DENALI INC, PRES14A, 2000-05-31

DENALI INC
PRES14A, 2000-05-31
BUSINESS SERVICES, NEC

Previous: MAXXIS GROUP INC, 10-Q/A, EX-27, 2000-05-31

Next: KEMPER SECURITIES TRUST, N-30D, 2000-05-31

<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12

DENALI INCORPORATED
(Name of Registrant as Specified in Its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction
applies:

(2) Aggregate number of securities to which transactions applies:

(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the form or schedule and the
date of its filing.

(1) Amount previously paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

DENALI INCORPORATED
1360 POST OAK BLVD., SUITE 2250
HOUSTON, TEXAS 77056

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

NOTICE AND PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 3, 2000
---------------------

To the Stockholders of Denali Incorporated:

You are cordially invited to attend the Special Meeting of Stockholders
(the "Special Meeting") of Denali Incorporated, a Delaware corporation (the
"Company"), which will be held at Four Oaks Place Tenant Conference Center
located at 1300 Post Oak Boulevard, Suite 490, Houston, Texas on July 3, 2000,
at 9:00 a.m., local time. At the Special Meeting, the stockholders of the
Company will be asked to consider and approve the following proposal
(collectively, the "Transaction"):

- the purchase by William Blair Mezzanine Capital Fund III, L.P. from the
Company of $11,000,000 in aggregate principal amount of 12% Senior
Subordinated A Notes due June 30, 2008 of the Company (the "Subordinated
Notes"), $9,000,000 in aggregate principal amount of 12% Senior
Subordinated Convertible B Notes due June 30, 2008 of the Company (the
"Convertible Notes") and 1,818,182 shares of the Company's common stock,
par value $0.01 per share (the "Common Stock"), for $4.40 per share, for
an aggregate purchase price of $28,000,000;

- the conversion by certain holders (including certain directors and
entities that are affiliates of directors of the Company) of outstanding
12% Senior Subordinated Notes due 2006 of the Company (the "Existing
Notes") and warrants to purchase shares of Common Stock at an exercise
price of $7.54 per share issued in connection with the Existing Notes
(the "Warrants") into $726,786 in aggregate principal amount of
Subordinated Notes, $594,644 in aggregate principal amount of Convertible
Notes and 711,537 shares of Common Stock; and

- the additional purchase for cash by certain holders of Existing Notes and
Warrants (including an entity that is an affiliate of a director of the
Company) from the Company of $455,713 in aggregate principal amount of
Subordinated Notes, $372,857 in aggregate principal amount of Convertible
Notes and 75,325 shares of Common Stock for $4.40 per share, for an
aggregate purchase price of $1,160,000.

The Transaction is more fully described in the Proxy Statement accompanying
this Notice.

Stockholders of record at the close of business on May 18, 2000 are
entitled to vote at the Special Meeting or any adjournment or postponement
thereof. Shares may be voted at the Special Meeting only if the holder is
present or represented by proxy. A list of stockholders entitled to vote at the
Special Meeting will be available for inspection at the Company's corporate
headquarters for any purpose related to the Special Meeting during ordinary
business hours for at least ten (10) days prior to the Special Meeting.

Please sign, date and mail the enclosed proxy in the enclosed envelope,
which requires no postage if mailed in the United States, so that your shares
will be represented at the meeting.

By Order of the Board of Directors,

Richard W. Volk
Chairman, Chief Executive Officer
and President

Houston, Texas
June 14, 2000
<PAGE> 3

DENALI INCORPORATED
1360 POST OAK BLVD., SUITE 2250
HOUSTON, TEXAS 77056

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

PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
JULY 3, 2000
---------------------

This Proxy Statement is furnished by the Board of Directors of Denali
Incorporated, a Delaware corporation (the "Company" or "Denali"), in connection
with the solicitation of proxies to be used for the purpose of voting at a
Special Meeting of Stockholders (the "Special Meeting"). The Special Meeting
will be held on July 3, 2000, at 9:00 a.m., local time, at Four Oaks Place
Tenant Conference Center located at 1300 Post Oak Boulevard, Suite 490, Houston,
Texas.

At the Special Meeting, the stockholders of the Company will be asked to
consider and approve the following proposal (collectively, the "Transaction"):

- the purchase by William Blair Mezzanine Capital Fund III, L.P. ("Blair")
from the Company of $11,000,000 in aggregate principal amount of 12%
Senior Subordinated A Notes due June 30, 2008 of the Company (the
"Subordinated Notes"), $9,000,000 in aggregate principal amount of 12%
Senior Subordinated Convertible B Notes due June 30, 2008 of the Company
(the "Convertible Notes," and together with the Subordinated Notes, the
"Notes") and 1,818,182 shares of the Company's common stock, par value
$0.01 per share (the "Common Stock"), for $4.40 per share, for an
aggregate purchase price of $28,000,000;

The enclosed proxy is solicited by the Board of Directors of the Company.
The proxy materials relating to the Special Meeting are being mailed on or about
June 14, 2000, to stockholders of record at the close of business on May 18,
2000 (the "Record Date"). Only holders (the "Stockholders") of record at the
close of business on the Record Date will be entitled to vote at the Special
Meeting, or any adjournment or postponement thereof, either in person or by
valid proxy. As of May 18, 2000, there were outstanding 5,558,914 shares of
Common Stock.

The holders of a majority of the voting power of all issued and outstanding
shares of the Company's capital stock entitled to vote, present in person or
represented by proxy, shall constitute a quorum at the Special Meeting. Treasury
shares, if any, will not be voted and are not counted in determining the number
of outstanding shares for voting purposes.

Stockholders are entitled to one vote for each share of Common Stock held
of record on each matter of business to be considered at the Special Meeting.
Ballots cast at the Special Meeting will be counted by the Inspector of
Elections and determinations of whether a quorum exists and whether the
Transaction is approved will be announced at the Special Meeting.

1
<PAGE> 4

The Inspector of Elections will treat abstentions and broker non-votes
received as shares that are present and entitled to vote for purposes of
determining a quorum. Because abstentions are counted as part of the voting
power present at the meeting and entitled to vote, they will be counted as a
vote against the proposal. However, broker non-votes (and other limited proxies)
will not be considered part of the voting power present at the meeting with
respect to the proposal. Therefore, broker non-votes are not counted against the
proposal, but merely reduce the absolute number of affirmative votes needed.

The Company will bear the cost of the solicitation of proxies, including
the charges and expenses of brokerage firms and others for forwarding
solicitation materials to the beneficial owners of the outstanding Common Stock.
In addition to soliciting proxies by mail, proxies may be solicited personally
or by telephone by directors, officers or employees of the Company, who will
receive no additional compensation for such services. A person giving the
enclosed proxy has the power to revoke it at anytime before it is exercised by:
(i) attending the Special Meeting and voting in person; (ii) duly executing and
delivering a proxy bearing a later date; or (iii) sending a written notice of
revocation to the Assistant Secretary of the Company at its corporate offices.
The corporate offices of the Company are located at 1360 Post Oak Blvd., Suite
2250, Houston, Texas 77056 and its telephone number at that address is
713-627-0933.

The affirmative vote of holders of a majority of the outstanding shares of
Common Stock entitled to vote and present in person or by proxy at the Special
Meeting are required for approval of the Transaction proposed to be acted upon
at the Special Meeting (the "Proposal").

IN DETERMINING WHETHER TO APPROVE THE PROPOSAL, THE STOCKHOLDERS SHOULD
CONSIDER ALL OF THE INFORMATION INCLUDED IN THIS PROXY STATEMENT.

2
<PAGE> 5

BENEFICIAL OWNERSHIP

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of May 18, 2000, (i) by persons known to the
Company to be beneficial owners of more than 5% of the Common Stock, (ii) each
of the Company's directors, (iii) the Company's CEO and each of the Company's
four other most highly compensated executive officers, and (iv) all directors
and executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Richard W. Volk(2)(3)....................................... 35,000 *
Philip J. Burguieres(4)..................................... 234,880 4.2%
EMC Holdings, L.L.C.
711 Louisiana, 33rd Floor
Houston, Texas 77002-2716
Ernest H. Cockrell(5)....................................... 661,249 11.8%
Cockrell Oil Corporation
1600 Smith, Suite 3900
Houston, Texas 77002
Bob Elfring................................................. -- *
Dorpsstratt 71
3632 AS Loenen aan de Vecht
The Netherlands
Thomas D. Simmons, Jr.(6)................................... 205,654 3.7%
Simmons Vedder Investment Partnership
1800 West Loop South, Suite 1575
Houston, Texas 77027
Joel V. Staff(7)............................................ 38,943 *
National Oilwell
10000 Richmond Avenue, Suite 400
Houston, Texas 77042-4200
J. Taft Symonds(8).......................................... 378,943 6.8%
Symonds Trust Co., Ltd.
2040 North Loop West, Suite 200
Houston, Texas 77018
Stephen M. Youts(9)......................................... 137,200 2.5%
Avondale Partners Inc
1360 Post Oak Blvd., Suite 2424
Houston, Texas 77056
R. Kevin Andrews(2)(10)..................................... 24,067 *
Robert B. Bennett(2)(11).................................... 18,350 *
Lee W. Orr(12).............................................. 42,082 *
Fibercast Company
25 S. Main
Sand Springs, Oklahoma 74063
Hans Siers(13).............................................. 2,000 *
Welna B. V.
Parallelstraat 52, 7575 AN
Oldenzaal, The Netherlands
</TABLE>

3
<PAGE> 6

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Alice L. Harcrow(15)........................................ 330,615 5.9%
#49 Wynden Oaks Drive
Houston, TX 77056

All Executive Officers and Directors as a Group (12
persons).................................................. 1,817,078 31.4%
</TABLE>

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

* Less than one percent.

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

(2) All officers of the Company except Hans Siers and Lee W. Orr have the
following address: 1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056.

(3) Includes 25,000 shares that may be acquired from the Company within 60 days
upon exercise of options.

(4) Includes 162,162 shares and warrants to purchase 53,487 shares owned by EMC
Equity Fund, L.P., the general partner of which is EMC Holdings, LLC, of
which Mr. Burguieres is the Chief Executive Officer.

(5) Includes 539,162 shares and warrants to purchase 53,487 shares owned by
Cockrell Investment Partners, L.P., a Texas limited partnership, of which
Mr. Cockrell is 35.3% owner and the Chairman of the general partner, and
68,600 shares owned by Cockrell Equity Partners L.P., of which Mr. Cockrell
is 35.4% owner and Chairman of the general partner.

(6) Includes warrants to purchase 5,943 shares. Also includes 76,328 shares and
warrants to purchase 5,943 shares owned by Simmons Family Trust of which
Mr. Simmons is Co-Trustee, and 36,883 shares and warrants to purchase 5,943
shares owned by Thomas Dudley Simmons, Jr. Marital Trust.

(7) Includes warrants to purchase 8,915 shares.

(8) Includes 356,514 shares and warrants to purchase 4,457 shares owned by
Symonds Trust Co., Ltd., a Texas corporation, of which Mr. Symonds is the
President and 13,514 shares and warrants to purchase 4,458 shares owned by
Anne Allen Symonds Revocable Trust. Mr. Symonds disclaims any beneficial
ownership of the Anne Allen Symonds Revocable Trust shares and warrants.

(9) Includes 133,770 shares owned by Avondale Partners LP, and 3,430 shares
owned by Avondale GP Inc. Avondale GP Inc is the general partner of
Avondale Partners LP. Mr. Youts is the President of Avondale GP Inc.

(10) Includes 10,437 shares that may be acquired from the Company within 60 days
upon exercise of options.

(11) Includes 3,000 shares that may be acquired from the Company within 60 days
upon exercise of options.

(12) Includes 42,082 shares that may be acquired from the Company within 60 days
upon exercise of options.

(13) Includes 2,000 shares that may be acquired from the Company within 60 days
upon exercise of options.

(14) Includes 294,100 shares owned by National Investment Management, Inc., a
California corporation of which Mr. Robins is the President and sole
stockholder.

(15) Includes 39,625 shares owned by the Harcrow Family Foundation, a charitable
foundation of which Ms. Harcrow is a trustee and 295,910 shares owned by
the Estate of Stephen T. Harcrow, of which Ms. Harcrow is a co-executor.

4
<PAGE> 7

PROPOSAL

AUTHORIZATION OF TRANSACTION

The Company is seeking approval of the Stockholders for the Transaction,
pursuant to which:

- Blair will purchase from the Company $11,000,000 in aggregate principal
amount of Subordinated Notes, $9,000,000 in aggregate principal amount of
Convertible Notes and 1,818,182 shares of the Common Stock for $4.40 per
share, for an aggregate purchase price of $28,000,000 (the "Blair
Transaction");

- certain holders (including certain directors and entities that are
affiliates of directors of the Company) (the "Converting Noteholders")
will convert Existing Notes and Warrants into $726,786 in aggregate
principal amount of Subordinated Notes, $594,644 in aggregate principal
amount of Convertible Notes and 711,537 shares of Common Stock (the
"Conversion"); and

- certain Converting Noteholders (the "Additional Purchasers") will
purchase from the Company $455,713 in aggregate principal amount of
Subordinated Notes, $372,857 in aggregate principal amount of Convertible
Notes and 75,325 shares of Common Stock for $4.40 per share, for an
aggregate purchase price of $1,160,000 (the "Additional Purchase").

Stockholder approval of the Transaction is required by rules
4460(i)(1)(D)(ii) and 4460(i)(1)(B) of the Marketplace Rules of the Nasdaq Stock
Market, Inc. (the "NASD Rules").

On May 22, 2000, the Board of Directors of the Company (the "Board")
approved the terms and conditions of the Transaction and the issuance of the
Subordinated Notes, the Convertible Notes and the shares of Common Stock
described above (the "Securities").

REASON FOR REQUEST FOR RATIFICATION

The Common Stock is listed on the Nasdaq SmallCap Market. NASD Rule
4460(i)(1)(D)(ii) (the "Nasdaq 20% Rule") requires stockholder approval prior to
the issuance of securities under certain circumstances, including in connection
with a transaction (other than a public offering) involving the sale or issuance
by the Company of Common Stock, or securities convertible into or exercisable
for Common Stock, equal to 20% or more of the Common Stock or 20% or more of the
voting power outstanding before such issuance at a price (or in the case of
convertible securities, a conversion price) less than the greater of the book or
market value of the Common Stock. The book value of the Company's Common Stock
as of March 31, 2000 was $6.32 per share. Since the Company proposes to sell its
Common Stock to Blair for $4.40 per share and the conversion price for the
Convertible Notes will be $4.75 per share, stockholder approval is required by
the Nasdaq 20% Rule. Additionally, NASD Rule 4460(i)(1)(B) (the "Nasdaq Control
Rule") requires stockholder approval of the issuance of securities by the
Company that would result in a change of control of the Company. Although Blair,
the Converting Noteholders and the Additional Purchasers (collectively, the
"Investors") will acquire in the Transaction a number of shares of Common Stock
(on a fully-diluted basis) representing 32% of the Company's voting power, and
although the Company does not believe that any change of control (whether for
purposes of the Nasdaq Control Rule or otherwise) is occurring as a result of
such transactions, there is no concrete test to determine the amount of
securities that the Company may issue to a person without triggering the Nasdaq
Control Rule. Depending on the facts and circumstances, the issuance by the
Company of securities representing less than a majority of the Company's voting
power may result in a change of control of the Company under the Nasdaq Control
Rule. The Company is seeking Stockholder approval and ratification of the
Transaction in order to ensure compliance with the Nasdaq 20% Rule and the
Nasdaq Control Rule (collectively, the "Nasdaq Rules").

In addition, because a number of directors and affiliates of directors are
participating in the transaction as either Converting Noteholders or Additional
Purchasers, the Company is seeking stockholder approval for purposes of Section
144 of the Delaware General Corporation Law (the "DGCL"). Section 144 of the
DGCL provides in part that no contract or arrangement between a corporation and
one or more of its officers or directors is void or voidable solely for the
reason that they are officers and directors or solely for the reason that
5
<PAGE> 8

any such directors participated in board meetings regarding, or voted on, such
contract or arrangement if the material facts of the relationship and contract
or arrangement are disclosed to the stockholders of the corporation and the
contract or arrangement is specifically approved in good faith by vote of the
stockholders.

Stockholder approval of the Transaction is not otherwise required as a
matter of Delaware law or other applicable laws or rules or by the Company's
Certificate of Incorporation or Bylaws.

PRINCIPAL REASONS FOR THE TRANSACTION

As a result of lower than expected operating results during the first nine
months of fiscal 2000, the Company was not in compliance with certain of the
financial covenants in both its senior bank credit facility and its Existing
Notes as of January 1, 2000 and April 1, 2000. The Company obtained a waiver
from its senior bank lenders of its second quarter financial covenant defaults
conditional on receipt of executed waivers from the holders of the Existing
Notes. The Company did not obtain a waiver of the covenant violations under its
Existing Notes as of January 1, 2000 or under either its senior bank credit
facility or its Existing Notes as of April 1, 2000. Thus, the Company continues
in technical default under both its senior bank credit facility and its Existing
Notes.

The Company amended its senior bank credit facility on February 24, 2000 in
connection with obtaining the conditional waiver of its financial covenant
violations. The amendment requires the Company to raise at least $7.5 million in
equity before July 31, 2000 in order to reduce its senior debt leverage ratio.
If the Company fails to raise $7.5 million of equity, the banks will receive up
to 1,000,000 warrants at nominal value to be issued on a schedule from August
2000 through December 2000.

In order to eliminate the technical defaults under the Existing Notes and
in order to prevent the warrants granted to the Company's banks from becoming
exercisable, the Company began evaluating various financing options to raise
equity and refinance its debt.

Prior to agreeing in principle on the terms of the Transaction, the Company
considered a number of strategic alternatives, including, among other things,
the following:

- the sale of certain of its businesses and assets;

- the issuance of Common Stock in a private placement transaction or
secondary public offering; and

- the issuance of junior subordinated debentures.

Based upon factors including, but not limited to, (i) general capital
market conditions, (ii) likelihood of transaction consummation with acceptable
terms, (iii) earnings per share dilution, (iv) likelihood of improvement in
liquidity and financial condition, and (v) income tax consequences, the Company
determined to pursue a private placement of a combination of debt and equity
with a strategic financial investor. After discussions with Blair and other
potential investors, the Company elected to pursue negotiations with Blair.
These discussions resulted in the proposed Transaction.

The Transaction will satisfy the condition imposed by the February 2000
senior bank credit facility amendment that required the Company to raise $7.5
million of equity. If the Transaction closes on or before July 31, 2000, this
will preclude the issuance of warrants to purchase 1,000,000 shares of Common
Stock at nominal value that otherwise would have been issued had the equity not
been raised. In addition, the Transaction will allow the Company to refinance
its Existing Notes with debt that matures two years later and with financial
covenants that are more acceptable to the Company. Finally, the Transaction will
provide the Company with needed liquidity.

