<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997.
REGISTRATION NO. 333-36857
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DENALI INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 76-0454639
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1360 POST OAK BLVD., SUITE 2470
HOUSTON, TEXAS 77056
(713) 627-0933
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
STEPHEN T. HARCROW
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DENALI INCORPORATED
1360 POST OAK BLVD., SUITE 2470
HOUSTON, TEXAS 77056
(713) 627-0933
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
ALLEN B. CRAIG, III ALAN P. BADEN
E. SCOTT LINEBERRY T. MARK KELLY
HUTCHESON & GRUNDY, L.L.P. VINSON & ELKINS L.L.P.
3300 TWO ALLEN CENTER 2300 FIRST CITY TOWER
1200 SMITH STREET 1001 FANNIN STREET
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 951-2800 (713) 758-2222
FAX: (713) 951-2925 FAX: (713) 758-2346
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1)(2) FEE(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 per value................................ $36,225,000 $10,978
===================================================================================================
</TABLE>
(1) Includes $4,725,000 to cover the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes $9,932 paid with previous filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION NOVEMBER 4, 1997
PROSPECTUS
2,100,000 SHARES
[LOGO]
DENALI INCORPORATED
COMMON STOCK
All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), of Denali Incorporated, a Delaware corporation ("Denali" or the
"Company"), offered hereby are being sold by the Company. Prior to this offering
(the "Offering"), there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price will
be between $13.00 and $15.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
Application has been made to have the Common Stock approved for listing on
the Nasdaq National Market under the symbol "DNLI".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total(3).......................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated offering expenses of $1.15 million payable by the
Company.
(3) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
315,000 shares of Common Stock from the Company, solely to cover
over-allotments. If all such shares are purchased by the Underwriters, the
total Price to Public will be $ , the total Underwriting Discount
will be $ and the total Proceeds to Company will be $ .
See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the Underwriters' right to withdraw, cancel or modify such offer and reject any
order in whole or in part. It is expected that delivery of the shares of the
Common Stock will be made on or about , 1997.
---------------------
MORGAN KEEGAN & COMPANY, INC. RAUSCHER PIERCE REFSNES, INC.
The date of this Prospectus is , 1997.
<PAGE> 3
[1. Map of United States identifying location of Company facilities]
[2. Ershigs logo and photograph of product with caption: "Ershigs is a
manufacturer of engineered fiberglass reinforced composites for handling
corrosive fluids. Ershigs designs, manufactures and installs stacks, stack
liners, scubbers, tanks, abrasion resistant pipe and fittings, retention
towers, and various types of engineered systems."]
[3. SEFCO logo and photograph of product with caption: "SEFCO is an integrated
manufacturer of engineered field-erected steel tanks and accessories for use
in the water and wastewater, agrochemical and petroleum industries."]
[4. Hoover Containment logo and photograph of product with caption: "Hoover
Containment is a manufacturer of steel rectangular above ground storage
tanks."]
[5. Fluid Containment logo and photograph of product with caption: "Fluid
containment is a manufacturer of fiberglass composite underground storage
tanks. Pictured above is the research tank farm for a major multinational
oil company. The installation pictured at the right shows a double-walled
tank. "]
[6. Photo with caption: "Our Vision. To be the leading provider of solutions for
the critical fluid handling industry."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS
AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including Notes thereto,
appearing elsewhere in this Prospectus. References to pro forma financial
information should be read in conjunction with the Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. As used in this Prospectus, all
references to the "Company" or to "Denali" refer to Denali Incorporated, its
predecessors and subsidiaries.
THE COMPANY
Denali Incorporated is a rapidly growing provider of products and services
for handling critical fluids, which are fluids that are economically valuable or
potentially hazardous to the environment. The Company believes that it is a
leading manufacturer of fiberglass composite underground storage tanks ("USTs"),
steel rectangular aboveground storage tanks ("ASTs") and engineered fiberglass
reinforced composites for handling corrosive fluids. Critical fluids handling
products and services are used in a wide variety of applications, including in
retail petroleum marketing and in petroleum, chemical, pulp and paper, electric
power and other industrial process plants.
BACKGROUND
The Company was formed in 1994 to acquire the fiberglass composite UST
business of Owens Corning. Initially, the Company focused its efforts on
improving profitability, improving responsiveness to customers and developing
new products. The Company's management also realized that the critical fluids
handling industry was highly fragmented and that there would be significant
opportunities to consolidate the industry.
In October 1995, the Company acquired Hoover Containment, Inc. ("Hoover"),
a manufacturer of steel rectangular ASTs, and, in February 1997, the Company
acquired Ershigs, Inc. ("Ershigs"), a manufacturer of engineered fiberglass
reinforced plastic ("FRP") products for handling corrosive fluids.
In October 1997, the Company acquired GL&V LaValley Construction, Inc.
("LaValley"), another manufacturer of engineered FRP products, and SEFCO, Inc.
("SEFCO"), a fabricator of engineered field-erected steel tanks.
Prior to forming the Company, the Company's Chairman and Chief Executive
Officer, Stephen T. Harcrow, was President of EnviroTech, a business unit of
Baker Hughes Incorporated, from 1988 to 1993. EnviroTech was a manufacturer of
equipment for process industries. During Mr. Harcrow's tenure as President,
EnviroTech grew through the acquisition of manufacturers of fluid separation,
pumping and measurement products, with annual revenues increasing from
approximately $365 million up to $680 million. Since the Company's formation,
five other former employees of EnviroTech have joined the Company as executive
officers.
PRODUCTS AND SERVICES
Containment Products. The Company's Containment Products Group specializes
in the manufacture of fiberglass composite USTs and steel rectangular ASTs. The
Company's fiberglass composite USTs, manhole products and oil/water separators
are marketed under the Fluid Containment tradename and its steel rectangular
ASTs are marketed under the Hoover and LubeCube(R) tradenames.
Engineered Products. The Company's Engineered Products Group specializes in
providing custom engineered FRP products and engineered metal products for the
pulp and paper, power, chemical, water and wastewater and other process
industries. The Company markets its engineered FRP products under the Ershigs
tradename and believes that it is a leading domestic provider of engineered FRP
products for corrosion resistant applications. SEFCO is an integrated
manufacturer of engineered field-erected steel tanks and accessories for use in
the water and wastewater, agrochemical and petroleum industries. This group
focuses its operations on complex projects, where custom engineering and special
manufacturing expertise are critical.
3
<PAGE> 5
BUSINESS STRATEGY
The Company's objective is to become the leading provider of a broad range
of products and services for handling critical fluids through strategic
acquisitions and internal growth. The Company believes that the fragmented
nature of the critical fluids handling industry, which is comprised of many
companies with limited product ranges or serving limited geographic areas, will
provide continued acquisition and internal growth opportunities. The Company
also believes that these opportunities provide the Company with the ability to
offer a comprehensive range of specialized solutions for meeting its customers'
critical fluids handling needs.
Acquisition Strategy. Since its founding in 1994, the Company has completed
five acquisitions. The Company's net sales have grown from approximately $17.8
million for fiscal 1995 (a 28-week period ended July 1, 1995) to $71.1 million
for fiscal 1997. Pro forma net sales for fiscal 1997 were approximately $104.9
million, including approximately $17.9 million with respect to the recent
acquisitions of SEFCO and LaValley. Net loss for fiscal 1995 was $43,000 and
increased to net income of $317,000 for fiscal 1997 and was $595,000 for pro
forma first quarter fiscal 1998, excluding a $2.3 million non-recurring
compensation charge. In addition, EBITDA (as defined in "Summary Consolidated
Financial Data") increased from $981,000 for fiscal 1995 to approximately $3.9
million for fiscal 1997 and was $2.3 million for pro forma first quarter fiscal
1998. Key elements of the Company's acquisition strategy include:
- Develop a Comprehensive Range of Products and Services. The Company's
existing products offer a variety of containment and engineered materials
solutions for handling critical fluids. The Company intends to broaden
its product lines to introduce additional critical fluid separation and
measurement products. The Company believes that the ability to offer a
comprehensive range of critical fluids handling products and services
will be a competitive advantage.
- Expand Within Existing Markets. The Company intends to expand its product
offerings within the geographic markets it currently serves. For example,
the SEFCO acquisition is expected to expand the Company's engineered
product capabilities into the field fabrication of tanks.
- Penetrate New Geographic Markets, Including International Markets. The
Company believes that it can expand its operations that are regional in
nature throughout the United States and internationally. For example, the
acquisition of LaValley is expected to strengthen the Company's market
position in the Gulf Coast region for the Company's engineered products.
In addition, the Company intends to pursue license agreements for the
international manufacture of certain products.
Internal Growth Strategy. The Company is also focused on expanding the
scope and profitability of each of the businesses it acquires. Key elements of
this growth strategy are:
- Promote Internal Growth through a Decentralized Structure. The Company
employs a decentralized management and operational structure to
capitalize on market knowledge, product expertise, name recognition and
customer relationships.
- Reduce Product and Administrative Costs. The Company's consolidation
effort has led to raw materials purchasing economies, manufacturing
efficiencies, increased sales coverage and product transportation cost
reductions. In addition, the Company has improved operating margins by
consolidating administrative functions such as finance, insurance and
employee benefits.
- Develop New Products. The Company utilizes the technological expertise,
market knowledge and customer relationships of the businesses it acquires
to develop new products. For example, as a result of the Company's
development efforts, sales of oil/water separators and FRP manhole
products have increased from approximately $500,000 for fiscal 1995 to
more than $2.3 million for fiscal 1997.
- Utilize Available Manufacturing Capacity. The Company also believes new
products, acquired businesses and growth of current product net sales
will increase manufacturing and facility utilization, contributing to
further increases in profitability.
The Company's principal offices are located at 1360 Post Oak Boulevard,
Suite 2470, Houston, Texas 77056, and its telephone number is (713) 627-0933.
4
<PAGE> 6
THE OFFERING
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Common Stock offered by the Company(1)....... 2,100,000 shares
Common Stock to be outstanding after the
Offering(1)(2)............................. 4,284,910 shares
Use of proceeds.............................. To repay outstanding indebtedness, to redeem
shares of preferred stock and to provide
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... DNLI
</TABLE>
- ---------------
(1) Does not include up to 315,000 shares of Common Stock which may be sold by
the Company on the exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."
(2) Does not include 538,863 shares of Common Stock issuable upon exercise of
outstanding options under the Company's stock option plans.
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the factors as set forth under the caption "Risk Factors."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The summary consolidated financial data for the period December 19, 1994
(date of inception) to July 1, 1995, and the years ended June 29, 1996 and June
28, 1997, have been derived from the Company's Consolidated Financial
Statements, which have been audited by Ernst & Young LLP. The Company operates
on a 52/53 week fiscal year ending on the Saturday closest to June 30. The
summary historical consolidated financial data for the three months ended
September 28, 1996 and September 27, 1997 have been derived from the unaudited
consolidated financial statements of the Company, which in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the periods presented. The results of
operations for the three months ended September 27, 1997 are not necessarily
indicative of the results of operations to be expected for the year. References
to fiscal years by date refer to the fiscal year ending in that calendar year;
for example, "fiscal 1997" refers to the fiscal year ended June 28, 1997.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------------------------------------------ --------------------------
FOR THE PERIOD
DECEMBER 19,
1994 THREE THREE THREE
(DATE OF MONTHS MONTHS MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28, SEPTEMBER 27,
1995 1996 1997 1996 1997 1997 1997
-------------- ---------- ---------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $17,799 $53,354 $71,101 $17,703 $21,979 $104,928 $26,318
Cost of sales............ 13,473 43,518 57,268 13,949 17,149 85,790 20,253
------- ------- ------- ------- ------- -------- -------
Gross profit............. 4,326 9,836 13,833 3,754 4,830 19,138 6,065
Selling, general and
administrative
expenses............... 3,771 9,604 11,874 2,786 3,825 17,455 4,518
Non-recurring
compensation expense... -- -- -- -- 2,312 -- 2,312
------- ------- ------- ------- ------- -------- -------
Operating income......... 555 232 1,959 968 (1,307) 1,683 (765)
Interest expense......... 671 1,783 2,058 498 607 3,277 809
Interest income.......... -- (65) (111) (25) (20) (111) (20)
Other income, net........ (72) (206) (598) (68) (142) (544) (233)
------- ------- ------- ------- ------- -------- -------
Income (loss) before
income taxes........... (44) (1,280) 610 563 (1,752) (939) (1,321)
Income tax provision
(benefit).............. (1) (446) 293 270 213 (376) 396
------- ------- ------- ------- ------- -------- -------
Net income (loss)........ $ (43) $ (834) $ 317 $ 293 $(1,965) $ (563) $(1,717)
Dividends on Series A
Preferred Stock........ (60) (120) (120) (30) (30) (120) (30)
------- ------- ------- ------- ------- -------- -------
Net Income (loss)
attributable to Common
Stock.................. $ (103) $ (954) $ 197 $ 263 $(1,995)(6) $ (683) $(1,747)(6)
======= ======= ======= ======= ======= ======== =======
Net income (loss) per
common share(2).......... $ (0.05) $ (0.44) $ 0.09 $ 0.12 $ (0.87)(6) $ (0.31) $ (0.76)(6)
======= ======= ======= ======= ======= ======== =======
Weighted average common
shares outstanding(2).... 2,078 2,185 2,198 2,185 2,288 2,198 2,288
======= ======= ======= ======= ======= ======== =======
</TABLE>
6
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<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------------------------------------------ ------------
FOR THE PERIOD
DECEMBER 19,
1994 THREE THREE
(DATE OF MONTHS MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28,
1995 1996 1997 1996 1997 1997
-------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by (used in)
operating activities.......... $ 3,789 $ (109) $ 625 $(1,493) $ 2,082
Net cash used in investing
activities.................... (7,527) (5,430) (4,631) (331) (166)
Net cash provided by (used in)
financing activities.......... 4,737 4,664 4,212 2,117 (1,796)
OTHER DATA:
Depreciation and amortization... $ 354 $ 913 $ 1,221 $ 285 $ 325 $2,053
EBITDA(3)....................... $ 981 $ 1,416 $ 3,889 $ 1,346 $ 1,492 $4,391
<CAPTION>
PRO FORMA(1)
-------------
THREE
MONTHS
ENDED
SEPTEMBER 27,
1997
-------------
<S> <C>
CASH FLOW DATA:
Net cash provided by (used in)
operating activities..........
Net cash used in investing
activities....................
Net cash provided by (used in)
financing activities..........
OTHER DATA:
Depreciation and amortization... $ 547
EBITDA(3)....................... $2,347
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, SEPTEMBER 27, 1997
1997 ---------------------------------------------
---------- PRO FORMA
HISTORICAL HISTORICAL PRO FORMA(4) AS ADJUSTED(4)(5)
---------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 8,019 $ 6,911 $ 7,708 $ 9,246
Total assets.............................................. 41,084 41,289 52,320 52,320
Total debt................................................ 24,024 22,228 31,228 5,807
Series A Preferred Stock (redeemable)..................... 1,200 1,200 1,200 --
Stockholders' equity (deficit)............................ (541) (224) (224) 25,968
</TABLE>
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(1) Gives effect to the acquisitions of Ershigs, LaValley and SEFCO, as if such
acquisitions had been consummated as of June 30, 1996, the beginning of the
period presented, and should be read in conjunction with the Pro Forma
Condensed Consolidated Financial Statements included elsewhere in this
Prospectus. The pro forma results of operations are not necessarily
indicative of the results that would have occurred had the acquisitions been
consummated as of the beginning of the period.
(2) Supplemental earnings (loss) per common share, which give effect to this
Offering as if it had occurred at the beginning of the periods presented,
were $0.40 and $(0.40)for the year ended June 28, 1997 and the three months
ended September 27, 1997, respectively. See Notes 2 and 18 to Consolidated
Financial Statements.
(3) EBITDA represents earnings before interest expense, income tax, depreciation
and amortization and non-recurring compensation expense. The Company
believes that EBITDA is a meaningful measure of its operating performance;
however, EBITDA should not be considered in isolation from or as a
substitute for net income or cash flow measures prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. In addition, EBITDA may not be comparable to
similarly titled measures reported by other companies.
(4) Gives effect to the acquisitions of LaValley and SEFCO as if such
acquisitions had been completed on June 28, 1997.
(5) Gives effect to the Offering and the application of the estimated net
proceeds therefrom as set forth under "Use of Proceeds." See
"Capitalization."
(6) For the three months ended September 27, 1997 net income attributable to
Common Stock and net income per common share were $317,000 and $0.14,
respectively, excluding the impact of a non-recurring charge related to a
compensation charge of $2,312,000 for the exchange of a subsidiary's stock
options for stock options to purchase the Company's Common Stock. See Note 6
of Notes to Consolidated Financial Statements (unaudited) for the three
months ended September 27, 1997. Also, for the three months ended September
27, 1997 pro forma net income attributable to Common Stock and pro forma net
income per common share were $565,000 and $0.25, respectively, excluding the
non-recurring charge discussed above.
7
<PAGE> 9
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus.
DEPENDENCE ON INDUSTRY SPENDING
The prospects for the Company depend upon the level of capital and
maintenance expenditures by its industrial customers. These industries
historically have been cyclical in nature and vulnerable to general downturns in
the economy. No assurance can be given that the Company will be able to increase
or maintain its level of sales in periods of economic stagnation or downturn.
Decreases in industry spending could have a significant adverse effect upon the
demand for the Company's products and services and the Company's results of
operations.
LIMITED OPERATING HISTORY
The Company commenced operations in December 1994 and has only a limited
operating history upon which investors may base an evaluation of its
performance. The likelihood of success of the Company must be considered in
light of the risks, expenses, difficulties and delays frequently encountered in
connection with the operation and development of new and expanding businesses.
ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY
Since 1994, the Company has completed five acquisitions of businesses in
pursuit of its strategic objectives. The Company plans to continue to pursue
acquisitions that complement its existing products and services. The Company
expects to face competition for acquisition candidates, which may limit the
number of acquisition opportunities and may lead to higher acquisition prices.
There can be no assurance that the Company will be able to identify, acquire or
manage profitably additional businesses or to integrate successfully any
acquired businesses into the Company without substantial costs, delays or other
operational or financial difficulties. Further, acquisitions involve a number of
special risks, including failure of the acquired business to achieve expected
results, diversion of management's attention, failure to retain key personnel of
the acquired business and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that the businesses the Company has acquired or may
acquire in the future will achieve anticipated net sales and earnings. See
"Business -- Strategy."
NEED FOR ADDITIONAL CAPITAL; LEVERAGE AND LIQUIDITY
The Company has experienced and expects to continue to experience
substantial working capital needs to fund it operations. Although the Company
believes that based on its current operations it will be able to meet the
interest and principal obligations on its indebtedness and to fund its capital
expenditures and other operating expenses out of cash flow from operations and
available borrowings under its principal credit facility over the next 12
months, there can be no assurance that the Company's business will continue to
generate cash flow at levels sufficient to meet these requirements. Further, the
Company plans to effect future acquisitions to pursue its business strategy
which may require additional financing. No assurance can be given as to the
availability or terms of any such additional financing that may be required.
At November 1, 1997, after giving effect to the issuance of the Common
Stock offered hereby and the application of the net proceeds therefrom to repay
indebtedness and to redeem certain shares of the Company's Series A Preferred
Stock, the Company would have had total indebtedness of approximately $7.6
million and debt as a percentage of total capitalization of 22.5%. Although the
Company's current amount of indebtedness, as adjusted, is relatively low, the
Company has been highly leveraged in the past and may increase the level of its
indebtedness in the future to fund its current operations or to finance
additional acquisitions. The degree to which the Company will be leveraged could
have important consequences, including the following: (i) the possible
impairment of the Company's ability to obtain financing in the future for
potential acquisitions, working capital, capital expenditures and general
corporate purposes; (ii) the
8
<PAGE> 10
necessity for a substantial portion of the Company's cash flow from operations
to be dedicated to the payment of principal and interest on its indebtedness;
and (iii) the potential for increased vulnerability of the Company to economic
downturns and possible limitation of its ability to withstand competitive
pressures. The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
RISKS RELATED TO INTERNAL GROWTH STRATEGY
Key elements of the Company's strategy are to improve the profitability of
its businesses and any businesses it may subsequently acquire and to continue to
expand the net sales of such businesses. Although the Company intends to seek to
improve the profitability of such businesses by various means, including
reducing administrative and other costs, there can be no assurance that the
Company will be able to do so. The Company's ability to increase the net sales
of such businesses will be affected by various factors, including demand for
products, the Company's ability to expand the range of products and services
offered by each of such businesses and the Company's ability to successfully
enter new markets. Many of these factors are beyond the control of the Company,
and there can be no assurance that the Company's strategies will be successful
or that it will be able to generate cash flow adequate for its operations and to
support internal growth. See "Business -- Business Strategy."
COMPETITION
The markets for the Company's products are fragmented and highly
competitive. Although none of the Company's competitors is considered dominant,
there are competitors that have significantly greater resources than the
Company, which, among other things, could be a competitive disadvantage to the
Company in securing certain projects. See "Business -- Competition."
INTERNATIONAL EXPANSION
The Company's successful expansion into global markets will depend on
numerous factors, many of which are beyond its control. In addition, global
expansion may increase the Company's exposure to certain risks inherent in doing
business outside the United States, including currency fluctuations,
restrictions on the repatriation of profits, compliance with foreign laws and
standards and political risks. Although the majority of the Company's contracts
with respect to international sales to date have been denominated in United
States dollars, no assurance can be made that future contracts will be
denominated in United States dollars; therefore, the Company may be subject to
foreign exchange risks in the future. The Company does not presently hedge
exchange rate fluctuations, but, in the future, may hedge economic exposures.
POTENTIAL FOR PRODUCT LIABILITY CLAIMS
Certain of the Company's products are used in handling potentially
hazardous materials. The Company carries insurance in amounts that it considers
adequate. However, catastrophic occurrences at locations where the Company's
products are used could in the future result in significant product liability
claims against the Company. In addition, a number of the Company's products are
used to store regulated substances such as petroleum. The release or leakage of
such substances from these products could also result in liability claims
against the Company.
GOVERNMENTAL REGULATION
The Company is subject to various foreign, federal, state and local laws
and regulations relating to the protection of health, safety and the
environment. The Company's business involves environmental and health and safety
management issues typically associated with manufacturing operations. Since
formation of the Company, the Company's cost of complying with such laws and
regulations has not been material. However, future laws and regulations may
become more stringent and may require the Company to incur significant
additional costs. See "Business -- Governmental Regulation."
9
<PAGE> 11
SEASONALITY
The Company's operations are subject to seasonal variations in weather
conditions. Because most of the Company's customers' construction activities
take place outdoors, the number of projects generally declines in the winter
months due to an increase in rainy and cold conditions. In addition, its
customers often schedule the completion of their projects during the summer
months in order to take advantage of the milder weather for the installation of
their equipment and systems. As a result, a disproportionate amount of the
Company's net income, net sales and gross profit has historically been earned
during the first and fourth quarters of the fiscal year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON PRINCIPAL SUPPLIER
The principal raw materials used by the Company in its manufacture of
fiberglass composite USTs are fiberglass and resin. Although resin is available
in adequate supply from a variety of sources, substantial manufacturers of
fiberglass are more limited in number. Because of this limited market supply,
the Company has entered into a supply contract with Owens Corning pursuant to
which the Company has agreed to purchase, and Owens Corning has agreed to
supply, at least 80% of the Company's fiberglass composite UST requirements
through December 31, 1997. The Company has entered into a supply contract with
Owens Corning beginning January 1, 1998 to supply at least 90% of the Company's
fiberglass requirements through December 31, 2000. In addition, this contract
contains certain pricing stabilization terms. As a result of this arrangement,
the Company remains significantly dependent upon Owens Corning to deliver
quality product in accordance with and, as required by, the Company's needs.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a limited number of key management, technical
and sales personnel. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified personnel. The Company faces
competition for such personnel from other companies and organizations, and there
can be no assurance that the Company will be successful in hiring or retaining
qualified personnel. The Company does not have written employment agreements
with its officers providing for specific terms of employment, and officers and
other key personnel could leave the Company's employ with little or no prior
notice. The Company's loss of key personnel, especially if the loss is without
advance notice, or the Company's inability to hire or retain key personnel,
could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company does not carry any key man life
insurance.
CONTINUED CONTROL BY CURRENT OFFICERS, DIRECTORS AND AFFILIATED ENTITIES
Upon completion of this Offering, the Company's current executive officers,
directors and entities affiliated with them will beneficially own, in the
aggregate, approximately 39.4% (36.8% if the Underwriters' over-allotment option
is exercised in full) of the Company's outstanding Common Stock. If they were to
act together, these stockholders would be able to control substantially all
matters requiring approval by the Company's stockholders, including the election
of directors, the adoption or amendment of provisions in the Company's
Certificate of Incorporation or Bylaws and the approval of mergers or other
business combination transactions. Such ownership of Common Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
and may affect the outcome of the voting and other rights of the other
stockholders. See "Principal Stockholders."
REDEMPTION OF PREFERRED STOCK HELD BY COMPANY DIRECTORS
The Company intends to use a portion of the net proceeds from the Offering
to redeem in full the Company's Series A Preferred Stock. As of September 30,
1997, such redemption amount totaled $1,410,000 (including $210,000 in accrued
and unpaid dividends). Approximately 75% of the Series A Preferred Stock is
beneficially owned by members of the Company's Board of Directors. See "Certain
Transactions" and "Use of Proceeds."
10
<PAGE> 12
ABSENCE OF DIVIDENDS
The Company anticipates that earnings will be retained for the development
of the Company's business and that no cash dividends will be declared on the
Common Stock in the foreseeable future. See "Dividend Policy."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or, if one develops, that it will be sustained. The initial
public offering price for the shares of Common Stock offered hereby has been
determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors and may not be indicative of the market
price of the Common Stock after this Offering. See "Underwriting." The market
price of the Common Stock may be volatile and could be adversely affected by
fluctuations in the Company's operating results or the operating results of the
Company's competitors, the failure of the Company's operating results to meet
the expectations of market analysts and investors, changes in environmental or
other laws and regulations, actions by regulatory authorities, developments in
respect of patents or proprietary rights, changes in market analyst
recommendations, general market conditions or other events and factors.
EFFECT OF ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company has not elected to be excluded from the provisions of Section
203 of the Delaware General Corporation Law, which imposes certain restrictions
on transactions between a corporation and "interested stockholders" (as defined
in Section 203). These restrictions could operate to delay or prevent a change
in control of the Company and to discourage, impede or prevent a merger, tender
offer or proxy contest involving the Company. See "Description of Capital
Stock -- Anti-Takeover Provisions of Delaware Law."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. The 2,184,910 shares of Common Stock outstanding prior to the Offering
are not registered under the Securities Act of 1933, as amended (the "Securities
Act"), and, therefore, are not freely tradable unless subsequently registered
under the Securities Act or exempted from such registration. All of such shares
may be sold pursuant to the requirements of Rule 144 promulgated under the
Securities Act, subject to certain holding period requirements and volume
limitations relating to the sale of securities. In addition, the Company has
adopted a 1996 Incentive Stock Option Plan (the "1996 Plan") and a 1997
Incentive Stock Option Plan (the "1997 Plan") pursuant to which the Company may
grant options to its officers and employees, and shares of Common Stock issuable
upon exercise of options granted under such plans will become available for
future sale in the public market. As of June 28, 1997, there were outstanding
options to acquire 113,190 shares granted under the 1996 Plan, all of which are
currently exercisable. In connection with a merger of Containment Solutions,
Inc., a wholly-owned subsidiary of the Company ("CSI"), with and into the
Company in September 1997, options to acquire an additional 254,643 shares of
Common Stock under the 1996 Plan were issued in exchange for options to acquire
1,400 shares of common stock of CSI, all of which options are immediately
exercisable. Pursuant to the 1997 Plan, the Company has granted, effective as of
the date of this Prospectus, options to acquire 171,030 shares of Common Stock,
of which options to acquire 56,845 shares shall be immediately exercisable. The
Company, all of its executive officers and directors, and certain stockholders
and their affiliates have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any right to purchase or
acquire Common Stock without the prior written consent of the Underwriters for a
period of 180 days after the date of this Prospectus. See "Shares Eligible for
Future Sale" and "Underwriting."
11
<PAGE> 13
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. New investors purchasing Common
Stock in this Offering accordingly will experience immediate and substantial
dilution in net tangible book value per share. See "Dilution."
POSSIBLE ISSUANCE OF PREFERRED STOCK
In addition to the Common Stock, the Company's Certificate of Incorporation
authorizes the issuance of up to 1,000,000 shares of preferred stock.
Immediately following redemption of all of the shares of the Company's Series A
Preferred Stock with a portion of the net proceeds of the Offering, no shares of
preferred stock of the Company will be outstanding, and the Company has no
current plans to issue any shares of preferred stock. However, because the
rights and preferences for any series of preferred stock may be set by the Board
of Directors in its sole discretion, those rights and preferences may be
superior to the rights of holders of the Common Stock and thus may adversely
affect the rights of holders of Common Stock. See "Description of Capital
Stock -- Preferred Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be $26.2 million ($30.3 million if the over-allotment
option is exercised in full), at an assumed public offering price of $14.00 per
share and after deducting the estimated underwriting discount and offering
expenses payable by the Company.
Approximately $16.7 million of the net proceeds to the Company will be used
to repay a portion of the borrowings of the Company incurred under its credit
facility (the "Credit Facility") and $0.2 million for unrelated term debt. The
Credit Facility bears interest per annum at varying rates of LIBOR plus a margin
ranging from 2.75% to 3.00% or the prime rate plus .50%. The Credit Facility has
a five year term. The Credit Facility was used to finance an aggregate of $9.0
million for the Company's acquisitions of LaValley and SEFCO. In addition,
approximately $6.7 million of the net proceeds will be used to repay the
Company's outstanding indebtedness to Owens Corning, which indebtedness was
incurred in connection with the Company's acquisition of the fiberglass
composite UST business of Owens Corning. The indebtedness to Owens Corning bears
interest at 10.0% per annum and is scheduled to mature on December 31, 1999.
Approximately $1.1 million (including accrued interest) of the net proceeds will
be used to repay the Company's outstanding indebtedness to Praxair, Inc., which
indebtedness was incurred in connection with the acquisition of Ershigs. The
indebtedness to Praxair, Inc. bears interest at a rate of 10.0% per annum and is
scheduled to mature in February 1998. A portion of the proceeds equal to
approximately $1.4 million will be used to redeem all of the shares of the
Company's Series A Preferred Stock (including accrued and unpaid dividends
through the date of redemption). The Company's Directors beneficially own
approximately 75% of the Series A Preferred Stock. The remaining net proceeds,
if any, are intended to be used by the Company for general working capital
purposes. See "Business -- Business Strategy."
