NATCO GROUP INC, S-1/A, 1999-12-13

NATCO GROUP INC
S-1/A, 1999-12-13
FABRICATED PLATE WORK (BOILER SHOPS)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999

REGISTRATION NO. 333-48851
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 3

TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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NATCO GROUP INC.
(Exact Name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3533 22-2906892
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

<TABLE>
<S> <C>
J. MICHAEL MAYER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
NATCO GROUP INC.
BROOKHOLLOW CENTRAL III BROOKHOLLOW CENTRAL III
2950 NORTH LOOP WEST, SUITE 750 2950 NORTH LOOP WEST, SUITE 750
HOUSTON, TEXAS 77092 HOUSTON, TEXAS 77092
(713) 683-9292 (713) 683-9292
(Address, including zip code, and telephone (Name, address, including zip code, and telephone
number, number, including area code,
including area code, of agent for service)
of Registrant's principal executive offices)
</TABLE>

Copies To:

<TABLE>
<S> <C>
VINSON & ELKINS L.L.P. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1001 FANNIN STREET, SUITE 2300 1700 PACIFIC AVENUE, SUITE 4100
HOUSTON, TEXAS 77002-6760 DALLAS, TEXAS 75201-4618
(713) 758-2222 (214) 969-4780
ATTN.: WILLIAM E. JOOR III ATTN.: SETH R. MOLAY, P.C.
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

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

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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

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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION -- , 1999

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PROSPECTUS
, 1999

[LOGO TO COME]

7,500,000 SHARES OF CLASS A COMMON STOCK

NATCO GROUP INC.:

- - We are a leading provider of wellhead equipment, systems and services used in
the production of oil and gas.

- - NATCO Group Inc.
Brookhollow Central III
2950 North Loop West, Suite 750
Houston, Texas 77092
(713) 683-9292

PROPOSED SYMBOL & MARKET:

- - NTG/New York Stock Exchange
THE OFFERING:

- - We are offering 4,000,000 shares of our common stock and the selling
stockholders are offering 3,500,000 shares of our common stock for resale.

- - We have granted the underwriters an option to purchase an additional 1,125,000
shares of common stock to cover over-allotments.

- - This is our initial public offering, and no public market currently exists for
our shares.

- - We anticipate that the initial public offering price for our common stock will
be between $ and $ per share.

- - We will not receive any proceeds from the sale of common stock by the selling
stockholders.

- - We plan to use the proceeds from this offering to repay outstanding debt and
for general corporate purposes, including pending acquisitions.

- - Closing: , 1999.

<TABLE>
<CAPTION>
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Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to NATCO:
Proceeds to the selling stockholders:
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</TABLE>

THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
SALOMON SMITH BARNEY
SIMMONS & COMPANY
INTERNATIONAL

DLJDIRECT INC.

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<PAGE> 3

MAP PAGE
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 7
Cautionary Statement Regarding Forward
Looking Statements................... 15
Use of Proceeds........................ 15
Dividend Policy........................ 16
Dilution............................... 17
Capitalization......................... 18
Selected Consolidated Financial Data... 19
Unaudited Condensed Pro Forma Financial
Statements........................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 27
</TABLE>

<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................... 39
Management............................. 50
Related Party Transactions............. 59
Principal and Selling Stockholders..... 63
Description of Capital Stock........... 65
Shares Eligible for Future Sale........ 69
Underwriting........................... 70
Legal Matters.......................... 72
Experts................................ 73
Available Information.................. 73
Index to Financial Statements.......... F-1
</TABLE>

NATCO GROUP INC. We were incorporated in Delaware in 1988. In 1989, we
acquired National Tank Company, which was founded in 1926 and is now our
principal operating subsidiary. The address of our principal executive offices
is Brookhollow Central III, 2950 North Loop West, Suite 750, Houston, Texas
77092, and our telephone number is (713) 683-9292.
------------------

You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
different information. This document may be used only where it is legal to sell
these securities. The information in this prospectus is only accurate on the
date of this prospectus. In this prospectus, all references to "we," "us" and
"our" refer to NATCO Group Inc. and its subsidiaries, unless indicated
otherwise.

i
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights selected information from this prospectus but does
not contain all of the information that may be important to you. This prospectus
includes specific terms of this offering, information about our business and
financial data. We encourage you to read this prospectus in its entirety before
making an investment decision.

WHAT WE DO

We are a leading provider of wellhead equipment, systems and services used
in the production of oil and gas. Our production equipment and systems are
primarily used at or near the wellhead to separate oil and gas within a
hydrocarbon stream and to remove contaminants. Separation and decontamination at
the wellhead are necessary to meet the specifications of transporters and end
users. Our products and services are used in onshore and offshore fields in most
major oil and gas producing regions in the world. On a pro forma basis, after
giving effect to our acquisition of The Cynara Company (Cynara), our revenues
and EBITDA for the twelve months ended December 31, 1998 were approximately
$213.7 million and $9.7 million. For the nine months ended September 30, 1999,
our revenues and EBITDA were approximately $125.9 million and $8.1 million.

We design and manufacture a diverse line of production equipment,
including:

- separators, which separate a hydrocarbon stream into oil, gas and water;

- dehydration and desalting units, which remove water and salt from oil and
gas;

- heaters, which prevent solids from forming in gas and reduce the
viscosity of oil;

- gas conditioning units and membrane separation systems, which remove
carbon dioxide and other contaminants from a gas stream;

- water filtration systems, which remove oil and contaminants from water
derived from the production process; and

- control systems, which monitor and control production equipment.

We offer our products and services as either integrated systems or
individual components. We provide our products and services through four
business segments:

- traditional production equipment and services, a segment which primarily
provides standardized components, replacement parts and used components
and equipment servicing;

- engineered systems, a segment which primarily provides customized, large
scale integrated oil and gas production systems;

- our Canadian operations, a segment which provides traditional production
equipment and services and engineered systems; and

- instrumentation and electrical systems, a segment which provides control
panels and systems that monitor and control oil and gas production.

We have designed, manufactured and marketed production equipment and
systems for over 70 years. We believe that, among our competitors, we have the
largest installed base of production equipment in the industry. We have achieved
our position in the industry by maintaining our technological leadership,
capitalizing on our strong brand name recognition and offering a broad range of
products and services.

1
<PAGE> 6

OUR BUSINESS STRATEGY

Our strategy for future growth is to expand and improve our market position
through:

- Focusing on Customer Relationships. We believe that our customers
increasingly prefer to work on a regular basis with a small number of
leading suppliers. We believe our size, scope of products, technological
expertise and service orientation provide us with a competitive advantage
in establishing preferred supplier relationships with customers. We
expect to generate growth in revenue and market share by establishing and
further developing new and existing customer relationships.

- Providing Turnkey Integrated Systems and Solutions. We believe our
turnkey design and manufacturing capabilities enable us to reduce our
customers' production equipment and systems costs and shorten delivery
times. Our strategy is to be involved in projects early, to provide, as
among our competitors, the broadest and most complete scope of equipment
and services and to focus on larger integrated systems. In some
applications, we also intend to increase the degree of standardization to
reduce engineering costs and to shorten delivery times.

- Introducing New Technologies and Products. Since our inception, we have
developed and acquired leading technologies that enable us to address the
world market demand for increasingly sophisticated production equipment.
We will continue to pursue new technologies through licenses,
acquisitions and internal development.

- Expanding International Presence. We have operated in various
international markets for more than 50 years. We intend to continue
expanding internationally in targeted geographic regions. Currently, our
most important international opportunity is the future development of
Southeast Asian gas markets. We believe our proprietary technology for
the bulk removal of carbon dioxide provides us with a competitive
advantage in pursuing projects in this region.

RECENT DEVELOPMENTS

CYNARA ACQUISITION

In November 1998, we acquired Cynara because it had proprietary technology
for the bulk removal of carbon dioxide from gas streams. Cynara designs,
constructs, operates and services membrane separation systems utilizing this
technology. A primary market for this application is production from gas wells,
such as those located in Southeast Asia, which have high levels of naturally
occurring carbon dioxide. Another market is production from wells, such as those
located in West Texas, in which carbon dioxide injection is used to enhance the
recovery of oil and gas reserves. This acquisition has expanded our ability to
offer integrated systems and services and complements our gas conditioning
product line.

In acquiring Cynara, we issued 500,000 shares of our common stock and paid
$5.3 million in cash to the Cynara stockholders. We also repaid $10.1 million of
Cynara's debt and agreed to issue additional shares of our common stock
contingent on the occurrence of specified operational thresholds. Based on
operations through September 30, 1999, 325,836 additional shares were earned and
issued on September 30, 1999. Up to a total of 950,000 more of these additional
shares may be earned at March 31, 2000 and December 31, 2000.

2
<PAGE> 7

PENDING ACQUISITIONS

We have executed non-binding letters of intent to acquire Porta-Test
International Inc., Engineering Specialties, Inc. and Modular Production
Equipment, Inc. These acquisitions, if completed, will close subsequent to the
completion of this offering.

Porta-Test International Inc. Porta-Test International Inc. (Porta-Test) is
located in Edmonton, Alberta, Canada. Porta-Test designs and manufactures
centrifugal devices used to enhance the effectiveness of separation equipment.
We expect to close the acquisition of Porta-Test in early 2000.

For the fiscal year ended June 30, 1999, Porta-Test had revenues of $7.3
million and EBITDA of $(0.1) million. To acquire all the outstanding Porta-Test
capital stock, we have agreed:

- to pay approximately $5.4 million in cash, net of cash acquired; and

- to issue our one-year promissory note for approximately $0.7 million.

Engineering Specialties, Inc. Engineering Specialties, Inc. (ESI) is
located in Covington, Louisiana. ESI designs and manufactures water processing
equipment used to remove oil and contaminants from water produced at the
wellhead, primarily on offshore facilities. We expect to close the acquisition
of ESI in early 2000.

For the year ended December 31, 1998, ESI had revenues of $3.9 million and
EBITDA of $0.8 million. To acquire all the outstanding ESI capital stock, we
have agreed:

- to pay approximately $7.3 million in cash, net of cash and marketable
securities acquired; and

- to issue options for 25,000 shares of our common stock, exercisable at
the initial offering price.

Modular Production Equipment, Inc. Modular Production Equipment, Inc. (MPE)
is located in Houston, Texas. MPE designs and manufactures wastewater treatment
separation systems and specializes in hydrocyclone technologies. We expect to
close the acquisition of MPE in early 2000.

For the year ended December 31, 1998, MPE had revenues of $7.6 million and
EBITDA of $0.6 million. To acquire all the outstanding MPE capital stock, we
have agreed:

- to pay approximately $2.2 million in cash, net of cash acquired; and

- to issue our one-year promissory note for $0.5 million.

3
<PAGE> 8

THE OFFERING

Class A common stock offered(1):

By us................. 4,000,000 shares

By the selling
stockholders.......... 3,500,000 shares

Total............ 7,500,000 shares

Common stock to be outstanding
after this offering(1)... 13,613,356 shares(2)

Use of proceeds............ We intend to use the net proceeds of approximately
$40.1 million that we will receive from this
offering primarily:

- to repay outstanding debt; and

- for general corporate purposes, including the
pending acquisitions.

Proposed New York Stock
Exchange symbol......... NTG
- ------------------------------

(1) Our common stock is divided into Class A common stock and Class B common
stock. The shares to be sold in this offering are Class A common stock. Only
the former stockholders of Cynara hold Class B common stock. Upon completion
of this offering, the two classes will have the same rights, except that the
holders of the Class B common stock will continue to have the rights:

- to elect one director; and

- to hold a class vote on any amendment to our charter that would authorize
additional Class B common stock or would adversely affect their right to
elect a director.

On January 1, 2002, the Class B common stock converts automatically into
Class A common stock to constitute a single class of common stock. In this
prospectus, references to "our common stock" include both our Class A and
Class B common stock.

(2) Excludes:

- up to 1,125,000 shares of Class A common stock issuable upon exercise by
the underwriters of their option to cover over-allotments;

- 1,795,197 shares of Class A common stock issuable on exercise of
outstanding stock options at a weighted average exercise price of $4.40
per share;

- 950,000 shares of Class B common stock contingently issuable under the
terms of our agreement to acquire Cynara; and

- up to 150,000 shares of Class A common stock subject to options to be
granted to certain employees immediately prior to this offering at an
exercise price equal to the initial public offering price.

4
<PAGE> 9

SUMMARY FINANCIAL INFORMATION

The following summary consolidated historical and unaudited pro forma
financial information for the periods and the dates indicated should be read in
conjunction with our consolidated historical and unaudited pro forma financial
statements included elsewhere in this prospectus. In 1998, we changed our fiscal
year-end to December 31 from March 31. The interim data reflects all adjustments
that, in the opinion of our management, are necessary to present fairly the
information for the nine-month periods. The unaudited pro forma statement of
operations and other financial data give effect to the acquisition of Cynara as
though it occurred on January 1, 1998. The unaudited historical financial data
presented for the nine-month period ended September 30, 1999 is not necessarily
indicative of the actual financial results to be expected for the full fiscal
year. See "Selected Consolidated Financial Data" and "Unaudited Condensed Pro
Forma Financial Statements" for more information regarding the historical and
the unaudited pro forma consolidated financial data.