USE OF PROCEEDS

Net proceeds from the sale of the Securities are to be used to reduce the
Company's current bank indebtedness, prepay the Existing Notes that are not
being converted pursuant to the Conversion, and for working capital and general
corporate purposes.

6
<PAGE> 9

EFFECTS OF THE TRANSACTION ON THE COMPANY AND HOLDERS OF COMMON STOCK

The approval of the Transaction will cause immediate dilution in the
current stockholders' ownership interests in the Company. The issuance of the
additional Common Stock in the Transaction or upon conversion of the Convertible
Notes issued in the Transaction may also have the effect of diluting the
earnings per share or book value per share of the outstanding shares of Common
Stock.

BOARD OF DIRECTORS RECOMMENDATIONS

The Board of Directors has reviewed and considered the terms and conditions
of the Transaction and the potential dilutive effects of the issuance of shares
of Common Stock in the Transaction and believes that the Transaction is fair to,
advisable and in the best interests of the Company and its Stockholders. FOR THE
REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY
APPROVED THE TRANSACTION AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE PROPOSAL.

FAIRNESS OPINION

Morgan Keegan was retained by the Company to render an opinion as to the
fairness of the consideration to be received by the Company from Blair in
exchange for the securities to be issued pursuant to the Blair Transaction.
Morgan Keegan was selected by the Company based on its qualifications,
expertise, reputation and knowledge of the business and affairs of the Company.
At the meeting of the Denali Board, Morgan Keegan rendered its oral opinion
that, as of May 22, 2000, and based upon and subject to various considerations,
the consideration to be received pursuant to the Blair Transaction for the
Securities is fair from a financial point of view to the Company.

THE FULL TEXT OF MORGAN KEEGAN'S WRITTEN OPINION DATED MAY 23, 2000, WHICH
SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND THE LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN, IS
ATTACHED AS APPENDIX I TO THIS PROXY STATEMENT. HOLDERS OF DENALI COMMON STOCK
ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. MORGAN
KEEGAN'S OPINION IS DIRECTED TO THE DENALI BOARD AND ADDRESSES THE FAIRNESS OF
THE CONSIDERATION TO BE RECEIVED IN THE AGGREGATE PURSUANT TO THE BLAIR
TRANSACTION, FROM A FINANCIAL POINT OF VIEW TO THE COMPANY, AND IT DOES NOT
ADDRESS ANY OTHER ASPECT OF THE TRANSACTION, NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF DENALI COMMON STOCK AS TO HOW TO VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN KEEGAN SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE OPINION.

In connection with rendering its opinion, Morgan Keegan, among other
things:

- reviewed certain publicly available financial statements, and other
business and financial information of Denali;

- reviewed certain internal financial statements and other financial and
operating data concerning Denali prepared by the management of Denali;

- analyzed certain financial forecasts prepared by the management of
Denali;

- discussed the past and current operations and financial condition and the
prospects of Denali with management of Denali;

- discussed with management how new equity capital could help Denali
achieve its operating and financial plans and potential alternatives to
raising such equity capital;

- reviewed the pro forma impact of the transaction on Denali's earnings per
share and financial ratios;

7
<PAGE> 10

- reviewed the reported prices and trading activity for the shares of the
Company's Common Stock;

- reviewed the financial terms, to the extent publicly available, of
certain comparable minority investment transactions by financial
investors;

- reviewed the proposed terms of the Blair Transaction; and

- considered such other factors and performed such other analyses as Morgan
Keegan deemed appropriate.

In arriving at its opinions, Morgan Keegan did not undertake to verify the
accuracy and completeness of, and assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by it
for the purposes of its opinion. With respect to financial forecasts provided by
Denali management, Morgan Keegan assumed that such forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgements of the future financial performance of Denali. Morgan Keegan did
not make any physical inspection or make any independent evaluation or appraisal
of any of the assets or liabilities (contingent or otherwise) of the Company nor
was Morgan Keegan furnished with any such evaluation or appraisal. In addition,
Morgan Keegan assumed, with the Company's consent, that the consummation of the
Blair Transaction will not result in a change of control of the Company. Morgan
Keegan also assumed that the Blair Transaction will be consummated substantially
in accordance with the terms described herein.

Morgan Keegan's opinion is necessarily based on financial, economic, market
and other conditions as in effect on, and the information made available to
Morgan Keegan as of the date of its opinion. Accordingly, Morgan Keegan has no
obligation to update or supplement its opinion even if later events or
information renders its opinion inaccurate. Additionally, Morgan Keegan's
opinion does not in any manner address (a) the value of the Common Stock to be
issued to Blair; or (b) the prices at which the Common Stock will trade
following the consummation of the Blair Transaction.

The following is a brief summary of certain analyses performed by Morgan
Keegan in connection with its oral opinion as of May 22, 2000 and the
preparation of its written opinion letter dated May 23, 2000.

Pro Forma Analysis of the Investment. Morgan Keegan analyzed the pro forma
impact of the Blair Transaction on earnings per share for Denali for fiscal
years 2001 through 2005. The pro forma results were calculated as if the
investment had closed at the beginning of fiscal 2001 and were based on
financial forecasts prepared by Denali management. Morgan Keegan noted that the
completion of the Transaction would be 45.8% dilutive to Denali's earnings per
share in fiscal 2001 and 41.3% dilutive to Denali's earnings per share in fiscal
2002.

Bank Leverage Ratio Analysis. Morgan Keegan analyzed the pro forma impact
of the Blair Transaction on Denali's bank leverage ratios for fiscal years 2000
through 2002. Morgan Keegan noted that the investment moderately improved
Denali's EBITDA/Interest Expense, Total Debt/EBITDA and Net Debt/Net Book
Capital bank leverage ratios, and provided incremental support for the purposes
of satisfying Denali's bank covenants.

Historical Common Stock Performance. Morgan Keegan reviewed the closing
prices and trading volumes of Denali Common Stock over the 60-day period from
March 20, 2000 to May 19, 2000 and over the 30-day period from April 20, 2000 to
May 19, 2000. Over the 60-day period, Morgan Keegan noted that the $4.40 sales
price of the Common Stock in the Blair Transaction represented a 67.3% premium
to the average closing price of Denali's Common Stock over the 60-day period and
a 100.9% premium to the 30-day average closing price.

Discounted Cash Flow Analysis. Morgan Keegan reviewed the present value per
share of Denali's theoretical future trading values based on financial forecasts
provided by Denali management for the fiscal years 2001 through 2005. Morgan
Keegan used the following methodology to calculate the present value per share
of Denali's future trading price: EBITDA multiples of 4.7-6.7x, and discount
rates ranging from

8
<PAGE> 11

17.3-19.3%. Morgan Keegan calculated the present value of future theoretical
trading values ranging from $(0.86) to $5.44 per share of Common Stock.

Analysis of Selected Precedent Significant Influence Transactions. Morgan
Keegan reviewed the terms of a number of significant "influence" transactions,
in which a significant minority stake of a company was acquired, and compared
certain statistics for the significant influence transactions to the relevant
statistics for the Blair Transaction.

No transaction utilized as a comparison in the precedent significant
influence transactions analysis is identical to the Blair Transaction. In
evaluating the precedent significant influence transactions, Morgan Keegan made
judgments and assumptions regarding industry performance, general business,
economic market and financial conditions and other matters, many of which are
beyond the control of Denali, such as the impact of competition on Denali and
the industry generally, industry growth and the absence of any material adverse
change in the financial condition and prospects of Denali or the industry or in
the financial markets in general.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinions, Morgan Keegan considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, Morgan Keegan
believes that selecting any portion of Morgan Keegan's analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinions. In addition, Morgan Keegan may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Morgan Keegan's view of the actual value of Denali.

In performing its analysis, Morgan Keegan made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Denali. The analyses
performed by Morgan Keegan are not necessarily indicative of actual values,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Morgan Keegan's
analysis of the fairness to the Company from a financial point of view of the
Blair Transaction and were provided to the Denali Board of Directors in
connection with the delivery of Morgan Keegan's opinions. The analyses do not
purport to be appraisals of value or to reflect the prices at which Denali
Common Stock might actually trade now or in the future in the open market. In
addition, as described above, the Morgan Keegan oral opinion as of May 22, 2000
was one of the many factors taken into consideration by the Denali Board of
Directors in making its determination to approve the Transaction. The terms of
the Blair Transaction were determined through arm's-length negotiations between
Denali and Blair and were approved by the Denali Board of Directors.

In arriving at its opinions, Morgan Keegan was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
all or part of Denali or any of its assets, nor did Morgan Keegan participate in
the negotiations or structuring of the Blair Transaction.

Morgan Keegan is an internationally recognized investment banking and
advisory firm. Morgan Keegan, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for corporate, estate and other purposes. In the
ordinary course of its trading, brokerage and financing activities, Morgan
Keegan and its affiliates may, at any time, have long or short positions in, and
buy and sell the debt or equity securities and senior loans of Denali for its
account or the account of its customers. In the past, Morgan Keegan and its
affiliates have provided financial advisory services to Denali and have received
fees for the rendering of these services.

Pursuant to an engagement letter dated March 29, 2000, Denali will pay
Morgan Keegan a fairness opinion fee of $115,000. Denali has also agreed to
reimburse Morgan Keegan for its expenses incurred in connection with the
services provided by Morgan Keegan. Denali has agreed to indemnify Morgan Keegan
and its affiliates, their respective directors, officers, agents and employees,
and each person, if any, controlling

9
<PAGE> 12

Morgan Keegan or any of its affiliates against certain liabilities and expenses,
including liabilities under the federal securities laws arising out of or in
connection with Morgan Keegan's engagement and any related transactions.

SUMMARY OF THE TRANSACTION

Pursuant to the Blair Transaction, Blair will purchase from the Company
$11,000,000 in aggregate principal amount of Subordinated Notes, $9,000,000 in
aggregate principal amount of Convertible Notes and 1,818,182 shares of Common
Stock for $4.40 per share, for an aggregate purchase price of $28,000,000. The
terms and conditions of the Blair Transaction will be governed by an Investment
Agreement to be executed between Blair and the Company (the "Investment
Agreement").

It will be a condition to Blair's investment in the Company that the
Company prepay its currently outstanding $15.0 million of Existing Notes, and
that the Company use its best efforts to repurchase all of the Warrants. In
order to satisfy this condition, the Company intends to enter into an agreement
with some holders of the Existing Notes, who together hold an aggregate of $4.5
million of the Existing Notes and Warrants to purchase an aggregate of 161,353
shares of the Company's Common Stock at $7.54 per share, under which these
holders will agree (1) to convert their Existing Notes and Warrants to Common
Stock, (2) to convert their Existing Notes and Warrants to a combination of
Subordinated Notes, Convertible Notes and Common Stock, or (3) to have their
Existing Notes prepaid and their Warrants repurchased. Certain of these holders
are directors of the Company or affiliates of directors of the Company. The
Company intends to prepay the Existing Notes held by the remaining holders,
totaling approximately $10.5 million principal and $628,500 prepayment penalty,
and to use its best efforts to negotiate for the repurchase of the Warrants held
by these holders.

As a result of the Transaction, the Company will receive approximately
$29.2 million of cash proceeds and will retire approximately $4.2 million of its
Existing Notes and Warrants to purchase 150,656 shares of its Common Stock in
exchange for the issuance of approximately $12.2 million of Subordinated Notes,
approximately $10.0 million of Convertible Notes and approximately 2.6 million
shares of Common Stock. The Company will use the proceeds primarily to prepay
the remaining approximately $10.8 million principal and $646,500 prepayment
penalty of its Existing Notes, to repay amounts under its senior bank credit
facility, and for working capital and general corporate purposes.

In addition, the Company will grant certain demand and "piggy-back"
registration rights which will provide for the registration of the Common Stock
issued in the Transaction and the Common Stock issuable upon conversion of the
Convertible Notes.

THE BLAIR TRANSACTION

The Investment Agreement

Pursuant to the Investment Agreement, Blair will purchase from the Company
$11,000,000 in aggregate principal amount of Subordinated Notes, $9,000,000 in
aggregate principal amount of Convertible Notes and 1,818,182 shares of Common
Stock, for an aggregate purchase price of $28,000,000.

The Investment Agreement will provide for representations and warranties of
the Company that are usual and customary for transactions of this nature,
including representations and warranties concerning the absence of conflicts
with organizational documents and agreements, the financial condition of the
Company, the business and properties of the Company, the absence of material
litigation, the absence of unreported liabilities and the absence of
environmental liabilities.

The Investment Agreement will include covenants that will require
compliance by the Company with certain financial ratios, which have not yet been
determined pending renegotiation of the Company's financial

10
<PAGE> 13

covenants under its senior bank credit agreement. In addition, the Company
expects that the Investment Agreement will include limitations on the Company's
ability to do, among other things, any of the following:

- make dividend payments and stock repurchases;

- incur indebtedness;

- create or assume liens;

- guarantee obligations;

- sell assets;

- incur capital expenditures;

- make investments;

- prepay indebtedness; and

- enter into new lines of business.

The Investment Agreement is expected to also obligate the Company to
provide certain financial and other information on a monthly, quarterly and
annual basis and to require that the Company maintain and operate its properties
in accordance with industry practice and in material compliance with its
contracts and agreements and to maintain its corporate existence. In addition,
the Investment Agreement will provide that Blair shall have the right to
designate two members of the board of directors of the Company.

The Investment Agreement is expected to provide that the obligation of the
Investors to complete the Blair Transaction will be subject to satisfaction of
certain conditions on or before consummation of the Blair Transaction,
including, without limitation, the following:

- the continuing accuracy of the Company's representations and warranties;

- the performance by the Company of its obligations under the Investment
Agreement and, giving effect to the issuance of the Notes, no default
shall have occurred and be continuing;

- the execution of guarantees of the Notes by each Subsidiary (other than
Denali Welna Europe B.V. and its subsidiaries);

- the Blair Transaction shall be permitted by, and shall not violate, any
laws or regulations;

- the absence of any action or proceeding restraining or prohibiting the
Blair Transaction;

- the amendment of the Company's senior bank credit facility on terms
acceptable to Blair;

- the pledge of 65% of the capital stock of Denali Welna to the holders of
the Notes;

- the execution and delivery of a registration rights agreement by the
parties thereto;

- the contemporaneous closing of the Conversion;

- the repayment of the Existing Notes not being converted pursuant to the
Conversion;

- the completion of environmental due diligence by Blair; and

- the absence of any material adverse change.

The Company and the Investors will likely agree to indemnify and save the
other party harmless from and against any and all claims, damages, actions,
losses (other than lost profits), costs, liabilities or expenses (including
professional fees and disbursements), which may be brought against the other
party as a result of, or arising out of the nonfulfillment of, any agreement or
covenant by such party, or any inaccuracy in or breach of any of such party's
representations or warranties contained in the Investment Agreement.

11
<PAGE> 14

Registration Rights

The securities issued to Blair in the Blair Transaction will be
unregistered and will be subject to transfer restrictions imposed by the
Securities Act of 1933, as amended (the "Securities Act"). Under the Securities
Act, these shares may not be offered, sold or transferred except:

- pursuant to an exemption from registration under the Securities Act, or

- pursuant to an effective registration statement under the Securities Act.

Pursuant to the registration rights agreement, Blair will be granted
certain demand and piggyback registration rights to require the Company to
register for resale in the future the shares of Common Stock purchased by Blair
in the Blair Transaction and the shares of Common Stock issuable upon conversion
of the Convertible Notes.

The registration rights agreement will contain indemnification provisions
customary in an agreement of this type covering matters related to, but not
limited to, violations of securities laws. In addition, the registration rights
agreement will provide that expenses incurred in connection with any demand or
piggyback registrations will be paid by the Company.

Deferred Restructuring Fee

If the Company's Enterprise Value (as defined below) on the earlier of June
30, 2005, a change in control of the Company or the sale of the Company is less
than certain specified values, the Company will pay Blair an additional
restructuring fee. The amount of this deferred fee will be equal to $0.20 per
$1.00 shortfall in Enterprise Value below such specified value, provided that
such deferred fee shall not exceed $2,000,000. Enterprise Value means (1) six
times the Company's prior 12 month's consolidated earnings before interest,
taxes, depreciation and amortization, less (2) its average indebtedness for the
prior month, plus (3) its average level of cash and cash equivalents over the
prior month.

Designation of Two Directors

Pursuant to the terms of the Investment Agreement, the Company will appoint
two directors designated by Blair to the Board of Directors promptly after the
closing of the Transaction, and will take actions to ensure that these two
directors are appointed to the Audit Committee, Compensation Committee and
Finance Committee of the Board.

CONVERSION AND PREPAYMENT OF EXISTING NOTES AND REPURCHASE OF WARRANTS;
ADDITIONAL SUBSCRIPTIONS.

It will be a condition to Blair's investment in the Company that the
Company prepay its currently outstanding $15.0 million of Existing Notes, and
that the Company use its best efforts to repurchase all of the Warrants. In
order to satisfy this condition, the Company intends to enter into an agreement
with some of the holders of the Existing Notes, who together hold an aggregate
of $4,524,998 of the Existing Notes and Warrants to purchase an aggregate of
161,353 shares of the Company's Common Stock at $7.54 per share, under which
these holders will agree (1) to convert their Existing Notes and Warrants to
Common Stock, (2) to convert their Existing Notes and Warrants to a combination
of Subordinated Notes, Convertible Notes and Common Stock, or (3) to have their
Existing Notes prepaid and their Warrants repurchased. Certain of these holders
are directors of the Company or affiliates of directors of the Company. The
Company intends to prepay the Existing Notes held by the remaining holders,
totaling approximately $10.5 million principal and $628,500 prepayment fee, and
to use its best efforts to negotiate for the repurchase of the Warrants held by
these holders.

The Company intends to agree with the following beneficial owners to
convert their Existing Notes and Warrants solely into shares of Common Stock.
The number of shares of Common Stock issuable to each such holder will be
calculated by dividing (a) the sum of (1) the principal amount of the holder's
Existing Notes,

12
<PAGE> 15

(2) a 6% prepayment penalty, and (3) $1.00 for each Warrant, by (b) a share
price of $4.40 per share, as set forth below:

<TABLE>
<CAPTION>
CURRENTLY HELD ISSUED IN EXCHANGE
------------------------- ------------------
HOLDER EXISTING NOTES WARRANTS COMMON STOCK
------ -------------- -------- ------------------
<S> <C> <C> <C>
EMC Equity Fund, L.P.(1).............................. $1,500,000 53,487 373,520
Simmons Family Trust(2)............................... $ 166,666 5,943 41,502
Thomas Dudley Simmons, Jr. Marital Trust(2)........... $ 166,666 5,943 41,502
Mr. Thomas D. Simmons, Jr.(3)......................... $ 166,666 5,943 41,502
Mr. Joel V. Staff(3).................................. $ 250,000 8,915 62,253
Anne Allen Symonds Revocable Trust(4)................. $ 125,000 4,458 31,127
</TABLE>

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

(1) Mr. Philip Burguieres, who was a director of the Company until April 27,
2000, is the Chief Executive Officer of EMC Holdings, LLC, the general
partner of EMC Equity Fund, L.P.