12
<PAGE> 14
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently expects that it will retain future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. With respect to dividends for the Company's Series A
Preferred Stock, see "Use of Proceeds."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 27, 1997, on a (i) historical basis, (ii) pro forma basis to give
effect to the acquisitions of LaValley and SEFCO, and (iii) pro forma as
adjusted basis to give effect to the sale of Common Stock offered hereby and
application of the net proceeds therefrom. See "Use of Proceeds." This
information is qualified in its entirety by, and should be read in conjunction
with, the Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Statements of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
-------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt....................... $ 1,403 $ 1,694 $ 1,694
Long-term debt, net of current portion.................. 19,607 28,316 4,113
Series A Preferred Stock, redeemable at $250 per share,
$.01 par value, authorized 16,000, issued and
outstanding 4,800 shares.............................. 1,200 1,200 --
Stockholders' equity
Common stock, $.01 par value; authorized 30,000,000
shares, issued and outstanding 2,184,910 shares;
issued and outstanding 4,284,910 shares, as
adjusted(1)........................................ 22 22 43
Additional paid-in capital............................ 2,609 2,609 28,780
Retained deficit...................................... (2,855) (2,855) (2,855)
------- ------- -------
Total stockholders' equity (deficit).......... (224) (224) 25,968
------- ------- -------
Total capitalization.......................... $21,986 $30,986 $31,775
======= ======= =======
</TABLE>
- ---------------
(1) Excludes shares of Common Stock issuable upon exercise of outstanding
options under the Company's stock option plans. See "Management -- Stock
Option Plans."
13
<PAGE> 15
DILUTION
Dilution is the reduction in the value of a purchaser's investment in
Common Stock measured by the difference between the purchase price per share and
the net tangible book value per share of the Common Stock after the purchase.
The net tangible book value per share of the Common Stock represents the net
tangible book value of the Company, its total assets less its total liabilities
and intangible assets (consisting primarily of goodwill), divided by the number
of shares of Common Stock outstanding. At September 27, 1997, the net tangible
book value of the Common Stock before giving effect to the Offering (assuming an
initial public offering price of $14.00 per share) was $(1.32) per share. After
giving effect to the sale of the shares of Common Stock offered in the Offering
and after deducting estimated underwriting discounts and offering expenses of
approximately $3.2 million, the net tangible book value of the Company at
September 27, 1997 would have been approximately $5.44 per share. This
represents an immediate dilution of $8.56 per share to new investors and an
increase in the net tangible book value of approximately $6.76 per share to
existing stockholders, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $14.00
Net tangible book value per share at September 27, 1997..... $(1.32)
Increase per share attributable to new stockholders......... $ 6.76
Adjusted net tangible book value per share after the Offering....... $ 5.44
Dilution of net tangible book value per share to new stockholders... $ 8.56
</TABLE>
The following table sets forth, as of September 27, 1997, the number of
shares of Common Stock purchased or to be purchased from the Company, the total
consideration paid or to be paid and the average price per share paid or to be
paid by existing stockholders and the new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PURCHASE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 2,184,910 51.0% $ 318,500 1.1% $ .15
New investors.............. 2,100,000 49.0% 29,400,000 98.9% 14.00
--------- ----- ----------- -----
Total............ 4,284,910 100% $29,718,500 100%
========= ===== =========== =====
</TABLE>
The foregoing information does not include 538,863 shares of Common Stock
issuable upon the exercise of stock options currently granted or expected to be
offered at the time of the Offering under the Company's 1996 and 1997 Incentive
Stock Option Plans. See "Management -- Incentive Stock Option Plans."
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the period December 19, 1994
(date of inception) to July 1, 1995 and the fiscal years ended June 29, 1996 and
June 28, 1997 have been derived from the Company's Consolidated Financial
Statements, which have been audited by Ernst & Young LLP, independent auditors.
The selected consolidated financial data for the three months ended September
28, 1996 and September 27, 1997 have been derived from the unaudited
consolidated financial statements of the Company, which in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the periods presented. The results of
operations for the three months ended September 27, 1997 are not necessarily
indicative of the results of operations to be expected for the year. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19,
1994 (DATE OF THREE MONTHS THREE MONTHS
INCEPTION) TO YEAR ENDED YEAR ENDED ENDED ENDED
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
-------------- ---------- ---------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $17,799 $53,354 $71,101 $17,703 $21,979
Cost of sales................... 13,473 43,518 57,268 13,949 17,149
------- ------- ------- ------- -------
Gross profit.................... 4,326 9,836 13,833 3,754 4,830
Selling, general and
administrative expenses....... 3,771 9,604 11,874 2,786 3,825
Non-recurring compensation
expense....................... -- -- -- -- 2,312
------- ------- ------- ------- -------
Operating income................ 555 232 1,959 968 (1,307)
Interest expense................ 671 1,783 2,058 498 607
Interest income................. -- (65) (111) (25) (20)
Other income, net............... (72) (206) (598) (68) (142)
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (44) (1,280) 610 563 (1,752)
Income tax provision
(benefit)..................... (1) (446) 293 270 213
------- ------- ------- ------- -------
Net income (loss)............... $ (43) $ (834) $ 317 $ 293 $(1,965)
Dividends on Series A Preferred
Stock......................... (60) (120) (120) (30) (30)
------- ------- ------- ------- -------
Net income (loss) attributable
to Common Stock............... $ (103) $ (954) $ 197 $ 263 $(1,995)(3)
======= ======= ======= ======= =======
Net income (loss) per common
share(1)...................... $ (0.05) $ (0.44) $ 0.09 $ 0.12 $ (0.87)(3)
======= ======= ======= ======= =======
Weighted average common shares
outstanding(1)................ 2,078 2,185 2,198 2,185 2,288
======= ======= ======= ======= =======
CASH FLOW DATA:
Net cash provided by (used in)
operating activities.......... $ 3,789 $ (109) $ 625 $(1,493) $ 2,082
Net cash used in investing
activities.................... (7,527) (5,430) (4,631) (331) (166)
Net cash provided (used in) by
financing activities.......... 4,737 4,664 4,212 2,117 (1,796)
OTHER DATA:
Depreciation and amortization... $ 354 $ 913 $ 1,221 $ 285 $ 325
EBITDA(2)....................... 981 1,416 3,889 1,346 1,492
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AS OF
----------------------------------------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 27,
1995 1996 1997 1997
------------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 3,192 $ 5,649 $ 8,019 $ 6,911
Total assets............................. 21,814 30,318 41,084 41,289
Total debt............................... 13,810 18,661 24,024 22,228
Series A Preferred Stock (redeemable).... 1,200 1,200 1,200 1,200
Stockholders' equity (deficit)........... $ 216 $ (738) $ (541) $ (224)
</TABLE>
- ---------------
(1) Supplemental earnings (loss) per common share, which give effect to this
Offering as if it had occurred at the beginning of the periods presented,
were $0.40 and $(0.40)for the year ended June 28, 1997 and the three months
ended September 27, 1997, respectively. See Notes 2 and 18 to Consolidated
Financial Statements.
(2) EBITDA represents earnings before consolidated net income, interest expense,
income tax, depreciation and amortization and non-recurring compensation
expense. The Company believes that EBITDA is a meaningful measure of its
operating performance; however, EBITDA should not be considered in isolation
from or as a substitute for net income or cash flow measures prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. In addition, EBITDA may not be
comparable to similarly titled measures reported by other companies.
(3) For the three months ended September 27, 1997 net income attributable to
Common Stock and net income per common share were $317,000 and $0.14,
respectively, excluding the impact of a non-recurring charge related to a
compensation charge of $2,312,000 for the exchange of a subsidiary's stock
options for stock options to purchase the Company's Common Stock. See Note 6
of Notes to Consolidated Financial Statements (unaudited) for the three
months ended September 27, 1997.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
included elsewhere in this document.
OVERVIEW
Since inception in 1994, the Company has acquired five businesses. Due to
the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of current or
future periods. Each of the acquisitions has been accounted for under the
purchase method of accounting. Accordingly, the acquired businesses have been
included in the Company's results of operations from the date of acquisition.
The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite UST business of Owens
Corning, including five manufacturing facilities. The purchase price was $16.6
million, consisting of $5.6 million in cash, $9.3 million in notes payable and
approximately $1.7 million in acquisition costs. The Company significantly
restructured the operations of this business at the time of purchase. Two of the
five manufacturing facilities of the business were closed, resulting in a
significant reduction in fixed manufacturing overhead. Operating costs were
significantly reduced throughout the Company, in part through the elimination of
approximately 20 management positions. The Company sold the two closed and idle
manufacturing facilities in fiscal 1996 for $1.5 million in cash (before selling
expenses) and an $850,000 note receivable.
In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover, a manufacturer of steel rectangular ASTs. The purchase
price of $5.5 million consisted of $5.4 million in cash and acquisition costs of
approximately $100,000. The Company eliminated certain operating costs through
the sharing of certain general and administrative functions within the acquired
businesses. The addition of the steel rectangular AST product line enabled the
Company to offer a broader line of containment products and to expand its
customer base. These two businesses form the Company's Containment Products
Group.
The Company has modernized and expanded its manufacturing capabilities for
its steel rectangular AST business through construction of a new,
built-for-purpose facility, consolidating three manufacturing and administrative
office locations in Maryland. Expenses associated with this consolidation
impacted fiscal 1997 results; however, the Company believes this move has
positioned the Company to more effectively and efficiently meet market demand
beyond fiscal 1997.
In February 1997, the Company acquired Ershigs, a manufacturer of
engineered FRP products, as the first of the Company's Engineered Products
Group. The $6.1 million purchase price consisted of $5.0 million in cash, $1.0
million in a note payable and acquisition costs of approximately $80,000.
Substantial operational changes were made upon the purchase of Ershigs,
including the closing of one of Ershigs' three manufacturing plants and the
restructuring most of Ershig's sales, general and administrative functions,
which enabled the Company to enhance profitability.
In October 1997, the Company acquired SEFCO for approximately $4.9 million
in net cash and $100,000 in direct acquisition costs. SEFCO is a manufacturer of
engineered field-erected aboveground steel tanks. In October 1997, the Company
also acquired LaValley for $3.9 million in cash and $100,000 in direct
acquisition costs. LaValley manufactures engineered FRP products. LaValley and
SEFCO, together with Ershigs, form the Company's Engineered Products Group.
The acquisitions of LaValley and SEFCO accounted for $17.9 million of the
Company's pro forma 1997 net sales of $104.9 million.
17
<PAGE> 19
The following table indicates the Company's net sales by product line for
fiscal 1995, 1996, 1997 and the three month periods ended September 28, 1996 and
September 27, 1997, and pro forma results for fiscal 1997 and the three months
ended September 27, 1997:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(4)
------------------------------------------------------------------- ------------------------
FOR THE
PERIOD THREE THREE THREE
DECEMBER 19, YEAR YEAR MONTHS MONTHS YEAR MONTHS
1994 (DATE OF ENDED ENDED ENDED ENDED ENDED ENDED
INCEPTION) TO JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27, JUNE 28, SEPTEMBER 27,
JULY 1, 1995 1996 1997 1996 1997 1997 1997
------------- -------- -------- ------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales by Product Line:
CONTAINMENT PRODUCTS:
Fiberglass composite
USTs(1)................. $17.8 $38.2 $39.7 $11.3 $11.3 $ 39.7 $11.3
Steel rectangular
ASTs(2)................. -- 15.2 25.1 6.4 6.7 25.1 6.7
ENGINEERED PRODUCTS:
Engineered FRP
products(3)(4).......... -- -- 6.3 -- 4.0 30.1 6.0
Engineered field-erected
steel tanks(4).......... -- -- -- -- -- 10.0 2.3
----- ----- ----- ----- ----- ------ -----
Total net sales.... $17.8 $53.4 $71.1 $17.7 $22.0 $104.9 $26.3
===== ===== ===== ===== ===== ====== =====
</TABLE>
- ---------------
(1) Reflects 28 weeks of results in fiscal 1995 and 52 weeks of results in
fiscal 1996 and fiscal 1997.
(2) Reflects 35 weeks of results in fiscal 1996 and 52 weeks of results in
fiscal 1997.
(3) Reflects 17 weeks of results in fiscal 1997.
(4) See footnotes to the Pro Forma Condensed Consolidated Financial Statements
for a description of the LaValley and SEFCO acquisitions. The pro forma
results of operations are not necessarily indicative of the results that
would have occurred had the acquisitions been completed as of the beginning
of the period.
RESULTS OF OPERATIONS
The following table sets forth for fiscal 1995, 1996, 1997 and the three
month periods ended September 28, 1996 and September 27, 1997, the percentage
relationship to net sales of certain expenses and earnings:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-------------------------------------------------------------------
FOR THE
PERIOD THREE THREE
DECEMBER 19, YEAR YEAR MONTHS MONTHS
1994 (DATE OF ENDED ENDED ENDED ENDED
INCEPTION) TO JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
JULY 1, 1995 1996 1997 1996 1997
------------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 75.7 81.6 80.5 78.8 78.0
----- ----- ----- ----- -----
Gross profit.............................. 24.3 18.4 19.5 21.2 22.0
----- ----- ----- ----- -----
Selling, general and administrative
expenses................................ 21.2 18.0 16.7 15.7 17.4
Non-recurring compensation expense........ -- -- -- -- 10.5
----- ----- ----- ----- -----
Operating income.......................... 3.1 0.4 2.8 5.5 (5.9)
Interest expense.......................... 3.8 3.3 2.9 2.8 2.8
Interest income........................... -- (0.1) (0.2) (0.1) (0.1)
Other income, net......................... (0.4) (0.4) (0.8) (0.4) (0.6)
----- ----- ----- ----- -----
Income (loss) before income taxes......... (0.3) (2.4) 0.9 3.2 (8.0)
Income tax provision (benefit)............ -- (0.8) 0.4 1.5 0.9
----- ----- ----- ----- -----
Net income (loss)......................... (0.3)% (1.6)% 0.5% 1.7% (8.9)%
===== ===== ===== ===== =====
</TABLE>
18
<PAGE> 20
THREE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
28, 1996
Net sales increased $4.3 million, or 24%, to $22 million in the first
quarter of fiscal 1998 from $17.7 million in the same quarter of fiscal 1997.
Most of the increase ($4.0 million) was attributable to the inclusion of Ershigs
sales in the fiscal 1998 period following the February 1997 acquisition by the
Company. The Containment Products Group sales increased 1.6% from the prior year
period.
Gross profit increased $1.1 million, or 29%, to $4.8 million in the fiscal
1998 period from $3.7 million in fiscal 1997. Most of the increase ($1.0
million) was related to the inclusion of Ershigs in the fiscal 1998 period at a
25.7% margin. Gross margin for the Company increased to 22% from 21.2% in the
prior year quarter due to Ershigs' higher margin products. The Containment
Products Group margin of 21.1% in the fiscal 1998 period was slightly lower than
the 21.2% margin in the prior year quarter.
Selling, general and administrative expenses for the fiscal 1998 first
quarter totaled $3.8 million (17.4% of revenues), compared with $2.8 million
(15.7% of revenues) for the prior year quarter. Most of the increase ($835,000)
was attributable to the inclusion of Ershigs in the fiscal 1998 period. The
remainder of the increase was attributable primarily to higher sales and
marketing expenses in the Containment Products Group.
The Company recognized a $2.3 million non-recurring compensation charge in
the first quarter of fiscal 1998 due to the exchange of subsidiary stock options
for Denali stock options.
Interest expense for the fiscal 1998 period increased $109,000 to $607,000
from $498,000 in the prior year quarter. The increase was due to increased debt
resulting from the February 1997 Ershigs acquisition.
The Company's provision for income taxes, which includes the effects of the
non-recurring charge for compensation expense, differs from the U.S. statutory
rate of 34% due to the non-recurring compensation charge being non-deductible
for income tax purposes. In addition, the Company's provision for income taxes
differs from the U.S. statutory rate due to state income taxes and other
permanent differences.
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company's results of operations for fiscal 1997 were greatly impacted
by the inclusion of 17 weeks of results of Ershigs, which was acquired in
February 1997, and the inclusion of the results of Hoover, which was acquired in
October 1995, for a full fiscal year as compared to 35 weeks reflected in fiscal
1996.
Net sales for fiscal 1997 increased $17.7 million, or 33%, to $71.1
million, from $53.4 million in fiscal 1996. This increase primarily resulted
from $6.3 million of sales at Ershigs and a $10.0 million increase in sales at
Hoover.
Gross profit increased $4.0 million, or 41%, to $13.8 million in fiscal
1997 from $9.8 million in fiscal 1996. Gross profit margins were 19.5% and 18.4%
for fiscal 1997 and 1996, respectively. The Containment Products Group's gross
profit margin improved to 19.6% in fiscal 1997 as compared to 18.4% in fiscal
1996. This improvement resulted primarily from a lower cost of fiberglass and
resin used in the manufacture of fiberglass composite USTs. The gross profit
margin for the Company's Engineered Products Group was 18.2% in fiscal 1997.
Selling, general and administrative expenses increased $2.3 million, or
24%, to $11.9 million in fiscal 1997 from $9.6 million in fiscal 1996. This
increase was attributable to the inclusion of the Ershigs business and a full 12
months of the Hoover business as discussed above. This increase was partially
offset by savings resulting from a reduction and consolidation of workforce for
the Company's fiberglass composite UST business. Selling, general and
administrative expenses decreased as a percentage of net sales from 18.0% in
fiscal 1996 to 16.7% in fiscal 1997.
Interest expense in fiscal 1997 was $2.1 million compared to $1.8 million
in fiscal 1996. The increase was primarily a result of increased borrowings
required to finance the purchase of Ershigs and a full year of interest for
borrowings in connection with the acquisition of Hoover.
19
<PAGE> 21
Other income increased $392,000 to $598,000 in fiscal 1997 from $206,000 in
fiscal 1996. This increase resulted primarily from a gain on the sale of idle
equipment to international licensees for the manufacture of fiberglass composite
USTs.
The increase in income tax expense for fiscal 1997 compared to fiscal 1996
resulted from higher pre-tax earnings related to increased profitability of the
Containment Products Group.
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company was incorporated on December 19, 1994. Consequently, fiscal
1995 represented the results of operations for the 28-week period from December
19, 1994 through July 1, 1995.
Net sales increased $35.6 million, or 200%, to $53.4 million in fiscal 1996
from $17.8 million in fiscal 1995. The increase in net sales was directly
attributable to the increased reporting period from 28 weeks to 52 weeks for the
fiberglass composite UST business acquired from Owens Corning in December 1994,
and to the inclusion of 35 weeks for the Hoover business, acquired in October
1995, reflected in fiscal 1996 whereas there were none in fiscal 1995.
Gross profit increased $5.5 million, or 128%, to $9.8 million in fiscal
1996 from $4.3 million in fiscal 1995. Gross profit margins were 18.4% and 24.3%
for fiscal 1996 and 1995, respectively. The decrease in margin was primarily
attributable to increased prices for fiberglass and resin used in the
manufacture of the fiberglass composite UST products.
Selling, general and administrative expenses increased $5.8 million, or
153%, in fiscal 1996 to $9.6 million from $3.8 million in fiscal 1995. Selling,
general and administrative expenses as a percentage of net sales decreased to
18.0% for fiscal 1996 compared to 21.2% for fiscal 1995 primarily due to the
Company's reduction and consolidation of its workforce.
Interest expense in fiscal 1996 was $1.8 million compared to $671,000 in
fiscal 1995. Approximately $300,000 of the increased interest expense in 1996
was attributable to increased borrowings arising from the acquisition of Hoover.
The remaining increase resulted from the inclusion of a full year of interest
expense for the Company. In addition, the level of borrowings for the fiberglass
composite UST business increased $1.2 million during fiscal 1996 to fund general
working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 28, 1997, was $8.0 million, as compared to $5.6
million at June 29, 1996. Cash provided by operating activities was $625,000 for
fiscal 1997 and cash used in operating activities was $109,000 in fiscal 1996.
The improvement in cash provided by operating activities resulted primarily from
a $1.2 million improvement in net income from an $834,000 loss in fiscal 1996 to
a $317,000 profit in fiscal 1997. Capital expenditures totaled $600,000 and
$942,000 in fiscal years 1997 and 1996, respectively. Working capital at
September 27, 1997, was $6.9 million as compared to $8.3 million at September
28, 1996. Cash provided by operating activities was $2.1 million for the three
months ended September 27, 1997 and cash used in operating activities was $1.5
million for the three months ended September 28, 1996. The improvement in cash
provided by operating activities resulted primarily from changes in working
capital. Capital expenditures totaled $208,000 and $71,000 for the three months
ended September 27, 1997 and September 28, 1996, respectively. The Company
anticipates that its operating cash flows and available line of credit after
application of the net proceeds of this Offering will be adequate to fund future
capital commitments and working capital requirements for the next 12 months. The
Company estimates that its capital expenditures for fiscal 1998 will be
approximately $1.2 million.
As further described in Note 7 to the Denali Incorporated Consolidated
Financial Statements, the Company refinanced its credit facilities in October
1997. In connection with the extinguishment of its old credit facility upon
funding of a new credit facility in October 1997, the Company paid prepayment
penalties of $323,000. In addition, the Company charged to expense unamortized
debt origination costs of $295,000 in October 1997. These charges will be
recognized in the Company's consolidated financial statements as an
extraordinary loss, net of tax, of $383,000 in the quarter ended December 27,
1997.
20
<PAGE> 22
The Company's Credit Facility with its principal lender provides for
revolving lines of credit and secured term loans of up to an aggregate of $29.7
million. As of November 1, 1997, the Company had outstanding indebtedness of
$10.7 million under the term loans and $11.6 million under the revolving lines
of credit. Borrowings under this Credit Facility are secured by liens on
substantially all of the Company's assets. See Note 7 of Notes to the
Consolidated Financial Statements for certain information regarding the Credit
Facility. The Credit Facility bears interest per annum at varying rates of LIBOR
plus a margin ranging from 2.75% to 3.00% or the prime rate plus .50%. The
Credit Facility has a five year term.
In connection with its acquisition of the fiberglass composite UST business
of Owens Corning, the Company issued to Owens Corning a $7.5 million note which
bears interest at an annual rate of 10.0% and matures on December 31, 1999, and
is to be repaid with a portion of the net proceeds of this Offering. The Company
anticipates that the early repayment of this indebtedness to Owens Corning will
result in extraordinary gains, net of tax, of approximately $416,000 in the
second quarter of fiscal 1998 and $242,000 in the fourth quarter of fiscal 1998.
The extraordinary gain in the fourth quarter is contingent on minimum purchases
through June 1998 required by the Company under the Owens Corning supply
agreement.
The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business. The IRBs bear interest at 9.9% per annum, mature in February 2001 and
are secured by the Company's Conroe, Texas manufacturing facility.
The Company's capital requirements primarily relate to acquisitions of
businesses in the critical fluids handling industry. The Company has made cash
payments net of cash acquired for acquisitions of approximately $26.5 million in
the aggregate since inception in December 1994. The source of this cash
primarily has been bank debt along with proceeds from the sale of idle assets
and use of net working capital. The Company's acquisition program will require
significant additional capital. The Company intends to seek additional capital
as necessary to fund such acquisitions through one or more funding sources that
may include borrowings under the Credit Facility, or offerings of debt and/or
equity securities of the Company. Cash provided by operating activities may also
be used to fund a portion of future acquisitions. Although management believes
that the Company will be able to obtain sufficient capital to fund acquisitions,
there can be no assurances that such capital will be available to the Company at
the time it is required or on terms acceptable to the Company.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced significant fluctuations in its quarterly
results of operations. These fluctuations have been attributable to timing of
acquisitions and seasonality. The Company's quarterly operating results are
affected by the annual construction season slowdown resulting from winter
weather especially in the period December through March. The fiberglass
composite UST business is especially impacted during the winter months. The
following table represents the Company's selected unaudited quarterly
consolidated statements of operations for each quarter in fiscal 1996 and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 29, 1996 FISCAL YEAR ENDED JUNE 28, 1997
---------------------------------------- ----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $10,507 $14,342 $12,377 $16,128 $17,703 $16,970 $13,906 $22,522
Operating income(loss)......... 142 2 (577) 665 968 666 (542) 867
Net income (loss).............. (173) (177) (643) 159 293 130 (487) 381
</TABLE>
21
<PAGE> 23
BUSINESS
THE COMPANY
The Company is a rapidly growing provider of products and services for
handling critical fluids, which are fluids that are economically valuable or
potentially hazardous to the environment. The Company believes that it is a
leading manufacturer of fiberglass composite USTs, steel rectangular ASTs and
fiberglass reinforced composites for handling corrosive fluids. Critical fluids
handling products and services are used in a wide variety of applications,
including in retail petroleum marketing and in petroleum, chemical, pulp and
paper, electric power and other industrial process plants.
BACKGROUND
The Company was formed in 1994 to acquire the fiberglass composite UST
business of Owens Corning. Initially, the Company focused its efforts on
improving profitability, improving responsiveness to customers and developing
new products. The Company's management also realized that the critical fluids
handling industry was highly fragmented and that there would be significant
opportunities to consolidate the industry.
In October 1995, the Company acquired Hoover, a manufacturer of steel
rectangular ASTs, and, in February 1997, the Company acquired Ershigs, a
manufacturer of engineered FRP products for handling corrosive fluids.
In October 1997, the Company acquired LaValley, another manufacturer of FRP
products, and SEFCO, a fabricator of engineered field-erected steel tanks.
Prior to forming the Company, the Company's Chairman and Chief Executive
Officer, Stephen T. Harcrow, was President of EnviroTech, a business unit of
Baker Hughes Incorporated, from 1988 to 1993. EnviroTech was a manufacturer of
equipment for process industries. During Mr. Harcrow's tenure as President,
EnviroTech grew through the acquisition of manufacturers of fluid separation,
pumping and measurement products, with annual revenues increasing from
approximately $365 million up to $680 million. Since the Company's formation,
five other former employees of EnviroTech have joined the Company as executive
officers.
PRODUCTS AND SERVICES
Containment Products. The Company's Containment Products Group specializes
in the manufacture of fiberglass composite USTs and rectangular steel ASTs. The
Company's fiberglass composite USTs, manhole products and oil/water separators
are marketed under the Fluid Containment tradename and its steel rectangular
ASTs are marketed under the Hoover and LubeCube(R) tradenames.
Engineered Products. The Company's Engineered Products Group specializes in
providing custom engineered FRP products and engineered metal products for the
pulp and paper, power, chemical, water and wastewater and other process
industries. The Company markets its engineered FRP products under the Ershigs
tradename and believes that it is a leading domestic provider of engineered FRP
products for corrosion resistant applications. SEFCO is an integrated
manufacturer of engineered field-erected steel tanks and accessories for use in
the water and wastewater, agrochemical and petroleum industries. This group
focuses its operations on complex projects, where custom engineering and special
manufacturing expertise are critical.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of a broad range
of products and services for handling critical fluids through strategic
acquisitions and internal growth. The Company believes that the fragmented
nature of the critical fluids handling industry, which is comprised of many
companies with limited product ranges or serving limited geographic areas, will
provide continued acquisition and internal growth opportunities. The Company
also believes that these opportunities provide the Company with the ability to
offer a comprehensive range of specialized solutions for meeting customers'
critical fluids handling needs.
22
<PAGE> 24
Acquisition Strategy. Since its founding in 1994, the Company has completed
five acquisitions. The Company's net sales have grown from approximately $17.8
million for fiscal 1995 (a 28-week period ended July 1, 1995) to $71.1 million
for fiscal 1997. Pro forma net sales for fiscal 1997 were approximately $104.9
million, including approximately $17.9 million with respect to the recent
acquisitions of SEFCO and LaValley. Net loss for fiscal 1995 was $43,000 and
increased to net income of $317,000 for fiscal 1997 and was $595,000 for pro
forma first quarter fiscal 1998, excluding a $2.3 million non-recurring
compensation charge. In addition, EBITDA (as defined in "Summary Consolidated
Financial Data") increased from $981,000 for fiscal 1995 to approximately $3.9
million for fiscal 1997 and was $2.3 million for pro forma first quarter fiscal
1998. Key elements of the Company's acquisition strategy include:
- Develop a Comprehensive Range of Products and Services. The Company's
existing products offer a variety of containment and engineered materials
solutions for handling critical fluids. The Company intends to broaden
its product lines to introduce additional critical fluid separation and
measurement products. The Company believes that the ability to offer a
comprehensive range of critical fluids handling products and services
will be a competitive advantage.
- Expand Within Existing Markets. The Company intends to expand its product
offerings within the geographic markets it currently serves. For example,
the SEFCO acquisition is expected to expand the Company's engineered
product capabilities into the field fabrication of tanks.
- Penetrate New Geographic Markets, Including International Markets. The
Company believes that it can expand its operations that are regional in
nature throughout the United States and internationally. For example, the
acquisition of LaValley is expected to strengthen the Company's market
position in the Gulf Coast region for the Company's engineered products.
In addition, the Company intends to pursue license agreements for the
international manufacture of certain products.
Internal Growth Strategy. The Company is also focused on expanding the
scope and profitability of each of the businesses it acquires. Key elements of
this growth strategy are:
- Promote Internal Growth through a Decentralized Structure. The Company
employs a decentralized management and operational structure to
capitalize on market knowledge, product expertise, name recognition and
customer relationships.
- Reduce Product and Administrative Costs. The Company's consolidation
effort has led to raw materials purchasing economies, manufacturing
efficiencies, increased sales coverage and product transportation cost
reductions. In addition, the Company has improved operating margins by
consolidating administrative functions such as finance, insurance and
employee benefits.
- Develop New Products. The Company utilizes the technological expertise,
market knowledge and customer relationships of the businesses it acquires
to develop new products. For example, as a result of the Company's
development efforts, sales of oil/water separators and FRP manhole
products have increased from approximately $500,000 for fiscal 1995 to
more than $2.3 million for fiscal 1997.
- Utilize Available Manufacturing Capacity. The Company also believes new
products, acquired businesses and growth of current product net sales
will increase manufacturing and facility utilization, contributing to
further increases in profitability.
23
<PAGE> 25
The following table sets forth certain information concerning the
businesses which the Company has acquired:
<TABLE>
<CAPTION>
PRIMARY INDUSTRIES
COMPANY DATE ACQUIRED PRINCIPAL PRODUCT SERVED
------- ------------- ----------------- ------------------
<S> <C> <C> <C>
Fluid Containment(1).......................... December 1994 Fiberglass Composite USTs Petroleum Marketing
Hoover........................................ October 1995 Steel Rectangular ASTs Petroleum Marketing
Ershigs....................................... February 1997 Engineered FRP Products Pulp and Paper,
Power, Chemical,
Water and Wastewater
LaValley Construction......................... October 1997 Engineered FRP Products Pulp and Paper,
Chemical, Power
SEFCO......................................... October 1997 Field-Erected Steel Tanks Water and Wastewater,
and Agrochemical
</TABLE>
- ---------------
(1) Formerly the fiberglass composite UST business of Owens Corning.
OPERATIONS
The Company is organized to capitalize on focused core competencies and
expertise. Its operations are currently split into two groups: the Containment
Products Group and the Engineered Products Group. As part of the Company's
growth strategy, the Company also anticipates creating two additional product
groups to include critical fluid separation and measurement product lines. For a
discussion of certain industry segment data, see Note 17 of Notes to the
Consolidated Financial Statements.
CONTAINMENT PRODUCTS
The Containment Products Group of the Company focuses its operations on the
manufacture of fiberglass composite USTs and steel rectangular ASTs.