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED NINE MONTHS PRO FORMA ENDED
MARCH 31, ENDED YEAR ENDED SEPTEMBER 30,
------------------- DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1998(1) 1998 1999
-------- -------- ------------ ------------ -------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Revenues......................................... $126,657 $202,023 $145,611 $213,651 $151,705 125,894
Cost of goods sold............................... 100,803 161,801 115,521 168,816 121,160 94,979
-------- -------- -------- -------- -------- -------
Gross profit..................................... 25,854 40,222 30,090 44,835 30,545 30,915
Selling, general and administrative expense...... 23,313 28,553 24,530 35,076 23,394 23,636
Depreciation and amortization expense............ 862 1,322 1,473 4,383 1,172 3,491
Interest expense................................. 1,861 2,992 2,215 3,555 2,022 2,546
Interest cost on postretirement liability(3)..... 957 1,048 786 1,048 786 785
Revaluation loss (gain) on postretirement
liability(3)................................... 1,466 159 53 53 -- (845)
Interest income.................................. (116) (140) (227) (227) (155) (175)
-------- -------- -------- -------- -------- -------
Income (loss) from continuing operations before
income taxes................................... (2,489) 6,288 1,260 947 3,326 1,477
Income tax provision (benefit)................... (659) 1,141 608 (30) 533 1,075
-------- -------- -------- -------- -------- -------
Income (loss) from continuing operations......... $ (1,830) $ 5,147 $ 652 $ 977 2,793 402
======== ======== ======== ======== ======== =======
Basic earnings (loss) per share from continuing
operations..................................... $ (0.31) $ 0.68 $ 0.08 $ 0.11 $ 0.34 $ 0.04
Diluted earnings (loss) per share from continuing
operations..................................... (0.28) 0.64 0.07 0.10 0.32 0.04
Basic earnings per share......................... 0.67 0.78 0.08 0.11 0.34 0.04
Diluted earnings per share....................... 0.64 0.73 0.07 0.10 0.32 0.04
Basic weighted average number of shares of common
stock outstanding.............................. 6,032 7,623 8,243 8,665 8,147 9,197
Diluted weighted average number of shares of
common stock outstanding....................... 6,371 8,067 8,942 9,366 8,863 9,868
OTHER DATA:
Cash flows provided by (used in) operating
activities..................................... $ 1,059 $ 3,113 $ (1,450) 2,009 12,494
Cash flows provided by (used in) investing
activities..................................... (798) (24,712) (17,069) (3,098) (1,550)
Cash flows provided by (used in) financing
activities..................................... (1,033) 21,660 20,179 1,578 (11,995)
Earnings before interest, taxes, depreciation and
amortization (EBITDA)(4)....................... 1,075 11,510 5,507 9,706 7,151 8,124
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, OFFERING
----------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999 1999(5)
------- ------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................... $12,551 $24,442 $ 31,466 $ 26,308 $ 38,236
Net property, plant and equipment............. 6,833 9,332 18,294 17,653 17,653
Total assets.................................. 70,044 95,413 118,412 104,046 111,331
Long-term debt(6)............................. 27,566 33,719 41,777 32,926 --
Stockholders' equity (deficit)................ (6,737) 5,419 24,190 28,104 68,315
</TABLE>

(See footnotes on next page)

5
<PAGE> 10

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

(1) The unaudited pro forma statement of operations and other data do not give
pro forma effect to this offering or to the pending acquisitions of
Porta-Test, ESI and MPE as these acquisitions, if they close, will close
after this offering. For information regarding the pro forma effect of this
offering and these pending acquisitions, see "Unaudited Condensed Pro Forma
Financial Statements."

(2) In June 1997, we distributed our investment in Process Technology Holdings,
Inc. (PTH) to our then sole stockholder in a tax-free transaction. In
accordance with generally accepted accounting principles, we account for the
results of operations of PTH as discontinued operations for all periods
presented. Accordingly, the net income of PTH is excluded from income (loss)
from continuing operations in our statements of operations for the periods
presented.

(3) When we acquired National Tank Company in 1989 from Combustion Engineering,
Inc., we agreed to provide specified health care and life insurance benefits
to employees of National Tank Company who retired prior to June 21, 1989.
These agreements provided that our annual cash costs related to these
benefits were reimbursed by the seller through June 21, 1999 to the extent
that they exceeded on an annual basis the lesser of one-third of the cash
costs in that year or $0.8 million, as adjusted for inflation. For the
fiscal year ended March 31, 1997, our aggregate cash costs related to these
benefits were $1.7 million, of which $1.1 million was reimbursed. For the
fiscal year ended March 31, 1998, our aggregate cash costs were $1.8
million, of which $1.0 million was reimbursed. For the nine months ended
December 31, 1998, our aggregate cash costs were $1.6 million, of which $1.1
million was reimbursed. For the nine months ended September 30, 1999, our
aggregate cash costs related to these benefits were $0.9 million, of which
$0.5 million was reimbursed. The reimbursement obligation expired on June
22, 1999, and we no longer receive reimbursement for any portion of these
cash costs. We currently plan to fund the cash requirements related to these
retired employee benefits on a current basis.

(4) EBITDA consists of income (loss) from continuing operations before interest
expense, interest cost on postretirement benefit liability, income tax
expense, and depreciation and amortization expense, less interest income.

EBITDA is not a measurement presented in accordance with generally accepted
accounting principles. You should not consider it 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 our
profitability or liquidity. EBITDA is included as a supplemental disclosure
because it may provide useful information regarding our ability to service
debt and to fund capital expenditures.

(5) See notes (a), (b) and (e) to Unaudited Condensed Pro Forma Balance Sheet.

(6) Includes current portion of long-term debt and revolving lines of credit.

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<PAGE> 11

RISK FACTORS

In determining whether to purchase shares of our common stock, you should
carefully consider the risk factors described below and all the information we
have included in this prospectus.

A SUBSTANTIAL OR EXTENDED DECLINE IN OIL OR GAS PRICES COULD RESULT IN LOWER
EXPENDITURES BY THE OIL AND GAS INDUSTRY, THEREBY AFFECTING OUR REVENUE.

Our business is substantially dependent on the condition of the oil and gas
industry and its willingness to spend capital on the exploration for and
development of oil and gas. A substantial or extended decline in these
expenditures may result in the location of fewer new reserves of oil and gas,
adversely affecting the market for our production equipment and services. The
level of these capital expenditures is generally dependent on the industry's
view of oil and gas prices, which have been characterized by significant
volatility in recent years. Oil and gas prices are affected by numerous factors,
including:

- the level of exploration activity;

- worldwide economic activity;

- interest rates and the cost of capital;

- environmental regulation;

- tax policies;

- political requirements of national governments;

- coordination by the Organization of Petroleum Exporting Countries (OPEC);

- the cost of producing oil and gas; and

- technological advances.

WE MAY LOSE MONEY ON FIXED PRICE CONTRACTS.

Many of our projects, including larger engineered systems projects, are
performed on a fixed-price basis. We are responsible for all cost overruns,
other than any resulting from change orders. Our costs and any gross profit
realized on our fixed-price contracts will often vary from the estimated amounts
on which these contracts were originally based. This may occur for various
reasons, including:

- errors in estimates or bidding;

- changes in availability and cost of labor and material; and

- variations in productivity from our original estimates.

These variations and the risks inherent in engineered systems projects may
result in reduced profitability or losses on our projects. Depending on the size
of a project, variations from estimated contract performance can have a
significant impact on our operating results for any particular fiscal quarter or
year.

WE HAVE RELIED AND WE EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF
CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES.

There have been and are expected to be periods where a substantial portion
of our revenues are derived from a single customer or a small group of
customers. We had revenues of $28.3 million (14% of our total revenues) from the
BP Exploration (Alaska), Inc. alliance project for fiscal 1998. On July 1, 1999,
we were awarded a $73.0 million contract to supply gas treating and conditioning
equipment to a project in Southeast Asia. The project is a joint venture under
the control of the Carigali-Triton Operating Company (CTOC), which is owned 50%
by Petronas, the Malaysian National Oil Company, and 50% by ARCO and Triton. The
project is located in the Gulf of Thailand. Although this project has not yet

7
<PAGE> 12

produced more than 10% of our revenues in any period, it will take approximately
two years to complete and is expected to comprise more than 10% of annual
billings during that period. A prolonged failure of this customer to fulfill its
contractual obligations to us or a termination of the related project could have
a material adverse effect on our results of operations.

OUR ABILITY TO ATTRACT AND RETAIN SKILLED LABOR IS CRUCIAL TO THE PROFITABILITY
OF OUR FABRICATION AND SERVICES ACTIVITIES.

Our ability to remain profitable depends in part on our ability to attract
and retain skilled manufacturing workers, equipment operators, engineers and
other technical personnel. Our ability to expand our operations, particularly in
the Gulf Coast area, depends primarily on our ability to increase our labor
force. Demand for these workers is currently high and the supply is extremely
limited. We believe that our wage rates are competitive and that our
relationship with our skilled labor force is good. A significant increase in the
wages paid by competing employers could, nevertheless, result in a reduction in
our skilled labor force, increases in the rates of wages we must pay or both. If
this were to occur, the immediate effect on us would be a reduction in our
profits and the extended effect would be diminishment of our production capacity
and profitability and impairment of our growth potential.

A THIRD PARTY WILL NO LONGER REIMBURSE US FOR A PORTION OF OUR COSTS OF
SPECIFIED EMPLOYEE HEALTH AND LIFE INSURANCE.

We are required by contract to provide health care and life insurance
benefits to our former employees who retired prior to June 21, 1989. The
contract also provided for partial reimbursement of our annual cash costs
related to these benefits by a third party. For the fiscal years ended March 31,
1997 and 1998, our cash costs related to these benefits were $1.7 million and
$1.8 million. In fiscal 1997, we were reimbursed $1.1 million, and in fiscal
1998 we were reimbursed $1.0 million. For the nine months ended December 31,
1998, our cash costs were $1.6 million, of which we were reimbursed $1.1
million. For the nine months ended September 30, 1999, our aggregate cash costs
related to these benefits were $0.9 million, of which $0.5 million was
reimbursed. The reimbursement obligation expired on June 22, 1999, and we no
longer receive reimbursement for any portion of these cash costs. At September
30, 1999, there were 531 retirees and surviving spouses and 323 dependents
covered by the specified postretirement benefits obligations. As a result of the
transaction described in "Related Party Transactions -- Capricorn I
Subsidiaries -- Tyler" these numbers will increase to 624 and 352, respectively.

In accounting for this liability, we evaluate annually the estimated
liability, discounted to present value, of the unreimbursable portion of these
benefits. We recognize and report in our financial statements gains and losses
from these evaluations. For the fiscal years ended March 31, 1997 and 1998, we
reported losses on revaluation of postretirement employee liability of $1.5
million and $0.2 million. For the nine months ended December 31, 1998, we
reported a loss of $0.1 million. For the nine months ended September 30, 1999 we
reported a gain of $0.8 million.

We cannot assure you that the costs of the actual benefits will not exceed
those projected or that future actuarial assessments of the extent of those
costs will not exceed the current assessment. Under those circumstances, the
adjustments required to be made to our recorded liability for these benefits
could have a material adverse effect on our results of operations and financial
condition.

THE LOSS OF ONE OR MORE OF OUR CUSTOMER RELATIONSHIPS COULD MATERIALLY HARM OUR
BUSINESS AND EARNINGS.

We expect to continue our practice of entering into relationships with
major oil companies and large independent producers. In these relationships, we
are typically designated as the preferred supplier of equipment or services or
both. Many of these relationships are nonbinding arrangements in which both
parties undertake to satisfy the objectives of the relationship. They may be
characterized as:

- blanket purchase orders for specified amounts of standardized equipment;

- project-specific integrated relationships; or

8
<PAGE> 13

- ongoing informal working relationships.

The loss of one or more of these relationships could have a material
adverse effect on our business and results of operations.

OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE INTERRUPTIONS DUE TO POLITICAL AND
ECONOMIC RISKS.

We operate our business and market our products and services in oil and gas
producing areas throughout the world. We are, therefore, subject to the risks
customarily attendant to international operations and investments in foreign
countries. These risks include:

- nationalization;

- expropriation;

- war and civil disturbances;

- restrictive actions by local governments;

- limitations on repatriation of earnings;

- changes in foreign tax laws; and

- changes in currency exchange rates.

The occurrence of any of these risks could have an adverse effect on
regional demand for our products and services or our ability to provide them. An
interruption of our international operations could have a material adverse
effect on our results of operations and financial condition.

A portion of our sales are made in Southeast Asia. The currencies of
several countries in Southeast Asia underwent significant devaluations against
the United States dollar in 1997 and early 1998. The devaluation of these
currencies and the related consequences to the economies in these countries have
adversely affected economic growth in the region. To the extent the economies of
countries in Southeast Asia continue to be adversely affected, we cannot assure
you that the demand for our products and services in the region will continue at
historical or anticipated levels.

OUR PENDING ACQUISITIONS THAT ARE INCLUDED IN OUR PRO FORMA FINANCIAL STATEMENTS
ARE SUBJECT TO THE RISK THAT THEY MAY NOT BE CONSUMMATED.

Our Unaudited Condensed Pro Forma Financial Statements give effect to the
completion of this offering and the pending acquisitions. With respect to the
pending acquisitions, however, we have only entered into non-binding letters of
intent. Accordingly, the completion of each of these transactions is subject to
numerous conditions, including the negotiation and execution of definitive
agreements and the fulfillment or waiver of the conditions to closing to be
included in the agreements. These conditions are expected to include such
matters as confirmation by each party of its representations and warranties in
those agreements, fulfillment of its covenants to be fulfilled by closing and
the absence of any material adverse change in the financial condition or results
of operations of the party we intend to acquire. We can not assure you that
these conditions will be fulfilled or that these acquisitions will be completed.
Moreover, even if they are completed, the pro forma financial statements are for
illustrative purposes only and are not necessarily indicative of the financial
results that would have been achieved if the acquisitions had been completed and
should not be viewed as indicative of results of operations or financial
position in future periods.

