corporate headquarters
</TABLE>

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

(1) Facility is located on 65 acres.

(2) Facility is located on 24 acres.

(3) Facility is located on 20 acres.

(4) Lease expires in 2004.

(5) Lease expires in February 1998 and the Company plans to consolidate into its
Bakersfield facility and will not renew the lease.

(6) Facility is located on 12 acres.

BACKLOG

The Company's backlog is based upon customer orders received that the
Company believes are firm. Backlog is comprised of both products to be delivered
and services to be performed. The level of backlog at any particular time is not
necessarily indicative of the future operating performance of the Company as
orders

28
<PAGE> 29

may be changed at any time and the Company is affected by seasonality. See "Risk
Factors -- Seasonality." At August 31, 1997 and August 31, 1996, the Containment
Products Group's backlog was approximately $11.9 million and $10.5 million,
respectively. For any given date, the Company anticipates that 80% of the
Containment Products Group's backlog will be shipped or performed within 90 days
and 90% will be shipped or performed within 180 days. At August 31, 1997, the
Engineered Products Group's backlog (including pending acquisitions) was
approximately $11.2 million. For any given date, the Company anticipates that
60% of the backlog of the Engineered Products Group will be shipped or performed
within 90 days and 80% will be shipped or performed within 180 days.

MATERIALS AND SUPPLIERS

Owens Corning and the Company are parties to a supply contract pursuant to
which the Company purchases from Owens Corning the fiberglass used in the
Company's composite products. Under this supply contract, Owens Corning is
required to supply and the Company is required to purchase at least 80% of the
Company's Containment Products group fiberglass requirements through December
31, 1997. The Company has entered into a supply contract with Owens Corning
beginning January 1, 1998, to supply at least 90% of the Company's fiberglass
requirements through December 31, 2000. In addition, this contract contains
certain stabilizing pricing parameters. In addition to Owens Corning, the
Company continues to negotiate with other vendors to ensure a continued supply
of fiberglass to the Company for its production needs.

The Company is a significant purchaser of resin. Resin is available in
adequate supply from many sources. The Company does not depend upon any single
supplier or source. The Company has identified additional resin suppliers during
the last year, which will allow for competitive bidding should a future pricing
or supply imbalance occur. The Company's ability to operate and to grow is
partially dependent upon its ability to obtain an adequate supply of resin and
fiberglass. The Company believes current market conditions, the above actions
and contractual arrangements make significant raw material cost deviations
unlikely during the next 36 months.

For the Company's steel fabrication businesses, the principal materials
used are standard steel shapes, steel plate, fittings, welding gases and paint
and are all currently available in adequate supply from many sources. The
Company does not depend upon any single supplier or source.

PATENTS AND TRADEMARKS

The Company owns numerous United States patents and has a number of
trademarks registered in the United States. Although the Company regards its
patents and trademarks to be of value, it believes that in most instances its
manufacturing and technical knowledge and experience are more important to its
competitive position than are its patents and trademarks. The Company does not
consider its business to be dependent on any one or more of such patents or
trademarks.

INSURANCE

The Company maintains a comprehensive insurance program providing various
types of coverage for its operations including, without limitation, commercial
general liability, commercial automobile liability, workers' compensation and
employment practices liability, directors and officers liability, business
interruption and property and casualty insurance. All policies are subject to
deductibles and other coverage limitations and are at limits and amounts of
insurance that, based on the Company's operating experience and consultations
with its independent insurance risk advisors, it believes are consistent with
customary practices and standards of companies engaged in similar businesses.
Although the Company's management believes that the Company's insurance is
adequate, there can be no assurance that the Company will be able to maintain
adequate insurance at rates which management considers commercially reasonable,
nor can there be any assurance such coverage will be adequate to cover all
claims that may arise.

GOVERNMENT REGULATION

The Company is subject to numerous foreign, federal, state and local laws
and regulations relating to the protection of health, safety and the
environment, including the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), the Clean Water Act, the Clean Air Act (including
the 1990 Amendments), the Resource Conservation and Recovery Act ("RCRA"), and
the Occupational Safety and

29
<PAGE> 30

Health Act ("OSHA"). Each of these statutes provides for the imposition of
substantial civil and criminal penalties, as well as the possibility of permit
revocation and corrective action orders, for violations of its requirements.
These laws may also provide for retroactive, strict liability, rendering a party
liable for environmental damage without regard to its negligence or fault. The
Company believes that it is in substantial compliance with such laws.
Nevertheless, risks of substantial costs and liabilities are inherent in certain
of its operations, and in certain products produced by the Company, as they are
with other enterprises engaged in similar businesses. Since its formation,
however, the Company's cost of complying with environmental and health and
safety laws and regulations has not been material, but the fact that such laws
or regulations are changed frequently makes predicting the cost or impact of
such laws and regulations on its future operations uncertain. Modification of
existing laws or regulations or the adoption of new laws or regulations
affecting the Company's operations could adversely affect the Company.

Wastewater

Certain of the Company's facilities discharge process wastewater and storm
water and are subject to the requirements of the federal Clean Water Act and
comparable state statutes. Many of such requirements are embodied in permits
issued to the plants by state and federal environmental agencies. The Company
believes its facilities are generally in compliance with such requirements.
However, both federal and state authorities continue to develop legislation and
regulations to control the discharge of water pollutants. Passage of more
restrictive legislation or regulations could necessitate additional capital
expenditures to reduce discharges of such substances into the environment due to
routine or episodic events.

Air Emissions

Certain of the Company's facilities are subject to the requirements of the
federal Clean Air Act and comparable state statutes. Many of such requirements
are embodied in permits issued to these facilities by governmental agencies. The
Company believes that its operations are in substantial compliance with such
statutes and permits in all states. Amendments to the federal Clean Air Act were
adopted in 1990 (the "1990 Amendments") and contain provisions that may result
in the imposition of certain pollution control requirements with respect to air
emissions from the Company's operations. These amendments direct the EPA to
establish technology-based standards for hazardous air pollutants based on the
use of "maximum achievable control technology" or MACT. By November 15, 1997,
the EPA is scheduled to promulgate MACT standards for the reinforced plastic
composites industry category. These standards may result in tighter emissions
control requirements affecting the Company's fiberglass tank manufacturing
operations. The Company is working with other industry members to assist the EPA
in the development of MACT standards that will be acceptable to the industry.
The 1990 Amendments may also require the Company to obtain new operating permits
for various of its facilities. The Company is currently in the process of
procuring such permits. The adoption of MACT standards applicable to the
Company's operations may result in increased operating or capital expenditures.
At this time, however, the Company does not believe that it will be materially
adversely affected by any emissions control or permit requirements resulting
from the 1990 Amendments.

Superfund

CERCLA, also known as "Superfund," and comparable state laws impose
liability, without regard to fault or the legality of the original act, on
certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substances found at a site. Those statutes also authorize governmental
environmental authorities such as the EPA and, in some instances, third parties
to take action in response to threats to the public health and the environment
and to seek to recover from the responsible classes of persons the costs
incurred in cleaning up the hazardous substances that have been released into
the environment and for damages to natural resources. It is also not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. In the course of its ordinary operations, the Company
generates waste, some of which may fall within the statutory definition of a
"hazardous substance" and some of which may have been disposed of at sites that
may require clean up under Superfund. The

30
<PAGE> 31

Company has been named as a potentially responsible party ("PRP") under CERCLA
or similar state Superfund laws at four sites: the Seaboard Chemical Company
site in Jamestown, North Carolina; the Diaz Refinery site in Diaz, Arizona; the
Bay Drum site in Tampa, Florida; and the Western Processing site in Kent,
Washington. In three such cases, however, the Company has entered into consent
orders resolving its liabilities as a de minimis or de micromis party and the
Company believes that any future liabilities related to these three sites will
not have a material adverse effect on the financial condition of the Company.
With respect to the Bay Drum site, the Company has been allocated a 0.012% share
of total waste associated with the site and is negotiating to be a party to the
consent decree entered into between EPA and 94 PRPs or to participate in an
internal buy-out with other de minimis parties. The Company believes that the
cost of any de minimis settlement will not have a material adverse effect on the
financial condition of the Company. The Company's Bellingham, Washington plant
is located adjacent to a wood treatment facility that has been proposed for
listing on the EPA's National Priorities List of Superfund sites (the Oeser
Company site). In addition, contamination has been discovered in Little
Squalicum Creek, which is in proximity to the site. Both sites are listed on the
Washington State Priorities List as awaiting remedial action. It is unknown by
the Company what the magnitude of potential cleanup costs may be for such sites.
To date, the Company has not been named a PRP relative to either site. The
Company believes that any liability relating to its historical disposal
practices will not have a material adverse effect on the financial condition of
the Company.

Solid and Hazardous Wastes

The Company generates hazardous and non-hazardous solid wastes which are
subject to the requirements of RCRA and comparable state statutes. The Company
believes that it is in general compliance with such requirements. The RCRA
regulations generally impose requirements on the handling of currently generated
hazardous waste, such regulations may also require "corrective action" with
respect to contamination at facilities caused by the past handling of various
substances. For example, spills and releases of materials from facility
operations might require clean up pursuant to such orders or other remedial
statutes. Though no assurances can be given in this regard, the Company does not
believe that any such clean up activities will have a material adverse effect on
its financial condition.

Safety Regulation

The Company is also subject to the requirements of OSHA and comparable
state statutes. The Company believes that it has operated in substantial
compliance with OSHA requirements, including general industry standards, record
keeping and hazard communicational requirements. The nature of the Company's
business may result from time to time in industrial accidents. On September 10,
1996, an employee died in an accident involving a Hoover tank at the Mira Loma,
California facility. In connection with the accident, criminal charges have been
filed against two of the Company's employees. The Company has engaged counsel to
represent the employees and to vigorously defend them against the charges. The
Company has not been charged. Though no assurances can be given regarding this
accident, the Company does not believe that liabilities associated with this
accident will have a material adverse effect on its financial condition. It is
possible that changes in safety and health regulations or a finding of
non-compliance of current regulations could result in additional capital
expenditures or operating expenses.

Present and Future Environmental Capital Expenditures.

Although it is the Company's policy to comply with all applicable
environmental, health and safety laws and regulations, in many instances the
implementing regulations have not been finalized. Even where regulations or
standards have been adopted, they are subject to varying and conflicting
interpretations and implementation. In many cases, compliance with environmental
regulations or standards can only be achieved by capital expenditures, some of
which may be significant. The Company has no current plans for substantial
capital expenditures with respect to compliance with environmental, health and
safety laws. To the extent estimates are available, capital expenditures for
environmental control facilities are expected to be less than $200,000 for each
of fiscal 1998 and 1999.

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<PAGE> 32

EMPLOYEES

At November 1, 1997, the Company employed 743 persons. Four collective
bargaining agreements cover 245 employees in California, Pennsylvania, Texas and
Washington. All of these agreements expire between December 1997 and October
1998. The Company considers its employee relations to be good.

LEGAL MATTERS

From time to time the Company is a party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. Except as described above, the Company is not aware of any
current or pending litigation or proceedings that could have a material adverse
effect on the Company's operations, financial condition or cash flow.

MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen T. Harcrow............... 51 Chairman of the Board and Chief Executive Officer
Ed de Boer....................... 54 Chief Operating Officer
R. Kevin Andrews................. 32 Chief Financial Officer
Melford S. Carter, Jr............ 35 Vice President of Business Development
Robert B. Bennett................ 55 Vice President (Containment Products Group)
Lee W. Orr....................... 39 Vice President (Engineered Products Group)
Cathy L. Smith................... 36 General Counsel
Ernest H. Cockrell............... 52 Director
Thomas D. Simmons, Jr............ 53 Director
J. Taft Symonds.................. 58 Director
Stephen M. Youts................. 50 Director
</TABLE>

Mr. Harcrow has been Chairman of the Board and Chief Executive Officer of
the Company since its inception in December 1994. Mr. Harcrow was employed with
Baker Hughes Incorporated ("BHI") for over 20 years until August 1993,
ultimately serving as Senior Vice President of BHI and President of its
EnviroTech operating group. Mr. Harcrow is also a director of Tetra
Technologies, Inc., a specialty inorganic chemical company. Mr. Harcrow has a BA
from the University of Houston.

Mr. de Boer became Chief Operating Officer of the Company on November 1,
1997. Prior to joining the Company as a consultant in January 1997, Mr. de Boer
served as President and Chief Executive Officer of EnviroTech Pumpsystems, Inc.,
a wholly owned subsidiary of the Weir Group of Glasgow, Scotland from September
1994 to February 1996. Mr. de Boer was President of the BHI EnviroTech Pump
Group from 1990 to 1994, and President of BGA International from 1988 to 1990.
Mr. de Boer has a BS in Mechanical Engineering from the Institute of Technology
in the Netherlands and an MBA from The University of British Columbia.

Mr. Andrews is Chief Financial Officer and has been with the Company since
August 1995. Prior to joining the Company, Mr. Andrews served as a Corporate
Development and Financial Manager for Moorco International, a supplier of fluid
measurement and pressure control products, from November 1993 until June 1995,
and the Financial Manager for BHI EnviroTech operating group from 1991 to 1993.
Mr. Andrews received his MBA and BA from The University of Tulsa and is a
certified public accountant.

Mr. Carter is Vice President of Business Development and has been with the
Company since August 1995. Prior to joining the Company, Mr. Carter served as
Corporate Marketing Manager for National-Oilwell, Inc., a supplier of oilfield
drilling equipment and consumables, from June 1994 to

32
<PAGE> 33

August 1995, and the Marketing Manager for the BHI EnviroTech operating group
from 1992 until 1994. Mr. Carter earned his MBA in finance and international
business and BS in Mechanical Engineering from The University of Texas at
Austin.

Mr. Bennett is Vice President of the Company and Chief Operating Officer of
the Containment Products Group and has served in that capacity since April 1996.
Prior to his association with the Company, he served as Vice President of the
Asia Pacific/Middle East Business Units of Baker Hughes INTEQ, Singapore from
1992 to 1995. He also served as Vice President, Milpark Drilling Fluids (a
division of BHI) from 1989 to 1992 and was President of Densitech, a drilling
fluids company, prior to its acquisition by BHI. Mr. Bennett has a BS in
Chemistry from Sam Houston State University.

Mr. Orr is Vice President of the Company and Chief Operating Officer of the
Engineered Products Group and has served in that capacity since May 1997. Prior
to joining the Company, Mr. Orr was Vice President and General Manager of
EnviroTech Molded Products from 1995 to 1997; General Manager of EnviroTech
Rubber Engineering from 1993 until 1995; and Vice President -- Finance for BGA
International from 1991 until 1993. Mr. Orr has an MBA from The University of
Texas at Austin and a BBA from Abilene Christian University.

Ms. Smith is General Counsel and has been with the Company since January
1996. Ms. Smith was employed more than six years at BHI from August 1989 to July
1995, most recently as General Counsel of EnviroTech. Prior to joining BHI, Ms.
Smith worked for the law firm of Thelen, Marrin, Johnson & Bridges from June
1986 to August 1989. Ms. Smith received her J.D. from The University of Houston.

Mr. Cockrell has been a director of the Company since its inception in
December 1994. Since 1970, Mr. Cockrell has served in various capacities at
Cockrell Oil Corporation and has been its Chairman and Chief Executive Officer
since 1996. Mr. Cockrell currently serves as a Director of Pennzoil Company and
Southwest Bank of Texas.

Mr. Simmons has been a director of the Company since its inception in
December 1994. Mr. Simmons serves as Chairman of Simmons, Vedder & Co., a real
estate development and investment firm which he cofounded in 1992. Prior to
founding Simmons, Vedder & Co., Mr. Simmons spent more than 20 years with the
Trammel Crow organization, most recently serving as Group Managing Partner.

Mr. Symonds has been a director of the Company since its inception in
December 1994. Since 1978, Mr. Symonds has served as Chairman of Maurice
Pincoffs Company, an international marketing company, and, since 1978, as
President of Symonds Trust Co., Ltd., an investment firm. Mr. Symonds currently
serves as Chairman of Tetra Technologies, Inc., and Director of Plains
Resources, Inc.

Mr. Youts has been a director of the Company since its inception in
December 1994. Since 1992, Mr. Youts has served as Managing Director and
Chairman of Avondale Partners, an investment banking firm.

DIRECTOR COMPENSATION

None of the Company's directors received any compensation for their
services as a director during fiscal 1997. After completion of the Offering, the
Company intends to pay each director who is not an employee of the Company an
annual director's fee of $12,000 plus a fee of $500 for each Board or committee
meeting attended. Members of the Board of Directors who are employees of the
Company do not receive any fees. The Company reimburses all directors for
reasonable expenses incurred in connection with attending meetings of the Board.
Officers serve at the discretion of the Board of Directors and are elected
annually. There are no family relationships between the directors or executive
officers of the Company. No director is selected or serves pursuant to any
special arrangement or contract.

The Board of Directors will be divided into three relatively equal classes
with up to four directors in each class, with each class serving for a term of
three years. At each annual meeting of stockholders, directors will be elected
by the holders of the Common Stock to succeed those directors whose terms are
expiring. See "Description of Capital Stock -- Common Stock."

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<PAGE> 34

Upon completion of the Offering, the Board of Directors intends to
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will make recommendations to the Board concerning salaries and
incentive compensation for the Company's officers and employees. The Audit
Committee will aid management in the establishment and supervision of the
Company's financial controls, evaluate the scope of the annual audit, review
audit results, consult with management and the Company's independent auditors
prior to the presentation of financial statements to shareholders and, as
appropriate, initiate inquiries into aspects of the Company's financial affairs.

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company during
fiscal 1997 to the Company's Chief Executive Officer and each other executive
officer whose compensation for such fiscal year was in excess of $100,000
(collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
NAME AND FISCAL ----------------------- ALL OTHER(3)
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($)
------------------ ------ --------- ----------- ---------------
<S> <C> <C> <C> <C>
Stephen T. Harcrow.............................
Chief Executive Officer 1997 240,000 60,000 3,837
Robert B. Bennett..............................
Vice President of Containment 1997 150,000 37,500 3,057
Products Group
R. Kevin Andrews...............................
Chief Financial Officer 1997 80,004 28,000 2,275
Melford S. Carter, Jr. ........................
Vice President of Business Development 1997 80,004 28,000 1,798
Cathy L. Smith.................................
General Counsel 1997 80,004 28,000 2,275
</TABLE>

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

(1) Information with respect to certain perquisites and other personal benefits
has been omitted because the aggregate value of such items does not meet the
minimum amount required for disclosure under SEC regulations.

(2) Bonus amounts were earned during the fiscal year indicated, but paid in the
second quarter of the following fiscal year.

(3) Each of the amounts in this column is a combination of (a) matching
contributions to the executive officer's account in the Company's Retirement
(401K) Plan and (b) premium payments by the Company for life insurance for
the benefit of the executive officer.

OPTION VALUES

The following table sets forth certain information with respect to the
value of the stock options held by the Named Executive Officers at June 28,
1997. No Named Executive Officer exercised any stock options during fiscal 1997.

OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL YEAR END(#) OPTIONS($)(1)
---------------------- --------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ---------------------- --------------------
<S> <C> <C>
R. Kevin Andrews....................................... 37,730/0 406,729/0
Melford S. Carter, Jr.................................. 37,730/0 406,729/0
Cathy L. Smith......................................... 37,730/0 406,729/0
</TABLE>

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

(1) Reflects the difference between the exercise price of options and the
initial public offering price.

34
<PAGE> 35

STOCK OPTION PLANS

1996 Incentive Stock Option Plan

The Company's 1996 Incentive Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors and the stockholders of the Company in
February 1996 and subsequently amended effective September 1997. The purpose of
the 1996 Plan is to promote the long-term growth and profitability of the
Company. The 1996 Plan is intended to grant incentive stock option awards to all
employees of the Company; provided, however, that such awards shall be
non-qualified options if they do not meet the requirements for being considered
as incentive stock options. No further options may be granted pursuant to the
1996 Plan.

The 1996 Plan is administered by the Company's Board of Directors. The
Board selects the employees who will receive awards, determines the terms of the
awards to be granted and interprets and administers the 1996 Plan. The Board of
Directors of the Company may terminate or amend the 1996 Plan without
stockholder approval, except to the extent that stockholder approval is required
by the Internal Revenue Code or other applicable law.

Awards granted under the 1996 Plan are subject to such terms and conditions
as the Board of Directors may establish. If a recipient of an award under the
1996 Plan ceases to be an employee of the Company by reason of death or
disability, all options theretofore granted to such recipient which are
exercisable at the date of such death or disability may be exercised by such
recipient's estate or the recipient at any time within three months after the
date of such death or disability. Except as provided below, if a recipient of an
award ceases to be an employee of the Company by reason of termination with or
without cause, resignation, retirement, or any reason other than death or
disability, all options awarded to such participant shall automatically
terminate, effective as of such cessation of employment, to the extent not
theretofore exercised. Notwithstanding the foregoing, with respect to options
under the 1996 Plan granted to Mr. Andrews, Mr. Carter and Ms. Smith, if Stephen
T. Harcrow does not hold the office at the Company of President, Chief Executive
Officer or a similar office with responsibility and authority comparable to that
of President or Chief Executive Officer, a recipient of an award who ceases to
be an employee of the Company by reason other than death or disability may
exercise all options theretofore granted and not previously exercised within
three months after the date upon which such recipient's employment is
terminated. Pursuant to the 1996 Plan, the payment of an optionee's exercise
price shall be made in cash. In connection with the merger of CSI with and into
the Company in September 1997, the Company issued options to acquire 254,643
shares of its Common Stock under the 1996 Plan in exchange for options to
acquire 1,400 shares of the common stock of CSI. As part of this transaction,
Mr. Bennett will receive options to acquire 72,750 shares of the Common Stock in
exchange for his CSI stock options (which were originally received in April
1996).