(2) Mr. Thomas D. Simmons, Jr., a director of the Company, is a co-trustee of
the Simmons Family Trust.

(3) Each of Mr. Simmons and Mr. Staff is a director of the Company.

(4) Anne Allen Symonds, the spouse of Mr. J. Taft Symonds, a director of the
Company, is the trustee of the Anne Allen Symonds Revocable Trust.

The Company intends to agree with the following beneficial owners to
convert their Exiting Notes and Warrants into a combination of Subordinated
Notes, Convertible Notes, and shares of Common Stock. The aggregate value of new
securities issued to each holder, based on the principal amount of the
Subordinated Notes and the Convertible Notes and a price per share of $4.40 for
each share of Common Stock, will be equal to the principal amount of the
Existing Notes held by such holder, as set forth below:

<TABLE>
<CAPTION>
CURRENTLY HELD ISSUED IN EXCHANGE
--------------------- -----------------------------------
EXISTING SUBORDINATED CONVERTIBLE COMMON
HOLDER NOTES WARRANTS NOTES NOTES STOCK
------ ---------- -------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
Cockrell Investment Partners, L.P.(1)....... $1,500,000 53,487 $589,286 $482,143 97,403
Symonds Trust Co., Ltd.(2).................. $ 125,000 4,457 $ 49,107 $ 40,179 8,117
Other Investors............................. $ 225,000 8,023 $ 88,393 $ 72,322 14,611
</TABLE>

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

(1) Mr. Ernest H. Cockrell, a director of the Company, beneficially owns 35.3%
of and is Chairman of the general partner of Cockrell Investment Partners,
L.P.

(2) Mr. J. Taft Symonds, a director of the Company, is the President of the
Symonds Trust Co., Ltd.

The Company intends to agree with two beneficial owners, who together hold
$300,000 of Existing Notes and 10,697 Warrants, to prepay their Existing Notes
in an amount equal to their principal amount plus a 6% prepayment penalty, and
to repurchase their Warrants for $1.00 for each Warrant.

In addition, two holders of the Existing Notes and the Warrants will
subscribe for additional Subordinated Notes, Convertible Notes and shares of
Common Stock on the same terms as Blair will invest, as set forth in the
following table:

<TABLE>
<CAPTION>
ADDITIONAL SUBORDINATED CONVERTIBLE
HOLDER INVESTMENT NOTES NOTES COMMON STOCK
------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cockrell Investment Partners, L.P.(1)....... $1,142,000 $448,643 $367,071 74,156
Other Investor.............................. $ 18,000 $ 7,071 $ 5,786 1,169
</TABLE>

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

(1) Mr. Ernest H. Cockrell, a director of the Company, beneficially owns 35.3%
of and is Chairman of the general partner of Cockrell Investment Partners,
L.P.

13
<PAGE> 16

DESCRIPTION OF THE NOTES

The Company will issue to Blair, the Converting Noteholders and the
Additional Purchasers $12,182,500 in aggregate principal amount of Subordinated
Notes and $9,967,500 in aggregate principal amount of Convertible Notes.

The Notes will bear interest at 12% per annum from the date of issuance.
Accrued interest on the Notes will be due and payable until maturity quarterly
in arrears on the last day of each September, December, March and June,
beginning on September 30, 2000. In addition, all accrued and unpaid interest
shall be paid upon the payment in full of the entire outstanding principal
amount of the Notes and, if payment in full is not paid when due, thereafter on
demand. The principal amount of the Notes will be due and payable on June 30,
2008.

Subordination

The Notes will be unsecured general obligations of the Company and will be
subordinate in right of payment to all indebtedness of the Company to the
lenders under its senior bank credit facility and certain other lenders, subject
to certain exceptions.

Prepayment

Except as provided below and except upon acceleration upon default, the
Company will not be permitted to prepay the Subordinated Notes prior to June 30,
2003, and will not be permitted to prepay the Convertible Notes prior to June
30, 2005.

Notwithstanding the foregoing, the Investment Agreement will provide that
if, at any time, there is a change in control or the Company consummates a sale
of the Company, the Company may, at its option prepay the Notes, in whole but
not in part. With respect to the Convertible Notes, the Company may only prepay
the Convertible Notes if (i) the Company otherwise then satisfies certain
conditions relating to the conversion of the Convertible Notes, and (ii) the
holders shall have the right and opportunity to convert the Convertible Notes
into shares of Common Stock, rather than accepting prepayment thereof. In the
event of any prepayment of the Notes in connection with a change in control or a
sale of the Company, the Company shall pay all accrued interest and all other
fees, expenses and amounts payable by the Company to the holders, as well as the
prepayment fee described below.

In addition, on or after July 1, 2003, the Company may at its option prepay
all or part of the Subordinated Notes; provided, however, any such prepayment
must be funded solely through the Company's cash flow from operations. On or
after July 1, 2005, the Company may, at its option, prepay all of the
Convertible Notes; provided, however, all of the following conditions (the
"Conversion Conditions") are satisfied:

(i) the Company must provide at least 20 days' prior written notice to
the holders and allow the holders to convert into shares of Common Stock
that portion of the Convertible Notes the Company proposes to prepay;

(ii) the average closing price for the Common Stock on Nasdaq or the
exchange on which the Common Stock is then traded, for the 90-day period
preceding such notice, must be in excess of a specified premium over the
conversion price; and

(iii) the Company must have received an undertaking from a nationally
recognized investment banking firm regarding the underwriting of a public
offering of the conversion shares and to institute research coverage of the
Company in connection with such offering.

Partial prepayments of principal on the Subordinated Notes shall be not
less than $500,000 of the issue amount and shall be a multiple of $500,000 of
the issue amount, and the Company shall pay therewith all accrued interest.

The Investment Agreement will provide that the Company will be obligated to
pay the holders of the Subordinated Notes a prepayment fee of 3% of the amount
prepaid on or prior to June 30, 2003 and 2% of the
14
<PAGE> 17

amount prepaid on or after July 1, 2003 and on or prior to June 30, 2004. The
prepayment fee shall be zero after July 1, 2004 or in the event of any change of
control or sale of the Company. In the event of any prepayment, the Company
shall also pay all other fees, expenses and amounts payable by the Company to
the holders.

The Investment Agreement will provide that the Company will not be
permitted, and will not permit any Affiliate, to purchase, redeem, prepay or
otherwise acquire, directly or indirectly, any of the outstanding Notes except
upon the payment or prepayment of the Notes in accordance with the terms of the
Agreement and the Notes.

Put Option on Change of Control

In the event of any change of control of the Company or sale of all or
substantially all of the assets of the Company, the holders of the Notes will
have the right to require the Company to prepay the Notes. The Company will not
be required to pay any prepayment penalty in connection with the exercise of
this put option by any holder of the Notes.

Guarantees and Pledge

The Notes will be unconditionally guaranteed by each of the Company's
existing subsidiaries other than Denali Welna and its subsidiaries pursuant to
subordinated subsidiary guarantees. The Notes will also be secured by a pledge
creating a first perfected security interest in 65% of the capital stock of
Denali Welna.

Defaults

The Investment Agreement will provide that if any of the following
conditions or events occur and are continuing:

- the Company defaults in the payment of any principal or prepayment
premium, if any, on the Notes when the same becomes due and payable;

- the Company defaults in the payment of any interest on the Notes for more
than three days after the same becomes due and payable;

- the Company defaults in the performance of or compliance with any of its
financial covenants and such default is not remedied within ten days
after a responsible officer obtains knowledge of such default;

- the Company defaults in the performance of or compliance with any other
term contained in the Investment Agreement and such default is not
remedied within 30 days after a responsible officer obtains knowledge of
such default;

- any representation or warranty of the Company proves to have been false
or incorrect in any material respect on the date as of which made;

- (i) the Company or any subsidiary is in default (as principal or as
guarantor or other surety) in the payment of any principal of or premium
or prepayment premium or interest on any indebtedness (other than the
Notes) such that such indebtedness has become due and payable before its
stated maturity or before its regularly scheduled dates of payment, or
(ii) the Company or any subsidiary is in default in the performance of or
compliance with any term of any indebtedness outstanding in an aggregate
principal amount of at least $500,000 such that such indebtedness has
become due and payable before its stated maturity or before its regularly
scheduled dates of payment, or (iii) as a consequence of the occurrence
or continuation of any event or condition (other than the passage of time
or the right of the holder of indebtedness outstanding in an aggregate
principal amount of at least $500,000 to convert such indebtedness into
equity interests or a sale of assets or other transaction that is
permitted if made in connection with a repayment of indebtedness), the
Company or any subsidiary has become obligated to purchase or repay such
indebtedness before its stated maturity or before its regularly scheduled
dates of payment; or

15
<PAGE> 18

- a final judgment or judgments not covered by insurance (as to which the
insurer has admitted liability in writing) for the payment of money
aggregating in excess of $500,000 are rendered against one or more of the
Company and its subsidiaries which judgments are not, within 60 days
after entry thereof, bonded, discharged or stayed pending appeal, or are
not discharged within 90 days after the expiration of such stay;

- any subsidiary guarantee shall cease to be in full force and effect as an
enforceable obligation of the respective subsidiary guarantor or any of
the subsidiary guarantors shall assert that its subsidiary guarantee is
unenforceable in any material respect; or

- the pledge shall cease to be, or shall be asserted by the Company or any
subsidiary not to be, a valid, perfected, first security interest in the
securities covered thereby;

then the majority holders may at any time at its or their option, by notice or
notices to the Company, declare all the Notes then outstanding to be immediately
due and payable.

The Investment Agreement will further provide that if any of the following
conditions or events occur and are continuing:

- the Company or any subsidiary (i) is generally not paying, or admits in
writing its inability to pay, its indebtedness as it becomes due, (ii)
files, or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of any
bankruptcy, insolvency, reorganization, moratorium or other similar law
of any jurisdiction, (iii) makes an assignment for the benefit of its
creditors, (iv) consents to the appointment of a custodian, reviewer,
trustee or other officer with similar powers with respect to it or with
respect to any substantial part of its property, or (v) is adjudicated as
insolvent or to be liquidated;

- a court or governmental authority of competent jurisdiction enters an
order appointing, without consent by the Company or any subsidiary, a
custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its property, or
constituting an order for relief or approving a petition for relief or
reorganization or any other petition in bankruptcy or for liquidation or
to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or liquidation of
the Company or any such subsidiary, or any such petition shall be filed
against the Company or any such subsidiary and such petition shall not be
dismissed within 60 days;

then all of the Notes then outstanding shall automatically become immediately
due and payable.

Upon the Notes becoming due and payable upon an event of default, whether
automatically or by declaration, such Notes will then mature and the entire
unpaid principal amount of such Notes, plus (a) all accrued and unpaid interest
thereon and (b) the prepayment fee (to the full extent permitted by applicable
law) determined in respect of such principal amount as if such Note were being
prepaid on such date, shall all be immediately due and payable.

Conversion of Convertible Notes

Each holder of the Convertible Notes will have the right at any time prior
to the maturity of the Notes, to convert all or any portion of the principal
amount thereof into shares of Common Stock at the conversion price of $4.75 per
share (subject to adjustment as described below).

The conversion price will be subject to adjustment if the Company issues or
sells any shares of its Common Stock or any other class of capital stock or
other security, the conversion or exercise of which would give the holder the
right to acquire Common Stock (including warrants, options, subscriptions or
purchase rights), without consideration or at a price per share less that the
fair market value of the Common Stock.

The conversion price will also be subject to adjustment on the earlier of
June 30, 2005, a change in control of the Company or a sale of the Company. On
the first to occur of these events, if the Company's Enterprise Value (as
defined below) is less than certain specified values, then the conversion price
will be

16
<PAGE> 19

reduced (but not below $4.40, except as a result of adjustments described in the
previous paragraph) at a rate of $0.025 per $1,000,000 of such deficit.
Enterprise Value means (1) six times the Company's prior 12 month's consolidated
earnings before interest, taxes, depreciation and amortization, less (2) its
average indebtedness for the prior month, plus (3) its average level of cash and
cash equivalents over the prior month.

DESCRIPTION OF THE CAPITAL STOCK

The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,004,800 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock").

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. The classification of the 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 1,004,800 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 SmallCap
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

17
<PAGE> 20

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 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 Harris Trust and Savings Bank,
Houston, Texas. Its telephone number is 713-546-9706.

IMPACT OF STOCKHOLDERS' FAILURE TO APPROVE THE TRANSACTION

If the Transaction is not approved by the stockholders, the Company will be
required to seek additional equity or debt financing from other sources to
continue to implement its business plan. Should the Company be unable to raise
additional incremental funds, the Company would be required to alter
substantially its business plan, which could include, without limitation,
divesting its assets. In addition, if the Company is unable to raise $7.5
million in equity by July 31, 2000, the warrants with nominal exercise price
granted to the Company's senior bank credit facility lenders will begin to
become exercisable.

NO APPRAISAL RIGHTS

Under Delaware law, objecting Stockholders will have no appraisal,
dissenters' or similar rights (i.e., the right to seek a judicial determination
of the "fair value" of the Common Stock and to compel the Company to

18
<PAGE> 21

purchase their Common Stock for cash in that amount) with respect to the
Transaction, nor will the Company voluntarily accord such rights to
Stockholders. Therefore, approval by the requisite number of shares of the
matters presented at the Special Meeting will bind all Stockholders and
objecting Stockholders will be able to liquidate their Common Stock only by
selling it in the market.

VOTING REQUIREMENTS

Each holder of Common Stock is entitled to one vote per share held. The
affirmative vote of holders of a majority of the outstanding shares of Common
Stock of the Company entitled to vote and present in person or by proxy at the
Special Meeting is required for approval of this Proposal, provided that the
number of shares present in person or by proxy constitutes a quorum. In the
event that a quorum is not present or represented at the Special Meeting, the
stockholders entitled to vote at the meeting present in person or by proxy shall
have the power to adjourn the meeting until a quorum shall be present or
represented. Proxies solicited by the Board of Directors that are returned
without indicating a voting preference will be voted for approval of this
Proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSAL.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the fiscal year 2000 to May 3, 2000, the Company purchased
approximately $57,406 of calcium carbonate ("brine") from Tetra Technologies,
Inc. J. Taft Symonds, a director of the Company, is the Chairman of the Board of
Tetra Technologies, and Stephen T. Harcrow, the Company's Chairman of the Board
and Chief Executive Officer until November 16, 1998, was on the Board of
Directors of Tetra Technologies. All of the brine purchases were made on a spot
basis without the benefit of a contract.

During the fiscal year 2000, as of May 3, 2000, the Company sold
approximately $29,214 of steel tanks to Pennzoil Company and $24,832 of steel
tanks to Pennzoil-Quaker State Company. Ernest H. Cockrell, a director of the
Company, is on the Board of Directors of Pennzoil-Quaker State Company.

Certain directors of the Company or entities affiliated with them are
participating in the Transaction. See Authorization of Transaction -- Conversion
and Prepayment of Existing Notes and Repurchase of Warrants; Additional
Subscriptions.

19
<PAGE> 22

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this document.

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19, YEAR ENDED NINE MONTHS ENDED
1994 (DATE OF ----------------------------------------- --------------------
INCEPTION) TO JUNE 29, JUNE 28, JUNE 27, JULY 3, MARCH 27, APRIL 1,
JULY 1, 1995 1996 1997 1998 1999 1999 2000
-------------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues......................... $17,799 $53,354 $71,101 $ 99,897 $148,760 $110,216 $144,063
Cost of revenues..................... 13,473 43,518 57,268 77,273 110,957 82,649 110,702
------- ------- ------- -------- -------- -------- --------
Gross profit......................... 4,326 9,836 13,833 22,624 37,803 27,567 33,361
Selling, general and administrative
expenses........................... 3,771 9,604 11,874 17,843 27,244 20,571 28,882
Restructuring and non-recurring
charges............................ -- -- -- -- -- -- 2,681
Non-recurring compensation expense... -- -- -- 2,312 682 682 --
------- ------- ------- -------- -------- -------- --------
Operating income..................... 555 232 1,959 2,469 9,877 6,314 1,798
Interest expense..................... 671 1,783 2,058 1,614 3,199 2,210 6,646
Interest income...................... -- (65) (111) (118) (124) (35) (170)
Other income, net.................... (72) (206) (598) (489) (453) (173) (35)
Put warrant valuation adjustment..... -- -- -- -- -- -- (1,198)
------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes.... (44) (1,280) 610 1,462 7,255 4,312 (3,445)
Income tax provision (benefit)....... (1) (446) 293 1,352 2,854 1,635 (1,701)
------- ------- ------- -------- -------- -------- --------
Net income (loss) before
extraordinary item................. (43) (834) 317 110 4,401 2,677 (1,744)
Extraordinary income (loss) on early
extinguishment of debt, net of
income tax......................... -- -- -- 219 (281) (281) --
Minority interest.................... -- -- -- -- -- -- 253
------- ------- ------- -------- -------- -------- --------
Net income (loss).................... (43) (834) 317 329 4,120 2,396 (1,997)
Dividends on Series A Preferred
Stock.............................. (60) (120) (120) (30) -- -- --
------- ------- ------- -------- -------- -------- --------
Net income (loss) attributable to
Common Stock....................... $ (103) $ (954) $ 197 $ 299 $ 4,120 $ 2,396 $ (1,997)
======= ======= ======= ======== ======== ======== ========
Net income (loss) per common share --
basic and diluted.................. $ (0.05) $ (0.44) $ 0.09 $ 0.08 $ 0.84 $ 0.49 $ (0.36)
======= ======= ======= ======== ======== ======== ========
Weighted average common shares
outstanding assuming dilution...... 2,078 2,185 2,198 3,875 4,888 4,869 5,504
======= ======= ======= ======== ======== ======== ========
CASH FLOW DATA:
Net cash provided by (used in)
operating activities............... $ 3,789 $ (109) $ 625 $ 3,854 $ 7,239 $ 1,936 $ (3,806)
Net cash used in investing
activities......................... (7,527) (5,430) (4,631) (31,126) (51,327) (8,420) (7,763)
Net cash provided by financing
activities......................... 4,737 4,664 4,212 27,117 45,737 6,416 14,383
OTHER DATA:
Depreciation and amortization........ $ 354 $ 913 $ 1,221 $ 1,692 $ 3,260 $ 2,381 $ 5,212
EBITDA(2)............................ 981 1,416 3,889 7,080 14,396 9,585 9,895
</TABLE>

20
<PAGE> 23

<TABLE>
<CAPTION>
AS OF AS OF
--------------------------------------------------- --------------------
JULY 1, JUNE 29, JUNE 28, JUNE 27, JULY 3, MARCH 27, APRIL 1,
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 3,192 $ 5,649 $ 8,019 $14,141 $(38,626) $ 17,973 $(45,855)
Total assets.............................. 21,814 30,318 41,084 80,382 176,575 108,080 179,415
Total debt................................ 13,810 18,661 24,024 29,896 92,229 47,421 81,988
Series A Preferred Stock (redeemable)..... 1,200 1,200 1,200 -- -- -- --
Stockholders' equity (deficit)............ $ 216 $ (738) $ (541) $28,674 $ 38,569 $ 42,978 $ 35,128
</TABLE>

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

(1) The Company uses a 52- or 53-week year-end ending on the Saturday closest to
June 30. The fiscal year ended July 3, 1999 was a 53-week year.