9
<PAGE> 14

FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
ADVERSELY AFFECT OUR OPERATING RESULTS.

We intend to continue our practice of acquiring other companies, assets and
product lines that complement or expand our existing business. Each acquisition,
however, involves a number of risks. These risks include:

- the diversion of our management's attention to the assimilation of the
operations and personnel of the acquired business;

- possible adverse effects on our operating results during the integration
process; and

- the possible inability to achieve the intended objectives of the
combination.

In pursuit of our acquisition strategy, we may seek to finance an
acquisition through borrowings under credit facilities or the issuance of new
debt or equity securities. If we should proceed with a relatively large cash
acquisition, we could deplete a substantial portion of our financial resources
to the possible detriment of our other operations. Any future acquisitions could
also dilute the equity interests of our stockholders, require us to write off
assets for accounting purposes or create other undesirable accounting issues,
such as significant expenses for amortization of goodwill or other intangible
assets.

OUR INSURANCE POLICIES MAY NOT COVER ALL PRODUCTS LIABILITY CLAIMS.

Some of our products are used in potentially hazardous production
applications that can cause:

- personal injury;

- loss of life;

- damage to property, equipment or the environment; and

- suspension of operations.

We maintain insurance coverage against these risks in accordance with
normal industry practice. This insurance will not protect us against liability
for some kinds of events, including specified events involving pollution, or
against losses resulting from business interruption. We cannot assure you that
our insurance will be adequate in risk coverage or policy limits to cover all
losses or liabilities that we may incur. Moreover, we cannot assure you that we
will be able in the future to maintain insurance at levels of risk coverage or
policy limits that we deem adequate. Any future damages caused by our products
or services that are not covered by insurance or are in excess of policy limits
could have a material adverse effect on our business, results of operations and
financial condition.

LIABILITY TO CUSTOMERS UNDER WARRANTIES MAY MATERIALLY AND ADVERSELY AFFECT OUR
EARNINGS.

We typically provide warranties as to the proper operation and conformance
to specifications of the equipment we manufacture. Failure of this equipment to
operate properly or to meet specifications may increase our costs by requiring
additional engineering resources, replacement of parts and equipment or service
or monetary reimbursement to a customer. Our warranties are often backed by
letters of credit. At September 30, 1999, we had provided to our customers
approximately $1.7 million in letters of credit related to warranties. We have
in the past received warranty claims and we expect to continue to receive them
in the future. To the extent that we should incur warranty claims in any period
substantially in excess of our warranty reserve, our results of operations and
financial condition could be materially and adversely affected.

WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH OUR ENVIRONMENTAL OBLIGATIONS.

In our equipment fabrication and refurbishing operations, we generate and
manage hazardous wastes. These include:

- waste solvents;

- waste paint;

10
<PAGE> 15

- waste oil;

- washdown wastes; and

- sandblasting wastes.

We attempt to identify and address environmental issues before acquiring
properties and to utilize industry accepted operating and disposal practices
regarding the management and disposal of hazardous wastes. Nevertheless, either
we or others may have released hazardous materials on our properties or in other
locations where hazardous wastes have been taken for disposal. We may be
required by federal or state environmental laws to remove hazardous wastes or to
remediate sites where they have been released. We could also be subjected to
civil and criminal penalties for violations of those laws. Our costs to comply
with these laws may adversely affect our earnings.

OUR QUARTERLY SALES AND EARNINGS MAY FLUCTUATE SIGNIFICANTLY.

A substantial amount of our revenues are derived from significant contracts
which are often performed over periods of two to six quarters. As a result, our
revenues and earnings may fluctuate significantly from quarter to quarter,
depending upon our ability to replace existing contracts with new orders and
upon the extent of any delays in completing existing projects.

TERMINATION OF A FEW LARGE PROJECTS COULD SUBSTANTIALLY REDUCE OUR BACKLOG.

Our backlog is based on awarded projects. Awarded projects include those
projects on which customers have authorized us to begin work or to purchase
materials. Each project that we currently include in our backlog is subject to
change or termination at the customer's election. Exercise by our customers of
their rights to change or terminate projects could change or reduce the amount
of backlog currently reported. The decrease could be substantial in the case of
the termination of a few large projects. A decrease in backlog may adversely
affect our future earnings.

THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.

Our success depends heavily on the continued services of our senior
management. Our senior management consists of a small number of individuals
relative to other comparable or larger companies. These are the individuals who
possess our bidding, procurement, transportation, logistics, planning, project
management, risk management and financial skills. If we lost or suffered an
extended interruption in the services of one or more of our senior officers, our
results of operations could be adversely affected. Moreover, we cannot assure
you that we will be able to attract and retain qualified personnel to succeed
members of our senior management. We do not maintain key man life insurance.

COMPETITION COULD RESULT IN REDUCED PROFITABILITY AND LOSS OF MARKET SHARE.

Contracts for our products and services are generally awarded on a
competitive basis, and competition is intense. The most important factors
considered by our customers in awarding contracts include:

- the availability and capabilities of our equipment;

- our ability to meet the customer's delivery schedule;

- our price;

- our reputation;

- our experience; and

- our safety record.

Historically, the existence of overcapacity in our industry has caused increased
price competition in many areas of our business.

11
<PAGE> 16

In addition, we may encounter obstacles in our international operations
that impair our ability to compete in individual countries. These obstacles may
include:

- subsidies granted in favor of local companies;

- import duties and fees imposed on us and other foreign operators;

- taxes imposed on foreign operators;

- lower wage rates in foreign countries; and

- fluctuations in the exchange value of the United States dollar compared
with the local currency.

Any or all these factors could adversely affect our ability to compete and
thus adversely affect our results of operations.

THE INTERNAL REVENUE SERVICE MAY CHALLENGE OUR TAX POSITION REGARDING THE
SPIN-OFF OF PROCESS TECHNOLOGY HOLDINGS, INC.

Prior to June 1997, we owned substantially all the outstanding stock of
Process Technology Holdings, Inc. (PTH). In connection with a financing in June
1997, we distributed all of that stock to our sole stockholder at the time,
Capricorn Investors, L.P. (Capricorn I). At that time, we obtained an opinion of
counsel to the effect that the distribution would be not be subject to federal
income tax either to us or Capricorn I. Tax-free treatment of the distribution
depends, in part, on the underlying facts and circumstances at the time of the
distribution. We cannot assure you that the IRS will agree with our
interpretation and that of our counsel of those facts and circumstances. If the
IRS were to challenge the tax-free treatment of the distribution and to prevail,
we would recognize a gain for federal income tax purposes with respect to the
distribution. The amount of the gain would be equal to the excess of the fair
market value of the PTH stock at the time of the distribution over our tax basis
in that stock. The resulting tax could have a material adverse effect on our
results of operations and financial condition. See "Related Party
Transactions -- Capricorn I Subsidiaries -- Tyler."

CONTROL OF OUR COMPANY BY THE EXISTING STOCKHOLDERS MAY DISCOURAGE TAKEOVER
BIDS.

As of September 30, 1999, Capricorn I and Capricorn Investors II, L.P.
(Capricorn II) owned 57.9% and 32.1% of our outstanding common stock.
Immediately upon completion of this offering, they will own 17.8% and 22.7%,
which percentages will decline to 16.4% and 20.9% if the underwriters exercise
fully their over-allotment option. As a result, one of our directors, Herbert S.
Winokur, Jr., through his control of Capricorn I and Capricorn II, will have
sufficient voting power to control our direction and policies. It is likely that
he will also be able to determine the outcome of any matter requiring
stockholder approval, including:

- a business combination involving a merger, consolidation or sale of all
or substantially all of our assets; and

- the election of directors of our company.

It is also likely that he will also be able to prevent a change in control of
our company except on terms acceptable to him.

In addition, Mr. Winokur will be able to exercise the contractual rights of
Capricorn I and Capricorn II to nominate two of our directors so long as
Capricorn I and Capricorn II together own at least 20% of our common stock.

We understand that Capricorn I intends in the near future to distribute to
its partners all the shares of our common stock that it owns. Even after that
distribution, however, Mr. Winokur is expected to be able to exert substantial
influence over the direction and policies of our company through his direct
holdings of our common stock and his control of Capricorn II.

12
<PAGE> 17

OUR RIGHTS PLAN AND THE DELAWARE LAW MAY DISCOURAGE ACQUISITION BIDS.

Our board of directors has adopted a stockholders' rights plan. Under this
plan, we have issued preferred stock purchase rights as a dividend on our
outstanding common stock and on any other common stock issued after adoption of
the plan. This will include the shares issued by us in this offering. These
rights are not currently exercisable. They would become exercisable, however, if
someone acquired or offered to acquire specified amounts of common stock.

Moreover, a provision of Delaware law that is applicable to us could delay
or make difficult a merger, tender offer or proxy contest involving us. This
provision also becomes applicable if someone acquires or offers to acquire a
specified amount of our common stock.

The rights and the provisions of the Delaware law have certain
anti-takeover effects. The rights will cause substantial dilution to a person or
group that attempts to acquire us without the approval of our board of
directors. The rights and the provisions of Delaware law may deter a potential
unfriendly offer or other effort to gain control of our company that is not
approved by our board of directors. This may deprive the stockholders of
opportunities to sell shares of our common stock at prices higher than those
prevailing in the market. Neither the rights nor this provision of Delaware law
should, however, interfere with any merger or other business combination that is
approved by our board of directors.

PROVISIONS OF OUR CHARTER AND BYLAWS MAY ALSO DISCOURAGE ACQUISITION BIDS.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. The board of directors can fix the terms of the preferred stock
without any action on the part of our stockholders. Our board has designated a
series of 500,000 shares of preferred stock that is subject to issuance under
our rights plan. The issuance of shares of preferred stock may delay or prevent
a change in control transaction. This may adversely affect the market price and
interfere with the voting and other rights of our common stock. We have no
current plans to issue any shares of preferred stock.

Our charter and bylaws contain the following anti-takeover provisions:

- only one of the three classes of directors is elected each year;

- the ability of our stockholders to remove directors without cause is
precluded;

- our stockholders may not act by written consent in lieu of a meeting
unless both the subject matter of the consent and the taking of action by
written consent have been approved by our board;

- a written request signed by the holders of at least 10% of our
outstanding common stock is required for the stockholders to call a
special meeting of stockholders; and

- advance notice is required for the stockholders to nominate directors or
submit proposals for consideration at stockholder meetings.

These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. As a result, they may limit
the price that some investors might be willing to pay in the future for shares
of our common stock. These provisions may also impede changes in our management.

OUR STOCK PRICE MAY BE VOLATILE BECAUSE OUR SHARES HAVE NOT PREVIOUSLY BEEN
TRADED PUBLICLY.

Prior to this offering, there has been no public market for our common
stock. We intend to apply to list our common stock on the NYSE. We cannot assure
you, however, that an active trading market for the common stock will develop or
that, if it develops, it will be sustained.

The initial public offering price of our common stock will be determined
through negotiations between our management and the selling stockholders on one
hand and the representatives of the underwriters on the other. The initial
public offering price may bear no relationship to the price at which our common

13
<PAGE> 18

stock will trade after the offering. Following the offering, prices for our
common stock may be influenced by a number of factors. These include:

- the liquidity of the market for our common stock;

- investor perceptions of us;

- investor perceptions of the energy services industry; and

- general economic conditions.

THE LAPSE OF LEGAL RESTRICTIONS ON THE SALE OF SHARES COULD AFFECT OUR STOCK
PRICE AND DILUTE YOUR STOCK OWNERSHIP.

Sales of substantial amounts of our common stock in the public market by
insiders following the offering, or the perception that these sales may occur,
could cause the market price of our common stock to fall. After the offering,
assuming the underwriters do not exercise their over-allotment option, there
will be outstanding 13,613,356 shares of our common stock. If the underwriters
exercise their over-allotment option, this number will increase to 14,738,356
shares. Of these, 6,113,356 shares will be held as follows:

<TABLE>
<CAPTION>
STOCKHOLDER NUMBER OF SHARES
<S> <C>
Capricorn I.......................................... 2,417,764
Capricorn II......................................... 3,087,021
Former stockholders of Cynara........................ 471,739*
Nathaniel A. Gregory................................. 136,832
</TABLE>

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

* Up to a total of 950,000 additional shares may be earned at March 31, 2000 and
December 31, 2000.

The holding periods under Rule 144 with respect to the shares of our common
stock held by Capricorn I, Capricorn II and the former stockholders of Cynara
have already expired or will have expired before the scheduled expiration of the
lock-up agreements to be entered into by our directors, officers and specified
shareholders. These lock-up agreements are scheduled to expire 180 days after
the date of this prospectus. Mr. Gregory may sell his shares under Rule 144
after July 12, 2000.

PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.

The net tangible book value of shares of our common stock that you purchase
in this offering will be substantially less than the price that you pay for
them. This immediate and substantial dilution in the net tangible book value of
the shares you purchase will be $7.40 assuming an initial public offering price
of $11.00 per share. If and to the extent that outstanding common stock options
are exercised after the offering, there may be further dilution in the net
tangible book value of your shares of common stock.

A CHANGE IN THE ESTIMATED LIFE OF GOODWILL COULD REDUCE OUR EARNINGS.