1997 Incentive Stock Option Plan

The Company's 1997 Incentive Stock Option Plan (the "1997 Plan") was
adopted by the Board of Directors and the stockholders of the Company in
September 1997. The purpose of the 1997 Plan is to promote the long-term growth
and profitability of the Company. The 1997 Plan is intended to grant incentive
stock option awards to all employees of the Company; provided, however, that
such awards shall be non-qualified options if they do not meet the requirements
for being considered as incentive stock options. Awards of options to acquire up
to an aggregate of 362,873 shares may be granted pursuant to the 1997 Plan.

The 1997 Plan is administered by the Company's Board of Directors. The
Board selects the employees who will receive awards, determines the type and
terms of the awards to be granted and interprets and administers the 1997 Plan.
The Board of Directors of the Company may terminate or amend the 1997 Plan
without stockholder approval, except to the extent that stockholder approval is
required by the Internal Revenue Code or other applicable law.

35
<PAGE> 36

Awards granted under the 1997 Plan are subject to such terms and conditions
as the Board of Directors may establish. If a recipient of an award under the
1997 Plan ceases to be an employee of the Company by reason of termination
without cause, resignation, retirement, death or disability, all options
theretofore granted to such recipient which are exercisable at the date of such
event may be exercised by such recipient or such recipient's estate if
applicable, at any time within three months after the date of such event. If a
recipient of an award ceases to be an employee of the Company by reason of
termination with cause, all options awarded to such participant shall
automatically terminate, effective as of such cessation of employment, to the
extent not theretofore exercised.

In September 1997, the Company awarded options effective as of the date of
this Prospectus to acquire 171,030 shares of the Company's Common Stock to
certain executive officers, including options to acquire 94,742 shares granted
to Mr. de Boer, 47,371 shares granted to Mr. Orr, and 9,639 shares each granted
to Mr. Andrews, Mr. Carter and Ms. Smith. Forty percent of the options granted
to Messrs. de Boer and Orr will vest immediately and the remaining options will
vest in equal amounts on the first, second, third and fourth anniversaries of
the date of grant. The options granted to Mr. Andrews, Mr. Carter and Ms. Smith
will vest in equal amounts on each of the first four anniversaries of the date
of grant. All such options will be exercisable at a price per share equal to the
price to the public reflected on the front cover of this Prospectus and must be
exercised within five years of the date of the grant.

SALARY CONTINUATION AGREEMENT

Mr. Harcrow is a party to a Salary Continuation Agreement entered into with
the Company in September 1997 which provides for certain payments to his wife in
the event of his death or disability. Upon the occurrence of such event, the
Company shall (i) pay to his wife in monthly installments an annual sum equal to
his annual salary for a period of three years thereafter and (ii) provide and
pay for health insurance for Mr. Harcrow's wife and family for such three year
period. The Salary Continuation Agreement will terminate in the event that Mr.
Harcrow terminates his employment with the Company for any reason other than
death or disability. In addition, the Company's obligations under the agreement
will terminate (i) upon the death of Mr. Harcrow's wife or (ii) upon Mr.
Harcrow's death or disability, if his wife is not then living. The Salary
Continuation Agreement will expire on August 31, 1999. On termination of the
agreement, the benefits described above shall remain in force and effect
thereafter; however, the three-year period for benefits will provide for
benefits only from the date of disability or death of Mr. Harcrow until
September 1, 2002.

CONFIDENTIALITY AND NON-COMPETITION AGREEMENTS

Each of Mr. Andrews, Mr. Carter and Ms. Smith has entered into a
Confidentiality and Non-Competition Agreement with the Company. Each agreement
contains a covenant-not-to-compete with the Company during such employee's
period of employment with the Company and for a period of one year following
termination of employment.

LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, the Company's directors will not be liable for
monetary damages for breach of a director's duty of care to the Company and its
stockholders. This provision does not eliminate a director's duty of care, and
in appropriate circumstances, equitable remedies such as an injunction or other
forms of non-monetary relief will remain available under Delaware law. Each
director continues to remain liable for a breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of the law, for improper
distributions to stockholders and for any transaction from which the director
derives an improper personal benefit. This provision also does not affect a
director's liability under other laws, such as the federal securities laws.

The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by the Delaware General Corporation
Law. Prior to consummation of this Offering, the Company will enter into
indemnification agreements with each of its directors that provide for
indemnification

36
<PAGE> 37

and expense advancement to the fullest extent permitted under the Delaware
General Corporation Law. Such indemnification agreements include related
provisions intended to facilitate the indemnitee's receipt of such benefits,
including certain provisions applicable to constituent corporations in the event
of certain mergers or acquisitions.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

J. Taft Symonds, a member of the Company's Board of Directors, is chairman
of the board of Tetra Technologies, Inc. ("Tetra"). Stephen T. Harcrow, Chairman
and Chief Executive Officer of the Company, serves on the Board of Directors and
Compensation Committee of Tetra. Since the Company does not presently have a
compensation committee, the entire Board of Directors of the Company is
responsible for review of executive compensation.

CERTAIN TRANSACTIONS

TETRA TECHNOLOGIES, INC.

During the fiscal year ended June 28, 1997, the Company purchased
approximately $82,000 of calcium carbonate ("brine") from Tetra, a specialty
inorganic chemical company. J. Taft Symonds, a director of the Company, is the
Chairman of the Board of Tetra, and Stephen T. Harcrow, the Company's Chairman
and Chief Executive Officer, is also on the Board of Directors of Tetra. All of
the brine purchases were made on a spot basis without the benefit of a contract.

REDEMPTION OF SERIES A PREFERRED STOCK

A portion of the proceeds from this Offering will be used to redeem all of
the currently issued and outstanding Series A Preferred Stock of the Company.
Approximately 75% of the Series A Preferred Stock is currently beneficially
owned by the Company's directors or their affiliates. Upon redemption of the
Series A Preferred Stock, each of Messrs. Harcrow, Cockrell, Symonds and Youts
(including affiliates) will receive approximately $235,000 (including accrued
and unpaid dividends through the redemption date), and Mr. Simmons (including
affiliates) will receive approximately $117,500 (including accrued and unpaid
dividends through the redemption date). In addition, National Investment
Management, Inc., a corporation wholly-owned by Mr. Richard D. Robins, a
beneficial owner of in excess of 5% of the Common Stock, will receive
approximately $235,000 (including accrued and unpaid dividends through the
redemption date) upon such redemption. See "Use of Proceeds."

37
<PAGE> 38

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby, by: (i) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers and (iv) all directors and executive officers of the Company
as a group:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
PERCENT(2)
----------------------------
PRIOR TO AFTER
NAME OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
(i) Directors
Stephen T. Harcrow(3)(4)....................... 411,925 18.9% 9.6%
Ernest H. Cockrell(5).......................... 343,000 15.7% 8.0%
Cockrell Oil Corporation
1600 Smith, Suite 4600
Houston, Texas 77002
Thomas D. Simmons, Jr.(6)...................... 133,770 6.1% 3.1%
Simmons Vedder Investment Partnership
1800 West Loop South, Suite 1575
Houston, Texas 77027
J. Taft Symonds(7)............................. 343,000 15.7% 8.0%
Symonds Trust Co., Ltd.
2040 North Loop West, Suite 200
Houston, Texas 77018
Stephen M. Youts(8)............................ 343,000 15.7% 8.0%
Avondale Partners, Inc.
Two Post Oak Central
1980 Post Oak Blvd., Suite 1910
Houston, Texas 77056
(ii) Non-Directors, Named Executive Officers
Robert B. Bennett(4)(9)........................ 72,750 3.2% 1.6%
R. Kevin Andrews(4)(10)........................ 37,730 1.7% *
Melford S. Carter, Jr.(4)(10).................. 37,730 1.7% *
Cathy L. Smith(4)(10).......................... 37,730 1.7% *
(iii) Non-Directors, 5% Beneficial Owners
Richard D. Robins(11).......................... 343,000 15.7% 8.0%
National Investment Management, Inc.
2601 Airport Drive, Suite 210
Torrance, CA 90505
Wolfram Vedder(12)............................. 171,500 7.8% 4.0%
Deidre L. Vedder(12)
1800 West Loop South
Suite 1575
Houston, TX 77027
(iv) All Executive Officers and Directors as a Group
(9 persons).................................. 1,760,635 74.3% 39.4%
</TABLE>

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

* Less than one percent.

(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers.

38
<PAGE> 39

(2) Except for the percentages of certain parties that are based on presently
exercisable options which are indicated in the following footnotes to the
table, the percentages indicated are based on 2,184,910 shares of Common
Stock issued and outstanding on October 31, 1997 and 4,284,910 shares
issued and outstanding subsequent to the completion of the Offering. In
the case of parties holding presently exercisable options, the percentage
ownership is calculated on the assumption that the shares purchasable
within the next 60 days underlying such options are outstanding.

(3) Mr. Harcrow is also an executive officer of the Company. Includes 36,015
shares owned by the Harcrow Family Partnership, L.P., the general partner
of which is a corporation of which Mr. Harcrow is the President.

(4) All officers of the Company have the following address: 1360 Post Oak
Blvd., Suite 2470, Houston, Texas 77056.

(5) Includes 343,000 shares owned by Cockrell Investment Partners, L.P., a
Texas limited partnership, of which Mr. Cockrell is the Chairman of Texas
Production Company, its general partner.

(6) Includes 58,310 shares owned by Simmons Family Trust of which Mr. Simmons
is Co-Trustee, and 18,865 shares owned by The Estate of Candace U.
Simmons, of which Mr. Simmons is the independent executor.

(7) Includes 343,000 shares owned by Symonds Trust Co., Ltd., a Texas
corporation, of which Mr. Symonds is the President.

(8) Includes 343,000 shares owned by Avondale CSI Holdings LP, a Delaware
limited partnership; Mr. Youts is the President of Avondale Partners,
Inc., its general partner.

(9) Includes 72,750 shares currently issuable upon the exercise of options.

(10) Includes 37,730 shares of Common Stock currently issuable upon the
exercise of options.

(11) Includes 343,000 shares owned by National Investment Management, Inc., a
California corporation of which Mr. Robins is the President and sole
stockholder.

(12) Although each disclaims beneficial ownership of the other's stock,
includes 85,750 shares owned directly by Mr. Wolfram Vedder and 85,750
shares owned directly by Mrs. Deidre L. Vedder, his wife.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $.01 per share, 1,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock") and 4,800 shares of Series A
Preferred Stock, par value $.01 per share. The discussions of the Common Stock
and Preferred Stock here and elsewhere in this Prospectus are qualified in their
entirety by reference to: (i) the Certificate of Incorporation of the Company,
as amended, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and (ii) the applicable Delaware
law.

The Company has issued and has outstanding 4,800 shares of its Series A
Preferred Stock, par value $.01 per share. All of such shares are issued to the
founders of the Company, including the Company's current directors who
collectively own approximately 75% of the issued and outstanding shares of
Series A Preferred Stock. The Company intends to use a portion of the proceeds
from this Offering to redeem all of the issued and outstanding shares of the
Series A Preferred Stock for a total aggregate purchase price of approximately
$1,410,000 (including $210,000 for accrued and unpaid dividends through
September 30, 1997).

COMMON STOCK

Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to cumulative voting
rights. The Board of Directors is classified into three classes of directors,
with each class of directors consisting of a number of directors as equal in
number as possible, with the term of each class of directors expiring on a
staggered basis. See "Management -- Board of Directors." The classification of
the

39
<PAGE> 40

Board of Directors may make it more difficult to change the composition of the
Board of Directors and thereby may discourage or make more difficult an attempt
by a person or group to obtain control of the Company.

Subject to the terms of any outstanding series of Preferred Stock, the
holders of Common Stock are entitled to dividends in such amounts and at such
times as may be declared by the Company's board of directors out of funds
legally available therefor. The Common Stock is not subject to any calls or
assessments. Upon liquidation or dissolution, holders of Common Stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
Preferred Stock. Holders of Common Stock have no redemption, conversion or
preemptive rights.

PREFERRED STOCK

Shares of Preferred Stock may be issued without stockholder approval. The
board of directors is authorized to issue up to 1,000,000 shares of Preferred
Stock in one or more series and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including, without
limitation (i) the number of shares and the name of the series, (ii) the rate
and times at which dividends will be payable on the shares of the series, and
the status of such dividends as cumulative or non-cumulative and as
participating or non-participating, (iii) the prices, times and terms, if any,
at or upon which shares of the series will be subject to redemption, (iv) the
rights, if any, to convert such shares into, or to exchange such shares for,
shares of any other class of stock of the Company, (v) the terms of the sinking
fund or redemption or purchase account, if any, to be provided for shares of the
series, (vi) the rights and preferences, if any, of shares of the series upon
any liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Company, (vii) the limitations, if any,
applicable while the series is outstanding, on the payment of dividends or
making of distributions on, or the acquisition of, the Common Stock or any other
class of stock which does not rank senior to the shares of the series. The
Company has no current plans for issuance of any shares of Preferred Stock. Any
issuance of shares of Preferred Stock may adversely affect the voting powers or
rights of the holders of Common Stock.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW

The Company is subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers. Section 203 prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq National
Market, from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that the stockholder
became an interested stockholder, with three exceptions: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon the consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time that the transaction commenced, excluding for purposes
of determining the number of shares outstanding the shares owned by persons who
are both directors and officers of the corporation and the shares owned by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to the date
that the stockholder became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not pursuant to written consent,
by the affirmative vote of at least 66 2/3% of the outstanding voting stock of
the corporation, excluding voting stock owned by the interested stockholder. The
restrictions in Section 203 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 (for
example, a proposed tender or exchange offer for 50% or more of the
corporation's outstanding voting stock) which is approved or not opposed by a
majority of the corporation's directors then in office and which is with or by a
person who had not been an interested stockholder during the preceding three
years or who became an interested stockholder with the approval of the
corporation's board of directors.

Section 203 defines a "business combination" as, in general: (i) any merger
or consolidation involving the corporation and the interested stockholder; (ii)
any sale lease, transfer, pledge or other disposition to the

40
<PAGE> 41

interested stockholder of 10% or more of the corporation's assets; (iii) subject
to certain exceptions, any transaction which results in the issuance or transfer
by the corporation to the interested stockholder of any stock of the
corporation; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series, or of
securities convertible into the stock of any class or series, which is
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as, in general, any person or
entity who or which directly or indirectly beneficially owns 15% or more of the
outstanding voting stock of the corporation and any person or entity affiliated
or associated with or controlling or controlled by that person or entity.

The provisions of Section 203 could operate to delay or prevent the removal
of incumbent directors of the Company or a change in control of the Company.
They also could discourage, impede or prevent a merger, tender offer or proxy
contest involving the Company, even if such an event would be favorable to the
interests of the Company's stockholders generally. By adopting an amendment to
the Company's certificate of incorporation or by-laws, the Company's
stockholders may elect not to have Section 203 apply to the Company effective 12
months after the adoption of the amendment. Neither the Company's Certificate of
Incorporation nor its By-Laws currently exclude the Company from the
restrictions imposed by Section 203.

TRANSFER AGENT

The Transfer Agent for the Common Stock is ChaseMellon Shareholder
Services, L.L.C., Dallas, Texas. Its telephone number is (800)635-9270.

41
<PAGE> 42

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of Common Stock. Aside
from the 2,100,000 shares sold in this Offering, only a limited number of shares
will be available for sale immediately following completion of this Offering
because of certain contractual and legal restrictions on resale (as described
below). Accordingly, sales of substantial amounts of Common Stock of the Company
in the public market after these restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.

Upon the completion of this Offering, the Company will have outstanding an
aggregate of 4,284,910 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding stock options
and warrants. Of these outstanding shares of Common Stock, the 2,100,000 shares
sold in this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by an "affiliate" of the
Company as that term is defined in Rule 144 under the Securities Act.

The remaining 2,184,910 shares of Common Stock held by existing
stockholders (the "Restricted Shares") will be "restricted securities" as that
term is defined in Rule 144 under the Securities Act. The Restricted Shares may
be sold in the public market only if they are registered under the Securities
Act or if they qualify for an exemption from registration under Rule 144 under
the Securities Act (which is summarized below). Sales of the Restricted Shares
in the public market, or the availability of the Restricted Shares for sale,
could adversely affect the market price of the Common Stock.

Certain stockholders of the Company, including all executive officers and
directors and the individuals and entities named in the table under "Principal
Stockholders," who will beneficially own in the aggregate 2,184,910 Restricted
Shares after the Offering, have entered into "lock-up" agreements with the
Underwriters, represented by Morgan Keegan & Company, Inc. and Rauscher Pierce
Refsnes, Inc. (the "Representatives"), pursuant to which they have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of, directly or indirectly, any of their Restricted Shares, or any shares of
Common Stock that they may acquire through the exercise of stock options, for a
period of 180 days from the date of this Prospectus without the prior written
consent of the Representatives. As a result of these contractual restrictions,
shares of Common Stock subject to the lock-up agreements are restricted from
sale until the lock-up agreements expire, notwithstanding that they otherwise
may be eligible for sale under Rule 144. Upon the expiration of the lock-up
agreements, shares will be eligible for sale pursuant to Rule 144.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) who has beneficially owned Restricted Shares for at least one
year (including the holding period of any prior beneficial owner except an
affiliate of the Company) would be entitled to sell during any three-month
period a number of Restricted Shares that does not exceed the greater of (i) 1%
of the number of shares of Common Stock then outstanding or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of the required notice of sale on Form 144. Sales of
Restricted Shares under Rule 144 are also subject to compliance with certain
conditions relating to the manner of sale, the requirement to file notice of the
sale with the Securities and Exchange Commission on Form 144 and the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the
Restricted Shares proposed to be sold for at least two years (including the
holding period of any prior owner except an affiliate), may sell the Restricted
Shares under Rule 144 without regard to any volume limitation or other
conditions or requirements of the rule. Accordingly, unless otherwise
restricted, holders of Restricted Shares who are eligible to use Rule 144(k) may
sell their shares immediately upon completion of this Offering.

As of October 31, 1997, there were outstanding options under the 1996 Stock
Plan to purchase 367,833 shares of Common Stock, all of which are presently
exercisable. Of such options, options for 185,940 shares were held by officers
and directors of the Company subject to the lock-up agreements described above.
With respect to the 1997 Plan, effective as of the date of this Prospectus,
options to acquire 171,030 shares of

42
<PAGE> 43

Common Stock have been awarded to certain executive officers of the Company. Of
these options, 56,845 will be immediately exercisable upon completion of the
Offering. Shortly after completion of this Offering, the Company intends to file
registration statements on Form S-8 to register the 367,833 shares of Common
Stock issued or issuable under the 1996 Plan and the 362,873 shares of Common
Stock issued or issuable under the 1997 Plan. Holders of all of the options
granted under the 1997 Plan prior to this Offering will be subject to lock-up
agreements with the Underwriters with respect to the shares of Common Stock
obtainable thereunder. These registration statements will become effective
automatically upon filing. Accordingly, shares registered under these
registration statements will be available for sale in the public market, subject
to the volume limitations under Rule 144 in the case of sales by affiliates of
the Company, except to the extent that the shares are subject to contractual
restrictions on sale under the lock-up agreements described above.

UNDERWRITING

The Underwriters named below, represented by Morgan Keegan & Company, Inc.
and Rauscher Pierce Refsnes, Inc. (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus.

<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
Morgan Keegan & Company, Inc................................ 510,000
Rauscher Pierce Refsnes, Inc................................ 510,000
Adams, Harkness & Hill, Inc................................. 45,000
J.C. Bradford & Co.......................................... 45,000
Brean Murray & Co., Inc..................................... 45,000
Cowen & Company............................................. 45,000
Crowell, Weedon & Co........................................ 45,000
Dominick & Dominick, Incorporated........................... 45,000
Equitable Securities Corporation............................ 45,000
Hanifen, Imhoff Inc......................................... 45,000
J.J.B. Hilliard, W.L. Lyons, Inc............................ 45,000
Interstate/Johnson Lane Corporation......................... 45,000
Janney Montgomery Scott Inc................................. 45,000
Jefferies & Company, Inc.................................... 45,000
Johnson Rice & Company L.L.C................................ 45,000
Laidlaw Global Securities, Inc.............................. 45,000
McDonald & Company Securities, Inc.......................... 45,000
Needham & Company, Inc...................................... 45,000
Petrie Parkman & Co......................................... 45,000
Principal Financial Securities, Inc......................... 45,000
Raymond James & Associates, Inc............................. 45,000
The Robinson-Humphrey Company, LLC.......................... 45,000
Sanders Morris Mundy Inc.................................... 45,000
Southwest Securities, Inc................................... 45,000
Stephens Inc................................................ 45,000
Tucker Anthony Incorporated................................. 45,000
---------
Total..................................................... 2,100,000
=========
</TABLE>

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased. The Company has been advised that the Underwriters propose to offer
the Common Stock to the public at the initial public offering price set forth on
the cover page of this Prospectus

43
<PAGE> 44

and to certain dealers at such price less a concession not in excess of $0.50
per share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per share to other dealers. The
initial public offering price and the concessions and discount to dealers may be
changed by the Underwriters after the public offering.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase on a pro rata basis up to
315,000 additional shares of Common Stock from the Company at the initial public
offering price, less underwriting discounts, as shown on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby.