FIBERGLASS COMPOSITE UNDERGROUND STORAGE TANKS. The Company believes that
it is a leading manufacturer of fiberglass composite USTs and markets its
products under the Fluid Containment tradename. The Company manufactures and
markets single wall and double wall fiberglass composite USTs; leak detection
systems; oil/water separators; ReTank(R) retrofit systems; storage tank anchor
systems; and fiberglass manhole and wetwell products. The Company is the
successor to the fiberglass composite UST business of Owens Corning, which
invented the fiberglass composite UST.
Prior to the Company's acquisition of the tank business of Owens Corning,
Owens Corning completed over 235,000 fiberglass composite UST installations
during a 30-year period, and helped write and maintain the Underwriters'
Laboratory ("UL") 1316 specification. Since the acquisition, the Company has
completed almost 15,000 installations of its own fiberglass composite UST
products. The Company has a comprehensive training program for installers of the
Company's products. The Company also has experienced field service groups
located in California, Texas, Indiana, Pennsylvania, Florida and South Carolina
that support both the installers and their customers.
Each fiberglass composite UST comes with a 30-year corrosion warranty and
is guaranteed not to rust. The corrosion resistant nature of fiberglass
reinforced composite is the chief advantage the Company's fiberglass composite
USTs have in the market. The Company continues to strengthen its position in the
UST industry through research and development and a continual upgrading of its
manufacturing processes and investment in its employees.
Market. The Company believes that its fiberglass composite UST business is
growing primarily because of increased geographic coverage programs by petroleum
marketers and increased scope of service station offerings by the major oil
companies. Most of these fiberglass composite UST sales are for new locations
and developments and not for replacement and rehabilitation programs. An
important market for the Company is the newer, larger stations, known as
"super-c" stores, that combine the traditional self-service station with a fast
food store and a convenience store. According to an August 1995 report of the
Fiberglass Tank and Pipe
24
<PAGE> 26
Institute, an industry organization with principal offices located in Houston,
Texas, over 90% of all major petroleum marketing companies in the United States,
which includes all of the major integrated oil companies, specify fiberglass
composite USTs at all of their new construction sites. The Company believes that
growth in this area will continue to expand.
The Environmental Protection Agency ("EPA") has established certain minimum
requirements for UST systems installed before December 22, 1988. A majority of
the USTs currently in place in the United States were installed prior to that
date. The EPA requirements call for spill protection, overfill protection and
corrosion protection. A site with a UST of this age must either (1) add spill,
overfill and corrosion protection by December 22, 1998; (2) close the existing
UST by December 22, 1998; or (3) replace the closed existing UST with a new UST
meeting current regulatory standards. The EPA has announced that it intends to
enforce these minimum requirements and that failure of UST owners to adhere to
these requirements by the specified date could result in the UST owner being
cited for violations and fined. To date, the Company's fiberglass composite UST
business does not appear to have been significantly impacted by the
implementation of these EPA requirements and there can be no assurance that
these requirements ultimately will be enforced by the EPA and, if enforced, that
the Company will realize an increase in its fiberglass composite UST net sales
as a result of such enforcement activity.
Competition. The UST market is highly competitive and fragmented, with
entrants from both steel tank suppliers and another major fiberglass composite
UST supplier. Steel tanks account for a majority of the United States UST
market, in terms of net sales. The remainder of this market is divided fairly
evenly between two fiberglass composite UST suppliers, the Company and Xerxes,
Inc., a company headquartered in Minneapolis, Minnesota that has six
manufacturing facilities in the United States. Although steel USTs are less
expensive than fiberglass composite USTs, fiberglass composite USTs are not
subject to corrosion and do not expose the customer to corrosion leaks and
related environmental problems. When determining which product to acquire, one
of these two factors will generally control the purchase decision. Although over
100 manufacturers of UL listed steel USTs are located in the United States, most
of these manufacturers are small, independent operations. Several of the UST
manufacturers, however, are divisions or subsidiaries of larger corporations
with financial resources greater than that of the Company. Transportation costs
are important in the overall cost of product for this market. As a result, local
manufacturers have a distinct advantage of shipping products to the customer.
The Company believes that its quality of manufacturing, manufacturing control,
product design, testing procedures, history of performance and reliability,
delivery capability, customer responsiveness and experienced personnel are
competitive advantages in the UST market.
Marketing and Customers. The Company takes a multifaceted approach to
marketing its fiberglass composite UST products and services. The Company's
sales staff primarily supports an extensive network of Petroleum Equipment
Industry ("PEI") distributors and contractors. For significant national
accounts, i.e. a major oil company, the Company generally sells directly to the
end user, filling orders through its distributors and contractors. The Company's
largest fiberglass composite UST customers are super-regional distribution
houses and major oil companies; however, the overall customer base is diverse,
with no one customer accounting for more than 4% of the Company's fiberglass
composite UST net sales in fiscal 1997. The Company's top eight fiberglass
composite UST customers, a mix of PEI distributors and major oil companies,
accounted for 22% of the Company's fiberglass composite UST net sales in fiscal
1997. The Company has license agreements with companies outside the United
States to produce fiberglass composite USTs using the Company's technology and
continues to expand this presence.
STEEL RECTANGULAR ABOVEGROUND STORAGE TANKS. The Company believes that it
is a leading manufacturer of steel rectangular ASTs. The AST market includes
both rectangular and cylindrical configurations and is defined by the Company as
steel constructions intended for stationary aboveground storage of flammable and
combustible liquids at atmospheric pressure. Part of this market includes tanks
called vault tanks which are constructed with an insulation system that is
designed to reduce the heat transferred to the primary tank in the event the
construction were to be exposed to a hydrocarbon pool fire. The term "AST" also
refers to tanks manufactured and then transported as a completed unit to the
customer. For the purposes of this Prospectus, the term "AST" does not include
tanks certified as "large aboveground storage tanks" by the American
25
<PAGE> 27
Petroleum Institute (tanks with a capacity in excess of 1,000 barrels). The
Containment Products Group does not manufacture these large aboveground storage
tanks.
The Company sells its steel rectangular AST products under the Hoover name
and has two primary product lines: lubricant tanks (Lube Cube(R)) and vault
tanks. Lube Cube(R) tanks are designed and built to hold oil and waste oil
products in a service station-type environment, are available in standard sizes
up to 12,000 gallons and may be custom designed according to the customer's
needs. All Lube Cubes(R) meet NFPA (National Fire Protection Association)-30 for
storage of flammable and combustible liquids and are manufactured, tested and
labeled according to UL-142 as well as Underwriters' Laboratories of Canada.
The Company's vault tanks, sometimes referred to as insulated tanks, are
steel rectangular ASTs designed to hold highly combustible fuels, whether
gasoline, diesel or other. These tanks meet all national fire code requirements
for "fire rated" ASTs. Vault tanks are labeled according to UL-2085 "Protected
Secondary Containment" for ASTs containing flammable liquids. The Company's
vault tanks utilize a patented double wall tank design with insulating material
surrounding the inner tank. A pressure testable second steel tank surrounds the
insulating material, providing protection to the material and secondary leak
containment for the primary tank. In addition to the UL listed tanks, the
Company also offers factory-installed equipment packages, including steps,
platforms, pumps and electronics for fuel dispensing, standby generators, used
oil and lubricating oil.
Market. The Company believes that its base market for its steel rectangular
AST products is growing. The Lube Cube(R) tank market is tied to the growth in
number and size of quick-change oil stations and full service centers for auto
repair. The vault tank business continues to grow as the market accepts
aboveground alternatives to historically underground storage. The vault tank
product line has experienced some sales activity associated with the EPA tank
upgrade deadline described above; however, the Company believes that its steel
rectangular AST growth will be driven by factors other than regulatory
compliance.
Competition. The Company's steel rectangular ASTs are sold in highly
fragmented and competitive markets. Most AST manufacturers produce cylindrical
steel tanks that compete against the Company's steel rectangular AST products.
Over 240 steel AST manufacturers operate in North America, and over 75 of these
companies manufacture vault tanks. Several competitors of the Company are
divisions or subsidiaries of larger companies with financial and other resources
greater than those of the Company. However, the Company believes that the
majority of its competitors in this market are local, individually owned
manufacturing facilities because of the cost to transport ASTs significant
distances. The Company believes that it is the only national manufacturing
company in this market, operating facilities in Maryland and California and
having subcontracting agreements with quality manufacturing companies in
Virginia, North Carolina, Indiana, Kansas, Nebraska, Idaho, Maryland and New
York. Almost half of the Company's steel rectangular AST net sales relate to
products manufactured by its subcontractors, providing the flexibility to
cost-effectively service its customers. The Company's national presence reduces
transportation costs for products relative to single plant competitors that
compete on a national basis. However, local manufacturers have a competitive
advantage in transportation costs. The Company believes that its broad product
lines, product design, delivery capability, customer responsiveness and
experienced personnel are competitive advantages in the AST market.
Marketing and Customers. The Company uses its sales staff and outside sales
representative to market its steel rectangular AST products to the end-user
through a network of PEI distributors and contractors. The customer base for its
steel rectangular ASTs is broad, having over 900 accounts. In fiscal 1997, no
customer accounted for greater than 4% of the Company's steel rectangular AST
net sales except for the United States government, which accounted for
approximately 8% of the Company's steel rectangular AST net sales.
ENGINEERED PRODUCTS
The Company's Engineered Products Group believes that it is a leading
manufacturer of engineered FRP products for corrosion resistant applications and
engineered field-erected steel tanks for the municipal and industrial markets.
26
<PAGE> 28
ENGINEERED COMPOSITE PRODUCTS. The Company markets its engineered FRP
products for corrosion resistant applications under the Ershigs name and is a
professional engineering, manufacturing and construction organization that has
been serving the industry since 1921. The Company acquired Ershigs in February
1997. The Company focuses its operations in corrosion resistant applications on
complex projects, where engineering and manufacturing expertise is critical. The
Company designs, manufactures and installs stacks, stack liners, scrubbers,
tanks, abrasion resistant pipe and fittings, retention towers and various types
of engineered systems. For large diameter structures, the Company employs a
proven on-site manufacturing process that eliminates most handling,
transportation and remote access concerns. The Company has produced seamless
tanks in excess of 100 feet in diameter using this method.
Market. The Company serves a variety of industries, including pulp and
paper, power, chemical, water and wastewater and other process industries. The
Company's business is affected by these industries' capital expenditures, which
are driven primarily by economic conditions as they relate to the need for new
construction, expansion or rehabilitation. Key drivers that the Company believes
will affect growth in this area are the implementation of new, more stringent
EPA emission regulations for the pulp and paper industry and for the power
industry and increasing prices of alternative materials, particularly corrosion
resistant grades of stainless steel. Certain capital expenditures in these
industries have been postponed pending the release of the new EPA regulations.
The EPA has announced that such regulations should be published by November
1998; however, there can be no assurance that such regulations will be released
by that date and, even if published by then, that the Company's corrosion
resistant engineered products net sales will experience growth as a result of
the implementation of such regulations.
Competition. The Company participates in a highly fragmented market where
it believes that most of its competitors are small regional fabrication
businesses. Field-erection capabilities and the Company's performance warranty
are believed by the Company to provide competitive advantages. RTP ("Reinforced
Thermoset Plastics")-1 certification is a competitive advantage in this market
and the Company is RTP-1 certified. RTP-1 certification is earned through
process audits administered by the American Society of Mechanical Engineers.
Such certification denotes quality manufacturing practices, adherence to
standardized procedures and a process to qualify material and tank design
according to prescribed tests of physical properties. The Company believes that
its engineering capabilities, quality reputation, history of performance and
effective customer service are competitive advantages in the engineered FRP
products market.
Marketing and Customers. The Company generally sells its engineered FRP
products through a combination of direct field sales and a sales representative
network. The scope of the work performed by the Company is large in nature and,
unless characterized as a special situation, has long lead times to order. The
experienced sales force works closely with the customer in designing the correct
solution for the customer's need. The customer base of the Company varies from
year to year due to the project-oriented nature of the Company's work in this
area. The Company has also entered into a license agreement with an
international company to provide technology, equipment and expertise.
ENGINEERED METAL PRODUCTS. In October 1997, the Company acquired SEFCO, a
manufacturer of engineered field-erected steel tanks and accessories for use in
the municipal, agrochemical and petroleum industries. The Company is vertically
integrated with services ranging from engineering design, materials procurement,
fabrication, site preparation, piping, foundation work, erection and painting,
both in shop and on site. The Company also offers tank inspection, maintenance
and repair and operates primarily in Oklahoma, Missouri, Arkansas and Kansas.
Market. The Company participates in the municipal and industrial markets.
These markets are dependent on customers' needs for new installations,
expansions and rehabilitation of existing facilities. The municipal market is
less cyclical than the industrial segment, and it historically represents
approximately 70% of the Company's engineered metal products net sales. The
Company deals with a select group of industrial customers that are primarily in
the chemical and petrochemical industries. In the region served, the Company
believes that both of these markets are growing.
Competition. The market in which the Company competes for engineered metal
products is highly competitive and characterized by numerous small competitors
in the municipal market and several large,
27
<PAGE> 29
public companies with financial resources greater than those of the Company in
the industrial market. The Company believes that it is able to achieve
differentiation by taking advantage of the levels of service, reliability and
quality control afforded by vertical integration. Generally, the Company's
competitors in the engineered metal products industry are reliant on outside
suppliers and local contractors to fulfill the complete scope of projects. The
Company believes that this difference between the Company and its competitors
provides the Company major advantages in bidding, quality control and
scheduling.
Marketing and Customers. Marketing activities in this area are limited. The
Company's engineered metal product customer focus has been the municipal water
industry. It has been the Company's experience that most municipal projects are
awarded on a price-based bid with attendant requirements for bid bonding. The
municipal customers are generally broad based with no known customers
representing over 20% of the Company's business activity in this area.
Alternatively, the Company believes that industrial client contracts are awarded
based upon a combination of bids and private negotiations. The Company believes
that it can differentiate itself in all engineered metal product markets in its
region as a result of the extensive services it offers through vertical
integration of its services.
FACILITIES
The Company operates facilities throughout the United States and considers
them to be in good operating condition and adequate for their present uses. The
Company believes that it has sufficient capacity to meet its current and
anticipated manufacturing requirements for its operations. The Company owns a
facility in Gatesville, Texas that is currently held for sale and is not used as
an operations base. The following table sets forth the Company's principal
manufacturing plants and offices:
<TABLE>
<CAPTION>
APPROXIMATE LEASED
AREA OR
(SQ.FT.) OWNED USES
----------- ------ ----
<S> <C> <C> <C>
Fiberglass Composite Underground Storage Tanks
Conroe, TX(1)............................... 130,000 Owned Manufacturing plant and Containment
Products Group headquarters
Mount Union, PA(2).......................... 110,000 Owned Manufacturing plant and administrative
offices
Bakersfield, CA(3).......................... 73,000 Owned Manufacturing plant and administrative
offices
Steel Rectangular Aboveground Storage Tanks
Baltimore, MD............................... 63,000 Leased(4) Manufacturing plant and administrative
offices
Mira Loma, CA............................... 54,000 Leased(5) Manufacturing plant and administrative
offices
Engineered Fiberglass Reinforced Composite
Products
Bellingham, WA.............................. 63,000 Owned Manufacturing plant and Engineered
Products Group headquarters
Wilson, NC.................................. 47,000 Owned Manufacturing plant and administrative
offices
Biloxi, MS.................................. 29,000 Owned Manufacturing plant and administrative
offices
Engineered Field-Erected Steel Tanks
Tulsa, OK(6)................................ 33,000 Owned Manufacturing plant and administrative
offices
Denali Incorporated
Houston, TX................................. 4,600 Leased Corporate headquarters
</TABLE>
- ---------------
(1) Facility is located on 65 acres.
(2) Facility is located on 24 acres.
(3) Facility is located on 20 acres.
(4) Lease expires in 2004.
(5) Lease expires in February 1998 and the Company plans to consolidate into its
Bakersfield facility and will not renew the lease.
(6) Facility is located on 12 acres.
BACKLOG
The Company's backlog is based upon customer orders received that the
Company believes are firm. Backlog is comprised of both products to be delivered
and services to be performed. The level of backlog at any particular time is not
necessarily indicative of the future operating performance of the Company as
orders
28
<PAGE> 30
may be changed at any time and the Company is affected by seasonality. See "Risk
Factors -- Seasonality." At August 31, 1997 and August 31, 1996, the Containment
Products Group's backlog was approximately $11.9 million and $10.5 million,
respectively. For any given date, the Company anticipates that 80% of the
Containment Products Group's backlog will be shipped or performed within 90 days
and 90% will be shipped or performed within 180 days. At August 31, 1997, the
Engineered Products Group's backlog (including pending acquisitions) was
approximately $11.2 million. For any given date, the Company anticipates that
60% of the backlog of the Engineered Products Group will be shipped or performed
within 90 days and 80% will be shipped or performed within 180 days.
MATERIALS AND SUPPLIERS
Owens Corning and the Company are parties to a supply contract pursuant to
which the Company purchases from Owens Corning the fiberglass used in the
Company's composite products. Under this supply contract, Owens Corning is
required to supply and the Company is required to purchase at least 80% of the
Company's Containment Products group fiberglass requirements through December
31, 1997. The Company has entered into a supply contract with Owens Corning
beginning January 1, 1998, to supply at least 90% of the Company's fiberglass
requirements through December 31, 2000. In addition, this contract contains
certain stabilizing pricing parameters. In addition to Owens Corning, the
Company continues to negotiate with other vendors to ensure a continued supply
of fiberglass to the Company for its production needs.
The Company is a significant purchaser of resin. Resin is available in
adequate supply from many sources. The Company does not depend upon any single
supplier or source. The Company has identified additional resin suppliers during
the last year, which will allow for competitive bidding should a future pricing
or supply imbalance occur. The Company's ability to operate and to grow is
partially dependent upon its ability to obtain an adequate supply of resin and
fiberglass. The Company believes current market conditions, the above actions
and contractual arrangements make significant raw material cost deviations
unlikely during the next 36 months.
For the Company's steel fabrication businesses, the principal materials
used are standard steel shapes, steel plate, fittings, welding gases and paint
and are all currently available in adequate supply from many sources. The
Company does not depend upon any single supplier or source.
PATENTS AND TRADEMARKS
The Company owns numerous United States patents and has a number of
trademarks registered in the United States. Although the Company regards its
patents and trademarks to be of value, it believes that in most instances its
manufacturing and technical knowledge and experience are more important to its
competitive position than are its patents and trademarks. The Company does not
consider its business to be dependent on any one or more of such patents or
trademarks.
INSURANCE
The Company maintains a comprehensive insurance program providing various
types of coverage for its operations including, without limitation, commercial
general liability, commercial automobile liability, workers' compensation and
employment practices liability, directors and officers liability, business
interruption and property and casualty insurance. All policies are subject to
deductibles and other coverage limitations and are at limits and amounts of
insurance that the Company believes are consistent with customary practices and
standards of companies engaged in similar businesses. Although the Company's
management believes that the Company's insurance is adequate, there can be no
assurance that the Company will be able to maintain adequate insurance at rates
which management considers commercially reasonable, nor can there be any
assurance such coverage will be adequate to cover all claims that may arise.
GOVERNMENT REGULATION
The Company is subject to numerous foreign, federal, state and local laws
and regulations relating to the protection of health, safety and the
environment, including the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), the Clean Water Act, the Clean Air Act (including
the 1990
29
<PAGE> 31
Amendments), the Resource Conservation and Recovery Act ("RCRA"), and the
Occupational Safety and Health Act ("OSHA"). Each of these statutes provides for
the imposition of substantial civil and criminal penalties, as well as the
possibility of permit revocation and corrective action orders, for violations of
its requirements. These laws may also provide for retroactive, strict liability,
rendering a party liable for environmental damage without regard to its
negligence or fault. The Company believes that it is in substantial compliance
with such laws. Nevertheless, risks of substantial costs and liabilities are
inherent in certain of its operations, and in certain products produced by the
Company, as they are with other enterprises engaged in similar businesses. Since
its formation, however, the Company's cost of complying with environmental and
health and safety laws and regulations has not been material, but the fact that
such laws or regulations are changed frequently makes predicting the cost or
impact of such laws and regulations on its future operations uncertain.
Modification of existing laws or regulations or the adoption of new laws or
regulations affecting the Company's operations could adversely affect the
Company.
Wastewater
Certain of the Company's facilities discharge process wastewater and storm
water and are subject to the requirements of the federal Clean Water Act and
comparable state statutes. Many of such requirements are embodied in permits
issued to the plants by state and federal environmental agencies. The Company
believes its facilities are generally in compliance with such requirements.
However, both federal and state authorities continue to develop legislation and
regulations to control the discharge of water pollutants. Passage of more
restrictive legislation or regulations could necessitate additional capital
expenditures to reduce discharges of such substances into the environment due to
routine or episodic events.
Air Emissions
Certain of the Company's facilities are subject to the requirements of the
federal Clean Air Act and comparable state statutes. Many of such requirements
are embodied in permits issued to these facilities by governmental agencies. The
Company believes that its operations are in substantial compliance with such
statutes and permits in all states. Amendments to the federal Clean Air Act were
adopted in 1990 (the "1990 Amendments") and contain provisions that may result
in the imposition of certain pollution control requirements with respect to air
emissions from the Company's operations. These amendments direct the EPA to
establish technology-based standards for hazardous air pollutants based on the
use of "maximum achievable control technology" or MACT. By November 15, 1997,
the EPA is scheduled to promulgate MACT standards for the reinforced plastic
composites industry category. These standards may result in tighter emissions
control requirements affecting the Company's fiberglass tank manufacturing
operations. The Company is working with other industry members to assist the EPA
in the development of MACT standards that will be acceptable to the industry.
The 1990 Amendments may also require the Company to obtain new operating permits
for various of its facilities. The Company is currently in the process of
procuring such permits. The adoption of MACT standards applicable to the
Company's operations may result in increased operating or capital expenditures.
At this time, however, the Company does not believe that it will be materially
adversely affected by any emissions control or permit requirements resulting
from the 1990 Amendments.
Superfund
CERCLA, also known as "Superfund," and comparable state laws impose
liability, without regard to fault or the legality of the original act, on
certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substances found at a site. Those statutes also authorize governmental
environmental authorities such as the EPA and, in some instances, third parties
to take action in response to threats to the public health and the environment
and to seek to recover from the responsible classes of persons the costs
incurred in cleaning up the hazardous substances that have been released into
the environment and for damages to natural resources. It is also not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly
30
<PAGE> 32
caused by the hazardous substances released into the environment. In the course
of its ordinary operations, the Company generates waste, some of which may fall
within the statutory definition of a "hazardous substance" and some of which may
have been disposed of at sites that may require clean up under Superfund. The
Company has been named as a potentially responsible party ("PRP") under CERCLA
or similar state Superfund laws at four sites: the Seaboard Chemical Company
site in Jamestown, North Carolina; the Diaz Refinery site in Diaz, Arizona; the
Bay Drum site in Tampa, Florida; and the Western Processing site in Kent,
Washington. In all such cases, however, the Company has entered into consent
orders resolving its liabilities as a de minimis or de micromis party and the
Company believes that any future liabilities related to these four sites will
not have a material adverse affect on the financial condition of the Company.
The Company's Bellingham, Washington plant is located adjacent to a wood
treatment facility that has been proposed for listing on the EPA's National
Priorities List of Superfund sites (the Oeser Company site). In addition,
contamination has been discovered in Little Squalicum Creek, which is in
proximity to the site. Both sites are listed on the Washington State Priorities
List as awaiting remedial action. It is unknown by the Company what the
magnitude of potential cleanup costs may be for such sites. To date, the Company
has not been named a PRP relative to either site. The Company believes that any
liability relating to its historical disposal practices will not have a material
adverse affect on the financial condition of the Company.
Solid and Hazardous Wastes
The Company generates hazardous and non-hazardous solid wastes which are
subject to the requirements of RCRA and comparable state statutes. The Company
believes that it is in general compliance with such requirements. The RCRA
regulations generally impose requirements on the handling of currently generated
hazardous waste, such regulations may also require "corrective action" with
respect to contamination at facilities caused by the past handling of various
substances. For example, spills and releases of materials from facility
operations might require clean up pursuant to such orders or other remedial
statutes. Though no assurances can be given in this regard, the Company does not
believe that any such clean up activities will have a material adverse affect on
its financial condition.
Safety Regulation
The Company is also subject to the requirements of OSHA and comparable
state statutes. The Company believes that it has operated in substantial
compliance with OSHA requirements, including general industry standards, record
keeping and hazard communicational requirements. The nature of the Company's
business may result from time to time in industrial accidents. On September 10,
1996, an employee died in an accident involving a Hoover tank at the Mira Loma,
California facility. In connection with the accident, criminal charges have been
filed against two of the Company's employees. The Company has engaged counsel to
represent the employees and to vigorously defend them against the charges. The
Company has not been charged. Though no assurances can be given regarding this
accident, the Company does not believe that liabilities associated with this
accident will have a material adverse effect on its financial condition. It is
possible that changes in safety and health regulations or a finding of
non-compliance of current regulations could result in additional capital
expenditures or operating expenses.
Present and Future Environmental Capital Expenditures.
Although it is the Company's policy to comply with all applicable
environmental, health and safety laws and regulations, in many instances the
implementing regulations have not been finalized. Even where regulations or
standards have been adopted, they are subject to varying and conflicting
interpretations and implementation. In many cases, compliance with environmental
regulations or standards can only be achieved by capital expenditures, some of
which may be significant. The Company has no current plans for substantial
capital expenditures with respect to compliance with environmental, health and
safety laws. To the extent estimates are available, capital expenditures for
environmental control facilities are expected to be less than $200,000 for each
of fiscal 1998 and 1999.
31
<PAGE> 33
EMPLOYEES
At November 1, 1997, the Company employed 743 persons. Four collective
bargaining agreements cover 245 employees in California, Pennsylvania, Texas and
Washington. All of these agreements expire between December 1997 and October
1998. The Company considers its employee relations to be good.
LEGAL MATTERS
From time to time the Company is a party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. Except as described above, the Company is not aware of any
current or pending litigation or proceedings that could have a material adverse
effect on the Company's operations, financial condition or cash flow.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen T. Harcrow............... 50 Chairman of the Board and Chief Executive Officer
Ed de Boer....................... 54 Chief Operating Officer
R. Kevin Andrews................. 32 Chief Financial Officer
Melford S. Carter, Jr............ 35 Vice President of Business Development
Robert B. Bennett................ 55 Vice President (Containment Products Group)
Lee W. Orr....................... 39 Vice President (Engineered Products Group)
Cathy L. Smith................... 36 General Counsel
Ernest H. Cockrell............... 52 Director
Thomas D. Simmons, Jr............ 53 Director
J. Taft Symonds.................. 58 Director
Stephen M. Youts................. 50 Director
</TABLE>
Mr. Harcrow has been Chairman of the Board and Chief Executive Officer of
the Company since its inception in December 1994. Mr. Harcrow was employed with
Baker Hughes Incorporated ("BHI") for over 20 years until August 1993,
ultimately serving as Senior Vice President of BHI and President of its
EnviroTech operating group. Mr. Harcrow is also a director of Tetra
Technologies, Inc., a specialty inorganic chemical company. Mr. Harcrow has a BA
from the University of Houston.
Mr. de Boer became Chief Operating Officer of the Company on November 1,
1997. Prior to joining the Company as a consultant in January 1997, Mr. de Boer
served as President and Chief Executive Officer of EnviroTech Pumpsystems, Inc.,
a wholly owned subsidiary of the Weir Group of Glasgow, Scotland from September
1994 to February 1996. Mr. de Boer was President of the BHI EnviroTech Pump
Group from 1990 to 1994, and President of BGA International from 1988 to 1990.
Mr. de Boer has a BS in Mechanical Engineering from the Institute of Technology
in the Netherlands and an MBA from The University of British Columbia.
Mr. Andrews is Chief Financial Officer and has been with the Company since
August 1995. Prior to joining the Company, Mr. Andrews served as a Corporate
Development and Financial Manager for Moorco International, a supplier of fluid
measurement and pressure control products, from November 1993 until June 1995,
and the Financial Manager for BHI EnviroTech operating group from 1991 to 1993.
Mr. Andrews received his MBA and BA from The University of Tulsa and is a
certified public accountant.
Mr. Carter is Vice President of Business Development and has been with the
Company since August 1995. Prior to joining the Company, Mr. Carter served as
Corporate Marketing Manager for National-Oilwell, Inc., a supplier of oilfield
drilling equipment and consumables, from June 1994 to
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<PAGE> 34
August 1995, and the Marketing Manager for the BHI EnviroTech operating group
from 1992 until 1994. Mr. Carter earned his MBA in finance and international
business and BS in Mechanical Engineering from The University of Texas at
Austin.
Mr. Bennett is Vice President of the Company and Chief Operating Officer of
the Containment Products Group and has served in that capacity since April 1996.
Prior to his association with the Company, he served as Vice President of the
Asia Pacific/Middle East Business Units of Baker Hughes INTEQ, Singapore from
1992 to 1995. He also served as Vice President, Milpark Drilling Fluids (a
division of BHI) from 1989 to 1992 and was President of Densitech, a drilling
fluids company, prior to its acquisition by BHI. Mr. Bennett has a BS in
Chemistry from Sam Houston State University.
Mr. Orr is Vice President of the Company and Chief Operating Officer of the
Engineered Products Group and has served in that capacity since May 1997. Prior
to joining the Company, Mr. Orr was Vice President and General Manager of
EnviroTech Molded Products from 1995 to 1997; General Manager of EnviroTech
Rubber Engineering from 1993 until 1995; and Vice President -- Finance for BGA
International from 1991 until 1993. Mr. Orr has an MBA from The University of
Texas at Austin and a BBA from Abilene Christian University.
Ms. Smith is General Counsel and has been with the Company since January
1996. Ms. Smith was employed more than six years at BHI from August 1989 to July
1995, most recently as General Counsel of EnviroTech. Prior to joining BHI, Ms.
Smith worked for the law firm of Thelen, Marrin, Johnson & Bridges from June
1986 to August 1989. Ms. Smith received her J.D. from The University of Houston.
Mr. Cockrell has been a director of the Company since its inception in
December 1994. Since 1970, Mr. Cockrell has served in various capacities at
Cockrell Oil Corporation and has been its Chairman and Chief Executive Officer
since 1996. Mr. Cockrell currently serves as a Director of Pennzoil Company and
Southwest Bank of Texas.
Mr. Simmons has been a director of the Company since its inception in
December 1994. Mr. Simmons serves as Chairman of Simmons, Vedder & Co., a real
estate development and investment firm which he cofounded in 1992. Prior to
founding Simmons, Vedder & Co., Mr. Simmons spent more than 20 years with the
Trammel Crow organization, most recently serving as Group Managing Partner.
Mr. Symonds has been a director of the Company since its inception in
December 1994. Since 1978, Mr. Symonds has served as Chairman of Maurice
Pincoffs Company, an international marketing company, and, since 1978, as
President of Symonds Trust Co., Ltd., an investment firm. Mr. Symonds currently
serves as Chairman of Tetra Technologies, Inc., and Director of Plains
Resources, Inc.