(2) EBITDA represents consolidated net income before interest expense, income
tax, depreciation and amortization, non-recurring compensation expense and
extraordinary items. 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.

21
<PAGE> 24

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

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

OVERVIEW

Denali Incorporated is a provider of products and services for handling
critical fluids, which are liquids, liquid mixtures, and slurries that are
economically valuable or potentially hazardous to the environment. The Company
is a manufacturer of fiberglass-composite underground storage tanks (USTs);
steel aboveground storage tanks (ASTs); and engineered fiberglass-reinforced
plastic-composite products for corrosion-resistant applications.

Since inception in 1994, the Company has acquired twelve 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.

Containment Products Group -- "Containment Solutions"

The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite UST business of Owens
Corning.

In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover Containment, Inc. ("Hoover"), a manufacturer of steel
rectangular ASTs. 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 known as Containment Solutions.

Engineered Products Group -- "Specialty Solutions"

In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered FRP products, as the first of the Company's
Engineered Products Group.

In October 1997, the Company acquired SEFCO Inc. ("SEFCO"), a manufacturer
of engineered field-erected aboveground steel tanks, and also acquired
GL&V/LaValley Industries, Inc. ("LaValley") (subsequently named "Ershigs
Biloxi"), a manufacturer of engineered FRP products.

In May 1998, the Company acquired CC&E, a leading North American field
constructor of fiberglass-reinforced plastic products and integrated the
operations into Ershigs.

In June 1998, the Company acquired Fibercast Company, a leading
manufacturer of fiberglass-reinforced plastic piping systems specializing in
highly corrosive environments.

In November 1998, the Company acquired Plasti-Fab, Inc., a leader in
providing fiberglass-reinforced flumes and metering stations to the water and
wastewater industries.

In February 1999, the Company acquired Belco Manufacturing Company, Inc.
and certain assets and assumed certain liabilities of S. Jones Limited
Partnership (collectively "Belco"). Belco manufactures engineered
fiberglass-reinforced plastic tanks, vessels and piping systems. Belco's
products are sold primarily into the water/wastewater and oil and gas industries
where corrosion-resistant products are needed.

On September 3, 1999, the Company acquired 67.5% of the issued and
outstanding stock of Manantial Chile S.A., a company that designs, equips,
installs and commissions industrial and municipal water and wastewater treatment
plants and systems.

22
<PAGE> 25

Belco, Fibercast, Ershigs, SEFCO, Plasti-Fab and Manantial form the
Company's Engineered Products Group known as Specialty Solutions.

On July 1, 1999, the Company acquired Welna, N.V., a company which operates
through two divisions. Welna Synthetics designs, manufactures, and installs all
forms of FRP pipe systems, vessels and other related equipment requiring high
levels of corrosion resistance. Welna Trade is a distribution operation that
specializes in high quality products and engineered systems for power
generation, water treatment, and paper and chemical processing industries.
Welna's operations had no effect on the Company's operating results for fiscal
year 1999. Welna's balance sheet has been consolidated as of July 3, 1999.

On November 11, 1999, the Company acquired all of the issued and
outstanding stock of HP Valves, a valve manufacturer located in Oldenzaal, The
Netherlands.

The following table indicates the Company's net revenues by segment for
fiscal 1997, 1998 and 1999 and for the nine months ended April 1, 2000 (in
millions):

<TABLE>
<CAPTION>
YEAR ENDED NINE
-------------------------------------------- MONTHS ENDED
JUNE 28, 1997 JUNE 27, 1998 JULY 3, 1999 APRIL 1, 2000
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET REVENUES BY SEGMENT:
Containment Solutions.............. $64.8 $71.5 $ 93.8 $ 43.9
Specialty Solutions................ 6.3 28.4 55.0 50.1
Welna.............................. -- -- -- 50.0
----- ----- ------ ------
Total net revenues....... $71.1 $99.9 $148.8 $144.0
===== ===== ====== ======
</TABLE>

RESULTS OF OPERATIONS

The following table sets forth for fiscal 1997, 1998, 1999 and for the nine
months ended April 1, 2000, the percentage relationship to net revenues of
certain expenses and earnings:

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
------------------------------------------------------------
YEAR ENDED NINE
-------------------------------------------- MONTHS ENDED
JUNE 28, 1997 JUNE 27, 1998 JULY 3, 1999 APRIL 1, 2000
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 80.5 77.4 74.6 76.8
----- ----- ----- -----
Gross profit.................................. 19.5 22.6 25.4 23.2
Selling, general and administrative
expenses.................................... 16.7 17.8 18.3 20.0
Restructuring and non-recurring charges....... -- -- -- 1.9
Non-recurring compensation expense............ -- 2.3 0.5 --
----- ----- ----- -----
Operating income.............................. 2.8 2.5 6.6 1.3
Interest expense.............................. 2.9 1.6 2.1 4.6
Interest income............................... (0.2) (0.1) (0.1) (0.1)
Put warrant value adjustment.................. -- -- -- (0.8)
Other income, net............................. (0.8) (0.5) (0.3) --
----- ----- ----- -----
Income (loss) before income taxes............. 0.9 1.5 4.9 (2.4)
Income tax provision (benefit)................ 0.4 1.4 1.9 (1.2)
----- ----- ----- -----
Net income (loss) before extraordinary item... 0.5% 0.1% 3.0% (1.2%)
===== ===== ===== =====
</TABLE>

Nine months ended April 1, 2000 compared with nine months ended March 27, 1999

Net sales increased $33.8 million, or 30.7%, to $144.0 million in the first
nine months of fiscal 2000 from $110.2 million in the same period of fiscal
1999. A total of $57.5 million of the increase resulted from the inclusion of
the new acquisitions (Welna, Manantial, HP Valves, Belco and Plasti-Fab). The
remaining

23
<PAGE> 26

$23.7 million decrease in sales primarily resulted from a $26.6 million decrease
in sales at Containment Solutions from $70.5 million in the fiscal 1999 period
to $43.9 million in the fiscal 2000 period due to less demand in the petroleum
equipment industry. The decrease at Containment Solutions was offset by an
increase at Specialty Solutions of approximately $2.9 million.

Gross profit increased $5.8 million, or 21.0%, to $33.4 million in the
fiscal 2000 period from $27.6 million in the fiscal 1999 period. Approximately
$14.5 million of the increase was related to the new acquisitions. This increase
was offset by an $8.0 million decrease in gross profit at Containment Solutions
and a $0.7 million decrease at Specialty Solutions. Gross margin for the Company
decreased to 23.2% from 25.0% in the prior year period primarily due to the
decrease in sales volume at Containment Solutions, partially offset by the
inclusion of Welna with gross margins of 26.5%.

Selling, general and administrative expenses increased $8.3 million to
$28.9 million for the first nine months of fiscal 2000 from $20.6 million in the
same period last year. The increase is primarily attributable to additional
expenses associated with the new acquisitions, offset by decreased sales and
marketing expenses at Containment Solutions and Specialty Solutions.

The Company recognized a $682,000 non-recurring compensation charge in the
second quarter of fiscal 1999 related to a salary continuation agreement.

The Company recorded $2.7 million of restructuring charges during the first
nine months of fiscal 2000 in connection with its restructuring plan. See Note 8
of the Notes to the Unaudited Consolidated Financial Statements for further
discussion.

The Company's fiscal 2000 provision for income taxes differs from the U.S.
statutory rate due to the put warrant valuation adjustment, state income taxes
and other permanent differences. The Company's fiscal 1999 provision for income
taxes differs from the U.S. statutory rate due to state income taxes and other
permanent differences.

Due to the above factors, net loss in the first nine months of fiscal 2000
was $1,997,000, or $0.36 per share, compared with net income of $2,396,000
(including an extraordinary item loss of $281,000), or $0.49 per share, in the
prior year nine month period. Excluding the impact of the restructuring charge
and warrant valuation adjustments, the net loss was $1,493,000, or $0.27 loss
per share for the first nine months of fiscal 2000 compared to net income of
$3,100,000, or $0.64 earnings per share for the same period last year, excluding
the non-recurring compensation charge and the extraordinary item.

Fiscal 1999 Compared with Fiscal 1998

The Company's results of operations for fiscal 1999 were significantly
affected by the inclusion of acquired companies. The results of SEFCO and
LaValley were included for a full year in fiscal 1999 versus 34 weeks in fiscal
1998. CC&E and Fibercast were included for a full year in fiscal year 1999
compared to seven and three weeks in fiscal year 1998, respectively. The results
of Plasti-Fab and Belco were included for 31 and 21 weeks in fiscal 1999,
respectively, following their purchases in November 1998 and February 1999. The
acquisition of Welna on July 1, 1999 had no impact on the current year results.

In addition, the Company utilizes a 52- or 53-week year-end ending on the
Saturday closest to June 30. The fiscal year ended July 3, 1999 was a 53-week
year.

Net revenues for fiscal 1999 increased $48.9 million, or 49%, to $148.8
million in fiscal 1999 from $99.9 million in fiscal 1998. Revenues from the
Specialty Solutions Group increased $26.6 million due primarily to the inclusion
of prior year acquisitions for a full fiscal year. The Containment Solutions
Group had an increase in revenues of $22.3 million, primarily from an increase
in UST demand from new construction and replacement.

Gross profit increased $15.2 million, or 67%, to $37.8 million in fiscal
1999 from $22.6 million in 1998. Gross margins for the Containment Solutions
Group increased to 25.3% in fiscal 1999 as compared to 20.9% in fiscal 1998 due
primarily to operational improvements and volume efficiencies. The gross margin
at Specialty

24
<PAGE> 27

Solutions decreased slightly to 25.6% in fiscal 1999 from 27.1% in fiscal 1998.
This slight decrease is the result of changes in the product and job mix from
the prior year.

Selling, general and administrative expenses increased $9.4 million, or
53%, to $27.2 million in fiscal 1999 from $17.8 million in fiscal 1998,
excluding non-recurring compensation charges of $682,000 and $2.3 million in
1999 and 1998, respectively. The increase is primarily attributable to
additional expenses from the acquired companies and increased sales expense due
to volume increases at Containment Solutions. Selling, general and
administrative expenses, as a percentage of net revenues, remained consistent at
18.3% for fiscal 1999 compared to 17.8% in fiscal 1998.

In fiscal 1999, the Company recognized a $682,000 non-recurring
compensation charge in the second quarter relating to a salary continuation
agreement. In fiscal 1998, the Company recognized a $2.3 million non-recurring
compensation charge in the first quarter due to the exchange of subsidiary stock
options for Denali stock options.

Interest expense in fiscal 1999 was $3.2 million compared to $1.6 million
in fiscal 1998. The increase was due to borrowings required to finance the
Company's acquisitions in late fiscal 1998 and fiscal 1999.

The Company's provision for income taxes differs from the U.S. statutory
rate of 34% due to state taxes, non-deductible goodwill amortization and other
permanent differences. In fiscal 1998, the Company's provision for income taxes
differed from the U.S. statutory rate due to the non-recurring compensation
charge being non-deductible for income tax purposes.

The Company recognized an extraordinary loss on the early extinguishment of
debt, net of income tax, of $281,000 in the third quarter of fiscal 1999.

Due to the factors described above, net income attributable to common stock
for fiscal 1999 increased from $299,000 in fiscal 1998 to $4.1 million in fiscal
1999. Earnings per share, excluding the non-recurring compensation expense and
extraordinary items, increased 60% to $.99 in fiscal 1999 from $.62 in fiscal
1998 on a diluted basis. Including the non-recurring compensation expense,
fiscal 1999 earnings per diluted share were $.90 before extraordinary items and
$.84 after extraordinary items.

Fiscal 1998 Compared with Fiscal 1997

The Company's results of operations for fiscal 1998 were significantly
affected by the inclusion of acquired companies. The results of Ershigs were
included for a full year in fiscal 1998 versus 17 weeks in fiscal 1997,
following the February 1997 acquisition by the Company. SEFCO and LaValley were
acquired in October 1997 and were included in the Company's results for 34 weeks
in fiscal 1998 and were not included in fiscal 1997 results. The results of CC&E
and Fibercast were included for seven and three weeks in fiscal 1998,
respectively, following the Company's purchases in May and June 1998.

Net revenues for fiscal 1998 increased $28.8 million, or 41%, to $99.9
million in fiscal 1998 from $71.1 million in fiscal 1997. Revenues at Specialty
Solutions increased $22.1 million due to the inclusion of acquired companies'
results in fiscal 1998. Revenues at Containment Solutions increased 10%, or $6.7
million, due to continued strong demand for petroleum storage tanks.

Gross profit increased $8.8 million, or 64%, to $22.6 million in fiscal
1998 from $13.8 million in fiscal 1997. Gross profit margins were 22.6% and
19.5% for fiscal 1998 and 1997, respectively. Gross profit margins at
Containment Solutions increased to 20.9% in fiscal 1998 as compared to 19.6% in
fiscal 1997 due to better throughput at the Company's manufacturing facilities.
The gross profit margin at Specialty Solutions improved to 27.1% in fiscal 1998
versus 18.2% in fiscal 1997 due to significant operating improvements at
Ershigs, purchased by the Company in fiscal 1997, and the additions of LaValley
and SEFCO to Specialty Solutions in fiscal 1998.

Selling, general and administrative expenses increased $5.9 million, or
50%, to $17.8 million in fiscal 1998 from $11.9 million in fiscal 1997,
excluding the $2.3 million compensation charge taken in fiscal 1998. The
increase is attributable to additional expenses associated with the acquired
companies at Specialty Solutions

25
<PAGE> 28

and increased sales and marketing expenses at Containment Solutions. Selling,
general and administrative expenses increased as a percentage of net revenues
from 16.7% in fiscal 1997 to 17.8% in fiscal 1998.

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 in fiscal 1998 was $1.6 million compared to $2.1 million
in fiscal 1997. The decrease in fiscal 1998 was due to the use of IPO proceeds
to pay down the Company's debt, partially offset by increased borrowings
required to finance the Company's acquisitions in fiscal 1998.

The Company's provision for income taxes primarily 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.

The Company recognized an extraordinary gain on the early extinguishment of
debt, net of income tax, of $219,000 in fiscal 1998.

Due to the factors described above, net income attributable to common stock
for fiscal 1998 increased from $197,000 in fiscal 1997 to $299,000 in fiscal
1998. Earnings per share, excluding the non-recurring compensation expense and
extraordinary items, increased from $.09 in fiscal 1997 to $.62 in fiscal 1998
on a diluted basis. Including the non-recurring compensation expense, earnings
per diluted share were $.02 in fiscal 1998 before extraordinary items and $.08
after extraordinary items.

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of fiscal 2000, exclusive of acquisitions, the
Company's operating activities used $0.8 million of cash to increase its
accounts receivable and inventories, $5.3 million of cash to reduce its accrued
liabilities, and $3.6 million to reduce its income tax liabilities. Decreases in
prepaid expenses provided $3.3 million of cash. The Company borrowed $14.4
million with the cash used primarily to conclude the purchase of HP Valves and
Manantial and for payments associated with restructuring operations and working
capital additions.

In May 2000, the Company announced the signing of a letter of intent with
William Blair Mezzanine Capital Fund III, L.P. ("Blair") in which Blair proposes
to invest $28 million in Denali through a combination of senior subordinated
notes, convertible senior subordinated notes, and common equity. This proposed
investment is subject to certain conditions including satisfactory completion of
due diligence by Blair and stockholder approval.

The Company's credit facility as amended February 24, 2000 with its
principal lender provides for revolving lines of credit and secured term loans
of up to an aggregate of $57.5 million, including $32.5 million in outstanding
term loans and a $25.0 million revolving line of credit. As of April 1, 2000,
the Company had outstanding indebtedness of $21.9 million under the revolving
lines of credit. Borrowings under this credit facility are secured by liens on
substantially all of the Company's U.S. assets. See Note 6 of Notes to the
Unaudited Consolidated Financial Statements for certain information regarding
the credit facility. The revolving credit facility and term loan provide for
borrowings, at the Company's option, at either the bank's prime rate plus
margins of 1.25% to 2.75% or varying rates of LIBOR plus 2.5% to 4.0% based on
the domestic leverage ratio levels. The acquisition term loan provides for
borrowings, at the Company's option, at either the bank's prime rate plus
margins of 1.75% to 3.25%, or at varying rates of LIBOR plus 3.0% to 4.5% based
on the domestic leverage ratio levels. The credit facility has a five-year term
expiring in January 2004.

$1.7 million of letters of credit outstanding. The senior credit facility
requires the Company to maintain certain financial covenants and requires an
annual fee of .50% on the unused portion of the revolving credit notes. The
senior credit facility is secured by substantially all of the assets of the
Company's U.S. subsidiaries.

On July 1, 1999, the Company issued $15.0 million, or $13.3 million net of
discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes"), bearing interest at 12% and
maturing in 2006. The subordinated notes were issued with detachable warrants
that enable the holders to purchase up to 534,873 common shares at $7.54 per
share. The warrants are exercisable immediately and expire in 2006. The warrants
or warrant shares also feature a put option that allows the holder to put up to
1/3 of the warrants or warrant shares each year at fair market value beginning
in year five and expiring in year ten. The warrants were recorded at fair value
of $1,733,000 based on the Black Scholes valuation model, which has been
recorded as a liability, and a related discount on the senior subordinated debt
was recorded for the same amount. This discount will be amortized over the
seven-year term of the subordinated notes as additional interest expense and the
liability will be adjusted to the fair value of the warrants in future periods.
At April 1, 2000, the liability had been reduced by $1,198,000 to $535,000. This
change has been recorded as a separate line item on the consolidated statement
of operations. The proceeds from the subordinated notes issuance were used in
the funding of the acquisition of Welna. The subordinated notes require the
Company to maintain certain financial covenants.

The Company expects to take a charge of approximately $2.4 million upon
closing of the Blair transaction, to expense the unamortized discount on the
existing subordinated debt and to write-off capitalized financing costs related
to the existing subordinated debt.

As a result of the lower than expected operating results during the first
nine months of fiscal 2000, the Company was not in compliance with certain of
the financial covenants in both its senior credit facility and its senior
subordinated notes as of April 1, 2000. In addition, the Company has a
continuing covenant default with its subordinated note holders due to unresolved
breaches of second quarter covenant targets. The bank group agreed to waive
financial covenant defaults conditional on receipt of executed waivers from the
Company's subordinated note holders. Because a waiver agreement has not yet been
reached with the subordinated note holders, the Company continues in technical
default with its U.S. bank group. Due to the ongoing default with the
subordinated debt holders, the Company does not intend to seek another
short-term waiver with its U.S. bank group until the proposed Blair transaction
is consummated. Because of the existing technical defaults, the Company has
classified $58,334,000 of its long-term debt as current liabilities at April 1,
2000. As mentioned above, the Company, in cooperation with its U.S. bank group,
expects to raise sufficient capital to reduce its senior domestic leverage
ratio. The Company does not anticipate that its lenders will accelerate the
maturity of the loans or discontinue the current revolving credit facility.
However, if these events were to occur or if the Company is not successful in
raising additional equity, the Company may be required to seek alternative
financing or other remedies.