The Company has agreed to indemnify the Underwriters or to contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.

The Company, the Company's executive officers and directors, and certain of
the Company's shareholders (in the aggregate, representing 53.6% of the shares
outstanding after the Offering assuming the Underwriters' over-allotment option
is not exercised) have agreed that, for a period of 180 days from the date of
this Prospectus, they will not, directly or indirectly, offer, sell, offer to
sell, contract to sell, grant any option to purchase, or otherwise dispose (or
announce any offer, sale, grant of any option to purchase, or other disposition)
of any additional shares of Common Stock, or any securities convertible into, or
exercisable or exchangeable for, shares of Common Stock, without the prior
written consent of the Underwriters.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

Prior to this Offering, there has been no public market for the shares of
Common Stock. Consequently, the initial public offering price has been
determined through negotiations among the Company and the Representatives. The
factors considered in making such determination include the prevailing market
conditions, the Company's financial and operating history and conditions, the
Company's prospects and the prospects for its industry in general, the
management of the Company, and the market prices of securities for companies in
business related to that of the Company.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "DNLI." The Company has been advised by the
Representatives that each of the Representatives presently intends to make a
market in the Common Stock offered hereby; the Representatives are not obligated
to do so, however, and any market making activity may be discontinued at any
time. There can be no assurance that an active public market for the Common
Stock will develop and continue after the Offering.

In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Representatives may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with the Offering that they are committed to purchase from the
Company, and in such case the Representatives may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representatives, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. The imposition of a penalty bid might also affect the price of
the Common Stock to the extent that it could discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the

44
<PAGE> 45

Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.

At the request of the Company, the Underwriters have reserved up to 120,938
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.

LEGAL MATTERS

The legality of the Common Stock offered hereby will be passed upon for the
Company by Hutcheson & Grundy, L.L.P., Houston, Texas. Certain legal matters
will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Houston,
Texas.

EXPERTS

The consolidated financial statements and schedule of the Company as of
June 29, 1996 and June 28, 1997 and the period from December 19, 1994 (date of
inception) to July 1, 1995, the year ended June 29, 1996, and the year ended
June 28, 1997, the financial statements of Hoover Containment Systems, Inc., as
of and for the year ended December 31, 1994 and the period from January 1, 1995
to October 27, 1995, the financial statements of Ershigs, Inc., as of December
31, 1996 and for the period from October 1, 1994 to December 31, 1994 and for
the years ended December 31, 1995 and 1996 and the period from January 1, 1997
to February 27, 1997, the financial statements of GL & V/LaValley Construction,
Inc., as of August 16, 1997 and the period from August 23, 1996 to August 16,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.

The financial statements of SEFCO, as of December 31, 1995 and for each of
two years in the period ended December 31, 1995 included in this Prospectus and
Registration Statement have been audited by Gaynor and Fawcett, Inc.,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.

The financial statements of SEFCO, as of and for the year ended December
31, 1996 included in this Prospectus and Registration Statement have been
audited by Leming, Schallner & Co., independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

ADDITIONAL INFORMATION

This Prospectus forms part of a Registration Statement on Form S-1 (the
"Registration Statement") which the Company has filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act. In accordance
with the Commission's rules and regulations, this Prospectus omits certain of
the information in the Registration Statement and all of its exhibits, and
reference is made to the Registration Statement and its exhibits for further
information relating to the Company and the Common Stock offered hereby. Copies
of the Registration Statement and its exhibits may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of this material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site on the World Wide Web, and copies of the
Registration Statement and its exhibits may be accessed at this

45
<PAGE> 46

Web site (http://www.sec.gov). Statements in this Prospectus concerning any
provisions of any contract or document are not necessarily complete, and each
such statement is qualified in its entirety by reference to the copy of the
relevant contract or document filed as an exhibit to the Registration Statement.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent public
accountants.

46
<PAGE> 47

DENALI INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DENALI INCORPORATED AND SUBSIDIARIES
Pro Forma Condensed Consolidated Financial Statements
(Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of
September 27, 1997.................................... F-3
Pro Forma Condensed Consolidated Statement of
Operations:
Year ended June 28, 1997............................. F-4
Quarter ended September 27, 1997..................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.................................. F-6
Consolidated Financial Statements:
Report of Independent Auditors......................... F-8
Consolidated Balance Sheets as of June 29, 1996 and
June 28, 1997......................................... F-9
Consolidated Statements of Operations for the Period
from December 19, 1994 (Date of Inception) to July 1,
1995 and the Years Ended June 29, 1996 and June 28,
1997.................................................. F-10
Consolidated Statements of Stockholders' Equity
(Deficit) for the Period from December 19, 1994 (Date
of Inception) to July 1, 1995 and the Years Ended June
29, 1996 and June 28, 1997............................ F-11
Consolidated Statements of Cash Flows for the Period
from December 19, 1994 (Date of Inception) to July 1,
1995 and the Years Ended June 29, 1996 and June 28,
1997.................................................. F-12
Notes to Consolidated Financial Statements............. F-13
Consolidated Balance Sheet as of September 27, 1997
(Unaudited)........................................... F-28
Consolidated Statements of Operations for the
three-month periods ended September 28, 1996 and
September 27, 1997 (Unaudited)........................ F-29
Consolidated Statements of Cash Flows for the
three-month periods ended September 28, 1996 and
September 27, 1997 (Unaudited)........................ F-30
Notes to Unaudited Consolidated Financial Statements... F-31
HOOVER CONTAINMENT SYSTEMS, INC.
Report of Independent Auditors............................ F-34
Balance Sheet as of December 31, 1994..................... F-35
Statements of Operations for the Year Ended December 31,
1994 and the Period from January 1, 1995 to October 27,
1995................................................... F-36
Statements of Stockholders' Equity for the Year Ended
December 31, 1994 and the Period from January 1, 1995
to October 27, 1995.................................... F-37
Statements of Cash Flows for the Year Ended December 31,
1994 and the Period from January 1, 1995 to October 27,
1995................................................... F-38
Notes to Financial Statements............................. F-39
ERSHIGS, INC.
Report of Independent Auditors............................ F-44
Balance Sheet as of December 31, 1996..................... F-45
Statements of Operations for the Period from October 1,
1994 to December 31, 1994 and for the Years Ended
December 31, 1995 and 1996 and the Period from January
1, 1997 to February 27, 1997........................... F-46
Statements of Stockholders' Equity for the Period from
October 1, 1994 to December 31, 1994 and for the Years
Ended December 31, 1995 and 1996 and the Period from
January 1, 1997 to February 27, 1997................... F-47
Statements of Cash Flows for the Period from October 1,
1994 to December 31, 1994 and for the Years Ended
December 31, 1995 and 1996 and the Period from January
1, 1997 to February 27, 1997........................... F-48
Notes to Financial Statements............................. F-49
</TABLE>

F-1
<PAGE> 48
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GL & V/LA VALLEY CONSTRUCTION, INC.
Report of Independent Auditors............................ F-54
Balance Sheet as of August 16, 1997....................... F-55
Statement of Operations for the Period from August 23,
1996 (Date of Acquisition) to August 16, 1997.......... F-56
Statement of Stockholders' Equity for the Period from
August 23, 1996 (Date of Acquisition) to August 16,
1997................................................... F-57
Statement of Cash Flow for the Period from August 23, 1996
(Date of Acquisition) to August 16, 1997............... F-58
Notes to Financial Statements............................. F-59
SEFCO, INC.
Report of Independent Auditors............................ F-64
Balance Sheets as of December 31, 1995, and 1996.......... F-65
Statements of Operations for the Years Ended December
1994, 1995, and 1996................................... F-66
Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995, and 1996...................... F-67
Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996................................... F-68
Notes to the Financial Statements......................... F-69
Balance Sheet as of September 30, 1997 (Unaudited)........ F-73
Statement of Operations for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited)................ F-74
Statement of Cash Flow for the Nine Months Ended September
30, 1996 and 1997 (Unaudited).......................... F-75
Notes to Unaudited Financial Statements................... F-76
</TABLE>

F-2
<PAGE> 49

PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DENALI INCORPORATED AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 27, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
DENALI
INCORPORATED LAVALLEY(1) SEFCO(1) ADJUSTMENTS PRO FORMA
------------ ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................... $ 450 $ 47 $ 611 $ (658)(a) $ 450
Accounts receivable, net................. 16,186 546 906 -- 17,638
Cost and estimated earnings in excess of
billings............................... -- 855 160 -- 1,015
Inventories.............................. 7,644 148 14 -- 7,806
Advances to parent....................... -- 1,357 -- (1,357)(b) --
Prepaid expenses......................... 1,426 -- 34 -- 1,460
Deferred tax assets...................... 934 42 -- (42)(c) 934
------- ------ ------ ------- -------
Total current assets.............. 26,640 2,995 1,725 (2,057) 29,303
Property, plant, and equipment, net........ 7,631 1,552 2,220 628(c) 12,031
Assets held for sale....................... 1,485 -- -- -- 1,485
Notes receivable........................... 900 -- -- -- 900
Goodwill, net.............................. 1,610 -- -- 3,967(b) 5,577
Deferred tax assets........................ 1,953 -- -- -- 1,953
Other assets............................... 1,070 -- 1 -- 1,071
------- ------ ------ ------- -------
Total assets...................... $41,289 $4,547 $3,946 $ 2,538 $52,320
======= ====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... $12,141 $ 424 $ 355 $ -- $12,920
Accrued liabilities...................... 4,654 166 256 100(c) 5,176
Billings in excess of costs and estimated
earnings............................... -- -- 109 -- 109
Income tax payable....................... 313 -- -- -- 313
Deferred tax liability................... -- -- 147 18(c) 165
Notes payable............................ 1,218 1,643 -- (1,643)(b) 1,218
Current maturities of long-term debt..... 1,403 -- -- 291(a) 1,694
------- ------ ------ ------- -------
Total current liabilities......... 19,729 2,233 867 (1,234) 21,595
Long-term debt, less current maturities.... 19,607 -- -- 8,709(a) 28,316
Deferred tax liability..................... -- -- 218 238(c) 456
Other long-term liabilities................ 977 -- -- -- 977
Series A redeemable Preferred Stock........ 1,200 -- -- -- 1,200
Stockholders' equity (deficit)
Common stock............................. 22 300 1 (301)(b) 22
Additional paid-in capital............... 2,609 1912 46 (1958)(b) 2,609
Retained earnings (deficit).............. (2,855) 102 2,814 (2,916)(b) (2,855)
------- ------ ------ ------- -------
Total stockholders' equity
(deficit)....................... (224) 2,314 2,861 (5,175) (224)
------- ------ ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)....................... $41,289 $4,547 $3,946 $ 2,538 $52,320
======= ====== ====== ======= =======
</TABLE>

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

(1) Unaudited balance sheet as of September 30, 1997.

See notes to unaudited pro forma condensed consolidated financial statements

F-3
<PAGE> 50

DENALI INCORPORATED AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 28, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------
DENALI
INCORPORATED ERSHIGS(1) LAVALLEY(2) SEFCO(3) ADJUSTMENTS PRO FORMA
------------ ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $71,101 $ 15,918 $7,877 $10,032 $ -- $104,928
Cost of sales........................ 57,268 14,889 6,353 7,602 (162)(d)
(146)(e)
192(f)
(206)(g) 85,790
------- -------- ------ ------- ----- --------
Gross profit......................... 13,833 1,029 1,524 2,430 322 19,138
Selling, general and administrative
expenses........................... 11,874 3,184 1,157 1,485 162(d)
(17)(e)
(480)(h)
90(i) 17,455
------- -------- ------ ------- ----- --------
Operating income (loss).............. 1,959 (2,155) 367 945 567 1,683
Interest expense..................... 2,058 329 174 -- 716(j) 3,277
Interest income...................... (111) -- -- (45) 45 (111)
Other (income) expense, net.......... (598) 47 23 (16) -- (544)
------- -------- ------ ------- ----- --------
Income (loss) before income taxes.... 610 (2,531) 170 1,006 (194) (939)
Provision (benefit) for income
taxes.............................. 293 (962) 79 362 (148)(k) (376)
------- -------- ------ ------- ----- --------
Net income (loss).................... $ 317 $ (1,569) $ 91 $ 644 $ (46) $ (563)
Dividends on Series A Preferred
Stock.............................. (120) (120)
------- --------
Net income (loss) attributable to
common stock....................... 197 (683)
======= ========
Net income (loss) per common share... $ 0.09 $ (0.31)
======= ========
Number of shares used to compute net
income (loss) per share............ 2,198 2,198
======= ========
</TABLE>

See notes to unaudited pro forma condensed consolidated financial statements
- ---------------

(1) Reflects results of Ershigs' operations for the period from July 1, 1996 to
February 27, 1997 (unaudited), the date of its acquisition by the Company.
Ershigs' results of operations subsequent to February 27, 1997 are reflected
in the Denali Incorporated historical results.

(2) Reflects results of LaValley's operations for the period from August 23,
1996 to August 16, 1997.

(3) Reflects results of SEFCO's operations for the period from July 1, 1996 to
June 28, 1997 (unaudited).

F-4
<PAGE> 51

DENALI INCORPORATED AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
QUARTER ENDED SEPTEMBER 27, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

See notes to unaudited pro forma condensed consolidated financial statements
- ---------------

(1) Reflects results for LaValley and SEFCO for the quarter ended September 30,
1997 (unaudited).

F-5
<PAGE> 52

DENALI INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

The accompanying unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on adjustments to
the historical consolidated financial statements of Denali Incorporated (the
"Company") to give effect to the acquisitions described in Note 3 (the
"Acquisitions"). The pro forma condensed consolidated balance sheet assumes the
Acquisitions were closed on June 28, 1997. The pro forma condensed consolidated
statement of operations assumes all Acquisitions described in Note 3 were
consummated as of the beginning of the period presented. The pro forma condensed
consolidated statements of operations are not necessarily indicative of results
that would have occurred had the Acquisitions been consummated as of the
beginning of the period presented or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Financial Statements should be read in conjunction
with the historical consolidated financial statements of the Company, the
historical financial statements of the entities acquired in the Acquisitions and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

(2) EARNINGS PER SHARE

Pro forma earnings per share were computed by dividing net income (or loss)
applicable to common stock by the weighted average number of shares of common
stock, common stock equivalents outstanding during the period and the dilutive
effect of common stock equivalents issued within one year prior to the Offering.
The number of shares of common stock and common stock equivalents has been
retroactively adjusted for the 1715-for-1 stock split. Common stock equivalents
consisted of the number of shares issuable on exercise of the outstanding stock
options less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of the
common stock during the period. The dilutive effect of common stock issued
within one year prior to the Offering for the periods prior to issuance was
determined in the same manner except that the Offering price of $13 per share
was used for the repurchase price.

(3) ACQUISITIONS

The acquisitions by the Company have been accounted for as purchases and,
accordingly, the results of operations of the acquired companies have been
included in the consolidated results of operations of the Company from the date
of acquisition.

In December 1994, the Company acquired certain assets and assumed certain
liabilities of the fiberglass composite underground storage tank business of
Owens Corning, including five manufacturing facilities. The purchase price
totaled $16.6 million, consisting of $5.6 million in cash, $9.3 million in notes
payable and approximately $1.7 million in acquisition costs.

On October 27, 1995, the Company acquired certain assets and assumed
certain liabilities of Hoover Containment Systems, Inc., a manufacturer of steel
rectangular ASTs. The purchase price totaled $5.5 million consisting of $5.4
million in cash and acquisition costs of approximately $100,000.

On February 28, 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered fiberglass reinforced plastic ("FRP"). The $6.1
million purchase price consisted of $5.0 million cash, $1.0 million in a note
payable and acquisition costs of approximately $80,000.

In October 1997, the Company acquired SEFCO, Inc. ("SEFCO") for
approximately $4.9 million in net cash and acquisition costs of approximately
$100,000. SEFCO is a manufacturer of engineered field-erected aboveground steel
tanks.

F-6
<PAGE> 53

DENALI INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In October 1997, the Company acquired LaValley Construction, Inc.
("LaValley") for $3.9 million in cash and acquisition costs of approximately
$100,000. LaValley manufactures engineered FRP products.

A summary of the fair value of assets acquired and liabilities assumed and
determination of goodwill (or negative goodwill allocated to non-current assets)
is as follows (in thousands):

<TABLE>
<CAPTION>
ERSHIGS LAVALLEY SEFCO
------- -------- -------
<S> <C> <C> <C>
Assets acquired........................................ $11,215 $3,449 $ 3,615
Liabilities assumed.................................... (3,848) (822) (1,209)
------- ------ -------
Value of net assets acquired........................... 7,367 2,627 2,406
Purchase price......................................... 6,080 4,000 5,000
------- ------ -------
Excess purchase price (goodwill or negative
goodwill)............................................ $(1,287) $1,373 $ 2,594
======= ====== =======
</TABLE>

(4) ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS

The following pro forma adjustments have been made to the historical
condensed consolidated balance sheet of the Company to give effect to the
acquisitions of LaValley and SEFCO described in Note 3 as if they had occurred
as of June 28, 1997 and to the historical condensed statements of operations as
if all the acquisitions described in Note 3 were consummated as of the beginning
of the period presented:

(a) To reflect the acquisitions of LaValley and SEFCO and the
borrowings under the Company's senior credit agreement to fund those
acquisitions, net of cash acquired at SEFCO.

(b) To reflect, in connection with the acquisition of LaValley and
SEFCO, the purchase price allocation and the elimination of assets not
acquired or liabilities not assumed by the Company.

(c) To reflect, in connection with the acquisition of LaValley and
SEFCO, the estimated fair market value of assets purchased and liabilities
assumed and the related deferred taxes.

(d) To reclass certain expenses to conform with the presentation used
by the Company.

(e) To reflect lower depreciation expense resulting from the
write-down of fixed assets as part of purchase accounting for an
acquisition.

(f) To reflect additional depreciation expense from the purchase
accounting step-up of the acquisition of LaValley and the purchase of fixed
assets from the shareholder of SEFCO as a condition of the purchase that
were previously leased by SEFCO from the shareholder (see (g)).

(g) To reduce expenses for certain lease expenses incurred by seller
for assets to be purchased by the Company (see (f)).

(h) To reduce expenses including the difference between compensation
and benefits of certain sellers prior to consummation of the acquisitions
and their compensation and benefits following the acquisitions as
stipulated in the respective employment agreements with the Company.

(i) To reflect amortization of goodwill related to the purchases of
LaValley and SEFCO, which is being amortized on a straight-line basis over
40 years.

(j) To reflect interest expense on the borrowings to fund the
purchases of Ershigs, LaValley and SEFCO in excess of historical interest
expense.

(k) To reflect the change in income taxes related to pro forma
adjustments.

F-7
<PAGE> 54

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Denali Incorporated

We have audited the accompanying consolidated balance sheets of Denali
Incorporated and subsidiaries (the "Company") as of June 29, 1996, and June 28,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the period from December 19, 1994 (date of
inception) to July 1, 1995 and the years ended June 29, 1996 and June 28, 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 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
Denali Incorporated, and subsidiaries at June 29, 1996 and June 28, 1997, and
the consolidated results of its operations and its cash flows for the period
from December 19, 1994 (date of inception) to July 1, 1995, and the years ended
June 29, 1996 and June 28, 1997 in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Houston, TX
August 27, 1997
except for Notes 7 and 18
as to which the date
is November 3, 1997

F-8
<PAGE> 55

DENALI INCORPORATED

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 124 $ 330
Investment in equity securities........................... 505 --
Accounts and notes receivable, net of allowances of
$114,000 in 1996 and $605,000 in 1997.................. 9,490 17,376
Inventories............................................... 5,660 6,686
Income tax receivable..................................... 509 40
Prepaid expenses.......................................... 898 913
Deferred tax assets....................................... 243 934
------- -------
Total current assets........................................ 17,429 26,279
Property, plant, and equipment, net......................... 7,923 7,695
Assets held for sale........................................ 1,120 1,520
Notes receivable............................................ 810 907
Goodwill, net............................................... 1,663 1,620
Deferred tax assets......................................... 336 1,953
Other assets................................................ 1,037 1,110
------- -------
Total assets................................................ $30,318 $41,084
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 8,483 $10,173
Accrued liabilities....................................... 2,712 5,249
Notes payable............................................. -- 1,460
Current maturities of long-term debt...................... 585 1,378
------- -------
Total current liabilities................................... 11,780 18,260
Long-term debt, less current maturities..................... 18,076 21,186
Other long-term liabilities................................. -- 979
Series A Preferred Stock, redeemable at $250 per share, $.01
par value:
Authorized shares -- 16,000
Issued and outstanding shares -- 4,800.................... 1,200 1,200
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 2,184,910............. 22 22
Additional paid-in capital................................ 297 297
Retained deficit.......................................... (1,057) (860)
------- -------
Total stockholders' deficit................................. (738) (541)
------- -------
Total liabilities and stockholders' deficit................. $30,318 $41,084
======= =======
</TABLE>

See accompanying notes.

