SEC Filing | Flowserve Corporation

View:

Download DOC

Download PDF

Download XLS

1
SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14a INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

Flowserve Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[x] No fee required.

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

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

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

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

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

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

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

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

(1) Amount Previously Paid:

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

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

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

(3) Filing Party:

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

(4) Date Filed:

-----------------------------------------------------------------------
2

[FLOWSERVE LOGO]

FLOWSERVE CORPORATION
222 WEST LAS COLINAS BOULEVARD
IRVING, TEXAS 75039

NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 22, 1999

The 1999 Annual Meeting of Shareholders of Flowserve Corporation will be held at
the Los Angeles Airport Hilton, 5711 West Century Boulevard, Los Angeles,
California, at 11:00 a.m. on Thursday, April 22, 1999, for the following
purposes:

1. To elect three directors to each serve for a term of three
years.

2. To approve a restructuring of the Company's stock-based
incentive plans by:

(a) reducing the authorized shares under the Flowserve
Corporation 1998 Restricted Stock Plan from 800,000
to 250,000; and simultaneously

(b) adopting the Flowserve Corporation 1999 Stock Option
Plan.

3. To transact such other business as may properly come before
the meeting or any adjournment thereof.

Shareholders of record at the close of business on March 4, 1999, are
entitled to notice of and to vote at this meeting.

By order of the Board of Directors,

Ronald F. Shuff
Secretary

Irving, Texas
March 15, 1999

- --------------------------------------------------------------------------------
VOTING YOUR PROXY IS IMPORTANT
Please Sign and Date Your Proxy and Return It in the Enclosed Envelope
- --------------------------------------------------------------------------------
3

FLOWSERVE CORPORATION

----------

PROXY STATEMENT

----------

Mailing Date
March 15, 1999

GENERAL INFORMATION

PERSONS MAKING THE SOLICITATION

The accompanying Proxy is solicited by the Board of Directors (the "Board") of
Flowserve Corporation (the "Company") and relates to the Company's 1999 Annual
Meeting of Shareholders (the "Annual Meeting") to be held at the Los Angeles
Airport Hilton, 5711 West Century Boulevard, Los Angeles, California at 11:00
a.m. on Thursday, April 22, 1999.

VOTING SECURITIES

The Company has one class of stock outstanding, common stock, $1.25 par value
(the "Common Stock"), of which there were 37,783,400 shares outstanding as of
March 4, 1999. Only holders of Common Stock whose names appeared of record on
the books of the Company at the close of business on March 4, 1999, are entitled
to notice of and to vote at the Annual Meeting. Each share entitles the holder
thereof to one vote.

The holders of a majority of the shares of Common Stock outstanding as
of the record date, whether present in person or represented by Proxy,
constitute a quorum at the Annual Meeting. Both shares as to which the holder
abstains from voting on a particular matter and broker "non-votes" (street-name
shares that the record holder refrains from voting because of the absence of
required instructions from the beneficial owner) will count towards the
determination of whether a quorum is present at the Annual Meeting.

ACTIONS TO BE TAKEN UNDER THE PROXY

If you do not specify on your Proxy how you want to vote your shares, all
properly executed Proxies will be voted for the election of Michael F. Johnston,
Charles M. Rampacek and Kevin E. Sheehan for three-year terms as directors of
the Company; for the restructuring of the Company's stock-based incentive plans
by (i) reducing the authorized shares under the 1998 Restricted Stock Plan from
800,000 to 250,000 and (ii) adopting the 1999 Stock Option Plan; and, at the
discretion of the persons acting under the Proxy, in the transaction of such
other business as may properly come before the meeting or any adjournment
thereof.

Should any nominee named herein for the office of director become
unable or unwilling to accept nomination or election, it is intended that the
persons acting under the Proxy will vote for the election, in his stead, of such
other person as the Board may designate. The Board has no reason to believe that
any of the nominees will be unable or unwilling to serve if elected to office.

The giving of a Proxy does not preclude the right to vote in person,
should the person giving the Proxy so desire. A person giving a Proxy has the
power to revoke the same, at any time before it has been exercised, by giving
the Company written notice bearing a later date than the Proxy, by submission of
a later dated Proxy, or by voting in person at the Annual Meeting (although
attendance at the Annual Meeting will not in and of itself constitute revocation
of a Proxy). In the absence of such revocation, properly executed Proxies will
be voted. The Proxy voting will be tabulated by the Company's transfer agent,
National City Bank, which will also serve as inspector of election at the Annual
Meeting.

1
4

ITEM NO. 1

ELECTION OF DIRECTORS

The Board currently consists of 10 directors who are divided into three classes,
with one full class being elected at each Annual Meeting of Shareholders. At the
Annual Meeting, the term of the directors serving in the Class of 1999 expires,
and three directors will be elected to hold office until the 2002 Annual Meeting
of Shareholders and until their successors are elected and qualified. Also at
the Annual Meeting, Mr. R. Elton White will retire from the Board after six
years of dedicated service. Under New York law, directors are elected by a
plurality of the votes cast at a meeting of shareholders by the holders of
shares entitled to vote in the election.

Set forth below is information with respect to each nominee for
election as a director and each director whose term of office continues after
the Annual Meeting.

CLASS OF 2002
NOMINEES TO BE ELECTED FOR A THREE-YEAR TERM:

MICHAEL F. JOHNSTON Director since 1997

Michael F. Johnston, 51, has been President of Americas Automotive Group of
Johnson Controls, Inc., a company serving the automotive and building services
industries, since 1997. He was Vice President and General Manager of ASG
Interior Systems Business of Johnson Controls, Inc. during 1997, Vice President
and General Manager of the Johnson Controls Battery Group from 1993 to 1997,
Vice President and General Manager of SLI Battery Division from 1991 to 1993 and
Vice President and General Manager of the Specialty Battery Division from 1989
to 1991.

CHARLES M. RAMPACEK Director since 1998

Charles M. Rampacek, 55, has been President and CEO of Lyondell-Citgo Refining
LP, a manufacturer of petroleum products, since 1996. He was employed by
Tenneco, Inc., where he served as President of Tenneco Gas Transportation
Company from 1992 to 1996, and as Executive Vice President of Tenneco Gas
operations from 1989 to 1992. Previously, he was Senior Vice President of
Refining of Tenneco Oil Company from 1982 to 1988.

KEVIN E. SHEEHAN Director since 1990

Kevin E. Sheehan, 53, is a general partner of the CID Equity Partners, a venture
capital firm that concentrates on early-stage and high-growth entrepreneurial
companies. He was a Vice President of Cummins Engine Company, a manufacturer of
diesel engines and related components, from 1980 until 1993. He is also a
director of the Auburn Foundry Group.

CLASS OF 2000
DIRECTORS WHOSE TERM IN OFFICE CONTINUES UNTIL 2000:

BERNARD G. RETHORE Director since 1997

Bernard G. Rethore, 57, has been Chairman of the Board and Chief Executive
Officer of the Company since 1997 and also President since November 1998. Mr.
Rethore was Chairman of the Board of BW/IP, Inc. (prior to its merger with the
Company) in 1997 and served as its President, Chief Executive Officer and a
director from 1995 to 1997. He was Senior Vice President of Phelps Dodge
Corporation and President of Phelps Dodge Industries, its diversified
international manufacturing business, from 1989 to 1995. Previously, Mr. Rethore
had been President and CEO of Microdot Industries, the diversified manufacturing
business of Microdot, Inc. Mr. Rethore is also a director of Maytag Corporation,
a manufacturer of residential and commercial appliances and related consumer
products, and Belden, Inc., a manufacturer of wire, cable and cord products for
the electronics industry.

2
5

DIANE C. HARRIS Director since 1993

Diane C. Harris, 56, is President of Hypotenuse Enterprises, Inc., a merger and
acquisition services and corporate development outsourcing company. She was Vice
President, Corporate Development, of Bausch & Lomb, an optics and health care
products company, from 1981 to 1996. She was a director of the Association for
Corporate Growth from 1993 to 1998 and its President from 1997 to 1998.

JAMES O. ROLLANS Director since 1997

James O. Rollans, 56, is Senior Vice President and Chief Financial Officer of
Fluor Corporation, a major engineering and construction firm. Mr. Rollans has
been Senior Vice President of Fluor since 1992 and its Chief Financial Officer
since 1998. He was Fluor's Chief Administrative Officer from 1994 to 1998, and
he served as its Chief Financial Officer from 1992 to 1994 and its Vice
President, Corporate Communications, from 1982 to 1992. Mr. Rollans is also a
director of Fluor Corporation and of Inovision, Inc., a pharmaceutical products
company.

CLASS OF 2001
DIRECTORS WHOSE TERM IN OFFICE CONTINUES UNTIL 2001:

HUGH K. COBLE Director since 1994

Hugh K. Coble, 64, is the Vice Chairman Emeritus of Fluor Corporation, a major
engineering and construction firm. Mr. Coble joined Fluor Corporation in 1966,
where he held a series of increasingly responsible management positions and had
been a director from 1984 until his retirement in 1997. He is also a director of
Beckman Instruments, Inc., a company that sells medical instruments, and a
director of ICO Global Communications, a telecommunications business.

GEORGE T. HAYMAKER, JR. Director since 1997

George T. Haymaker, Jr., 61, is Chairman and Chief Executive Officer of Kaiser
Aluminum Corporation. Before joining Kaiser in 1993 as its President and Chief
Operating Officer, Mr. Haymaker had worked with a private partner in the
acquisition and redirection of several metal fabricating companies. He had also
been Executive Vice President of Alumax and held various positions at Alcoa,
including Vice President and Treasurer and Group Vice President of International
Operations.

WILLIAM C. RUSNACK Director since 1997

William C. Rusnack, 54, is President, Chief Executive Officer and a director of
Clark Refining & Marketing, Inc., a company which refines crude oil to
manufacture petroleum products for sale. Mr. Rusnack was Senior Vice President
of ARCO, an integrated petroleum company, from 1990 to 1998, and President of
ARCO Products Company from 1993 to 1998. He is also a director of Clark U.S.A.,
Inc.

Any shareholder who intends to nominate a director must, pursuant to
Article III, Section 2 of the By-Laws of the Company as approved by the
Shareholders at the 1986 Annual Meeting of Shareholders, give written notice of
such intention to the Secretary of the Company. The notice must be received at
the principal executive offices of the Company not less than 50 days prior to
the meeting (or if fewer than 60 days notice or prior public disclosure of the
meeting date is given or made to shareholders, not later than the tenth day
following the day on which the notice of the date of the meeting was mailed or
such public disclosure was made) and must include specified information about
the nominee and the shareholder. The proposed nomination will be referred to the
Executive Committee of the Board for further consideration. No shareholder has
to date notified the Company of any intention to nominate a director.

3
6

BOARD COMMITTEES: MEMBERSHIP AND FUNCTIONS

Six meetings of the Board were held in 1998. The number of meetings held by each
of the three standing committees of the Board in 1998 was as follows:
Audit/Finance Committee - eight; Compensation Committee -five; Executive
Committee - four.

The Audit/Finance Committee, of which Mr. Rusnack is chairman and Mrs.
Harris and Messrs. Rampacek, Rollans and White are members, advises the Board on
strategic financial matters, including making recommendations to the Board on
acquisitions, divestitures, major financings, pension fund performance, capital
structure and dividend policy. The Committee meets with the independent
auditors, internal auditors and management personnel to review the scope and
results of the annual audit of the financial statements of the Company and the
recommendations of the independent auditors pertaining to accounting practices,
policies and procedures and overall internal controls. The Committee also
approves major capital expenditures made in the ordinary course of business and
recommends annually the appointment of independent auditors for the Company.

The Compensation Committee, of which Mr. Sheehan is chairman and
Messrs. Coble, Haymaker and Johnston are members, has the responsibility of
establishing executive compensation through which officers and key management
personnel are compensated in a manner that is internally equitable, externally
competitive and an incentive for effective performance in the best interest of
shareholders. The Committee has the authority of the Board to fix the
compensation of officers, including the Chief Executive Officer, who are elected
by the Board. The Committee also administers the Company's stock option,
restricted stock and incentive compensation plans. It is responsible for
reviewing the management succession plan and for recommending changes in
director compensation to the Board. The report of the Committee on the Company's
executive compensation practices is on page 11 of this Proxy Statement.

The Executive Committee, of which Mr. Coble is chairman and Messrs.
Rethore, Rusnack and Sheehan are members, is empowered to exercise the full
authority of the Board except as to matters not delegable to a committee under
the New York Business Corporation Law. The Committee makes recommendations to
the Board for the positions of Chairman of the Board, President, Chief Executive
Officer and candidates for director. The Committee also reviews and makes
recommendations on Board self governance matters to the Board.