Mr. Youts has been a director of the Company since its inception in
December 1994. Since 1992, Mr. Youts has served as Managing Director and
Chairman of Avondale Partners, an investment banking firm.
DIRECTOR COMPENSATION
None of the Company's directors received any compensation for their
services as a director during fiscal 1997. After completion of the Offering, the
Company intends to pay each director who is not an employee of the Company an
annual director's fee of $12,000 plus a fee of $500 for each Board or committee
meeting attended. Members of the Board of Directors who are employees of the
Company do not receive any fees. The Company reimburses all directors for
reasonable expenses incurred in connection with attending meetings of the Board.
Officers serve at the discretion of the Board of Directors and are elected
annually. There are no family relationships between the directors or executive
officers of the Company. No director is selected or serves pursuant to any
special arrangement or contract.
The Board of Directors will be divided into three relatively equal classes
with up to four directors in each class, with each class serving for a term of
three years. At each annual meeting of stockholders, directors will be elected
by the holders of the Common Stock to succeed those directors whose terms are
expiring. See "Description of Capital Stock -- Common Stock."
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<PAGE> 35
Upon completion of the Offering, the Board of Directors intends to
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will make recommendations to the Board concerning salaries and
incentive compensation for the Company's officers and employees. The Audit
Committee will aid management in the establishment and supervision of the
Company's financial controls, evaluate the scope of the annual audit, review
audit results, consult with management and the Company's independent auditors
prior to the presentation of financial statements to shareholders and, as
appropriate, initiate inquiries into aspects of the Company's financial affairs.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
fiscal 1997 to the Company's Chief Executive Officer and each other executive
officer whose compensation for such fiscal year was in excess of $100,000
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
NAME AND FISCAL ----------------------- ALL OTHER(3)
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($)
------------------ ------ --------- ----------- ---------------
<S> <C> <C> <C> <C>
Stephen T. Harcrow.............................
Chief Executive Officer 1997 240,000 60,000 3,837
Robert B. Bennett..............................
Vice President of Containment 1997 150,000 37,500 3,057
Products Group
R. Kevin Andrews...............................
Chief Financial Officer 1997 80,004 28,000 2,275
Melford S. Carter, Jr. ........................
Vice President of Business Development 1997 80,004 28,000 1,798
Cathy L. Smith.................................
General Counsel 1997 80,004 28,000 2,275
</TABLE>
- ---------------
(1) Information with respect to certain perquisites and other personal benefits
has been omitted because the aggregate value of such items does not meet the
minimum amount required for disclosure under SEC regulations.
(2) Bonus amounts were earned during the fiscal year indicated, but paid in the
second quarter of the following fiscal year.
(3) Each of the amounts in this column is a combination of (a) matching
contributions to the executive officer's account in the Company's Retirement
(401K) Plan and (b) premium payments by the Company for life insurance for
the benefit of the executive officer.
OPTION VALUES
The following table sets forth certain information with respect to the
value of the stock options held by the Named Executive Officers at June 28,
1997. No Named Executive Officer exercised any stock options during fiscal 1997.
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL YEAR END(#) OPTIONS($)(1)
---------------------- --------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ---------------------- --------------------
<S> <C> <C>
R. Kevin Andrews....................................... 37,730/0 444,459/0
Melford S. Carter, Jr.................................. 37,730/0 444,459/0
Cathy L. Smith......................................... 37,730/0 444,459/0
</TABLE>
34
<PAGE> 36
- ---------------
(1) Reflects the difference between the exercise price of options and the
assumed initial public offering price.
STOCK OPTION PLANS
1996 Incentive Stock Option Plan
The Company's 1996 Incentive Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors and the stockholders of the Company in
February 1996 and subsequently amended effective September 1997. The purpose of
the 1996 Plan is to promote the long-term growth and profitability of the
Company. The 1996 Plan is intended to grant incentive stock option awards to all
employees of the Company; provided, however, that such awards shall be
non-qualified options if they do not meet the requirements for being considered
as incentive stock options. No further options may be granted pursuant to the
1996 Plan.
The 1996 Plan is administered by the Company's Board of Directors. The
Board selects the employees who will receive awards, determines the terms of the
awards to be granted and interprets and administers the 1996 Plan. The Board of
Directors of the Company may terminate or amend the 1996 Plan without
stockholder approval, except to the extent that stockholder approval is required
by the Internal Revenue Code or other applicable law.
Awards granted under the 1996 Plan are subject to such terms and conditions
as the Board of Directors may establish. If a recipient of an award under the
1996 Plan ceases to be an employee of the Company by reason of death or
disability, all options theretofore granted to such recipient which are
exercisable at the date of such death or disability may be exercised by such
recipient's estate or the recipient at any time within three months after the
date of such death or disability. Except as provided below, if a recipient of an
award ceases to be an employee of the Company by reason of termination with or
without cause, resignation, retirement, or any reason other than death or
disability, all options awarded to such participant shall automatically
terminate, effective as of such cessation of employment, to the extent not
theretofore exercised. Notwithstanding the foregoing, with respect to options
under the 1996 Plan granted to Mr. Andrews, Mr. Carter and Ms. Smith, if Stephen
T. Harcrow does not hold the office at the Company of President, Chief Executive
Officer or a similar office with responsibility and authority comparable to that
of President or Chief Executive Officer, a recipient of an award who ceases to
be an employee of the Company by reason other than death or disability may
exercise all options theretofore granted and not previously exercised within
three months after the date upon which such recipient's employment is
terminated. Pursuant to the 1996 Plan, the payment of an optionee's exercise
price shall be made in cash. In connection with the merger of CSI with and into
the Company in September 1997, the Company issued options to acquire 254,643
shares of its Common Stock under the 1996 Plan in exchange for options to
acquire 1,400 shares of the common stock of CSI. As part of this transaction,
Mr. Bennett will receive options to acquire 72,750 shares of the Common Stock in
exchange for his CSI stock options (which were originally received in April
1996).
1997 Incentive Stock Option Plan
The Company's 1997 Incentive Stock Option Plan (the "1997 Plan") was
adopted by the Board of Directors and the stockholders of the Company in
September 1997. The purpose of the 1997 Plan is to promote the long-term growth
and profitability of the Company. The 1997 Plan is intended to grant incentive
stock option awards to all employees of the Company; provided, however, that
such awards shall be non-qualified options if they do not meet the requirements
for being considered as incentive stock options. Awards of options to acquire up
to an aggregate of 362,873 shares may be granted pursuant to the 1997 Plan.
The 1997 Plan is administered by the Company's Board of Directors. The
Board selects the employees who will receive awards, determines the type and
terms of the awards to be granted and interprets and administers the 1997 Plan.
The Board of Directors of the Company may terminate or amend the 1997 Plan
without stockholder approval, except to the extent that stockholder approval is
required by the Internal Revenue Code or other applicable law.
35
<PAGE> 37
Awards granted under the 1997 Plan are subject to such terms and conditions
as the Board of Directors may establish. If a recipient of an award under the
1997 Plan ceases to be an employee of the Company by reason of termination
without cause, resignation, retirement, death or disability, all options
theretofore granted to such recipient which are exercisable at the date of such
event may be exercised by such recipient or such recipient's estate if
applicable, at any time within three months after the date of such event. If a
recipient of an award ceases to be an employee of the Company by reason of
termination with cause, all options awarded to such participant shall
automatically terminate, effective as of such cessation of employment, to the
extent not theretofore exercised.
In September 1997, the Company awarded options effective as of the date of
this Prospectus to acquire 171,030 shares of the Company's Common Stock to
certain executive officers, including options to acquire 94,742 shares granted
to Mr. de Boer, 47,371 shares granted to Mr. Orr, and 9,639 shares each granted
to Mr. Andrews, Mr. Carter and Ms. Smith. Forty percent of the options granted
to Messrs. de Boer and Orr will vest immediately and the remaining options will
vest in equal amounts on the first, second, third and fourth anniversaries of
the date of grant. The options granted to Mr. Andrews, Mr. Carter and Ms. Smith
will vest in equal amounts on each of the first four anniversaries of the date
of grant. All such options will be exercisable at a price per share equal to the
price to the public reflected on the front cover of this Prospectus and must be
exercised within five years of the date of the grant.
SALARY CONTINUATION AGREEMENT
Mr. Harcrow is a party to a Salary Continuation Agreement entered into with
the Company in September 1997 which provides for certain payments to his wife in
the event of his death or disability. Upon the occurrence of such event, the
Company shall (i) pay to his wife in monthly installments an annual sum equal to
his annual salary for a period of three years thereafter and (ii) provide and
pay for health insurance for Mr. Harcrow's wife and family for such three year
period. The Salary Continuation Agreement will terminate in the event that Mr.
Harcrow terminates his employment with the Company for any reason other than
death or disability. In addition, the Company's obligations under the agreement
will terminate (i) upon the death of Mr. Harcrow's wife or (ii) upon Mr.
Harcrow's death or disability, if his wife is not then living. The Salary
Continuation Agreement will expire on August 31, 1999. On termination of the
agreement, the benefits described above shall remain in force and effect
thereafter; however, the three-year period for benefits will provide for
benefits only from the date of disability or death of Mr. Harcrow until
September 1, 2002.
CONFIDENTIALITY AND NON-COMPETITION AGREEMENTS
Each of Mr. Andrews, Mr. Carter and Ms. Smith has entered into a
Confidentiality and Non-Competition Agreement with the Company. Each agreement
contains a covenant-not-to-compete with the Company during such employee's
period of employment with the Company and for a period of one year following
termination of employment.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, the Company's directors will not be liable for
monetary damages for breach of a director's duty of care to the Company and its
stockholders. This provision does not eliminate a director's duty of care, and
in appropriate circumstances, equitable remedies such as an injunction or other
forms of non-monetary relief will remain available under Delaware law. Each
director continues to remain liable for a breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of the law, for improper
distributions to stockholders and for any transaction from which the director
derives an improper personal benefit. This provision also does not affect a
director's liability under other laws, such as the federal securities laws.
The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by the Delaware General Corporation
Law. Prior to consummation of this Offering, the Company will enter into
indemnification agreements with each of its directors that provide for
indemnification
36
<PAGE> 38
and expense advancement to the fullest extent permitted under the Delaware
General Corporation Law. Such indemnification agreements include related
provisions intended to facilitate the indemnitee's receipt of such benefits,
including certain provisions applicable to constituent corporations in the event
of certain mergers or acquisitions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
J. Taft Symonds, a member of the Company's Board of Directors, is chairman
of the board of Tetra Technologies, Inc. ("Tetra"). Stephen T. Harcrow, Chairman
and Chief Executive Officer of the Company, serves on the Board of Directors and
Compensation Committee of Tetra. Since the Company does not presently have a
compensation committee, the entire Board of Directors of the Company is
responsible for review of executive compensation.
CERTAIN TRANSACTIONS
TETRA TECHNOLOGIES, INC.
During the fiscal year ended June 28, 1997, the Company purchased
approximately $82,000 of calcium carbonate ("brine") from Tetra, a specialty
inorganic chemical company. J. Taft Symonds, a director of the Company, is the
Chairman of the Board of Tetra, and Stephen T. Harcrow, the Company's Chairman
and Chief Executive Officer, is also on the Board of Directors of Tetra. All of
the brine purchases were made on a spot basis without the benefit of a contract.
In addition, the Company's is currently bidding on several jobs with Tetra,
including a scrubber and multiple tank project. The combined pending projects
are expected to be awarded in November 1997, with construction to begin in
Spring 1998, and if such projects were awarded to the Company, it would receive
payments from Tetra totaling approximately $320,000.
REDEMPTION OF SERIES A PREFERRED STOCK
A portion of the proceeds from this Offering will be used to redeem all of
the currently issued and outstanding Series A Preferred Stock of the Company.
Approximately 75% of the Series A Preferred Stock is currently beneficially
owned by the Company's directors or their affiliates. Upon redemption of the
Series A Preferred Stock, each of Messrs. Harcrow, Cockrell, Symonds and Youts
(including affiliates) will receive approximately $235,000 (including accrued
and unpaid dividends through the redemption date), and Mr. Simmons (including
affiliates) will receive approximately $117,500 (including accrued and unpaid
dividends through the redemption date). In addition, National Investment
Management, Inc., a corporation wholly-owned by Mr. Richard D. Robins, a
beneficial owner of in excess of 5% of the Common Stock, will receive
approximately $235,000 (including accrued and unpaid dividends through the
redemption date) upon such redemption. See "Use of Proceeds."
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<PAGE> 39
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby, by: (i) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers and (iv) all directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
PERCENT(2)
----------------------------
PRIOR TO AFTER
NAME OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
(i) Directors
Stephen T. Harcrow(3)(4)....................... 411,925 18.9% 9.6%
Ernest H. Cockrell(5).......................... 343,000 15.7% 8.0%
Cockrell Oil Corporation
1600 Smith, Suite 4600
Houston, Texas 77002
Thomas D. Simmons, Jr.(6)...................... 133,770 6.1% 3.1%
Simmons Vedder Investment Partnership
1800 West Loop South, Suite 1575
Houston, Texas 77027
J. Taft Symonds(7)............................. 343,000 15.7% 8.0%
Symonds Trust Co., Ltd.
2040 North Loop West, Suite 200
Houston, Texas 77018
Stephen M. Youts(8)............................ 343,000 15.7% 8.0%
Avondale Partners, Inc.
Two Post Oak Central
1980 Post Oak Blvd., Suite 1910
Houston, Texas 77056
(ii) Non-Directors, Named Executive Officers
Robert B. Bennett(4)(9)........................ 72,750 3.2% 1.6%
R. Kevin Andrews(4)(10)........................ 37,730 1.7% *
Melford S. Carter, Jr.(4)(10).................. 37,730 1.7% *
Cathy L. Smith(4)(10).......................... 37,730 1.7% *
(iii) Non-Directors, 5% Beneficial Owners
Richard D. Robins(11).......................... 343,000 15.7% 8.0%
National Investment Management, Inc.
2601 Airport Drive, Suite 210
Torrance, CA 90505
Wolfram Vedder(12)............................. 171,500 7.8% 4.0%
Deidre L. Vedder(12)
1800 West Loop South
Suite 1575
Houston, TX 77027
(iv) All Executive Officers and Directors as a Group
(9 persons).................................. 1,760,635 74.3% 39.4%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers.
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<PAGE> 40
(2) Except for the percentages of certain parties that are based on presently
exercisable options which are indicated in the following footnotes to the
table, the percentages indicated are based on 2,184,910 shares of Common
Stock issued and outstanding on October 31, 1997 and 4,284,910 shares
issued and outstanding subsequent to the completion of the Offering. In
the case of parties holding presently exercisable options, the percentage
ownership is calculated on the assumption that the shares purchasable
within the next 60 days underlying such options are outstanding.
(3) Mr. Harcrow is also an executive officer of the Company. Includes 36,015
shares owned by the Harcrow Family Partnership, L.P., the general partner
of which is a corporation of which Mr. Harcrow is the President.
(4) All officers of the Company have the following address: 1360 Post Oak
Blvd., Suite 2470, Houston, Texas 77056.
(5) Includes 343,000 shares owned by Cockrell Investment Partners, L.P., a
Texas limited partnership, of which Mr. Cockrell is the Chairman of Texas
Production Company, its general partner.
(6) Includes 58,310 shares owned by Simmons Family Trust of which Mr. Simmons
is Co-Trustee, and 18,865 shares owned by The Estate of Candace U.
Simmons, of which Mr. Simmons is the independent executor.
(7) Includes 343,000 shares owned by Symonds Trust Co., Ltd., a Texas
corporation, of which Mr. Symonds is the President.
(8) Includes 343,000 shares owned by Avondale CSI Holdings LP, a Delaware
limited partnership; Mr. Youts is the President of Avondale Partners,
Inc., its general partner.
(9) Includes 72,750 shares currently issuable upon the exercise of options.
(10) Includes 37,730 shares of Common Stock currently issuable upon the
exercise of options.
(11) Includes 343,000 shares owned by National Investment Management, Inc., a
California corporation of which Mr. Robins is the President and sole
stockholder.
(12) Although each disclaims beneficial ownership of the other's stock,
includes 85,750 shares owned directly by Mr. Wolfram Vedder and 85,750
shares owned directly by Mrs. Deidre L. Vedder, his wife.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $.01 per share, 1,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock") and 4,800 shares of Series A
Preferred Stock, par value $.01 per share. The discussions of the Common Stock
and Preferred Stock here and elsewhere in this Prospectus are qualified in their
entirety by reference to: (i) the Certificate of Incorporation of the Company,
as amended, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and (ii) the applicable Delaware
law.
The Company has issued and has outstanding 4,800 shares of its Series A
Preferred Stock, par value $.01 per share. All of such shares are issued to the
founders of the Company, including the Company's current directors who
collectively own approximately 75% of the issued and outstanding shares of
Series A Preferred Stock. The Company intends to use a portion of the proceeds
from this Offering to redeem all of the issued and outstanding shares of the
Series A Preferred Stock for a total aggregate purchase price of approximately
$1,410,000 (including $210,000 for accrued and unpaid dividends through
September 30, 1997).
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to cumulative voting
rights. The Board of Directors is classified into three classes of directors,
with each class of directors consisting of a number of directors as equal in
number as possible, with the term of each class of directors expiring on a
staggered basis. See "Management -- Board of Directors." The classification of
the
39
<PAGE> 41
Board of Directors may make it more difficult to change the composition of the
Board of Directors and thereby may discourage or make more difficult an attempt
by a person or group to obtain control of the Company.
Subject to the terms of any outstanding series of Preferred Stock, the
holders of Common Stock are entitled to dividends in such amounts and at such
times as may be declared by the Company's board of directors out of funds
legally available therefor. The Common Stock is not subject to any calls or
assessments. Upon liquidation or dissolution, holders of Common Stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
Preferred Stock. Holders of Common Stock have no redemption, conversion or
preemptive rights.
PREFERRED STOCK
Shares of Preferred Stock may be issued without stockholder approval. The
board of directors is authorized to issue up to 1,000,000 shares of Preferred
Stock in one or more series and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including, without
limitation (i) the number of shares and the name of the series, (ii) the rate
and times at which dividends will be payable on the shares of the series, and
the status of such dividends as cumulative or non-cumulative and as
participating or non-participating, (iii) the prices, times and terms, if any,
at or upon which shares of the series will be subject to redemption, (iv) the
rights, if any, to convert such shares into, or to exchange such shares for,
shares of any other class of stock of the Company, (v) the terms of the sinking
fund or redemption or purchase account, if any, to be provided for shares of the
series, (vi) the rights and preferences, if any, of shares of the series upon
any liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Company, (vii) the limitations, if any,
applicable while the series is outstanding, on the payment of dividends or
making of distributions on, or the acquisition of, the Common Stock or any other
class of stock which does not rank senior to the shares of the series. The
Company has no current plans for issuance of any shares of Preferred Stock. Any
issuance of shares of Preferred Stock may adversely affect the voting powers or
rights of the holders of Common Stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers. Section 203 prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq National
Market, from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that the stockholder
became an interested stockholder, with three exceptions: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon the consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time that the transaction commenced, excluding for purposes
of determining the number of shares outstanding the shares owned by persons who
are both directors and officers of the corporation and the shares owned by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to the date
that the stockholder became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not pursuant to written consent,
by the affirmative vote of at least 66 2/3% of the outstanding voting stock of
the corporation, excluding voting stock owned by the interested stockholder. The
restrictions in Section 203 also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation (for
example, a proposed tender or exchange offer for 50% or more of the
corporation's outstanding voting stock) which is approved or not opposed by a
majority of the corporation's directors then in office and which is with or by a
person who had not been an interested stockholder during the preceding three
years or who became an interested stockholder with the approval of the
corporation's board of directors.
Section 203 defines a "business combination" as, in general: (i) any merger
or consolidation involving the corporation and the interested stockholder; (ii)
any sale lease, transfer, pledge or other disposition to the
40
<PAGE> 42
interested stockholder of 10% or more of the corporation's assets; (iii) subject
to certain exceptions, any transaction which results in the issuance or transfer
by the corporation to the interested stockholder of any stock of the
corporation; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series, or of
securities convertible into the stock of any class or series, which is
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as, in general, any person or
entity who or which directly or indirectly beneficially owns 15% or more of the
outstanding voting stock of the corporation and any person or entity affiliated
or associated with or controlling or controlled by that person or entity.
The provisions of Section 203 could operate to delay or prevent the removal
of incumbent directors of the Company or a change in control of the Company.
They also could discourage, impede or prevent a merger, tender offer or proxy
contest involving the Company, even if such an event would be favorable to the
interests of the Company's stockholders generally. By adopting an amendment to
the Company's certificate of incorporation or by-laws, the Company's
stockholders may elect not to have Section 203 apply to the Company effective 12
months after the adoption of the amendment. Neither the Company's Certificate of
Incorporation nor its By-Laws currently exclude the Company from the
restrictions imposed by Section 203.
TRANSFER AGENT
The Transfer Agent for the Common Stock is ChaseMellon Shareholder
Services, L.L.C., Dallas, Texas. Its telephone number is (800)635-9270.
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<PAGE> 43
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of Common Stock. Aside
from the 2,100,000 shares sold in this Offering, only a limited number of shares
will be available for sale immediately following completion of this Offering
because of certain contractual and legal restrictions on resale (as described
below). Accordingly, sales of substantial amounts of Common Stock of the Company
in the public market after these restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon the completion of this Offering, the Company will have outstanding an
aggregate of 4,284,910 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding stock options
and warrants. Of these outstanding shares of Common Stock, the 2,100,000 shares
sold in this Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by an "affiliate" of the
Company as that term is defined in Rule 144 under the Securities Act.
The remaining 2,184,910 shares of Common Stock held by existing
stockholders (the "Restricted Shares") will be "restricted securities" as that
term is defined in Rule 144 under the Securities Act. The Restricted Shares may
be sold in the public market only if they are registered under the Securities
Act or if they qualify for an exemption from registration under Rule 144 under
the Securities Act (which is summarized below). Sales of the Restricted Shares
in the public market, or the availability of the Restricted Shares for sale,
could adversely affect the market price of the Common Stock.
Certain stockholders of the Company, including all executive officers and
directors and the individuals and entities named in the table under "Principal
Stockholders," who will beneficially own in the aggregate 2,184,910 Restricted
Shares after the Offering, have entered into "lock-up" agreements with the
Underwriters, represented by Morgan Keegan & Company, Inc. and Rauscher Pierce
Refsnes, Inc. (the "Representatives"), pursuant to which they have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of, directly or indirectly, any of their Restricted Shares, or any shares of
Common Stock that they may acquire through the exercise of stock options, for a
period of 180 days from the date of this Prospectus without the prior written
consent of the Representatives. As a result of these contractual restrictions,
shares of Common Stock subject to the lock-up agreements are restricted from
sale until the lock-up agreements expire, notwithstanding that they otherwise
may be eligible for sale under Rule 144. Upon the expiration of the lock-up
agreements, shares will be eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) who has beneficially owned Restricted Shares for at least one
year (including the holding period of any prior beneficial owner except an
affiliate of the Company) would be entitled to sell during any three-month
period a number of Restricted Shares that does not exceed the greater of (i) 1%
of the number of shares of Common Stock then outstanding or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of the required notice of sale on Form 144. Sales of
Restricted Shares under Rule 144 are also subject to compliance with certain
conditions relating to the manner of sale, the requirement to file notice of the
sale with the Securities and Exchange Commission on Form 144 and the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the
Restricted Shares proposed to be sold for at least two years (including the
holding period of any prior owner except an affiliate), may sell the Restricted
Shares under Rule 144 without regard to any volume limitation or other
conditions or requirements of the rule. Accordingly, unless otherwise
restricted, holders of Restricted Shares who are eligible to use Rule 144(k) may
sell their shares immediately upon completion of this Offering.
As of October 31, 1997, there were outstanding options under the 1996 Stock
Plan to purchase 367,833 shares of Common Stock, all of which are presently
exercisable. Of such options, options for 185,940 shares were held by officers
and directors of the Company subject to the lock-up agreements described above.
With respect to the 1997 Plan, effective as of the date of this Prospectus,
options to acquire 171,030 shares of
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<PAGE> 44
Common Stock have been awarded to certain executive officers of the Company. Of
these options, 56,845 will be immediately exercisable upon completion of the
Offering. Shortly after completion of this Offering, the Company intends to file
registration statements on Form S-8 to register the 367,833 shares of Common
Stock issued or issuable under the 1996 Plan and the 362,873 shares of Common
Stock issued or issuable under the 1997 Plan. Holders of all of the options
granted under the 1997 Plan prior to this Offering will be subject to lock-up
agreements with the Underwriters with respect to the shares of Common Stock
obtainable thereunder. These registration statements will become effective
automatically upon filing. Accordingly, shares registered under these
registration statements will be available for sale in the public market, subject
to the volume limitations under Rule 144 in the case of sales by affiliates of
the Company, except to the extent that the shares are subject to contractual
restrictions on sale under the lock-up agreements described above.
UNDERWRITING
The Underwriters named below, represented by Morgan Keegan & Company, Inc.
and Rauscher Pierce Refsnes, Inc. (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
Morgan Keegan & Company, Inc................................
Rauscher Pierce Refsnes, Inc................................
---------
Total..................................................... 2,100,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased. The Company has been advised that the Underwriters propose to offer
the Common Stock to the public at the initial public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share to other dealers. The initial public offering price and
the concessions and discount to dealers may be changed by the Underwriters after
the public offering.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase on a pro rata basis up to
315,000 additional shares of Common Stock from the Company at the initial public
offering price, less underwriting discounts, as shown on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby.
The Company has agreed to indemnify the Underwriters or to contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Company, the Company's executive officers and directors, and certain of
the Company's shareholders (in the aggregate, representing 53.6% of the shares
outstanding after the Offering assuming the Underwriters' over-allotment option
is not exercised) have agreed that, for a period of 180 days from the date of
this Prospectus, they will not, directly or indirectly, offer, sell, offer to
sell, contract to sell, grant any option to purchase, or otherwise dispose (or
announce any offer, sale, grant of any option to purchase, or other
43
<PAGE> 45
disposition) of any additional shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock,
without the prior written consent of the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the shares of
Common Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company and the Representatives. Among the
factors considered in making such determination will be the prevailing market
conditions, the Company's financial and operating history and conditions, the
Company's prospects and the prospects for its industry in general, the
management of the Company, and the market prices of securities for companies in
business related to that of the Company.
The Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "DNLI." The Company has been advised by the
Representatives that each of the Representatives presently intends to make a
market in the Common Stock offered hereby; the Representatives are not obligated
to do so, however, and any market making activity may be discontinued at any
time. There can be no assurance that an active public market for the Common
Stock will develop and continue after the Offering.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Representatives may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with the Offering that they are committed to purchase from the
Company, and in such case the Representatives may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representatives, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of other Underwriters, the selling concession with
respect to Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. The imposition of a penalty bid might also affect the price of
the Common Stock to the extent that it could discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
At the request of the Company, the Underwriters have reserved up to 109,250
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Hutcheson & Grundy, L.L.P., Houston, Texas. Certain legal matters
will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Houston,
Texas.
44
<PAGE> 46
EXPERTS
The consolidated financial statements and schedule of the Company as of
June 29, 1996 and June 28, 1997 and the period from December 19, 1994 (date of
inception) to July 1, 1995, the year ended June 29, 1996, and the year ended
June 28, 1997, the financial statements of Hoover Containment Systems, Inc., as
of and for the year ended December 31, 1994 and the period from January 1, 1995
to October 27, 1995, the financial statements of Ershigs, Inc., as of December
31, 1996 and for the period from October 1, 1994 to December 31, 1994 and for
the years ended December 31, 1995 and 1996 and the period from January 1, 1997
to February 27, 1997, the financial statements of GL & V/LaValley Construction,
Inc., as of August 16, 1997 and the period from August 23, 1996 to August 16,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of SEFCO, as of December 31, 1995 and for each of
two years in the period ended December 31, 1995 included in this Prospectus and
Registration Statement have been audited by Gaynor and Fawcett, Inc.,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of SEFCO, as of and for the year ended December
31, 1996 included in this Prospectus and Registration Statement have been
audited by Leming, Schallner & Co., independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus forms part of a Registration Statement on Form S-1 (the
"Registration Statement") which the Company has filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act. In accordance
with the Commission's rules and regulations, this Prospectus omits certain of
the information in the Registration Statement and all of its exhibits, and
reference is made to the Registration Statement and its exhibits for further
information relating to the Company and the Common Stock offered hereby. Copies
of the Registration Statement and its exhibits may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of this material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site on the World Wide Web, and copies of the
Registration Statement and its exhibits may be accessed at this Web site
(http://www.sec.gov). Statements in this Prospectus concerning any provisions of
any contract or document are not necessarily complete, and each such statement
is qualified in its entirety by reference to the copy of the relevant contract
or document filed as an exhibit to the Registration Statement.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent public
accountants.
45
<PAGE> 47
DENALI INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DENALI INCORPORATED AND SUBSIDIARIES
Pro Forma Condensed Consolidated Financial Statements
(Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of
September 27, 1997.................................... F-3
Pro Forma Condensed Consolidated Statement of
Operations:
Year ended June 28, 1997............................. F-4
Quarter ended September 27, 1997..................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.................................. F-6
Consolidated Financial Statements:
Report of Independent Auditors......................... F-8
Consolidated Balance Sheets as of June 29, 1996 and
June 28, 1997......................................... F-9
Consolidated Statements of Operations for the Period
from December 19, 1994 (Date of Inception) to July 1,
1995 and the Years Ended June 29, 1996 and June 28,
1997.................................................. F-10
Consolidated Statements of Stockholders' Equity
(Deficit) for the Period from December 19, 1994 (Date
of Inception) to July 1, 1995 and the Years Ended June
29, 1996 and June 28, 1997............................ F-11
Consolidated Statements of Cash Flows for the Period
from December 19, 1994 (Date of Inception) to July 1,
1995 and the Years Ended June 29, 1996 and June 28,
1997.................................................. F-12
Notes to Consolidated Financial Statements............. F-13
Consolidated Balance Sheet as of September 27, 1997
(Unaudited)........................................... F-28
Consolidated Statements of Operations for the
three-month periods ended September 28, 1996 and
September 27, 1997 (Unaudited)........................ F-29
Consolidated Statements of Cash Flows for the
three-month periods ended September 28, 1996 and
September 27, 1997 (Unaudited)........................ F-30
Notes to Unaudited Consolidated Financial Statements... F-31
HOOVER CONTAINMENT SYSTEMS, INC.
Report of Independent Auditors............................ F-34
Balance Sheet as of December 31, 1994..................... F-35
Statements of Operations for the Year Ended December 31,
1994 and the Period from January 1, 1995 to October 27,
1995................................................... F-36
Statements of Stockholders' Equity for the Year Ended
December 31, 1994 and the Period from January 1, 1995
to October 27, 1995.................................... F-37
Statements of Cash Flows for the Year Ended December 31,
1994 and the Period from January 1, 1995 to October 27,
1995................................................... F-38
Notes to Financial Statements............................. F-39
ERSHIGS, INC.