F-9
<PAGE> 56

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE
PERIOD
DECEMBER 19,
1994 (DATE OF YEAR ENDED
INCEPTION) TO ----------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
-------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales.................................................. $17,799 $53,354 $71,101
Cost of sales.............................................. 13,473 43,518 57,268
------- ------- -------
Gross profit............................................... 4,326 9,836 13,833
Selling, general, and administrative expenses.............. 3,771 9,604 11,874
------- ------- -------
Operating income........................................... 555 232 1,959
Interest expense........................................... 671 1,783 2,058
Interest income............................................ -- (65) (111)
Other income, net.......................................... (72) (206) (598)
------- ------- -------
Income (loss) before income taxes.......................... (44) (1,280) 610
Income tax expense (benefit)............................... (1) (446) 293
------- ------- -------
Net income (loss).......................................... $ (43) $ (834) $ 317
Dividends on Series A Preferred Stock...................... (60) (120) (120)
------- ------- -------
Net income (loss) attributable to common stock............. $ (103) $ (954) $ 197
======= ======= =======
Net income (loss) per share of common stock................ $ (0.05) $ (0.44) $ 0.09
======= ======= =======
Weighted average common shares outstanding................. 2,078 2,185 2,198
======= ======= =======
</TABLE>

See accompanying notes.

F-10
<PAGE> 57

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON COMMON
STOCK STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Common stock issued at December 19, 1994
(date of inception)........................ 2,058 $21 $279 $ -- $ 300
Issuance of common stock................ 127 1 18 -- 19
Dividends declared...................... -- -- -- (60) (60)
Net loss................................ -- -- -- (43) (43)
----- --- ---- ----- -----
Balance at July 1, 1995...................... 2,185 22 297 (103) 216
Dividends declared......................... -- -- -- (120) (120)
Net loss................................... -- -- -- (834) (834)
----- --- ---- ----- -----
Balance at June 29, 1996..................... 2,185 22 297 (1,057) (738)
Dividends declared......................... -- -- -- (120) (120)
Net income................................. -- -- -- 317 317
----- --- ---- ----- -----
Balance at June 28, 1997..................... 2,185 $22 $297 $(860) $(541)
===== === ==== ===== =====
</TABLE>

See accompanying notes.

F-11
<PAGE> 58

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19, 1994 YEARS ENDED
(DATE OF INCEPTION) -------------------
TO JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ (43) $ (834) $ 317
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation......................................... 325 790 1,043
Amortization......................................... 29 123 178
Provision for losses on accounts receivable.......... 89 55 176
Deferred tax expense (benefit)....................... (583) 4 25
(Gain) loss on disposal of property, plant and
equipment and assets held for sale................ -- 210 (447)
Changes in operating assets and liabilities:
Accounts receivable............................... 902 22 (3,377)
Inventories....................................... 301 (1,250) 1,238
Prepaid expenses.................................. (403) (372) (90)
Other assets...................................... (24) (43) (57)
Accounts payable.................................. 2,209 1,323 886
Accrued liabilities............................... 688 671 264
Income tax receivable/payable..................... 299 (808) 469
------- ------- -------
Net cash provided by (used in) operating activities.... 3,789 (109) 625
INVESTING ACTIVITIES
Acquisitions net of cash acquired...................... (7,210) (5,427) (4,825)
Purchases of property, plant and equipment............. (333) (942) (600)
Proceeds from sale of property, plant, and equipment
and assets held for sale............................. 84 1,363 208
Payments on notes receivable........................... -- 13 81
Purchases of equity securities......................... (68) (437) (593)
Proceeds from sale of equity securities................ -- -- 1,098
------- ------- -------
Net cash used in investing activities.................. (7,527) (5,430) (4,631)
FINANCING ACTIVITIES
Proceeds from common stock issuance.................... 319 -- --
Proceeds from preferred stock issuance................. 1,200 -- --
Dividends paid......................................... -- (90) --
Net borrowings under revolving lines of credit......... 3,552 4,065 2,848
Proceeds from term notes and other long-term debt...... 1,375 2,019 2,200
Principal payments on term notes and other long-term
debt................................................. (1,461) (1,233) (685)
Debt origination cost.................................. (248) (97) (151)
------- ------- -------
Net cash provided by financing activities.............. 4,737 4,664 4,212
------- ------- -------
Increase (decrease) in cash............................ 999 (875) 206
Cash at beginning of period............................ -- 999 124
------- ------- -------
Cash at end of period.................................. $ 999 $ 124 $ 330
======= ======= =======
</TABLE>

See accompanying notes.

F-12
<PAGE> 59

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1997

1. THE COMPANY

ORGANIZATION AND BASIS OF PRESENTATION

Denali Incorporated ("Denali" or the "Company"), a Delaware corporation,
was incorporated on December 19, 1994, and through its wholly owned subsidiaries
is primarily engaged in the manufacture and sale of fiberglass composite
underground storage tanks, steel rectangular aboveground storage tanks, and
engineered fiberglass reinforced plastic products for corrosion resistant
applications.

The Company uses a 52 or 53 week year ending on the Saturday closest to
June 30.

Certain prior year amounts have been reclassified to conform to current
year presentation.

2. SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The Consolidated Financial Statements include the accounts of Denali and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates by management.
Actual results could differ from those estimates.

INVESTMENTS IN EQUITY SECURITIES

The Company determines the appropriate classification of investments in
equity securities at the time of purchase and confirms such designation as of
the balance sheet date. Marketable equity securities are classified as
available-for-sale securities and are stated at fair value, with any unrealized
gains and losses, net of tax, reported as a separate component of stockholder's
equity. Realized gains and losses are recognized based on the
specific-identification method for equity securities sold. The Company's
investments are in a mutual fund that holds U.S. Treasury bills. As of June 29,
1996, the fair value of investments in equity securities, using quoted market
prices, approximates their carrying value.

CASH AND CASH EQUIVALENTS

The Company considers all cash accounts and money market accounts to be
cash and cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, prepaid expenses, accounts receivable, and
other current assets and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying value of the Company's
revolving lines of credit and notes payable approximates fair value because the
rates on such lines are variable, based on current market.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees.

INVENTORIES

Inventories are determined using actual cost or a standard cost method
based on a first-in, first-out ("FIFO") basis. FIFO inventory is stated at the
lower of cost or market.

F-13
<PAGE> 60

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost. Depreciation is computed
by the straight-line method using rates based on the estimated useful lives of
the related assets. Estimated useful lives used for depreciation purposes are as
follows:

<TABLE>
<S> <C>
Buildings and improvements.................................. 20 years
Machinery and equipment..................................... 3 to 10 years
</TABLE>

ACCOUNTING FOR LONG-LIVED ASSETS

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of fiscal 1997 and the effect of adoption was not
material.

GOODWILL

Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the undiscounted cash flows. Accumulated amortization was $27,000
and $69,000 for the years ended June 29, 1996 and June 28, 1997, respectively.
Amortization expense was $-0-, $27,000, and $42,000 for the period December 19,
1994 (date of inception) to July 1, 1995, and for the years ended June 29, 1996,
and June 28, 1997.

REVENUES FROM LICENSE ARRANGEMENTS

The Company has certain license agreements whereby it receives royalties
equal to the greater of a certain percentage of the licensee's sales for
products based on the Company's proprietary technology and processes or a
guaranteed amount as specified in the agreements. The agreements expire between
1998 and 2011. The Company recognizes the actual royalties due or the guaranteed
amount under these license agreements in the period of the licensee's sales.

REVENUE RECOGNITION

Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting. Revenues from
certain long-term construction contracts, usually performed on job sites, are
recognized on the percentage-of-completion method. Earned revenue is based on
the percentage that incurred costs to date are to total estimated costs after
giving effect to the most recent estimates of total cost. The cumulative impact
of revisions in total cost estimates during the progress of work is reflected in
the year in which these changes become known. Earned revenue reflects the
original contract price adjusted for agreed-upon claim and change order revenue,
if any.

Losses expected to be incurred on jobs in process, after consideration of
estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known. Selling and administrative expenses are
charged to income in the year incurred and are not allocated to contracts in
progress.

F-14
<PAGE> 61

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING

The Company expenses all advertising costs as incurred. Advertising costs
incurred were $193,000, $330,000, and $402,000 for the period December 19, 1994
(date of inception) to July 1, 1995 and for the years ended June 29, 1996 and
June 28, 1997, respectively.

INCOME TAXES

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

RESEARCH AND DEVELOPMENT COSTS

The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged against earnings in the period incurred. Research
and development costs expensed were $242,000, $492,000, and $319,000 for the
period December 19, 1994 (date of inception) to July 1, 1995, and for the years
ended June 29, 1996 and June 28, 1997, respectively.

CONCENTRATION OF CREDIT RISK

Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continuously
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of major commercial
organizations and independent sub-contractors. No customer accounted for 10% or
more of revenues for the period December 19, 1994 (date of inception) to July 1,
1995, and for the years ended June 29, 1996 and June 28, 1997.

PER SHARE INFORMATION

Per share amounts have been computed by dividing net income (or loss)
applicable to common stock (net income or loss, less preferred stock dividends)
by the weighted average number of common shares and common stock equivalents
outstanding during the respective periods. Common stock equivalent shares
consist of the incremental shares issuable upon the exercise of stock options
(using the treasury stock method where applicable). Shares for which stock
options were granted within a 12-month period prior to an initial public
offering are treated as outstanding for all periods presented. Therefore, shares
for which options were granted subsequent to September 1996 have been considered
as having been outstanding for purposes of the calculation (using the treasury
stock method with the offering price used for fair market value) for all periods
presented. Common stock equivalent shares from stock options granted prior to
September 1996 are excluded from computations if their effect is antidilutive.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted by the Company in
the second quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of common stock equivalents will be excluded. The
impact of Statement No. 128 on primary and fully diluted net income (loss) per
share is not expected to be material for the period December 19, 1994 (date of
inception) to July 1, 1995, and for the years ended June 29, 1996 and June 28,
1997.

CAPTIVE INSURANCE PROGRAM

In January 1996, the Company entered into a captive insurance program for
its workers' compensation, auto, and general liability coverages. The program
provides for certain reinsurance on claims over $250,000

F-15
<PAGE> 62

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and certain other claims. The Company uses actuarial determined information
provided by the captive insurance company to determine its estimated liability.

ACCOUNTING CHANGES

In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
and Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements, which are effective for periods beginning after
December 15, 1997, expand and modify disclosures and, accordingly, will have no
impact on the Company's reported financial position, results of operations, or
cash flows.

3. ACQUISITIONS

Effective December 31, 1994, the Company purchased certain assets and
assumed certain liabilities of the Owens-Corning Fiberglass(R) underground tank
group (the "tank group"). The acquisition was accounted for under the purchase
method of accounting, whereby the assets and liabilities of the tank group
acquired through the Company's subsidiaries were adjusted to their estimated
fair values at the acquisition date, which exceeded the purchase price by
approximately $4.1 million. Accordingly, the excess amount was allocated to
reduce the basis of property, plant, and equipment (except assets held for sale
as discussed below).

Under the purchase agreement, the Company acquired net assets of $16.6
million, including five manufacturing facilities, two of which were closed by
the Company after acquisition, in exchange for $5.6 million in cash, $1.8
million in notes payable, and $7.5 million in a subordinated unsecured note
payable. The Company incurred approximately $1.7 million in acquisition costs.
The consolidated financial statements reflect all operations for the acquired
company since January 1, 1995.

Effective October 27, 1995, the Company purchased certain assets and
assumed certain liabilities of Hoover Containment Systems, Inc., a manufacturer
of above-ground storage tanks made of steel. The acquisition was accounted for
under the purchase method of accounting whereby the assets and liabilities of
the acquired company were adjusted to their estimated fair values at the
acquisition date.

Under the purchase agreement, the Company acquired net assets of $3.8
million in exchange for $5.4 million in cash and incurred approximately $100,000
in acquisition costs resulting in the recording of goodwill of approximately
$1.7 million. The consolidated financial statements reflect all operations for
the acquired company since the date of acquisition.

Effective February 28, 1997, the Company acquired all of the issued and
outstanding stock of Ershigs, a manufacturer of fiberglass-reinforced plastic
composites for corrosion-resistant applications. The acquisition was accounted
for under the purchase method of accounting whereby the assets and liabilities
of Ershigs were adjusted to their estimated fair values at the acquisition date,
which exceeded the purchase price by approximately $1.3 million. Accordingly,
the excess amount was allocated to reduce the basis of property, plant, and
equipment (except for assets held for sale as discussed below).

Under the purchase agreement, the Company acquired net assets of $7.4
million in exchange for $5.0 million in cash and $1.0 million in a subordinated
unsecured note payable. The Company incurred approximately $80,000 in
acquisition costs. The consolidated financial statements reflect all operations
for the acquired company since the date of acquisition.

F-16
<PAGE> 63

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited results of operations have been prepared assuming
the acquisitions had occurred as of the beginning of the periods presented.
Those results are not necessarily indicative of results of future operations nor
of results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented.

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
JUNE 29, JUNE 28,
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $ 61,728 $87,019
Net income (loss)........................................... $ (709) $ (286)
Earnings (loss) per common share............................ $ (0.32) $ (0.13)
</TABLE>

ASSETS HELD FOR SALE

Assets held for sale are recorded on the balance sheet at amounts equal to
estimated net realizable values adjusted for anticipated earnings or losses,
interest and other carrying costs until sale.

The assets held for sale of $3.6 million identified at the date of
acquisition of the tank group consisted primarily of two manufacturing
facilities and related manufacturing equipment. The two manufacturing facilities
were closed in early 1995 and had insignificant operations after the date of
acquisition. One manufacturing facility was sold in December 1995 at its
previously recorded net realizable value. The other manufacturing facility was
sold in June 1996, with the Company recognizing a loss of $208,000 due to a
decline in the market value of the property during 1996. Certain of the
manufacturing equipment was sold during the year ended June 28, 1997 under
licensing arrangements with the Company recognizing a gain on the sale of the
equipment of $312,000. At June 28, 1997, the remaining assets held for sale of
$700,000 consist of certain manufacturing equipment which the Company primarily
expects to sell under similar license arrangements or through an international
joint venture.

The assets held for sale of $820,000 identified at the date of acquisition
of Ershigs consisted primarily of a manufacturing facility and related
manufacturing equipment. The manufacturing facility was closed in May 1997 with
operating losses of $68,000 eliminated from the Company's results of operations
for the year ended June 28, 1997. The assets are anticipated to be sold within a
year from the acquisition date.

4. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $ 2,544 $ 2,147
Raw materials............................................... 2,100 2,805
Work in process............................................. 1,016 1,734
-------- -------
$ 5,660 $ 6,686
======== =======
</TABLE>

F-17
<PAGE> 64

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,089 $ 1,089
Buildings and improvements.................................. 3,580 3,685
Machinery and equipment..................................... 4,371 5,062
Construction in progress.................................... 3 22
-------- -------
9,043 9,858
Less accumulated depreciation............................... (1,120) (2,163)
-------- -------
Property, plant, and equipment, net......................... $ 7,923 $ 7,695
======== =======
</TABLE>

6. NOTES RECEIVABLE

Notes receivable consist of certain notes received as part of the sale of
certain assets held for sale. During the year ended June 29, 1996, the Company
received a note receivable for an original amount of $850,000 payable over five
years with interest at 10%. During the year ended June 28, 1997, the Company
received a note receivable for an original amount of $339,000 payable over three
years with interest imputed at 10%. The current portion of the notes receivable
is approximately $172,000 which is included in accounts and notes
receivable-current.

7. LONG-TERM DEBT

Long-term debt is summarized below:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit note with a financial institution, interest
payable monthly at prime plus 1.50% (10% at June 28,
1997), due December 20, 1999, secured by all assets of its
subsidiary, Fluid Containment, Inc. ("FCI")............... $ 4,579 $ 4,830
Term note with a financial institution, due in monthly
installments of $17,000 plus interest at prime plus 2%
(10.5% at June 28, 1997) through December 20, 1999,
secured by all assets of FCI.............................. 700 500
Industrial Revenue Bonds with Montgomery County Industrial
Development Corporation, interest payable semiannually on
February 1 and August 1 at 9.875%, principal due February
1, 2001, secured by FCI's Conroe, Texas, manufacturing
facility.................................................. 1,000 1,000
Revolving credit note with a financial institution, interest
payable monthly at 30-day LIBOR plus 3.5% (9.1875% at June
28, 1997), due October 27, 2000, secured by all assets of
its subsidiary, Hoover Containment, Inc. ("Hoover")....... 3,038 3,663
Term note with a financial institution, due in monthly
installments of $7,000 plus interest at 30-day LIBOR plus
3.75% (9.4375% at June 28, 1997) through October 1, 2000,
secured by all assets
of Hoover................................................. 375 290
Term note with a financial institution, due in monthly
installments of $25,000 plus interest at 30-day LIBOR plus
4.15% (9.8375% at June 28, 1997) through October 1, 1999,
secured by all assets
of Hoover................................................. 700 400
</TABLE>

F-18
<PAGE> 65

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit note with a financial institution, interest
payable monthly at 30-day LIBOR plus 3.75% or at prime
plus 1% (9.4375% at June 28, 1997), due February 28, 2002,
secured by all assets of its subsidiary Ershigs Inc.
(Ershigs)................................................. -- 1,972
Term note with a financial institution, due in monthly
installments of $7,000 plus interest at 30-day LIBOR plus
4% or at prime plus 1.25% (9.6875% at June 28, 1997)
through February 28, 2002, secured by all assets of
Ershigs................................................... -- 579
Term note with a financial institution, due in monthly
installments of $13,000 plus interest at 30-day LIBOR rate
4% or at prime plus 1.25% (9.6875% at June 28, 1997)
through February 28, 2002, secured by all assets of
Ershigs................................................... -- 1,061
Subordinated to FCI revolving credit note and term note,
unsecured note payable to a seller, interest at 10%
payable semi-annually on June 30 and December 31,
principal due
December 31, 1999......................................... 8,269 8,269
------- -------
18,661 22,564
Less current maturities..................................... 585 1,378
------- -------
Long-term debt due after one year........................... $18,076 $21,186
======= =======
</TABLE>

FCI's long-term debt agreement provides for a revolving credit note not to
exceed the lesser of $10 million or an amount (the borrowing base) based on
accounts receivable and inventories as specified in the agreement's borrowing
base formula. Borrowings under the revolving credit note totaled $4.6 million
and $4.8 million at June 29, 1996 and June 28, 1997, respectively. The borrowing
base formula yielded a maximum borrowing base of $8.1 million at June 28, 1997.
The debt agreement provides, among other things, for the maintenance of certain
minimums, as defined, for net income, working capital, tangible net worth,
interest coverage, debt coverage, capital expenditures, and average
availability.

HCI's long-term debt agreement provides for a revolving credit note not to
exceed the lesser of $6.5 million less the outstanding term note balance or an
amount (the borrowing base) based on accounts receivable and inventories as
specified in the agreement's borrowing base formula. Borrowings under the
revolving credit facility totaled $3.0 million and $3.7 million at June 29, 1996
and June 28, 1997, respectively. The borrowing base formula yielded a maximum
borrowing base of $4.7 million at June 28, 1997. The debt agreement provides,
among other things, for the maintenance of certain minimums, as defined, for net
income, working capital, tangible net worth, interest coverage, debt coverage,
and average availability.

Ershigs' long-term debt agreement provides for a revolving credit note not
to exceed the lesser of $6.5 million less the outstanding term note balance or
an amount (the borrowing base) based on accounts receivable and inventories as
specified in the agreement's borrowing base formula. Borrowings under the
revolving credit facility totaled $2 million at June 28, 1997. The borrowing
base formula yielded a maximum borrowing base of $4.9 million at June 28, 1997.
The debt agreement provides, among other things, for the maintenance of certain
minimums, as defined, for net income, working capital, tangible net worth,
interest coverage, debt coverage, and average availability.

The unsecured note payable is subordinated to FCI's revolving credit note
and term note. However, payment of interest on the subordinated note is
permitted under FCI's senior debt agreement. The unsecured note payable allowed
FCI to make two in-kind interest payments whereby accrued interest is added to
the outstanding principal balance. FCI made in-kind interest payments of
$375,000 and $394,000 during the

F-19
<PAGE> 66

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period December 19, 1994 (date of inception) to July 1, 1995, and the year ended
June 29, 1996, respectively. FCI paid interest of $827,000 during the year ended
June 28, 1997.

At June 28, 1997, the Company was not in compliance with certain financial
covenants in FCI's, HCI's, and Ershigs' long-term agreements with a financial
institution. The Company has obtained amendments or waivers of these certain
covenants in FCI's, HCI's and Ershigs' loan agreements which cure any non-
compliance with such covenants as of June 28, 1997 and through the first quarter
of fiscal 1998. On October 24, 1997, the Company refinanced all of the related
debt with a new financial institution and the new terms are reflected in the
financial statements.