Each of the directors attended, in the aggregate, 75% or more of the
1998 meetings of the Board and of the standing committees on which he or she
served.

BOARD INTERNAL GOVERNANCE GUIDELINES

The Board has adopted internal self governance guidelines designed to promote
superior management of the Company. The guidelines address the director
selection process, composition of Board Committees (including selection of an
outside director as Chairperson of the Executive Committee) and the formal
process for Board review of Chief Executive Officer, individual director and
full Board performance. The guidelines establish requirements for director stock
ownership, including requiring the receipt of one-half of a director's target
annual compensation in the form of restricted Common Stock. The guidelines
further mandate that directors own Common Stock with a value of at least
$100,000 by the end of his/her fifth year of Board service. Finally, these
guidelines require the offer of resignation by a non-employee director when the
director's principle occupation has changed during a term of office.

DIRECTOR COMPENSATION

The philosophy of the Board is that a significant component of director
compensation should be paid in the form of Common Stock. During 1998, about 94%
of the aggregate compensation paid to all non-employee directors was in the form
of Common Stock. These Common Stock payments were made in the form of restricted
stock grants and deferrals of cash retainers in the form of Common Stock, as
described in the following paragraphs.

4
7

Non-employee director compensation consists of equivalent components of
restricted stock and a cash retainer with a total target value of $36,000 per
year. In 1998, the dollar value of the restricted stock portion was based upon a
grant of 600 restricted shares under the Company's Restricted Stock Plan at an
average market price of $30 per share (applicable at the time of restricted
stock grants) and the annual cash retainer was $18,000. Dividend and voting
rights attach upon receipt of the restricted stock. The restricted stock vests
one year after grant, unless forfeited back to the Company due to earlier
termination of Board service. Committee chairmen receive an additional annual
retainer of $2,000, and all non-employee directors also receive $500 for
attendance at any special meeting requiring travel.

Under the Company's current deferred compensation arrangements for
non-employee directors, a director may elect to defer, in the form of Common
Stock or cash, receipt of the annual cash retainer payable for service as a
director, plus any special retainer for service as a committee chairman, until
he or she terminates Board service.

The Company maintains a liability insurance policy with the Chubb Group
of Insurance Companies and Royal Insurance Company of America covering part of
the Company's statutory right and obligation to indemnify directors and officers
and partially covering directors and officers in some instances in which they
might not otherwise be indemnified by the Company. The current policy is for a
three year term (expiring August 30, 2000) at an annual cost of approximately
$230,000.

SECURITY OWNERSHIP

OWNERSHIP OF COMMON STOCK BY DIRECTORS AND OFFICERS

Set forth in the table below is information as of February 22, 1999, with
respect to the number of shares of Common Stock of the Company beneficially
owned by each director and certain executive officers of the Company and by all
directors and officers as a group. For purposes of this table, an individual is
considered to "beneficially own" any shares of Common Stock (i) over which he or
she exercises sole or shared voting or investment power or (ii) of which he or
she has the right to acquire beneficial ownership at any time within 60 days
after February 22, 1999.

(A) (B)
NUMBER OF SHARES, INCLUDING
OPTION SHARES THAT MAY OPTION SHARES SHOWN IN COLUMN (A),
BE ACQUIRED WITHIN 60 DAYS BENEFICIALLY OWNED (a)(b)
-------------------------- -------------------------

Hugh K. Coble.................................. -- 5,413
Diane C. Harris................................ 788 7,571
George T. Haymaker............................. -- 2,051
William M. Jordan ............................ 62,280 248,279 (c) (d)
Michael F. Johnston............................ 4,703 7,738
Charles M. Rampacek ........................... -- 2,301
Bernard G. Rethore............................. 259,071 340,526 (c) (d)
James O. Rollans............................... 5,991 8,738
William C. Rusnack............................. 9,056 12,656
George A. Shedlarski........................... 29,966 83,161 (c) (d)
Kevin E. Sheehan............................... -- 8,909
Mark E. Vernon................................. 31,264 64,351 (c) (d)
Reid B. Wayman................................. 19,541 25,479 (C)
R. Elton White................................. 788 12,433
Howard D. Wynn................................. 51,524 77,560 (c) (d)
18 Directors and Officers as a Group (e) 473,649 796,603

5
8
- ----------

(a) Unless otherwise indicated, voting power and investment power are exercised
solely by the named individual or are shared by such individual and his or
her immediate family members.

(b) No director or officer beneficially owns in excess of 1% of the outstanding
shares of Common Stock of the Company. All directors and officers as a
group own 2.1% of the outstanding shares of Common Stock of the Company.
Percentages are calculated on the basis of the number of shares outstanding
at February 22, 1999, plus the number of shares subject to outstanding
options held by the individual or group that are exercisable within 60 days
thereafter.

(c) Includes the following shares held as of December 31, 1998, by defined
contribution benefit plans sponsored by the Company for the following
individuals: Mr. Rethore - 1,964; Mr. Shedlarski - 5,353; Mr. Vernon - 301;
Mr. Wayman - 1,321; Mr. Wynn - 10,474; and Mr. Jordan - 28,684; and all
directors and officers as a group - 31,955. Participants in these Plans
have the right to vote shares held for their accounts, but disposition of
the shares is restricted and may be made only in accordance with the terms
of the plans, which are designed to comply with Section 401(k) of the
Internal Revenue Code.

(d) Includes 4,837 shares held for the benefit of Mr. Rethore; 7,500 shares
each held for the benefit of Messrs. Shedlarski and Vernon; 245 shares held
for the benefit of Mr. Wynn; 14,500 shares held for the benefit of Mr.
Jordan; and 27,809 shares held for the benefit of all directors and
executive officers as a group, which are subject to restrictions on resale
and forfeiture back to the Company, but which have full dividend rights.
Receipt of such shares (except for shares held by Messrs. Rethore and Wynn)
has been deferred until termination of service.

(e) Mr. Jordan resigned from his position as President and Chief Operating
Officer, effective November 1, 1998, but remains an employee. Mr. Wayman
departed the Company effective January 31, 1999. Their shareholdings are
not included in the computation of shareholdings of "Directors and Officers
as a Group" in any part of this table or its footnotes.

OWNERSHIP OF COMMON STOCK BY SIGNIFICANT STOCKHOLDERS

Except as set forth below, the Company does not know of any party who or which
beneficially owns more than 5% of the Company's Common Stock.

NAME AND ADDRESS OF SHARES OF COMMON STOCK PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS (a)
---------------- ------------------ ------------

American Century Investment Management, Inc. 3,064,400 (b) 8.1%
4500 Main Street
Kansas City, Missouri 64141

Gabelli Funds, Inc. 2,069,050 (c) 5.5%
One Corporation Center
Rye, New York 10580

- ----------

(a) Based on the number of shares of common stock of the Company outstanding
as of December 31, 1998.

(b) Based on information set forth in Schedule 13G, dated February 10, 1999,
filed with the Securities and Exchange Commission by American Century
Investment Management, Inc. ("ACIM"), on its behalf and on behalf of
American Century Capital Portfolios, Inc. ("ACCP"), which states that ACIM
has sole voting and dispositive power as to all such shares and that ACCP,
an investment client of ACIM, has sole voting and dispositive power as to
2,657,700 of such shares.

(c) Based on information set forth in Schedule 13D, dated November 20, 1998,
filed with the Securities and Exchange Commission by Mario J. Gabelli, Marc
J. Gabelli and various entities which either one directly or indirectly
controls or for which either one acts as chief investment officer, which
states that Gabelli Funds, Inc. has sole voting and dispositive power as to
450,000 of such shares, GAMCO Investors, Inc. sole voting power as to

6
9

1,531,050 of such shares and sole dispositive power as to 1,580,050 of such
shares, Gabelli Performance Partnership L.P. sole voting and dispositive
power as to 1,500 of such shares, Gemini Capital Management Ltd. sole
voting and dispositive power as to 30,000 of such shares and Gabelli
International II Limited sole voting and dispositive power as to 7,500 of
such shares.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Each of the Company's executive officers and directors has filed all personal
Common Stock ownership reports required under Section 16(a) of the Securities
Exchange Act of 1934 on a timely basis.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain summary information concerning the
compensation provided by the Company to the Chief Executive Officer and its four
other highest compensated officers in 1998 and one additional individual who was
not serving as an executive officer at December 31, 1998, but who otherwise
would have been one of the four other highest compensated officers.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION (1)
--------------------------------------------------------------
(a) (b) (c) (d) (e)
OTHER
ANNUAL
NAME AND SALARY BONUS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (3)
------------------ ---- ------- ------- ------------

BERNARD G. RETHORE (2) ............ 1998 588,077 300,322 56,615
Chairman, President and 1997 480,930 566,578(8) 0
Chief Executive Officer 1996 400,000 258,376 0

GEORGE A. SHEDLARSKI .............. 1998 279,048 111,932 4,063
Vice Pres. and Pres. 1997 255,242 124,863 0
Flow Solutions Div. 1996 228,810 170,513 0

MARK E. VERNON .................... 1998 276,058 106,551 0
Vice Pres. and Pres. 1997 224,989 146,301 6,344
Flow Control Div. 1996 211,708 168,531 0

REID B. WAYMAN (9) ................ 1998 238,068 105,000 1,198
Vice Pres. and Pres. 1997 193,569 142,410 0
Service Repair Div. 1996 126,429 35,918 0

HOWARD D. WYNN (2) ................ 1998 261,550 106,348(8) 1,393
Vice Pres. and Pres. 1997 219,732 176,678 0
Rotating Equipment Div. 1996 167,000 90,460 0

WILLIAM M. JORDAN (10) ............ 1998 540,865 301,475(8) 348
Former President and 1997 475,788 450,520 0
Chief Operating Officer 1996 396,308 484,979(8) 0

LONG-TERM COMPENSATION (1)
-------------------------------------------
AWARDS PAYOUTS
-------------------------------------------
(a) (f) (g) (h) (i)
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
NAME AND AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) (4) (#) (5) ($) (6) ($) (7)
------------------- ------- ------- ------- -------

BERNARD G. RETHORE (2) ............ 0 85,680 0 4,425
Chairman, President and 0 62,300 0 2,438
Chief Executive Officer 192,304 0 0 2,375

GEORGE A. SHEDLARSKI .............. 0 29,160 0 10,402
Vice Pres. and Pres. 0 9,000 143,199 10,042
Flow Solutions Div. 0 7,000 97,478 10,042

MARK E. VERNON .................... 0 29,160 0 14,242
Vice Pres. and Pres. 0 7,500 143,199 18,916
Flow Control Div. 0 7,000 95,100 15,399

REID B. WAYMAN (9) ................ 0 29,160 0 14,717
Vice Pres. and Pres. 373,125 22,500 56,357 9,600
Service Repair Div. 0 2,500 0 11,095

HOWARD D. WYNN (2) ................ 0 29,160 0 10,957
Vice Pres. and Pres. 0 18,600 0 2,924
Rotating Equipment Div. 5,648 0 0 3,000

WILLIAM M. JORDAN (10) ............ 0 67,560 0 8,180
Former President and 0 18,000 303,113 11,740
Chief Operating Officer 546,000 57,000 218,635 11,630

- ----------

(1) Salary, annual bonus and long-term payouts may be deferred with interest by
the recipient until retirement. Annual bonus and long-term payouts also may
be deferred in the form of Common Stock.

(2) Mr. Rethore became Chairman and Chief Executive Officer and Mr. Wynn became
Vice President and President of the Rotating Equipment Division following
the merger of the Company (formerly known as Durco International Inc. and
The Duriron Company, Inc.) and BW/IP, Inc. ("BW/IP") on July 22, 1997 (the
"Merger"). Mr. Rethore had been Chairman, President and Chief Executive
Officer of BW/IP, and Mr. Wynn had been Vice President of BW/IP and
President of the Pump Division of BW/IP prior to the Merger. Compensation
paid or awarded to

7
10

Messrs. Rethore and Wynn by BW/IP in 1996 and in 1997 prior to the
Merger is included for informational purposes only. Information
provided for 1997 for Messrs. Rethore and Wynn includes salary paid to
them by BW/IP in the amounts of $246,090 and $105,712, respectively,
between January 1, 1997, and the effective date of the Merger.

(3) Amounts shown include tax adjustment payments on relocation allowances. The
only other type of Other Annual Compensation for each of the named officers
was in the form of perquisites and, except for Mr. Rethore in 1998, was
less than the level required for reporting. Perquisites in the amount of
$56,336 for Mr. Rethore include $30,000 for commuting expenses and $16,230
for a company-provided car.