In June 1999, the Company entered into a new senior credit facility with
two Netherlands financial institutions ("Senior Dutch Facility") to finance the
acquisition of Welna. The new Senior Dutch Facility provides for two term loans
for a total facility of Dutch guilders (NLG) 25 million. Term Loan A provides
for borrowings of NLG 15 million with quarterly payments of NLG 625,000
beginning October 1, 1999. Term Loan B provides for borrowings of NLG 10 million
with principal due at date of maturity (August 1, 2001). As of April 1, 2000,
the Company had outstanding indebtedness of NLG $23.1 million, or approximately
$10.0 million. The term loans bear interest at Euribor plus 1.75%. The Senior
Dutch Facility requires the Company to maintain certain financial covenants. The
Company is in compliance with all financial covenants as of April 1, 2000. The
facility is secured by substantially all of Welna's assets.

The Company also assumed approximately $15 million in debt, net of cash
acquired, with the acquisition of Welna on July 1, 1999. The debt bears interest
at an average of approximately 4.75% and consists primarily of lines of credit
facilities that are due on demand with various financial institutions.

The Company's capital requirements have primarily related to acquisitions
of businesses in the critical fluids handling industry. The Company has made
cash payments net of cash acquired for acquisitions of
27
<PAGE> 30

approximately $98.3 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 cash provided by operations. The Company
intends to focus on debt reduction and the integration of its prior and recent
acquisitions for the remainder of fiscal year 2000.

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.

IMPACT OF YEAR 2000 ISSUES

In late 1999, the Company completed the evaluation, remediation and testing
of its information systems and noninformation technology systems in preparation
for the year 2000. To date, the Company has not experienced any material adverse
impacts on its systems as a result of the year 2000 issue. To date, the Company
has not incurred material costs to address the year 2000 readiness of its
systems. There can be no assurance that the cost estimates associated with the
year 2000 issue will not have a material adverse effect on the Company's results
of operations and financial condition. The Company will continue to monitor its
systems and its suppliers and vendors throughout the year 2000 to ensure that
any latent year 2000 matters that may arise are addressed promptly.

EURO CONVERSION

On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Company is
currently evaluating issues raised by the introduction and initial
implementation of the Euro on January 1, 2002. The Company does not expect costs
of system modifications to be material, nor does it expect the introduction and
use of the Euro to materially and adversely affect its financial condition or
results of operations. The Company will continue to evaluate the impact of the
Euro introduction.

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

This Proxy Statement contains certain forward-looking statements as such
term is defined in the Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words, "anticipate", "believe", "estimate", "expect" and "intend"
and words or phrases of similar import, as they relate to the Company or its
subsidiaries or Company management, are intended to identify forward-looking
statements. Such statements reflect the current risks, uncertainties and
assumptions related to certain factors including, without limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is subject to market risk exposure related to changes in
interest rates on its senior domestic and foreign credit facilities, which
includes revolving credit notes and term notes. These instruments carry interest
at a pre-agreed upon percentage point spread from either the prime interest
rate, LIBOR, or Euribor. Under its senior domestic credit facilities, the
Company may, at its option, fix the interest rate for certain

28
<PAGE> 31

borrowings based on a spread over LIBOR for 30 days to 6 months. At June 27,
1998 and July 3, 1999, the Company had $28.7 million and $58.9 million,
respectively, outstanding under its senior credit facilities. Based on these
balances, an immediate change of one percent in the interest rate would cause a
change in interest expense of approximately $287,000 and $589,000, or $.05 and
$.07, net of tax, per diluted share, respectively, on an annual basis. The
Company's objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.

The Company also has working capital lines of credit with various financial
institutions for several foreign subsidiaries. These lines of credit are
denominated in the subsidiary's local currency. The majority of these
instruments carry interest at a percentage point spread from certain European
interest rates, such as LIBOR, PIBOR and STIBOR. At July 3, 1999, the Company
had $16.2 million outstanding under these facilities. Based on this balance, an
immediate change of one percent in the interest rate would cause a change in
interest expense of approximately $162,000, or $0.02, net of tax, per diluted
share, on an annual basis.

Beginning in fiscal year 2000, the Company, through its subsidiary Welna,
will have manufacturing and sales activities in foreign jurisdictions. In 1999,
the Company manufactured its products in the United States. With the addition of
Welna, the Company will have manufacturing and sales facilities in The
Netherlands, Germany, Poland, France and the United Kingdom. In addition, the
Company will also have sales activities in Belgium and Thailand. As a result,
the Company's financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are primarily exposed to changes in exchange rates between the
Dutch guilder and the Polish Zloty and Swedish Krona (non-Euro countries). When
the Dutch guilder strengthens against the Polish Zloty and Swedish Krona, the
value of non-functional currency sales decreases. When the Dutch guilder
weakens, the function currency amount of sales increases. The Company does not
currently hedge its net investment in foreign operations.

The Company has exposure to price fluctuations associated with its primary
raw materials, including fiberglass, resin and steel. The Company's supply
agreement with a major supplier of fiberglass holds pricing constant for the
period from January 1, 1998 through June 30, 1999 and subsequently contains
certain stabilizing pricing parameters through its expiration on December 31,
2000. In addition, the Company does not have any long-term purchase agreements
nor does it depend upon any single supplier or source for its resin or steel
requirements.

SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING

Any proposal by stockholders for stockholder action to be presented at the
next Annual Meeting of Stockholders to be held in 2000, must have been received
by the Company's Assistant Secretary, at the Company's offices, not later than
May 23, 2000, in order to be included in the Company's proxy statement and form
of proxy for that meeting. Such proposals should be addressed to the Company at
1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056, Attention: Janice
McCormick, Assistant Secretary. If a shareholder proposal is introduced at the
2000 Annual Meeting of Stockholders without any discussion of the proposal in
the Company's proxy statement, and the stockholder did not notify the Company on
or before May 23, 2000, as required by SEC Rule 14(a)-4(c)(1), of the intent to
raise such proposal at the Annual Meeting of Stockholders, then proxies received
by the Company for the 2000 Annual Meeting will be voted by the persons named as
such proxies in their discretion with respect to such proposals. Notice of such
proposal is to be sent to the above address.

29
<PAGE> 32

OTHER BUSINESS

The Board of Directors is not aware of any other business to be considered
or acted upon at the Special Meeting other than those described above.

By Order of the Board of Directors,

Richard W. Volk
Chairman, Chief Executive Officer
and President

Houston, Texas
June 13, 2000

30
<PAGE> 33

APPENDIX I

[MORGAN KEEGAN LETTERHEAD]

May 23, 2000

Board of Directors
Denali Incorporated
1360 Post Oak Boulevard
Suite 2250
Houston, TX 77056

Ladies and Gentlemen:

The Board of Directors of Denali Incorporated ("DNLI" or the "Company") has
requested our opinion as to the fairness to the Company, from a financial point
of view, of the consideration to be received by the Company in a proposed
transaction (the "Transaction") between the Company and William Blair Mezzanine
Capital Fund III, L.P. ("Blair").

You have advised us that in the Transaction the Company would issue to
Blair 1,818,182 shares of its common stock (the "Company Common Stock") at a
price of $4.40 per share, and $20,000,000 aggregate principal amount of
partially convertible senior subordinated notes convertible into Company Common
Stock at a conversion price of $4.75 per share. Upon consummation of the
Transaction, Blair would own a minority ownership interest in the Company Common
Stock.

In connection with our opinion, we have:

(1) reviewed certain publicly available financial statements and other
business and financial information on Denali;

(2) reviewed certain internal financial statements and other financial
and operating data concerning Denali prepared by the management of Denali;

(3) analyzed certain financial forecasts prepared by the management of
Denali;

(4) discussed the past and current operations and financial condition
and the prospects of Denali with management of Denali;

(5) discussed with management how new equity capital could help Denali
achieve its operating and financial plans and potential alternatives to
raising such equity capital;

(6) reviewed the pro forma impact of the transaction on Denali's
earnings per share and financial ratios;

(7) reviewed the reported prices and trading activity for the shares
of the Company's Common Stock;

(8) reviewed the financial terms, to the extent publicly available, of
certain comparable minority investment transactions by financial investors;

(9) reviewed a draft of the Agreement, including exhibits and
schedules thereto, to be entered into between Denali and Blair and certain
related documents;

In addition, we have considered such other factors and performed such other
analyses as Morgan Keegan deemed appropriate.

In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us. We have not been engaged to, and have not attempted
to, independently verify any of such information and have further relied upon
the assurances of management of the Company that they are not aware of any facts
or circumstances that would make such information inaccurate or misleading.
I-1
<PAGE> 34

With respect to the financial and operational forecasts made available to
us by the management of the Company and used in our analysis, we have assumed
that such financial and operational forecasts have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of
management as to the matters covered thereby. We have not been engaged to assess
the achievability of such projections or the assumptions on which they were
based and express no view as to such projections or assumptions. In addition, we
have not conducted a physical inspection or made any independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of the
Company nor have we been furnished with any such evaluation or appraisal.

It should be noted that this opinion is based on financial, economic,
market and other conditions and circumstances existing on, and information made
available as of, or as they exist and can be evaluated on, the date hereof and
does not address any matters subsequent to such date. In addition, our opinion
is, in any event, limited to the fairness, as of the date hereof, from a
financial point of view, to the Company of the consideration to be paid for the
investment in common equity and partially convertible senior subordinated notes
by Blair in connection with the Transaction and does not address the underlying
business decision to effect the Transaction or any other terms of the
Transaction. We have also assumed that the conditions to the Transaction as set
forth in the draft Agreement would be satisfied, without any waiver or
modification thereof, and that the Transaction would be consummated on a timely
basis in the manner contemplated by the draft Agreement. In addition, we are not
expressing any opinion as to the actual value of the Company Common Stock or to
the prices at which the Company Common Stock may trade following the date of
this opinion.

In the ordinary course of our business, we may actively trade in the equity
securities of the Company for our own account and the accounts of our customers
and, accordingly, may at any time hold a significant long or short position in
such securities.

Our opinion is rendered to the Board of Directors of the Company in
connection with its consideration of the Transaction and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote in connection with the Transaction. This letter may not be disclosed
or otherwise referred to without our prior written consent in each instance,
except as may be required by law or a court of competent jurisdiction.

Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
consideration to be paid to the Company in connection with the Transaction is
fair, to the Company from a financial point of view.

Yours very truly,

MORGAN KEEGAN & COMPANY, INC.

I-2
<PAGE> 35

DENALI INCORPORATED

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C>
Consolidated Balance Sheets as of July 3, 1999 and April 1,
2000 (Unaudited).......................................... F-1
Consolidated Statements of Operations for the Three Months
Ended April 1, 2000 and March 27, 1999 and the Nine Months
Ended April 1, 2000 and March 27, 1999 (Unaudited)........ F-2
Consolidated Statements of Cash Flows for the Nine Months
Ended April 1, 2000 and March 27, 1999 (Unaudited)........ F-3
Notes to Unaudited Consolidated Financial Statements
(Unaudited)............................................... F-4
Report of Independent Auditors.............................. F-10
Report of Independent Auditors.............................. F-11
Consolidated Balance Sheets as of June 27, 1998 and July 3,
1999...................................................... F-12
Consolidated Statements of Operations for the Years Ended
June 28, 1997, June 27, 1998 and July 3, 1999............. F-13
Consolidated Statements of Stockholders' Equity as of June
28, 1997, June 27, 1998 and July 3, 1999.................. F-14
Consolidated Statements of Cash Flows for the Years Ended
June 28, 1997, June 27, 1998 and July 3, 1999............. F-15
Notes to Consolidated Financial Statements.................. F-16
</TABLE>
<PAGE> 36

DENALI INCORPORATED

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
APRIL 1, JULY 3,
2000 1999
------------ --------
(UNAUDITED) (NOTE)
(IN THOUSANDS)
<S> <C> <C>
ASSETS

Current assets:
Cash...................................................... $ 4,340 $ 1,824
Accounts receivable, net of allowances of $1,042,000 at
April 1, 2000 and $1,419,000 at July 3, 1999........... 39,459 38,862
Inventories............................................... 27,305 26,175
Income tax receivable..................................... 1,709 --
Prepaid expenses.......................................... 3,370 4,052
Other receivables......................................... -- 2,591
Deferred tax assets....................................... 1,164 1,135
-------- --------
Total current assets........................................ 77,347 74,639
Property, plant and equipment, net.......................... 46,170 46,938
Goodwill, net............................................... 51,276 50,651
Other assets................................................ 4,373 3,898
Assets held for sale........................................ 249 449
-------- --------
Total assets...................................... $179,415 $176,575
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 19,284 $ 19,047
Accrued liabilities....................................... 11,687 15,777
Lines of credit........................................... 23,353 16,217
Income taxes payable...................................... -- 1,757
Current maturities of long-term debt...................... 6,545 4,030
Long-term debt in technical default (Notes 6 and 19)...... 58,334 52,457
Related party subordinated debt in technical default
(Notes 6 and 19)....................................... 3,999 3,980
-------- --------
Total current liabilities................................... 123,202 113,265
Long-term debt, less current maturities..................... 13,110 15,545
Accrued pension costs....................................... 1,880 2,109
Minority interest........................................... 1,775 1,571
Deferred taxes.............................................. 1,838 1,692
Other long-term liabilities................................. 2,482 3,824
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized shares -- 30,000,000 Issued, and outstanding
shares -- 5,558,914 at April 1, 2000, and 5,423,215 at
July 3, 1999.......................................... 56 54
Additional paid-in capital................................ 35,639 34,956
Other accumulated comprehensive loss...................... (2,129) --
Retained earnings......................................... 1,562 3,559
-------- --------
Total stockholders' equity........................ 35,128 38,569
-------- --------
Total liabilities and stockholders' equity........ $179,415 $176,575
======== ========
</TABLE>

See accompanying notes.

Note: The balance sheet at July 3, 1999 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.

F-1
<PAGE> 37

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................ $46,142 $36,328 $144,063 $110,216
Cost of revenues.................................... 37,161 27,667 110,702 82,649
------- ------- -------- --------
Gross profit........................................ 8,981 8,661 33,361 27,567
Selling, general and administrative expenses........ 8,962 7,065 28,882 20,571
Restructuring and non-recurring charges............. 190 -- 2,681 --
Non-recurring compensation expense.................. -- -- -- 682
------- ------- -------- --------
Operating income (loss)............................. (171) 1,596 1,798 6,314
Interest expense.................................... 2,426 925 6,646 2,210
Interest income..................................... -- (23) (170) (35)
Other (income) expense, net......................... 96 (66) (35) (173)
Put warrant valuation adjustment.................... -- -- (1,198) --
------- ------- -------- --------
Income (loss) before income taxes and minority
interest.......................................... (2,693) 760 (3,445) 4,312
Income tax (benefit) expense........................ (983) 284 (1,701) 1,635
------- ------- -------- --------
Net income (loss) before minority interest and
extraordinary item................................ (1,710) 476 (1,744) 2,677
Extraordinary loss on early extinguishment of debt,
net............................................... -- (281) -- (281)
Minority interest................................... 61 -- 253 --
------- ------- -------- --------
Net income (loss)................................... $(1,771) $ 195 $ (1,997) $ 2,396
======= ======= ======== ========
Net income (loss) per common share -- basic and
diluted:
Income (loss) before extraordinary item........... $ (0.32) $ 0.10 $ (0.36) $ 0.55
Extraordinary item................................ -- (0.06) -- (0.06)
------- ------- -------- --------
Net income (loss) per common share................ $ (0.32) $ 0.04 $ (0.36) $ 0.49
======= ======= ======== ========
Comprehensive income (loss):
Net income (loss)................................. $(1,771) $ 195 $ (1,997) $ 2,396
Currency translation adjustments.................. (1,230) -- (2,129) --
------- ------- -------- --------
Comprehensive income (loss)....................... $(3,001) $ 195 $ (4,126) $ 2,396
======= ======= ======== ========
</TABLE>

See accompanying notes.

F-2
<PAGE> 38

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
APRIL 1, MARCH 27,
2000 1999
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,997) $ 2,396
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 3,679 1,813
Amortization.............................................. 1,533 568
Deferred tax.............................................. 654 --
Put warrant valuation adjustment.......................... (1,198) --
Provision for losses on accounts receivable............... 180 229
Gain on disposal of property, plant and equipment and
assets held for sale................................... (280) --
Changes in operating assets and liabilities:
Accounts receivable.................................... (369) 1,273
Inventories............................................ (464) (3,911)
Prepaid expenses....................................... 3,346 (900)
Other assets and liabilities........................... (237) 279
Accounts payable....................................... 196 (891)
Accrued liabilities.................................... (5,269) 1,652
Income tax receivable/payable.......................... (3,580) (572)
------- -------
Net cash provided by (used in) operating activities......... (3,806) 1,936
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (3,977) (6,702)
Purchases of property, plant and equipment.................. (4,304) (1,718)
Proceeds from sale of property, plant and equipment and
assets held for sale...................................... 518 --
------- -------
Net cash used in investing activities....................... (7,763) (8,420)
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit.................................................... 14,727 (1,403)
Net borrowings (repayments) on term notes and other
long-term debt............................................ (344) 9,559
Debt origination cost....................................... -- (1,740)
------- -------
Net cash provided by financing activities................... 14,383 6,416
Effect of exchange rate changes on cash..................... (298) --
------- -------
Increase (decrease) in cash................................. 2,516 (68)
Cash at beginning of period................................. 1,824 175
------- -------
Cash at end of period....................................... $ 4,340 $ 107
======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 39

DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

The consolidated financial statements of Denali Incorporated and its
majority and 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. In the opinion of management, 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
herein.

2. INVENTORIES

Inventories are summarized below (in thousands):

<TABLE>
<CAPTION>
APRIL 1, JULY 3,
2000 1999
-------- -------
<S> <C> <C>
Finished goods.............................................. $10,095 $10,546
Raw materials............................................... 9,872 8,672
Work in process............................................. 7,338 6,957
------- -------
$27,305 $26,175
======= =======
</TABLE>

3. PER SHARE INFORMATION

The following table sets forth the weighted average shares outstanding for
the computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
-------- --------- -------- ---------
(SHARE DATA IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding...... 5,559 4,918 5,504 4,867
Dilutive securities -- employee stock options... -- -- -- 2
----- ----- ----- -----
Weighted average common shares outstanding
assuming full dilution........................ 5,559 4,918 5,504 4,869
===== ===== ===== =====
</TABLE>

Options to purchase 223,055 and 506,416 shares of common stock and warrants
to purchase zero and 534,873 shares of common stock were outstanding as of March
27, 1999 and April 1, 2000, respectively, but were not included in the
computation of diluted earnings per share because their assumed exercise would
have been anti-dilutive to earnings per share.