On October 24, 1997, the Company's subsidiaries entered into a senior
credit facility, as amended, with a new bank to refinance its revolving and term
credit arrangements at FCI, Hoover, and Ershigs and to finance the acquisitions
of LaValley and SEFCO. Borrowings outstanding under its existing revolving and
term credit arrangements at June 28, 1997 were $10.5 million and $2.8 million,
respectively. The new senior credit facility provides for a maximum of $19.7
million revolving credit notes due in October 2002, and a maximum of $10.5
million in term loans with equal monthly payments of $100,000 plus interest due
in October 2002 or upon the termination of the revolving credit notes. The new
credit notes may be extended for an initial term of five years and may be
renewed in increments of one year thereafter, unless notice of termination is
provided by either party 90 days prior to an anniversary date. The new revolving
credit notes provide for borrowings, at the Company's option, at either the
Bank's prime rate plus 1/2% or LIBOR plus 2 3/4%. Borrowings under the new
revolving credit notes will be based on accounts receivable and inventory as
specified in the agreement's borrowing base formula. The new term loans provide
for borrowings, at the Company's option, at either the Bank's prime rate plus
1/2% or LIBOR plus 3%. The new senior credit facility provides availability for
letters of credit up to $1.5 million subject to availability of borrowing
capacity under the revolving credit notes. The new senior credit facility
requires the Company's subsidiaries to maintain certain financial covenants and
requires an annual fee of 0.375% on the unused portion of the revolving credit
notes. The new senior credit facility is secured by accounts receivable,
property, equipment and general intangible assets of the Company's subsidiaries.
The Company has classified its existing revolving and term credit arrangements
in the accompanying consolidated balance sheet as of June 28, 1997 based on the
terms of the new senior credit facility.

In connection with the extinguishment of its existing revolving and term
credit arrangements upon funding of the new senior credit facility in October
1997, the Company paid prepayment penalties of $323,000. In addition, the
Company charged to expense unamortized debt origination costs of $295,000 in
October 1997. These charges will be recognized in the Company's consolidated
financial statements as an extraordinary loss, net of tax, in the quarter ended
December 27, 1997.

Scheduled maturities of long-term debt at June 28, 1997 based on the terms
of the new senior credit facility are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year:
1998........................................................ $ 1,378
1999........................................................ 903
2000........................................................ 9,172
2001........................................................ 1,903
2002........................................................ 903
Thereafter.................................................. 8,305
-------
Total............................................. $22,564
=======
</TABLE>

F-20
<PAGE> 67

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company paid interest on its long-term debt of $166,000, $904,000, and
$1,181,000 for the period December 19, 1994 (date of inception) to July 1, 1995,
and for the years ended June 29, 1996 and June 28, 1997, respectively.

8. NOTES PAYABLE

Notes payable are summarized below:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
One-year unsecured note payable to a seller, principal and
interest at 10% due February 28, 1998..................... $ -- $1,000
Note payable with a financial institution, due in quarterly
installments of $27,500 plus interest at prime plus 1%
(9.5% at June 28, 1997) with an additional principal
payment of $250,000 on August 31, 1997, due December 31,
1997 secured by a note receivable......................... -- 460
------ ------
$ -- $1,460
====== ======
</TABLE>

The Company paid interest on these notes of $48,000, $82,000, and $15,000
for the period December 19, 1994 (date of inception) to July 1, 1995 and during
the years ended June 29, 1996 and June 28, 1997, respectively.

9. COMMITMENTS AND CONTINGENCIES

The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
that the supplier provide and the Company purchase at least 80% of the Company's
fiberglass requirements from the supplier. The contract expired on December 31,
1999. The Company and supplier are currently negotiating the terms of a
modification to the supply contract which would provide for an extension of at
least one year and certain stabilizing pricing parameters tied to a consumer
price index. In addition, the Company continues to negotiate with other vendors
to ensure a continued supply of fiberglass to meet the Company's production
needs. The Company is also a significant purchaser of resin and steel. The
Company does not depend upon any single supplier or source for steel or resin
requirements.

The Company has not encountered any significant difficulty to date in
obtaining raw materials in sufficient quantities to support its operations at
current or expected near-term future levels. However, any disruption in raw
material supply or abrupt increases in raw material prices could have an adverse
effect on the Company's operations.

The Company and its subsidiaries are, from time to time, subject to various
lawsuits and claims and other actions arising out of the normal course of
business. The Company is also subject to contingencies pursuant to environmental
laws and regulations that in the future may require the Company to take action
to correct the effects on the environment of prior manufacturing and waste
disposal practices. Accrued environmental liabilities at June 28, 1997 were
$575,000 and, in management's opinion, such accruals are appropriate based on
existing facts and circumstances. Under more adverse circumstances, however,
this potential liability could be higher. Current year expenditures were not
material.

While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the consolidated financial position, results
of operations or cash flows of the Company.

F-21
<PAGE> 68

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. LEASES

The Company leases certain manufacturing facilities, machinery and
equipment, and office space under operating leases. Future minimum payments on
operating leases are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year:
1998........................................................ $ 826
1999........................................................ 617
2000........................................................ 453
2001........................................................ 364
2002 and thereafter......................................... 354
------
Total............................................. $2,614
======
</TABLE>

Total rental expense was $199,000, $725,000, and $1,028,000 for the period
December 19, 1994 (date of inception) to July 1, 1995 and for the years ended
June 29, 1996 and June 28, 1997, respectively.

11. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax over financial reporting basis of net book value of
property, plant, and equipment......................... $351 $1,886
Expenses accrued for financial reporting not yet
deductible for tax..................................... 339 1,518
Net operating loss and other carryforwards................ 124 663
Other..................................................... 74 203
---- ------
Total deferred tax assets................................... 888 4,270
Deferred tax liabilities:
Expenses deductible for tax which are capitalizable for
financial reporting.................................... 203 121
Other..................................................... 106 164
---- ------
Total deferred tax liabilities.............................. 309 285
---- ------
Valuation allowance......................................... -- (1,098)
---- ------
Net deferred tax assets..................................... $579 $2,887
==== ======
</TABLE>

F-22
<PAGE> 69

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19, YEAR ENDED
1994 (DATE OF -------------------
INCEPTION) TO JUNE 29, JUNE 28,
JULY 1, 1995 1996 1997
-------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal............................................. $ 521 $(474) $231
State............................................... 61 24 38
----- ----- ----
Total current income tax expense (benefit)............ 582 (450) 269
----- ----- ----
Deferred income tax expense (benefit):
Federal............................................. (522) 72 (3)
State............................................... (61) (68) 27
----- ----- ----
Total deferred income tax expense (benefit)........... (583) 4 24
----- ----- ----
Total income tax expense (benefit).................... $ (1) $(446) $293
===== ===== ====
</TABLE>

The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD YEAR ENDED
DECEMBER 19, 1994 --------------------
(DATE OF INCEPTION) TO JUNE 29, JUNE 28,
JULY 1, 1995 1996 1997
---------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax (benefit) expense at 34%... $(15) $(435) $207
State income taxes, net of federal benefit..... (2) (48) 48
Meals and entertainment........................ 16 40 33
Other, net..................................... -- (3) 5
------ ----- ----
Reported total income tax expense (benefit).... $ (1) $(446) $293
====== ===== ====
</TABLE>

The Company paid $284,000, $329,000, and $236,000 of income taxes for the
period December 19, 1994 (date of inception) to July 1, 1995 and for the years
ended June 29, 1996 and June 28, 1997, respectively.

12. EQUITY

In December 1994, the Company issued 4,800 shares of Series A redeemable
non-voting preferred stock for $250 per share. The holders of the preferred
stock are entitled to receive cumulative dividends at 10%. The preferred stock
is redeemable beginning December 20, 1995 at $250 per share, plus any and all
accrued but unpaid dividends. Dividends of $60,000, $120,000, and $120,000 were
declared by the Board of Directors during the period December 19, 1994 (date of
inception) to July 1, 1995 and for the years ended June 29, 1996 and June 28,
1997, respectively. The Company made dividend payments of $90,000 during the
year ended June 29, 1996 with dividends of $90,000 and $210,000 accrued as of
June 29, 1996 and June 28, 1997.

The Company has entered into a Stockholders Agreement (the "Agreement")
with the holders of its outstanding shares of common and preferred stock. The
Agreement provides the Company and its stockholders the right of first refusal
to purchase the selling stockholder's shares.

13. INCENTIVE STOCK OPTION PLAN

Effective February 14, 1996, the Company adopted an incentive stock option
plan (the "Plan") for certain key employees. Denali has reserved 367,833 shares
of common stock for purposes of the Plan.

F-23
<PAGE> 70

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average grant date fair value per option granted in the period
December 19, 1994 (date of inception) to July 1, 1995, and for the years ending
June 29, 1996 and June 28, 1997 was $250, $3,806, and $-0- respectively. All
options have five year terms and are fully exercisable upon date of grant. The
weighted average remaining contractual life at June 28, 1997 was 3.67 years.

A summary of Denali's stock option activity and related information for the
period December 19, 1994 (date of inception) to July 1, 1995 and for the years
ended June 29, 1996 and June 28, 1997 follows:

<TABLE>
<CAPTION>
FISCAL WEIGHTED FISCAL WEIGHTED FISCAL WEIGHTED
YEAR AVERAGE YEAR AVERAGE YEAR AVERAGE
1995 EXERCISE 1996 EXERCISE 1997 EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year......................... -- $ -- -- $ -- 113,190 $2.22
Granted...................... 126,910 .15 113,190 2.22 -- --
Exercised.................... 126,910 .15 -- -- -- --
Canceled..................... -- -- -- -- -- --
------- ---- ------- ----- ------- -----
Outstanding -- end of year..... -- $ -- 113,190 2.22 113,190 $2.22
======= ==== ======= ===== ======= =====
</TABLE>

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (ABP 25), and related
interpretations in accounting for its employee stock options.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS
123), which also requires that the information be determined as if the Company
had accounted for its employee stock options granted subsequent to July 1, 1995
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using a minimum value option pricing model. The
minimum value method calculated a fair value that is approximately the same as
recorded by the Company according to APB 25; therefore, pro forma presentation
has not been included.

14. GAIN SHARING PLAN

During fiscal year 1995, the Company adopted a gain sharing plan that
covers all employees of the Containment Products Group who have satisfied
minimum employment standards. During the period December 19, 1994 (date of
inception) to July 1, 1995, and for the years ended June 29, 1996 and June 28,
1997 the Company made a gain sharing contribution equally to all eligible
employees totaling $80,000, $111,000 and $144,000, respectively based on a
distribution of 10% of quarterly earnings before taxes and gain sharing expense.

15. RETIREMENT PLANS

During fiscal year 1995, the Company adopted a defined-contribution
retirement plan, Fluid Containment 401(k) Retirement Plan (the "Plan"), that
covers all eligible employees of the Company. Effective July 1, 1997, the Plan
was amended to include all eligible employees of Ershigs. The Plan allows
employees to defer up to 15% of their compensation, with the Company matching
50% of the first 6% of the participant's contribution. Participants are
immediately and fully vested in employer contributions. The Company's matching
contribution was $52,000, $236,000, and $277,000 for the period December 19,
1994 (date of inception) to July 1, 1995 and for the years ended June 29, 1996
and June 28, 1997, respectively.

16. SEASONALITY AND INFLATION

The Company's operating results are affected by the annual construction
season slowdown resulting from winter weather especially in the period December
through March. The underground fiberglass tank products

F-24
<PAGE> 71

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

are especially impacted during the winter months. The Company believes that the
effects of seasonality will be less severe in the future, as the Company
continues to expand and diversify its product offerings.

The effect of inflation on the Company's operations were not significant
during the periods presented in the consolidated financial statements.

17. SEGMENT DATA

The Company operates in two industry segments: Containment Products and
Engineered Products. The Containment Products segment, which provides
containment solutions for critical fluids, specializes in the manufacture of
fiberglass underground storage tanks and steel reinforced aboveground storage
tanks. The Engineered Products segment, which provides engineered solutions for
the containment of critical fluids, specializes in fiberglass reinforced plastic
products for corrosion resistant applications and engineered metal products for
the municipal and industrial markets. Except for certain revenues with respect
to license agreements with manufacturers located outside of the United States,
which revenues are not material as considered in relation to the Company's total
net sales, the Company operates in only one geographic segment, the United
States. The following is a summary of the industry segment data for the period
December 19, 1994 (date of inception) to July 1, 1995 and for the years ended
June 29, 1996 and June 28, 1997:

<TABLE>
<CAPTION>
DEPRECIATION
NET OPERATING IDENTIFIABLE CAPITAL AND
SALES INCOME ASSETS EXPENDITURES AMORTIZATION
------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Period December 19, 1994 (date of
inception) to July 1, 1995:
Containment Products.................... $17,799 $ 645 $18,455 $333 $ 354
Engineered Products..................... -- -- -- -- --
Corporate............................... -- (90) 3,369 -- --
------- ------ ------- ---- ------
Consolidated............................ $17,799 $ 555 $21,814 $333 $ 354
======= ====== ======= ==== ======
Year ended June 29, 1996:
Containment Products.................... $53,354 $ 430 $28,350 $912 $ 908
Engineered Products..................... -- -- -- --
Corporate............................... -- (198) 1,968 30 5
------- ------ ------- ---- ------
Consolidated............................ $53,354 $ 232 $30,318 $942 $ 913
======= ====== ======= ==== ======
Year ended June 28, 1997:
Containment Products.................... $64,817 $2,080 $29,934 $523 $1,199
Engineered Products..................... 6,284 81 9,791 33 13
Corporate............................... -- (202) 1,359 44 9
------- ------ ------- ---- ------
Consolidated............................ $71,101 $1,959 $41,084 $600 $1,221
======= ====== ======= ==== ======
</TABLE>

18. SUBSEQUENT EVENTS

INITIAL PUBLIC OFFERING

The Company filed a registration statement with the Securities and Exchange
Commission ("SEC") in October 1997 and two amendments to the registration
statement in November 1997 to register the sale of shares of its common stock.
The Company intends to use the net proceeds of the sale to repay a portion of
the outstanding indebtedness under its credit facilities, to repay $218,000 for
a bank note payable, to repay $6.7 million of a subordinated unsecured note
payable to a supplier, to repay the $1.1 million unsecured note payable
(including interest) to a seller, to redeem the outstanding shares of preferred
stock totaling approximately $1.4 million, including accrued and unpaid
dividends, and to fund general working capital purposes.

F-25
<PAGE> 72

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Supplemental net income per share is $0.39 for the year ended June 28, 1997
and is determined by adding back to net income used for the calculation of net
income per share the interest expense, net of taxes associated with the debt
which will be retired by the proceeds of the offering and adding the dividends
paid or accrued associated with the preferred stock which will be redeemed by
the proceeds of the offering. The number of shares outstanding used in
calculating supplemental net income per share was the weighted average common
shares outstanding after giving effect to the estimated number of shares that
would be required to be sold in the offering to repay the debt and redeem the
preferred stock.

COMMON STOCK

On September 23, 1997, the Company effected a 1,715-for-1 stock split. All
stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.

ACQUISITIONS

In October 1997, the Company acquired all of the issued and outstanding
stock of SEFCO, Inc., a manufacturer of aboveground steel storage tanks for
approximately $4.9 million in cash, which is net of cash acquired of
approximately $600,000, and direct acquisition costs of approximately $100,000.

In October 1997, the Company acquired all of the issued and outstanding
stock of GL&V/LaValley Construction, Inc., a company engaged in the installation
of underground storage tanks for $3.9 million in cash and direct acquisition
costs of approximately $100,000, with a two-year non-compete agreement.

1997 STOCK OPTION PLAN

In September 1997, the Company adopted an incentive stock option plan (the
"1997 Plan"). The 1997 Plan permits the granting of both incentive stock options
and non-qualified stock option awards to all employees of the Company. Awards to
acquire up to an aggregate of 362,873 shares may be granted pursuant to the 1997
Plan. The Board of Directors selects the employees who will receive the awards,
determines the type and terms of the awards to be granted and interprets and
administers the 1997 Plan.

In September 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. 142,113 of the options vest 40% immediately and the
remainder over a four year period. The remaining 28,917 options vest ratably
over four years. All of the options were granted at fair market value which
equaled the public offering price.

REORGANIZATION OF SUBSIDIARIES AND EXCHANGE OF STOCK OPTIONS.

Effective September 1997, the Company completed a reorganization of it
subsidiaries. As part of the reorganization one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997 the CSI stock option
plan has 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options to a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company will recognize a compensation charge in the
quarter ended September 27, 1997 of approximately $2.3 million.

A summary of CSI's stock option activity and related information prior to
the exchange for the years ended June 29, 1996 and June 28, 1997 follows:

F-26
<PAGE> 73

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1996 EXERCISE 1997 EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year...................... -- $ -- 1,475 $259
Granted............................................. 1,475 259 300 --
Canceled............................................ -- -- 375 259
------ ---- ------ ----
Outstanding -- end of year............................ 1,475 $259 1,400 $259
====== ==== ====== ====
</TABLE>

F-27
<PAGE> 74

DENALI INCORPORATED

CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 1997
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash...................................................... $ 450 $ 450
Accounts and notes receivable, net of allowances of
$627,000............................................... 16,186 16,186
Inventories............................................... 7,644 7,644
Prepaid expenses.......................................... 1,426 1,426
Deferred tax assets....................................... 934 934
------- -------
Total current assets.............................. 26,640 26,640
Property, plant, and equipment, net......................... 7,631 7,631
Assets held for sale........................................ 1,485 1,485
Notes receivable............................................ 900 900
Goodwill, net............................................... 1,610 1,610
Deferred tax assets......................................... 1,953 1,953
Other assets................................................ 1,070 1,070
------- -------
Total assets...................................... $41,289 $41,289
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $12,141 $12,141
Accrued liabilities....................................... 4,654 4,414
Income tax payable........................................ 313 313
Notes payable............................................. 1,218 1,218
Current maturities of long-term debt...................... 1,403 1,403
Preferred Stock to be redeemed with offering proceeds
(including dividends in arrears)....................... -- 1,440
------- -------
Total current liabilities......................... 19,729 20,929
Long-term debt, less current maturities..................... 19,607 19,607
Other long-term liabilities................................. 977 977
Series A Preferred Stock, redeemable at $250 per share, $.01
par value:
Authorized shares -- 16,000
Issued and outstanding shares -- 4,800.................... 1,200 --
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 2,184,910............. 22 22
Additional paid-in capital................................ 2,609 2,609
Retained deficit.......................................... (2,855) (2,855)
------- -------
Total stockholders' deficit....................... (224) (224)
------- -------
Total liabilities and stockholders' deficit....... $41,289 $41,289
======= =======
</TABLE>

See accompanying notes.

F-28
<PAGE> 75

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $17,703 $21,979
Cost of sales............................................... 13,949 17,149
------- -------
Gross profit................................................ 3,754 4,830
Selling, general and administrative expenses................ 2,786 3,825
Non-recurring compensation expense.......................... -- 2,312
------- -------
Operating income............................................ 968 (1,307)
Interest expense............................................ 498 607
Interest income............................................. (25) (20)
Other income, net........................................... (68) (142)
------- -------
Income (loss) before income taxes........................... 563 (1,752)
Income tax expense.......................................... 270 213
------- -------
Net income (loss)........................................... $ 293 $(1,965)
Dividends on Series A Preferred Stock....................... (30) (30)
------- -------
Net income (loss) attributable to common stock.............. $ 263 $(1,995)
======= =======
Net income (loss) per share of common stock................. $ 0.12 $ (0.87)
======= =======
Weighted average common shares outstanding.................. 2,185 2,286
======= =======
</TABLE>

See accompanying notes.

F-29
<PAGE> 76

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 293 $(1,965)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-recurring compensation expense........................ -- 2,312
Depreciation.............................................. 240 271
Amortization.............................................. 45 54
Provision for losses on accounts receivable............... 19 3
Gain on sale of property, plant and equipment and assets
held for sale.......................................... (45) --
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,516) 1,187
Inventories............................................ (283) (958)
Prepaid expenses....................................... 31 (513)
Other assets........................................... (2) (5)
Accounts payable....................................... (239) 1,968
Accrues liabilities.................................... 193 (625)
Income tax receivable/payable.......................... 771 353
------- -------
Net cash provided by (used in) operating activities......... (1,493) 2,082
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (71) (208)
Proceeds from sale of property, plant, and equipment and
assets held for sale...................................... 52 35
Payments on notes receivable................................ 6 7
Purchases of equity securities.............................. (318) --
------- -------
Net cash used in investing activities....................... (331) (166)
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving lines of credit... 2,295 (1,315)
Principal payments on term notes and other long-term debt... (178) (481)
------- -------
Net cash provided by (used in) financing activities......... 2,117 (1,796)
------- -------
Increase in cash............................................ 293 120
Cash at beginning of period................................. 124 330
------- -------
Cash at end of period....................................... $ 417 $ 450
======= =======
</TABLE>

See accompanying notes

F-30
<PAGE> 77

DENALI INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The consolidated financial statements of Denali Incorporated and its
wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. The consolidated financial statements reflect all
elimination entries and adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the interim periods.

The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes included elsewhere
in this Prospectus.

2. INVENTORIES

Inventories consist of the following at September 27, 1997 (in thousands):

<TABLE>
<S> <C>
Finished goods.............................................. $2,874
Raw Materials............................................... 3,057
Work in process............................................. 1,713
------
$7,644
======
</TABLE>

3. INCOME TAXES

The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
The Company's provision for income taxes differs from the U.S. statutory rate of
34% due primarily to the non-recurring compensation charge, discussed in Note 6,
being non-deductible for income tax purposes.

4. PER SHARE INFORMATION

F-31
<PAGE> 78

DENALI INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock equivalents will be excluded. The impact of Statement No. 128 on
primary and fully diluted net income (loss) per share is not expected to be
material for the quarter ended September 27, 1997.