(4) Mr. Rethore received an award of restricted BW/IP common stock of 8,206
shares from BW/IP in May 1996. In 1997, pursuant to the BW/IP 1996
Long-Term Incentive Plan, Mr. Rethore and Mr. Wynn received matching
restricted stock awards of 2,019 shares and 353 shares, respectively, of
BW/IP common stock that vest over three years. At the time of the Merger,
the BW/IP shares were exchanged into shares of the Company by multiplying
the BW/IP shares by .6968, the rate at which all BW/IP stock was exchanged
for shares of common stock ("Exchange Rate"). Mr. Jordan received 21,000
shares of restricted Common Stock in 1996. Mr. Wayman received 15,000
shares of restricted Common Stock in 1997, which were forfeited in January
1999 as the result of his departure from the Company. On December 31, 1998,
previously granted restricted shares had a value of $80,113 for Mr.
Rethore; $240,156 for Mr. Jordan; $124,219 for Messrs. Shedlarski and
Vernon; $248,438 for Mr. Wayman; and $4,058 for Mr. Wynn. The
aforementioned restricted shares represent the only restricted holdings of
such officers. Regular dividends are payable on all such restricted shares,
which may be deferred except for shares previously granted to Messrs.
Rethore and Wynn by BW/IP.

(5) Option amounts shown were awarded by the Company to Mr. Rethore and Mr.
Wynn after the Merger. In addition to the amounts shown, pursuant to the
BW/IP, Inc. 1996 Long-Term Incentive Plan, Messrs. Rethore and Wynn
received stock options from BW/IP in February 1997 to acquire 92,000 shares
and 32,000 shares, respectively, of BW/IP common stock, and Mr. Wynn
received a stock option in 1996 to acquire 22,000 shares of BW/IP common
stock. At the time of the Merger, the original number of shares underlying
these BW/IP awards was multiplied by the Exchange Rate. The underlying
option price per share was simultaneously changed by dividing it by .6968.

(6) Based on a three-year performance plan ending in December of noted year but
actually paid in the following year. Payment under the plan for performance
ending in 1997 was one-half cash and one-half shares of Common Stock of the
Company at then fair market value. The procedure for determining the number
of shares payable is based on current market value of shares at the time of
award. As a result of the Merger, payouts for the three-year performance
cycles ending in December 1998 and December 1999 were accelerated for
payment in February 1998 based upon performance at December 31, 1997,
against such three-year targets. The payments were in addition to amounts
shown in the Summary Compensation Table for 1997. The individuals to whom
such payments were made, and the respective amounts paid for the three-year
cycles scheduled to end in 1998 and 1999 were as follows: Mr. Jordan
$395,033 and $515,371; Mr. Shedlarski $170,437 and $181,271; Mr. Vernon
$170,437 and $181,271; and Mr. Wayman $64,301 and $181,271. Messrs. Rethore
and Wynn did not participate in this plan prior to 1998.

(7) The 1998 amounts shown consist of: (i) Company contributions to officer
accounts in defined contribution benefit plans (which are generally
available to salaried employees) in the following amounts: Mr. Rethore -
$4,425; Mr. Shedlarski - $5,760; Mr.Vernon - $9,600; Mr. Wayman - $9,600;
Mr. Wynn - $4,585; and Mr. Jordan - $5,760; (Mr. Vernon and Mr. Wayman
participate in a Company subsidiary's profit sharing plan in which no other
officers participate.) and (ii) the computation, under SEC rules, of the
actuarial value to officers (except the non-participating Mr. Rethore) of
the non-term portion of an executive "split dollar" life insurance program,
in the following amounts: Mr. Shedlarski - $4,642; Mr. Vernon - $4,642; Mr.
Wayman - $5,117; Mr. Wynn - $6,372; and Mr. Jordan - $2,420.

(8) Mr. Wynn elected to take 50% of his 1998 annual bonus; Mr. Rethore elected
to take all of his 1997 annual bonus; and Mr. Jordan elected to take all of
his 1998 and 1996 annual bonuses in the form of shares of Common Stock,
payable after retirement, which resulted in the amount of the bonuses paid
in Common Stock being increased 15% for Messrs. Wynn and Jordan in 1998, 5%
for Mr. Rethore in 1997 and 5% for Mr. Jordan in 1996 in value over their
cash equivalent. The procedure for determining the number of shares payable
in lieu of cash is also fixed under this plan.

8
11

(9) Effective January 31, 1999, Mr. Wayman departed the Company.

(10) Mr. Jordan resigned from his position as President and Chief Operating
Officer effective November 1, 1998, but remains an employee of the Company
under an employment agreement until July 2002.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

The following table contains information concerning the grant of Stock Options
under the Company's 1997 Stock Option Plan to its executives named in the
Summary Compensation Table. No Stock Appreciation Rights were granted in 1998
either in tandem with such Stock Options or otherwise, and no previously
outstanding Stock Options were amended in 1998 to change the exercise price.

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
---------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL EXERCISE ANNUAL RATE OF STOCK
SECURITIES OPTIONS OR PRICE APPRECIATION FOR
UNDERLYING GRANTED TO BASE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
GRANTED (#)(1) FISCAL YEAR ($/SH) DATE 5% ($ 10%($)
------------ ----------- ------ -------- -------- --------

Bernard G. Rethore 85,680 10.8 18.50 11/2/08 996,852 2,526,206
George A. Shedlarski 29,160 3.7 18.50 11/2/08 339,265 859,759
Mark E. Vernon 29,160 3.7 18.50 11/2/08 339,265 859,759
Reid B. Wayman 29,160 3.7 18.50 11/2/08 339,265 859,759
Howard D. Wynn 29,160 3.7 18.50 11/2/08 339,265 859,759
William M. Jordan 67,560 8.5 18.50 11/2/08 786,034 1,991,952

- ---------

(1) All Stock Options granted were for a 10-year term. Of these options, only
the following were granted as incentive stock options: Mr. Shedlarski -
4,631; Mr. Vernon - 4,631; and Mr. Wayman - 3,725. The remaining options
granted to each executive were nonqualified. The exercise price of all
these Stock Options is equal to the fair market value on the date of grant,
with pro rata vesting occurring on each grant anniversary until fully
vested on the third anniversary of grant. All these Stock Options have
tandem limited rights which, in general, allow the optionee to receive the
value of the Stock Option in the event of a change of control of the
Company.

(2) All appreciation valuations set forth are for illustrative purposes only,
as required by SEC rules, and are not projections of future stock
appreciation rates.

OPTION/SAR EXERCISES AND HOLDINGS

For the executives named in the Summary Compensation Table, the following table
sets forth information concerning the exercise of Stock Options and/or SARs
during 1998 and the unexercised Stock Options and SARs held by such executives
as of the end of 1998.

9
12

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

(a) (b) (c) (d) (e)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) (1)
ACQUIRED ON VALUE ---------------------------------- ------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------ ----------- ------------- ----------- -------------

Bernard G. Rethore -- -- 259,071 127,214 -- --
George A. Shedlarski -- -- 29,966 37,494 13,359 --
Mark E. Vernon 2,142 6,158 31,264 36,494 20,934 --
Reid B. Wayman -- -- 19,541 44,994 16,898 --
Howard D. Wynn -- -- 51,524 41,560 -- --
William M. Jordan -- -- 62,280 98,560 3,563 --

- ----------
(1) Based upon the excess, where applicable, of the market value of $16.5625
per share at December 31, 1998, of the shares covered by Stock Options held
by these officers, over the applicable exercise prices of such Stock Option
shares.

PENSION PLANS

The following tables show the estimated annual pension benefits payable to a
covered participant at normal retirement at age 65 under the Company's qualified
defined benefit pension plans and nonqualified supplemental pension plans. These
nonqualified plans provide certain additional retirement benefits that would
otherwise be denied participants by reason of certain Internal Revenue Code
limitations on qualified plan benefits. All executive officers listed in the
Summary Compensation Table except Messrs. Vernon and Wayman are covered by these
plans.

Table I indicates the maximum annual retirement benefit that persons in
specified compensation and years of service classifications would be entitled to
receive under the former Durco International Inc. defined benefit and
supplemental retirement plans. The executive officers noted in the Summary
Compensation Table who are covered by these plans are Messrs. Jordan and
Shedlarski.

TABLE I - PENSION PLAN (1)

YEARS OF SERVICE (2)
-------------------------------------------------------------------------------------------
REMUNERATION (3) 15 20 25 30 35
---------------- -- -- -- -- --

$300,000 $ 60,198 $ 80,265 $100,331 $120,397 $140,463
400,000 81,198 108,265 135,331 162,397 189,463
500,000 102,198 136,265 170,331 204,397 238,463
600,000 123,198 164,265 205,331 246,397 287,463
700,000 144,198 192,265 240,331 288,397 336,463
800,000 165,198 220,265 275,331 330,397 385,463
900,000 186,198 248,265 310,331 372,397 434,463

- ---------

(1) Benefits are calculated as annual straight life annuity amounts beginning
at age 65 and are not reduced by any federal Social Security benefits.
Optional payment forms of actuarial equivalence are also available.

(2) Current credited years of service for pension benefit calculation:
Mr. Jordan - 27; Mr. Shedlarski - 27.

(3) Covered compensation for pension benefit calculation includes only base
salary and annual bonus shown on the Summary Compensation Table.

10
13

Table II indicates the maximum annual retirement benefit that persons in
specified compensation and years of service classifications would be entitled to
receive under the former BW/IP International, Inc. Retirement Plan and the
former BW/IP, Inc. Supplemental Executive Retirement Plan ("SERP"). The
executive officers noted in the Summary Compensation Table who are covered by
these plans are Messrs. Rethore and Wynn.

TABLE II - PENSION PLAN (1)

YEARS OF SERVICE (2)
-------------------------------------------------------------------------------------------
REMUNERATION (3) 15 20 25 30 35 40
---------------- -- -- -- -- -- --

$300,000 $ 69,899 $ 93,198 $116,498 $139,798 $147,298 $154,798
400,000 93,899 125,198 156,498 187,798 197,798 207,798
500,000 117,899 157,198 196,498 235,798 248,298 260,798
600,000 141,899 189,198 236,498 283,798 298,798 313,798
700,000 165,899 221,198 276,498 331,798 349,298 366,798
800,000 189,899 253,198 316,498 379,798 399,798 419,798
900,000 213,899 285,198 356,498 427,798 450,298 472,798

- ----------

(2) Current credited years of service for pension benefit calculation:
Mr. Rethore - 3; Mr. Wynn - 27.

(3) Covered compensation for pension benefit calculation includes only base
salary and annual bonus shown on the Summary Compensation Table.

REPORT OF COMPENSATION COMMITTEE
CONCERNING EXECUTIVE COMPENSATION

OVERALL COMPENSATION POLICY AND BENCHMARK EVALUATION PROCESS

The Compensation Committee of the Board consists of four directors, none of whom
is a present or former officer or employee of the Company. The Board-adopted
statement of purposes and responsibilities of the Compensation Committee states
that the Committee is charged with the broad responsibility of seeing that
officers and key management personnel are effectively compensated in terms of
salaries, supplemental compensation and benefits which are internally equitable
and externally competitive. Within that framework, and in order to tie
compensation directly to performance, the Committee has adopted an
"incentive-leveraged" compensation policy which offers the Company's officers,
including the Chief Executive Officer, the opportunity to supplement their base
salaries with substantial cash and stock-based incentives, more fully described
below. This policy has the effect of holding base salaries below prevailing
market midpoint rates while offering higher than average incentives to motivate
executives to attain Company objectives.

The Committee has established, for all officers, including the Chief
Executive Officer, a compensation policy which would place the officers' total
annual cash compensation (consisting of salary and annual incentive plan awards)
at the sixty-fifth percentile of companies of comparable size, if the Company
attains its target financial goals under its incentive plans described
hereafter. The Committee established this sixty-fifth percentile benchmark based
upon data received by the Committee from Hay Associates and Hewitt Associates.
The Hay and Hewitt databases included a cross section of companies in order to
allow the Committee to consider overall executive compensation trends.

11
14

INCENTIVE PLANS - DESIGN AND STRATEGY

The Company's Annual and Long-Term Incentive Plans allow opportunities, through
effective performance against goals, for significant additional cash and stock
compensation for the Chief Executive Officer and other officers. Performance
goals, which must be met in order to earn payment of incentive compensation
target awards, are set to reward superior performance. Incentive awards are
payable if the Company achieves or exceeds predetermined results against
quantitative financial performance measures designed to benefit shareholders,
such as return on shareholders' equity ("ROE"), "economic value added" ("EVA"*),
and/or return on net assets ("RONA"). For 1998, the Company's Chief Executive
Officer's annual and long-term incentives were set, when combined, to be 125% of
his individual salary reference rate if all goals were met. In comparison, the
total combined annual and long-term incentives were set within a band of 95% to
120% of salary reference rate for other officers listed in the Summary
Compensation Table on page 7.