4. FOREIGN CURRENCY TRANSLATION

The Company's foreign subsidiaries use the local currency as their
functional currency. Financial statements of these subsidiaries are translated
into U.S. dollars using the exchange rate at the balance sheet dates for assets
and liabilities and a weighted average exchange rate for each period for
revenues, expenses, gains and losses and cash flows. The impact of currency
fluctuations is recorded as comprehensive income. For

F-4
<PAGE> 40
DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the nine months ended April 1, 2000, the Company had a foreign currency
translation loss of $2,129,000 which is recorded as comprehensive loss and is
classified as a separate component of stockholders' equity.

5. INCOME TAXES

The Company's provision for income taxes for the three months and nine
months ended April 1, 2000 differs from the U.S. statutory rate primarily due to
the put warrant valuation adjustment which is not taxable, non-deductible
goodwill amortization and other permanent differences.

6. LONG-TERM DEBT

On January 12, 1999, the Company entered into a new senior credit facility
with a group of lenders to refinance its revolving and term credit arrangements,
as amended most recently on February 24, 2000, to provide working capital and an
acquisition line of credit. This senior credit facility provides for a maximum
of $25.0 million in a revolving credit facility due in January 2004, and a term
loan up to $20.0 million with equal quarterly payments plus interest of $500,000
the first year, $750,000 the second year, $1.0 million the third year, $1.25
million the fourth year, and $1.5 million the fifth year. The credit facility
also provides for up to a $15.3 million acquisition term loan with the first
principal installment due 21 months following the closing of the credit
facility. As of April 1, 2000, the Company had outstanding indebtedness of $17.2
million under the term loan, $21.9 million under the revolving lines of credit
and $15.3 million under the acquisition term loan. The revolving credit notes
and term loans provide for borrowings, at the Company's option, at either the
bank's prime rate plus margins of 1.25% to 2.75% or varying rates of LIBOR plus
2.5% to 4.0% based on the domestic leverage ratio levels. The acquisition term
loans provide for borrowing, at the Company's option, at either the bank's prime
rate plus margins of 1.75% to 3.25% or at varying rates of LIBOR plus 3.0% to
4.5% based on the domestic leverage ratio levels.

This senior credit facility provides availability for letters of credit up
to $10.0 million subject to availability of borrowing capacity under the
revolving credit notes. As of April 1, 2000, the Company had $1.7 million of
letters of credit outstanding. The senior credit facility requires the Company
to maintain certain financial covenants and requires an annual fee of .50% on
the unused portion of the revolving credit notes. The senior credit facility is
secured by substantially all of the assets of the Company's U.S. subsidiaries.

On July 1, 1999, the Company issued $15 million, or $13.3 million net of
discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes"), bearing interest at 12% and
maturing in 2006. The subordinated notes were issued with detachable warrants
that enable the holders to purchase up to 534,873 common shares at $7.54 per
share. The warrants are exercisable immediately and expire in 2006. The warrants
or warrant shares also feature a put option that allows the holder to put up to
1/3 of the warrants or warrant shares each year at fair market value beginning
in year five and expiring in year ten. The warrants were recorded at fair value
of $1,733,000 based on the Black Scholes valuation model, which has been
recorded as a liability, and a related discount on the senior subordinated debt
was recorded for the same amount. This discount will be amortized over the
seven-year term of the subordinated notes as additional interest expense and the
liability will be adjusted to the fair value of the warrants in future periods.
At April 1, 2000, the liability had been reduced by $1,198,000 to $535,000. This
change has been recorded as a separate line item on the consolidated statement
of operations. The proceeds from the subordinated notes issuance were used in
the funding of the acquisition of Welna. The subordinated notes require the
Company to maintain certain financial covenants.

F-5
<PAGE> 41
DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the lower than expected operating results during the first
nine months of fiscal 2000, the Company was not in compliance with certain of
the financial covenants in both its senior credit facility and its senior
subordinated notes as of April 1, 2000. In addition, the Company has a
continuing covenant default with its subordinated note holders due to unresolved
breaches of second quarter covenant targets. The bank group agreed to waive
second quarter financial covenant defaults conditional on receipt of executed
waivers from the Company's subordinated note holders. Because a waiver agreement
has not yet been reached with the subordinated note holders, the Company
continues in technical default with its U.S. bank group. Due to the ongoing
default with the subordinated debt holders, the Company does not intend to seek
another short-term waiver with its U.S. bank group until the proposed Blair
transaction (see discussion below) is consummated. Because of existing technical
defaults, the Company has classified $58,334,000 of its long-term debt as
current liabilities at April 1, 2000. The Company expects to raise sufficient
capital through the Blair transaction to reduce its senior domestic leverage
ratio to acceptable levels for the U.S. bank group. The Company does not
anticipate that its lenders will accelerate the maturity of the loans or
discontinue the current revolving credit facility. However, if these events were
to occur or if the Company is not successful in raising additional equity, the
Company may be required to seek alternative financing or other remedies.

In June 1999, the Company entered into a new senior credit facility
("Senior Dutch Facility") with two Netherland financial institutions to finance
the acquisition of Welna. The new Senior Dutch Facility provides for two term
loans for a total facility of Dutch guilders (NLG) 25 million. Term Loan A
provides for borrowings of NLG 15 million with quarterly payments of NLG 625,000
beginning October 1, 1999. Term Loan B provides for borrowings of NLG 10 million
with principal due at date of maturity (August 1, 2001). As of April 1, 2000,
the Company had outstanding indebtedness of NLG 23.1 million, or approximately
$10.0 million. The term loans bear interest at Euribor plus 1.75%. The Senior
Dutch Facility requires the Company to maintain certain financial covenants. The
Company is in compliance with all financial covenants as of April 1, 2000. The
facility is secured by substantially all of Welna's assets.

7. ACQUISITIONS

On September 3, 1999, the Company acquired 67.5% of the issued and
outstanding stock of Manantial Chile S.A. ("Manantial"), a company that designs,
equips, installs and commissions industrial and municipal water and wastewater
treatment plants and systems for approximately $1.1 million in cash and 27,199
shares of common stock valued at $213,000.

In addition, on November 11, 1999, the Company acquired all of the issued
and outstanding stock of HP Valves, a valve manufacturer located in Oldenzaal,
The Netherlands for $2.8 million in cash, assumption of $1.4 million of debt,
and 108,500 shares of common stock valued at $472,000.

Both of the acquisitions described above were accounted for under the
purchase method of accounting whereby the assets and liabilities were adjusted
to their estimated fair value at the acquisition date.

In connection with the July 1, 1999 acquisition of Welna N.V., a Dutch
company formerly listed on the Official Market of the Amsterdam Stock Exchange,
the Company has adjusted the preliminary estimates of the fair market value of
the purchased assets and liabilities resulting in a NLG 750,000 or approximately
$350,000 decrease in goodwill.

F-6
<PAGE> 42
DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. RESTRUCTURING OF OPERATIONS

On October 11, 1999, the Company announced the restructuring of certain
operations, including the closure of the Conroe manufacturing facility. In
connection with this restructuring plan, the Company accrued and recorded as
expense $2,276,000 of involuntary termination benefits covering 96 employees.
These costs are included in the non-recurring restructuring charge totaling
$2,681,000, which is recorded as a separate line item on the consolidated
statement of operations. These termination benefits are related to employee
terminations associated with the Conroe manufacturing facility closure and
workforce reductions associated with the consolidation and reduction of selling,
general and administrative support in the U.S. and European operations. As of
April 1, 2000, termination benefits totaling $2,162,000 for 78 employees had
been paid and charged against this liability. Certain costs associated with this
plan had not yet been incurred as of April 1, 2000 and will result in additional
charges in the remaining months of fiscal 2000.

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
two of the Company's subsidiaries, Containment Solutions, Inc. and Ershigs, Inc.
to purchase at least 90% of their fiberglass requirements from the supplier. The
contract expired on December 31, 1998. Effective January 1, 1999, the contract
was modified to obtain more favorable pricing levels based on certain minimum
volume purchases for the calendar years ending December 31, 1999 and 2000. 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. In management's opinion, recorded accruals for environmental
liabilities 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, the ultimate liabilities resulting from such claims will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.

10. SEGMENT DATA

The Company has adopted Statement of Financial Accounting Standards No.
131 -- "Disclosures About Segments of an Enterprise and Related Information"
that requires disclosure of financial and descriptive information about the
Company's reportable operating segments. The operating segments presented are
the segments of the Company for which separate financial information is
available and operating performance is evaluated regularly by senior management
in deciding how to allocate resources and in assessing performance.

F-7
<PAGE> 43
DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company evaluates the performance of its operating segments based on
revenues, operating income and working capital efficiencies.

In fiscal year 1999, the Company operated in two industry segments:
Containment Solutions and Specialty Solutions. The Containment Solutions segment
specializes in the manufacture of fiberglass underground storage tanks and steel
reinforced aboveground storage tanks for fluids handling. The Specialty
Solutions segment provides engineered solutions for the containment of fluids,
specializes in fiberglass reinforced plastic products for corrosion resistant
applications and engineered metal products for the municipal and industrial
markets. For fiscal 1999, 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
revenues, the Company operated in only one geographic segment, the United
States. Beginning in fiscal year 2000, the Company, through its Welna and
Manantial subsidiaries, has global operations, with a primary concentration in
Europe. Welna is reported as an additional segment for segment reporting and
Manantial is reported in Specialty Solutions. All intersegment net revenues and
expenses are immaterial and have been eliminated in computing net revenues and
operating income.

The following is a summary of the industry segment data for the nine months
ended March 27, 1999 and April 1, 2000 (in thousands):

<TABLE>
<CAPTION>
NET OPERATING
REVENUES INCOME
-------- ---------
<S> <C> <C>
Nine months ended March 27, 1999:
Containment Solutions....................................... $ 70,525 $ 6,802
Specialty Solutions......................................... 39,691 1,843
Corporate................................................... -- (1,649)
Non-recurring compensation charge........................... -- (682)
-------- -------
Consolidated................................................ $110,216 $ 6,314
======== =======
Nine months ended April 1, 2000:
Containment Solutions....................................... $ 43,948 $ 2,359
Specialty Solutions......................................... 50,077 1,917
Welna....................................................... 50,038 1,997
Corporate................................................... -- (1,794)
Restructuring charge -- Containment Solutions............... -- (500)
Restructuring charge -- International....................... -- (1,390)
Restructuring charge -- Corporate........................... -- (791)
-------- -------
Consolidated................................................ $144,063 $ 1,798
======== =======
</TABLE>

Operating income reconciles to income before income taxes as shown on the
consolidated statements of operations as follows (in thousands):

<TABLE>
<CAPTION>
APRIL 1, MARCH 27,
2000 1999
-------- ---------
<S> <C> <C>
Total segment operating income.............................. $ 1,798 $6,314
Interest expense.......................................... 6,646 2,210
Interest income........................................... (170) (35)
Other income, net......................................... (35) (173)
Put warrant valuation adjustment.......................... (1,198) --
------- ------
Income (loss) before income taxes......................... $(3,445) $4,312
======= ======
</TABLE>

F-8
<PAGE> 44
DENALI INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SEASONALITY

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 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.

F-9
<PAGE> 45

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Denali Incorporated

We have audited the accompanying consolidated balance sheets of Denali
Incorporated and subsidiaries (the "Company") as of June 27, 1998 and July 3,
1999, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended June 28, 1997, June 27,
1998 and July 3, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits. We did not audit the consolidated balance sheet of Welna N.V., a
majority owned subsidiary acquired on July 1, 1999, which statement reflects
total assets of $59,105,000 as of July 3, 1999. That consolidated balance sheet
was audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the balance sheet data included for Welna
N.V., is based solely on the report of other auditors.

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

Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated August 16,
1999, the Company, as discussed in Note 19, has experienced a substantial
reduction in revenues that adversely affect the Company's current results of
operations and liquidity, and the Company is not in compliance with certain
financial covenants. Note 19 describes management's plans to address these
issues.

In our opinion, based on our audits and, as to the balance sheet at July 3,
1999, the report of other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Denali Incorporated and subsidiaries at June 27, 1998 and
July 3, 1999, and the consolidated results of its operations and its cash flows
for the years ended June 28, 1997, June 27, 1998 and July 3, 1999 in conformity
with accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

Houston, Texas
August 16, 1999, except for
Note 19 as to which the
date is May 30, 2000.

F-10
<PAGE> 46

REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying consolidated balance sheet of Welna N.V.,
Enschede, the Netherlands, as of July 3, 1999. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement 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 consolidated balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating, the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Welna N.V.,
Enschede, the Netherlands, as of July 3, 1999, in conformity with US generally
accepted accounting principles.

DELOITTE & TOUCHE

Enschede, Netherlands
August 16, 1999

F-11
<PAGE> 47

DENALI INCORPORATED

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 175 $ 1,824
Accounts receivable, net of allowances of $907,000 in 1998
and $1,419,000 in 1999................................. 23,465 38,862
Inventories............................................... 10,489 26,175
Prepaid expenses.......................................... 1,152 4,052
Other receivables......................................... -- 2,591
Deferred tax assets....................................... 1,242 1,135
------- --------
Total current assets.............................. 36,523 74,639
Property, plant and equipment, net........................ 20,270 46,938
Goodwill, net............................................. 19,435 50,651
Other assets.............................................. 1,758 3,898
Deferred tax assets....................................... 1,947 --
Assets held for sale...................................... 449 449
------- --------
Total assets...................................... $80,382 $176,575
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $13,140 $ 19,047
Accrued liabilities....................................... 7,180 15,777
Lines of credit........................................... -- 16,217
Income taxes payable...................................... 620 1,757
Current maturities of long-term debt...................... 1,442 4,030
Long-term debt in technical default (Notes 6 and 19)...... -- 52,457
Related party subordinated debt in technical default
(Notes 6 and 19)....................................... -- 3,980
------- --------
Total current liabilities......................... 22,382 113,265
Long-term debt, less current maturities..................... 28,454 15,545
Accrued pension costs....................................... -- 2,109
Minority interest........................................... -- 1,571
Deferred taxes.............................................. -- 1,692
Other long-term liabilities................................. 872 3,824
Series A Preferred Stock, redeemable at $250 per share, $.01
par value:
Authorized shares -- 1,004,800 Issued and outstanding
shares -- none at June 27, 1998 and none at July 3,
1999................................................... -- --
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value Authorized
shares -- 30,000,000
Issued and outstanding shares -- 4,828,743 at June 27,
1998 and 5,423,215 at July 3, 1999..................... 48 54
Additional paid-in capital.................................. 29,187 34,956
Retained earnings (deficit)................................. (561) 3,559
------- --------
Total stockholders' equity........................ 28,674 38,569
------- --------
Total liabilities and stockholders' equity........ $80,382 $176,575
======= ========
</TABLE>

See accompanying notes.

F-12
<PAGE> 48

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues................................................ $71,101 $99,897 $148,760
Cost of revenues............................................ 57,268 77,273 110,957
------- ------- --------
Gross profit................................................ 13,833 22,624 37,803
Selling, general, and administrative expenses............... 11,874 17,843 27,244
Non-recurring compensation charge........................... -- 2,312 682
------- ------- --------
Operating income............................................ 1,959 2,469 9,877
Interest expense............................................ 2,058 1,614 3,199
Interest income............................................. (111) (118) (124)
Other income, net........................................... (598) (489) (453)
------- ------- --------
Income before income taxes.................................. 610 1,462 7,255
Income tax expense.......................................... 293 1,352 2,854
------- ------- --------
Net income before extraordinary item........................ 317 110 4,401
Extraordinary income (loss) on early extinguishment of debt,
net of income tax......................................... -- 219 (281)
------- ------- --------
Net income.................................................. 317 329 4,120
Dividends on Series A Preferred Stock....................... (120) (30) --
------- ------- --------
Net income attributable to Common Stock..................... $ 197 $ 299 $ 4,120
======= ======= ========
Net income per common share -- basic and diluted:
Income before extraordinary item.......................... $ 0.09 $ 0.02 $ 0.90
Extraordinary item........................................ -- 0.06 (.06)
------- ------- --------
Net income per common share............................... $ 0.09 $ 0.08 $ 0.84
======= ======= ========
</TABLE>

See accompanying notes.

F-13
<PAGE> 49

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON COMMON RETAINED
STOCK STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)
Exchange of employee stock options............... -- -- 2,312 -- 2,312
Issuance of common stock......................... 2,276 23 25,969 -- 25,992
Exercise of employee stock options............... 368 3 609 -- 612
Dividends declared............................... -- -- -- (30) (30)
Net income....................................... -- -- -- 329 329
----- --- ------- ------- -------
Balance at June 27, 1998........................... 4,829 $48 $29,187 $ (561) $28,674
Issuance of common stock for Acquisitions........ 105 1 1,108 -- 1,109
Issuance of common stock in a private
Placement..................................... 489 5 4,505 -- 4,510
Income tax benefit related to incentive Stock
option plans.................................. -- -- 156 -- 156
Net income....................................... -- -- -- 4,120 4,120
----- --- ------- ------- -------
Balance at July 3, 1999............................ 5,423 $54 $34,956 $ 3,559 $38,569
===== === ======= ======= =======
</TABLE>

See accompanying notes.

F-14
<PAGE> 50

DENALI INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 317 $ 329 $ 4,120
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-recurring compensation expense........................ -- 2,312 --
Depreciation.............................................. 1,043 1,436 2,535
Amortization.............................................. 178 256 725
Provision for losses on accounts receivable............... 176 93 397
Deferred tax expense...................................... 25 236 248
Gain on disposal of property, plant and equipment and
assets held for sale.................................... (447) (89) (31)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... (3,377) (85) 2,163
Inventories............................................. 1,238 (1,612) (4,731)
Prepaid expenses........................................ (90) (92) (502)
Other assets and liabilities............................ (57) (212) 1,720
Accounts payable........................................ 886 1,223 39
Accrued liabilities..................................... 264 (652) 159
Income tax payable...................................... 469 711 397
------- -------- --------
Net cash provided by operating activities................... 625 3,854 7,239
INVESTING ACTIVITIES
Acquisitions net of cash acquired........................... (4,825) (29,770) (48,518)
Purchases of property, plant and equipment.................. (600) (3,071) (2,886)
Proceeds from sale of property, plant and equipment and
assets held for sale...................................... 208 899 77
Payments on notes receivable................................ 81 816 --
Purchases of equity securities.............................. (593) -- --
Proceeds from sale of equity securities..................... 1,098 -- --
------- -------- --------
Net cash used in investing activities....................... (4,631) (31,126) (51,327)
FINANCING ACTIVITIES
Proceeds from common stock issuance......................... -- 25,992 4,525
Proceeds from exercise of stock options..................... -- 612 --
Redemption of preferred stock............................... -- (1,200) --
Dividends paid.............................................. -- (210) --
Net borrowings (repayments) under revolving lines of
credit.................................................... 2,848 8,990 (8,455)
Proceeds from term notes and long-term debt................. 2,200 10,398 48,949
Proceeds from subordinated debt............................. -- -- 15,000
Principal payments on term notes and long-term debt......... (685) (17,016) (11,441)
Debt origination costs...................................... (151) (449) (2,841)
------- -------- --------
Net cash provided by financing activities................... 4,212 27,117 45,737
------- -------- --------
Increase (decrease) in cash................................. 206 (155) 1,649
Cash at beginning of period................................. 124 330 175
------- -------- --------
Cash at end of period....................................... $ 330 $ 175 $ 1,824
======= ======== ========
</TABLE>

See accompanying notes.