5. 1997 STOCK OPTION PLAN

6. REORGANIZATION OF SUBSIDIARIES AND EXCHANGE OF STOCK OPTIONS

Effective in September 1997, the Company completed a reorganization of it
subsidiaries. As part of the reorganization, one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997 the CSI stock option
plan had 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options for a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company recognized a non-recurring compensation charge in
the quarter ended September 27, 1997 of approximately $2.3 million.

7. INITIAL PUBLIC OFFERING

Supplemental net loss per share is $(0.38) for the quarter ended September
27, 1997 and is determined by adding back to net loss used for the calculation
of net loss per share the interest expense, net of taxes, associated with the
debt which will be retired by the proceeds of the offering and adding the
dividends paid or accrued associated with the preferred stock which will be
redeemed by the proceeds of the offering. The number of shares outstanding used
in calculating supplemental net loss per share was the weighted average common
shares outstanding after giving effect to the estimated number of shares that
would be required to be sold in the offering to repay the debt and redeem the
preferred stock.

COMMON STOCK

F-32
<PAGE> 79

DENALI INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. SUBSEQUENT EVENTS

In October 1997, the Company acquired all of the issued and outstanding
stock of SEFCO, Inc., a manufacturer of engineered field-erected steel tanks and
accessories for use in the municipal, agrochemical and petroleum industries, for
$4.9 million in cash, which is net of cash acquired of approximately $600,000,
and direct acquisition costs of $100,000.

In October 1997, the Company acquired all of the issued and outstanding
stock of GL&V/LaValley Construction, Inc., a manufacturer and installer of
fiberglass reinforced plastic products for $3.9 million in cash and direct
acquisition costs of $100,000, with a two-year non-compete agreement.

9. UNAUDITED PRO FORMA BALANCE SHEET

In connection with the initial public offering of the Company's Common
Stock, the Company will pay the dividends in arrears on the Company's preferred
stock and redeem the preferred shares for cash from the proceeds of the initial
public offering. The pro forma unaudited balance sheet gives effect to the
redemption of the preferred shares for cash.

F-33
<PAGE> 80

REPORT OF INDEPENDENT AUDITORS

Denali Incorporated

We have audited the accompanying balance sheet of Hoover Containment
Systems, Inc. (the "Company"), a wholly owned subsidiary of Hoover Group, Inc.
as of December 31, 1994 and the related statements of operations, stockholder's
equity, and cash flows for the year ended December 31, 1994, and the period from
January 1, 1995 to October 27, 1995. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hoover Containment Systems,
Inc. at December 31, 1994, and the results of its operations and its cash flows
for the year then ended and the period from January 1, 1995 to October 27, 1995,
in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas
September 12, 1997

F-34
<PAGE> 81

HOOVER CONTAINMENT SYSTEMS, INC.

BALANCE SHEET
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS

Current assets:
Accounts receivable, net of allowance of $96.............. $3,784
Inventories............................................... 2,233
Prepaid expenses.......................................... 67
Deferred tax asset........................................ 101
------
Total current assets.............................. 6,185
Property, plant, and equipment, net......................... 805
Goodwill, net............................................... 313
Patents, net................................................ 802
Other assets, net........................................... 116
------
Total assets...................................... $8,221
======

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Cash overdrafts........................................... $ 397
Accounts payable.......................................... 2,050
Accrued liabilities....................................... 457
Payable to affiliates..................................... 4,664
Current maturities of long-term debt...................... 100
------
Total current liabilities......................... 7,668
Long-term debt, net of current maturities................... 100
Commitments and contingencies
Stockholder's equity:
Common stock, , no par value:
Authorized, issued, and outstanding shares -- 1,000.... --
Paid-in-capital........................................... 300
Retained earnings......................................... 153
------
Total stockholder's equity........................ 453
------
Total liabilities and stockholder's equity........ $8,221
======
</TABLE>

See accompanying notes.

F-35
<PAGE> 82

HOOVER CONTAINMENT SYSTEMS, INC

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FROM JANUARY 1,
DECEMBER 31, 1995 TO
1994 OCTOBER 27, 1995
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $18,875 $19,500
Cost of sales............................................... 15,116 15,612
------- -------
Gross profit................................................ 3,759 3,888
Selling, general, and administrative expenses............... 3,126 3,154
------- -------
Operating income............................................ 633 734
Interest expense............................................ 370 386
Other expenses.............................................. 6 98
------- -------
Income before income taxes.................................. 257 250
Provision for income taxes.................................. 104 95
------- -------
Net income.................................................. $ 153 $ 155
======= =======
</TABLE>

See accompanying notes.

F-36
<PAGE> 83

HOOVER CONTAINMENT SYSTEMS, INC

STATEMENTS OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO OCTOBER 27, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON TOTAL
STOCK PAID-IN RETAINED STOCKHOLDER'S
SHARES CAPITAL EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Common stock issued at January 7, 1994.............. 1,000 $300 $ -- $300
Net income.......................................... -- -- 153 153
----- ---- ---- ----
Balance at December 31, 1994........................ 1,000 300 153 453
Net income.......................................... -- -- 155 155
----- ---- ---- ----
Balance at October 27, 1995......................... 1,000 $300 $308 $608
===== ==== ==== ====
</TABLE>

See accompanying notes.

F-37
<PAGE> 84

HOOVER CONTAINMENT SYSTEMS, INC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1,
YEAR ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 153 $ 155
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 209 160
Amortization of goodwill.................................. 9 7
Amortization of other assets.............................. 60 50
Amortization of patents................................... 7 53
Loss on disposal of assets................................ 6 24
Deferred tax benefit...................................... (101) (67)
Changes in operating assets and liabilities:
Accounts receivables................................... (1,103) 34
Inventories............................................ (1,029) 755
Prepaid expenses....................................... (31) (11)
Other assets........................................... (13) (8)
Cash overdrafts........................................ 287 (397)
Accounts payable....................................... 367 943
Accrued liabilities.................................... 107 289
Payable to affiliates.................................. 2,123 (1,525)
Deferred revenue....................................... (227) --
------- -------
Net cash provided by operating activities................... 824 462
INVESTING ACTIVITIES
Purchase of patents......................................... (609) --
Purchases of property and equipment......................... (215) (142)
------- -------
Net cash used by investing activities....................... (824) (142)
FINANCING ACTIVITIES
Principal payments on term note and other long-term debt.... -- (100)
------- -------
Net cash used by financing activities....................... -- (100)
------- -------
Decrease in cash............................................ -- 220
Cash at beginning of period................................. -- --
------- -------
Cash at end of period....................................... $ -- $ 220
======= =======
</TABLE>

See accompanying notes.

F-38
<PAGE> 85

HOOVER CONTAINMENT SYSTEMS, INC

NOTES TO FINANCIAL STATEMENTS
OCTOBER 27, 1995

1. THE COMPANY

ORGANIZATION AND BASIS OF PRESENTATION

The Hoover Containment Systems, Inc. (the "Company") is a manufacturer of
above-ground steel tanks in the domestic U.S. market. The Company was
incorporated on January 7, 1994 as a wholly owned subsidiary of Hoover Group,
Inc. through a contribution to the Company of $300,000. Prior to its
incorporation, the Company was a division of Hoover Group, Inc. On October 27,
1995 the net assets of the Company were acquired by Denali, Inc. for $5.4
million in cash.

These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of the Hoover Group's general and administrative expenses directly
related to the Company's operations. The amounts allocated by the Hoover Group
are not necessarily indicative of the actual costs which may have been incurred
had the Company operated as an entity unaffiliated with the Hoover Group.
However, the Company believes that the allocations are reasonable and in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 55.

2. SIGNIFICANT ACCOUNTING POLICIES

INVENTORIES

Inventories are determined using actual cost based on a first-in, first-out
("FIFO") basis. FIFO inventory is stated a the lower of cost or market.

PROPERTY, PLANT, AND EQUIPMENT

<TABLE>
<S> <C>
Buildings and improvements........................... 20 years
Machinery and equipment.............................. 3 to 10 years
</TABLE>

GOODWILL

Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the undiscounted cashflows. Goodwill amortization expense was
$8,600 and $7,100 for the year ended December 31, 1994 and the period from
January 1, 1995 through October 27, 1995, respectively. Accumulated amortization
was $30,000 at December 31, 1994.

PATENTS

Patents, including costs to acquire the patents of $129,000, are being
amortized on a straight basis over fifteen years. The Company periodically
evaluates the recoverability of patents by assessing whether the unamortized
balance can be recovered over its remaining life through cash flows generated by
the underlying assets. Patent amortization expense was $7,500 and $53,900 for
the year ended December 31, 1994 and the period from January 1, 1995 through
October 27, 1995, respectively. Accumulated amortization was $7,500 at December
31, 1994.

F-39
<PAGE> 86

HOOVER CONTAINMENT SYSTEMS, INC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

OTHER ASSETS

Included in other assets are non-compete agreements that total $472,500.
The agreements were recorded at costs when the agreements were signed and are
being amortized over the life of the agreement. Amortization expense was $60,000
and $50,000 for the year ended December 31, 1994 and the period from January 1,
1995 through October 27, 1995, respectively. Accumulated amortization was
$397,500 at December 31, 1994.

INCOME TAXES

The Company's taxable income is included in the consolidated federal income
tax return of the Parent. The federal tax provision is substantially the same
provision as if the Company was required to file its own federal income tax
return on a separate company basis.

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

RESEARCH AND DEVELOPMENT COSTS

The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged against earnings in the period incurred. Research
and development costs expensed were $38,000 and $35,000 for the year ended
December 31, 1994 and during the period from January 1, 1995 to October 27,
1995, respectively.

ADVERTISING COSTS

All advertising costs are expensed when incurred. Costs which are included
in selling, general and administrative expense were $99,000 and $23,000 for the
year ended December 31, 1994 and during the period from January 1, 1995 to
October 27, 1995, respectively.

REVENUE RECOGNITION

Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of accounts receivable, accounts payable and
short-term debts approximate fair values due to the short-term maturities of
these instruments. The carrying value of the Company's long-term debt
approximates fair value because the rate on such debt is not significantly
different from the current market rate.

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.

F-40
<PAGE> 87

HOOVER CONTAINMENT SYSTEMS, INC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

CONCENTRATION OF CREDIT RISK

The Company's trade customers are geographically dispersed throughout the
United States and are concentrated in the petrochemical industry. The Company
had one customer individually exceeding 5% of accounts receivable, accounting
for approximately 6% of total accounts receivable at December 31, 1994.

3. PURCHASE OF ASSETS

In 1994, the Company purchased certain patents, inventory, and fixed assets
from a manufacturer of above-ground steel storage tanks for approximately
$860,000 including a note payable for $200,000 and acquisition costs of
$130,000. The assets were recorded at their fair values at the acquisition date.

4. INVENTORIES

Inventories consisted of the following at December 31, 1994 (In thousands):

<TABLE>
<S> <C>
Raw materials............................................. $ 739
Work in process........................................... 570
Finished goods............................................ 924
------
$2,233
======
</TABLE>

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following at December 31,
1994 (In thousands):

<TABLE>
<S> <C>
Buildings and improvements.................................. $ 208
Machinery and equipment..................................... 987
Furniture and fixtures...................................... 20
Office equipment............................................ 50
Automobiles................................................. 16
Construction in progress.................................... 23
======
1,304
Less accumulated depreciation............................... 499
------
Property, plant, and equipment, net......................... $ 805
======
</TABLE>

6. LONG-TERM DEBT

Long-term at December 31, 1994 is summarized below (In thousands):

<TABLE>
<S> <C>
Note Payable, unsecured note payable to the former owner,
interest at 6%, payable annually on August 31, due August
31, 1996.................................................. $200
----
Less current maturities..................................... 100
----
Total note payable................................ $100
====
</TABLE>

F-41
<PAGE> 88

HOOVER CONTAINMENT SYSTEMS, INC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

The components of the income tax expense(benefit) were as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................. $182 $144
State................................... 23 18
---- ----
205 162
---- ----
Deferred:
Federal................................. (90) (60)
State................................... (11) (7)
---- ----
(101) (67)
---- ----
Total.............................. $104 $ 95
==== ====
</TABLE>

<TABLE>
<S> <C>
Deferred tax assets:
Bonus accrual............................................. $ (74)
Allowance for bad debts................................... (27)
-----
$(101)
=====
</TABLE>

The income tax provision reconciled to the tax computed at the statutory
federal rate:

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Tax at federal statutory rate..................... $ 89 $85
State income taxes net of federal benefit......... 7 7
Non-deductible meals and entertainment............ 4 3
Other............................................. 4 --
---- ---
Total............................................. $104 $95
==== ===
</TABLE>

8. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are, from time to time, subject to
litigation and claims arising in the ordinary course of business. In the opinion
of management, the ultimate outcome of these litigation and claims is not
expected to have a material adverse effect on the consolidated financial
statements.

F-42
<PAGE> 89

HOOVER CONTAINMENT SYSTEMS, INC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. LEASES

The Company leases certain manufacturing facilities, machinery and
equipment and office space under operating leases. Future minimum payments on
operating leases are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C>
1995......................................... $ 466
1996......................................... 427
1997......................................... 304
1998......................................... 58
1999 and thereafter.......................... 29
------
Total................................. $1,284
======
</TABLE>

Total rent expense was $384,000 and $381,000 for the year ended December
31, 1994 and for the period from January 1, 1995 to October 27, 1995,
respectively.

10. RELATED PARTY TRANSACTIONS

The Company was allocated certain general and administrative expenses from
Hoover Group, Inc. totaling $526,000 and $543,000 for the year ended December
31, 1994 and the period from January 1, 1995 through October 27, 1995,
respectively.

11. RETIREMENT PLANS

The Company has a defined-contribution retirement plan that covers all
eligible employees. The plan allows employees to defer up to 15% of their
compensation, with the Company matching 50% of the first 6% of the participant's
contributions. Participants are immediately and fully vested in employee
contributions.

Contribution expense was $15,000 and $32,000 for the year ended December
31, 1994 and the period from January 1, 1995 through October 27, 1995,
respectively.

F-43
<PAGE> 90

REPORT OF INDEPENDENT AUDITORS

Denali Incorporated

We have audited the accompanying balance sheet of Ershigs, Inc., (the
"Company"), as of December 31, 1996, and the related statements of operations,
stockholder's equity, and cash flows for the period from January 1, 1997 to
February 27, 1997, for each of the two years in the period ended December 31,
1996, and for the period from October 1, 1994 to December 31, 1994. 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 Ershigs, Inc. at December
31, 1996, and the results of its operations and its cash flows for the period
from January 1, 1997 to February 27, 1997, for each of the two years in the
period ended December 31, 1996, and for the period from October 1, 1994 to
December 31, 1994, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas
September 22, 1997

F-44
<PAGE> 91

ERSHIGS, INC.

BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance of $525,000......... $ 3,754
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 494
Inventory:
Raw material........................................... 945
Work-in-process........................................ 1,454
-------
Total Inventory........................................... 2,399
Deferred tax assets....................................... 661
-------
Total current assets.............................. 7,308
Property, plant and equipment:
Land and improvements..................................... 340
Buildings................................................. 1,203
Shop equipment............................................ 539
Furniture and other equipment............................. 202
Construction in progress.................................. 31
-------
2,315
Less accumulated depreciation............................... (196)
-------
2,119
Deferred tax assets......................................... 1,691
Other assets................................................ 15
-------
Total assets...................................... $11,133
=======

LIABILITIES
Current liabilities:
Bank overdraft............................................ $ 235
Accounts payable.......................................... 436
Accrued expenses.......................................... 1,110
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................. 181
Current portion of long-term debt......................... 400
-------
Total current liabilities......................... 2,362
Long-term debt, net of current portion...................... 300
Advances from parent........................................ 2,330
Other long-term liabilities................................. 911
-------
Total liabilities................................. 5,903

Commitments and contingencies

Stockholder's equity:
Voting common stock, 25,000 no par value shares
Authorized, 8,250 shares issued and outstanding........ --
Non-voting common stock, 25,000 no par value shares
Authorized, 8,250 shares issued and outstanding........
Paid-in capital........................................... 6,000
Retained deficit.......................................... (770)
-------
Total stockholder's equity........................ 5,230
-------
Total liabilities and stockholder's equity........ $11,133
=======
</TABLE>

See accompanying notes.

F-45
<PAGE> 92

ERSHIGS, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD PERIOD
FROM OCTOBER 1, YEAR ENDED FROM JANUARY 1,
1994 TO DECEMBER 31 1997 TO
DECEMBER 31 ----------------- FEBRUARY 27
1994 1995 1996 1997
--------------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Net sales..................................... $ 5,121 $21,833 $24,484 $3,188
Cost of sales................................. 4,905 19,657 20,496 3,134
------- ------- ------- ------
Gross profit.................................. 216 2,176 3,988 54
Selling, general and administrative
expenses.................................... 1,258 4,088 4,589 748
------- ------- ------- ------
Operating loss................................ (1,042) (1,912) (601) (694)
Other income (expense):
Interest expense............................ (35) (130) (526) (79)
Interest income............................. 2 3 --
Other, net.................................. 2 31 (98) 16
------- ------- ------- ------
Other expense, net............................ (31) (99) (621) (63)
------- ------- ------- ------
Loss before income taxes...................... (1,073) (2,011) (1,222) (757)
Income tax benefit............................ 379 648 452 288
------- ------- ------- ------
Net loss............................ $ (694) $(1,363) $ (770) $ (469)
======= ======= ======= ======
</TABLE>

See accompanying notes.

F-46
<PAGE> 93

ERSHIGS, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
COMMON TOTAL
STOCK PAID-IN RETAINED STOCKHOLDER'S
SHARES CAPITAL DEFICIT EQUITY
------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 30, 1994................... 16,500 $ 7,947 $(1,378) $ 6,569
Net loss........................................ -- -- (694) (694)
------ ------- ------- -------
Balance at December 31, 1994.................... 16,500 $ 7,947 $(2,072) $ 5,875
Net loss........................................ -- -- (1,363) (1,363)
------ ------- ------- -------
Balance at December 31, 1995.................... 16,500 $ 7,947 $(3,435) $ 4,512
New basis in accounting adjustment.............. -- (1,947) 3,435 1,488
Net loss........................................ -- -- (770) (770)
------ ------- ------- -------
Balance at December 31, 1996.................... 16,500 $ 6,000 $ (770) $ 5,230
Net loss........................................ -- (469) (469)
------ ------- ------- -------
Balance at February 27, 1997.................... 16,500 $ 6,000 $(1,239) $ 4,761
====== ======= ======= =======
</TABLE>

See accompanying notes.

F-47
<PAGE> 94

ERSHIGS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD PERIOD
FROM OCTOBER 1, FROM JANUARY 1,
1994 TO YEAR ENDED DECEMBER 31 1997 TO
DECEMBER 31, ----------------------- FEBRUARY 27,
1994 1995 1996 1997
--------------- --------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $ (694) $(1,363) $ (770) $ (469)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation....................... 237 813 215 30
Amortization....................... 70 279 -- --
Provision for losses on accounts
receivable....................... 79 95 351 --
Deferred tax provision (benefit)... (64) (141) (216) 13
Gain on sale of assets............. 1 (27) (4) --
Change in operating assets and
liabilities:
Accounts receivable.............. (1,593) (454) 400 (8)
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... (108) (174) (195) (4)
Inventory........................ 575 (664) (689) 134
Other assets..................... -- -- (15) --
Bank overdraft................... 375 (222) (43) (235)
Accounts payable................. 20 (143) (435) 369
Accrued expenses................. 223 (141) 229 (265)
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 33 361 (322) (103)
Other long-term liabilities...... 64 (8) 2 (18)
------- ------- ------- ------
Net cash used in operating
activities.................. (782) (1,789) (1,492) (556)
------- ------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment.......................... (426) (465) (445) (13)
Proceeds from sale of property, plant
and equipment...................... 3 41 7 --
------- ------- ------- ------
Net cash used in investing
activities.................. (423) (424) (438) (13)
------- ------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from parent.............. 1,328 2,613 2,330 1,525
Repayment of long-term debt........... (123) (400) (400) (700)
------- ------- ------- ------
Net cash provided by financing
activities.................. 1,205 2,213 1,930 825
------- ------- ------- ------
Net change in cash...................... -- -- -- 256
Cash at beginning of period............. -- -- -- --
------- ------- ------- ------
Cash at end of period................... $ -- $ -- $ -- $ 256
======= ======= ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................ $ 35 $ 132 $ 109 $ 14
======= ======= ======= ======
</TABLE>

See accompanying notes.

F-48
<PAGE> 95

ERSHIGS, INC.

NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF THE BUSINESS AND BASIS OF ACCOUNTING

Ershigs, Inc. (the Company) is a contract designer and manufacturer of
fiberglass reinforced plastic composites for corrosion resistant applications in
the domestic U.S. market. The Company operates fabrication plants located in
Washington, North Carolina and Texas.

The Company was acquired by CBI Industries, Inc. (CBI) on May 21, 1993 and
became a wholly-owned subsidiary of CBI. As a result of the acquisition of the
Company by CBI, the Company recorded goodwill of $5.1 million.