Our balance sheet at September 30, 1999, had an amount called "goodwill"
that represented 18.6% of assets and 68.7% of stockholders' equity. Goodwill is
recorded when we pay more for a business than the fair value of the tangible and
separately measurable intangible net assets. GAAP requires us to amortize this
and all other intangible assets over the periods we benefit from those assets.
The amortization periods for our acquisitions to date are either 20 years or 40
years. We evaluate the useful life of all our assets on an ongoing basis. If we
were to assign a shorter life to a material portion of the goodwill, earnings
reported in prospective periods would be reduced. If management should determine
that the remaining balance of goodwill was impaired, we would be required to
take an immediate charge to earnings with a correlative effect on stockholder's
equity.

14
<PAGE> 19

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This prospectus, including the sections entitled "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," contains forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks and uncertainties. These factors may cause our
company's or our industry's actual results, levels of activity, performance or
achievements to be materially different from those expressed or implied by the
forward-looking statements. These risks and other factors include those listed
under "Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology.

These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 4,000,000 shares of
common stock that we are selling in this offering will be approximately $40.1
million ($51.6 million if the underwriters fully exercise their over-allotment
option.) This is based on an assumed public offering price of $11.00 per share
and after deducting the underwriting discount and estimated offering expenses
payable by us. We will not receive any proceeds from the sale of shares being
sold by the selling stockholders.

We intend to use the net proceeds that we receive from this offering as
follows:

- to repay all of our outstanding indebtedness under our credit facilities
(approximately $32.9 million as of September 30, 1999); and

- to apply the balance to general corporate purposes, including the pending
acquisitions of Porta-Test, ESI and MPE. The pending acquisitions will
require approximately $14.9 million. To the extent the proceeds from this
offering are not sufficient to fund these acquisitions, we will borrow
the additional funds under our revolving credit facility.

Pending use for these purposes, we plan to invest the net proceeds in
short-term investment-grade securities.

The weighted average interest rate for outstanding borrowings under our
credit facilities as of September 30, 1999 was 7.9%. The term loan portion of
one of our credit facilities is payable in quarterly installments through
November 2003. The revolving portion of that credit facility matures on November
30, 2001. The other credit facility matures on July 23, 2002. We used borrowings
under our credit facilities to fund acquisitions and capital expenditures and
for general corporate purposes.

15
<PAGE> 20

DIVIDEND POLICY

We do not intend to declare or pay any dividends on our common stock in the
foreseeable future. Instead, we intend to retain any future earnings for use in
our business.

Our board will determine the payment of future dividends on our common
stock and the amount of any such dividends in light of:

- any applicable contractual restrictions limiting our ability to pay
dividends;

- our earnings;

- our financial condition;

- our ability to fund our capital requirements; and

- other factors our board deems relevant.

Currently, our bank credit facilities restrict the amount of dividends and
other distributions that our operating subsidiaries may pay to us. Since we are
a holding company, these restrictions have the practical effect of precluding us
from paying dividends on our common stock.

16
<PAGE> 21

DILUTION

Our net tangible book value at September 30, 1999 was $0.91 per share of
our common stock. Net tangible book value per share represents our total
tangible assets reduced by our total liabilities and divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share that you pay in
this offering and the net tangible book value per share immediately after this
offering.

After giving effect to the receipt of the proceeds from our sale of
4,000,000 shares at an assumed public offering price of $11.00 per share, our
net tangible book value per share at September 30, 1999 would have been
approximately $3.60. This represents an immediate increase in net tangible book
value per share of $2.69 to existing stockholders and an immediate decrease in
net tangible book value per share of $7.40 to you. The following table
illustrates this dilution.

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 11.00
Net tangible book value per share at September 30, 1999... $ 0.91
Increase per share attributable to new investors.......... 2.69
--------
Net tangible book value per share after this offering....... $ 3.60
--------
Dilution per share to new investors......................... $ 7.40
========
</TABLE>

The following table sets forth as of September 30, 1999 the differences
between the amounts paid or to be paid by the groups set forth in the table with
respect to the aggregate number of shares of our common stock acquired or to be
acquired by each group.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER % AMOUNT % PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 9,613,356 58.8 $42,372,000 44.9 $ 4.41
New investors(1)........................ 4,000,000 24.4 $44,000,000 46.7 $11.00
Option holders.......................... 1,795,197 11.0 $ 7,899,000 8.4 $ 4.40
Former Cynara stockholders(2)........... 950,000 5.8 -- -- --
---------- ----- ----------- -----
Total......................... 16,358,553 100.0% $94,271,000 100.0% $ 5.76
</TABLE>

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

(1) Before deducting underwriters' commissions and our expenses and assuming a
public offering price of $11.00 per share.

(2) Includes only shares contingently issuable to the former stockholders of
Cynara under the Cynara merger agreement and assumes that no additional
consideration will be paid for such shares. Under the Cynara merger
agreement, such shares are issuable only if Cynara achieves certain revenue
thresholds.

17
<PAGE> 22

CAPITALIZATION

The following table sets forth our capitalization at September 30, 1999 and
as adjusted as of that date to reflect the sale of 4,000,000 shares of our
common stock in this offering and the application of the estimated net proceeds
from the offering. You should read the information below in conjunction with
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 1,675 $ 8,388
======= =======
Current portion of long-term debt and revolving credit
facility.................................................. $ 4,643 $ --
Long-term debt (excluding current portion).................. 28,283 --
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000
shares authorized; no shares outstanding............... -- --
Class A common stock, par value $0.01 per share,
45,000,000 shares authorized; 8,787,520 and 13,141,617
shares outstanding, respectively(2)(3)................. 88 131
Class B common stock, par value $0.01 per share, 5,000,000
shares authorized; 825,836 and 471,739 shares
outstanding, respectively(2)(4)........................ 8 5
Additional paid-in capital................................ 43,273 83,653
Accumulated deficit....................................... (8,416) (9,349)
Treasury stock, 470,188 shares at cost...................... (4,550) (4,550)
Accumulated other comprehensive loss........................ (1,075) (1,075)
Note receivable from an officer and stockholder............. (1,224) (500)
------- -------
Total stockholders' equity........................ 28,104 68,315
------- -------
Total capitalization.............................. $61,030 $68,315
======= =======
</TABLE>

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

(1) Does not reflect adjustments related to the pending acquisitions of
Porta-Test, ESI and MPE, as they will not close, if at all, until after this
offering. The estimated cash required for the pending acquisitions is $14.9
million.

(2) The shares to be sold in this offering are Class A common stock. Only the
former stockholders of Cynara hold Class B common stock. Upon completion of
this offering, the two classes will have the same rights, except that the
holders of the Class B common stock will continue to have the rights:

- to elect one director; and

- to hold a class vote on any amendment to our charter that would authorize
additional Class B common stock or would adversely affect their rights to
elect a director.

On January 1, 2002, the Class B common stock converts automatically into
Class A common stock to constitute a single class of common stock.

(3) Excludes the following related to Class A common stock:

- up to 1,125,000 shares if the underwriters exercise their option to cover
over-allotments;

- 1,795,197 shares issuable at October 31, 1999 on exercise of outstanding
stock options at a weighted average exercise price of $4.40 per share;
and

- up to 150,000 shares subject to options to be granted to certain
employees immediately prior to the offering at an exercise price equal to
the initial public offering price.

(4) Excludes 950,000 shares of Class B common stock contingently issuable under
the terms of our agreement to acquire Cynara.

18
<PAGE> 23

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for each of the
four fiscal years ended March 31, 1998 and the nine months ended December 31,
1998 has been derived from our audited consolidated financial statements. The
data for the nine-month periods ended September 30, 1998 and 1999 has been
derived from our unaudited interim consolidated financial statements, which
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of our financial position and results of operations for
these periods. Operating results for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
entire year. This data should be read in conjunction with our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
----------------------------------------- DECEMBER 31, -------------------
1995 1996 1997 1998 1998 1998 1999
-------- -------- -------- -------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................ $109,909 $112,724 $126,657 $202,023 $145,611 $151,705 $125,894
Cost of goods sold.................. 88,322 91,530 100,803 161,801 115,521 121,160 94,979
-------- -------- -------- -------- -------- -------- --------
Gross profit........................ 21,587 21,194 25,854 40,222 30,090 30,545 30,915
Selling, general and administrative
expense........................... 22,483 21,754 23,313 28,553 24,530 23,394 23,636
Restructuring charges(2)............ 984 776 -- -- -- -- --
Depreciation and amortization
expense........................... 903 731 862 1,322 1,473 1,172 3,491
Interest expense.................... 3,358 2,422 1,861 2,992 2,215 2,022 2,546
Interest cost on postretirement
liability(3)...................... 1,064 932 957 1,048 786 786 785
Revaluation (gain) loss on
postretirement liability(3)....... (4,781) 2,273 1,466 159 53 -- (845)
Interest income..................... (1,692) (336) (116) (140) (227) (155) (175)
Gain on sale of investment(4)....... (10,124) (6,320) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... 9,392 (1,038) (2,489) 6,288 1,260 3,326 1,477
Income tax provision (benefit)...... 4,462 (528) (659) 1,141 608 533 1,075
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations........................ $ 4,930 $ (510) $ (1,830) $ 5,147 $ 652 $ 2,793 $ 402
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations............. $ 0.76 $ (0.08) $ (0.31) $ 0.68 $ 0.08 $ 0.34 $ 0.04
Diluted earnings (loss) per share
from continuing operations........ 0.76 (0.08) (0.28) 0.64 0.07 0.32 0.04
Basic earnings per share............ 0.81 0.05 0.67 0.78 0.08 0.34 0.04
Diluted earnings per share.......... 0.81 0.05 0.64 0.73 0.07 0.32 0.04
Basic weighted average shares of
common stock...................... 6,502 6,056 6,032 7,623 8,243 8,147 9,197
Diluted weighted average shares of
common stock...................... 6,502 6,243 6,371 8,067 8,942 8,863 9,868
OTHER DATA:
Cash flows provided by (used in)
operating activities.............. $ (5,160) $ (4,416) $ 1,059 $ 3,113 $ (1,450) $ 2,009 $ 12,494
Cash flows provided by (used in)
investing activities.............. 15,457 9,544 (798) (24,712) (17,069) (3,098) (1,550)
Cash flows provided by (used in)
financing activities.............. (8,547) (7,671) (1,033) 21,660 20,179 1,578 (11,995)
EBITDA(5)........................... 13,025 2,711 1,075 11,510 5,507 7,151 8,124
</TABLE>

19
<PAGE> 24

<TABLE>
<CAPTION>
MARCH 31,
------------------------------------- DECEMBER 31, SEPTEMBER 30,
1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Working capital............................... $ 3,445 $ 3,102 $12,551 $24,442 $ 31,466 $ 26,308
Net property, plant and equipment............. 6,506 6,660 6,833 9,332 18,294 17,653
Total assets.................................. 67,105 57,349 70,044 95,413 118,412 104,046
Long-term debt(6)............................. 25,649 23,245 27,566 33,719 41,777 32,926
Stockholders' equity (deficit)................ (4,672) (8,866) (6,737) 5,419 24,190 28,104
</TABLE>

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

(1) In June 1997, we distributed our investment in PTH to our then sole
stockholder in a tax-free transaction. In accordance with generally accepted
accounting principles, we account for the results of operations of PTH as
discontinued operations for all periods presented. Accordingly, the net
income of PTH is excluded from income (loss) from continuing operations in
our income statements for the periods presented.

(2) We have recorded charges of:

- $1.0 million in fiscal 1995 consisting of relocation, severance benefits
and recruiting costs related to the relocation of engineering and
administrative personnel to corporate headquarters; and

- $0.8 million in fiscal 1996, of which $0.5 million related to the closing
of our Singapore operations and $0.3 million related to recruiting and
employee relocation expenses.

(4) In fiscal 1995, we sold a portion of our interest in a subsidiary for a gain
of $10.1 million, and in fiscal 1996, we completed the sale of our remaining
interest in that subsidiary for a gain of $6.3 million.

(5) EBITDA consists of income (loss) from continuing operations before interest
expense, interest cost on postretirement benefit liability, income tax
expense, and depreciation and amortization expense, less interest income.

(6) Includes current portion of long-term debt and revolving lines of credit.

20
<PAGE> 25

UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS

The tables on the following pages present selected unaudited condensed pro
forma financial data for the periods and dates indicated.

In 1998, the Company changed its year end to December 31. For pro forma
purposes, the quarter ended March 31, 1998 is combined with the nine months
ended December 31, 1998 to present the statement of operations data for the
twelve months ended December 31, 1998.

The unaudited condensed pro forma statement of operations and other
financial data give effect to this offering and to the acquisition of Cynara and
the pending acquisitions of Porta-Test, ESI and MPE as though each occurred on
January 1, 1998. The unaudited condensed pro forma balance sheet data gives
effect to this offering and to the acquisitions of Porta-Test, ESI and MPE as
though each occurred on September 30, 1999, and excludes future contingent
consideration related to Cynara. The unaudited condensed pro forma statements of
operations and other financial data presented below are not necessarily
indicative of the financial results that would have occurred had this offering
and the acquisitions of Cynara, Porta-Test, ESI and MPE occurred on January 1,
1998 or of our financial position had this offering or the acquisitions of
Porta-Test, ESI and MPE occurred on September 30, 1999 and should not be viewed
as indicative of operations or financial position in future periods. With
respect to our pending acquisitions, we have only entered into non-binding
letters of intent. Accordingly, the completion of each of the acquisitions of
Porta-Test, ESI and MPE is subject to numerous conditions, including the
negotiation and execution of definitive agreements and the fulfillment or waiver
of the conditions to closing to be included in the agreements. As a result, we
can not assure you that these acquisitions will be completed.