The specific performance goals under these incentive plans were
established by the Compensation Committee at the beginning of 1998. The 1998
Annual Plan includes only 1998 goals, while the 1998 Long-Term Plan contains
goals covering the three-year period ending December 31, 2000. The 1998 Annual
Plan contains general quantitative financial goals, including RONA and EVA for
the participating executives, including the CEO, plus diversity improvement and
information technology implementation goals. The 1998 Long-Term Plan is
EVA-based for all participants, including the CEO, with awards earned by
participants when the Company earns more than its cost of capital (i.e.,
weighted equity and debt capitalization) over the measured periods of this plan.

INCENTIVE PLANS - 1998 RESULTS

Mr. Rethore and the other listed officers received below-target awards under the
1998 Annual Incentive Plan. Mr. Rethore's award was equivalent to 51% of his
1998 salary. The counterpart range of awards for the other officers noted in the
Summary Compensation Table extended from 40% to 57%.

Under the 1998-2000 Long-Term Plan, the officers listed in the Summary
Compensation Table were eligible to receive a portion of the long-term award for
achieving 1998 goals. However, no amounts were paid because minimum performance
levels were not attained.

STOCK-BASED COMPENSATION

Stock-based forms of incentive compensation utilized by the Company include
stock options and restricted stock awards.

With regard to stock options, the Committee has adopted a stock option
plan administration policy under which options are granted annually to officers
and selected other key employees. The number of options granted in 1998 to Mr.
Rethore and other officers was based, in general, upon their job performance,
their respective salary reference rates, the market price of a share of Common
Stock at date of grant and application of the "Black Scholes" option valuation
formula. The Committee believes that these grants help link the objectives of
management and shareholders.

While the Committee authorized no grants of restricted stock to any of
its officers in 1998, the Committee believes that restricted stock may be used
as a valuable compensation tool and thus may do so under appropriate
circumstances in the future.

The Committee, as part of its review of stock-based compensation,
adopted personal stock ownership guidelines for all the aforementioned officers.
These guidelines require unrestricted personal stock ownership equal to four
times salary for the CEO and two times salary for the other noted officers. The
Committee has given the guidelines substantive impact by increasing the annual
stock option grant to an executive in compliance by 20% over what the officer
would have received if not in compliance. Officers failing to meet their
personal ownership within the prescribed period are required to receive one-half
of any future Annual Incentive Plan awards in Common Stock until compliance is
attained.

* EVA (R)IS A REGISTERED TRADEMARK OF STERN STEWART & CO.

12
15

TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION

The Committee has not formally adopted a policy with regard to qualifying
executive compensation plans for tax deductibility under Internal Revenue Code
Section 162(m), which generally limits the corporate tax deduction for
compensation paid to certain executive officers named in the Proxy Statement to
$1 million per year. Non-deferred executive compensation is below the level at
which this tax limitation would apply.

K. E. Sheehan, Chairman
H. K. Coble
G.T. Haymaker
M. F. Johnston

TOTAL RETURN TO SHAREHOLDERS

The following graph compares the cumulative shareholder total return, assuming
reinvestment of dividends, of the Company's Common Stock, the Standard & Poor's
Machinery (Diversified) - 500 Index ("S&P Machinery Diversified"), which is
comprised of companies in the heavy duty capital equipment industry but outside
the Company's flow control industry, and the Standard & Poor's 500 Index ("S&P
500"), which is a broad equity market index. The graph assumes $100 was invested
on December 31, 1993, in the Company's Common Stock and in each of the indices.

[CHART]

YEARS

1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----

Flowserve Corporation $100.00 $116.14 $156.04 $184.54 $193.97 $117.82
S&P 500 $100.00 $101.32 $139.40 $171.40 $228.59 $293.91
S&P Machinery Diversified $100.00 $ 97.34 $120.13 $149.73 $198.06 $164.84

The foregoing table is based on the Company's closing price per share of
$16.5625 on December 31, 1998.

13
16

EMPLOYMENT AGREEMENTS

Effective with the Merger, the Company entered into an employment agreement with
Bernard G. Rethore to serve as Chairman and Chief Executive Officer for a period
ending on the earlier of (i) the Board's acceptance of Mr. Rethore's resignation
after serving for three years or (ii) five years after the Merger. The agreement
includes an annual base salary of no less than $550,000, subject to increase
based on annual reviews, with an annual bonus opportunity of no less than 50% of
base salary and with participation in long-term incentive plans. If the Board
accepts Mr. Rethore's resignation after such three-year period, Mr. Rethore's
employment may continue as a consultant for two years at the same base salary,
with an annual bonus opportunity of no less than 50% of base salary, but no
additional participation in long-term incentive plans. Mr. Rethore's employment
agreement also provides for the continued payment of compensation for five years
after the Merger if the Company terminates his employment without cause or if
Mr. Rethore terminates his employment for "good reason" (which includes any
action by the Company resulting in a material diminution in his position or a
material breach of the agreement by the Company). Mr. Rethore also has the right
to an additional retirement benefit equal to the excess of (i) his retirement
benefit payable under the SERP, assuming one additional year of service for each
actual year of service over (ii) his retirement benefit actually payable under
the SERP.

Effective shortly after the Merger, the Company entered into employment
agreements with other executive officers, including Messrs. Shedlarski, Vernon,
Wayman and Wynn, providing for, among other things, the payment of termination
benefits in the event that the individual's employment is terminated by the
Company without cause or by the officer for "good reason" (which includes a
substantial, detrimental change in position, duties or status or a material
breach of the agreement by the Company). The termination benefits under these
agreements include, among other things, a payment equal to the sum of annual
base salary plus the average annual bonus paid in the last two calendar years,
with such sum then multiplied by two if termination occurs after July 31, 1998,
but before August 1, 1999, or by one if termination occurs after July 31, 1999,
but before July 31, 2001. The agreements terminate on July 31, 2001. Mr. Wayman
receives termination benefits as provided above under the terms of his
employment agreement arising from his departure from the Company in January
1999.

The Company is a party to contracts with Messrs. Rethore, Shedlarski,
Vernon and Wynn and certain other officers and key employees of the Company
providing for, among other things, the payment of severance benefits in the
event that the individual's employment with the Company is terminated under
specified circumstances within two years after a change in control of the
Company. The severance benefits under the contracts with the named individuals
include, among other things, payment of the following: (i) three times the sum
of the individual's base annual salary and the greater of (a) the average amount
awarded to the individual under any incentive compensation plan or arrangement
for the two years preceding employment termination or (b) the average of his/her
target awards under any such incentive plans for the immediately following three
years; (ii) the value of any outstanding Stock Options held by the individual
under any Stock Option plan of the Company, determined in accordance with a
formula set forth in the contract; (iii) a supplemental pension payment
equivalent to the additional benefit which would be earned for two additional
years of service; (iv) all legal fees and expenses incurred by the individual as
a result of his termination of employment; and (v) full reimbursement (on a
"grossed-up" basis") of certain excise tax liabilities arising from the benefit
payments and any such reimbursement, if applicable. The term of each such
contract continues until December 31, 2001, subject to extension beyond that
date by agreement of the parties.

Effective with the Merger, the Company entered into an employment
agreement with William M. Jordan to serve as President and Chief Operating
Officer for a five-year period ending in July 2002. This agreement established
an annual base salary of no less than $500,000, subject to annual increases,
with an annual bonus opportunity of no less than 50% of base salary and with
participation in long-term incentive plans. Mr. Jordan resigned his position as
President and Chief Operating Officer effective November 1, 1998, but continues
to serve as an employee under this agreement. He will thus receive continued
salary payments and is eligible to receive annual incentive plan and long-term
incentive plan awards under the same terms through the end of the contract term.

Prior to the Merger, the Company also entered into a supplemental
pension agreement with Mr. Jordan under which Mr. Jordan is entitled to a
nonqualified pension supplement upon retirement. The supplement is

14
17

computed by calculating the amount necessary for Mr. Jordan to receive the same
total pension benefit at attainment of age 60 that he would receive under the
Company's existing qualified and nonqualified pension plans at age 65. Mr.
Jordan will receive credit under this agreement for his expected continued
employment through July 2002 under his aforementioned employment agreement.

ITEM NO. 2

APPROVAL OF RESTRUCTURING OF STOCK-BASED
INCENTIVE PLANS TO REDUCE AUTHORIZED SHARES OF
RESTRICTED STOCK PLAN AND ADD NEW STOCK OPTION PLAN

After analysis of the Company's current stock-based incentive plans, the Board
recommends that shareholders authorize, in a coordinated manner, the following
restructuring of these programs (the "Stock Plan Restructuring") by approving:

(i) the reduction of the authorized shares covered under the
Flowserve Corporation 1998 Restricted Stock Plan (the
"Restricted Stock Plan") from 800,000 to 250,000; and
simultaneously

(ii) the adoption of a proposed new Flowserve Corporation 1999
Stock Option Plan (the "Stock Option Plan").

The Board believes that the effect of reducing the Company's authority
to issue restricted stock under the Restricted Stock Plan, while simultaneously
increasing the amount of available option shares through the proposed Stock
Option Plan, will benefit shareholders as follows. First of all, the
substitution of the increased stock option compensation authority, instead of
using the existing restricted stock authority, has certain anticipated favorable
effects on future income statements of the Company. The Company's granting of
stock options under the Stock Option Plan would result in no current charge in
the Company's income statement under current generally accepted accounting
principles. In contrast, the granting of restricted stock under the Restricted
Stock Plan will result in a charge to earnings equal to the value of the
underlying Common Stock over the period of restriction. Additionally, the
Company's granting of shares under the Restricted Stock Plan typically results
in no new consideration to the Company except the continued service of the
recipient during the applicable restriction period. In comparison, the recipient
of a stock option is required to pay to the Company the cost of the option
exercise price, either in cash or shares of Common Stock as described hereafter,
resulting in incremental benefit for the Company, in addition to the recipient's
providing consideration in the form of continued service.

The Board last sought shareholder approval of a similar stock option
plan in 1997 (the "1997 Plan") prior to the Merger. The Merger nearly doubled
the size of the Company and increased the number of key managers considered
eligible for stock options. There are currently insufficient remaining ungranted
options under the Company's 1997 Plan to allow the continuance of the Company's
annual option granting practices, with only 439,000 shares remaining available
under the 1997 Plan. The Board believes that the continuation of this stock
option granting practice is a cost-effective tool to incent Company management
to achieve shareholder objectives of superior Company performance and resulting
appreciation of the Common Stock.

RESTRICTED STOCK PLAN

If this proposal is approved, the Restricted Stock Plan will continue as
previously approved by shareholders in 1998, except with the maximum authorized
shares reduced from 800,000 to 250,000. Participation in the Restricted Stock
Plan will remain limited to non-employee directors and key employees selected by
the Compensation Committee (the "Committee"). During the applicable restricted
period, recipients of restricted shares under the Restricted Stock Plan still
may not transfer or dispose of such shares and will continue to forfeit such
restricted shares if they fail to meet requirements of the applicable
restrictions. However, recipients will continue to have shareholder voting and
dividend rights in shares issued under the Restricted Stock Plan immediately
upon issuance. The Restricted Stock Plan also still will require that at least
one-half of a non-employee director's compensation, otherwise payable in cash,
be paid through grants under the Restricted Stock

15
18

Plan. As of February 15, 1999, 4,515 shares of restricted stock had been granted
under the Restricted Stock Plan to both key employees and non-employee
directors.

STOCK OPTION PLAN

The Stock Option Plan is designed to provide the Company with the flexibility to
award grants of options to purchase shares of Common Stock, pursuant to the
following terms and with the following ramifications for the recipient and the
Company.

Under the Stock Option Plan, 1.9 million shares of Common Stock, $1.25
par value, are reserved for issuance during the 10-year term of the Stock Option
Plan. This reservation equals about 5.0% of the currently outstanding Common
Stock.