On January 12, 1996, pursuant to the merger agreement dated December 22,
1995, CBI became a subsidiary of Praxair, Inc. (Praxair). As a result of the
acquisition of CBI by Praxair and Praxair's intent to sell the Company, the
financial statements reflect a new basis of accounting as of January 12, 1996.
The new basis of accounting resulted in the Company's assets and liabilities
being adjusted to their estimated net realizable value based on the ultimate
disposition value in February 1997, adjusted for the operating losses of the
Company. The new basis of accounting adjustments, primarily related to the
adjustment of the Company's assets and liabilities to net realizable values, has
a significant effect on the Company's future results of operations for the
periods subsequent to December 31, 1995. The more significant adjustments relate
to the write-off of unamortized goodwill, a reduction in the basis of fixed
assets and recognition of the related deferred tax asset, which significantly
reduces depreciation and amortization expense. The results of operations from
January 1, 1996 to January 11, 1996 are not considered significant to the
financial statements and are included in the accompanying statement of
operations for the year ended December 31, 1996.

These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of its parent company's general and administrative expenses directly
related to the Company's operations. The amounts allocated by its parent company
are not necessarily indicative of the actual costs which may have been incurred
had the Company operated as an entity unaffiliated with its parent company.
However, the Company believes that the allocations are reasonable and in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 55.

On February 28, 1997, the Company was acquired by Denali Incorporated
(Denali) in a stock purchase for $6 million. In connection with the acquisition
of the Company by Denali, the fabrication plant in Texas was closed.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of accounts receivable and accounts payable
approximate fair values due to the short-term maturities of these instruments.
The carrying value of the Company's long-term debt approximates fair value
because the rate on such debt is variable, based on current market.

F-49
<PAGE> 96

ERSHIGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORY

Inventory of raw materials and work-in-process is stated at the lower of
cost (determined by the first-in, first-out method) or market. Work-in-process
includes capitalization of labor and overhead costs.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Improvements which
increase the useful life of property and replacements of major components of
property are capitalized, while maintenance, repairs and minor replacements are
expensed as incurred.

Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets. The estimated useful lives range from 3 to 10 years
for equipment and from 10 to 50 years for buildings and land improvements.

INCOME TAXES

The Company's results are included in the consolidated federal income tax
return filed by its parent company. The Company uses the liability method of
accounting for income taxes. Under the liability method, deferred income taxes
are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates
that will be in effect when the differences reverse.

The policy of the parent company is for each U.S. subsidiary to currently
recognize any federal income tax expense, as computed on a separate subsidiary
basis. Any resulting tax liability or receivable is remitted to or received from
the parent through the advances from parent account.

GOODWILL

Prior to the acquisition of the Company's parent by Praxair, goodwill
represented the excess cost of the purchase of the Company by CBI over the fair
value of the Company's tangible assets at the date of acquisition. Goodwill was
being amortized on a straight-line basis over 20 years. The goodwill was
eliminated in the new basis of accounting adjustments as a result of the January
1996 acquisition of the Company by Praxair.

RESEARCH AND DEVELOPMENT COSTS

The costs of materials and equipment that are acquired for research and
development activities, and which have alternative uses, are capitalized and
depreciated over the period of future benefit. All research and development
costs are charged against earnings in the period incurred. Research and
development costs expensed were $-0-, $27,000, $104,000, and $10,000 during the
period from October 1, 1994 to December 31, 1994, the years ended December 31,
1995 and 1996 and the period from January 1, 1997 to February 27, 1997,
respectively.

REVENUE RECOGNITION

Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting. Revenues from
certain long-term construction contracts, usually performed on job sites, are
recognized on the percentage-of-completion method. Earned revenue is based on
the percentage that incurred costs to date bear to total estimated costs after
giving effect to the most recent estimates of total cost. The cumulative impact
of revisions in total cost estimates during the progress of work is reflected in
the year in which these changes become known. Earned revenue reflects the
original contract price adjusted for agree-upon claim and change order revenue,
if any.

F-50
<PAGE> 97

ERSHIGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT

The balance of long-term debt at December 31, 1996 consists of a note
payable due in monthly installments of $33,333, plus interest at the bank's
prime rate plus 1% (9.5% at December 31, 1996). This note is collateralized by
virtually all the assets of the Company. The note payable requires the Company
to comply with certain financial covenants, the most restrictive of which
includes the maintenance of liability and leverage ratios as well as limitations
on dividends, additional borrowings and advances to affiliates. The Company was
in compliance with all covenants as of December 31, 1996. The note matures
$400,000 and $300,000 in the year ended December 31, 1997 and 1998,
respectively. In February, 1997, the note payable was repaid in full by the
parent company through the advances from parent account.

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Costs and estimated earnings on uncompleted contracts are summarized as
follows (In thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Costs incurred on uncompleted contracts..................... $4,829
Estimated earnings.......................................... 785
------
5,614
Less billings to date....................................... 5,302
------
$ 312
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 493
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................. 181
------
$ 312
======
</TABLE>

5. CONCENTRATION OF CREDIT RISK

The Company's trade customers are geographically dispersed throughout the
United States and are concentrated in the power utilities, pulp and paper and
chemical industries. The Company continuously evaluates the creditworthiness of
its customers and generally does not require collateral. The Company had 8
customers individually exceeding 5% of accounts receivable, accounting for
approximately 68% of total accounts receivable at December 31, 1996.

6. COMMITMENTS AND CONTINGENCIES

The Company is subject to various lawsuits and claims and other actions
arising in the normal course of business. The Company is also subject to
contingencies pursuant to environmental laws and regulations that in the future
may require the Company to take action to correct the effects on the environment
of prior manufacturing and waste disposal practices. Accrued environmental
liabilities at December 31, 1996 were $411,000 and, in management's opinion,
such accruals are appropriate based on existing facts and circumstances. Under
more adverse circumstances, however, this potential liability could be higher.
Current expenditures have not been material.

F-51
<PAGE> 98

ERSHIGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the financial position, results of operations
or cash flows of the Company.

Due to the nature of the contracting business, lawsuits occasionally arise.
It is not possible to predict the results of specific lawsuits; however, the
Company's management believes that there are no issues or incidents that would
be material to its financial position, results of operations or cash flows. In
addition, the Company has given certain guarantees in connection with the
performance of contracts.

7. INCOME TAXES

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Tax over book basis of net book value of property, plant,
and equipment.......................................... $1,346
Expense accrued for books not yet deductible for tax...... 1,006
------
Total deferred tax assets................................... 2,352
Total deferred tax liabilities.............................. --
------
Net deferred tax assets..................................... $2,352
======
</TABLE>

The components of income tax benefit are as follows (In thousands):

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED PERIOD FROM
1994 TO DECEMBER 31, JANUARY 1, 1997
DECEMBER 31, ------------ TO FEBRUARY 27,
1994 1995 1996 1997
------------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Current income tax benefit:
Federal................................ $281 $454 $211 $269
State.................................. 33 53 25 32
---- ---- ---- ----
Total current income tax benefit......... 314 507 236 301
Deferred income tax benefit (expense):
Federal................................ 58 126 193 (12)
State.................................. 7 15 23 (1)
---- ---- ---- ----
Total deferred income tax benefit
(expense).............................. 65 141 216 (13)
---- ---- ---- ----
Total income tax benefit................. $379 $648 $452 $288
==== ==== ==== ====
</TABLE>

F-52
<PAGE> 99

ERSHIGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The reconciliation of income tax benefit computed at U.S. federal statutory
tax rates to the reported tax benefit is as follows (In thousands):

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED PERIOD FROM
1994 TO DECEMBER 31, JANUARY 1, 1997
DECEMBER 31, ------------ TO FEBRUARY 27,
1994 1995 1996 1997
------------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Expected income tax benefit at 34%....... $365 $684 $416 $258
State income taxes, net of federal
benefit................................ 40 68 48 30
Goodwill................................. (24) (95) -- --
Other.................................... (2) (9) (12) --
---- ---- ---- ----
Reported total income tax benefit........ $379 $648 $452 $288
==== ==== ==== ====
</TABLE>

8. RELATED-PARTY TRANSACTIONS

The Company was allocated certain general and administrative expenses,
including administration of the Company's workers' compensation insurance, from
its parent company totaling $58,000, $281,000, $296,000, and $9,000 during the
period from October 1, 1994 to December 31, 1994, the years ended December 31,
1995 and 1996 and the period from January 1, 1997 to February 27, 1997,
respectively.

The Company was allocated interest costs from Praxair of $420,000 and
$70,000 for the year ended December 31, 1996 and for the period January 1, 1997
to February 27, 1997, respectively, related to Praxair carrying its investment
in Ershigs as an asset held for sale.

9. PROFIT SHARING PLAN

The Company maintains a defined contribution profit sharing and 401(k) plan
for substantially all nonunion employees. The plan allows employees to defer up
to 15% of their compensation. Discretionary contributions to the profit sharing
plan are determined by the Board of Directors and funded annually. A profit
sharing contribution of $32,000 was made during the period from October 1, 1994
to December 31, 1994. No profit sharing contribution was made for the years
ended December 31, 1995 and 1996, or the period from January 1, 1997 to February
27, 1997.

F-53
<PAGE> 100

REPORT OF INDEPENDENT AUDITORS

Denali Incorporated

We have audited the accompanying balance sheet of GL&V/LaValley
Construction, Inc. (the "Company"), as of August 16, 1997, and the related
statements of operations, stockholder's equity, and cash flows for the period
from August 23, 1996 (date of acquisition) to August 16, 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 financial position of GL&V/LaValley Construction,
Inc., at August 16, 1997, and the results of its operations and its cash flows
for the period from August 23, 1996 (date of acquisition) to August 16, 1997, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas
September 9, 1997

F-54
<PAGE> 101

GL&V/LAVALLEY CONSTRUCTION, INC.

BALANCE SHEET
AUGUST 16, 1997

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 7,962
Trade accounts receivable, net of allowance for doubtful
accounts of $55,000.................................... 1,001,987
Inventories............................................... 125,850
Costs and estimated earnings on uncompleted contracts in
excess of related billings............................. 454,625
Due from parent........................................... 1,392,198
Prepaid expenses and other................................ 21,826
Deferred tax asset........................................ 80,948
Total current assets.............................. 3,085,396
Property, plant, and equipment, net......................... 1,591,397
----------
$4,676,793
==========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable and accrued expenses..................... $ 562,894
Warranty reserve.......................................... 95,000
Income taxes payable...................................... 24,083
Note payable to parent.................................... 1,643,000
----------
Total current liabilities......................... 2,324,977
Deferred tax liability...................................... 49,240
Stockholder's equity:
Common stock, $10 par value:
Authorized shares -- 30,000
Issued and outstanding shares -- 30,000................ 300,000
Additional paid-in capital................................ 1,911,853
Retained earnings......................................... 90,723
----------
2,302,576
----------
Total liabilities and stockholder's equity........ $4,676,793
==========
</TABLE>

See accompanying notes.

F-55
<PAGE> 102

GL&V/LAVALLEY CONSTRUCTION, INC.

STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997

<TABLE>
<S> <C>
Revenues.................................................... $7,876,830
Direct costs................................................ 6,352,975
----------
Gross margin................................................ 1,523,855
Selling expenses............................................ 210,012
Administrative expenses..................................... 947,160
----------
1,157,172
Operating profit............................................ 366,683
Other expense:
Interest expense............................................ (174,338)
Other, net.................................................. (23,036)
----------
Earnings before income taxes................................ 169,309
Income taxes................................................ 78,586
----------
Net earnings................................................ $ 90,723
==========
</TABLE>

See accompanying notes.

F-56
<PAGE> 103

GL&V/LAVALLEY CONSTRUCTION, INC.

STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997

<TABLE>
<CAPTION>
ADDITIONAL
CAPITAL PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, August 23, 1996....................... $300,000 $ 4,811,853 $ -- $ 5,111,853
Dividends to parent.......................... -- (2,900,000) (2,900,000)
Net earnings for the period.................. -- -- 90,723 90,723
-------- ----------- ------- -----------
Balance, August 16, 1997....................... $300,000 $ 1,911,853 $90,723 $ 2,302,576
======== =========== ======= ===========
</TABLE>

See accompanying notes.

F-57
<PAGE> 104

GL&V/LAVALLEY CONSTRUCTION, INC.

STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997

<TABLE>
<S> <C>
Operating activities:
Net earnings.............................................. $ 90,723
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation expense................................... 204,622
Loss on disposition of property, plant, and
equipment............................................. 7,608
Deferred income tax expense............................ 13,063
Changes in operating assets and liabilities:
Trade accounts receivable............................ 867,475
Inventories.......................................... 50,296
Costs and estimated earnings on uncompleted contracts
in excess of related billings....................... 214,632
Income taxes payable................................. 24,083
Prepaid expenses and other current assets............ (14,879)
Accounts payable and accrued expenses................ (689,608)
Warranty reserve..................................... (93,852)
Unearned income...................................... (83,514)
-----------
Net cash provided by operating activities................... 590,649
-----------
Investing activities:
Due from Parent........................................... 139,991
Purchases of property, plant, and equipment............... (175,678)
-----------
Net cash used in investing activities....................... (35,687)
-----------
Financing activities:
Proceeds from issuance of notes payable to Parent......... 1,643,000
Payments on notes payable to Parent....................... (2,190,000)
-----------
Net cash used in financing activities....................... (547,000)
-----------
Increase in cash............................................ 7,962
Cash at beginning of period................................. --
-----------
Cash at end of period....................................... $ 7,962
===========
Cash paid during period for income taxes.................... $ 32,000
===========
</TABLE>

NONCASH INVESTING AND FINANCING ACTIVITIES

The Company declared a dividend of $2,900,000 which was applied to reduce
the amount due to its Parent.

See accompanying notes.

F-58
<PAGE> 105

GL&V/LAVALLEY CONSTRUCTION, INC.

NOTES TO FINANCIAL STATEMENTS
AUGUST 16, 1997

1. ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES

GL&V/LaValley Construction, Inc. (the "Company" or "LCI"), a Mississippi
corporation, is wholly owned by GL&V/LaValley Industries, Inc. (the "Parent" or
"LII"), a Washington corporation. LCI markets and installs equipment and parts
primarily for the paper pulp industry throughout North America. On August 23,
1996, LII became a wholly owned subsidiary through a stock purchase of GL&V
Holdings, Inc., a Washington corporation which is wholly owned by Groupe
Laperriere & Verreault Inc., a Canadian corporation. The stock purchase of the
Parent was accounted for under the purchase method and the amount of the
purchase price allocated to the Company was allocated based on the fair value of
the assets acquired and liabilities assumed, which approximated the net book
value of the Company.

These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of the Parent's general and administrative expenses directly related to
the Company's operations. The amounts allocated by the Parent are not
necessarily indicative of the actual costs which may have been incurred had the
Company operated as an entity unaffiliated with the Parent. However, the Company
believes that the allocations are reasonable and in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 55.

REVENUE AND COST RECOGNITION

Revenues from contracts with customers for manufacture, repair, or
installation of equipment are recognized on the percentage-of-completion method,
measured by the percentage of construction costs incurred to date to estimated
total costs for each contract. Expended construction costs are considered by
management to be the best available measure of progress on these contracts.
Construction costs include all direct material, equipment, labor, subcontractor,
and indirect costs related to contract performance. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions and final contract settlements may
result in revisions to costs and income and are recognized in the period the
revisions are determined.

The asset, "Costs and estimated earnings on uncompleted contracts in excess
of related billings," represents revenues recognized in excess of amounts
billed.

Contracts other than those described above are generally accounted for on a
time-and-material basis. Revenues and accounts receivable from such jobs are
recorded at the amount billable based on the costs incurred.

INVENTORIES

Inventories consist of raw materials and are valued at the lower of average
cost or market, with cost determined by the moving average method, which
approximates the first-in/first-out method.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost. Depreciation is charged
to income over the estimated useful lives of the respective assets using the
straight-line method, over lives of 31.5 years for building and improvements and
5 to 7 years for machinery and equipment, furniture and fixtures, and vehicles.

F-59
<PAGE> 106

GL&V/LAVALLEY CONSTRUCTION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company's taxable income is included in the consolidated federal income
tax return of the Parent. The federal tax provision is substantially the same
provision as if the Company were required to file its own federal income tax
return on a separate company basis.

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

USE OF ESTIMATES

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash, prepaid expenses, accounts receivable,
accounts payable, and accrued expenses approximate fair values due to the
short-term maturities of these instruments. The book values of cash, trade
receivables, and trade payables are considered to be representative of their
respective fair values because of their short-term nature.

2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Costs and estimated earnings on uncompleted contracts at August 16, 1997
are summarized as follows:

<TABLE>
<S> <C>
Costs incurred on uncompleted contracts..................... $1,370,424
Estimated earnings.......................................... 254,654
----------
1,625,078
Less billings to date....................................... 1,170,453
----------
Uncompleted contracts with costs and estimated earnings in
excess of related billings................................ $ 454,625
==========
</TABLE>

3. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following at August 16,
1997:

<TABLE>
<CAPTION>
COST
----------
<S> <C>
Land........................................................ $ 31,360
Building and improvements................................... 1,504,162
Machinery and equipment..................................... 1,162,726
Furniture and fixtures...................................... 124,421
Vehicles.................................................... 104,108
----------
2,926,777
Less accumulated depreciation............................... 1,335,380
----------
Property, plant, and equipment.............................. $1,591,397
==========
</TABLE>

F-60
<PAGE> 107

GL&V/LAVALLEY CONSTRUCTION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. NOTE PAYABLE AND CREDIT FACILITY

The Company has a note payable to its Parent in the amount of $1,643,000
which is due on demand. The note bears interest at the bank prime.

The Company is party to a revolving line of credit and a term loan on a
joint and several basis with its Parent. As of August 16, 1997, the Company had
no outstanding balance. As of August 16, 1997, the Parent had $2,202,381
outstanding from the term loan facility. This credit facility is collateralized
by the accounts receivable, inventory, machinery and equipment, fixtures,
documents, instruments, general intangibles and proceeds thereof, and real
property of the Company and its Parent.

5. DEFINED-CONTRIBUTION 401(K) SAVINGS PLAN

The Company participates in the Parent's defined-contribution 401(k)
savings plan, which is available to substantially all of the Company's
employees, whereby the Company will match 100% of the participant's contribution
up to 1.5% of compensation. The Company made contributions to the plan of
$13,058 during the period.

6. INCOME TAXES

For the period August 23, 1996 (date of acquisition) to August 16, 1997,
the income tax provision consisted of the following components:

<TABLE>
<S> <C>
Current
Federal................................................... $62,523
State..................................................... 3,000
-------
65,523
Deferred.................................................... 13,063
-------
Total............................................. $78,586
=======
</TABLE>

The income tax provision reconciled to the tax computed at the federal
statutory rate:

<TABLE>
<S> <C>
Tax at federal statutory rate............................... $ 57,565
State income taxes net of federal benefit................... 5,926
Decrease in valuation allowance............................. (15,222)
Nondeductible meals and entertainment....................... 20,810
Nondeductible penalties..................................... 7,103
Other....................................................... 2,404
--------
$ 78,586
========
</TABLE>

The deferred tax asset and liability at August 16, 1997 consists of the
following:

<TABLE>
<S> <C>
Deferred tax asset:
Expenses deducted for book not deductible for tax in the
period................................................. $80,948
Deferred tax liability:
Depreciation of property and equipment.................... 49,240
-------
Net deferred tax asset...................................... $31,708
=======
</TABLE>

F-61
<PAGE> 108

GL&V/LAVALLEY CONSTRUCTION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The valuation allowance was decreased by $15,222 to $0 during the period
August 24, 1996 through August 16, 1997, based on management's reevaluation of
the likelihood of realization of the net deferred tax assets.

7. LEASES AND COMMITMENTS

The Company has various equipment under noncancelable operating leases
expiring through 2000. Rent expense under all such leases approximates $8,557
for the period August 23, 1996 to August 16, 1997.

Future minimum lease payments under operating leases for personal property
with noncancelable terms in excess of one year, at August 16, 1997, total
$12,264 and are payable as follows: 1998 -- $8,557; 1999 -- $3,707; and
2000 -- $-0-.

8. RELATED PARTY TRANSACTIONS

The Parent provides certain administrative functions on behalf of the
Company that are allocated to the Company for separate financial reporting
purposes. The costs allocated of $430,000 for the period from August 23, 1996 to
August 16, 1997 have been recorded in administrative expenses.

The Company is covered through the Parent company's business insurance
program. For the period August 23, 1996 to August 16, 1997, the Parent charged
the Company $27,744 for its proportionate share of the insurance coverage.

The Company also pays the Parent a management fee equal to 1.25% of
revenues. For the period from August 23, 1996 to August 16, 1997, the Company
paid LII $101,478.

The advance to the Parent represents cash transferred to the Parent
company.

The Company has provided goods and services to the Parent totaling $572,308
for the period August 23, 1996 to August 16, 1997 which include a profit margin
of 18%.

9. CONCENTRATION OF CREDIT RISK

The Company has one significant customer that accounted for approximately
17% of all sales for the period from August 23, 1996 to August 16, 1997.

10. SUBSEQUENT EVENTS

In August 1997, the Company signed a letter of intent to sell all of its
common stock to Denali Incorporated for $3.9 million. The sale of the Company is
anticipated to close by October 31, 1997.

F-62
<PAGE> 109

REPORTS OF INDEPENDENT AUDITORS

The Board of Directors
SEFCO, Inc.

We have audited the accompanying balance sheet of SEFCO, Inc., as of
December 31, 1996, and the related statements of operations, stockholders'
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 audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEFCO, Inc. at December 31,
1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.

LEMING, SCHALLNER & CO.