F-15
<PAGE> 51

DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999

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 and majority owned
subsidiaries is primarily engaged in the design, manufacture, installation and
sale of fiberglass composite underground storage tanks, steel aboveground
storage tanks, and engineered fiberglass reinforced plastic products for
corrosion resistant applications. During fiscal 1999, the Company's products
were primarily marketed in the United States. On July 1, 1999, the Company
acquired Welna, N.V. ("Welna"), which is headquartered in The Netherlands. Welna
is a provider of engineered fluid handling products to the chemical,
petrochemical, pulp and paper, water/wastewater, microelectronics and
environmental process industries. Beginning in fiscal 2000, the addition of
Welna will expand the Company's products and services globally, primarily to
Europe.

The Company uses a 52- or 53-week year ending on the Saturday closest to
June 30. The fiscal year ended July 3, 1999 was a 53-week year.

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 and majority 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.

Cash and Cash Equivalents

The Company considers all cash accounts and money market accounts with an
original maturity less than 90 days 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 primarily variable, based on current market.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements using the
intrinsic value method 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. Inventory is stated at the lower
of cost or market.

F-16
<PAGE> 52
DENALI INCORPORATED

NOTES TO THE 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 to 30 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 discounted cash flows. The Company also has negative goodwill
of approximately $1.1 million resulting from the acquisition of Ershigs in
February 1997. The negative goodwill is being amortized primarily over the
estimated life of the related assets, which is estimated to be 15 years.
Accumulated amortization was $168,000 and $616,000 for the years ended June 27,
1998 and July 3, 1999, respectively. Amortization expense was $42,000, $99,000
and $448,000 for the years ended June 28, 1997, June 27, 1998 and July 3, 1999.

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
1999 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 period 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 period incurred and are not allocated to contracts in
progress.

Advertising

The Company expenses all advertising costs as incurred. Advertising costs
incurred were $402,000, $582,000 and $748,000 for the years ended June 28, 1997,
June 27, 1998 and July 3, 1999, respectively.

F-17
<PAGE> 53
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $319,000, $458,000 and $798,000 for the
years ended June 28, 1997, June 27, 1998 and July 3, 1999, respectively.

Concentration of Credit Risk

Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company periodically
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 years ended June 28, 1997, June 27, 1998 and July 3,
1999.

Per Share Information

The following table sets forth the weighted average shares outstanding for
the computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- -------
(SHARE DATA IN THOUSANDS)
<S> <C> <C> <C>
Weighted average common shares outstanding.................. 2,185 3,736 4,886
Dilutive securities -- employee stock options and
warrants.................................................. 13 139 2
----- ----- -----
Weighted average common shares outstanding assuming full
dilution.................................................. 2,198 3,875 4,888
===== ===== =====
</TABLE>

Captive Insurance Program

In January 1996, the Company entered into a captive insurance program for
its workers' compensation and automobile coverages. The program provides for
certain reinsurance on claims over $250,000 and aggregate insurance for the
total claims exposure of the captive company. The Company uses actuarial
determined information provided by the captive insurance company to determine
its estimated liability.

Accounting Changes

Effective June 28, 1998, the Company adopted SFAS No. 132, Employers'
Disclosures about Pension and Other Postretirement Benefits. This statement
standardizes the disclosure requirements for pension and other postretirement
benefits. The adoption of SFAS No. 132 did not have an effect on the Company's
financial position or results of operations.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("FAS 133"). The Company is required to adopt FAS 133 effective the beginning of
fiscal year 2001. The Statement will require the Company to

F-18
<PAGE> 54
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.

3. ACQUISITIONS

Effective February 28, 1997, the Company acquired all of the issued and
outstanding stock of Ershigs, Inc. ("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) with the remaining amount of $1.1 million allocated to negative goodwill.
The negative goodwill is being amortized primarily over the estimated life of
the related deferred tax assets, which is estimated to be 15 years.

Effective October 1997, the Company acquired all of the issued and
outstanding stock of SEFCO, Inc. ("SEFCO"), a manufacturer of engineered
field-erected steel tanks and accessories for use in the municipal, agrochemical
and petroleum industries. Effective October 1997, the Company acquired all of
the issued and outstanding stock of GL&V/LaValley Construction, Inc.
("LaValley"), a manufacturer and installer of fiberglass-reinforced plastic
products. Effective May 1998, the Company purchased all of the issued and
outstanding stock of CC&E/RPS, Inc. ("CC&E"), a leading North American field
constructor of fiberglass-reinforced plastic products. Effective June 1998, the
Company acquired 100% of the issued and outstanding stock of Fibercast Company
("Fibercast"), a leading manufacturer of fiberglass-reinforced plastic piping
systems specializing in highly corrosive environments.

In connection with the fiscal 1998 acquisitions, the Company acquired net
assets of $9.8 million in exchange for $28.5 million in cash, which is net of
$700,000 cash acquired, and incurred approximately $450,000 in acquisition costs
resulting in the recording of goodwill of approximately $19 million. The Company
also paid down $1.1 million of bank and seller debt and assumed $3.5 million of
bank debt in connection with the Fibercast acquisition. During fiscal 1999, the
seller in the CC&E acquisition received contingent payments of $202,000 based on
an increase in the level of bookings, which was recorded as an increase to
goodwill. In addition, approximately $919,000 of purchase price adjustments were
recorded, resulting in an increase to goodwill.

Effective November 23, 1998, the Company acquired all of the issued and
outstanding stock of Plasti-Fab, Inc. ("Plasti-Fab"), a manufacturer of FRP
gates, metered manholes and flumes for use in the waste/wastewater industries.
Effective February 3, 1999, the Company acquired all of the outstanding stock of
Belco Manufacturing Company, Inc. and certain assets and assumed certain
liabilities of S. Jones Limited Partnership (collectively "Belco"). Belco
manufactures FRP tanks, ducting, piping, scrubbers and dampers primarily for the
industrial water/wastewater industries.

Effective July 1, 1999, the Company completed its tender offer for the
publicly held shares of Welna N.V. ("Welna"), a Dutch company listed on the
Official Market of the Amsterdam Stock Exchange. Denali purchased 99.8% of the
outstanding stock of Welna. The consolidated balance sheet includes the effect
of the acquisition of Welna; however, there was no effect on the income
statement in fiscal year 1999. The consolidated balance sheet includes minority
interest, which represents minority ownership in certain Welna subsidiaries.

Welna currently operates through two major divisions. Welna Synthetics
designs, manufactures and installs all forms of FRP pipe systems, vessels and
other related equipment requiring high levels of corrosion resistance. Welna
Trade is a distribution operation that specializes in high quality products and
engineered systems for power generation, water treatment and paper and chemical
processing industries. Welna markets

F-19
<PAGE> 55
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

its products through its subsidiaries in The Netherlands, Germany, United
Kingdom, Belgium, Sweden, France, Poland and Thailand.

In connection with the fiscal 1999 acquisitions, the Company acquired net
assets of $37.6 million in exchange for $47.2 million in cash, which is net of
$2.6 million cash acquired, and incurred approximately $2.1 million in
acquisition costs resulting in the recording of goodwill of approximately $30.2
million. The allocation of the purchase price to assets and liabilities acquired
for the acquisitions are based on preliminary estimates of fair market value.
Upon determination of the fair market value of the purchased assets and
liabilities, the purchase price allocation may be adjusted. The Company issued
594,189 common shares for the fiscal 1999 acquisitions valued at $5.6 million.
The Company also assumed approximately $15 million of bank debt, net of cash
acquired, in connection with the Welna acquisition.

All of the acquisitions described above were accounted for under the
purchase method of accounting whereby the assets and liabilities were adjusted
to their estimated fair values at the acquisition date. The consolidated
financial statements reflect all operations for the acquired companies since the
date of acquisition.

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>
JUNE 27, JULY 3,
1998 1999
---------- ----------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues................................................ $206,623 $222,422
Net income (loss) before extraordinary item................. (1,319) 1,746
Net income (loss)........................................... (1,100) 1,465
Net income (loss) per common share -- basic and diluted..... (0.26) 0.26
</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.

Assets held for sale of $3.6 million were identified in December 1994, the
date of acquisition of the tank group from Owens Corning, consisting 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. During fiscal year 1998, manufacturing
equipment with a book value of $250,000 was sold through an international joint
venture with the Company recognizing a gain of $107,000. These transactions have
been recorded as other income, net on the consolidated statement of operations.
At July 3, 1999, the remaining assets held for sale of $449,000 consist of
certain manufacturing equipment, which the Company primarily expects to sell
under similar license arrangements or through an international joint venture.

Assets held for sale of $820,000 were identified at the date of acquisition
of Ershigs consisting primarily of a manufacturing facility and related
manufacturing equipment. The manufacturing facility was closed in May

F-20
<PAGE> 56
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 with operating losses of $68,000 eliminated from the Company's results of
operations for the year ended June 28, 1997. In January 1998, the assets were
sold with the Company recognizing no gain or loss.

4. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $ 4,748 $10,546
Raw materials............................................... 4,289 8,672
Work in process............................................. 1,452 6,957
------- -------
$10,489 $26,175
======= =======
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 2,110 $ 6,678
Buildings and improvements.................................. 6,966 22,198
Machinery and equipment..................................... 14,024 22,603
Construction in progress.................................... 769 1,330
------- -------
23,869 52,809
Less accumulated depreciation............................... (3,599) (5,871)
------- -------
Property, plant and equipment, net.......................... $20,270 $46,938
======= =======
</TABLE>

6. LONG-TERM DEBT

Long-term debt is summarized below:

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit note with a financial institution, interest
payable monthly at 30-day LIBOR plus 2.5% (8.16% at June
27, 1998), due October 31, 2002, secured by substantially
all assets of the Company's subsidiaries.................. $19,400 $ --
Revolving credit note with a financial institution, interest
payable quarterly at prime (8.5% at June 27, 1998), due
October 31, 2002, secured by substantially all assets of
the Company's subsidiaries................................ 55 --
Term note with a financial institution, due in monthly
installments of $51,816, plus interest at 30-day LIBOR
plus 2.5% (8.16% at June 27, 1998) through October 24,
2002, with remaining balance of $3,079 due October 24,
2002, secured by substantially all assets of the Company's
subsidiaries.............................................. 5,785 --
Term note with a financial institution, due in monthly
installments of $58,500, plus interest at prime plus 0.5%
beginning August 1, 1998 (9.0% at June 27, 1998) through
February 7, 2001, secured by property, plant and equipment
of Fibercast.............................................. 3,500 --
Term note with a seller, due in monthly installments of
$5,591, including interest at 8%, through January 16,
2001, secured by all assets of purchased facility......... 156 --
</TABLE>

F-21
<PAGE> 57
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
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 --
Term note with a financial institution, due in quarterly
installments of $500,000 the first year, $750,000 the
second year, $1.0 million the third year; $1.25 million
the fourth year and $1.5 million the fifth year, plus
interest at LIBOR plus 3.0% (8.33% at July 3, 1999)
through 2004, secured by substantially all assets of the
Company's subsidiaries.................................... -- 19,000
Acquisition note with a financial institution, due in
quarterly payments starting September 30, 2000, with
payments 1-6 equal to 5% of outstanding principal amount;
payments 7-10 equal to 7.5% and payments 11-14 equal to
10%, interest payable at LIBOR plus 3.5% (8.49% at July 3,
1999), secured by substantially all assets of the
Company's subsidiaries.................................... -- 17,200
Revolving credit note with a financial institution, interest
payable monthly at LIBOR plus 3.0% (8.0% at July 3, 1999),
principal due December 31, 2003, secured by substantially
all assets of the Company's subsidiaries.................. -- 9,500
Revolving credit note with a financial institution, interest
payable monthly at prime plus 1.75% (9.75% at July 3,
1999), principal due December 31, 2003, secured by
substantially all assets of the Company's subsidiaries.... -- 1,500
Senior subordinated notes, interest paid quarterly at 12%,
principal due July 1, 2006................................ -- 15,000
Term loan with a financial institution, interest payable
quarterly at Euribor plus 1.75% (4.389% at July 3, 1999)
through August 2005, principal due in quarterly payments
of NLG 625,000 beginning on October 1, 1999 secured by
Welna's assets............................................ -- 7,049
Term loan with a financial institution, interest payable
quarterly at Euribor plus 1.75% (4.389% at July 3, 1999),
principal due August 1, 2001 secured by Welna's assets.... -- 4,700
Various unsecured term notes with financial institutions,
interest payable quarterly ranging from 5.5% to 8.5% with
principal due between 2001 and 2003....................... -- 3,796
------- -------
Subtotal.................................................... 29,896 77,745
Less current maturities..................................... 1,442 4,030
Less long-term debt in technical default (Note 19).......... -- 52,457
Less related party subordinated debt in technical default
(Note 19)................................................. -- 3,980
Less discount on senior subordinated notes.................. -- 1,733
------- -------
Long-term debt due after one year........................... $28,454 $15,545
======= =======
</TABLE>

On January 12, 1999, the Company entered into a new senior credit facility
with a group of lenders to refinance its revolving and term credit arrangements,
as amended, to provide working capital and an acquisition line of credit. This
new senior credit facility provides for a maximum of $20.0 million in revolving
credit facility due in January 2004, and a term loan up to $20.0 million with
equal quarterly payments plus interest of $500,000 the first year, $750,000 the
second year, $1.0 million the third year, $1.25 million the fourth year, and
$1.5 million the fifth year. The credit facility also provides for up to a $35.0
million acquisition term loan with the first principal installment due 21 months
following the closing of the credit facility. As of July 3, 1999, the Company
had outstanding indebtedness of $19.0 million under the term loan, $11.0 million
under the revolving lines of credit and $17.2 million under the acquisition term
loan. The new revolving credit notes and term loans provide for borrowings, at
the Company's option, at either the lender's prime rate plus a margin of 1.75%
or varying rates of LIBOR plus 3.0%. The acquisition term loans provide for
borrowing, at the

F-22
<PAGE> 58
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's option, at either the lender's prime rate plus a margin of 2.25% or at
varying rates of LIBOR plus 3.5%.

This new senior credit facility provides availability for letters of credit
up to $10.0 million subject to availability of borrowing capacity under the
revolving credit notes. As of July 3, 1999, the Company had $2.0 million of
letters of credit outstanding. The new senior credit facility requires the
Company to maintain certain financial covenants and requires an annual fee of
.50% on the unused portion of the revolving credit notes and .75% on the unused
portion of the acquisition term loan. As of July 3, 1999, the Company's unused
portion of the revolving credit line and acquisition term loan was $7.5 million
and $17.8 million, respectively. The Company was in compliance with all required
financial covenants at July 3, 1999. This new senior credit facility is secured
by substantially all of the assets of the Company's subsidiaries.

In June 1999, the Company entered into a new senior credit facility
("Senior Dutch Facility") with two Netherland financial institutions to finance
the acquisition of Welna. The new Senior Dutch Facility provides for two term
loans for a total facility of Dutch guilders (NLG) 25 million. Term Loan A
provides for borrowings of NLG 15 million with quarterly payments of NLG 625,000
beginning October 1, 1999. Term Loan B provides for borrowings of NLG 10 million
with principal due at date of maturity (August 1, 2001). As of July 3, 1999, the
Company had outstanding indebtedness of NLG 25 million, or approximately $11.7
million. The term loans bear interest at Euribor plus 1.75%. The Senior Dutch
Facility requires the Company to maintain certain financial covenants. The
facility is secured by substantially all of Welna's assets.

The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business in December 1994. In addition, the Company assumed $3.5 million of term
debt with a financial institution in connection with its acquisition of
Fibercast in June 1998. During the current fiscal year, the Company repaid both
notes.

Also, in connection with the extinguishment of its old revolving and term
credit arrangements upon funding of the new senior credit facility in January
1999, the Company recorded an extraordinary charge of $454,000 ($281,000 net of
tax) related to unamortized debt origination costs.

On July 1, 1999, the Company issued $15 million or $13.3 million net of
discount (of which $3,980,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes") bearing interest at 12% and
maturing in 2006. The subordinated notes were issued with detachable warrants
that enable the holder to purchase up to 534,873 common shares at $7.54 per
share. The warrants are exercisable immediately and expire in 2006. The warrants
or warrant shares also feature a put option that allows the holder to put up to
1/3 of the warrants or warrant shares each year at fair market value beginning
in year five and expiring in year ten. The Company has an option to terminate
the obligation to repurchase the warrants or warrant shares for a total fee not
to exceed $2.48 million. The warrants were recorded at fair value of $1,733,000
based on Black Scholes valuation model, which has been recorded as a liability,
and a related discount on the senior subordinated debt was recorded for the same
amount. This discount will be amortized over the seven year term of the note as
additional interest expense. The liability will be adjusted to the fair value of
the warrants in future periods not to exceed $2.46 million. The proceeds from
the subordinated debt issuance were used in the funding of the acquisition of
Welna.

In the prior fiscal year, in connection with the extinguishment of a prior
revolving and term credit arrangement in October 1997, the Company paid
prepayment penalties of $323,000 and charged to expense unamortized debt
origination costs of $299,000. In addition, the Company realized gains of
$591,000 and $384,000 in November 1997 and March 1998, respectively, from the
prepayment of a seller note. As a result of these transactions, the Company
incurred a net extraordinary gain of $353,000 ($219,000 net of tax) for the
fiscal year ended June 27, 1998.

F-23
<PAGE> 59
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled maturities of long-term debt at July 3, 1999 are as follows (in
thousands):

<TABLE>
<S> <C>
Fiscal year:
2000....................................................... $ 4,030
2001....................................................... 9,030
2002....................................................... 9,961
2003....................................................... 12,681
2004....................................................... 42,043
-------
Total............................................ $77,745
=======
</TABLE>

As more fully described in footnote 19, the Company was not in compliance
with certain of the financial covenants in both its Senior Credit Facility and
its Senior Subordinated Notes as of April 1, 2000. Because of these technical
defaults the Company has classified $56,437 of its existing indebtedness as
current liabilities.

The Company paid interest on its long-term debt of $1,181,000, $1,662,000
and $3,118,000 during the years ended June 28, 1997, June 27, 1998 and July 3,
1999, respectively.