Porta-Test reports its financial results on the basis of a fiscal year
ending on June 30. The information contained in these unaudited condensed pro
forma financial statements with respect to Porta-Test has been derived from the
unaudited interim financial statements of Porta-Test for the twelve months ended
December 31, 1998 and the nine months ended September 30, 1999.

ESI reports its financial results on the basis of a fiscal year ending on
December 31. The information contained in these unaudited condensed pro forma
financial statements with respect to ESI has been derived from the audited
combined financial statements of ESI for the year ended December 31, 1998 and
the unaudited combined interim financial statements of ESI for the nine months
ended September 30, 1999.

MPE reports its financial results on the basis of a fiscal year ending on
December 31. The information contained in these unaudited condensed pro forma
financial statements with respect to MPE has been derived from unaudited
financial statements for the year ended December 31, 1998 and the unaudited
interim financial statements of MPE for the nine months ended September 30,
1999.

You should read this information in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements and related notes
included elsewhere in this prospectus.

21
<PAGE> 26

NATCO GROUP INC.

UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NATCO GROUP INC.
---------------------
THREE NINE
MONTHS MONTHS
ENDED ENDED PRO FORMA PRO FORMA
MARCH 31, DECEMBER COMBINED OFFERING PORTA-TEST
1998 31, 1998 CYNARA(A) COMPANY(B) ADJUSTMENTS ACQUISITION
--------- --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $55,219 $145,611 $12,821 $213,651 $ -- $8,118
Cost of goods sold.......................... 44,572 115,521 8,723 168,816 -- 4,854
------- -------- ------- -------- ------- ------
Gross profit................................ 10,647 30,090 4,098 44,835 -- 3,264
Selling, general and administrative
expense................................... 7,368 24,530 3,178 35,076 -- 2,391
Depreciation and amortization expense....... 410 1,473 2,500 4,383 -- 55
Interest expense............................ 704 2,215 636 3,555 (3,555)(d) 64
Interest cost on postretirement liability... 262 786 -- 1,048 -- --
Revaluation loss on postretirement
liability................................. -- 53 -- 53 -- --
Interest income............................. -- (227) -- (227) -- --
------- -------- ------- -------- ------- ------
Income (loss) from continuing operations
before income taxes....................... 1,903 1,260 (2,216) 947 3,555 754
Provision for income taxes.................. (2) 608 (636) (30) 1,351(e) 22
------- -------- ------- -------- ------- ------
Income (loss) from continuing operations.... $ 1,905 $ 652 $(1,580) $ 977 $ 2,204 $ 732
======= ======== ======= ======== ======= ======
Basic earnings per share from continuing
operations................................ $ 0.08 $ 0.11
Diluted earnings per share from continuing
operations................................ $ 0.07 $ 0.10
Basic weighted average number of shares of
common stock.............................. 8,243 8,665
Diluted weighted average number of shares of
common stock.............................. 8,942 9,366
EBITDA...................................... $ 5,507 $ 9,706

PRO FORMA
ESI MPE ACQUISITION
ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues.................................... $3,906 $7,608 $ -- $233,283
Cost of goods sold.......................... 1,882 5,878 -- 181,430
------ ------ ------- --------
Gross profit................................ 2,024 1,730 -- 51,853
Selling, general and administrative
expense................................... 1,231 1,113 -- 39,811
Depreciation and amortization expense....... 65 101 621(c) 5,225
Interest expense............................ -- 115 706(d) 885
Interest cost on postretirement liability... -- -- -- 1,048
Revaluation loss on postretirement
liability................................. -- -- -- 53
Interest income............................. (69) (1) -- (297)
------ ------ ------- --------
Income (loss) from continuing operations
before income taxes....................... 797 402 $(1,327) 5,128
Provision for income taxes.................. 6 111 321(e) 1,781
------ ------ ------- --------
Income (loss) from continuing operations.... $ 791 $ 291 $(1,648) $ 3,347
====== ====== ======= ========
Basic earnings per share from continuing
operations................................ $ 0.26
Diluted earnings per share from continuing
operations................................ $ 0.25
Basic weighted average number of shares of
common stock.............................. 12,665
Diluted weighted average number of shares of
common stock.............................. 13,366
EBITDA...................................... $ 11,989
</TABLE>

See the accompanying notes to our unaudited pro forma financial statements.

22
<PAGE> 27

NATCO GROUP INC.

UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
OFFERING PORTA-TEST ESI MPE ACQUISITION
HISTORICAL ADJUSTMENTS ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $125,894 $ -- $ 3,723 $2,129 $2,962 $ -- $134,708
Cost of goods sold............... 94,979 -- 3,264 1,320 2,173 -- 101,736
-------- ------- ------- ------ ------ ------- --------
Gross profit..................... 30,915 -- 459 809 789 -- 32,972
Selling, general and
administrative expense......... 23,636 -- 1,792 844 878 -- 27,150
Depreciation and amortization
expense........................ 3,491 -- 51 45 89 466(c) 4,142
Interest expense................. 2,546 (2,493)(d) 16 -- -- 644(d) 713
Interest cost on postretirement
liability...................... 785 -- -- -- -- -- 785
Revaluation gain on
postretirement liability....... (845) -- -- -- -- -- (845)
Interest income.................. (175) -- -- (164) -- -- (339)
-------- ------- ------- ------ ------ ------- --------
Income (loss) from continuing
operations before income
taxes.......................... 1,477 2,493 (1,400) 84 (178) (1,110) 1,366
Provision for income taxes....... 1,075 947(e) (26) -- (50) (745)(e) 1,201
-------- ------- ------- ------ ------ ------- --------
Income (loss) from continuing
operations..................... $ 402 $ 1,546 $(1,374) $ 84 $ (128) $ (365) $ 165
======== ======= ======= ====== ====== ======= ========
Basic earnings per share from
continuing operations.......... $ 0.04 $ 0.01
Diluted earnings per share from
continuing operations.......... $ 0.04 $ 0.01
Basic weighted average number of
shares of common stock......... 9,197 13,197
Diluted weighted average number
of shares of common stock...... 9,868 13,868
EBITDA........................... $ 8,124 $ 6,667
</TABLE>

See the accompanying notes to our unaudited pro forma financial statements.
23
<PAGE> 28

NATCO GROUP INC.

UNAUDITED CONDENSED PRO FORMA BALANCE SHEET

AS OF SEPTEMBER 30, 1999

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA PORTA-
OFFERING PRO FORMA TEST ESI MPE
HISTORICAL ADJUSTMENTS OFFERING ACQUISITION ACQUISITION ACQUISITION
---------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,675 40,120(a) $ 8,388 $ -- $ 229 $ 45
(32,926)(b)
(481)(e)
Marketable Securities.......... -- -- -- -- 2,574 --
Trade accounts receivable, net
of allowance for doubtful
accounts..................... 30,114 -- 30,114 784 646 1,382
Inventories.................... 20,754 -- 20,754 1,062 381 309
Note receivable from
director..................... 1,846 -- 1,846 -- -- --
Deferred income tax assets,
net.......................... 1,885 -- 1,885 -- -- --
Income tax receivable.......... 1,627 572(e) 2,199 -- -- 50
Prepaid expenses and other
current assets............... 1,022 -- 1,022 217 41 54
-------- -------- -------- ------ ------ ------
Total current assets..... 58,923 7,285 66,208 2,063 3,871 1,840
-------- -------- -------- ------ ------ ------
Property, plant and equipment,
net.......................... 17,653 -- 17,653 346 189 365
Goodwill....................... 19,318 -- 19,318 -- -- --
-- --
Deferred income tax assets,
net.......................... 6,479 -- 6,479 -- -- --
Other assets, net.............. 1,673 -- 1,673 -- 9 34
-------- -------- -------- ------ ------ ------
Total assets............. $104,046 $ 7,285 $111,331 $2,409 $4,069 $2,239
======== ======== ======== ====== ====== ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current installments of
long-term debt............... $ 4,643 $ (4,643)(b) -- $ 67 $ -- $ 103
Revolving credit bank loan..... -- -- -- -- -- 925
Accounts payable............... 14,463 -- 14,463 963 50 324
Accrued expenses and other..... 11,945 -- 11,945 923 255 178
Customer advances.............. 1,564 -- 1,564 -- 65 --
-------- -------- -------- ------ ------ ------
Total current
liabilities............. 32,615 (4,643) 27,972 1,953 370 1,530
-------- -------- -------- ------ ------ ------
Long-term debt, excluding
current installments......... 28,283 (28,283)(b) -- 163 -- --
Postretirement benefit
liability and other.......... 15,044 -- 15,044 28 -- --
-------- -------- -------- ------ ------ ------
Total liabilities........ 75,942 (32,926) 43,016 2,144 370 1,530
-------- -------- -------- ------ ------ ------
Stockholders' equity:
Common stock, $.01 par value
per share.................... 96 40(a) 136 -- 2 82
Additional paid-in capital..... 43,273 40,380(a)(e) 83,653 -- 4 --
Accumulated deficit............ (8,416) (933)(e) (9,349) 299 4,557 627
Treasury stock, 470,188 shares
at cost...................... (4,550) -- (4,550) -- (990) --
Note receivable from
stockholder.................. (1,224) 724(e) (500) -- -- --
Accumulated other comprehensive
loss......................... (1,075) -- (1,075) (34) 126 --
-------- -------- -------- ------ ------ ------
Total stockholders'
equity.................. 28,104 40,211 68,315 265 3,699 709
-------- -------- -------- ------ ------ ------
Total liabilities and
stockholders' equity.... $104,046 $ 7,285 $111,331 $2,409 $4,069 $2,239
======== ======== ======== ====== ====== ======

<CAPTION>
PRO FORMA
ACQUISITION
ADJUSTMENTS PRO FORMA
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... (5,931)(c) $ --
(10,000)(d)
7,314(d)
(2,700)(f)
2,655(f)
Marketable Securities.......... -- 2,574
Trade accounts receivable, net
of allowance for doubtful
accounts..................... -- 32,926
Inventories.................... -- 22,506
Note receivable from
director..................... -- 1,846
Deferred income tax assets,
net.......................... -- 1,885
Income tax receivable.......... -- 2,249
Prepaid expenses and other
current assets............... -- 1,334
-------- --------
Total current assets..... (8,662) 65,320
-------- --------
Property, plant and equipment,
net.......................... 1,375(d) 19,928
Goodwill....................... 5,436(c) 31,738
4,993(d)
1,991(f)
Deferred income tax assets,
net.......................... -- 6,479
Other assets, net.............. -- 1,716
-------- --------
Total assets............. $ 5,133 $125,181
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current installments of
long-term debt............... $ (170)(c)(f) $ --
Revolving credit bank loan..... (925)(f) --
Accounts payable............... -- 15,800
Accrued expenses and other..... -- 13,301
Customer advances.............. -- 1,629
-------- --------
Total current
liabilities............. (1,095) 30,730
-------- --------
Long-term debt, excluding
current installments......... 10,834(c) 10,997
Postretirement benefit
liability and other.......... -- 15,072
-------- --------
Total liabilities........ 9,739 56,799
-------- --------
Stockholders' equity:
Common stock, $.01 par value
per share.................... (84)(c)(d)(f) 136
Additional paid-in capital..... 63(d) 83,720
Accumulated deficit............ (5,483)(c)(d)(f) (9,349)
Treasury stock, 470,188 shares
at cost...................... 990(d) (4,550)
Note receivable from
stockholder.................. -- (500)
Accumulated other comprehensive
loss......................... (92)(c)(d) (1,075)
-------- --------
Total stockholders'
equity.................. (4,606) 68,382
-------- --------
Total liabilities and
stockholders' equity.... $ 5,133 $125,181
======== ========
</TABLE>

See the accompanying notes to our unaudited pro forma financial statements.
24
<PAGE> 29

NATCO GROUP INC.

NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS

The unaudited condensed pro forma financial statements include no provision
relating to exercise by the underwriters of their overallotment option. The
other assumptions used in preparing our unaudited condensed pro forma statements
of operations for the twelve months ended December 31, 1998 and for the nine
months ended September 30, 1999 and our unaudited condensed pro forma balance
sheet as of September 30, 1999 are set forth below.

STATEMENTS OF OPERATIONS

(a) The results for Cynara are taken from its interim financial statements
for the period from January 1, 1998 to November 18, 1998, the date that we
acquired Cynara. Results for Cynara include a provision for additional goodwill
amortization of $0.5 million.

(b) Results for this column represent our results combined with those of
Cynara for the twelve months ended December 31, 1998.

(c) To reflect additional goodwill amortization recorded in the acquisition
of Porta-Test of $0.3 million and $0.2 million, ESI of $0.2 million and $0.2
million, and MPE of $0.1 million and $0.1 million for the twelve months ended
December 31, 1998 and the nine months ended September 30, 1999.

(d) To reflect the elimination of our interest expense of $3.6 million and
$2.5 million, for the twelve months ended December 31, 1998 and the nine months
ended September 30, 1999, as a result of repayments of all outstanding debt
balances with the proceeds of this offering. To reflect also additional interest
expense of $0.7 and $0.6 for the twelve months ended December 31, 1998 and the
nine months ended September 30, 1999 related to additional borrowings of $11.0
million at an assumed interest rate of 8% per year required to close the
contemplated acquisitions.

(e) To reflect income tax adjustments at a rate of 38% for the interest
expense adjustments and income tax expense and benefit to Porta-Test and ESI at
a rate of 38%.

BALANCE SHEET

(a) To reflect our sale of 4,000,000 shares of our common stock in this
offering at an assumed initial public offering price of $11.00 per share and the
related costs and the application of the net proceeds of the sale. The unaudited
condensed pro forma statements of operations reflect reductions of interest
attributable to the use of those proceeds to pay our debt under our revolving
credit facility.