The Stock Option Plan permits the Committee to authorize the granting
of stock options to officers, directors and key employees of the Company. The
Committee has discretion under the Stock Option Plan to designate the
recipients, terms, quantity and timing of any stock options granted under the
Stock Option Plan, provided that grants to non-employee directors are subject to
approval by the Board. The Committee can grant either incentive stock options or
nonqualified stock options, in its discretion. No option may be granted under
the Stock Option Plan at an option price per share which, when combined with the
value of any consideration provided by the grantee, is less than 50% of the
market value of the underlying shares on the date of grant. In the case of
incentive stock options, the option price per share must not be less than market
value on the date of grant. Unless otherwise specifically determined by the
Committee, (i) no option may be exercised more than 10 years after the date of
grant, and (ii) no option may be exercised within the first year after the date
of grant. The granted stock options may contain stock appreciation rights or
limited rights (which accelerate vesting in the event of a change of control of
the Company). Option recipients may pay the option exercise price in either cash
or through delivery of shares with a then current market value equal to the
option price.

The persons eligible to participate in the Stock Option Plan are the
directors, officers and key employees of the Company. As of March 1, 1999, there
were nine non-employee directors and nine officers of the Company. Approximately
200 key employees are considered eligible for the Stock Option Plan, although
the Committee has traditionally authorized grants to a fewer number. The
Committee intends to restrict participation in the Stock Option Plan to those
individuals who have the ability to significantly contribute to the future
results of the Company.

Under current federal tax law, the option recipient recognizes no
taxable income and the Company no tax deduction upon the granting of a stock
option under the Stock Option Plan.

The subsequent federal income tax consequences for the Company and the
option recipient differ whether the granted option is an incentive stock option
("ISO") or a nonqualified stock option ("NSO"). If the option is an ISO, the
recipient realizes no taxable income upon exercise of the stock option (although
the transaction may trigger certain alternative minimum tax liability for the
recipient). The Company correspondingly realizes no tax deduction. If the
recipient resells the underlying shares within one year after exercise, he or
she incurs ordinary income tax liability on the lesser of (i) the difference
between the exercise price and the fair market value on the date of exercise or
(ii) the difference between the exercise price and the resale price. The Company
simultaneously is entitled to a tax deduction in the same amount. If the resale
occurs more than one year later, the recipient receives capital gains tax
treatment on this difference. The Company receives no tax benefit from this
later resale.

If the option is granted as an NSO, the recipient at option exercise
incurs ordinary income tax liability on the difference between market value of
the underlying shares at exercise and the option price. The recipient then
receives a new tax basis in the underlying shares equal to this exercise price
plus any income realized upon exercise. The Company receives a corresponding tax
deduction in an amount equal to the taxable income incurred by the recipient at
exercise. Option recipients may elect to defer until employment termination the
receipt of income and the delivery of the underlying shares upon exercise of an
NSO through compliance with applicable Stock Option Plan procedures. The
Company's corresponding tax deduction is then identically delayed.

16
19

The foregoing is a summary only, and the actual tax consequences of the
granting and exercise of stock options are more complex than the summary stated
above.

The number of options to be received by any recipient under the Stock
Option Plan is not now determinable, but no person may be granted options
covering more than 500,000 shares during the life of the Stock Option Plan. For
information about the Company's granting of options during 1998 under the 1997
Plan, please see page 9 of this Proxy Statement.

For further information about the terms and conditions of the Stock
Option Plan, please review the copy of the Stock Option Plan's text which is
attached to this Proxy Statement as Exhibit A.

Approval of the Stock Plan Restructuring requires an affirmative vote
of the holders of a majority of the Common Stock entitled to vote and
represented in person or by proxy at the Annual Meeting. Because of the
affirmative vote requirement, absentions and broker non-votes have the same
effect as a vote against the Stock Plan Restructuring.

THE BOARD URGES SHAREHOLDERS TO VOTE "FOR" THE APPROVAL OF THE STOCK
PLAN RESTRUCTURING, BY REDUCING THE AUTHORIZED SHARES UNDER THE RESTRICTED STOCK
PLAN FROM 800,000 TO 250,000 AND SIMULTANEOUSLY ADOPTING THE STOCK OPTION PLAN.

INDEPENDENT AUDITORS

In 1998, the Company eliminated the formality of seeking ratification at the
Annual Meeting of the appointment of Ernst & Young LLP as the Company's
independent auditors. Ernst & Young LLP has served as the Company's independent
auditors since 1956. A representative of Ernst & Young will attend the meeting
and respond to any questions or make a statement if he or she desires.

OTHER BUSINESS

The Board of Directors does not know of any other matters of business which may
be brought before the Annual Meeting. However, it is intended that, as to any
such other matters or business, a vote may be cast pursuant to the accompanying
Proxy in accordance with the judgment of the person or persons voting such
Proxy.

SHAREHOLDERS' PROPOSALS

A proposal by a shareholder intended for inclusion in the Company's Proxy
Statement and form of Proxy for the 2000 Annual Meeting of Shareholders must be
received by the Company at 222 West Las Colinas Boulevard, Irving, Texas, 75039,
Attention: Secretary, on or before November 13, 1999 in order to be eligible for
such inclusion. The 2000 Annual Meeting of Shareholders is tentatively scheduled
to be held on April 20, 2000, with such date being subject to change.

17
20

SOLICITATION OF PROXIES

The cost of preparing, assembling and mailing this Proxy Statement and the
accompanying form of Proxy will be borne by the Company. Banks, brokerage houses
and other custodians, nominees and fiduciaries will be requested to forward
Proxy materials to their principals and to obtain authorization for the
execution of Proxies. Directors, officers and regular employees of the Company
may solicit Proxies personally from some shareholders if Proxies are not
received promptly. The Company will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their out-of-pocket expenses in
handling Proxy materials.

FLOWSERVE CORPORATION

By: RONALD F. SHUFF
Secretary

18
21

EXHIBIT A

FLOWSERVE CORPORATION

1999 STOCK OPTION PLAN

SECTION 1. PURPOSES.

The purposes of this 1999 Stock Option Plan (the "Plan") are (i) to
provide incentives to directors, officers and other key employees of the Company
upon whose judgment, initiative and efforts the long-term growth and success of
the Company is largely dependent; (ii) to assist the Company in attracting and
retaining directors and key employees of proven ability; and (iii) to increase
the identity of interests of such directors and key employees with those of the
Company's shareholders.

SECTION 2. DEFINITIONS.

For purposes of the Plan:

(a) "Acquisition Transaction" means a transaction of the type
described in Section 8(b)(ii).

(b) "Affiliate" means a person controlling, controlled by or
under common control with the Company.

(d) "Change in Composition of the Board" means an event of the
type described in Section 8(b)(iv).

(e) "Change in Control" means a transaction of the type
described in Section 8(b)(iii).

(f) "Committee" means the Compensation Committee of the Board
of Directors.

(g) "Code" means the Internal Revenue Code of 1986, as
amended.

(h) "Company" means Flowserve Corporation, a New York
corporation, and its successors in interest.

(i) "Current Market Value" means the closing price on the New
York Stock Exchange (or such successor reporting system as may be
selected by the Committee) on the date the value of a Share is to be
determined or, if there are no sales on such date, the next preceding
date for which a sale is reported.

(j) "Designation of Beneficiary" means the written designation
by the Holder of the person or entity to receive the Holder's options
and any related Stock Appreciation Rights and Limited Rights upon the
Holder's death, which designation shall be on such form as prescribed
by the Committee and filed with the General Counsel, the Chief
Financial Officer or the Treasurer of the Company (or such other person
as the Committee may designate).

(k) "Director Option" means the type of stock option described
in Section 9.

(l) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.

(m) "Fair Market Value" means the average of the closing
prices on the New York

19
22

Stock Exchange (or such successor reporting system as may be selected
by the Committee) during the period beginning twenty-one days prior to
and ending on the date the value of a Share is to be determined.

(n) "Family Members" means children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings
(including half-brother and -sisters), nephews, nieces and in-laws.

(o) "Grantee" means the person who received the option and any
related Stock Appreciation Right and/or Limited Right from the Company.

(p) "Holder" means the person(s) or entity who owns the option
and any related Stock Appreciation Right and/or Limited Right, whether
the Grantee, Transferee, heir or other beneficiary.

(q) "Incentive Stock Option" means an option granted under the
Plan which qualifies as an incentive stock option under Section 422 of
the Code.

(r) "Limited Right" means a right granted under Section 8(a)
of the Plan.

(s) "Nonqualified Option" means an option granted and
described under the Plan which does not qualify as an Incentive Stock
Option under Section 422 of the Code and which is not a Director
Option.

(t) "Qualified Domestic Relations Order" means a qualified
domestic relations order as defined in the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder.

(u) "Share" or "Shares" means the shares of Common Stock,
$1.25 par value, of the Company.

(v) "Stock Appreciation Right" means a right granted and
described under Section 8(d) of the Plan.

(w) "Subsidiary" means any entity 50% or more of the voting
control of which is owned, directly or indirectly, by the Company.

(x) "Tender Offer" means a tender offer or a request or
invitation for tenders or an exchange offer subject to regulation under
Section 14(d) of the Exchange Act, and the rules and regulations
thereunder, as the same may be amended, modified or superseded from
time to time.

(y) "Transferee" means the person who received the option and
any related Stock Appreciation Right and/or Limited Right from the
Grantee during the Grantee's lifetime in accordance with this Plan.

SECTION 3. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of this Section 3(a) and to
adjustment as provided in Section 11, the maximum number of Shares that
may be issued and/or delivered under the Plan upon the exercise of
options is 1,900,000. Such Shares may be either authorized and unissued
or treasury Shares, if any. Any Shares subject to an option, which for
any reason has (i) terminated, (ii) expired or (iii) has been canceled
prior to being fully exercised or being canceled through payment of
either a Limited Right or Stock Appreciation Right, may again be
subject to option under the Plan. Additionally, if the Holder of an
option pays the exercise price of an option by the delivery of Shares
already owned by the Holder, in accordance with Section 7(b), then such
delivered Shares, whether delivered through the attestation procedure
of Section 7(e) or not, shall be additionally available for issuance,
subject to option, under the Plan. Furthermore, if such payment is made
by the Holder in part through the Company retaining Shares under
Section 7(d), then such retained Shares shall be additionally available
for issuance, subject to option, under the Plan. Finally,

20
23

if the Company, pursuant to Section 7(c) of the Plan, authorizes cash
payment to a Holder in consideration for cancellation of all or a part
of such Holder's option, then the Shares covered by such payment shall
be subject to option under the Plan.

(b) Subject to adjustment as provided in Section 11, the
maximum number of Limited Rights or Stock Appreciation Rights which may
be exercised under the Plan is 1,900,000. In any case, any Limited
Rights or Stock Appreciation Rights granted under the Plan which for
any reason (i) terminate, (ii) expire or (iii) are canceled prior to
being fully exercised may again be granted under the Plan, provided
that the option to which Limited Rights or Stock Appreciation Rights
relate has not been exercised.

(c) The maximum number of Shares subject to options that may
be granted to any employee during the term of the Plan shall be 500,000
Shares. The maximum number of Stock Appreciation Rights and of Limited
Rights that may be granted to any employee during the term of the Plan
shall be 500,000, all provided that the aggregate maximum number of
Limited Rights, Stock Appreciation Rights or options exercised by any
employee hereunder shall not exceed 500,000. Each of the foregoing
amounts shall be subject to adjustment as provided in Section 11.

SECTION 4. ADMINISTRATION.

The Plan shall be administered by the Committee which shall be
comprised in a manner that satisfies all applicable legal requirements,
including satisfying the Non-Employee Director standard set forth in Rule 16b-3
promulgated under the Exchange Act, if applicable. In addition, as applicable,
the Committee will be constituted in a manner consistent with the "outside
director" standard set forth in the regulations under Section 162(m) of the
Code.

The Committee shall have and exercise all the power and authority
granted to it under the Plan. Subject to Section 9 and other applicable
provisions of the Plan, the Committee shall in its sole discretion determine the
persons to whom, and the times at which, Incentive Stock Options, Nonqualified
Options, Director Options, Stock Appreciation Rights and Limited Rights shall be
granted; the number of Shares to be subject to each option; the option price per
Share; and the term of each option. In making such determinations, the Committee
may take into consideration each employee's present and/or potential
contribution to the success of the Company and its Subsidiaries and any other
factors which the Committee may deem relevant and proper. Subject to the
provisions of the Plan, the Committee shall also interpret the Plan; prescribe,
amend and rescind rules and regulations relating to the Plan; correct defects,
supply omissions and reconcile any inconsistencies in the Plan; and make all
other determinations necessary or advisable for the administration of the Plan.
Such determinations of the Committee shall be conclusive. A majority of the
Committee shall constitute a quorum for meetings of the Committee, and the act
of a majority of the Committee at a meeting, or an act reduced to or approved in
writing by all members of the Committee, shall be the act of the Committee.

SECTION 5. ELIGIBILITY.