Report of Independent Auditors............................ F-44
Balance Sheet as of December 31, 1996..................... F-45
Statements of Operations for the Period from October 1,
1994 to December 31, 1994 and for the Years Ended
December 31, 1995 and 1996 and the Period from January
1, 1997 to February 27, 1997........................... F-46
Statements of Stockholders' Equity for the Period from
October 1, 1994 to December 31, 1994 and for the Years
Ended December 31, 1995 and 1996 and the Period from
January 1, 1997 to February 27, 1997................... F-47
Statements of Cash Flows for the Period from October 1,
1994 to December 31, 1994 and for the Years Ended
December 31, 1995 and 1996 and the Period from January
1, 1997 to February 27, 1997........................... F-48
Notes to Financial Statements............................. F-49
</TABLE>
F-1
<PAGE> 48
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GL & V/LA VALLEY CONSTRUCTION, INC.
Report of Independent Auditors............................ F-54
Balance Sheet as of August 16, 1997....................... F-55
Statement of Operations for the Period from August 23,
1996 (Date of Acquisition) to August 16, 1997.......... F-56
Statement of Stockholders' Equity for the Period from
August 23, 1996 (Date of Acquisition) to August 16,
1997................................................... F-57
Statement of Cash Flow for the Period from August 23, 1996
(Date of Acquisition) to August 16, 1997............... F-58
Notes to Financial Statements............................. F-59
SEFCO, INC.
Report of Independent Auditors............................ F-64
Balance Sheets as of December 31, 1995, and 1996.......... F-65
Statements of Operations for the Years Ended December
1994, 1995, and 1996................................... F-66
Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995, and 1996...................... F-67
Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996................................... F-68
Notes to the Financial Statements......................... F-69
Balance Sheet as of September 30, 1997 (Unaudited)........ F-73
Statement of Operations for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited)................ F-74
Statement of Cash Flow for the Nine Months Ended September
30, 1996 and 1997 (Unaudited).......................... F-75
Notes to Unaudited Financial Statements................... F-76
</TABLE>
F-2
<PAGE> 49
PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DENALI INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
DENALI
INCORPORATED LAVALLEY(1) SEFCO(1) ADJUSTMENTS PRO FORMA
------------ ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................... $ 450 $ 47 $ 611 $ (658)(a) $ 450
Accounts receivable, net................. 16,186 546 906 -- 17,638
Cost and estimated earnings in excess of
billings............................... -- 855 160 -- 1,015
Inventories.............................. 7,644 148 14 -- 7,806
Advances to parent....................... -- 1,357 -- (1,357)(b) --
Prepaid expenses......................... 1,426 -- 34 -- 1,460
Deferred tax assets...................... 934 42 -- (42)(c) 934
------- ------ ------ ------- -------
Total current assets.............. 26,640 2,995 1,725 (2,057) 29,303
Property, plant, and equipment, net........ 7,631 1,552 2,220 628(c) 12,031
Assets held for sale....................... 1,485 -- -- -- 1,485
Notes receivable........................... 900 -- -- -- 900
Goodwill, net.............................. 1,610 -- -- 3,967(b) 5,577
Deferred tax assets........................ 1,953 -- -- -- 1,953
Other assets............................... 1,070 -- 1 -- 1,071
------- ------ ------ ------- -------
Total assets...................... $41,289 $4,547 $3,946 $ 2,538 $52,320
======= ====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... $12,141 $ 424 $ 355 $ -- $12,920
Accrued liabilities...................... 4,654 166 256 100(c) 5,176
Billings in excess of costs and estimated
earnings............................... -- -- 109 -- 109
Income tax payable....................... 313 -- -- -- 313
Deferred tax liability................... -- -- 147 18(c) 165
Notes payable............................ 1,218 1,643 -- (1,643)(b) 1,218
Current maturities of long-term debt..... 1,403 -- -- 291(a) 1,694
------- ------ ------ ------- -------
Total current liabilities......... 19,729 2,233 867 (1,234) 21,595
Long-term debt, less current maturities.... 19,607 -- -- 8,709(a) 28,316
Deferred tax liability..................... -- -- 218 238(c) 456
Other long-term liabilities................ 977 -- -- -- 977
Series A redeemable Preferred Stock........ 1,200 -- -- -- 1,200
Stockholders' equity (deficit)
Common stock............................. 22 300 1 (301)(b) 22
Additional paid-in capital............... 2,609 1912 46 (1958)(b) 2,609
Retained earnings (deficit).............. (2,855) 102 2,814 (2,916)(b) (2,855)
------- ------ ------ ------- -------
Total stockholders' equity
(deficit)....................... (224) 2,314 2,861 (5,175) (224)
------- ------ ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)....................... $41,289 $4,547 $3,946 $ 2,538 $52,320
======= ====== ====== ======= =======
</TABLE>
- ---------------
(1) Unaudited balance sheet as of September 30, 1997.
See notes to unaudited pro forma condensed consolidated financial statements
F-3
<PAGE> 50
DENALI INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 28, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------
DENALI
INCORPORATED ERSHIGS(1) LAVALLEY(2) SEFCO(3) ADJUSTMENTS PRO FORMA
------------ ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $71,101 $ 15,918 $7,877 $10,032 $ -- $104,928
Cost of sales........................ 57,268 14,889 6,353 7,602 (162)(d)
(146)(e)
192(f)
(206)(g) 85,790
------- -------- ------ ------- ----- --------
Gross profit......................... 13,833 1,029 1,524 2,430 322 19,138
Selling, general and administrative
expenses........................... 11,874 3,184 1,157 1,485 162(d)
(17)(e)
(480)(h)
90(i) 17,455
------- -------- ------ ------- ----- --------
Operating income (loss).............. 1,959 (2,155) 367 945 567 1,683
Interest expense..................... 2,058 329 174 -- 716(j) 3,277
Interest income...................... (111) -- -- (45) 45 (111)
Other (income) expense, net.......... (598) 47 23 (16) -- (544)
------- -------- ------ ------- ----- --------
Income (loss) before income taxes.... 610 (2,531) 170 1,006 (194) (939)
Provision (benefit) for income
taxes.............................. 293 (962) 79 362 (148)(k) (376)
------- -------- ------ ------- ----- --------
Net income (loss).................... $ 317 $ (1,569) $ 91 $ 644 $ (46) $ (563)
Dividends on Series A Preferred
Stock.............................. (120) (120)
------- --------
Net income (loss) attributable to
common stock....................... 197 (683)
======= ========
Net income (loss) per common share... $ 0.09 $ (0.31)
======= ========
Number of shares used to compute net
income (loss) per share............ 2,198 2,198
======= ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements
- ---------------
(1) Reflects results of Ershigs' operations for the period from July 1, 1996 to
February 27, 1997 (unaudited), the date of its acquisition by the Company.
Ershigs' results of operations subsequent to February 27, 1997 are reflected
in the Denali Incorporated historical results.
(2) Reflects results of LaValley's operations for the period from August 23,
1996 to August 16, 1997.
(3) Reflects results of SEFCO's operations for the period from July 1, 1996 to
June 28, 1997 (unaudited).
F-4
<PAGE> 51
DENALI INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
QUARTER ENDED SEPTEMBER 27, 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
DENALI
INCORPORATED LAVALLEY(1) SEFCO(1) ADJUSTMENTS PRO FORMA
------------ ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $21,979 $1,974 $ 2,365 $ -- $ 26,318
Cost of sales........................................ 17,149 1,621 1,485 48(f)
(50)(g) 20,253
------- ------ ------- ------ --------
Gross profit......................................... 4,830 353 880 2 6,065
Selling, general and administrative expenses......... 3,825 303 550 (184)(h)
24(i) 4,518
Non-recurring compensation expense................... 2,312 -- -- -- 2,312
------- ------ ------- ------ --------
Operating income (loss).............................. (1,307) 50 330 162 (765)
Interest expense..................................... 607 34 -- 168(j) 809
Interest income...................................... (20) -- (17) 17 (20)
Other (income) expense, net.......................... (142) (91) -- -- (233)
------- ------ ------- ------ --------
Income (loss) before income taxes.................... (1,752) 107 347 (23) (1,321)
Provision (benefit) for income taxes................. 213 41 261 (119)(k) 396
------- ------ ------- ------ --------
Net income (loss).................................... $(1,965) $ 66 $ 86 $ (96) $ (1,717)
======= ====== ======= ====== ========
Dividends on Series A Preferred Stock................ (30) (30)
Net loss attributable to Common Stock................ $(1,995) $ (1,747)
======= ========
Net loss per common share............................ $ (0.87) $ (0.76)
======= ========
Number of shares used to compute net loss per
share.............................................. 2,288 2,288
======= ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements
- ---------------
(1) Reflects results for LaValley and SEFCO for the quarter ended September 30,
1997 (unaudited).
F-5
<PAGE> 52
DENALI INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on adjustments to
the historical consolidated financial statements of Denali Incorporated (the
"Company") to give effect to the acquisitions described in Note 3 (the
"Acquisitions"). The pro forma condensed consolidated balance sheet assumes the
Acquisitions were closed on June 28, 1997. The pro forma condensed consolidated
statement of operations assumes all Acquisitions described in Note 3 were
consummated as of the beginning of the period presented. The pro forma condensed
consolidated statements of operations are not necessarily indicative of results
that would have occurred had the Acquisitions been consummated as of the
beginning of the period presented or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Financial Statements should be read in conjunction
with the historical consolidated financial statements of the Company, the
historical financial statements of the entities acquired in the Acquisitions and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
(2) EARNINGS PER SHARE
Pro forma earnings per share were computed by dividing net income (or loss)
applicable to common stock by the weighted average number of shares of common
stock, common stock equivalents outstanding during the period and the dilutive
effect of common stock equivalents issued within one year prior to the Offering.
The number of shares of common stock and common stock equivalents has been
retroactively adjusted for the 1715-for-1 stock split. Common stock equivalents
consisted of the number of shares issuable on exercise of the outstanding stock
options less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of the
common stock during the period. The dilutive effect of common stock issued
within one year prior to the Offering for the periods prior to issuance was
determined in the same manner except that the Offering price of $14 per share
was used for the repurchase price.
(3) ACQUISITIONS
The acquisitions by the Company have been accounted for as purchases and,
accordingly, the results of operations of the acquired companies have been
included in the consolidated results of operations of the Company from the date
of acquisition.
In December 1994, the Company acquired certain assets and assumed certain
liabilities of the fiberglass composite underground storage tank business of
Owens Corning, including five manufacturing facilities. The purchase price
totaled $16.6 million, consisting of $5.6 million in cash, $9.3 million in notes
payable and approximately $1.7 million in acquisition costs.
On October 27, 1995, the Company acquired certain assets and assumed
certain liabilities of Hoover Containment Systems, Inc., a manufacturer of steel
rectangular ASTs. The purchase price totaled $5.5 million consisting of $5.4
million in cash and acquisition costs of approximately $100,000.
On February 28, 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered fiberglass reinforced plastic ("FRP"). The $6.1
million purchase price consisted of $5.0 million cash, $1.0 million in a note
payable and acquisition costs of approximately $80,000.
In October 1997, the Company acquired SEFCO, Inc. ("SEFCO") for
approximately $4.9 million in net cash and acquisition costs of approximately
$100,000. SEFCO is a manufacturer of engineered field-erected aboveground steel
tanks.
F-6
<PAGE> 53
DENALI INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1997, the Company acquired LaValley Construction, Inc.
("LaValley") for $3.9 million in cash and acquisition costs of approximately
$100,000. LaValley manufactures engineered FRP products.
A summary of the fair value of assets acquired and liabilities assumed and
determination of goodwill (or negative goodwill allocated to non-current assets)
is as follows (in thousands):
<TABLE>
<CAPTION>
ERSHIGS LAVALLEY SEFCO
------- -------- -------
<S> <C> <C> <C>
Assets acquired........................................ $11,215 $3,449 $ 3,615
Liabilities assumed.................................... (3,848) (822) (1,209)
------- ------ -------
Value of net assets acquired........................... 7,367 2,627 2,406
Purchase price......................................... 6,080 4,000 5,000
------- ------ -------
Excess purchase price (goodwill or negative
goodwill)............................................ $(1,287) $1,373 $ 2,594
======= ====== =======
</TABLE>
(4) ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated balance sheet of the Company to give effect to the
acquisitions of LaValley and SEFCO described in Note 3 as if they had occurred
as of June 28, 1997 and to the historical condensed statements of operations as
if all the acquisitions described in Note 3 were consummated as of the beginning
of the period presented:
(a) To reflect the acquisitions of LaValley and SEFCO and the
borrowings under the Company's senior credit agreement to fund those
acquisitions, net of cash acquired at SEFCO.
(b) To reflect, in connection with the acquisition of LaValley and
SEFCO, the purchase price allocation and the elimination of assets not
acquired or liabilities not assumed by the Company.
(c) To reflect, in connection with the acquisition of LaValley and
SEFCO, the estimated fair market value of assets purchased and liabilities
assumed and the related deferred taxes.
(d) To reclass certain expenses to conform with the presentation used
by the Company.
(e) To reflect lower depreciation expense resulting from the
write-down of fixed assets as part of purchase accounting for an
acquisition.
(f) To reflect additional depreciation expense from the purchase
accounting step-up of the acquisition of LaValley and the purchase of fixed
assets from the shareholder of SEFCO as a condition of the purchase that
were previously leased by SEFCO from the shareholder (see (g)).
(g) To reduce expenses for certain lease expenses incurred by seller
for assets to be purchased by the Company (see (f)).
(h) To reduce expenses including the difference between compensation
and benefits of certain sellers prior to consummation of the acquisitions
and their compensation and benefits following the acquisitions as
stipulated in the respective employment agreements with the Company.
(i) To reflect amortization of goodwill related to the purchases of
LaValley and SEFCO, which is being amortized on a straight-line basis over
40 years.
(j) To reflect interest expense on the borrowings to fund the
purchases of Ershigs, LaValley and SEFCO in excess of historical interest
expense.
(k) To reflect the change in income taxes related to pro forma
adjustments.
F-7
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Denali Incorporated
We have audited the accompanying consolidated balance sheets of Denali
Incorporated and subsidiaries (the "Company") as of June 29, 1996, and June 28,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the period from December 19, 1994 (date of
inception) to July 1, 1995 and the years ended June 29, 1996 and June 28, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Denali Incorporated, and subsidiaries at June 29, 1996 and June 28, 1997, and
the consolidated results of its operations and its cash flows for the period
from December 19, 1994 (date of inception) to July 1, 1995, and the years ended
June 29, 1996 and June 28, 1997 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, TX
August 27, 1997
except for Notes 7 and 18
as to which the date
is November 3, 1997
F-8
<PAGE> 55
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 124 $ 330
Investment in equity securities........................... 505 --
Accounts and notes receivable, net of allowances of
$114,000 in 1996 and $605,000 in 1997.................. 9,490 17,376
Inventories............................................... 5,660 6,686
Income tax receivable..................................... 509 40
Prepaid expenses.......................................... 898 913
Deferred tax assets....................................... 243 934
------- -------
Total current assets........................................ 17,429 26,279
Property, plant, and equipment, net......................... 7,923 7,695
Assets held for sale........................................ 1,120 1,520
Notes receivable............................................ 810 907
Goodwill, net............................................... 1,663 1,620
Deferred tax assets......................................... 336 1,953
Other assets................................................ 1,037 1,110
------- -------
Total assets................................................ $30,318 $41,084
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 8,483 $10,173
Accrued liabilities....................................... 2,712 5,249
Notes payable............................................. -- 1,460
Current maturities of long-term debt...................... 585 1,378
------- -------
Total current liabilities................................... 11,780 18,260
Long-term debt, less current maturities..................... 18,076 21,186
Other long-term liabilities................................. -- 979
Series A Preferred Stock, redeemable at $250 per share, $.01
par value:
Authorized shares -- 16,000
Issued and outstanding shares -- 4,800.................... 1,200 1,200
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 2,184,910............. 22 22
Additional paid-in capital................................ 297 297
Retained deficit.......................................... (1,057) (860)
------- -------
Total stockholders' deficit................................. (738) (541)
------- -------
Total liabilities and stockholders' deficit................. $30,318 $41,084
======= =======
</TABLE>
See accompanying notes.
F-9
<PAGE> 56
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD
DECEMBER 19,
1994 (DATE OF YEAR ENDED
INCEPTION) TO ----------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
-------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales.................................................. $17,799 $53,354 $71,101
Cost of sales.............................................. 13,473 43,518 57,268
------- ------- -------
Gross profit............................................... 4,326 9,836 13,833
Selling, general, and administrative expenses.............. 3,771 9,604 11,874
------- ------- -------
Operating income........................................... 555 232 1,959
Interest expense........................................... 671 1,783 2,058
Interest income............................................ -- (65) (111)
Other income, net.......................................... (72) (206) (598)
------- ------- -------
Income (loss) before income taxes.......................... (44) (1,280) 610
Income tax expense (benefit)............................... (1) (446) 293
------- ------- -------
Net income (loss).......................................... $ (43) $ (834) $ 317
Dividends on Series A Preferred Stock...................... (60) (120) (120)
------- ------- -------
Net income (loss) attributable to common stock............. $ (103) $ (954) $ 197
======= ======= =======
Net income (loss) per share of common stock................ $ (0.05) $ (0.44) $ 0.09
======= ======= =======
Weighted average common shares outstanding................. 2,078 2,185 2,198
======= ======= =======
</TABLE>
See accompanying notes.
F-10
<PAGE> 57
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON COMMON
STOCK STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Common stock issued at December 19, 1994
(date of inception)........................ 2,058 $21 $279 $ -- $ 300
Issuance of common stock................ 127 1 18 -- 19
Dividends declared...................... -- -- -- (60) (60)
Net loss................................ -- -- -- (43) (43)
----- --- ---- ----- -----
Balance at July 1, 1995...................... 2,185 22 297 (103) 216
Dividends declared......................... -- -- -- (120) (120)
Net loss................................... -- -- -- (834) (834)
----- --- ---- ----- -----
Balance at June 29, 1996..................... 2,185 22 297 (1,057) (738)
Dividends declared......................... -- -- -- (120) (120)
Net income................................. -- -- -- 317 317
----- --- ---- ----- -----
Balance at June 28, 1997..................... 2,185 $22 $297 $(860) $(541)
===== === ==== ===== =====
</TABLE>
See accompanying notes.
F-11
<PAGE> 58
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19, 1994 YEARS ENDED
(DATE OF INCEPTION) -------------------
TO JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ (43) $ (834) $ 317
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation......................................... 325 790 1,043
Amortization......................................... 29 123 178
Provision for losses on accounts receivable.......... 89 55 176
Deferred tax expense (benefit)....................... (583) 4 25
(Gain) loss on disposal of property, plant and
equipment and assets held for sale................ -- 210 (447)
Changes in operating assets and liabilities:
Accounts receivable............................... 902 22 (3,377)
Inventories....................................... 301 (1,250) 1,238
Prepaid expenses.................................. (403) (372) (90)
Other assets...................................... (24) (43) (57)
Accounts payable.................................. 2,209 1,323 886
Accrued liabilities............................... 688 671 264
Income tax receivable/payable..................... 299 (808) 469
------- ------- -------
Net cash provided by (used in) operating activities.... 3,789 (109) 625
INVESTING ACTIVITIES
Acquisitions net of cash acquired...................... (7,210) (5,427) (4,825)
Purchases of property, plant and equipment............. (333) (942) (600)
Proceeds from sale of property, plant, and equipment
and assets held for sale............................. 84 1,363 208
Payments on notes receivable........................... -- 13 81
Purchases of equity securities......................... (68) (437) (593)
Proceeds from sale of equity securities................ -- -- 1,098
------- ------- -------
Net cash used in investing activities.................. (7,527) (5,430) (4,631)
FINANCING ACTIVITIES
Proceeds from common stock issuance.................... 319 -- --
Proceeds from preferred stock issuance................. 1,200 -- --
Dividends paid......................................... -- (90) --
Net borrowings under revolving lines of credit......... 3,552 4,065 2,848
Proceeds from term notes and other long-term debt...... 1,375 2,019 2,200
Principal payments on term notes and other long-term
debt................................................. (1,461) (1,233) (685)
Debt origination cost.................................. (248) (97) (151)
------- ------- -------
Net cash provided by financing activities.............. 4,737 4,664 4,212
------- ------- -------
Increase (decrease) in cash............................ 999 (875) 206
Cash at beginning of period............................ -- 999 124
------- ------- -------
Cash at end of period.................................. $ 999 $ 124 $ 330
======= ======= =======
</TABLE>
See accompanying notes.
F-12
<PAGE> 59
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1997
1. THE COMPANY
ORGANIZATION AND BASIS OF PRESENTATION
Denali Incorporated ("Denali" or the "Company"), a Delaware corporation,
was incorporated on December 19, 1994, and through its wholly owned subsidiaries
is primarily engaged in the manufacture and sale of fiberglass composite
underground storage tanks, steel rectangular aboveground storage tanks, and
engineered fiberglass reinforced plastic products for corrosion resistant
applications.
The Company uses a 52 or 53 week year ending on the Saturday closest to
June 30.
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The Consolidated Financial Statements include the accounts of Denali and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates by management.
Actual results could differ from those estimates.
INVESTMENTS IN EQUITY SECURITIES
The Company determines the appropriate classification of investments in
equity securities at the time of purchase and confirms such designation as of
the balance sheet date. Marketable equity securities are classified as
available-for-sale securities and are stated at fair value, with any unrealized
gains and losses, net of tax, reported as a separate component of stockholder's
equity. Realized gains and losses are recognized based on the
specific-identification method for equity securities sold. The Company's
investments are in a mutual fund that holds U.S. Treasury bills. As of June 29,
1996, the fair value of investments in equity securities, using quoted market
prices, approximates their carrying value.
CASH AND CASH EQUIVALENTS
The Company considers all cash accounts and money market accounts to be
cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, prepaid expenses, accounts receivable, and
other current assets and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying value of the Company's
revolving lines of credit and notes payable approximates fair value because the
rates on such lines are variable, based on current market.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees.
INVENTORIES
Inventories are determined using actual cost or a standard cost method
based on a first-in, first-out ("FIFO") basis. FIFO inventory is stated at the
lower of cost or market.
F-13
<PAGE> 60
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is computed
by the straight-line method using rates based on the estimated useful lives of
the related assets. Estimated useful lives used for depreciation purposes are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 20 years
Machinery and equipment..................................... 3 to 10 years
</TABLE>
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of fiscal 1997 and the effect of adoption was not
material.
GOODWILL
Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the undiscounted cash flows. Accumulated amortization was $27,000
and $69,000 for the years ended June 29, 1996 and June 28, 1997, respectively.
Amortization expense was $-0-, $27,000, and $42,000 for the period December 19,
1994 (date of inception) to July 1, 1995, and for the years ended June 29, 1996,
and June 28, 1997.
REVENUES FROM LICENSE ARRANGEMENTS
The Company has certain license agreements whereby it receives royalties
equal to the greater of a certain percentage of the licensee's sales for
products based on the Company's proprietary technology and processes or a
guaranteed amount as specified in the agreements. The agreements expire between
1998 and 2011. The Company recognizes the actual royalties due or the guaranteed
amount under these license agreements in the period of the licensee's sales.
REVENUE RECOGNITION
Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting. Revenues from
certain long-term construction contracts, usually performed on job sites, are
recognized on the percentage-of-completion method. Earned revenue is based on
the percentage that incurred costs to date are to total estimated costs after
giving effect to the most recent estimates of total cost. The cumulative impact
of revisions in total cost estimates during the progress of work is reflected in
the year in which these changes become known. Earned revenue reflects the
original contract price adjusted for agreed-upon claim and change order revenue,
if any.
Losses expected to be incurred on jobs in process, after consideration of
estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known. Selling and administrative expenses are
charged to income in the year incurred and are not allocated to contracts in
progress.
F-14
<PAGE> 61
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
The Company expenses all advertising costs as incurred. Advertising costs
incurred were $193,000, $330,000, and $402,000 for the period December 19, 1994
(date of inception) to July 1, 1995 and for the years ended June 29, 1996 and
June 28, 1997, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
RESEARCH AND DEVELOPMENT COSTS
The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged against earnings in the period incurred. Research
and development costs expensed were $242,000, $492,000, and $319,000 for the
period December 19, 1994 (date of inception) to July 1, 1995, and for the years
ended June 29, 1996 and June 28, 1997, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continuously
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of major commercial
organizations and independent sub-contractors. No customer accounted for 10% or
more of revenues for the period December 19, 1994 (date of inception) to July 1,
1995, and for the years ended June 29, 1996 and June 28, 1997.
PER SHARE INFORMATION
Per share amounts have been computed by dividing net income (or loss)
applicable to common stock (net income or loss, less preferred stock dividends)
by the weighted average number of common shares and common stock equivalents
outstanding during the respective periods. Common stock equivalent shares
consist of the incremental shares issuable upon the exercise of stock options
(using the treasury stock method where applicable). Shares for which stock
options were granted within a 12-month period prior to an initial public
offering are treated as outstanding for all periods presented. Therefore, shares
for which options were granted subsequent to September 1996 have been considered
as having been outstanding for purposes of the calculation (using the treasury
stock method with the offering price used for fair market value) for all periods
presented. Common stock equivalent shares from stock options granted prior to
September 1996 are excluded from computations if their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted by the Company in
the second quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of common stock equivalents will be excluded. The
impact of Statement No. 128 on primary and fully diluted net income (loss) per
share is not expected to be material for the period December 19, 1994 (date of
inception) to July 1, 1995, and for the years ended June 29, 1996 and June 28,
1997.
CAPTIVE INSURANCE PROGRAM
In January 1996, the Company entered into a captive insurance program for
its workers' compensation, auto, and general liability coverages. The program
provides for certain reinsurance on claims over $250,000
F-15
<PAGE> 62
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and certain other claims. The Company uses actuarial determined information
provided by the captive insurance company to determine its estimated liability.
ACCOUNTING CHANGES
In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
and Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements, which are effective for periods beginning after
December 15, 1997, expand and modify disclosures and, accordingly, will have no
impact on the Company's reported financial position, results of operations, or
cash flows.
3. ACQUISITIONS
Effective December 31, 1994, the Company purchased certain assets and
assumed certain liabilities of the Owens-Corning Fiberglass(R) underground tank
group (the "tank group"). The acquisition was accounted for under the purchase
method of accounting, whereby the assets and liabilities of the tank group
acquired through the Company's subsidiaries were adjusted to their estimated
fair values at the acquisition date, which exceeded the purchase price by
approximately $4.1 million. Accordingly, the excess amount was allocated to
reduce the basis of property, plant, and equipment (except assets held for sale
as discussed below).
Under the purchase agreement, the Company acquired net assets of $16.6
million, including five manufacturing facilities, two of which were closed by
the Company after acquisition, in exchange for $5.6 million in cash, $1.8
million in notes payable, and $7.5 million in a subordinated unsecured note
payable. The Company incurred approximately $1.7 million in acquisition costs.
The consolidated financial statements reflect all operations for the acquired
company since January 1, 1995.
Effective October 27, 1995, the Company purchased certain assets and
assumed certain liabilities of Hoover Containment Systems, Inc., a manufacturer
of above-ground storage tanks made of steel. The acquisition was accounted for
under the purchase method of accounting whereby the assets and liabilities of
the acquired company were adjusted to their estimated fair values at the
acquisition date.
Under the purchase agreement, the Company acquired net assets of $3.8
million in exchange for $5.4 million in cash and incurred approximately $100,000
in acquisition costs resulting in the recording of goodwill of approximately
$1.7 million. The consolidated financial statements reflect all operations for
the acquired company since the date of acquisition.
Effective February 28, 1997, the Company acquired all of the issued and
outstanding stock of Ershigs, a manufacturer of fiberglass-reinforced plastic
composites for corrosion-resistant applications. The acquisition was accounted
for under the purchase method of accounting whereby the assets and liabilities
of Ershigs were adjusted to their estimated fair values at the acquisition date,
which exceeded the purchase price by approximately $1.3 million. Accordingly,
the excess amount was allocated to reduce the basis of property, plant, and
equipment (except for assets held for sale as discussed below).
Under the purchase agreement, the Company acquired net assets of $7.4
million in exchange for $5.0 million in cash and $1.0 million in a subordinated
unsecured note payable. The Company incurred approximately $80,000 in
acquisition costs. The consolidated financial statements reflect all operations
for the acquired company since the date of acquisition.
F-16
<PAGE> 63
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited results of operations have been prepared assuming
the acquisitions had occurred as of the beginning of the periods presented.
Those results are not necessarily indicative of results of future operations nor
of results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
JUNE 29, JUNE 28,
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $ 61,728 $87,019
Net income (loss)........................................... $ (709) $ (286)
Earnings (loss) per common share............................ $ (0.32) $ (0.13)
</TABLE>
ASSETS HELD FOR SALE
Assets held for sale are recorded on the balance sheet at amounts equal to
estimated net realizable values adjusted for anticipated earnings or losses,
interest and other carrying costs until sale.
The assets held for sale of $3.6 million identified at the date of
acquisition of the tank group consisted primarily of two manufacturing
facilities and related manufacturing equipment. The two manufacturing facilities
were closed in early 1995 and had insignificant operations after the date of
acquisition. One manufacturing facility was sold in December 1995 at its
previously recorded net realizable value. The other manufacturing facility was
sold in June 1996, with the Company recognizing a loss of $208,000 due to a
decline in the market value of the property during 1996. Certain of the
manufacturing equipment was sold during the year ended June 28, 1997 under
licensing arrangements with the Company recognizing a gain on the sale of the
equipment of $312,000. At June 28, 1997, the remaining assets held for sale of
$700,000 consist of certain manufacturing equipment which the Company primarily
expects to sell under similar license arrangements or through an international
joint venture.
The assets held for sale of $820,000 identified at the date of acquisition
of Ershigs consisted primarily of a manufacturing facility and related
manufacturing equipment. The manufacturing facility was closed in May 1997 with
operating losses of $68,000 eliminated from the Company's results of operations
for the year ended June 28, 1997. The assets are anticipated to be sold within a
year from the acquisition date.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $ 2,544 $ 2,147
Raw materials............................................... 2,100 2,805
Work in process............................................. 1,016 1,734
-------- -------
$ 5,660 $ 6,686
======== =======
</TABLE>
F-17
<PAGE> 64
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,089 $ 1,089
Buildings and improvements.................................. 3,580 3,685
Machinery and equipment..................................... 4,371 5,062
Construction in progress.................................... 3 22
-------- -------
9,043 9,858
Less accumulated depreciation............................... (1,120) (2,163)
-------- -------
Property, plant, and equipment, net......................... $ 7,923 $ 7,695
======== =======
</TABLE>
6. NOTES RECEIVABLE
Notes receivable consist of certain notes received as part of the sale of
certain assets held for sale. During the year ended June 29, 1996, the Company
received a note receivable for an original amount of $850,000 payable over five
years with interest at 10%. During the year ended June 28, 1997, the Company
received a note receivable for an original amount of $339,000 payable over three
years with interest imputed at 10%. The current portion of the notes receivable
is approximately $172,000 which is included in accounts and notes
receivable-current.