7. LINES OF CREDIT

In June 1999, the Company entered into a credit facility that provides
short-term borrowings for certain subsidiaries of Welna. The credit facility
provides for a maximum working capital line of credit of NLG 25 million, a term
loan of NLG 2.5 million and an acquisition line of NLG 12.5 million, for a total
facility of NLG 40 million. The facility bears interest quarterly at Euribor
plus .75% (3.389% at July 3, 1999). The Company has approximately NLG 25.4
million, or $11.8 million, outstanding under this facility at July 3, 1999. The
amount available under these facilities is approximately $6.8 million.

The Company also has separate working capital facilities for their
subsidiaries in Germany, Poland and France. These facilities provide for
borrowings up to DM 14.75 million, SEK 3.5 million, and FFR 2.25 million. These
facilities bear interest at various fixed and variable interest rates, ranging
from approximately 4.5% to 10.75% at July 3, 1999. As of July 3, 1999, the
Company has approximately $4.4 million outstanding under these facilities. The
unused portion of these facilities is approximately $4.6 million. These
facilities are due on demand.

8. 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
two of the Company's subsidiaries, Fluid Containment and Ershigs, to purchase at
least 90% of their fiberglass requirements from the supplier. The contract
expires on December 31, 1998. Effective January 1, 1999, the contract was
modified to obtain more favorable pricing levels based on certain minimum volume
purchases for the calendar years ended December 31, 1999 and 2000. 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.

F-24
<PAGE> 60
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 July 3, 1999 were
$520,000 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.

Upon the disability and subsequent resignation of Stephen T. Harcrow, the
Company's former president, during the second quarter of fiscal year 1999, the
Company has begun to make payments pursuant to the Salary Continuation Agreement
between the Company and Mr. Harcrow. The Company recognized a charge of $682,000
in the second quarter of fiscal year 1999 as a result of Mr. Harcrow's
disability triggering the payments under the Salary Continuation Agreement.

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 (in thousands):

<TABLE>
<S> <C>
Fiscal year:
2000........................................................ $1,721
2001........................................................ 1,621
2002........................................................ 1,534
2003........................................................ 1,219
2004 and thereafter......................................... 1,179
------
Total............................................. $7,274
======
</TABLE>

Total rental expense was $1,028,000, $1,204,000 and $1,570,000 for the
years ended June 28, 1997, June 27, 1998 and July 3, 1999, respectively.

10. 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 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax over financial reporting basis of net book value of
property, plant and equipment.......................... $ 564 $1,672
Expenses accrued for financial reporting not yet
deductible for tax..................................... 1,775 2,364
Net operating loss and other carryforwards................ 1,718 2,143
Other..................................................... 219 206
------ ------
Total deferred tax assets......................... $4,276 $6,385
====== ======
</TABLE>

F-25
<PAGE> 61
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis of net book value of property, plant
and equipment.......................................... $ -- $5,081
Expenses deducted for tax, but not accrued for book....... -- 552
Financial reporting over tax basis of goodwill............ 310 94
Other..................................................... 93 237
------ ------
Total deferred tax liabilities............................ 403 5,964
------ ------
Valuation allowance....................................... (684) (978)
------ ------
Net deferred tax assets (liabilities)............. $3,189 $ (557)
====== ======
</TABLE>

The Company has net operating loss carryforwards of approximately $7.9
million that expire through 2017 that are available to offset future taxable
income of certain acquired subsidiaries. These carryforwards are subject to
certain limitations that would limit the carryforwards to approximately $5.4
million. The July 3, 1999 valuation allowance primarily represents net operating
loss carryforwards acquired in May 1998 as a result of the CC&E acquisition, the
future realization of which is uncertain. Any benefits that are ultimately
realized will be recorded as a reduction of goodwill.

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal.................................................. $231 $1,025 $2,378
State.................................................... 38 91 228
---- ------ ------
Total current income tax expense........................... 269 1,116 2,606
---- ------ ------
Deferred income tax expense (benefit):
Federal.................................................. (3) 338 222
State.................................................... 27 (102) 26
---- ------ ------
Total deferred income tax expense.......................... 24 236 248
---- ------ ------
Total income tax expense................................... $293 $1,352 $2,854
==== ====== ======
</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>
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax expense at 34%......................... $207 $ 497 $2,467
State income taxes, net of federal benefit................. 48 116 254
Non-recurring compensation charge.......................... -- 786 --
Other, net................................................. 38 (47) 133
---- ------ ------
Reported total income tax expense.......................... $293 $1,352 $2,854
==== ====== ======
</TABLE>

The Company paid $236,000, $723,000 and $2,175,000 of income taxes during
the years ended June 28, 1997, June 27, 1998 and July 3, 1999, respectively.

F-26
<PAGE> 62
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. STOCKHOLDERS' EQUITY

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.

The Company completed an initial public offering in November 1997. The net
proceeds to the Company from the sale of the 2,276,000 shares of common stock
offered by the Company (after deducting underwriting discounts and commissions
of $2.1 million) were $27.5 million. In addition, during the registration
process, the Company incurred approximately $1.5 million in legal, accounting,
printing and other costs, which were offset against the proceeds of the offering
as a component of additional paid-in capital. Of the approximately $26.0 million
of net proceeds to the Company from the offering, the Company repaid
approximately $15.6 million of the outstanding indebtedness under its credit
facilities, repaid $195,000 for a bank note payable, repaid $6.7 million of the
subordinated unsecured note payable to a seller, repaid a $1.1 million unsecured
note (including interest) to a seller and redeemed the outstanding shares of
preferred stock of the Company totaling approximately $1.4 million, including
accrued and unpaid dividends. The remaining $1.0 million of net proceeds was
used for general working capital purposes.

During 1999, the Company received proceeds of $4.5 million from the
issuance of 489,189 common shares in a private placement. The proceeds were used
to fund the acquisition of Welna.

12. INCENTIVE STOCK OPTION PLAN

Effective February 14, 1996, the Company adopted an incentive stock option
plan (the "Plan") for certain key employees. Denali reserved 367,833 shares of
common stock for purposes of the Plan, all of which have been granted and
exercised as of June 27, 1998.

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 November 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. An additional option for 7,700 shares was granted in
December 1997. The remaining 184,143 shares were granted during fiscal year
1999. Options for 142,113 shares vest 40% immediately and the remainder over a
four-year period. The remaining options for 220,760 shares vest ratably over
four years. All of the options were granted at fair market value. At July 3,
1999, all options available under the 1997 plan have been granted.

Effective September 1997, the Company completed a reorganization of its
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 compensation charge in the quarter
ended September 27, 1997 of approximately $2.3 million.

F-27
<PAGE> 63
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of Denali's stock option activity and related information for the
years ended June 28, 1997, June 27, 1998 and July 3, 1999 follows:

<TABLE>
<CAPTION>
FISCAL YEAR WEIGHTED FISCAL YEAR WEIGHTED FISCAL YEAR WEIGHTED
1997 AVERAGE 1998 AVERAGE 1999 AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year....................... 113,190 2.22 113,190 2.22 178,730 12.99
Granted.................... -- -- 433,373 6.19 184,143 9.95
Exercised.................. -- -- (367,833) 1.67 -- --
------- ---- --------- ----- -------- -----
Outstanding-end of year...... 113,190 2.22 178,730 12.99 362,873 11.45
Exercisable-end of year...... 113,190 2.22 56,845 13.00 87,316 13.00
Weighted average grant date
fair value per option...... $-0- $6.94 $5.85
</TABLE>

All options have five-year terms and are exercisable based on four year
vesting terms. Exercise price per share for options outstanding at July 3, 1999
ranges from $8.56-$14.50 and the average remaining contractual life was 3.5
years.

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 options
granted prior to June 28, 1997 was estimated at the date of grant using a
minimum value option pricing model. The fair value of options granted subsequent
to June 28, 1997 was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions for June 27, 1998 and July 3, 1999,
respectively: risk-free interest rate of 5.3% and 5.6%, a dividend yield of 0%,
volatility factors of the expected market price of the Company's common stock of
26% and 74% and a weighted average expected life of the option of four years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, as if the Company had accounted for its employee stock
options granted subsequent to July 1, 1995 under the fair value method
prescribed by FAS No. 123, follows:

<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Pro forma net income (in thousands)........................ $ 317 $ 43 $3,642
Pro forma earnings per share -- basic and diluted.......... $0.090 $0.003 $0.750
</TABLE>

13. GAIN SHARING PLAN

The Company has a gain sharing plan that covers all employees of the
Company who have satisfied minimum employment standards. For the years ended
June 28, 1997, June 27, 1998 and July 3, 1999, the Company made a gain sharing
contribution equally to all eligible employees totaling $144,000, $347,000 and
$762,000, respectively. Distributions are currently based on 5% of quarterly
operating earnings.

F-28
<PAGE> 64
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. 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. Effective January 1,
1998, the Plan was amended to include all eligible employees of Ershigs Biloxi
and SEFCO. Effective January 1, 1999, the Plan was amended to include all
eligible employees of Fibercast and Plasti-Fab. 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
$277,000, $444,000 and $640,000 for the years ended June 28, 1997, June 27, 1998
and July 3, 1999, respectively.

15. PENSION PLANS

The Company, through its Welna subsidiary, sponsors pension plans that
cover the majority of the employees of Welna. Generally, these plans provide
defined pension benefits based on years of service and final average pay.
Pension plan assets are invested primarily in government securities. Due to the
fact that all the pension plans relate to Welna, the plans had no effect on
current year results and thus, all disclosures relating to the income statement
have been omitted. The following aggregate pension plan items are included in
the July 3, 1999 consolidated balance sheet (in thousands):

<TABLE>
<S> <C>
Pension obligation........................................ $ 8,770
Fair value of plan assets................................. (8,123)
-------
Obligation greater than assets............................ 647
Obligation for early retirement -- unfunded............... 1,462
-------
Net liability recorded in the consolidated balance
sheet................................................... $ 2,109
=======
Assumptions as of July 3, 1999:
Discount rate............................................. 5%
Expected return on plan assets............................ 6%
Rate of compensation increase............................. 3-5%
</TABLE>

16. SEASONALITY AND INFLATION

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

17. SEGMENT DATA

F-29
<PAGE> 65
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accounting policies of the segments are the same as those described in
Note 2 -- "Significant Accounting Policies". All intersegment net revenues and
expenses are immaterial and have been eliminated in computing net revenues and
operating income.

The Company operates in two industry segments: Containment Solutions and
Specialty Solutions. The Containment Solutions segment specializes in the
manufacture of fiberglass underground storage tanks and steel reinforced
aboveground storage tanks for fluids handling. The Specialty Solutions segment
provides engineered solutions for the containment of fluids, specializes in
fiberglass reinforced plastic products for corrosion resistant applications and
engineered metal products for the municipal and industrial markets. For fiscal
1999, 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 revenues, the
Company operates in only one geographic segment, the United States. Beginning in
fiscal year 2000, the Company, through its Welna subsidiary, will have global
operations, with a primary concentration in Europe. Welna is reported as an
additional segment for segment reporting. In the current year, Welna is included
in the presentation of the required asset information as Welna's assets and
liabilities are included in the July 3, 1999 consolidated balance sheet. The
following is a summary of the industry segment data for the years ended June 28,
1997, June 27, 1998 and July 3, 1999:

<TABLE>
<CAPTION>
DEPRECIATION
NET OPERATING TOTAL CAPITAL AND
REVENUES INCOME ASSETS EXPENDITURES AMORTIZATION
-------- --------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended June 28, 1997:
Containment Solutions................. $ 64,817 $ 2,080 $ 29,934 $ 523 $1,199
Specialty Solutions................... 6,284 81 9,791 33 13
Corporate............................. -- (202) 1,359 44 9
-------- ------- -------- ------ ------
Consolidated.......................... $ 71,101 $ 1,959 $ 41,084 $ 600 $1,221
======== ======= ======== ====== ======
Year Ended June 27, 1998:
Containment Solutions................. $ 71,487 $ 3,822 $ 33,564 $2,108 $1,257
Specialty Solutions................... 28,410 2,596 45,838 785 412
Corporate............................. -- (1,637) 980 178 23
Non-recurring compensation charge..... -- (2,312) -- -- --
-------- ------- -------- ------ ------
Consolidated.......................... $ 99,897 $ 2,469 $ 80,382 $3,071 $1,692
======== ======= ======== ====== ======
Year Ended July 3, 1999:
Containment Solutions................. $ 93,791 $ 9,131 $ 37,420 $1,526 $1,486
Specialty Solutions................... 54,969 3,527 57,069 1,282 1,621
Welna................................. -- -- 80,586 -- --
Corporate............................. -- (2,099) 1,500 78 153
Non-recurring compensation charge..... -- (682) -- -- --
-------- ------- -------- ------ ------
Consolidated.......................... $148,760 $ 9,877 $176,575 $2,886 $3,260
======== ======= ======== ====== ======
</TABLE>

F-30
<PAGE> 66
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating income reconciles to income before income taxes as shown on the
consolidated statements of operations as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Total segment operating income............................. $1,959 $2,469 $9,877
Interest expense........................................... 2,058 1,614 3,199
Interest income............................................ (111) (118) (124)
Other income, net.......................................... (598) (489) (453)
------ ------ ------
Income before income taxes................................. $ 610 $1,462 $7,255
====== ====== ======
</TABLE>

As noted above, for fiscal 1999 and prior, revenues were generated
primarily in the United States and thus no geographic disclosures are necessary.
Due to the acquisition of Welna on July 1, 1999, geographic information for
long-lived assets is presented below (in thousands):

<TABLE>
<CAPTION>
LONG-LIVED ASSETS(1) AT:
------------------------
JUNE 27, JULY 3,
1998 1999
---------- ---------
<S> <C> <C>
United States............................................... $20,270 $22,133
International -- Total...................................... $24,805
Significant countries included above:
The Netherlands........................................ $13,500
Poland................................................. 2,826
Germany................................................ 3,419
United Kingdom......................................... 1,955
France................................................. 2,845
</TABLE>

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

(1) Long-lived assets include property, plant and equipment, net of accumulated
depreciation.

18. SUBSEQUENT EVENTS (UNAUDITED)

In addition, on September 1, 1999, the Company signed a letter of intent to
acquire all of the issued and outstanding stock of HP Valves, a valve
manufacturer located in Oldenzaal, The Netherlands.

19. MANAGEMENT PLAN

F-31
<PAGE> 67
DENALI INCORPORATED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$3,999,000 of the subordinated debt with related parties as current liabilities
in its unaudited quarterly financial statements as of April 1, 2000.
Additionally, because of these defaults, the Company has reclassified
$52,457,000 of its long-term debt and $3,980,000 of the subordinated debt with
related parties as current liabilities in its audited financial statements as of
July 3, 1999.

The Company amended its U.S. credit facility on February 24, 2000. The
amendment requires the Company to raise at least $7.5 million in equity before
July 31, 2000 in order to reduce its senior debt leverage ratio. If Denali fails
to raise $7.5 million of equity, the banks will receive up to 1,000,000 warrants
at nominal value to be issued on a schedule from August 2000 through December
2000. In cooperation with its U.S. bank group, the Company expects to raise
sufficient capital to reduce its senior domestic leverage ratio. The Company
does not anticipate that its lenders will accelerate the maturity of the loans
or discontinue the current revolving credit facility.

As part of the Blair transaction, certain subordinated debt held by related
parties will be converted into a combination of new subordinated debt,
convertible debt and shares of Common Stock. Additionally, certain other
subordinated debt holders will purchase for cash from the Company $455,713 in
new subordinated debt, $372,857 in convertible debt, and 75,325 shares of Common
stock at $4.40 per share.

The net proceeds from the Blair transaction will be used to reduce the
Company's current U.S. Bank indebtedness and repay the existing subordinated
notes that are not being converted pursuant to this transaction. Management
believes that consummation of the Blair transaction will provide the Company
with the necessary short-term liquidity for its operations. If the Blair
transaction does not occur, the Company will be required to seek additional
sources of capital. There are no guarantees that the Company would be successful
in securing additional capital. If the Company was unsuccessful in seeking
additional capital resources, it could have significant negative consequences on
the results of operations or financial position of the Company.

F-32
<PAGE> 68

[FRONT OF PROXY CARD]
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!

SPECIAL MEETING OF STOCKHOLDERS
DENALI INCORPORATED

JULY 3, 2000

Please Detach and Mail in the Envelope Provided

[X] Please mark your votes as in this example.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING MATTER:

The approval of the following:

o the purchase by William Blair Mezzanine Capital Fund III, L.P. from
the Company of $11,000,000 in aggregate principal amount of 12% Senior
Subordinated A Notes due June 30, 2008 of the Company (the
"Subordinated Notes"), $9,000,000 in aggregate principal amount of 12%
Senior Subordinated Convertible B Notes due June 30, 2008 of the
Company (the "Convertible Notes") and 1,818,182 shares of the
Company's common stock, par value $0.01 per share (the "Common
Stock"), for $4.40 per share, for an aggregate purchase price of
$28,000,000;

o the conversion by certain holders of outstanding 12% Senior
Subordinated Notes due 2006 of the Company and warrants to purchase
shares of Common Stock at an exercise price of $7.54 per share issued
in connection with the Existing Notes (the "Warrants") (including
certain directors and entities that are affiliates of directors of the
Company) into $726,786 in aggregate principal amount of Subordinated
Notes, $594,644 in aggregate principal amount of Convertible Notes and
711,537 shares of Common Stock; and

o the additional purchase for cash by certain holders of Existing Notes
and Warrants (including an entity that is an affiliate of a director
of the Company) from the Company of $455,713 in aggregate principal
amount of Subordinated Notes, $372,857 in aggregate principal amount
of Convertible Notes and 75,325 shares of Common Stock for $4.40 per
share, for an aggregate purchase price of $1,160,000.

FOR AGAINST ABSTAIN
[ ] [ ] [ ]

SIGNATURE(S) DATE

_______________________________________ ____________________, 2000

Note: (Please sign your name exactly as it appears on the proxy. When
signing as attorney, agent, executor, administrator, trustee, guardian or
corporate officer, please give full title as such. Each joint owner should sign
the proxy.)

<PAGE> 69

[BACK OF PROXY CARD]

DENALI INCORPORATED

SPECIAL MEETING OF STOCKHOLDERS

JULY 3, 2000

The undersigned hereby appoints Richard W. Volk, Robert B. Bennett and R.
Kevin Andrews, and each of them, with full power of substitution, proxies to
vote all stock of Denali Incorporated owned by the undersigned at the Special
Meeting of Stockholders July 3, 2000 and any adjournment of the meeting, on the
items of business set forth on the reverse side and on such other business as
may properly come before the meeting.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IF THE
UNDERSIGNED FAILS TO SPECIFY HOW THE PROXY IS TO BE VOTED, IT WILL BE VOTED FOR
THE PROPOSAL.

(TO BE SIGNED ON REVERSE SIDE)

----------- SEE REVERSE SIDE -----------