From time to time during the term of the Plan, the Committee may grant
one or more Incentive Stock Options and/or Nonqualified Options to any person
who is then an officer or other key employee or director of the Company or a
Subsidiary. Any grant of an option, Stock Appreciation Right or Limited Right
made to a director shall not be effective until it is ratified by the Board of
Directors.

SECTION 6. TERMS AND CONDITIONS OF OPTIONS.

(a) Written Grant Form. The terms of each option granted under
the Plan shall be set forth in a written document, the form of which
shall be approved by the Committee.

(b) Terms and Conditions of General Application. The following
terms and provisions shall apply to all options (other than Director
Options to which the provisions of Section 9 shall be applicable)

21
24
granted under the Plan.

(1) No option may be granted under the Plan at an
option price per Share which, when combined with the value of
any consideration provided by the Grantee of the option, is
less than 50% of the Current Market Value of the underlying
Shares on the date of grant.

(2) Unless otherwise specifically determined by the
Committee, no option may be exercised more than ten years
after the date of grant.

(3) Except as otherwise provided in the Plan, no
option shall be exercisable within one year after the date of
grant. At the time an option is granted, the Committee may
provide that after such one year period, the option may be
exercised with respect to all Shares thereto, or may be
exercised with respect to only a specified number of Shares
over a specified period or periods.

(4) Except as otherwise provided in the Plan, an
option may be exercised only if the Grantee thereof has been
continuously employed by the Company or a Subsidiary since the
date of grant. Whether authorized leave of absence or absence
for military or governmental service shall constitute a
termination of employment shall be determined by the
Committee, after consideration of the provisions of Section
1.421-7(h) of the regulations issued under the Code, if
appropriate.

(5) At the time an option is granted, or at such
other time as the Committee may determine, the Committee may
provide that, if the Grantee of the option ceases to be
employed by the Company or a Subsidiary for any reason
(including retirement or disability) other than death, the
option will continue to be exercisable by the Holder for such
additional period (not to exceed the remaining term of such
option) after such termination of employment as the Committee
may provide.

(6) At the time an option is granted, the Committee
may provide that, if the Grantee of the option dies while
employed by the Company or a Subsidiary or while entitled to
the benefits of any additional exercise period established by
the Committee with respect to such option in accordance with
Section 6(b)(5), then the option will continue to be
exercisable by the person or persons (including the Holder's
estate) to whom the Holder's rights with respect to such
option shall have passed by Designation of Beneficiary, or if
none, by will or by the laws of descent and distribution for
such additional period after death (not to exceed the
remaining term of such option) as the Committee may provide.

(7) At the time an option is granted, the Committee
may provide for any restrictions or limitations on the
transferability of the Shares issuable upon the exercise of
such options as it may deem appropriate.

(c) Additional Provisions Applicable to Incentive Stock
Options. The following additional terms and provisions shall apply to
Incentive Stock Options granted under the Plan, notwithstanding any
provision of Section 6(b) to the contrary:

(1) No Incentive Stock Option may be granted at an
option price per Share which is less than the Current Market
Value of the Share on the date of grant.

(2) No Incentive Stock Option shall be granted to an
officer or other employee who possesses directly or indirectly
(within the meaning of Section 424(d) of the Code) at the time
of grant more than 10% of the voting power of all classes of
Shares of the Company or of any parent corporation or any
Subsidiary of the Company unless (i) the option price is at
least 110% of the

22
25

Current Market Value of the Shares subject to the option on
the date the option is granted and (ii) the option is not
exercisable after the expiration of five years from the date
of grant.

(3) The aggregate Current Market Value (determined as
of the time an Incentive Stock Option is granted) of Shares
with respect to which Incentive Stock Options are exercisable
for the first time by any individual in any calendar year
(under the Plan and all other plans of the Company and any
Subsidiary) shall not exceed $100,000, or such other maximum
amount permitted by the Code.

(d) Waiver of Terms. The Committee may waive or modify at any
time, either before or after the granting of an option, any condition
or restriction with respect to the exercise of such option imposed by
or pursuant to this Section 6 (or Section 9 in the case of Director
Options) in such circumstances as the Committee may, in its discretion,
deem appropriate (including, without limitation, in the event the
Grantee retires with the approval of the Company, or in the event of a
proposed Acquisition Transaction, a Change in Control, Tender Offer for
Shares, or other similar transaction involving the Company).

(e) Acceleration Upon Certain Events. In the event of (i) a
Tender Offer (other than an offer by the Company) for Shares, if the
offeror acquires Shares pursuant thereto, (ii) an Acquisition
Transaction, (iii) a Change in Control or (iv) a Change in Composition
of the Board, all outstanding options granted hereunder shall become
exercisable in full (whether or not otherwise exercisable), effective
on the date of the first purchase of Shares (or acceptance of Shares
for purchase) pursuant to the Tender Offer, or the date of shareholder
approval of the Acquisition Transaction, or the date of filing of the
Schedule 13D reflecting the Change in Control (or, if not made, the
date upon which such filing becomes delinquent), or the date of the
Change in Composition of the Board, as the case may be (the occurrence
of any such event is hereinafter referred to as an "Acceleration").

SECTION 7. EXERCISE OF OPTIONS.

(a) Notice of Exercise. The Holder of an option granted under
the Plan may exercise all or part of such option by giving written
notice of exercise and making payment of the option price as provided
in Section 7(b); provided, however, that an option may not be exercised
for a fraction of a Share. No Holder of an option nor such Holder's
legal representatives, legatees or distributees will be, or will be
deemed to be, a holder of any Shares covered by such option unless and
until certificates for such Shares are issued in accordance with the
Plan.

(b) Payment of Option Price. The option price for Shares with
respect to which an option is exercised shall be paid in full at the
time such notice is given. An option shall be deemed exercised on the
date the Company's General Counsel, its Chief Financial Officer or its
Treasurer (or such other person as the Committee may designate)
receives written notice of exercise, together with full payment for the
Shares purchased. The option price shall be paid to the Company either
in cash or in Shares having a Current Market Value equal to the option
price (or a combination of cash and Shares such that the sum of the
Current Market Value of the Shares plus the cash equals the option
price). Payment of the option price in Shares can be made by the
delivery of Shares already-owned by the Holder or by the retention of
Shares by the Company from Shares that would otherwise be issued to the
Holder upon the exercise of the option.

(c) Payment in Cancellation of Option. The Committee shall have
the authority in its sole discretion to authorize the payment to the
Holder of an option granted under the Plan (with consent of such Holder
or, in the event of an Acceleration of options, without such consent),
in exchange for the cancellation of all or a part of such Holder's
option, of cash equal to the excess of the aggregate Fair Market Value
on the date of such cancellation of the Shares with respect to which
the option is being canceled over the aggregate option price of such
Shares; provided, however, that if an Acceleration of options granted
hereunder has occurred, for purposes of this subparagraph, "Fair Market
Value" on the date of such cancellation shall be

23
26

calculated in the same manner as the "exercise value" of a Limited
Right would be calculated under Section 8(c) with respect to such date
(whether or not any Limited Rights are actually outstanding).
Notwithstanding the foregoing, in the case of a Director Option, such
payment in exchange for cancellation of the option shall be made only
in the event of an Acceleration of Options.

(d) Special Payment Provisions for Nonqualified Options;
Withholding Taxes. Upon the exercise of a Nonqualified Option, the
Company, at the discretion of the Committee, may pay the exercising
party a cash lump sum which is equivalent to the net tax savings to the
Company, as determined by the Committee, arising from the tax deduction
available to the Company through such exercise, where applicable, under
the Code. Additionally, the Grantee of a Nonqualified Option may elect
to have the Company retain from the Shares to be issued upon his
exercise of such option Shares having a Current Market Value on the
date of exercise equal to all or any part of the federal, state and
local withholding tax payments (whether mandatory or permissive) to be
made by the Grantee with respect to the exercise of the option (up to a
maximum amount determined by the Grantee's top marginal tax rate) in
lieu of making such payments in cash.

(e) Attestation Procedure. If a Holder desires to pay the
option price upon the exercise of an option with already-owned Shares,
the Holder may either physically deliver already-owned Shares or may
follow the attestation procedure set forth in this Section 7(e) (the
"Attestation Procedure") to be deemed to have delivered such
already-owned Shares. To follow the Attestation Procedure, the Holder
shall submit to the Company's General Counsel, its Chief Financial
Officer or its Treasurer (or such other person as is designated by the
Committee) a signed statement at the time of exercise of an option that
(i) sets forth the number of Shares already-owned by the Holder that
are to be used in payment of the option price (the "Payment Shares"),
(ii) confirms that the Holder is the owner of the Payment Shares, and
(iii) if the Payment Shares are registered in the Holder's name, sets
forth the certificate number(s) of the Payment Shares. The Payment
Shares shall be treated as having been delivered to the Company by the
Holder on the date of exercise, and the Company shall issue to the
Holder a certificate for the number of Shares subject to the option
exercise less the number of Payment Shares. The Committee shall have
the authority to amend the foregoing Attestation Procedure from time to
time.

SECTION 8. LIMITED RIGHTS AND STOCK APPRECIATION RIGHTS.

(a) Grant of Limited Rights. The Committee may grant Limited
Rights with respect to any option granted under the Plan either at the
time the option is granted or at any time thereafter prior to the
exercise, cancellation, termination or expiration of such option. The
number of Limited Rights covered by any such grant shall not exceed,
but may be less than, the number of Shares covered by the related
option. The term of any Limited Right shall be the same as the term of
the option to which it relates. The right of a Holder to exercise a
Limited Right shall be canceled if and to the extent a related option
is exercised or canceled, and the right of a Holder to exercise an
option shall be canceled if and to the extent a related Limited Right
is exercised.

(b) Events Permitting Exercise of Limited Rights. A Limited
Right shall be exercisable only if and to the extent that the related
option is exercisable; provided, however, that notwithstanding the
foregoing, a Limited Right issued in connection with an ISO shall not
be exercisable unless the Current Market Value of a Share on the date
of exercise exceeds the exercise price of a Share subject to the
related option. A Limited Right which is otherwise exercisable may be
exercised only during the following periods:

(i) during a period of 30 days following the date of
expiration of a Tender Offer (other than an offer by the
Company) for Shares, if the offeror acquires Shares pursuant to
such Tender Offer;

(ii) during a period of 30 days following the date of
approval by the shareholders of the Company of a definitive
agreement: (x) for the merger or consolidation of the Company
into or with another corporation not controlled by the Company
immediately prior to such merger or

24
27

consolidation, if the Company will not be the surviving
corporation or will become a subsidiary of such other
corporation or (y) for the sale of all or substantially all of
the assets of the Company (each of the foregoing transactions
is hereinafter referred to as an "Acquisition Transaction");

(iii) during a period of 30 days following the date upon
which the Company is provided a copy of a Schedule 13D (filed
pursuant to Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) indicating that any
"person" or "group" (as such terms are defined in Section
13(d)(3) of such act) has become the holder of 20% or more of
the outstanding voting Shares of the Company (the foregoing
transaction hereinafter referred to as a "Change of Control");
and

(iv) during a period of 30 days following a change in the
composition of the Board of Directors such that individuals who
were members of the Board of Directors on the date two years
prior to such change (or who were elected, or were nominated
for election by the Company's shareholders, with the
affirmative vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such two
year period) no longer constitute a majority of the Board of
Directors (such a change in composition is hereinafter referred
to as a "Change in Composition of the Board").

(c) Exercise of Limited Rights. Upon exercise of a Limited
Right, the Holder thereof shall receive from the Company a cash payment
equal to the excess of: (x) the aggregate "exercise value" on the date
of exercise (determined as provided below) of that number of Shares as
is equal to the number of Limited Rights being exercised over (y) the
aggregate exercise price under the related option of that number of
Shares as is equal to the number of Limited Rights being exercised. A
Holder shall exercise a Limited Right by giving written notice of such
exercise to the Company's General Counsel, its Chief Financial Officer
or its Treasurer (or such other person as the Committee may designate).
A Limited Right shall be deemed exercised on the date any such officer
(or other person) receives such written notice.

The "exercise value" of a Limited Right on the date of exercise shall
be:

(i) in the case of an exercise during a period described in
Section 8(b)(i), the highest price per Share paid pursuant to
any Tender Offer which is in effect any time during the 60-day
period prior to the date on which the Limited Right is
exercised;

(ii) in the case of an exercise during a period described
in Section 8(b)(ii), the greater of: (x) the highest Current
Market Value of a Share during the 30-day period prior to the
date of shareholder approval of the Acquisition Transaction, or
(y) the highest fixed or formula per Share price payable
pursuant to the Acquisition Transaction (if determinable on the
date of exercise);

(iii) in the case of an exercise during a period described
in Section 8(b)(iii), the greater of: (x) the highest Current
Market Value of a Share during the 30-day period prior to the
date the Company is provided with a copy of the Schedule 13D,
or (y) the highest acquisition price of a Share shown on such
Schedule 13D; and

(iv) in the case of an exercise during a period described
in Section 8(b)(iv), the highest Current Market Value of a
Share during the 30-day period prior to the date of the Change
in Composition of the Board.