7. LONG-TERM DEBT
Long-term debt is summarized below:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit note with a financial institution, interest
payable monthly at prime plus 1.50% (10% at June 28,
1997), due December 20, 1999, secured by all assets of its
subsidiary, Fluid Containment, Inc. ("FCI")............... $ 4,579 $ 4,830
Term note with a financial institution, due in monthly
installments of $17,000 plus interest at prime plus 2%
(10.5% at June 28, 1997) through December 20, 1999,
secured by all assets of FCI.............................. 700 500
Industrial Revenue Bonds with Montgomery County Industrial
Development Corporation, interest payable semiannually on
February 1 and August 1 at 9.875%, principal due February
1, 2001, secured by FCI's Conroe, Texas, manufacturing
facility.................................................. 1,000 1,000
Revolving credit note with a financial institution, interest
payable monthly at 30-day LIBOR plus 3.5% (9.1875% at June
28, 1997), due October 27, 2000, secured by all assets of
its subsidiary, Hoover Containment, Inc. ("Hoover")....... 3,038 3,663
Term note with a financial institution, due in monthly
installments of $7,000 plus interest at 30-day LIBOR plus
3.75% (9.4375% at June 28, 1997) through October 1, 2000,
secured by all assets
of Hoover................................................. 375 290
Term note with a financial institution, due in monthly
installments of $25,000 plus interest at 30-day LIBOR plus
4.15% (9.8375% at June 28, 1997) through October 1, 1999,
secured by all assets
of Hoover................................................. 700 400
</TABLE>
F-18
<PAGE> 65
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit note with a financial institution, interest
payable monthly at 30-day LIBOR plus 3.75% or at prime
plus 1% (9.4375% at June 28, 1997), due February 28, 2002,
secured by all assets of its subsidiary Ershigs Inc.
(Ershigs)................................................. -- 1,972
Term note with a financial institution, due in monthly
installments of $7,000 plus interest at 30-day LIBOR plus
4% or at prime plus 1.25% (9.6875% at June 28, 1997)
through February 28, 2002, secured by all assets of
Ershigs................................................... -- 579
Term note with a financial institution, due in monthly
installments of $13,000 plus interest at 30-day LIBOR rate
4% or at prime plus 1.25% (9.6875% at June 28, 1997)
through February 28, 2002, secured by all assets of
Ershigs................................................... -- 1,061
Subordinated to FCI revolving credit note and term note,
unsecured note payable to a seller, interest at 10%
payable semi-annually on June 30 and December 31,
principal due
December 31, 1999......................................... 8,269 8,269
------- -------
18,661 22,564
Less current maturities..................................... 585 1,378
------- -------
Long-term debt due after one year........................... $18,076 $21,186
======= =======
</TABLE>
FCI's long-term debt agreement provides for a revolving credit note not to
exceed the lesser of $10 million or an amount (the borrowing base) based on
accounts receivable and inventories as specified in the agreement's borrowing
base formula. Borrowings under the revolving credit note totaled $4.6 million
and $4.8 million at June 29, 1996 and June 28, 1997, respectively. The borrowing
base formula yielded a maximum borrowing base of $8.1 million at June 28, 1997.
The debt agreement provides, among other things, for the maintenance of certain
minimums, as defined, for net income, working capital, tangible net worth,
interest coverage, debt coverage, capital expenditures, and average
availability.
HCI's long-term debt agreement provides for a revolving credit note not to
exceed the lesser of $6.5 million less the outstanding term note balance or an
amount (the borrowing base) based on accounts receivable and inventories as
specified in the agreement's borrowing base formula. Borrowings under the
revolving credit facility totaled $3.0 million and $3.7 million at June 29, 1996
and June 28, 1997, respectively. The borrowing base formula yielded a maximum
borrowing base of $4.7 million at June 28, 1997. The debt agreement provides,
among other things, for the maintenance of certain minimums, as defined, for net
income, working capital, tangible net worth, interest coverage, debt coverage,
and average availability.
Ershigs' long-term debt agreement provides for a revolving credit note not
to exceed the lesser of $6.5 million less the outstanding term note balance or
an amount (the borrowing base) based on accounts receivable and inventories as
specified in the agreement's borrowing base formula. Borrowings under the
revolving credit facility totaled $2 million at June 28, 1997. The borrowing
base formula yielded a maximum borrowing base of $4.9 million at June 28, 1997.
The debt agreement provides, among other things, for the maintenance of certain
minimums, as defined, for net income, working capital, tangible net worth,
interest coverage, debt coverage, and average availability.
The unsecured note payable is subordinated to FCI's revolving credit note
and term note. However, payment of interest on the subordinated note is
permitted under FCI's senior debt agreement. The unsecured note payable allowed
FCI to make two in-kind interest payments whereby accrued interest is added to
the outstanding principal balance. FCI made in-kind interest payments of
$375,000 and $394,000 during the
F-19
<PAGE> 66
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period December 19, 1994 (date of inception) to July 1, 1995, and the year ended
June 29, 1996, respectively. FCI paid interest of $827,000 during the year ended
June 28, 1997.
At June 28, 1997, the Company was not in compliance with certain financial
covenants in FCI's, HCI's, and Ershigs' long-term agreements with a financial
institution. The Company has obtained amendments or waivers of these certain
covenants in FCI's, HCI's and Ershigs' loan agreements which cure any non-
compliance with such covenants as of June 28, 1997 and through the first quarter
of fiscal 1998. On October 24, 1997, the Company refinanced all of the related
debt with a new financial institution and the new terms are reflected in the
financial statements.
On October 24, 1997, the Company's subsidiaries entered into a senior
credit facility, as amended, with a new bank to refinance its revolving and term
credit arrangements at FCI, Hoover, and Ershigs and to finance the acquisitions
of LaValley and SEFCO. Borrowings outstanding under its existing revolving and
term credit arrangements at June 28, 1997 were $10.5 million and $2.8 million,
respectively. The new senior credit facility provides for a maximum of $19.7
million revolving credit notes due in October 2002, and a maximum of $10.5
million in term loans with equal monthly payments of $100,000 plus interest due
in October 2002 or upon the termination of the revolving credit notes. The new
credit notes may be extended for an initial term of five years and may be
renewed in increments of one year thereafter, unless notice of termination is
provided by either party 90 days prior to an anniversary date. The new revolving
credit notes provide for borrowings, at the Company's option, at either the
Bank's prime rate plus 1/2% or LIBOR plus 2 3/4%. Borrowings under the new
revolving credit notes will be based on accounts receivable and inventory as
specified in the agreement's borrowing base formula. The new term loans provide
for borrowings, at the Company's option, at either the Bank's prime rate plus
1/2% or LIBOR plus 3%. The new senior credit facility provides availability for
letters of credit up to $1.5 million subject to availability of borrowing
capacity under the revolving credit notes. The new senior credit facility
requires the Company's subsidiaries to maintain certain financial covenants and
requires an annual fee of 0.375% on the unused portion of the revolving credit
notes. The new senior credit facility is secured by accounts receivable,
property, equipment and general intangible assets of the Company's subsidiaries.
The Company has classified its existing revolving and term credit arrangements
in the accompanying consolidated balance sheet as of June 28, 1997 based on the
terms of the new senior credit facility.
In connection with the extinguishment of its existing revolving and term
credit arrangements upon funding of the new senior credit facility in October
1997, the Company paid prepayment penalties of $323,000. In addition, the
Company charged to expense unamortized debt origination costs of $295,000 in
October 1997. These charges will be recognized in the Company's consolidated
financial statements as an extraordinary loss, net of tax, in the quarter ended
December 27, 1997.
Scheduled maturities of long-term debt at June 28, 1997 based on the terms
of the new senior credit facility are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1998........................................................ $ 1,378
1999........................................................ 903
2000........................................................ 9,172
2001........................................................ 1,903
2002........................................................ 903
Thereafter.................................................. 8,305
-------
Total............................................. $22,564
=======
</TABLE>
F-20
<PAGE> 67
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid interest on its long-term debt of $166,000, $904,000, and
$1,181,000 for the period December 19, 1994 (date of inception) to July 1, 1995,
and for the years ended June 29, 1996 and June 28, 1997, respectively.
8. NOTES PAYABLE
Notes payable are summarized below:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
One-year unsecured note payable to a seller, principal and
interest at 10% due February 28, 1998..................... $ -- $1,000
Note payable with a financial institution, due in quarterly
installments of $27,500 plus interest at prime plus 1%
(9.5% at June 28, 1997) with an additional principal
payment of $250,000 on August 31, 1997, due December 31,
1997 secured by a note receivable......................... -- 460
------ ------
$ -- $1,460
====== ======
</TABLE>
The Company paid interest on these notes of $48,000, $82,000, and $15,000
for the period December 19, 1994 (date of inception) to July 1, 1995 and during
the years ended June 29, 1996 and June 28, 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
that the supplier provide and the Company purchase at least 80% of the Company's
fiberglass requirements from the supplier. The contract expired on December 31,
1999. The Company and supplier are currently negotiating the terms of a
modification to the supply contract which would provide for an extension of at
least one year and certain stabilizing pricing parameters tied to a consumer
price index. In addition, the Company continues to negotiate with other vendors
to ensure a continued supply of fiberglass to meet the Company's production
needs. The Company is also a significant purchaser of resin and steel. The
Company does not depend upon any single supplier or source for steel or resin
requirements.
The Company has not encountered any significant difficulty to date in
obtaining raw materials in sufficient quantities to support its operations at
current or expected near-term future levels. However, any disruption in raw
material supply or abrupt increases in raw material prices could have an adverse
effect on the Company's operations.
The Company and its subsidiaries are, from time to time, subject to various
lawsuits and claims and other actions arising out of the normal course of
business. The Company is also subject to contingencies pursuant to environmental
laws and regulations that in the future may require the Company to take action
to correct the effects on the environment of prior manufacturing and waste
disposal practices. Accrued environmental liabilities at June 28, 1997 were
$575,000 and, in management's opinion, such accruals are appropriate based on
existing facts and circumstances. Under more adverse circumstances, however,
this potential liability could be higher. Current year expenditures were not
material.
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the consolidated financial position, results
of operations or cash flows of the Company.
F-21
<PAGE> 68
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASES
The Company leases certain manufacturing facilities, machinery and
equipment, and office space under operating leases. Future minimum payments on
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1998........................................................ $ 826
1999........................................................ 617
2000........................................................ 453
2001........................................................ 364
2002 and thereafter......................................... 354
------
Total............................................. $2,614
======
</TABLE>
Total rental expense was $199,000, $725,000, and $1,028,000 for the period
December 19, 1994 (date of inception) to July 1, 1995 and for the years ended
June 29, 1996 and June 28, 1997, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax over financial reporting basis of net book value of
property, plant, and equipment......................... $351 $1,886
Expenses accrued for financial reporting not yet
deductible for tax..................................... 339 1,518
Net operating loss and other carryforwards................ 124 663
Other..................................................... 74 203
---- ------
Total deferred tax assets................................... 888 4,270
Deferred tax liabilities:
Expenses deductible for tax which are capitalizable for
financial reporting.................................... 203 121
Other..................................................... 106 164
---- ------
Total deferred tax liabilities.............................. 309 285
---- ------
Valuation allowance......................................... -- (1,098)
---- ------
Net deferred tax assets..................................... $579 $2,887
==== ======
</TABLE>
F-22
<PAGE> 69
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 19, YEAR ENDED
1994 (DATE OF -------------------
INCEPTION) TO JUNE 29, JUNE 28,
JULY 1, 1995 1996 1997
-------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal............................................. $ 521 $(474) $231
State............................................... 61 24 38
----- ----- ----
Total current income tax expense (benefit)............ 582 (450) 269
----- ----- ----
Deferred income tax expense (benefit):
Federal............................................. (522) 72 (3)
State............................................... (61) (68) 27
----- ----- ----
Total deferred income tax expense (benefit)........... (583) 4 24
----- ----- ----
Total income tax expense (benefit).................... $ (1) $(446) $293
===== ===== ====
</TABLE>
The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD YEAR ENDED
DECEMBER 19, 1994 --------------------
(DATE OF INCEPTION) TO JUNE 29, JUNE 28,
JULY 1, 1995 1996 1997
---------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax (benefit) expense at 34%... $(15) $(435) $207
State income taxes, net of federal benefit..... (2) (48) 48
Meals and entertainment........................ 16 40 33
Other, net..................................... -- (3) 5
------ ----- ----
Reported total income tax expense (benefit).... $ (1) $(446) $293
====== ===== ====
</TABLE>
The Company paid $284,000, $329,000, and $236,000 of income taxes for the
period December 19, 1994 (date of inception) to July 1, 1995 and for the years
ended June 29, 1996 and June 28, 1997, respectively.
12. EQUITY
In December 1994, the Company issued 4,800 shares of Series A redeemable
non-voting preferred stock for $250 per share. The holders of the preferred
stock are entitled to receive cumulative dividends at 10%. The preferred stock
is redeemable beginning December 20, 1995 at $250 per share, plus any and all
accrued but unpaid dividends. Dividends of $60,000, $120,000, and $120,000 were
declared by the Board of Directors during the period December 19, 1994 (date of
inception) to July 1, 1995 and for the years ended June 29, 1996 and June 28,
1997, respectively. The Company made dividend payments of $90,000 during the
year ended June 29, 1996 with dividends of $90,000 and $210,000 accrued as of
June 29, 1996 and June 28, 1997.
The Company has entered into a Stockholders Agreement (the "Agreement")
with the holders of its outstanding shares of common and preferred stock. The
Agreement provides the Company and its stockholders the right of first refusal
to purchase the selling stockholder's shares.
13. INCENTIVE STOCK OPTION PLAN
Effective February 14, 1996, the Company adopted an incentive stock option
plan (the "Plan") for certain key employees. Denali has reserved 367,833 shares
of common stock for purposes of the Plan.
F-23
<PAGE> 70
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average grant date fair value per option granted in the period
December 19, 1994 (date of inception) to July 1, 1995, and for the years ending
June 29, 1996 and June 28, 1997 was $250, $3,806, and $-0- respectively. All
options have five year terms and are fully exercisable upon date of grant. The
weighted average remaining contractual life at June 28, 1997 was 3.67 years.
A summary of Denali's stock option activity and related information for the
period December 19, 1994 (date of inception) to July 1, 1995 and for the years
ended June 29, 1996 and June 28, 1997 follows:
<TABLE>
<CAPTION>
FISCAL WEIGHTED FISCAL WEIGHTED FISCAL WEIGHTED
YEAR AVERAGE YEAR AVERAGE YEAR AVERAGE
1995 EXERCISE 1996 EXERCISE 1997 EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year......................... -- $ -- -- $ -- 113,190 $2.22
Granted...................... 126,910 .15 113,190 2.22 -- --
Exercised.................... 126,910 .15 -- -- -- --
Canceled..................... -- -- -- -- -- --
------- ---- ------- ----- ------- -----
Outstanding -- end of year..... -- $ -- 113,190 2.22 113,190 $2.22
======= ==== ======= ===== ======= =====
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (ABP 25), and related
interpretations in accounting for its employee stock options.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS
123), which also requires that the information be determined as if the Company
had accounted for its employee stock options granted subsequent to July 1, 1995
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using a minimum value option pricing model. The
minimum value method calculated a fair value that is approximately the same as
recorded by the Company according to APB 25; therefore, pro forma presentation
has not been included.
14. GAIN SHARING PLAN
During fiscal year 1995, the Company adopted a gain sharing plan that
covers all employees of the Containment Products Group who have satisfied
minimum employment standards. During the period December 19, 1994 (date of
inception) to July 1, 1995, and for the years ended June 29, 1996 and June 28,
1997 the Company made a gain sharing contribution equally to all eligible
employees totaling $80,000, $111,000 and $144,000, respectively based on a
distribution of 10% of quarterly earnings before taxes and gain sharing expense.
15. RETIREMENT PLANS
During fiscal year 1995, the Company adopted a defined-contribution
retirement plan, Fluid Containment 401(k) Retirement Plan (the "Plan"), that
covers all eligible employees of the Company. Effective July 1, 1997, the Plan
was amended to include all eligible employees of Ershigs. The Plan allows
employees to defer up to 15% of their compensation, with the Company matching
50% of the first 6% of the participant's contribution. Participants are
immediately and fully vested in employer contributions. The Company's matching
contribution was $52,000, $236,000, and $277,000 for the period December 19,
1994 (date of inception) to July 1, 1995 and for the years ended June 29, 1996
and June 28, 1997, respectively.
16. SEASONALITY AND INFLATION
The Company's operating results are affected by the annual construction
season slowdown resulting from winter weather especially in the period December
through March. The underground fiberglass tank products
F-24
<PAGE> 71
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are especially impacted during the winter months. The Company believes that the
effects of seasonality will be less severe in the future, as the Company
continues to expand and diversify its product offerings.
The effect of inflation on the Company's operations were not significant
during the periods presented in the consolidated financial statements.
17. SEGMENT DATA
The Company operates in two industry segments: Containment Products and
Engineered Products. The Containment Products segment, which provides
containment solutions for critical fluids, specializes in the manufacture of
fiberglass underground storage tanks and steel reinforced aboveground storage
tanks. The Engineered Products segment, which provides engineered solutions for
the containment of critical fluids, specializes in fiberglass reinforced plastic
products for corrosion resistant applications and engineered metal products for
the municipal and industrial markets. Except for certain revenues with respect
to license agreements with manufacturers located outside of the United States,
which revenues are not material as considered in relation to the Company's total
net sales, the Company operates in only one geographic segment, the United
States. The following is a summary of the industry segment data for the period
December 19, 1994 (date of inception) to July 1, 1995 and for the years ended
June 29, 1996 and June 28, 1997:
<TABLE>
<CAPTION>
DEPRECIATION
NET OPERATING IDENTIFIABLE CAPITAL AND
SALES INCOME ASSETS EXPENDITURES AMORTIZATION
------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Period December 19, 1994 (date of
inception) to July 1, 1995:
Containment Products.................... $17,799 $ 645 $18,455 $333 $ 354
Engineered Products..................... -- -- -- -- --
Corporate............................... -- (90) 3,369 -- --
------- ------ ------- ---- ------
Consolidated............................ $17,799 $ 555 $21,814 $333 $ 354
======= ====== ======= ==== ======
Year ended June 29, 1996:
Containment Products.................... $53,354 $ 430 $28,350 $912 $ 908
Engineered Products..................... -- -- -- --
Corporate............................... -- (198) 1,968 30 5
------- ------ ------- ---- ------
Consolidated............................ $53,354 $ 232 $30,318 $942 $ 913
======= ====== ======= ==== ======
Year ended June 28, 1997:
Containment Products.................... $64,817 $2,080 $29,934 $523 $1,199
Engineered Products..................... 6,284 81 9,791 33 13
Corporate............................... -- (202) 1,359 44 9
------- ------ ------- ---- ------
Consolidated............................ $71,101 $1,959 $41,084 $600 $1,221
======= ====== ======= ==== ======
</TABLE>
18. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission ("SEC") in September 1997 and an amendment to the registration
statement in November 1997 to register the sale of shares of its common stock.
The Company intends to use the net proceeds of the sale to repay a portion of
the outstanding indebtedness under its credit facilities, to repay $218,000 for
a bank note payable, to repay $6.7 million of a subordinated unsecured note
payable to a supplier, to repay the $1.1 million unsecured note payable
(including interest) to a seller, to redeem the outstanding shares of preferred
stock totaling approximately $1.4 million, including accrued and unpaid
dividends, and to fund general working capital purposes.
F-25
<PAGE> 72
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental net income per share is $0.40 for the year ended June 28, 1997
and is determined by adding back to net income used for the calculation of net
income per share the interest expense, net of taxes associated with the debt
which will be retired by the proceeds of the offering and adding the dividends
paid or accrued associated with the preferred stock which will be redeemed by
the proceeds of the offering. The number of shares outstanding used in
calculating supplemental net income per share was the weighted average common
shares outstanding after giving effect to the estimated number of shares that
would be required to be sold in the offering to repay the debt and redeem the
preferred stock.
COMMON STOCK
On September 23, 1997, the Company effected a 1,715-for-1 stock split. All
stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.
ACQUISITIONS
In October 1997, the Company acquired all of the issued and outstanding
stock of SEFCO, Inc., a manufacturer of aboveground steel storage tanks for
approximately $4.9 million in cash, which is net of cash acquired of
approximately $600,000, and direct acquisition costs of approximately $100,000.
In October 1997, the Company acquired all of the issued and outstanding
stock of GL&V/LaValley Construction, Inc., a company engaged in the installation
of underground storage tanks for $3.9 million in cash and direct acquisition
costs of approximately $100,000, with a two-year non-compete agreement.
1997 STOCK OPTION PLAN
In September 1997, the Company adopted an incentive stock option plan (the
"1997 Plan"). The 1997 Plan permits the granting of both incentive stock options
and non-qualified stock option awards to all employees of the Company. Awards to
acquire up to an aggregate of 362,873 shares may be granted pursuant to the 1997
Plan. The Board of Directors selects the employees who will receive the awards,
determines the type and terms of the awards to be granted and interprets and
administers the 1997 Plan.
In September 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. 142,113 of the options vest 40% immediately and the
remainder over a four year period. The remaining 28,917 options vest ratably
over four years. All of the options were granted at fair market value which
equaled the public offering price.
REORGANIZATION OF SUBSIDIARIES AND EXCHANGE OF STOCK OPTIONS.
Effective September 1997, the Company completed a reorganization of it
subsidiaries. As part of the reorganization one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997 the CSI stock option
plan has 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options to a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company will recognize a compensation charge in the
quarter ended September 27, 1997 of approximately $2.3 million.
A summary of CSI's stock option activity and related information prior to
the exchange for the years ended June 29, 1996 and June 28, 1997 follows:
F-26
<PAGE> 73
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1996 EXERCISE 1997 EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year...................... -- $ -- 1,475 $259
Granted............................................. 1,475 259 300 --
Canceled............................................ -- -- 375 259
------ ---- ------ ----
Outstanding -- end of year............................ 1,475 $259 1,400 $259
====== ==== ====== ====
</TABLE>
F-27
<PAGE> 74
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash...................................................... $ 450 $ 450
Accounts and notes receivable, net of allowances of
$627,000............................................... 16,186 16,186
Inventories............................................... 7,644 7,644
Prepaid expenses.......................................... 1,426 1,426
Deferred tax assets....................................... 934 934
------- -------
Total current assets.............................. 26,640 26,640
Property, plant, and equipment, net......................... 7,631 7,631
Assets held for sale........................................ 1,485 1,485
Notes receivable............................................ 900 900
Goodwill, net............................................... 1,610 1,610
Deferred tax assets......................................... 1,953 1,953
Other assets................................................ 1,070 1,070
------- -------
Total assets...................................... $41,289 $41,289
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $12,141 $12,141
Accrued liabilities....................................... 4,654 4,414
Income tax payable........................................ 313 313
Notes payable............................................. 1,218 1,218
Current maturities of long-term debt...................... 1,403 1,403
Preferred Stock to be redeemed with offering proceeds
(including dividends in arrears)....................... -- 1,440
------- -------
Total current liabilities......................... 19,729 20,929
Long-term debt, less current maturities..................... 19,607 19,607
Other long-term liabilities................................. 977 977
Series A Preferred Stock, redeemable at $250 per share, $.01
par value:
Authorized shares -- 16,000
Issued and outstanding shares -- 4,800.................... 1,200 --
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 2,184,910............. 22 22
Additional paid-in capital................................ 2,609 2,609
Retained deficit.......................................... (2,855) (2,855)
------- -------
Total stockholders' deficit....................... (224) (224)
------- -------
Total liabilities and stockholders' deficit....... $41,289 $41,289
======= =======
</TABLE>
See accompanying notes.
F-28
<PAGE> 75
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $17,703 $21,979
Cost of sales............................................... 13,949 17,149
------- -------
Gross profit................................................ 3,754 4,830
Selling, general and administrative expenses................ 2,786 3,825
Non-recurring compensation expense.......................... -- 2,312
------- -------
Operating income............................................ 968 (1,307)
Interest expense............................................ 498 607
Interest income............................................. (25) (20)
Other income, net........................................... (68) (142)
------- -------
Income (loss) before income taxes........................... 563 (1,752)
Income tax expense.......................................... 270 213
------- -------
Net income (loss)........................................... $ 293 $(1,965)
Dividends on Series A Preferred Stock....................... (30) (30)
------- -------
Net income (loss) attributable to common stock.............. $ 263 $(1,995)
======= =======
Net income (loss) per share of common stock................. $ 0.12 $ (0.87)
======= =======
Weighted average common shares outstanding.................. 2,185 2,288
======= =======
</TABLE>
See accompanying notes.
F-29
<PAGE> 76
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 293 $(1,965)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-recurring compensation expense........................ -- 2,312
Depreciation.............................................. 240 271
Amortization.............................................. 45 54
Provision for losses on accounts receivable............... 19 3
Gain on sale of property, plant and equipment and assets
held for sale.......................................... (45) --
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,516) 1,187
Inventories............................................ (283) (958)
Prepaid expenses....................................... 31 (513)
Other assets........................................... (2) (5)
Accounts payable....................................... (239) 1,968
Accrues liabilities.................................... 193 (625)
Income tax receivable/payable.......................... 771 353
------- -------
Net cash provided by (used in) operating activities......... (1,493) 2,082
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (71) (208)
Proceeds from sale of property, plant, and equipment and
assets held for sale...................................... 52 35
Payments on notes receivable................................ 6 7
Purchases of equity securities.............................. (318) --
------- -------
Net cash used in investing activities....................... (331) (166)
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving lines of credit... 2,295 (1,315)
Principal payments on term notes and other long-term debt... (178) (481)
------- -------
Net cash provided by (used in) financing activities......... 2,117 (1,796)
------- -------
Increase in cash............................................ 293 120
Cash at beginning of period................................. 124 330
------- -------
Cash at end of period....................................... $ 417 $ 450
======= =======
</TABLE>
See accompanying notes
F-30
<PAGE> 77
DENALI INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Denali Incorporated and its
wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. The consolidated financial statements reflect all
elimination entries and adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes included elsewhere
in this Prospectus.
2. INVENTORIES
Inventories consist of the following at September 27, 1997 (in thousands):
<TABLE>
<S> <C>
Finished goods.............................................. $2,874
Raw Materials............................................... 3,057
Work in process............................................. 1,713
------
$7,644
======
</TABLE>
3. INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
The Company's provision for income taxes differs from the U.S. statutory rate of
34% due primarily to the non-recurring compensation charge, discussed in Note 6,
being non-deductible for income tax purposes.
4. PER SHARE INFORMATION
Per share amounts have been computed by dividing net income (or loss)
applicable to common stock (net income or loss, less preferred stock dividends)
by the weighted average number of common shares and common stock equivalents
outstanding during the respective periods. Common stock equivalent shares
consist of the incremental shares issuable upon the exercise of stock options
(using the treasury stock method where applicable). Shares for which stock
options were granted within a 12-month period prior to an initial public
offering are treated as outstanding for all periods presented. Therefore, shares
for which options were granted subsequent to September 1996 have been considered
as having been outstanding for purposes of the calculation (using the treasury
stock method with the offering price used for fair market value) for all periods
presented. Common stock equivalent shares from stock options granted prior to
September 1996 are excluded from computations if their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted by the Company in
the second quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of
F-31
<PAGE> 78
DENALI INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock equivalents will be excluded. The impact of Statement No. 128 on
primary and fully diluted net income (loss) per share is not expected to be
material for the quarter ended September 27, 1997.
5. 1997 STOCK OPTION PLAN
In September 1997, the Company adopted an incentive stock option plan (the
"1997 Plan"). The 1997 Plan permits the granting of both incentive stock options
and non-qualified stock option awards to all employees of the Company. Awards to
acquire up to an aggregate of 362,873 shares may be granted pursuant to the 1997
Plan. The Board of Directors selects the employees who will receive the awards,
determines the type and terms of the awards to be granted and interprets and
administers the 1997 Plan.
In September 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. 142,113 of the options vest 40% immediately and the
remainder over a four year period. The remaining 28,917 options vest ratably
over four years. All of the options were granted at fair market value which
equaled the public offering price.
6. REORGANIZATION OF SUBSIDIARIES AND EXCHANGE OF STOCK OPTIONS
Effective in September 1997, the Company completed a reorganization of it
subsidiaries. As part of the reorganization, one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997 the CSI stock option
plan had 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options for a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company recognized a non-recurring compensation charge in
the quarter ended September 27, 1997 of approximately $2.3 million.
7. INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission ("SEC") in September 1997 and an amendment to the registration
statement in November, 1997 to register the sale of shares of its common stock.
The Company intends to use the net proceeds of the sale to repay a portion of
the outstanding indebtedness under its credit facilities, to repay $218,000 for
a bank note payable, to repay $6.7 million of a subordinated unsecured note
payable to a supplier, to repay the $1.1 million unsecured note payable
(including interest) to a seller, to redeem the outstanding shares of preferred
stock totaling approximately $1.4 million, including accrued and unpaid
dividends, and to fund general working capital purposes.
Supplemental net loss per share is $(0.40) for the quarter ended September
27, 1997 and is determined by adding back to net loss used for the calculation
of net loss per share the interest expense, net of taxes, associated with the
debt which will be retired by the proceeds of the offering and adding the
dividends paid or accrued associated with the preferred stock which will be
redeemed by the proceeds of the offering. The number of shares outstanding used
in calculating supplemental net loss per share was the weighted average common
shares outstanding after giving effect to the estimated number of shares that
would be required to be sold in the offering to repay the debt and redeem the
preferred stock.
COMMON STOCK
On September 23, 1997, the Company effected a 1,715-for-1 stock split. All
stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.
F-32
<PAGE> 79
DENALI INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS
In October 1997, the Company acquired all of the issued and outstanding
stock of SEFCO, Inc., a manufacturer of engineered field-erected steel tanks and
accessories for use in the municipal, agrochemical and petroleum industries, for
$4.9 million in cash, which is net of cash acquired of approximately $600,000,
and direct acquisition costs of $100,000.
In October 1997, the Company acquired all of the issued and outstanding
stock of GL&V/LaValley Construction, Inc., a manufacturer and installer of
fiberglass reinforced plastic products for $3.9 million in cash and direct
acquisition costs of $100,000, with a two-year non-compete agreement.
9. UNAUDITED PRO FORMA BALANCE SHEET
In connection with the initial public offering of the Company's Common
Stock, the Company will pay the dividends in arrears on the Company's preferred
stock and redeem the preferred shares for cash from the proceeds of the initial
public offering. The pro forma unaudited balance sheet gives effect to the
redemption of the preferred shares for cash.