Tulsa, Oklahoma
January 22, 1997

F-63
<PAGE> 110

REPORTS OF INDEPENDENT AUDITORS

Board of Directors
SEFCO, Inc.

We have audited the accompanying balance sheet SEFCO, Inc. as of December
31, 1995, and the related statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 1995.
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 SEFCO, Inc., at December 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

GAYNOR AND FAWCETT, INC.

Tulsa, Oklahoma
February 5, 1996

F-64
<PAGE> 111

SEFCO, INC.

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 475,931 $ 339,804
Certificates of deposit................................... 35,630 1,100,000
Accounts receivable -- contracts.......................... 1,158,140 806,104
Accounts receivable -- other.............................. 3,165 3,765
Costs and estimated earnings on incomplete contracts in
excess of billings..................................... 199,178 118,737
Inventory................................................. 210,498 18,117
Prepaid expenses.......................................... 88,348 24,099
---------- ----------
Total current assets.............................. 2,170,890 2,410,626
Property and equipment:
Machinery and equipment................................... 1,617,431 1,837,913
Automotive equipment...................................... 228,218 511,350
Furniture and fixtures.................................... 46,018 61,118
Leasehold improvements.................................... 453,992 380,708
Land...................................................... 15,000 129,351
---------- ----------
2,360,659 2,920,440
Less accumulated depreciation............................. 1,155,677 1,439,966
---------- ----------
Net property and equipment.................................. 1,204,982 1,480,474
Other assets:
Cash value of life insurance.............................. 83,118 129,085
Deposits.................................................. 1,840 840
---------- ----------
Total other assets................................ 84,958 129,925
Total assets...................................... $3,460,830 $4,021,025
========== ==========

LIABILITIES

Current liabilities:
Accounts payable.......................................... $ 624,338 $ 385,361
Accrued expenses.......................................... 213,951 212,786
Warranty reserve.......................................... 40,000 50,000
Income taxes payable...................................... 160,318 265,914
Billings in excess of costs and estimated earnings on
incomplete contracts................................... 358,858 355,497
Current deferred income taxes............................. 171,038 113,649
---------- ----------
Total current liabilities......................... 1,568,503 1,383,207
Deferred income taxes....................................... 58,731 75,082
Stockholders' equity:
Common stock, $1 par value, 10,000 shares authorized; 500
and 1,000 shares issued at December 31, 1995 and 1996,
respectively........................................... 500 1,000
Additional paid-in capital.................................. 46,058 46,058
Retained earnings........................................... 1,787,038 2,515,678
---------- ----------
Total stockholders' equity........................ 1,833,596 2,562,736
Total liabilities and stockholders' equity........ $3,460,830 $4,021,025
========== ==========
</TABLE>

See accompanying notes.

F-65
<PAGE> 112

SEFCO, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenues............................................. $6,675,574 $8,445,324 $10,121,541
Cost of revenues:
Direct contract costs.............................. 5,001,174 5,947,929 6,685,831
Indirect overhead.................................. 472,298 604,730 744,580
---------- ---------- -----------
Total cost of revenue................................ 5,473,472 6,552,659 7,430,411
---------- ---------- -----------
Gross profit......................................... 1,202,102 1,892,665 2,691,130
General and administrative expenses.................. 980,285 1,174,358 1,530,824
---------- ---------- -----------
Income from operations............................... 221,817 718,307 1,160,306
Other income (expenses):
Interest income.................................... 13,179 20,089 32,833
Net gain (loss) on sale of assets.................. (10,510) 4,630 (3,338)
Interest expense................................... (3,749) (1,256) --
Other income....................................... -- 7,268 20,055
---------- ---------- -----------
Total other income (expenses)........................ (1,080) 30,731 49,550
---------- ---------- -----------
Income before provision for taxes.................... 220,737 749,038 1,209,856
Provision for income taxes:
Current............................................ 70,330 226,499 496,754
Deferred........................................... 13,203 56,954 (41,038)
---------- ---------- -----------
Total provision for taxes............................ 83,533 283,453 455,716
---------- ---------- -----------
Net income........................................... $ 137,204 $ 465,585 $ 754,140
========== ========== ===========
</TABLE>

See accompanying notes.

F-66
<PAGE> 113

SEFCO, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993................ 500 $ 500 $46,058 $1,189,249 $1,235,807
Dividends declared........................ -- -- -- (2,000) (2,000)
Net income................................ -- -- -- 137,204 137,204
----- ------ ------- ---------- ----------
Balance at December 31, 1994................ 500 500 46,058 1,324,453 1,371,011
Dividends declared........................ -- -- -- (3,000) (3,000)
Net income................................ -- -- -- 465,585 465,585
----- ------ ------- ---------- ----------
Balance at December 31, 1995................ 500 500 46,058 1,787,038 1,833,596
Stock Dividends declared.................. 500 500 -- (500) --
Dividend declared......................... -- -- -- (25,000) (25,000)
Net income................................ -- -- -- 754,140 754,140
----- ------ ------- ---------- ----------
Balance at December 31, 1996................ 1,000 $1,000 $46,058 $2,515,678 $2,562,736
===== ====== ======= ========== ==========
</TABLE>

See accompanying notes.

F-67
<PAGE> 114

SEFCO, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Operating activities
Net income.............................................. $137,204 $465,585 $ 754,140
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 228,701 233,970 369,153
Deferred income taxes................................. 13,203 56,954 (41,038)
Gain (loss) on sale of assets......................... 10,510 (4,630) 3,338
Cash value of life insurance.......................... (43,231) (39,740) (45,967)
Changes in operating assets and liabilities:
Accounts receivable................................... (693,918) (112,756) 351,436
Other accounts receivable............................. (1,187) 585 --
Deposits.............................................. -- (1,040) 1,000
Costs and estimated earnings in excess of billings.... 15,891 (41,487) 80,441
Inventory............................................. (8,409) (196,141) 192,381
Prepaid income taxes.................................. (67,390) 67,390 --
Prepaid expenses...................................... 35,805 (2,675) 64,249
Accounts payable...................................... 237,678 186,851 (238,977)
Accrued expenses...................................... 75,504 97,809 (1,165)
Warranty reserve...................................... -- -- 10,000
Income taxes payable.................................. (44,839) 160,318 105,596
Billings in excess of costs and estimated earnings.... 110,017 173,819 (3,361)
-------- -------- ----------
5,539 1,044,812 1,601,226
Investing activities
Proceeds from sale of fixed assets...................... 32,522 8,200 58,920
Purchase of fixed assets................................ (134,109) (715,673) (706,903)
Sale (purchase) of certificates of deposit.............. 17,500 (35,630) (1,064,370)
-------- -------- ----------
(84,087) (743,103) (1,712,353)
Financing activities
Payment of dividends.................................... (2,000) (2,000) (25,000)
Retirement of notes payable............................. (234,080) (26,169) --
Proceeds from cash value of life insurance.............. 72,114 -- --
-------- -------- ----------
(163,966) (28,169) (25,000)
Total increase (decrease) in cash....................... (242,514) 273,540 (136,127)
Beginning cash balance.................................. 444,905 202,391 475,931
-------- -------- ----------
Ending cash balance..................................... $202,391 $475,931 $ 339,804
Supplemental schedule of cash flow information:
Cash paid during the year for interest.................. $ 3,749 $ 1,256 $ --
Cash paid during the year for income taxes.............. $182,559 $ 17,861 $ 388,454
</TABLE>

In non-cash transactions during fiscal year 1994, the Company purchased
fixed assets for notes payable in the amount of $35,076, and financed the annual
insurance renewal for $16,125.

See accompanying notes.

F-68
<PAGE> 115

SEFCO, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY'S ACTIVITIES

SEFCO, Inc. (the "Company"), is engaged in the business of the fabrication
and erection of above-ground steel storage tanks for municipalities and the
petroleum and grain industries. Work is performed primarily under fixed-price
contracts.

SUBSIDIARY COMPANIES

The Company holds 100% of the stock of two subsidiary companies, Marvel
Painting and Construction, Inc., and SEFCO of Arkansas, Inc. Both subsidiaries
are inactive shells, thus the financial statements reflect only the financial
position, operations and cash flows of SEFCO, Inc.

REVENUE AND COST RECOGNITION

Revenues from fixed-price contracts are recognized on the
percentage-of-completion method. No revenue is recognized on a contract until
substantial costs have been incurred. The percentage of completion is measured
by the ratio of costs incurred to date to estimated total costs on the contract.

Contract costs include all direct materials, labor and subcontract costs,
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and equipment costs. Selling, general, and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.

The asset, "Costs and estimated earnings on incomplete contracts in excess
of billings," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on incomplete
contracts," represents amounts billed in excess of revenues recognized.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of all highly liquid investments with a
maturity of three months or less when purchased.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

DEPOSITS HELD IN FINANCIAL INSTITUTIONS

The Company had demand deposits on hand in financial institutions which
exceeded depositor's insurance provided by the applicable guaranty agency by
$90,817, $361,287, and $1,339,804 at December 31, 1994, 1995, and 1996,
respectively.

PROPERTY, EQUIPMENT, AND DEPRECIATION

Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method based on the estimated useful lives of the related
assets. Construction machinery and furniture are being depreciated

F-69
<PAGE> 116

SEFCO, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

over periods of five to ten years. Autos and trucks have estimated useful lives
of three to five years. Leasehold costs have estimated useful lives of 27 to 39
years.

Maintenance, repairs, and minor renewals are charged to operations as
incurred. Improvements and major renewals are capitalized. Upon sale or
disposition of properties, the asset account is relieved of the cost, and the
accumulated depreciation account is charged with depreciation taken prior to the
sale; any resultant gain or loss is credited or charged to earnings.

INCOME TAXES

Deferred income taxes are provided for differences in timing of reporting
income for financial statement and tax purposes arising from differences in the
methods of accounting for construction contracts, depreciation, and warranty
reserves. Construction contracts are reported for tax purposes on the completed
contract method and for financial statement purposes on the
percentage-of-completion method. Accelerated depreciation is used for tax
reporting, and straight-line depreciation is used for financial statement
reporting. The Company has established a reserve fund for warranties which is
not currently deductible for tax purposes.

2. ACCOUNTS RECEIVABLE -- CONTRACTS

Accounts receivable are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- --------
<S> <C> <C>
Completed contracts........................................ $ 306,321 $166,935
Contracts in progress...................................... 851,819 639,169
---------- --------
Total accounts receivable.................................. $1,158,140 $806,104
========== ========
</TABLE>

There were no accounts written-off during the years ended December 31,
1994, 1995, and 1996.

3. CONTRACTS IN PROGRESS

Information with respect to contracts in progress is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Expenditures on incomplete contracts...................... $2,043,906 $1,845,755
Estimated earnings........................................ 501,823 353,361
---------- ----------
2,545,729 2,199,116
Less billings to date..................................... 2,705,409 2,435,876
---------- ----------
$ (159,680) $ (236,760)
========== ==========
</TABLE>

The information above is included in the accompanying balance sheets under
the following captions:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Current assets - costs and estimated earnings on incomplete
contracts in excess of billings.......................... $ 199,178 $ 118,737
Current liabilities - billings in excess of costs and
estimated earnings on incomplete contracts............... (358,858) (355,497)
--------- ---------
$(159,680) $(236,760)
========= =========
</TABLE>

F-70
<PAGE> 117

SEFCO, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Expense accrued for books not yet deductible for tax...... $ 14,976 $ 18,868
Other..................................................... 1,872 -
-------- --------
Total deferred tax assets................................... 16,848 18,868
Deferred tax liabilities:
Book over tax basis of net book value of property, plant,
and equipment.......................................... 58,731 75,082
Contract revenue on percent completion for book and
completed contract for tax............................. 187,886 132,517
-------- --------
Total deferred tax liabilities.............................. 246,617 207,599
-------- --------
Net deferred tax liabilities................................ $229,769 $188,731
======== ========
</TABLE>

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Current income tax expense:
Federal........................................... $56,263 $198,053 $422,246
State............................................. 14,067 28,446 74,508
------- -------- --------
Total current income tax expense:................... 70,330 226,499 496,754
Deferred income tax expense (benefit):
Federal........................................... 9,759 49,024 (34,882)
State............................................. 3,444 7,930 (6,156)
------- -------- --------
Total deferred income tax expense (benefit)......... 13,203 56,954 (41,038)
------- -------- --------
Total income tax expense............................ $83,533 $283,453 $455,716
======= ======== ========
</TABLE>

The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Expected income tax expense at 34%.................. $75,050 $254,673 $411,351
State income taxes, net of federal benefit.......... 4,824 23,867 45,188
Meals and entertainment............................. 800 2,115 1,185
Other, net.......................................... 2,859 2,798 (2,008)
------- -------- --------
Reported total income tax expense................... $83,533 $283,453 $455,716
======= ======== ========
</TABLE>

For the years ended December 31, 1994, 1995, and 1996, the federal income
tax provision was less than the amount of taxes computed at the 34% statutory
federal income tax rate because of permanent differences related to expenses
which were not deductible for tax purposes and the federal benefit of state
income taxes.

F-71
<PAGE> 118

SEFCO, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. PENSION

During 1994 the Company had a profit sharing plan which covered
substantially all employees of the Company. Employees become eligible for
participation after two years of service.

In 1995, the Company converted its profit sharing plan to a 401(k)
retirement plan (the "Plan") which covers substantially all of the employees of
the Company. The Plan allows employees to defer up to 15% of their compensation,
with the Company matching 100% of the first 6% of the participant's
contribution. Participants are immediately and fully vested in employer
contributions. The Company accrued contributions to the pension plan of $-0-,
$65,425, and $89,723 for the years ended December 31, 1994, 1995, and 1996,
respectively.

6. RELATED PARTY TRANSACTIONS

The Company rents land and facilities owned by the stockholders of the
Company and pays insurance, maintenance, and utility bills incurred at the
premises in addition to rent. The Company paid $36,000 in rent payments in 1994,
1995, and 1996.

The stockholders own certain construction equipment which they lease to the
Company on a month-to-month basis. Rental rates are equivalent to rates
available in the marketplace. The Company paid $144,000, $144,000, and $228,000
in the years ended December 31, 1994, 1995, and 1996, respectively, for the use
of this equipment.

7. REVOLVING LINE OF CREDIT

In April 1996, the Company entered into a $450,000 revolving line of credit
with interest at 1% above the New York prime rate to provide operating capital.
The line is collateralized by all accounts, contracts, contract rights, and
general intangibles and by all inventory, equipment, and leasehold improvements.
The line expires April 22, 1997. At December 31, 1996, the Company had not
borrowed funds against the line.

8. CONTINGENT LIABILITY

The Company has the normal contingencies inherent to construction
activities and a general commitment to correct certain deficiencies in
construction for a period of one year after completion of a construction
contract. Such contingencies and commitments have not been material in prior
years, and in the opinion of management, the Company has adequate insurance
coverage and no material contingencies will result from present or future
claims.

9. CONCENTRATION OF CREDIT RISK

The company extends credit to customers as a normal course of business. At
December 31, 1996, the Company had extended credit to two customers totaling
$246,000 or 30% of accounts receivable-contracts.

F-72
<PAGE> 119

SEFCO, INC.

BALANCE SHEET

ASSETS

September 30, 1997
(Unaudited)

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 610,808
Accounts receivable -- contracts.......................... 856,219
Accounts receivable -- other.............................. 49,687
Costs and estimated earnings in excess of billings on
incomplete contracts................................... 159,980
Inventory................................................. 13,804
Prepaid expenses.......................................... 33,858
----------
Total current assets.............................. 1,724,356
----------
Property and equipment:
Machinery and equipment................................... 2,094,442
Automotive equipment...................................... 397,504
Furniture and fixture..................................... 77,722
Leasehold improvements.................................... 440,071
Land...................................................... 875,237
----------
3,884,976
Less accumulated depreciation............................. 1,664,584
----------
Net property and equipment.................................. 2,220,392
----------
Other assets:
Deposits.................................................. 840
----------
Total other assets.......................................... 840
----------
Total assets................................................ $3,945,588
==========
</TABLE>

LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 354,689
Accrued expenses.......................................... 206,426
Warranty reserve.......................................... 50,000
Billings in excess of costs and estimated earnings on
incomplete contracts................................... 108,893
Current deferred income taxes............................. 146,942
----------
Total current liabilities......................... 866,950
----------
Deferred income taxes....................................... 217,806
----------
Stockholders' equity:
Common stock -- $1 par value, 10,000 shares authorized,
1,000 shares issued.................................... 1,000
Additional paid-in-capital................................ 46,058
Retained earnings......................................... 2,813,774
----------
Total stockholders' equity........................ 2,860,832
----------
Total liabilities and stockholder's equity........ $3,945,588
==========

See notes to unaudited financial statements.

F-73
<PAGE> 120

SEFCO, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $7,716,178 $7,359,168
Cost of revenues:
Direct contract costs..................................... 5,209,729 5,000,666
Indirect overhead......................................... 539,049 474,578
---------- ----------
Total cost of revenues...................................... 5,748,778 5,475,244
---------- ----------
Gross profit................................................ 1,974,400 1,883,924
General and administrative expenses......................... 1,198,187 1,245,039
---------- ----------
Income from operations...................................... 776,213 638,885
---------- ----------
Other income (expense):
Loss on sale of fixed assets.............................. (3,338) (3,220)
Interest income........................................... 20,883 40,818
Other income.............................................. 26,505 28,505
Other expense............................................. (10,690) (8,087)
---------- ----------
Total other income (expense)................................ 33,360 58,016
---------- ----------
Net income before provision for income taxes................ 809,573 696,901
---------- ----------
Provision (benefit) for income taxes:
Current................................................... 285,114 222,788
Deferred.................................................. 24,861 176,017
---------- ----------
Total provision for income taxes.................. 309,975 398,805
---------- ----------
Net income........................................ $ 499,598 $ 298,096
========== ==========
</TABLE>

See notes to unaudited financial statements.

F-74
<PAGE> 121

SEFCO, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
Operating Activities
Net income.................................................. $ 499,598 $ 298,096
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 275,671 285,759
Deferred income taxes..................................... 24,861 176,017
Cash value of life insurance.............................. (33,452) 129,085
Loss on sale of investments and fixed assets.............. 3,338 8,440
Changes in operating assets and liabilities:
Accounts receivable....................................... 295,312 (96,037)
Costs and estimated earnings in excess of billings........ 55,160 (41,243)
Deposits.................................................. 1,000 --
Inventory................................................. 40,405 4,313
Prepaid expenses.......................................... 44,626 (9,759)
Accounts payable.......................................... (394,698) (30,672)
Accrued expenses.......................................... 363,235 (6,360)
Warranty reserve.......................................... (7,077) --
Accrued income taxes...................................... (48,334) (265,914)
Billings in excess of costs and estimated earnings........ 32,499 (246,604)
--------- ----------
Net cash provided by operating activities................... 1,152,144 205,121
--------- ----------
Investing Activities
Proceeds from sale of property and equipment................ 55,589 88,088
Acquisition of property and equipment....................... (641,065) (1,116,985)
Decrease in certificates of deposit......................... 35,630 1,100,000
Purchase of investments..................................... -- (549,466)
Redemption of investments................................... -- 544,246
--------- ----------
Net cash provided by investing activities................... (549,846) 65,883
--------- ----------
Net increase in cash........................................ 602,298 271,004
Cash at beginning of period................................. 475,931 339,804
--------- ----------
Cash at end of period....................................... 1,078,229 610,808
========= ==========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.................................................. $ -- $ --
Income taxes.............................................. $ 337,344 $ 518,952
</TABLE>

See notes to unaudited financial statements.

F-75
<PAGE> 122

SEFCO, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997

1. GENERAL

The financial statements of SEFCO, Inc. (the "Company"), included herein
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
Company believes that the presentations and disclosures herein are adequate to
make the information not misleading.

The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
financial statements and notes included elsewhere in the Prospectus.

2. INCOME TAXES

F-76
<PAGE> 123

REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE

We have audited the consolidated financial statements of Denali
Incorporated and subsidiaries (the "Company") as of June 29, 1996, and June 28,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the period from December 19, 1994 (date of
inception) to July 1, 1995 and the years ended June 29, 1996 and June 28, 1997,
and have issued our report thereon dated August 27, 1997 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Houston, Texas
August 27, 1997

S-1
<PAGE> 124

DENALI INCORPORATED

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS END
OF PERIOD EXPENSES DESCRIBE(B) DESCRIBE(A) OF PERIOD
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 28, 1997
Allowance for Doubtful Accounts... $114 $176 $575 $260 $605
Fiscal Year Ended June 28, 1996
Allowance for Doubtful Accounts... $ 89 $ 55 $ -- $ 30 $114
Period from December 19, 1994
(date of inception) to July 1,
1995
Allowance for Doubtful Accounts... $ -- $ 89 $ -- $ -- $ 89
</TABLE>

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

(A) Uncollectible accounts written off, net of recoveries.

(B) Allowance for doubtful accounts resulting from the acquisition of Ershigs.

S-2
<PAGE> 125

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 12
Dividend Policy....................... 13
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 32
Certain Transactions.................. 37
Principal Stockholders................ 38
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 42
Underwriting.......................... 43
Legal Matters......................... 45
Experts............................... 45
Additional Information................ 45
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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

UNTIL DECEMBER 16, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

2,100,000 SHARES
[DENALI INCORPORATED LOGO]

COMMON STOCK
--------------------

PROSPECTUS
--------------------
MORGAN KEEGAN & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
NOVEMBER 20, 1997
======================================================