Notwithstanding the foregoing, in no event shall the exercise value of
a Limited Right issued in connection with an Incentive Stock Option
exceed the maximum permissible exercise value for such a right under
the Code and the regulations and interpretations issued pursuant
thereto. Any securities or property which form part or all of the
consideration paid for Shares pursuant to a Tender Offer or Acquisition
Transaction shall

25
28

be valued at the higher of (1) the valuation placed on such securities
or property by the person making such Tender Offer or the other party
to such Acquisition Transaction, or (2) the value placed on such
securities or property by the Committee.

(d) Grant of Stock Appreciation Rights. The Committee may grant
Stock Appreciation Rights with respect to any option granted under the
Plan either at the time the option is granted or at any time thereafter
prior to the exercise, cancellation, termination or expiration of such
option. The aggregate number of Stock Appreciation Rights covered by
any such grant shall not exceed, but may be less than, the number of
Shares covered by the related option. The term of any Stock
Appreciation Right shall be the same as the term of the option to which
it relates. The right of a Holder to exercise a Stock Appreciation
Right shall be canceled if and to the extent a related option is
exercised or canceled, and to the extent a related Limited Right is
exercised. In no event shall both a Stock Appreciation Right and
Limited Right both be paid in connection with an option to which they
both relate. The exercise, cancellation or termination of a Stock
Appreciation Right covering any Shares shall automatically terminate
the Limited Right corresponding to such Shares with the converse being
equally true, and the right of a Holder to exercise an option shall be
canceled if and to the extent a related Stock Appreciation Right is
exercised.

(e) Events Permitting Exercise of Stock Appreciation Rights. A
Stock Appreciation Right shall be exercisable only if and to the extent
that the related option is exercisable; provided, however, that
notwithstanding the foregoing, a Stock Appreciation Right issued in
connection with an Incentive Stock Option shall not be exercisable
unless the Current Market Value of a Share on the date of exercise
exceeds the exercise price of a Share subject to the related option.

(f) Exercise of Stock Appreciation Rights. Upon exercise of a
Stock Appreciation Right, the Holder thereof shall receive from the
Company a cash payment equal to the excess of (x) the aggregate Current
Market Value on the date of exercise of that number of Shares as is
equal to the number of Stock Appreciation Rights being exercised over
(y) the aggregate exercise price under the related option of that
number of Shares as is equal to the number of Stock Appreciation Rights
being exercised. A Holder shall exercise a Stock Appreciation Right by
giving written notice of such exercise to the Company's General
Counsel, its Chief Financial Officer or its Treasurer or such other
person as the Committee may designate. A Stock Appreciation Right shall
be deemed exercised on the date any such officer (or other person)
receives such written notice. If a Stock Appreciation Right or its
corresponding option has not been exercised, canceled, terminated or
expired on the last day of the term of such Stock Appreciation Right,
the Holder of such Stock Appreciation Right will automatically receive
a cash payment from the Company in an amount, if any, that would be
payable if the Stock Appreciation Right is exercised on such date.

Notwithstanding the foregoing, in no event shall the exercise value of
a Stock Appreciation Right issued in connection with an Incentive Stock
Option exceed the maximum permissible exercise value for such a right
under the Code and the regulations and interpretations issued pursuant
thereto.

SECTION 9. DIRECTOR OPTIONS.

(a) All non-employee directors of the Company shall be eligible
to receive grants of stock options hereunder ("Director Options"),
except to the extent that any such grant would, in the opinion of legal
counsel of the Company, result in liability under Section 16 of the
Exchange Act or under other law or regulation applicable to the
participation of directors in the Plan.

(b) All Director Options granted hereunder shall be options
that do not qualify as Incentive Stock Options.

(c) The option price of a Director Option shall be the Current
Market Value. The option price for Shares with respect to which a
Director Option is exercised shall be paid in full at the time notice
of exercise

26
29

of the option is given to the Company's General Counsel, its Chief
Financial Officer or its Treasurer (or such other person as the
Committee may designate). The option price shall be paid to the Company
either in cash or in Shares having a Current Market Value equal to the
option price (or a combination of cash and Shares such that the sum of
the Current Market Value of the Shares plus the cash equals the option
price). Payment of the option price in Shares can be made by the
delivery of Shares already-owned by the Holder or by the retention of
Shares by the Company from Shares that would otherwise be issued to the
Holder upon the exercise of the option. In any case in which payment of
the option price is to be made by delivery of already-owned Shares, the
Attestation Procedure set forth in Section 7(e) may be used, subject to
the limitations described in such Section.

(d) Subject to the limitations hereinafter set forth, a
Director Option granted hereunder shall extend for a term of ten years.
The exercise of Stock Appreciation Rights relating to any Director
Option is subject to Section 8(e).

(e) All rights of a director in any Director Option shall
expire at the end of the option's normal term, provided that any
director who ceases to be a director and then engages in any action
which is competitive to or detrimental to the best interests of the
Company shall forfeit such option, upon decision to that effect by the
Committee. In the event a director ceases to be a director for any
reason, all rights of such Director Option shall continue until the
director's death, subject to the foregoing and following provisions.

(f) Any Director Option granted to a director under the Plan
and outstanding on the date of the Holder's death may be exercised by
the person or persons (including the Holder's estate) to whom the
Holder's rights with respect to the Director Option shall have passed
by Designation of Beneficiary; or if none, by the laws of descent and
distribution or pursuant to a Qualified Domestic Relations Order at any
time prior to the specified expiration date of such Director Option or
the first anniversary of the Grantee's death, whichever is the first to
occur. Upon the occurrence of the earlier event, the Director Option
shall then terminate.

(g) Director Options may include Stock Appreciation Rights and
shall include Limited Rights. The number of Limited Rights included in
any such Director Option shall equal the number of Shares covered by
such option.

(h) Director Options shall otherwise be subject to the terms
and conditions of Nonqualified Options (and Limited Rights) stated in
this Plan.

SECTION 10. NON-TRANSFERABILITY.

(a) General Rule. Except as otherwise provided in this Section
10, options, Stock Appreciation Rights and Limited Rights may not be
sold, pledged, assigned, hypothecated, or transferred other than by
Designation of Beneficiary, or if none, by will or the laws of descent
and distribution upon the Holder's death, and may be exercised during
the lifetime of the Grantee only by such Grantee or by his guardian or
legal representative. All grants under the Plan, with the exception of
Incentive Stock Options and any Stock Appreciation Rights and Limited
Rights relating thereto, may be transferred pursuant to a Qualified
Domestic Relations Order.

(b) Permitted Transfers. Subject to this Section 10 and except
as the Committee may otherwise prescribe from time to time, the
Committee may act to permit the transfer or assignment of an option
(together with any related Stock Appreciation Right and/or Limited
Right) by a Grantee for no consideration to the Grantee's Family
Members, trusts for the sole benefit of the Grantee's Family Members or
partnerships whose only partners are Family Members of the Grantee;
provided, however, that any such permitted transfer or assignment shall
not apply to an option that is an Incentive Stock Option (but only if
nontransferability is necessary in order for the option to qualify as
an Incentive Stock Option) and to any Stock Appreciation Rights or
Limited Rights related to an Incentive Stock Option.

27
30

(c) Other Permitted Transfers. Unless the Committee otherwise
determines at the time of grant, the following options (together with
any related Stock Appreciation Right and/or Limited Right) may be
transferred or assigned by the Grantee thereof for no consideration to
the Grantee's Family Members, trusts for the sole benefit of the
Grantee's Family Members, or partnerships whose only partners are
Family Members of the Grantee: (i) Director Options; and (ii) options
that both (x) are granted to or held by an individual who is an officer
of the Company, and (y) at the time of grant, are Nonqualified Options.

(d) Method and Effect of Transfer. Any permitted transfer or
assignment of an option and any Stock Appreciation Right and/or Limited
Right related thereto shall only be effective upon receipt by the
General Counsel, the Chief Financial Officer or the Treasurer of the
Company (or such other person as the Committee may designate) of an
instrument acceptable in form and substance to the Committee that
effects the transfer or assignment and that contains an agreement by
the Transferee to accept and comply with all the terms and conditions
of the stock option award and this Plan. A Transferee shall possess all
the same rights and obligations as the Grantee under the Plan, except
that the Transferee can subsequently transfer such option and any
related Stock Appreciation Rights and/or Limited Rights only by (i)
Designation of Beneficiary or, if none, then by will or the laws of
descent and distribution, or (ii) a transfer to a beneficiary or
partner if the Transferee is a trust or partnership, respectively.

(e) Satisfaction of Withholding Obligations. Unless the
Committee otherwise prescribes, upon the exercise of a Nonqualified
Option or its related Stock Appreciation Rights or Limited Rights by a
Transferee, when and as permitted in accordance with this Section 10,
the Grantee is required to satisfy the applicable withholding tax
obligations by paying cash to the Company with respect to any income
recognized by the Grantee upon the exercise of such option by the
Transferee. If the Grantee does not satisfy the applicable withholding
tax obligations on the exercise date of the option or related Stock
Appreciation Right or Limited Right, the Company shall, in the case of
the exercise of an option, retain from the Shares to be issued to the
Transferee upon the exercise of the option a number of Shares having a
Current Market Value on the exercise date equal to the mandatory
withholding tax payable by the Grantee or, in the case of the exercise
of a Stock Appreciation Right or Limited Right, deduct from the cash to
be delivered to the Transferee such amount as is equal to the mandatory
withholding taxes payable by the Grantee.

SECTION 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.

In the event of a change in outstanding Shares by reason of a Share
dividend, recapitalization, merger, consolidation, split-up, combination or
exchange of Shares, extraordinary dividend paid as part of a restructuring plan,
or the like, the maximum number of Shares subject to option during the existence
of the Plan, the number of Stock Appreciation Rights and Limited Rights which
may be granted under the Plan, the number of options, Stock Appreciation Rights
and Limited Rights that may be granted to each person under the Plan, the number
of Shares subject to, and the option price of, each outstanding option, the
number of Stock Appreciation Rights and Limited Rights outstanding, the Current
Market Value of a Share on the date a Stock Appreciation Right and/or a Limited
Right is granted, and the like shall be appropriately adjusted by the Company,
subject to review by the Committee if the Committee so elects. In the event the
Committee elects to review such adjustment, the Committee's determination shall
be conclusive.

SECTION 12. CONDITIONS UPON GRANTING AND EXERCISE OF OPTIONS, STOCK
APPRECIATION RIGHTS AND LIMITED RIGHTS AND ISSUANCE OF SHARES.

No option, Stock Appreciation Right or Limited Right shall be granted,
and no option, Stock Appreciation Right or Limited Right shall be exercised and
Shares shall not be issued or delivered upon the exercise of an option unless
the grant and exercise thereof, and the issuance and/or delivery of Shares
pursuant thereto, or the payment therefore, shall comply with all relevant
provisions of state and federal law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirement of any stock exchange upon which the
Shares then may be listed. The Company shall use reasonable efforts to comply
with all such requirements.

28
31

SECTION 13. AMENDMENT AND TERMINATION OF PLAN.

(a) Amendment. Subject to the limitations hereinafter set
forth, the Committee may from time to time amend the Plan or any award
granted under the Plan, or any provision thereof, in such respects as
the Committee may deem advisable; provided, however, that any such
amendment shall be approved by the holders of Shares entitling them to
exercise a majority of the voting power of the Company if such approval
is required under applicable law; or:

(i) if such amendment would increase the aggregate number
of Shares which may be issued and/or delivered under the Plan;

(ii) if such amendment would modify the requirements as to
eligibility for participation in the Plan.

Any amendment to an option, Stock Appreciation Right or Limited Right
granted to a director shall be made or ratified by the Board of
Directors.

(b) Termination. The Committee may at any time terminate the
Plan.

(c) Effect of Amendment or Termination. No amendment or
termination of the Plan or any award granted under the Plan shall
adversely affect any option or Limited Right or Stock Appreciation
Right previously granted under the Plan without the consent of the
Holder thereof.

SECTION 14. NOTICES.