F-33
<PAGE> 80
REPORT OF INDEPENDENT AUDITORS
Denali Incorporated
We have audited the accompanying balance sheet of Hoover Containment
Systems, Inc. (the "Company"), a wholly owned subsidiary of Hoover Group, Inc.
as of December 31, 1994 and the related statements of operations, stockholder's
equity, and cash flows for the year ended December 31, 1994, and the period from
January 1, 1995 to October 27, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hoover Containment Systems,
Inc. at December 31, 1994, and the results of its operations and its cash flows
for the year then ended and the period from January 1, 1995 to October 27, 1995,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
September 12, 1997
F-34
<PAGE> 81
HOOVER CONTAINMENT SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance of $96.............. $3,784
Inventories............................................... 2,233
Prepaid expenses.......................................... 67
Deferred tax asset........................................ 101
------
Total current assets.............................. 6,185
Property, plant, and equipment, net......................... 805
Goodwill, net............................................... 313
Patents, net................................................ 802
Other assets, net........................................... 116
------
Total assets...................................... $8,221
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdrafts........................................... $ 397
Accounts payable.......................................... 2,050
Accrued liabilities....................................... 457
Payable to affiliates..................................... 4,664
Current maturities of long-term debt...................... 100
------
Total current liabilities......................... 7,668
Long-term debt, net of current maturities................... 100
Commitments and contingencies
Stockholder's equity:
Common stock, , no par value:
Authorized, issued, and outstanding shares -- 1,000.... --
Paid-in-capital........................................... 300
Retained earnings......................................... 153
------
Total stockholder's equity........................ 453
------
Total liabilities and stockholder's equity........ $8,221
======
</TABLE>
See accompanying notes.
F-35
<PAGE> 82
HOOVER CONTAINMENT SYSTEMS, INC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FROM JANUARY 1,
DECEMBER 31, 1995 TO
1994 OCTOBER 27, 1995
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $18,875 $19,500
Cost of sales............................................... 15,116 15,612
------- -------
Gross profit................................................ 3,759 3,888
Selling, general, and administrative expenses............... 3,126 3,154
------- -------
Operating income............................................ 633 734
Interest expense............................................ 370 386
Other expenses.............................................. 6 98
------- -------
Income before income taxes.................................. 257 250
Provision for income taxes.................................. 104 95
------- -------
Net income.................................................. $ 153 $ 155
======= =======
</TABLE>
See accompanying notes.
F-36
<PAGE> 83
HOOVER CONTAINMENT SYSTEMS, INC
STATEMENTS OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO OCTOBER 27, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK PAID-IN RETAINED STOCKHOLDER'S
SHARES CAPITAL EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Common stock issued at January 7, 1994.............. 1,000 $300 $ -- $300
Net income.......................................... -- -- 153 153
----- ---- ---- ----
Balance at December 31, 1994........................ 1,000 300 153 453
Net income.......................................... -- -- 155 155
----- ---- ---- ----
Balance at October 27, 1995......................... 1,000 $300 $308 $608
===== ==== ==== ====
</TABLE>
See accompanying notes.
F-37
<PAGE> 84
HOOVER CONTAINMENT SYSTEMS, INC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1,
YEAR ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 153 $ 155
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 209 160
Amortization of goodwill.................................. 9 7
Amortization of other assets.............................. 60 50
Amortization of patents................................... 7 53
Loss on disposal of assets................................ 6 24
Deferred tax benefit...................................... (101) (67)
Changes in operating assets and liabilities:
Accounts receivables................................... (1,103) 34
Inventories............................................ (1,029) 755
Prepaid expenses....................................... (31) (11)
Other assets........................................... (13) (8)
Cash overdrafts........................................ 287 (397)
Accounts payable....................................... 367 943
Accrued liabilities.................................... 107 289
Payable to affiliates.................................. 2,123 (1,525)
Deferred revenue....................................... (227) --
------- -------
Net cash provided by operating activities................... 824 462
INVESTING ACTIVITIES
Purchase of patents......................................... (609) --
Purchases of property and equipment......................... (215) (142)
------- -------
Net cash used by investing activities....................... (824) (142)
FINANCING ACTIVITIES
Principal payments on term note and other long-term debt.... -- (100)
------- -------
Net cash used by financing activities....................... -- (100)
------- -------
Decrease in cash............................................ -- 220
Cash at beginning of period................................. -- --
------- -------
Cash at end of period....................................... $ -- $ 220
======= =======
</TABLE>
See accompanying notes.
F-38
<PAGE> 85
HOOVER CONTAINMENT SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
OCTOBER 27, 1995
1. THE COMPANY
ORGANIZATION AND BASIS OF PRESENTATION
The Hoover Containment Systems, Inc. (the "Company") is a manufacturer of
above-ground steel tanks in the domestic U.S. market. The Company was
incorporated on January 7, 1994 as a wholly owned subsidiary of Hoover Group,
Inc. through a contribution to the Company of $300,000. Prior to its
incorporation, the Company was a division of Hoover Group, Inc. On October 27,
1995 the net assets of the Company were acquired by Denali, Inc. for $5.4
million in cash.
These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of the Hoover Group's general and administrative expenses directly
related to the Company's operations. The amounts allocated by the Hoover Group
are not necessarily indicative of the actual costs which may have been incurred
had the Company operated as an entity unaffiliated with the Hoover Group.
However, the Company believes that the allocations are reasonable and in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 55.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are determined using actual cost based on a first-in, first-out
("FIFO") basis. FIFO inventory is stated a the lower of cost or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is computed
by the straight-line method using rates based on the estimated useful lives of
the related assets. Estimated useful lives used for depreciation purposes are as
follows:
<TABLE>
<S> <C>
Buildings and improvements........................... 20 years
Machinery and equipment.............................. 3 to 10 years
</TABLE>
GOODWILL
Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the undiscounted cashflows. Goodwill amortization expense was
$8,600 and $7,100 for the year ended December 31, 1994 and the period from
January 1, 1995 through October 27, 1995, respectively. Accumulated amortization
was $30,000 at December 31, 1994.
PATENTS
Patents, including costs to acquire the patents of $129,000, are being
amortized on a straight basis over fifteen years. The Company periodically
evaluates the recoverability of patents by assessing whether the unamortized
balance can be recovered over its remaining life through cash flows generated by
the underlying assets. Patent amortization expense was $7,500 and $53,900 for
the year ended December 31, 1994 and the period from January 1, 1995 through
October 27, 1995, respectively. Accumulated amortization was $7,500 at December
31, 1994.
F-39
<PAGE> 86
HOOVER CONTAINMENT SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Included in other assets are non-compete agreements that total $472,500.
The agreements were recorded at costs when the agreements were signed and are
being amortized over the life of the agreement. Amortization expense was $60,000
and $50,000 for the year ended December 31, 1994 and the period from January 1,
1995 through October 27, 1995, respectively. Accumulated amortization was
$397,500 at December 31, 1994.
INCOME TAXES
The Company's taxable income is included in the consolidated federal income
tax return of the Parent. The federal tax provision is substantially the same
provision as if the Company was required to file its own federal income tax
return on a separate company basis.
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
RESEARCH AND DEVELOPMENT COSTS
The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged against earnings in the period incurred. Research
and development costs expensed were $38,000 and $35,000 for the year ended
December 31, 1994 and during the period from January 1, 1995 to October 27,
1995, respectively.
ADVERTISING COSTS
All advertising costs are expensed when incurred. Costs which are included
in selling, general and administrative expense were $99,000 and $23,000 for the
year ended December 31, 1994 and during the period from January 1, 1995 to
October 27, 1995, respectively.
REVENUE RECOGNITION
Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable and
short-term debts approximate fair values due to the short-term maturities of
these instruments. The carrying value of the Company's long-term debt
approximates fair value because the rate on such debt is not significantly
different from the current market rate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-40
<PAGE> 87
HOOVER CONTAINMENT SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's trade customers are geographically dispersed throughout the
United States and are concentrated in the petrochemical industry. The Company
had one customer individually exceeding 5% of accounts receivable, accounting
for approximately 6% of total accounts receivable at December 31, 1994.
3. PURCHASE OF ASSETS
In 1994, the Company purchased certain patents, inventory, and fixed assets
from a manufacturer of above-ground steel storage tanks for approximately
$860,000 including a note payable for $200,000 and acquisition costs of
$130,000. The assets were recorded at their fair values at the acquisition date.
4. INVENTORIES
Inventories consisted of the following at December 31, 1994 (In thousands):
<TABLE>
<S> <C>
Raw materials............................................. $ 739
Work in process........................................... 570
Finished goods............................................ 924
------
$2,233
======
</TABLE>
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
1994 (In thousands):
<TABLE>
<S> <C>
Buildings and improvements.................................. $ 208
Machinery and equipment..................................... 987
Furniture and fixtures...................................... 20
Office equipment............................................ 50
Automobiles................................................. 16
Construction in progress.................................... 23
======
1,304
Less accumulated depreciation............................... 499
------
Property, plant, and equipment, net......................... $ 805
======
</TABLE>
6. LONG-TERM DEBT
Long-term at December 31, 1994 is summarized below (In thousands):
<TABLE>
<S> <C>
Note Payable, unsecured note payable to the former owner,
interest at 6%, payable annually on August 31, due August
31, 1996.................................................. $200
----
Less current maturities..................................... 100
----
Total note payable................................ $100
====
</TABLE>
F-41
<PAGE> 88
HOOVER CONTAINMENT SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the income tax expense(benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................. $182 $144
State................................... 23 18
---- ----
205 162
---- ----
Deferred:
Federal................................. (90) (60)
State................................... (11) (7)
---- ----
(101) (67)
---- ----
Total.............................. $104 $ 95
==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows at December 31, 1994 (in
thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Bonus accrual............................................. $ (74)
Allowance for bad debts................................... (27)
-----
$(101)
=====
</TABLE>
The income tax provision reconciled to the tax computed at the statutory
federal rate:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1995 TO
DECEMBER 31, OCTOBER 27,
1994 1995
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Tax at federal statutory rate..................... $ 89 $85
State income taxes net of federal benefit......... 7 7
Non-deductible meals and entertainment............ 4 3
Other............................................. 4 --
---- ---
Total............................................. $104 $95
==== ===
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are, from time to time, subject to
litigation and claims arising in the ordinary course of business. In the opinion
of management, the ultimate outcome of these litigation and claims is not
expected to have a material adverse effect on the consolidated financial
statements.
F-42
<PAGE> 89
HOOVER CONTAINMENT SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASES
The Company leases certain manufacturing facilities, machinery and
equipment and office space under operating leases. Future minimum payments on
operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C>
1995......................................... $ 466
1996......................................... 427
1997......................................... 304
1998......................................... 58
1999 and thereafter.......................... 29
------
Total................................. $1,284
======
</TABLE>
Total rent expense was $384,000 and $381,000 for the year ended December
31, 1994 and for the period from January 1, 1995 to October 27, 1995,
respectively.
10. RELATED PARTY TRANSACTIONS
The Company was allocated certain general and administrative expenses from
Hoover Group, Inc. totaling $526,000 and $543,000 for the year ended December
31, 1994 and the period from January 1, 1995 through October 27, 1995,
respectively.
11. RETIREMENT PLANS
The Company has a defined-contribution retirement plan that covers all
eligible employees. The plan allows employees to defer up to 15% of their
compensation, with the Company matching 50% of the first 6% of the participant's
contributions. Participants are immediately and fully vested in employee
contributions.
Contribution expense was $15,000 and $32,000 for the year ended December
31, 1994 and the period from January 1, 1995 through October 27, 1995,
respectively.
F-43
<PAGE> 90
REPORT OF INDEPENDENT AUDITORS
Denali Incorporated
We have audited the accompanying balance sheet of Ershigs, Inc., (the
"Company"), as of December 31, 1996, and the related statements of operations,
stockholder's equity, and cash flows for the period from January 1, 1997 to
February 27, 1997, for each of the two years in the period ended December 31,
1996, and for the period from October 1, 1994 to December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ershigs, Inc. at December
31, 1996, and the results of its operations and its cash flows for the period
from January 1, 1997 to February 27, 1997, for each of the two years in the
period ended December 31, 1996, and for the period from October 1, 1994 to
December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
September 22, 1997
F-44
<PAGE> 91
ERSHIGS, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance of $525,000......... $ 3,754
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 494
Inventory:
Raw material........................................... 945
Work-in-process........................................ 1,454
-------
Total Inventory........................................... 2,399
Deferred tax assets....................................... 661
-------
Total current assets.............................. 7,308
Property, plant and equipment:
Land and improvements..................................... 340
Buildings................................................. 1,203
Shop equipment............................................ 539
Furniture and other equipment............................. 202
Construction in progress.................................. 31
-------
2,315
Less accumulated depreciation............................... (196)
-------
2,119
Deferred tax assets......................................... 1,691
Other assets................................................ 15
-------
Total assets...................................... $11,133
=======
LIABILITIES
Current liabilities:
Bank overdraft............................................ $ 235
Accounts payable.......................................... 436
Accrued expenses.......................................... 1,110
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................. 181
Current portion of long-term debt......................... 400
-------
Total current liabilities......................... 2,362
Long-term debt, net of current portion...................... 300
Advances from parent........................................ 2,330
Other long-term liabilities................................. 911
-------
Total liabilities................................. 5,903
Commitments and contingencies
Stockholder's equity:
Voting common stock, 25,000 no par value shares
Authorized, 8,250 shares issued and outstanding........ --
Non-voting common stock, 25,000 no par value shares
Authorized, 8,250 shares issued and outstanding........
Paid-in capital........................................... 6,000
Retained deficit.......................................... (770)
-------
Total stockholder's equity........................ 5,230
-------
Total liabilities and stockholder's equity........ $11,133
=======
</TABLE>
See accompanying notes.
F-45
<PAGE> 92
ERSHIGS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD PERIOD
FROM OCTOBER 1, YEAR ENDED FROM JANUARY 1,
1994 TO DECEMBER 31 1997 TO
DECEMBER 31 ----------------- FEBRUARY 27
1994 1995 1996 1997
--------------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Net sales..................................... $ 5,121 $21,833 $24,484 $3,188
Cost of sales................................. 4,905 19,657 20,496 3,134
------- ------- ------- ------
Gross profit.................................. 216 2,176 3,988 54
Selling, general and administrative
expenses.................................... 1,258 4,088 4,589 748
------- ------- ------- ------
Operating loss................................ (1,042) (1,912) (601) (694)
Other income (expense):
Interest expense............................ (35) (130) (526) (79)
Interest income............................. 2 3 --
Other, net.................................. 2 31 (98) 16
------- ------- ------- ------
Other expense, net............................ (31) (99) (621) (63)
------- ------- ------- ------
Loss before income taxes...................... (1,073) (2,011) (1,222) (757)
Income tax benefit............................ 379 648 452 288
------- ------- ------- ------
Net loss............................ $ (694) $(1,363) $ (770) $ (469)
======= ======= ======= ======
</TABLE>
See accompanying notes.
F-46
<PAGE> 93
ERSHIGS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK PAID-IN RETAINED STOCKHOLDER'S
SHARES CAPITAL DEFICIT EQUITY
------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 30, 1994................... 16,500 $ 7,947 $(1,378) $ 6,569
Net loss........................................ -- -- (694) (694)
------ ------- ------- -------
Balance at December 31, 1994.................... 16,500 $ 7,947 $(2,072) $ 5,875
Net loss........................................ -- -- (1,363) (1,363)
------ ------- ------- -------
Balance at December 31, 1995.................... 16,500 $ 7,947 $(3,435) $ 4,512
New basis in accounting adjustment.............. -- (1,947) 3,435 1,488
Net loss........................................ -- -- (770) (770)
------ ------- ------- -------
Balance at December 31, 1996.................... 16,500 $ 6,000 $ (770) $ 5,230
Net loss........................................ -- (469) (469)
------ ------- ------- -------
Balance at February 27, 1997.................... 16,500 $ 6,000 $(1,239) $ 4,761
====== ======= ======= =======
</TABLE>
See accompanying notes.
F-47
<PAGE> 94
ERSHIGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD PERIOD
FROM OCTOBER 1, FROM JANUARY 1,
1994 TO YEAR ENDED DECEMBER 31 1997 TO
DECEMBER 31, ----------------------- FEBRUARY 27,
1994 1995 1996 1997
--------------- --------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $ (694) $(1,363) $ (770) $ (469)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation....................... 237 813 215 30
Amortization....................... 70 279 -- --
Provision for losses on accounts
receivable....................... 79 95 351 --
Deferred tax provision (benefit)... (64) (141) (216) 13
Gain on sale of assets............. 1 (27) (4) --
Change in operating assets and
liabilities:
Accounts receivable.............. (1,593) (454) 400 (8)
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... (108) (174) (195) (4)
Inventory........................ 575 (664) (689) 134
Other assets..................... -- -- (15) --
Bank overdraft................... 375 (222) (43) (235)
Accounts payable................. 20 (143) (435) 369
Accrued expenses................. 223 (141) 229 (265)
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 33 361 (322) (103)
Other long-term liabilities...... 64 (8) 2 (18)
------- ------- ------- ------
Net cash used in operating
activities.................. (782) (1,789) (1,492) (556)
------- ------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment.......................... (426) (465) (445) (13)
Proceeds from sale of property, plant
and equipment...................... 3 41 7 --
------- ------- ------- ------
Net cash used in investing
activities.................. (423) (424) (438) (13)
------- ------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from parent.............. 1,328 2,613 2,330 1,525
Repayment of long-term debt........... (123) (400) (400) (700)
------- ------- ------- ------
Net cash provided by financing
activities.................. 1,205 2,213 1,930 825
------- ------- ------- ------
Net change in cash...................... -- -- -- 256
Cash at beginning of period............. -- -- -- --
------- ------- ------- ------
Cash at end of period................... $ -- $ -- $ -- $ 256
======= ======= ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................ $ 35 $ 132 $ 109 $ 14
======= ======= ======= ======
</TABLE>
See accompanying notes.
F-48
<PAGE> 95
ERSHIGS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF ACCOUNTING
Ershigs, Inc. (the Company) is a contract designer and manufacturer of
fiberglass reinforced plastic composites for corrosion resistant applications in
the domestic U.S. market. The Company operates fabrication plants located in
Washington, North Carolina and Texas.
The Company was acquired by CBI Industries, Inc. (CBI) on May 21, 1993 and
became a wholly-owned subsidiary of CBI. As a result of the acquisition of the
Company by CBI, the Company recorded goodwill of $5.1 million.
On January 12, 1996, pursuant to the merger agreement dated December 22,
1995, CBI became a subsidiary of Praxair, Inc. (Praxair). As a result of the
acquisition of CBI by Praxair and Praxair's intent to sell the Company, the
financial statements reflect a new basis of accounting as of January 12, 1996.
The new basis of accounting resulted in the Company's assets and liabilities
being adjusted to their estimated net realizable value based on the ultimate
disposition value in February 1997, adjusted for the operating losses of the
Company. The new basis of accounting adjustments, primarily related to the
adjustment of the Company's assets and liabilities to net realizable values, has
a significant effect on the Company's future results of operations for the
periods subsequent to December 31, 1995. The more significant adjustments relate
to the write-off of unamortized goodwill, a reduction in the basis of fixed
assets and recognition of the related deferred tax asset, which significantly
reduces depreciation and amortization expense. The results of operations from
January 1, 1996 to January 11, 1996 are not considered significant to the
financial statements and are included in the accompanying statement of
operations for the year ended December 31, 1996.
These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of its parent company's general and administrative expenses directly
related to the Company's operations. The amounts allocated by its parent company
are not necessarily indicative of the actual costs which may have been incurred
had the Company operated as an entity unaffiliated with its parent company.
However, the Company believes that the allocations are reasonable and in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 55.
On February 28, 1997, the Company was acquired by Denali Incorporated
(Denali) in a stock purchase for $6 million. In connection with the acquisition
of the Company by Denali, the fabrication plant in Texas was closed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable and accounts payable
approximate fair values due to the short-term maturities of these instruments.
The carrying value of the Company's long-term debt approximates fair value
because the rate on such debt is variable, based on current market.
F-49
<PAGE> 96
ERSHIGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORY
Inventory of raw materials and work-in-process is stated at the lower of
cost (determined by the first-in, first-out method) or market. Work-in-process
includes capitalization of labor and overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements which
increase the useful life of property and replacements of major components of
property are capitalized, while maintenance, repairs and minor replacements are
expensed as incurred.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets. The estimated useful lives range from 3 to 10 years
for equipment and from 10 to 50 years for buildings and land improvements.
INCOME TAXES
The Company's results are included in the consolidated federal income tax
return filed by its parent company. The Company uses the liability method of
accounting for income taxes. Under the liability method, deferred income taxes
are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates
that will be in effect when the differences reverse.
The policy of the parent company is for each U.S. subsidiary to currently
recognize any federal income tax expense, as computed on a separate subsidiary
basis. Any resulting tax liability or receivable is remitted to or received from
the parent through the advances from parent account.
GOODWILL
Prior to the acquisition of the Company's parent by Praxair, goodwill
represented the excess cost of the purchase of the Company by CBI over the fair
value of the Company's tangible assets at the date of acquisition. Goodwill was
being amortized on a straight-line basis over 20 years. The goodwill was
eliminated in the new basis of accounting adjustments as a result of the January
1996 acquisition of the Company by Praxair.
RESEARCH AND DEVELOPMENT COSTS
The costs of materials and equipment that are acquired for research and
development activities, and which have alternative uses, are capitalized and
depreciated over the period of future benefit. All research and development
costs are charged against earnings in the period incurred. Research and
development costs expensed were $-0-, $27,000, $104,000, and $10,000 during the
period from October 1, 1994 to December 31, 1994, the years ended December 31,
1995 and 1996 and the period from January 1, 1997 to February 27, 1997,
respectively.
REVENUE RECOGNITION
Revenues from sales of products fabricated at plant locations are
recognized using the units-of-delivery method of accounting. Revenues from
certain long-term construction contracts, usually performed on job sites, are
recognized on the percentage-of-completion method. Earned revenue is based on
the percentage that incurred costs to date bear to total estimated costs after
giving effect to the most recent estimates of total cost. The cumulative impact
of revisions in total cost estimates during the progress of work is reflected in
the year in which these changes become known. Earned revenue reflects the
original contract price adjusted for agree-upon claim and change order revenue,
if any.
F-50
<PAGE> 97
ERSHIGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Losses expected to be incurred on jobs in process, after consideration of
estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known. Selling and administrative expenses are
charged to income in the year incurred and are not allocated to contracts in
progress.
3. LONG-TERM DEBT
The balance of long-term debt at December 31, 1996 consists of a note
payable due in monthly installments of $33,333, plus interest at the bank's
prime rate plus 1% (9.5% at December 31, 1996). This note is collateralized by
virtually all the assets of the Company. The note payable requires the Company
to comply with certain financial covenants, the most restrictive of which
includes the maintenance of liability and leverage ratios as well as limitations
on dividends, additional borrowings and advances to affiliates. The Company was
in compliance with all covenants as of December 31, 1996. The note matures
$400,000 and $300,000 in the year ended December 31, 1997 and 1998,
respectively. In February, 1997, the note payable was repaid in full by the
parent company through the advances from parent account.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts are summarized as
follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Costs incurred on uncompleted contracts..................... $4,829
Estimated earnings.......................................... 785
------
5,614
Less billings to date....................................... 5,302
------
$ 312
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 493
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................. 181
------
$ 312
======
</TABLE>
5. CONCENTRATION OF CREDIT RISK
The Company's trade customers are geographically dispersed throughout the
United States and are concentrated in the power utilities, pulp and paper and
chemical industries. The Company continuously evaluates the creditworthiness of
its customers and generally does not require collateral. The Company had 8
customers individually exceeding 5% of accounts receivable, accounting for
approximately 68% of total accounts receivable at December 31, 1996.
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to various lawsuits and claims and other actions
arising in the normal course of business. The Company is also subject to
contingencies pursuant to environmental laws and regulations that in the future
may require the Company to take action to correct the effects on the environment
of prior manufacturing and waste disposal practices. Accrued environmental
liabilities at December 31, 1996 were $411,000 and, in management's opinion,
such accruals are appropriate based on existing facts and circumstances. Under
more adverse circumstances, however, this potential liability could be higher.
Current expenditures have not been material.
F-51
<PAGE> 98
ERSHIGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the financial position, results of operations
or cash flows of the Company.
Due to the nature of the contracting business, lawsuits occasionally arise.
It is not possible to predict the results of specific lawsuits; however, the
Company's management believes that there are no issues or incidents that would
be material to its financial position, results of operations or cash flows. In
addition, the Company has given certain guarantees in connection with the
performance of contracts.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Tax over book basis of net book value of property, plant,
and equipment.......................................... $1,346
Expense accrued for books not yet deductible for tax...... 1,006
------
Total deferred tax assets................................... 2,352
Total deferred tax liabilities.............................. --
------
Net deferred tax assets..................................... $2,352
======
</TABLE>
The components of income tax benefit are as follows (In thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED PERIOD FROM
1994 TO DECEMBER 31, JANUARY 1, 1997
DECEMBER 31, ------------ TO FEBRUARY 27,
1994 1995 1996 1997
------------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Current income tax benefit:
Federal................................ $281 $454 $211 $269
State.................................. 33 53 25 32
---- ---- ---- ----
Total current income tax benefit......... 314 507 236 301
Deferred income tax benefit (expense):
Federal................................ 58 126 193 (12)
State.................................. 7 15 23 (1)
---- ---- ---- ----
Total deferred income tax benefit
(expense).............................. 65 141 216 (13)
---- ---- ---- ----
Total income tax benefit................. $379 $648 $452 $288
==== ==== ==== ====
</TABLE>
F-52
<PAGE> 99
ERSHIGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax benefit computed at U.S. federal statutory
tax rates to the reported tax benefit is as follows (In thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED PERIOD FROM
1994 TO DECEMBER 31, JANUARY 1, 1997
DECEMBER 31, ------------ TO FEBRUARY 27,
1994 1995 1996 1997
------------ ---- ---- ---------------
<S> <C> <C> <C> <C>
Expected income tax benefit at 34%....... $365 $684 $416 $258
State income taxes, net of federal
benefit................................ 40 68 48 30
Goodwill................................. (24) (95) -- --
Other.................................... (2) (9) (12) --
---- ---- ---- ----
Reported total income tax benefit........ $379 $648 $452 $288
==== ==== ==== ====
</TABLE>
8. RELATED-PARTY TRANSACTIONS
The Company was allocated certain general and administrative expenses,
including administration of the Company's workers' compensation insurance, from
its parent company totaling $58,000, $281,000, $296,000, and $9,000 during the
period from October 1, 1994 to December 31, 1994, the years ended December 31,
1995 and 1996 and the period from January 1, 1997 to February 27, 1997,
respectively.
The Company was allocated interest costs from Praxair of $420,000 and
$70,000 for the year ended December 31, 1996 and for the period January 1, 1997
to February 27, 1997, respectively, related to Praxair carrying its investment
in Ershigs as an asset held for sale.
9. PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing and 401(k) plan
for substantially all nonunion employees. The plan allows employees to defer up
to 15% of their compensation. Discretionary contributions to the profit sharing
plan are determined by the Board of Directors and funded annually. A profit
sharing contribution of $32,000 was made during the period from October 1, 1994
to December 31, 1994. No profit sharing contribution was made for the years
ended December 31, 1995 and 1996, or the period from January 1, 1997 to February
27, 1997.
F-53
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
Denali Incorporated
We have audited the accompanying balance sheet of GL&V/LaValley
Construction, Inc. (the "Company"), as of August 16, 1997, and the related
statements of operations, stockholder's equity, and cash flows for the period
from August 23, 1996 (date of acquisition) to August 16, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GL&V/LaValley Construction,
Inc., at August 16, 1997, and the results of its operations and its cash flows
for the period from August 23, 1996 (date of acquisition) to August 16, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
September 9, 1997
F-54
<PAGE> 101
GL&V/LAVALLEY CONSTRUCTION, INC.
BALANCE SHEET
AUGUST 16, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 7,962
Trade accounts receivable, net of allowance for doubtful
accounts of $55,000.................................... 1,001,987
Inventories............................................... 125,850
Costs and estimated earnings on uncompleted contracts in
excess of related billings............................. 454,625
Due from parent........................................... 1,392,198
Prepaid expenses and other................................ 21,826
Deferred tax asset........................................ 80,948
Total current assets.............................. 3,085,396
Property, plant, and equipment, net......................... 1,591,397
----------
$4,676,793
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 562,894
Warranty reserve.......................................... 95,000
Income taxes payable...................................... 24,083
Note payable to parent.................................... 1,643,000
----------
Total current liabilities......................... 2,324,977
Deferred tax liability...................................... 49,240
Stockholder's equity:
Common stock, $10 par value:
Authorized shares -- 30,000
Issued and outstanding shares -- 30,000................ 300,000
Additional paid-in capital................................ 1,911,853
Retained earnings......................................... 90,723
----------
2,302,576
----------
Total liabilities and stockholder's equity........ $4,676,793
==========
</TABLE>
See accompanying notes.
F-55
<PAGE> 102
GL&V/LAVALLEY CONSTRUCTION, INC.
STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997
<TABLE>
<S> <C>
Revenues.................................................... $7,876,830
Direct costs................................................ 6,352,975
----------
Gross margin................................................ 1,523,855
Selling expenses............................................ 210,012
Administrative expenses..................................... 947,160
----------
1,157,172
Operating profit............................................ 366,683
Other expense:
Interest expense............................................ (174,338)
Other, net.................................................. (23,036)
----------
Earnings before income taxes................................ 169,309
Income taxes................................................ 78,586
----------
Net earnings................................................ $ 90,723
==========
</TABLE>
See accompanying notes.
F-56
<PAGE> 103
GL&V/LAVALLEY CONSTRUCTION, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997
<TABLE>
<CAPTION>
ADDITIONAL
CAPITAL PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, August 23, 1996....................... $300,000 $ 4,811,853 $ -- $ 5,111,853
Dividends to parent.......................... -- (2,900,000) (2,900,000)
Net earnings for the period.................. -- -- 90,723 90,723
-------- ----------- ------- -----------
Balance, August 16, 1997....................... $300,000 $ 1,911,853 $90,723 $ 2,302,576
======== =========== ======= ===========
</TABLE>
See accompanying notes.
F-57
<PAGE> 104
GL&V/LAVALLEY CONSTRUCTION, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 23, 1996 (DATE OF ACQUISITION) TO AUGUST 16, 1997
<TABLE>
<S> <C>
Operating activities:
Net earnings.............................................. $ 90,723
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation expense................................... 204,622
Loss on disposition of property, plant, and
equipment............................................. 7,608
Deferred income tax expense............................ 13,063
Changes in operating assets and liabilities:
Trade accounts receivable............................ 867,475
Inventories.......................................... 50,296
Costs and estimated earnings on uncompleted contracts
in excess of related billings....................... 214,632
Income taxes payable................................. 24,083
Prepaid expenses and other current assets............ (14,879)
Accounts payable and accrued expenses................ (689,608)
Warranty reserve..................................... (93,852)
Unearned income...................................... (83,514)
-----------
Net cash provided by operating activities................... 590,649
-----------
Investing activities:
Due from Parent........................................... 139,991
Purchases of property, plant, and equipment............... (175,678)
-----------
Net cash used in investing activities....................... (35,687)
-----------
Financing activities:
Proceeds from issuance of notes payable to Parent......... 1,643,000
Payments on notes payable to Parent....................... (2,190,000)
-----------
Net cash used in financing activities....................... (547,000)
-----------
Increase in cash............................................ 7,962
Cash at beginning of period................................. --
-----------
Cash at end of period....................................... $ 7,962
===========
Cash paid during period for income taxes.................... $ 32,000
===========
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
The Company declared a dividend of $2,900,000 which was applied to reduce
the amount due to its Parent.