(b) To reflect the repayment of $32.9 million of outstanding borrowings
under our credit facilities from the proceeds of this offering.

(c) To reflect the pending acquisition of Porta-Test for $6.1 million,
consisting of $5.1 million cash, a note of $0.7 million and assumed debt of $0.2
million. We will retire the assumed debt of $0.2 million and pay the $0.7
million note from the proceeds of this offering. We will account for the
acquisition by using the purchase method of accounting; the preliminary
valuation of fair values of assets and liabilities of Porta-Test did not differ
materially from those amounts recorded as historical cost. Excess purchase price
over the fair value of the underlying assets of $5.4 million was allocated to
goodwill and will be amortized over 20 years.

(d) To reflect the pending acquisition of ESI for $10.1 million, consisting
of $10.0 million cash and options to purchase 25,000 shares of common stock at
the initial public offering price valued at $0.1 million. As part of the
purchase, the former owner of ESI will contribute property, plant and equipment
valued at $1.4 million. We will pay for the acquisition with a combination of
cash from the offering and revolver borrowings totaling $7.3 million. We will
account for the acquisition by using the purchase method of accounting; the
preliminary valuation of fair values of assets and liabilities of ESI did not
differ materially from those amounts recorded as historical cost. Excess
purchase price over the fair value of the underlying assets of $5.0 million was
allocated to goodwill and will be amortized over 20 years.

(e) To record the net effect of a bonus to be paid to the Chief Executive
Officer upon the completion of the initial public offering. In July 1999, we
issued 136,832 shares of stock to the officer at a

25
<PAGE> 30

price of $8.81 per share in exchange for a $1.2 million note receivable. Upon
completion of the offering, we will pay the officer a bonus equal to the
outstanding principal and interest of the note, and we will record compensation
expense in the amount of $1.2 million. We will also record compensation expense
of $0.3 million to reflect the difference between the anticipated price per
share of the initial public offering, and the price paid by the officer of
$8.81. At the time the bonus is paid, the officer will repay $0.7 million toward
the balance due on his note. We will also record a tax benefit of $0.6 million
related to this transaction. This expense will be recognized, net of income
taxes, in the quarter the offering is consummated. See "Management -- Employment
Agreement."

(f) To reflect the pending acquisition of MPE for $3.6 million, consisting
of $2.2 million cash, a note of $0.5 million and assumed debt of $0.9 million.
We will retire the assumed debt of $0.9 million and reflect payment of the $0.5
million note we recorded in connection with the acquisition from availability
under our revolving credit facility. We will account for the acquisition by
using the purchase method of accounting; the preliminary valuation of fair
values of assets and liabilities of MPE did not differ materially from those
amounts recorded as historical cost. Excess purchase price over the fair market
value of the underlying assets of $2.0 million was allocated to goodwill and
will be amortized over 20 years.

26
<PAGE> 31

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

HISTORY OF OUR COMPANY

Our company was incorporated in 1988 by Capricorn I. In 1989, Capricorn I
and a group of investors provided us with sufficient funds to enable us to
acquire all the outstanding capital stock of National Tank Company, W. S. Tyler,
Incorporated (Tyler) and another company from Combustion Engineering, Inc. (C-E)
for cash. National Tank Company is now our principal subsidiary.

In December 1991, Capricorn I loaned us approximately $5.0 million. In
exchange, we issued to Capricorn I our subordinated promissory notes in an equal
principal amount.

In 1992, we organized PTH as our subsidiary and contributed to it all the
outstanding stock of W. S. Tyler, Incorporated.

During the period from June 1989 through January 1997, both we and
Capricorn I, on various occasions, acquired shares of our common stock from our
original investor group other than Capricorn I. By the end of January 1997,
Capricorn I was our sole stockholder.

Between 1992 and 1997, Capricorn I consented to the addition to principal
of accrued but unpaid interest on our subordinated promissory notes, and to
various extensions of the maturities of the promissory notes.

On June 30, 1997, we undertook a significant financing and reorganization.
At that time:

- PTH, with the consent of Capricorn I, assumed $4.6 million in principal
amount of our subordinated promissory notes;

- we distributed all the outstanding capital stock of PTH to Capricorn I;

- we refinanced our portion of the original subordinated promissory notes
by issuing a new $5.1 million 13% subordinated promissory note due 2000
in exchange for the old notes;

- Capricorn II acquired from us a new $2.4 million 13% subordinated
promissory note due 2000 and 2,113,334 shares of our common stock for
$13.0 million in cash; and

- we acquired all the outstanding capital stock of Total Engineering
Services Team, Inc. (TEST) by using the proceeds from the Capricorn II
financing and proceeds from borrowings under a bank credit facility.

In March 1998, we issued 1,010,333 shares of our common stock to Capricorn
I and 468,925 shares of our common stock to Capricorn II in exchange for the
surrender and cancellation of our subordinated promissory notes.

In November 1998, we acquired Cynara by merging it into our subsidiary
National Tank Company in exchange for which we:

- paid $5.3 million in cash;

- repaid $10.1 million of Cynara's debt;

- issued 500,000 shares of our Class B common stock; and

- granted Cynara's stockholders a right to receive up to 1,400,000
additional shares (which we currently expect not to exceed 1,275,836
shares) of our Class B common stock under specified circumstances.

We have consolidated the results of operations of Cynara with our results
from the date of acquisition under the purchase method of accounting for
business combinations.

27
<PAGE> 32

To assist us in our acquisition of Cynara, Capricorn II invested $5.3
million in our company in exchange for a convertible promissory note. In
December 1998, Capricorn II elected to convert the note, and we issued an
additional 504,762 shares of our common stock to Capricorn II.

OVERVIEW

We are a holding company, and substantially all of our operations are
conducted through our directly and indirectly wholly owned subsidiaries. We
operate through four business segments:

- traditional production equipment and services, a segment which primarily
provides standardized components, replacement parts and used components
and equipment servicing;

- engineered systems, a segment which primarily provides customized, large
scale integrated oil and gas production systems;

- our Canadian operations, a segment which combines traditional production
equipment and services and engineered systems; and

- instrumentation and electrical control systems, a segment which provides
control panels and systems that monitor and control oil and gas
production.

We recognize revenues from significant contracts (contracts greater than
$250,000 and longer than four months in duration) and all instrumentation and
electrical contracts and orders on the percentage of completion method. We
record revenues and profits on other sales as shipments are made. Earned revenue
is based on the percentage that costs incurred to date bear to total estimated
costs. If estimated total costs on any contract or work-in-process indicate a
loss, we recognize the entire loss immediately. We generally recognize revenue
and earnings to which the percentage of completion method applies over a period
of two to six quarters. Customers typically retain an interest in uncompleted
projects.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------------------- -----------------------------------
1997(1) 1998(1) 1997(2) 1998(2)
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $126,657 100.0% $202,023 100.0% $182,372 100.0% $200,830 100.0%
Cost of goods sold...................... 100,803 79.6 161,801 80.1 146,804 80.5 160,093 79.7
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit............................ 25,854 20.4 40,222 19.9 35,568 19.5 40,737 20.3
Selling, general and administrative
expense............................... 23,313 18.4 28,553 14.1 28,219 15.5 31,898 15.9
Depreciation and amortization expense... 862 0.7 1,322 0.7 1,086 0.6 1,883 0.9
Interest expense........................ 1,861 1.5 2,992 1.5 3,112 1.7 2,919 1.5
Interest cost on postretirement
liability............................. 957 0.8 1,048 0.5 1,067 0.6 1,048 0.5
Revaluation (gain) loss on
postretirement liability.............. 1,466 1.2 159 0.1 159 0.1 53 --
Interest income......................... (116) (0.1) (140) (0.1) (98) (0.1) (227) (0.1)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes................... (2,489) (2.0) 6,288 3.1 2,023 1.1 3,163 1.6
Provision (benefit) for income taxes.... (659) (0.5) 1,141 0.6 938 0.5 606 0.3
-------- -------- -------- -------- -----
Income (loss) from continuing
operations............................ (1,830) (1.5) 5,147 2.5 1,085 0.6 2,557 1.3
Income from discontinued operations, net
of income tax(2)...................... 1,100 0.9 767 0.4 767 0.4 -- --
Gain on disposal of division, net of
income tax............................ 4,788 3.8 -- -- -- -- -- --
-------- -------- -------- --------
Net income.............................. $ 4,058 3.2 $ 5,914 2.9 $ 1,852 1.0 $ 2,557 1.3
======== ======== ======== ========

<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998(1) 1999(1)
-------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $151,705 100.0% $125,894 100.0%
Cost of goods sold...................... 121,160 79.9 94,979 75.4
-------- ----- -------- -----
Gross profit............................ 30,545 20.1 30,915 24.6
Selling, general and administrative
expense............................... 23,394 15.4 23,636 18.8
Depreciation and amortization expense... 1,172 0.8 3,491 2.8
Interest expense........................ 2,022 1.3 2,546 2.0
Interest cost on postretirement
liability............................. 786 0.5 785 0.6
Revaluation (gain) loss on
postretirement liability.............. -- -- (845) (0.7)
Interest income......................... (155) (0.1) (175) (0.1)
-------- --------
Income (loss) from continuing operations
before income taxes................... 3,326 2.2 1,477 1.2
Provision (benefit) for income taxes.... 533 0.4 1,075 0.9
-------- ----- --------
Income (loss) from continuing
operations............................ 2,793 1.8 402 0.3
Income from discontinued operations, net
of income tax(2)...................... -- -- -- --
Gain on disposal of division, net of
income tax............................ -- -- -- --
-------- --------
Net income.............................. 2,793 1.8 $ 402 0.3
======== ========
</TABLE>

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

(1) For information about our segment financial reporting, see Note (20) of
Notes to Consolidated Financial Statements.

(2) In 1998, we changed our fiscal year end from March 31 to December 31. For
comparison purposes, we have presented our unaudited statement of operations
data for the twelve months ended December 31, 1997 and 1998.

(3) Represents the results of operations of PTH, all the outstanding stock of
which was distributed by us to Capricorn I as a dividend on June 30, 1997.
See Note (17) of Notes to Consolidated Financial Statements.

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<PAGE> 33

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998

Revenues. Revenues for the first nine months of 1999 decreased $25.8
million, or 17%, to $125.9 million from $151.7 million for the nine months ended
September 30, 1998. Revenues generated in the first nine months of 1999 included
$12.6 million of revenue attributed to Cynara, which we acquired in November
1998. Excluding the impact of Cynara for 1999, our revenues would have declined
$38.4 million, or 25% in the first nine months of 1999 compared to the first
nine months of 1998. The overall decline in revenue in 1999 compared to 1998 was
attributable to the significant reduction in spending by our customers as a
result of the sharp decrease in energy prices that began in mid-1998 and
continued until early 1999.

Revenues for traditional equipment and services for the nine months ended
September 30, 1999 decreased $17.0 million, or 30%, to $39.9 million from $56.9
million for the first nine months of 1998 inclusive of revenue from affiliates
of $0.6 million for the nine months ended September 30, 1999 and $0.6 million
for the nine months ended September 30, 1998. For comparison purposes, the
average number of drilling rigs operating in the United States during the first
nine months of 1999 was 566, compared to an average of 881 rigs operating during
the first nine months of 1998. This 36% decrease in the average number of rigs
operating is indicative of the significant curtailment in spending levels of our
customers.

Revenues for engineered systems for the nine months ended September 30,
1999 increased $12.3 million, or 39%, to $43.7 million from $31.4 million for
the first nine months of 1998 inclusive of revenue from affiliates of $1.6
million for the nine months ended September 30, 1999 and $0.7 million for the
nine months ended September 30, 1998. This increase was due to the inclusion of
Cynara's results in 1999.

Revenues for NATCO-Canada for the nine months ended September 30, 1999
decreased by $20.2 million, or 62%, to $12.5 million from $32.7 million for the
nine months ended September 30, 1998 inclusive of revenue from affiliates of
$0.0 million for the nine months ended September 30, 1999 and $1.7 million for
the nine months ended September 30, 1998. The decrease in revenue was
attributable to the significant decline in spending levels by our customers due
to low energy prices as well as the completion of a large project in 1998.

Revenues for instrumentation and electrical systems for the nine months
ended September 30, 1999 decreased $1.0 million, or 3%, to $33.6 million from
$34.5 million for the nine months ended September 30, 1998 inclusive of revenue
from affiliates of $1.6 million for the nine months ended September 30, 1999 and
$0.8 million for the nine months ended September 30, 1998.

Gross Profit. Gross profit for the nine months ended September 30, 1999
increased $0.3 million, or 2%, to $30.9 million, compared to $30.6 million for
the nine months ended September 30, 1998. As a percentage of revenue, gross
margins improved to 24.6% for the nine months ended September 30, 1999 from
20.1% for the nine months ended September 30, 1998. The margin improvement was
attributable partially to the inclusion of Cynara's results in 1999, as well as
an improved product mix due to the sharp decline in revenue from NATCO-Canada,
which historically has generated lower margins.

Gross profit for traditional equipment and services decreased $4.3 million,
or 30%, for the nine months ended September 30, 1999, to $10.1 million, compared
to $14.4 million the first nine months of 1998. This decrease was primarily due
to the 30% reduction in revenue during the same time period. As a percentage of
revenue, gross margins were 25.4% for the first nine months of 1999, compared to
25.3 for the first nine months of 1998.