Each notice relating to this Plan shall be in writing and delivered in
person or by mail to the proper address. Each notice to the General Counsel, the
Chief Financial Officer or the Treasurer of the Company shall be delivered or
sent to his attention at the principal business office of the Company. Each
notice to the Committee shall be delivered or sent to the principal business
office of the Company and addressed as follows: "Attention: Compensation
Committee." Each notice to the Holder shall be addressed to such person or
persons at the Holder's address as set forth in the records of the Company.
Anyone to whom a notice may be given under this Plan may designate a new address
by written notice to the other party to that effect.

SECTION 15. BENEFIT OF PLAN.

This Plan shall inure to the benefit of and be binding upon each
successor and assign of the Company. All rights and obligations imposed upon the
Holder and all rights granted to the Company under this Plan shall be binding
upon such Holder's heirs, legal representatives and permitted assigns.

SECTION 16. PRONOUNS AND PLURALS.

All pronouns shall be deemed to refer to the masculine, feminine,
singular or plural, as the identity of the person or persons may require.

SECTION 17. SHAREHOLDER APPROVAL AND TERM OF PLAN.

The Plan shall become effective upon its approval by the affirmative
vote (either in person or by proxy) of the holders of a majority of the Shares
at the Company's 1999 Annual Meeting of Shareholders. No options shall be
granted under the Plan after December 31, 2008.

SECTION 18. ISSUANCE OF SHARE UNITS IN LIEU OF SHARES UPON EXERCISE OF NQSOS.

(a) Definitions. As used in this Section 18, the following
terms have the following meanings:

29
32

(1) "NQSO" means a Nonqualified Option or a Director
Option.

(2) "Share Unit" has the meaning indicated in Section 18(b)

(3) "Qualifying Exercise" has the meaning indicated in
section 18(d).

(4) "Unit Holder" means the person to whose account Share
Units are credited.

(5) "Representative" means the executor of the estate of
the Unit Holder or another legally constituted representative
of the Unit Holder or the Unit Holder's estate.

(b) Share Unit. A Share Unit represents the right to receive a
Share from the Company, with delivery of the Share to be made in
accordance with Section 18(g). The Company shall maintain on its
records an account reflecting the identity of each person to whom Share
Units have been credited and the number of Share Units from time to
time credited to each such person.

(c) Effect of Qualifying Exercise. In the event of a Qualifying
Exercise, (i) Shares, equal in number to the Shares delivered by the
Grantee in payment of the option price, shall be issued to the Grantee,
(ii) the balance of the Shares covered by the option exercise (the
"Profit Shares") shall not be issued, and (iii) the Grantee shall be
credited with such number of Share Units as equals the number of Profit
Shares. In case the Attestation Procedure is used, clause (i) above
shall be inapplicable and the Shares referred to therein shall not be
issued.

(d) Qualifying Exercise. For the exercise of an option to be a
Qualifying Exercise, all of the following conditions must be satisfied:

(1) The option must be a NQSO and held by the Grantee.

(2) The Grantee must make an advance election in accordance
with Section 18(e) (while employed by the Company or a
Subsidiary in the case of a Nonqualified Option).

(3) The Grantee must make payment of the option price
either (i) by delivery to the Company of Shares having a
Current Market Value on the date of exercise equal to the
option price (as permitted by Sections 7(b) and 9(c)), or (ii)
by use of the Attestation Procedure (as permitted by Sections
7(e) and 9(c)).

(4) The Grantee and the exercise of the option must comply
with other applicable requirements of the Plan.

(e) Advance Election. A Grantee of a NQSO who desires to be
credited with Share Units upon exercise of the NQSO must deliver to the
Committee (to the attention of either the General Counsel, the Chief
Financial Officer or the Treasurer of the Company, or such other
officer or person who may be designated by the Committee) a written
election, on a form prescribed by the Committee, to receive such Share
Units upon such exercise, although the Committee or its designee may
elect to honor any written election statement from an option holder
which communicates substantially the same election intention. Unless
otherwise approved by the Company, such election must be delivered on
or before the earlier of (i) six months and one day preceding exercise
of the option or (ii) the last business day of the calendar year
immediately preceding the calendar year of the option exercise.

(f) Crediting of Additional Share Units. The number of Share
Units credited to a Unit Holder shall from time to time be increased
(during the period from initial crediting the Share Units to final
payment of the Share Units) by the crediting, on the payment date of
each dividend on Shares of the Company, of such number of additional
Share Units (including any fraction of a Unit) as equals the quotient
resulting from

30
33

dividing (i) the Dividend Equivalent Amount (as defined below) by (ii)
Current Market Value as of the dividend payment date.

(1) Dividend Equivalent Amount. The Dividend Equivalent
Amount is the amount resulting from multiplying (i) the
dividend per Share payable on the payment date by (ii) the
number of Share Units then credited to the account of option
holder.

(2) Adjustment of Share Units. In the event of a change in
outstanding Shares by reason of a Share dividend,
recapitalization, merger, consolidation, split up, combination
or exchange of Shares, extraordinary dividend paid as part of a
restructuring plan, or the like, the number of Share Units
credited to the account of any Unit Holder and the securities
issuable upon payment of the Share Units shall be appropriately
adjusted by the Company, subject to review by the Committee if
the Committee so elects. In the event the Committee elects to
review such adjustment, the Committee's determination shall be
conclusive.

(g) Payment of Share Units. Share Units shall be paid by
delivery to the Unit Holder (or his Representative) of one Share for
each Share Unit credited to the account of the Unit Holder. Delivery of
such Shares shall be made following termination of the Unit Holder's
employment with the Company and its Subsidiaries and shall be made in a
single lump sum or in annual installments, as provided below:

(1) Termination of Employment Other Than as a Result of
Retirement or Death. Except in the case of a Director Option,
in the event a Unit Holder ceases to be employed by the Company
and its Subsidiaries for any reason other than retirement or
death, payment of any Share Units credited to the Unit Holder's
account will be made in a lump sum within 60 days after
termination of the Unit Holder's employment.

(2) Retirement. In the event a Unit Holder retires under a
retirement plan of the Company or a Subsidiary, or, in the case
of a Director Option, upon termination of the Unit Holder's
service as a director, payment of any Share Units credited to
the Unit Holder's account will be made commencing within 60
days after such retirement or termination in accordance with
the method of payment elected by the Unit Holder pursuant to
Section 18(i). If the election is a lump sum, all Share Units
will be paid to the Unit Holder within 60 days after retirement
or termination. If installments shall have been elected, the
number of Share Units credited to the Unit Holder's account as
of the date of retirement or termination shall be divided by
the number of annual installments elected, and the first
installment shall be paid within 60 days after retirement or
termination. The second and all subsequent installment payments
shall be made between January 1 and 15 of each subsequent year.
Any additional Share Units credited to the Unit Holder's
account pursuant to Section 18(f) following the retirement or
termination shall be paid as part of the installment paid in
the calendar year immediately following the crediting of such
additional Share Units.

(3) Death. If any Share Units credited to a Unit Holder's
account remain unpaid at the Unit Holder's death, then payment
of such Share Units shall be made after the Unit Holder's death
(i) to the Unit Holder's beneficiary (ies) (designated as
provided in Section 18(i)) in accordance with the method of
distribution elected by the Unit Holder (either lump sum or
installments, as provided above), or (ii) if the Unit Holder
has not designated a beneficiary or if the beneficiary
predeceases the Unit Holder, to the Unit Holder's estate in a
lump sum. Should a beneficiary die after the Unit Holder but
before the entire benefit has been disbursed, the balance of
the Share Units shall be paid to the beneficiary's estate in a
lump sum.

(4) Emergency Distribution. In the event an emergency
situation occurs (as described below), the Unit Holder may
request the Committee to approve an immediate distribution to
the Unit Holder of all or some of the Share Units credited to
the Unit Holder's account. Any such distribution will be solely
within the discretion of the Committee and will be limited in
an amount to that

31
34

necessary to meet the emergency. As used herein, an emergency
situation means a bona fide unexpected financial emergency that
is caused by an event beyond the control of the Unit Holder
(e.g., a serious family illness or disaster) and would result
in severe financial hardship to the Unit Holder if early
distribution were not permitted.

(5) Fractional Shares. In any circumstance in which
distribution of a fraction of a Share would otherwise be made,
an equivalent cash distribution (based upon Current Market
Value as of the third business day preceding the payment) shall
be made.

(6) Withholding Taxes. The payment of Share Units shall be
subject to the payment of all applicable withholding taxes by
the Unit Holder.

(h) Acceleration of Payment. Notwithstanding the provisions of
Section 18(g), a Unit Holder shall have the right to demand and receive
immediate Payment of all Share Units credited to the Unit Holder's
account during any period during which Limited Rights may be exercised
in accordance with clauses (i), (ii), (iii) and (iv) of Section 8(b).

(i) Payment Election; Designation of Beneficiary. A Unit
Holder's election to receive payment of Share Units in a lump sum or
installments shall be made by delivery as provided in Section 18(e), on
a form prescribed by the Committee, although the Committee may elect to
honor any written election statement which communicates substantially
the same election intention. A Unit Holder may make designation of the
Holder's beneficiary(ies) on this form or by other written notice to
the Committee. Once an election with respect to the method of payment
(lump sum or installments) has been made, such election may not be
changed except with the consent of the Committee. In the absence of a
valid election to receive payment of Share Units in installments, such
payment shall be made in a lump sum.

(j) Number of Shares Issued Under Plan. For purposes of
determining the number of Shares that have been issued and/or are
available for issuance under the Plan, the initial crediting of a Share
Unit to the account of a Unit Holder in accordance with Section 18(c)
shall be counted as the issuance of a Share under the Plan, but the
crediting of additional Share Units in accordance with Section 18(f)
will not be so counted.

(k) Unsecured Account. Any Share Units credited to the account
of a Unit Holder represent only an unsecured promise of the Company to
make payment of the Share Units in accordance with the terms of the
Plan, irrespective of whether the Company makes use of any trust
arrangement to make payment of Share Units. Neither a Unit Holder nor
any beneficiary of a Unit Holder will have or acquire any right, title
or interest in any asset of the Company or any Subsidiary as a result
of any Share Units credited to a Unit Holder's account. At all times, a
Unit Holder's rights with respect to Share Units credited to the Unit
Holder's account will be only those of an unsecured creditor of the
Company. The Company will not be obligated or required in any manner to
restrict the use of any of its assets as a result of any Share Units
credited to a Unit Holder's account.

(l) Securities Law Compliance. The Company's obligation to
credit Share Units to the account of any Unit Holder and to deliver
Shares in connection with the payment of Share Units shall at all times
be subject to compliance with any applicable federal or state
securities laws.

32
35
DETACH HERE
- --------------------------------------------------------------------------------

FLOWSERVE CORPORATION

PROXY FOR ANNUAL SHAREHOLDERS' MEETING - APRIL 22, 1999
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY

The undersigned hereby appoints BERNARD G. RETHORE and HUGH K. COBLE, and
each of them, with full power to act without the other, as proxies with full
power of substitution, to represent and to vote on behalf of the undersigned all
of the shares of common stock of Flowserve Corporation which the undersigned is
entitled in any capacity to vote if personally present at the 1999 Annual
Meeting of Shareholders of Flowserve Corporation to be held at 11:00 a.m. on
Thursday, April 22, 1999, at the Los Angeles Airport Hilton, 5711 West Century
Boulevard, Los Angeles, California, and at any adjournment thereof, upon the
proposals listed on the reverse side of this Proxy and more fully described in
the Notice of Annual Meeting of Shareholders dated March 15, 1999, and upon all
matters presented at the Annual Meeting but not known to the Board of Directors
at a reasonable time before the solicitation of this proxy.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1 AND 2.

(CONTINUED, AND TO BE DATED AND SIGNED, ON OTHER SIDE)
36
DETACH HERE
- --------------------------------------------------------------------------------

PROXY NO. SHARES

(Continued from the other side)

1. Election of three directors each for a three year term.

[ ] FOR all nominees listed below
(except as marked to the contrary below)

[ ] WITHHOLD AUTHORITY
to vote for all nominees listed below

INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name below:

Michael F. Johnston Charles M. Rampacek Kevin E. Sheehan

2. Approval of restructuring of stock-based incentive plans by:

(a) reducing authorized shares under the Flowserve Corporation 1998
Restricted Stock Plan from 800,000 to 250,000; and simultaneously

(b) adopting the Flowserve Corporation 1999 Stock Option Plan.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

DATE: 1999
-------------------------

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

-----------------------------------
SIGNATURE(S) OF SHAREHOLDER(S)

Please sign as name(s) appear at left.
Executors, administrators, trustees,
guardians and others signing in a
representative capacity, should indicate
the capacity in which they sign. An
authorized officer may sign on behalf of
a corporation and should indicate the
name of the corporation and his or her
capacity.