Gross profit for the nine months ended September 30, 1999 for engineered
systems increased $6.5 million, or 133%, to $11.4 million, compared to $4.9
million for the nine months ended September 30, 1998. The increase was partially
due to the inclusion of Cynara in the 1999 results, as well as the completion of
two projects during the second quarter of 1999 that had favorable margins. As a
percentage of revenue, gross margins were 26.4% for the first nine months of
1999, compared to 15.8% for the first nine months of 1998.

29
<PAGE> 34

Gross profit for the nine months ended September 30, 1999 for NATCO-Canada
decreased $2.6 million, or 60%, to $1.8 million, compared to $4.3 million for
the nine months ended September 30, 1998. Gross profit decreased due to a 62%
decline in revenue during the same period. As a percentage of revenue, gross
margins were 14.0% for the first nine months of 1999, compared to 13.3% for the
first nine months of 1998.

Gross profit for the first nine months of 1999 for instrumentation and
electrical systems increased $0.7 million, or 10%, to $7.5 million, compared to
$6.8 million for the first nine months of 1998. Gross profit improved due
primarily to the more efficient completion of projects in 1999 and to the
completion of a high margin project in Venezuela during the second quarter of
1999. As a percentage of revenue, gross margins were 22.5% for the first nine
months of 1999, compared to 19.8% for the first nine months of 1998.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased $0.2 million or 1% to $23.6 million for the
nine months ended September 30, 1999, compared to the $23.4 million reported for
the nine months ended September 30, 1998. Overall, reductions in expenses in the
United States and Canada as a result of the severe downturn in the industry were
offset by the inclusion of Cynara in the 1999 results. In addition, during the
first nine months of 1999 we recorded non-recurring costs of $0.4 million
primarily associated with the retirement of one of our officers and $0.6 million
related to the purchase by the Company of stock options previously granted to
the Chief Executive Officer of the Company. During the first nine months of
1999, we revised previous estimates related to the remaining costs associated
with the closure of NATCO (UK) Ltd., and reversed these accruals.

Depreciation and Amortization Expense. Depreciation and amortization
expense for the first nine months of 1999 increased $2.4 million, or 200%, to
$3.5 million, compared to $1.2 million the first nine months of 1998. This
increase was due primarily to the inclusion of Cynara in 1999.

Interest Expense. Interest expense was $2.5 million in the first nine
months of 1999, compared to $2.0 million for the same period in 1998. This 25%
increase in interest expense was due primarily to increased debt incurred in
connection with the acquisition of Cynara.

Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement benefit liability remained constant when comparing the nine month
periods ended September 30, 1998 and 1999.

Revaluation Gain on Postretirement Benefit Liability. The liability
decreased during the nine month period ended September 30, 1999 as a result of
an increase in the discount rate (from 6.75% to 7.5%) used to calculate the net
present value of this liability.

Income from Continuing Operations. Income from continuing operations for
the nine months ended September 30, 1999 decreased to $1.8 million compared to
$3.3 million for the nine months ended September 30, 1998. The decrease was due
primarily to a $2.4 million increase in depreciation and a $0.5 million increase
in interest expense, offset by a $0.4 million increase in gross profit and a
$0.8 million revaluation gain on the postretirement benefit liability.

Net Income. Net income for the nine months ended September 30, 1999
decreased to $0.4 million compared to $2.8 million reported for the nine months
ended September 30, 1998. The decrease was due to the various factors discussed
above.

TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997

Revenues. Revenues for the year ended December 31, 1998 increased $18.5
million, or 10%, to $200.8 million from $182.4 million for the year ended
December 31, 1997. The increase was principally attributable to the inclusion of
TEST for the full year in 1998 as compared to six months for 1997. The increase
was also attributable to the inclusion of Cynara revenue for five weeks in 1998.
Excluding the impact of the acquisitions, our revenues would have declined $7.0
million, or 4%, from 1998 to 1997. The decline in revenue in 1998 compared to
1997 was attributable to the reduction in spending by our

30
<PAGE> 35

customers as a result of the sharp decrease in energy prices that began in
mid-1998 and continued until early 1999.

Revenues for traditional production equipment and services for the year
ended December 31, 1998 decreased $1.6 million, or 2%, to $71.0 million from
$72.6 million for the year ended December 31, 1997, inclusive of revenues from
affiliates of $0.7 million for the year ended December 31, 1998 and $0.6 million
for the year ended December 31, 1997.

Revenues for engineered systems for the year ended December 31, 1998
increased $8.9 million, or 24%, to $45.6 million from $36.6 million for the year
ended December 31, 1997, inclusive of revenues from affiliates of $1.5 million
for the year ended December 31, 1998 and $0.7 million for the year ended
December 31, 1997. This increase is largely due to the completion of projects in
1998 that were awarded to us in 1997.

Revenues for NATCO-Canada for the year ended December 31, 1998 decreased by
$11.2 million, or 20%, to $43.5 million from $54.7 million for the year ended
December 31, 1997, inclusive of revenues from affiliates of $2.5 million for the
year ended December 31, 1998 and $2.1 million for the year ended December 31,
1997. The decrease in revenue was attributable to the significant decline in
spending levels by our customers due to low energy prices as well as the
completion of a large project in the first six months of 1998.

Revenues for instrumentation and electrical systems for the year ended
December 31, 1998 increased $24.7 million, or 113%, to $46.6 million from $21.9
million from the year ended December 31, 1997, inclusive of revenues from
affiliates of $1.1 million for the year ended December 31, 1998 and $0.0 million
for the year ended December 31, 1997. The increase is principally attributable
to the inclusion of TEST for the full year in 1998 as compared to six months in
1997.

Gross profit. Gross profit for the year ended December 31, 1998 increased
$5.2 million, or 15%, to $40.7 million from $35.6 million from the year ended
December 31, 1997. As a percentage of revenue, gross margin improved to 20.3%
for 1998 versus 19.5% for 1997. The margin improvement was attributable to
improved performance for engineered systems projects as well as an improved
product mix due to the sharp decline in revenue from NATCO-Canada, which
historically has generated lower margins.

Gross profit for traditional production equipment and services decreased
$1.1 million, or 6%, to $17.6 million from $18.7 million from the year ended
December 31, 1997. This decrease was primarily due to the 2.2% reduction in
revenue during the same time period. As a percentage of revenue, gross margins
were 24.8% for 1998 compared with 25.7% for 1997.

Gross profit for engineered systems increased $3.9 million, or 87%, to $8.4
million from $4.5 million from the year ended December 31, 1997. The increase
was partially due to the inclusion of Cynara in the 1998 results, as well as due
to the completion of projects during 1998, which had more favorable margins due
to improved project management as well as selectivity in the bid and acceptance
process. As a percentage of revenue, gross margins were 18.3% for 1998 compared
to 12.2% for 1997.

Gross profit for NATCO-Canada decreased $2.4 million, or 29%, to $6.0
million from $8.4 million. The decrease is principally attributable to a 20%
reduction in revenues for the same period of time. As a percentage of revenue,
gross margins were 13.7% for 1998 compared to 15.3% in 1997.

Gross profit for instrumentation and electrical systems increased $4.8
million, or 122%, to $8.9 million from $4.0 million from the year ended December
31, 1997. The increase was principally attributable to the inclusion of TEST for
the full year in 1998 as compared to six months in 1997. As a percentage of
revenue, gross margins were 19.0% for 1998 compared with 18.5% for 1997.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased $3.7 million, or 13%, to $31.9 million for the
year ended December 31, 1998 compared to $28.2 million for the year ended
December 31, 1997. The increase was primarily due to the inclusion of TEST for
the full year in 1998 compared to only six months in 1997, as well as the
inclusion of Cynara for five weeks in 1998. In addition, non-recurring expenses
totaling $1.6 million were recorded in 1998, of which
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<PAGE> 36

$1.2 million related to our previous initial public offering effort in early
1998, and $0.4 million related to severance costs incurred. In addition,
insurance reserve reductions totaling $2.5 million were recorded in 1998,
reflecting revisions to previous estimates related to workers compensation and
general liability claims. In 1997, we incurred non-recurring compensation
expense related to the conversion of stock appreciation rights into stock
options totaling $1.2 million.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased $0.8 million, or 73%, to $1.9 million from $1.1 million for
the year ended December 31, 1997. This increase was principally to goodwill
amortization related to the TEST acquisition and depreciation related to Cynara
gas processing plants.

Interest Expense. Interest expense decreased $0.2 million, or 6%, to $2.9
million from $3.1 million for the year ended December 31, 1997. This 6% decrease
in interest expense was due primarily to the conversion of 13% subordinated
notes into common stock by our principal stockholders on April 1, 1998.

Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement benefit liability remained constant on a year-to-year basis.

Revaluation Loss on Postretirement Benefit Liability. Revaluation loss
decreased by $0.1 million, or 67%, from $0.2 million for the year ended December
31, 1997 to $0.1 million for the year ended December 31, 1998. This resulted
from slight changes in the actuarial assumptions.

Income from Continuing Operations. Income from continuing operations for
1998 increased $1.5 million, or 136%, to $2.6 million from $1.1 million for the
year ended December 31, 1997. The increase was due primarily to the $5.2 million
increase in gross profit (largely due to the decrease in revenues), less a $0.8
million increase in depreciation and a $3.7 million increase in selling, general
and administrative expense.

Net Income. Net income for the year ended December 31, 1998 decreased $0.7
million, or 38%, to $2.6 million from $1.9 million for the year ended December
31, 1997. The decrease was due to the various factors discussed above.

FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997

Revenues. Revenues for the fiscal year ended March 31, 1998 increased by
$75.3 million, or 59%, to $202.0 million from $126.7 million for the fiscal year
ended March 31, 1997. Of this increase, $32.7 million was attributable to the
inclusion of the results of TEST in our results for the last nine months of the
fiscal year ended March 31, 1998. We had revenues of $27.7 million from the BP
Exploration (Alaska), Inc. alliance project compared to revenues of only $4.5
million from such alliance for the fiscal year ended March 31, 1997.

Revenues for traditional production equipment and services for fiscal 1998
increased by $19.9 million, or 35%, to $76.8 million from $56.9 million for
fiscal 1997 inclusive of revenue from affiliates of $0.6 million for the year
ended March 31, 1998 and $1.1 million for the year ended March 31, 1997. The
increase in revenues resulted primarily from strong demand in the market for
these products and services.

Revenues for engineered systems for fiscal 1998 decreased by $9.3 million,
or 21%, to $34.3 million from $43.6 million for fiscal 1997 inclusive of revenue
from affiliates of $0.8 million for the year ended March 31, 1998 and $0.9
million for the year ended March 31, 1997. The decrease in revenues resulted
primarily from the postponement of a major project and from our increased
selectivity in the bid process.

Revenues for NATCO-Canada, for fiscal 1998, increased by $27.7 million, or
87%, to $59.7 million compared to $32.0 million for fiscal 1997 inclusive of
revenue from affiliates of $0.0 million for the year ended March 31, 1998 and
$3.9 million for the year ended March 31, 1997. A significant portion of the
increase in revenues was due to a substantial project for BP Exploration
(Alaska), Inc.

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<PAGE> 37

Revenues for instrumentation and electrical systems of $33.2 million was
attributable to the inclusion of TEST revenues for the nine months ended March
31, 1998 inclusive of revenue from affiliates of $0.5 million for the year ended
March 31, 1998 and $0.0 million for the year ended March 31, 1997.

Gross Profit. Gross profit for fiscal 1998, increased $14.3 million, or
56%, to $40.2 million from $25.9 million for fiscal 1997 primarily due to the
increases in revenues discussed above. As a percentage of revenues, gross
profits remained unchanged for fiscal 1998 compared to fiscal 1997.

Gross profit for traditional production equipment and services for fiscal
1998 increased $5.1 million, or 35%, to $19.6 million from $14.5 million for
fiscal 1997 primarily due to the increases in revenue discussed above. As a
percentage of revenues, gross profit decreased from 25.5% for fiscal 1997 to
25.6% for fiscal 1998, primarily as a result of a shift in the mix of business,
as the volume of higher margin parts business grew less rapidly than the
traditional equipment business.

Gross profit for engineered systems for fiscal 1998 decreased $0.8 million,
or 14%, to $5.2 million from $6.0 million for fiscal 1997, primarily due to the
decrease in revenue discussed above. As a percentage of revenues, gross profit
increased from 13.8% for fiscal 1997 to 15.1% for fiscal 1998.

Gross profit for NATCO-Canada for fiscal 1998 increased by $3.6 million, or
67%, to $9.0 million from $5.4 million for fiscal 1997 primarily due to the
increase in revenue discussed above. As a percentage of revenues, gross profit
decreased from 16.7% for fiscal 1997 to 15.1% for fiscal 1998, primarily as a
result of a lower margin on the BP Exploration (Alaska), Inc. project.

Gross profit for instrumentation and electrical systems of $6.4 million for
fiscal 1998 was attributable to the inclusion of gross profit for TEST for the
nine months ended March 31, 1998.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased $5.2 million, or 22%, to $28.5 million for
fiscal 1998 from $23.3 million for fiscal 1997. Of this increase, $4.7 million
was attributable to the inclusion of the results of TEST, and the remainder was
primarily attributable to increased expenses associated with the increase in
volume in our business. In addition, insurance reserve reductions totaling $1.3
million were recorded during the year ended March 31, 1998, reflecting a
revisions to previous estimates related to workers compensation and general
liability claims. For the year ended March 31, 1997, non-recurring compensation
expense related to the conversion of stock appreciation rights into stock
options totaling $1.2 million was recorded.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased $0.5 million, or 53%, to $1.3 million for fiscal 1998 from
$0.9 million for fiscal 1997. Of the $0.5 million increase in fiscal 1998, $0.4
million related to depreciation and amortization expense at TEST.

Interest Expense. Interest expense increased by $1.1 million, or 58%, to
$3.0 million for fiscal 1998 from $1.9 million for fiscal 1997, primarily as a
result of increased debt incurred in connection with the acquisition of TEST.

Interest Cost on Postretirement Benefit Liability. Interest cost on
postretirement benefit liability increased $0.1 million, or 10%, to $1.0 million
for fiscal 1998 from $1.0 million for fiscal 1997 due to increased amortization
resulting from an upward revaluation of the postretirement benefit liability
based on revised actuarial assumptions at March 31, 1997.

Revaluation Loss on Postretirement Benefit Liability. Our revaluation of
postretirement benefit liability decreased $1.3 million, or 87%, from $1.5
million for fiscal 1997 to $0.2 million for fiscal 1998. This resulted primarily
from a decrease in the discount rate used in the actuarial calculations.

Income (Loss) from Continuing Operations. Income from continuing operations
increased $7.0 million to $5.1 million for fiscal 1998 from a loss of $1.8
million for fiscal 1997, primarily as a result of increases in gross profit and
the inclusion of operations of TEST for the nine months ended March 31, 1998.

33
<PAGE> 38

Income from Discontinued Operations. Income from discontinued operations of
$0.8 million for the year ended March 31, 1998 and $1.1 million for the year
ended March 31, 1997 represented income from our subsidiary PTH, the capital
stock of which was distributed in June 1997 to our sole stockholder.

Net Income. Net income increased by $1.9 million, or 46%, to $5.9 million
for fiscal 1998 from $4.1 million for fiscal 1997 primarily as a result of the
factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses for cash are working capital, capital expenditures and
acquisitions. Our cash sources are cash provided by operations, cash provided by
investing activities and cash provided by financing activities. To the extent
our cash requirements for working capital, capital expenditures and acquisitions
exceed the cash provided by operations and investing activities, we must finance
our cash requirements, primarily through debt and equity financing activities.
As of September 30, 1999, we had cash and working capital of $1.7 million and
$26.3 million. As of September 30, 1999, after giving effect to this offering,
we would have had cash and working capital of $8.4 million and $38.2 million.

Net cash provided by (used in) operating activities for the fiscal years
ended March 31, 1997 and 1998 was $1.1 million and $3.1 million, and for the
nine months ended December 31, 1998 was $(1.5) million. For the nine months
ended September 30, 1999, net cash provided by operating activities was $12.5
million.

Net cash used in investing activities for the years ended March 31, 1997
and 1998 was $0.8 million and $24.7 million. Net cash used in investing
activities for the nine months ended December 31, 1998 was $17.1 million. Our
primary use of funds in fiscal 1998 was the acquisition of TEST, which required
the use of $22.4 million of cash. Our primary use of funds for the nine months
ended December 31, 1998 was the acquisition of Cynara, which required the use of
$15.5 million of cash.

We maintain a revolving credit and term loan facility as well as a working
capital facility for export sales. The revolving credit facility provides for up
to $22.0 million of borrowings in the United States and up to $10.0 million of
borrowings in Canada, subject to borrowing base limitations. As of September 30,
1999, borrowings under the revolving credit facility totaled $3.9 million. In
addition, we had issued $3.4 million of letters of credit under the revolving
facility as of September 30, 1999. The initial term loan of $32.5 million had
been reduced to $29.0 million as of September 30, 1999. Borrowings under the
revolving credit facility mature in November 2001, and the term loan matures in
November 2003. The revolving credit and term facility is secured by
substantially all of our assets. The export sales credit facility provides for
aggregate borrowings of $10.0 million, subject to borrowing base limitations, of
which $0.0 million was outstanding as of September 30, 1999. In addition, we had
issued letters of credit totaling $8.3 million under the export facility. The
export sales credit facility is secured by specific project inventory and
receivables, and is partially guaranteed by the EXIM Bank. The export sales
credit facility loans mature in July 2002. As of September 30, 1999, the
weighted average interest rate of our borrowings under our credit facilities was
7.9%.

We will repay all outstanding borrowings under the revolving credit and
term loan facility as well as the export sales credit facility, which as of
September 30, 1999 totaled $32.9 million, with a portion of the net proceeds of
this offering. We will use the balance of the net proceeds from this offering
for general corporate purposes, including the funding of a portion of the costs
of the acquisitions of Porta-Test, ESI and MPE. Total cash consideration for
these acquisitions will be approximately $14.9 million, net of cash acquired.

We estimate that cash generated from operations for the remainder of 1999
and all of fiscal 2000 will be sufficient to meet our cash operating
requirements during that time. Our capital expenditures generally consist of
renovations and expansions of our manufacturing plants, technological
improvements to our management information systems and acquisitions of, and
improvements to, other equipment we use in our business. Historically, these
capital expenditures have ranged from $1.0 million to $2.0 million annually.
Assuming the underwriters do not exercise their over-allotment option, upon
completion of this offering,

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we will have $28.6 million of credit available under our revolving credit
facility and $1.7 million available under our export sales credit facility, both
subject to borrowing base limitations, which will be available to fund our
pending acquisitions, working capital, capital expenditures and other corporate
uses. As of October 31, 1999, borrowing base limitations reduced our available
borrowing capacity to $17.4 million. We believe that our operating cash flow,
supported by our borrowing capacity, will be adequate to fund our operations
throughout the remainder of 1999 and all of 2000. If we should decide to pursue
one or more acquisition opportunities during fiscal 2000, our determination as
to our ability to finance the acquisitions will be a critical element of our
analysis of the opportunities.

INFLATION AND CHANGES IN PRICES

The costs of materials (e.g., steel) for our products rise and fall with
their value in the commodity markets. Generally, increases in raw materials and
labor costs are passed on to our customers.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued by the Financial
Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting
for derivative instruments, including derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If specified conditions
are met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness, as well as the
ineffective portion of the gain or loss, is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.

We will adopt SFAS 133 for our fiscal year beginning January 1, 2001. We
have not determined the impact that SFAS 133 will have on our financial
statements and believe that the determination will not be meaningful until
closer to the date of initial adoption.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks. Market risk is the potential loss arising
from adverse changes in market prices and rates. We do not enter into derivative
or other financial instruments for trading or speculative purposes. Our market
risk could arise from changes in interest rates and foreign currency exchange
rates.

Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates. Assuming our current level of borrowings, a 100 basis
point increase in interest rates under these borrowings would decrease our 1998
pro forma net income by approximately $0.4 million and our 1998 pro forma cash
flow from operations by approximately $0.4 million. In the event of an adverse
change in interest rates, we could take action to mitigate our exposure. Due to
the uncertainty of the actions that would be taken and their possible effects,
however, this analysis assumes no such actions. Furthermore, this analysis does
not consider the effects of the change in the level of overall economic activity
that could exist in such an environment.

Foreign Currency Exchange Risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. The majority of our foreign
currency transactions are denominated in the
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Canadian dollar, which is the functional currency of NATCO-Canada. As these
contracts are denominated and settled in the functional currency, risks
associated with currency fluctuations are minimized. We do not currently hedge
against foreign currency translation risks and we believe that foreign currency
exchange risk is not significant to our operations.

A portion of our sales is made in Southeast Asia, where several countries
have experienced significant devaluations in their currencies against the United
States dollar in 1997 and early 1998. The devaluation of these currencies and
the related consequences to the economies in those countries have adversely
affected economic growth in the region. To the extent that the economics of
countries in this region continue to be adversely affected, demand for our
products and services in the region most likely will be reduced.

YEAR 2000 COMPLIANCE

Issues involving the Year 2000, or "Y2K," concern the business implications
associated with the upcoming change in century. On January 1, 2000, all computer
hardware and software systems that use outdated 2-digit year fields may
experience processing errors that could result in system failures. For example,
programs that have date-sensitive features may recognize 01/01/00 as January 1,
1900 instead of January 1, 2000. These failures may be limited or they may be
widespread depending on the system and its software, as well as its location and
function.

System Information. The nature of our business and our products is not
dependent upon hardware and software to the extent that Y2K issues pose a
significant threat. In early 1998, we nonetheless formed a Y2K task force to
prepare for January 1, 2000. This task force was charged with reviewing,
assessing, and ensuring compliance of hardware and software in the following
areas:

- current products;

- manufacturing systems;

- enterprise management systems;

- personal computers and personal computer networks;

- engineering and design systems;

- infrastructure; and

- suppliers.

Based upon its analysis and evaluations and written communications from vendors
and licensors of company-used hardware and software, we do not believe that the
risks of system malfunctions resulting from the interrelationships of our
systems with those of customers, suppliers or contractors are significant.

We operate both domestically and internationally in more than 50 locations
including offices, manufacturing facilities, sales and service centers, and
on-site operations. Our Y2K database consists of more than 20 individual
information technology and non-information technology systems. Based on internal
discussions and our wide use of certain systems, we believe that only five of
the more than 200 systems in our database are significant.

Our significant systems include:

- e-mail programs and servers;

- system servers; and

- accounting and financial programs.

Our Y2K program addresses these significant systems.

Year 2000 Progress. Our Y2K progress has been tracked in four phases:
assessment, remediation, testing, and implementation. The assessment phase
includes an inventory of our systems and a criticality evaluation of each
system. The remediation phase includes strategy, planning, and execution for
upgrading or replacing deficient systems. The testing phase includes unit or
system testing, as necessary and

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applicable. The implementation phase includes new system deliveries and
upgrades, as well as readiness certification of all systems. As of October 31,
1999, we have completed approximately:

- 99% of the assessment phase;

- 99% of the remediation phase;

- 95% of the testing phase; and

- 90% of the implementation phase.

Thus, we believe our overall completion of Y2K related tasks stands at
approximately 95%. Furthermore, we have achieved substantial completion of all
phases except implementation, which will be substantially complete before
December 15, 1999.

We believe our overall completion of Y2K related tasks affecting our significant
systems stands at approximately 97%. We will not test certain significant
systems that have been certified to be Y2K compliant because the testing process
may cause the software licenses to expire. Based on our current operating
practices and representations of our software suppliers, however, we believe
that all Y2K issues associated with these systems have been addressed and that
these systems will not be adversely affected.

The Y2K task force is also communicating with our suppliers and customers
regarding their state of Y2K readiness. Specifically, the task force either has
received or is in the process of receiving written documentation from these
third parties regarding their Y2K readiness and the issues they believe it
raises for them. The task force has more closely scrutinized those suppliers
that provide us with products that are more likely to present Y2K issues and
believes that no significant Y2K issues exist. The task force has also reviewed
publicly available information, if any, regarding these third-party systems and
their Y2K compliance.

Cost to Address Y2K Issues. Costs directly related to assessing Y2K issues
through October 31, 1999 are less than $50,000 and have been expensed. We do not
expect to incur significant additional cost related to Y2K compliance during the
remainder of 1999. These costs are based on our best estimates.

Y2K Risk Factors. While we believe that our internal operations do not have
material issues with respect to Y2K compliance, we cannot guarantee that
assessment. Additionally, we may not properly identify all potential problems or
all potentially affected systems. In that case, we will not have remedied all
these problems within our systems. We also have no means of insuring that third
parties with whom we conduct our business will be Y2K ready. The inability of
these third parties to complete their Y2K assessments in a timely fashion could
materially affect our results of operations and cash flows. The effect of
non-compliance by these third parties is not determinable.

The most likely "worst case" impacts that we could reasonably anticipate
from Y2K non-compliance are as follows:

- our inability to execute financial transactions with our banks or other
third parties whose systems fail or malfunction;

- impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to our planned and ongoing
operations necessitating deferral or total shut down of our operation;
and

- impairment of our ability to deliver our products to, or receive payment
from, our customers.

Contingency Plans. We have a contingency plan in place to ensure the safety
of our employees. While this plan covers all company employees, it is
specifically directed at those employees working in offshore environments and on
international assignments.

Due to the nature of our operations and the status of our Y2K analysis, our
Y2K contingency plans are limited. We will continue to monitor all of our
systems through the first quarter of 2000. In the event we discover new or
previously unidentified risks, we will immediately develop a contingency plan to
address the risk posed.

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Summary. We believe that we will be able to achieve substantial Y2K
readiness with respect to the critical systems that we control. The extent and
magnitude of the Y2K problem as it will affect us, both before and for some time
after January 1, 2000, are, however, difficult to predict or quantify. We cannot
assure you that all of our systems and all outside systems that we depend upon
will be adequately identified and compliant so that they are Y2K ready by
January 1, 2000. If, despite our efforts and those of our task force, there are
mission critical Y2K related failures that create substantial disruption to our
business, the adverse effects could be material. These unknown material effects
and the costs associated with them are difficult to estimate accurately because
of unanticipated vendor delays, technical difficulties, the impacts of test of
outside systems and similar events.

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BUSINESS

GENERAL

We are a leading provider of wellhead equipment, systems and services used
in the production of oil and gas. Our production equipment and systems are
primarily used at or near the wellhead to separate oil and gas within a
hydrocarbon stream and to remove contaminants. Separation and decontamination at
the wellhead are necessary to meet the specifications of transporters and end
users. Our products and services are used in onshore and offshore fields in most
major oil and gas producing regions in the world. On a pro forma basis after
giving effect to our acquisition of Cynara, our revenues and EBITDA for the
twelve months ended December 31, 1998 were approximately $213.7 million and $9.7
million. Our revenues and EBITDA for the nine months ended September 30, 1999
were approximately $125.9 million and $8.1 million.