See accompanying notes.
F-58
<PAGE> 105
GL&V/LAVALLEY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 16, 1997
1. ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
GL&V/LaValley Construction, Inc. (the "Company" or "LCI"), a Mississippi
corporation, is wholly owned by GL&V/LaValley Industries, Inc. (the "Parent" or
"LII"), a Washington corporation. LCI markets and installs equipment and parts
primarily for the paper pulp industry throughout North America. On August 23,
1996, LII became a wholly owned subsidiary through a stock purchase of GL&V
Holdings, Inc., a Washington corporation which is wholly owned by Groupe
Laperriere & Verreault Inc., a Canadian corporation. The stock purchase of the
Parent was accounted for under the purchase method and the amount of the
purchase price allocated to the Company was allocated based on the fair value of
the assets acquired and liabilities assumed, which approximated the net book
value of the Company.
These financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and include the historical balance
sheets, results of operations and cash flows of the Company, including allocated
portions of the Parent's general and administrative expenses directly related to
the Company's operations. The amounts allocated by the Parent are not
necessarily indicative of the actual costs which may have been incurred had the
Company operated as an entity unaffiliated with the Parent. However, the Company
believes that the allocations are reasonable and in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 55.
REVENUE AND COST RECOGNITION
Revenues from contracts with customers for manufacture, repair, or
installation of equipment are recognized on the percentage-of-completion method,
measured by the percentage of construction costs incurred to date to estimated
total costs for each contract. Expended construction costs are considered by
management to be the best available measure of progress on these contracts.
Construction costs include all direct material, equipment, labor, subcontractor,
and indirect costs related to contract performance. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions and final contract settlements may
result in revisions to costs and income and are recognized in the period the
revisions are determined.
The asset, "Costs and estimated earnings on uncompleted contracts in excess
of related billings," represents revenues recognized in excess of amounts
billed.
Contracts other than those described above are generally accounted for on a
time-and-material basis. Revenues and accounts receivable from such jobs are
recorded at the amount billable based on the costs incurred.
INVENTORIES
Inventories consist of raw materials and are valued at the lower of average
cost or market, with cost determined by the moving average method, which
approximates the first-in/first-out method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is charged
to income over the estimated useful lives of the respective assets using the
straight-line method, over lives of 31.5 years for building and improvements and
5 to 7 years for machinery and equipment, furniture and fixtures, and vehicles.
F-59
<PAGE> 106
GL&V/LAVALLEY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company's taxable income is included in the consolidated federal income
tax return of the Parent. The federal tax provision is substantially the same
provision as if the Company were required to file its own federal income tax
return on a separate company basis.
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, prepaid expenses, accounts receivable,
accounts payable, and accrued expenses approximate fair values due to the
short-term maturities of these instruments. The book values of cash, trade
receivables, and trade payables are considered to be representative of their
respective fair values because of their short-term nature.
2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at August 16, 1997
are summarized as follows:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts..................... $1,370,424
Estimated earnings.......................................... 254,654
----------
1,625,078
Less billings to date....................................... 1,170,453
----------
Uncompleted contracts with costs and estimated earnings in
excess of related billings................................ $ 454,625
==========
</TABLE>
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at August 16,
1997:
<TABLE>
<CAPTION>
COST
----------
<S> <C>
Land........................................................ $ 31,360
Building and improvements................................... 1,504,162
Machinery and equipment..................................... 1,162,726
Furniture and fixtures...................................... 124,421
Vehicles.................................................... 104,108
----------
2,926,777
Less accumulated depreciation............................... 1,335,380
----------
Property, plant, and equipment.............................. $1,591,397
==========
</TABLE>
F-60
<PAGE> 107
GL&V/LAVALLEY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTE PAYABLE AND CREDIT FACILITY
The Company has a note payable to its Parent in the amount of $1,643,000
which is due on demand. The note bears interest at the bank prime.
The Company is party to a revolving line of credit and a term loan on a
joint and several basis with its Parent. As of August 16, 1997, the Company had
no outstanding balance. As of August 16, 1997, the Parent had $2,202,381
outstanding from the term loan facility. This credit facility is collateralized
by the accounts receivable, inventory, machinery and equipment, fixtures,
documents, instruments, general intangibles and proceeds thereof, and real
property of the Company and its Parent.
5. DEFINED-CONTRIBUTION 401(K) SAVINGS PLAN
The Company participates in the Parent's defined-contribution 401(k)
savings plan, which is available to substantially all of the Company's
employees, whereby the Company will match 100% of the participant's contribution
up to 1.5% of compensation. The Company made contributions to the plan of
$13,058 during the period.
6. INCOME TAXES
For the period August 23, 1996 (date of acquisition) to August 16, 1997,
the income tax provision consisted of the following components:
<TABLE>
<S> <C>
Current
Federal................................................... $62,523
State..................................................... 3,000
-------
65,523
Deferred.................................................... 13,063
-------
Total............................................. $78,586
=======
</TABLE>
The income tax provision reconciled to the tax computed at the federal
statutory rate:
<TABLE>
<S> <C>
Tax at federal statutory rate............................... $ 57,565
State income taxes net of federal benefit................... 5,926
Decrease in valuation allowance............................. (15,222)
Nondeductible meals and entertainment....................... 20,810
Nondeductible penalties..................................... 7,103
Other....................................................... 2,404
--------
$ 78,586
========
</TABLE>
The deferred tax asset and liability at August 16, 1997 consists of the
following:
<TABLE>
<S> <C>
Deferred tax asset:
Expenses deducted for book not deductible for tax in the
period................................................. $80,948
Deferred tax liability:
Depreciation of property and equipment.................... 49,240
-------
Net deferred tax asset...................................... $31,708
=======
</TABLE>
F-61
<PAGE> 108
GL&V/LAVALLEY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance was decreased by $15,222 to $0 during the period
August 24, 1996 through August 16, 1997, based on management's reevaluation of
the likelihood of realization of the net deferred tax assets.
7. LEASES AND COMMITMENTS
The Company has various equipment under noncancelable operating leases
expiring through 2000. Rent expense under all such leases approximates $8,557
for the period August 23, 1996 to August 16, 1997.
Future minimum lease payments under operating leases for personal property
with noncancelable terms in excess of one year, at August 16, 1997, total
$12,264 and are payable as follows: 1998 -- $8,557; 1999 -- $3,707; and
2000 -- $-0-.
8. RELATED PARTY TRANSACTIONS
The Parent provides certain administrative functions on behalf of the
Company that are allocated to the Company for separate financial reporting
purposes. The costs allocated of $430,000 for the period from August 23, 1996 to
August 16, 1997 have been recorded in administrative expenses.
The Company is covered through the Parent company's business insurance
program. For the period August 23, 1996 to August 16, 1997, the Parent charged
the Company $27,744 for its proportionate share of the insurance coverage.
The Company also pays the Parent a management fee equal to 1.25% of
revenues. For the period from August 23, 1996 to August 16, 1997, the Company
paid LII $101,478.
The advance to the Parent represents cash transferred to the Parent
company.
The Company has provided goods and services to the Parent totaling $572,308
for the period August 23, 1996 to August 16, 1997 which include a profit margin
of 18%.
9. CONCENTRATION OF CREDIT RISK
The Company has one significant customer that accounted for approximately
17% of all sales for the period from August 23, 1996 to August 16, 1997.
10. SUBSEQUENT EVENTS
In August 1997, the Company signed a letter of intent to sell all of its
common stock to Denali Incorporated for $3.9 million. The sale of the Company is
anticipated to close by October 31, 1997.
F-62
<PAGE> 109
REPORTS OF INDEPENDENT AUDITORS
The Board of Directors
SEFCO, Inc.
We have audited the accompanying balance sheet of SEFCO, Inc., as of
December 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEFCO, Inc. at December 31,
1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
LEMING, SCHALLNER & CO.
Tulsa, Oklahoma
January 22, 1997
F-63
<PAGE> 110
REPORTS OF INDEPENDENT AUDITORS
Board of Directors
SEFCO, Inc.
We have audited the accompanying balance sheet SEFCO, Inc. as of December
31, 1995, and the related statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEFCO, Inc., at December 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
GAYNOR AND FAWCETT, INC.
Tulsa, Oklahoma
February 5, 1996
F-64
<PAGE> 111
SEFCO, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 475,931 $ 339,804
Certificates of deposit................................... 35,630 1,100,000
Accounts receivable -- contracts.......................... 1,158,140 806,104
Accounts receivable -- other.............................. 3,165 3,765
Costs and estimated earnings on incomplete contracts in
excess of billings..................................... 199,178 118,737
Inventory................................................. 210,498 18,117
Prepaid expenses.......................................... 88,348 24,099
---------- ----------
Total current assets.............................. 2,170,890 2,410,626
Property and equipment:
Machinery and equipment................................... 1,617,431 1,837,913
Automotive equipment...................................... 228,218 511,350
Furniture and fixtures.................................... 46,018 61,118
Leasehold improvements.................................... 453,992 380,708
Land...................................................... 15,000 129,351
---------- ----------
2,360,659 2,920,440
Less accumulated depreciation............................. 1,155,677 1,439,966
---------- ----------
Net property and equipment.................................. 1,204,982 1,480,474
Other assets:
Cash value of life insurance.............................. 83,118 129,085
Deposits.................................................. 1,840 840
---------- ----------
Total other assets................................ 84,958 129,925
Total assets...................................... $3,460,830 $4,021,025
========== ==========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 624,338 $ 385,361
Accrued expenses.......................................... 213,951 212,786
Warranty reserve.......................................... 40,000 50,000
Income taxes payable...................................... 160,318 265,914
Billings in excess of costs and estimated earnings on
incomplete contracts................................... 358,858 355,497
Current deferred income taxes............................. 171,038 113,649
---------- ----------
Total current liabilities......................... 1,568,503 1,383,207
Deferred income taxes....................................... 58,731 75,082
Stockholders' equity:
Common stock, $1 par value, 10,000 shares authorized; 500
and 1,000 shares issued at December 31, 1995 and 1996,
respectively........................................... 500 1,000
Additional paid-in capital.................................. 46,058 46,058
Retained earnings........................................... 1,787,038 2,515,678
---------- ----------
Total stockholders' equity........................ 1,833,596 2,562,736
Total liabilities and stockholders' equity........ $3,460,830 $4,021,025
========== ==========
</TABLE>
See accompanying notes.
F-65
<PAGE> 112
SEFCO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenues............................................. $6,675,574 $8,445,324 $10,121,541
Cost of revenues:
Direct contract costs.............................. 5,001,174 5,947,929 6,685,831
Indirect overhead.................................. 472,298 604,730 744,580
---------- ---------- -----------
Total cost of revenue................................ 5,473,472 6,552,659 7,430,411
---------- ---------- -----------
Gross profit......................................... 1,202,102 1,892,665 2,691,130
General and administrative expenses.................. 980,285 1,174,358 1,530,824
---------- ---------- -----------
Income from operations............................... 221,817 718,307 1,160,306
Other income (expenses):
Interest income.................................... 13,179 20,089 32,833
Net gain (loss) on sale of assets.................. (10,510) 4,630 (3,338)
Interest expense................................... (3,749) (1,256) --
Other income....................................... -- 7,268 20,055
---------- ---------- -----------
Total other income (expenses)........................ (1,080) 30,731 49,550
---------- ---------- -----------
Income before provision for taxes.................... 220,737 749,038 1,209,856
Provision for income taxes:
Current............................................ 70,330 226,499 496,754
Deferred........................................... 13,203 56,954 (41,038)
---------- ---------- -----------
Total provision for taxes............................ 83,533 283,453 455,716
---------- ---------- -----------
Net income........................................... $ 137,204 $ 465,585 $ 754,140
========== ========== ===========
</TABLE>
See accompanying notes.
F-66
<PAGE> 113
SEFCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993................ 500 $ 500 $46,058 $1,189,249 $1,235,807
Dividends declared........................ -- -- -- (2,000) (2,000)
Net income................................ -- -- -- 137,204 137,204
----- ------ ------- ---------- ----------
Balance at December 31, 1994................ 500 500 46,058 1,324,453 1,371,011
Dividends declared........................ -- -- -- (3,000) (3,000)
Net income................................ -- -- -- 465,585 465,585
----- ------ ------- ---------- ----------
Balance at December 31, 1995................ 500 500 46,058 1,787,038 1,833,596
Stock Dividends declared.................. 500 500 -- (500) --
Dividend declared......................... -- -- -- (25,000) (25,000)
Net income................................ -- -- -- 754,140 754,140
----- ------ ------- ---------- ----------
Balance at December 31, 1996................ 1,000 $1,000 $46,058 $2,515,678 $2,562,736
===== ====== ======= ========== ==========
</TABLE>
See accompanying notes.
F-67
<PAGE> 114
SEFCO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Operating activities
Net income.............................................. $137,204 $465,585 $ 754,140
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 228,701 233,970 369,153
Deferred income taxes................................. 13,203 56,954 (41,038)
Gain (loss) on sale of assets......................... 10,510 (4,630) 3,338
Cash value of life insurance.......................... (43,231) (39,740) (45,967)
Changes in operating assets and liabilities:
Accounts receivable................................... (693,918) (112,756) 351,436
Other accounts receivable............................. (1,187) 585 --
Deposits.............................................. -- (1,040) 1,000
Costs and estimated earnings in excess of billings.... 15,891 (41,487) 80,441
Inventory............................................. (8,409) (196,141) 192,381
Prepaid income taxes.................................. (67,390) 67,390 --
Prepaid expenses...................................... 35,805 (2,675) 64,249
Accounts payable...................................... 237,678 186,851 (238,977)
Accrued expenses...................................... 75,504 97,809 (1,165)
Warranty reserve...................................... -- -- 10,000
Income taxes payable.................................. (44,839) 160,318 105,596
Billings in excess of costs and estimated earnings.... 110,017 173,819 (3,361)
-------- -------- ----------
5,539 1,044,812 1,601,226
Investing activities
Proceeds from sale of fixed assets...................... 32,522 8,200 58,920
Purchase of fixed assets................................ (134,109) (715,673) (706,903)
Sale (purchase) of certificates of deposit.............. 17,500 (35,630) (1,064,370)
-------- -------- ----------
(84,087) (743,103) (1,712,353)
Financing activities
Payment of dividends.................................... (2,000) (2,000) (25,000)
Retirement of notes payable............................. (234,080) (26,169) --
Proceeds from cash value of life insurance.............. 72,114 -- --
-------- -------- ----------
(163,966) (28,169) (25,000)
Total increase (decrease) in cash....................... (242,514) 273,540 (136,127)
Beginning cash balance.................................. 444,905 202,391 475,931
-------- -------- ----------
Ending cash balance..................................... $202,391 $475,931 $ 339,804
Supplemental schedule of cash flow information:
Cash paid during the year for interest.................. $ 3,749 $ 1,256 $ --
Cash paid during the year for income taxes.............. $182,559 $ 17,861 $ 388,454
</TABLE>
In non-cash transactions during fiscal year 1994, the Company purchased
fixed assets for notes payable in the amount of $35,076, and financed the annual
insurance renewal for $16,125.
See accompanying notes.
F-68
<PAGE> 115
SEFCO, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY'S ACTIVITIES
SEFCO, Inc. (the "Company"), is engaged in the business of the fabrication
and erection of above-ground steel storage tanks for municipalities and the
petroleum and grain industries. Work is performed primarily under fixed-price
contracts.
SUBSIDIARY COMPANIES
The Company holds 100% of the stock of two subsidiary companies, Marvel
Painting and Construction, Inc., and SEFCO of Arkansas, Inc. Both subsidiaries
are inactive shells, thus the financial statements reflect only the financial
position, operations and cash flows of SEFCO, Inc.
REVENUE AND COST RECOGNITION
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method. No revenue is recognized on a contract until
substantial costs have been incurred. The percentage of completion is measured
by the ratio of costs incurred to date to estimated total costs on the contract.
Contract costs include all direct materials, labor and subcontract costs,
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and equipment costs. Selling, general, and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings on incomplete contracts in excess
of billings," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on incomplete
contracts," represents amounts billed in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with a
maturity of three months or less when purchased.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
DEPOSITS HELD IN FINANCIAL INSTITUTIONS
The Company had demand deposits on hand in financial institutions which
exceeded depositor's insurance provided by the applicable guaranty agency by
$90,817, $361,287, and $1,339,804 at December 31, 1994, 1995, and 1996,
respectively.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method based on the estimated useful lives of the related
assets. Construction machinery and furniture are being depreciated
F-69
<PAGE> 116
SEFCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
over periods of five to ten years. Autos and trucks have estimated useful lives
of three to five years. Leasehold costs have estimated useful lives of 27 to 39
years.
Maintenance, repairs, and minor renewals are charged to operations as
incurred. Improvements and major renewals are capitalized. Upon sale or
disposition of properties, the asset account is relieved of the cost, and the
accumulated depreciation account is charged with depreciation taken prior to the
sale; any resultant gain or loss is credited or charged to earnings.
INCOME TAXES
Deferred income taxes are provided for differences in timing of reporting
income for financial statement and tax purposes arising from differences in the
methods of accounting for construction contracts, depreciation, and warranty
reserves. Construction contracts are reported for tax purposes on the completed
contract method and for financial statement purposes on the
percentage-of-completion method. Accelerated depreciation is used for tax
reporting, and straight-line depreciation is used for financial statement
reporting. The Company has established a reserve fund for warranties which is
not currently deductible for tax purposes.
2. ACCOUNTS RECEIVABLE -- CONTRACTS
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- --------
<S> <C> <C>
Completed contracts........................................ $ 306,321 $166,935
Contracts in progress...................................... 851,819 639,169
---------- --------
Total accounts receivable.................................. $1,158,140 $806,104
========== ========
</TABLE>
There were no accounts written-off during the years ended December 31,
1994, 1995, and 1996.
3. CONTRACTS IN PROGRESS
Information with respect to contracts in progress is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Expenditures on incomplete contracts...................... $2,043,906 $1,845,755
Estimated earnings........................................ 501,823 353,361
---------- ----------
2,545,729 2,199,116
Less billings to date..................................... 2,705,409 2,435,876
---------- ----------
$ (159,680) $ (236,760)
========== ==========
</TABLE>
The information above is included in the accompanying balance sheets under
the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Current assets - costs and estimated earnings on incomplete
contracts in excess of billings.......................... $ 199,178 $ 118,737
Current liabilities - billings in excess of costs and
estimated earnings on incomplete contracts............... (358,858) (355,497)
--------- ---------
$(159,680) $(236,760)
========= =========
</TABLE>
F-70
<PAGE> 117
SEFCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Expense accrued for books not yet deductible for tax...... $ 14,976 $ 18,868
Other..................................................... 1,872 -
-------- --------
Total deferred tax assets................................... 16,848 18,868
Deferred tax liabilities:
Book over tax basis of net book value of property, plant,
and equipment.......................................... 58,731 75,082
Contract revenue on percent completion for book and
completed contract for tax............................. 187,886 132,517
-------- --------
Total deferred tax liabilities.............................. 246,617 207,599
-------- --------
Net deferred tax liabilities................................ $229,769 $188,731
======== ========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Current income tax expense:
Federal........................................... $56,263 $198,053 $422,246
State............................................. 14,067 28,446 74,508
------- -------- --------
Total current income tax expense:................... 70,330 226,499 496,754
Deferred income tax expense (benefit):
Federal........................................... 9,759 49,024 (34,882)
State............................................. 3,444 7,930 (6,156)
------- -------- --------
Total deferred income tax expense (benefit)......... 13,203 56,954 (41,038)
------- -------- --------
Total income tax expense............................ $83,533 $283,453 $455,716
======= ======== ========
</TABLE>
The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Expected income tax expense at 34%.................. $75,050 $254,673 $411,351
State income taxes, net of federal benefit.......... 4,824 23,867 45,188
Meals and entertainment............................. 800 2,115 1,185
Other, net.......................................... 2,859 2,798 (2,008)
------- -------- --------
Reported total income tax expense................... $83,533 $283,453 $455,716
======= ======== ========
</TABLE>
For the years ended December 31, 1994, 1995, and 1996, the federal income
tax provision was less than the amount of taxes computed at the 34% statutory
federal income tax rate because of permanent differences related to expenses
which were not deductible for tax purposes and the federal benefit of state
income taxes.
F-71
<PAGE> 118
SEFCO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PENSION
During 1994 the Company had a profit sharing plan which covered
substantially all employees of the Company. Employees become eligible for
participation after two years of service.
In 1995, the Company converted its profit sharing plan to a 401(k)
retirement plan (the "Plan") which covers substantially all of the employees of
the Company. The Plan allows employees to defer up to 15% of their compensation,
with the Company matching 100% of the first 6% of the participant's
contribution. Participants are immediately and fully vested in employer
contributions. The Company accrued contributions to the pension plan of $-0-,
$65,425, and $89,723 for the years ended December 31, 1994, 1995, and 1996,
respectively.
6. RELATED PARTY TRANSACTIONS
The Company rents land and facilities owned by the stockholders of the
Company and pays insurance, maintenance, and utility bills incurred at the
premises in addition to rent. The Company paid $36,000 in rent payments in 1994,
1995, and 1996.
The stockholders own certain construction equipment which they lease to the
Company on a month-to-month basis. Rental rates are equivalent to rates
available in the marketplace. The Company paid $144,000, $144,000, and $228,000
in the years ended December 31, 1994, 1995, and 1996, respectively, for the use
of this equipment.
7. REVOLVING LINE OF CREDIT
In April 1996, the Company entered into a $450,000 revolving line of credit
with interest at 1% above the New York prime rate to provide operating capital.
The line is collateralized by all accounts, contracts, contract rights, and
general intangibles and by all inventory, equipment, and leasehold improvements.
The line expires April 22, 1997. At December 31, 1996, the Company had not
borrowed funds against the line.
8. CONTINGENT LIABILITY
The Company has the normal contingencies inherent to construction
activities and a general commitment to correct certain deficiencies in
construction for a period of one year after completion of a construction
contract. Such contingencies and commitments have not been material in prior
years, and in the opinion of management, the Company has adequate insurance
coverage and no material contingencies will result from present or future
claims.
9. CONCENTRATION OF CREDIT RISK
The company extends credit to customers as a normal course of business. At
December 31, 1996, the Company had extended credit to two customers totaling
$246,000 or 30% of accounts receivable-contracts.
F-72
<PAGE> 119
SEFCO, INC.
BALANCE SHEET
ASSETS
September 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 610,808
Accounts receivable -- contracts.......................... 856,219
Accounts receivable -- other.............................. 49,687
Costs and estimated earnings in excess of billings on
incomplete contracts................................... 159,980
Inventory................................................. 13,804
Prepaid expenses.......................................... 33,858
----------
Total current assets.............................. 1,724,356
----------
Property and equipment:
Machinery and equipment................................... 2,094,442
Automotive equipment...................................... 397,504
Furniture and fixture..................................... 77,722
Leasehold improvements.................................... 440,071
Land...................................................... 875,237
----------
3,884,976
Less accumulated depreciation............................. 1,664,584
----------
Net property and equipment.................................. 2,220,392
----------
Other assets:
Deposits.................................................. 840
----------
Total other assets.......................................... 840
----------
Total assets................................................ $3,945,588
==========
</TABLE>
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 354,689
Accrued expenses.......................................... 206,426
Warranty reserve.......................................... 50,000
Billings in excess of costs and estimated earnings on
incomplete contracts................................... 108,893
Current deferred income taxes............................. 146,942
----------
Total current liabilities......................... 866,950
----------
Deferred income taxes....................................... 217,806
----------
Stockholders' equity:
Common stock -- $1 par value, 10,000 shares authorized,
1,000 shares issued.................................... 1,000
Additional paid-in-capital................................ 46,058
Retained earnings......................................... 2,813,774
----------
Total stockholders' equity........................ 2,860,832
----------
Total liabilities and stockholder's equity........ $3,945,588
==========
See notes to unaudited financial statements.
F-73
<PAGE> 120
SEFCO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $7,716,178 $7,359,168
Cost of revenues:
Direct contract costs..................................... 5,209,729 5,000,666
Indirect overhead......................................... 539,049 474,578
---------- ----------
Total cost of revenues...................................... 5,748,778 5,475,244
---------- ----------
Gross profit................................................ 1,974,400 1,883,924
General and administrative expenses......................... 1,198,187 1,245,039
---------- ----------
Income from operations...................................... 776,213 638,885
---------- ----------
Other income (expense):
Loss on sale of fixed assets.............................. (3,338) (3,220)
Interest income........................................... 20,883 40,818
Other income.............................................. 26,505 28,505
Other expense............................................. (10,690) (8,087)
---------- ----------
Total other income (expense)................................ 33,360 58,016
---------- ----------
Net income before provision for income taxes................ 809,573 696,901
---------- ----------
Provision (benefit) for income taxes:
Current................................................... 285,114 222,788
Deferred.................................................. 24,861 176,017
---------- ----------
Total provision for income taxes.................. 309,975 398,805
---------- ----------
Net income........................................ $ 499,598 $ 298,096
========== ==========
</TABLE>
See notes to unaudited financial statements.
F-74
<PAGE> 121
SEFCO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
--------- ----------
(UNAUDITED)
<S> <C> <C>
Operating Activities
Net income.................................................. $ 499,598 $ 298,096
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 275,671 285,759
Deferred income taxes..................................... 24,861 176,017
Cash value of life insurance.............................. (33,452) 129,085
Loss on sale of investments and fixed assets.............. 3,338 8,440
Changes in operating assets and liabilities:
Accounts receivable....................................... 295,312 (96,037)
Costs and estimated earnings in excess of billings........ 55,160 (41,243)
Deposits.................................................. 1,000 --
Inventory................................................. 40,405 4,313
Prepaid expenses.......................................... 44,626 (9,759)
Accounts payable.......................................... (394,698) (30,672)
Accrued expenses.......................................... 363,235 (6,360)
Warranty reserve.......................................... (7,077) --
Accrued income taxes...................................... (48,334) (265,914)
Billings in excess of costs and estimated earnings........ 32,499 (246,604)
--------- ----------
Net cash provided by operating activities................... 1,152,144 205,121
--------- ----------
Investing Activities
Proceeds from sale of property and equipment................ 55,589 88,088
Acquisition of property and equipment....................... (641,065) (1,116,985)
Decrease in certificates of deposit......................... 35,630 1,100,000
Purchase of investments..................................... -- (549,466)
Redemption of investments................................... -- 544,246
--------- ----------
Net cash provided by investing activities................... (549,846) 65,883
--------- ----------
Net increase in cash........................................ 602,298 271,004
Cash at beginning of period................................. 475,931 339,804
--------- ----------
Cash at end of period....................................... 1,078,229 610,808
========= ==========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.................................................. $ -- $ --
Income taxes.............................................. $ 337,344 $ 518,952
</TABLE>
See notes to unaudited financial statements.
F-75
<PAGE> 122
SEFCO, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
1. GENERAL
The financial statements of SEFCO, Inc. (the "Company"), included herein
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
Company believes that the presentations and disclosures herein are adequate to
make the information not misleading.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
financial statements and notes included elsewhere in the Prospectus.
2. INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
F-76
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Denali
Incorporated and subsidiaries (the "Company") as of June 29, 1996, and June 28,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the period from December 19, 1994 (date of
inception) to July 1, 1995 and the years ended June 29, 1996 and June 28, 1997,
and have issued our report thereon dated August 27, 1997 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
August 27, 1997
S-1
<PAGE> 124
DENALI INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS END
OF PERIOD EXPENSES DESCRIBE(B) DESCRIBE(A) OF PERIOD
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 28, 1997
Allowance for Doubtful Accounts... $114 $176 $575 $260 $605
Fiscal Year Ended June 28, 1996
Allowance for Doubtful Accounts... $ 89 $ 55 $ -- $ 30 $114
Period from December 19, 1994
(date of inception) to July 1,
1995
Allowance for Doubtful Accounts... $ -- $ 89 $ -- $ -- $ 89
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Allowance for doubtful accounts resulting from the acquisition of Ershigs.
S-2
<PAGE> 125
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 12
Dividend Policy....................... 13
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 32
Certain Transactions.................. 37
Principal Stockholders................ 38
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 42
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 45
Additional Information................ 45
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,100,000 SHARES
[LOGO]
DENALI INCORPORATED
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MORGAN KEEGAN & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
, 1997
======================================================
<PAGE> 126
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of all estimated expenses to be incurred by the
Registrant in connection with the issuance and distribution of the Common Stock
offered hereby, other than underwriting discounts and commissions:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 10,978
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 600,000
Blue Sky fees and expenses, including fees of counsel....... 3,000
Transfer agent's fees....................................... 2,500
NASD filing fees............................................ 4,123
Nasdaq listing fee.......................................... 26,425
Other....................................................... 52,974
----------
Total....................................................... $1,150,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, the Company's Certificate of Incorporation
limits the personal liability of directors. The Certificate of Incorporation
provides that a director of the Company will not be personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) payment of an improper dividend or improper repurchase of the
Company's stock under Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived any improper personal
benefit. The Company's Certificate of Incorporation further provides that in the
event the Delaware General Corporation Law is amended to allow the further
elimination or limitation of the liability of directors, then the liability of
the Company's directors shall be limited or eliminated to the fullest extent
permitted by the amended Delaware General Corporation Law. This provision is
intended to afford directors additional protection from, and limit their
potential liability for, suits alleging a breach of the duty of care by a
director. The Company believes that this provision will assist it in securing
the services of directors who are not employees of the Company. While
stockholders may be unable to recover monetary damages against directors for
actions that are in violation of their fiduciary duties, it may be possible to
obtain injunctive or other equitable relief with respect to such actions.
Under Article 6 of the Company's Bylaws as currently in effect, each person
who is or was a director or officer of the Company or a subsidiary of the
Company, or who serves or served any other enterprise or organization at the
request of the Company or a subsidiary of the Company, shall be indemnified by
the Company to the full extent permitted by the Delaware General Corporation
Law.
Under such law, to the extent that such person is successful on the merits
in defense of a suit or proceeding brought against him by reason of the fact
that he is or was a director or officer of the Company, or serves or served any
other enterprise or organization at the request of the Company, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred in connection with such action.
Under such law, if unsuccessful in defense of a third party civil suit or a
criminal suit, or if such suit is settled, such a person shall be indemnified
against both (i) expenses, including attorneys' fees, and (ii) judgments, fines
and amounts paid in settlement if he acted in good faith and in a manner he
reasonably
II-1
<PAGE> 127
believed to be in, or not opposed to, the best interests of the Company, and,
with respect to any criminal action, had no reasonable cause to believe his
conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Company, where such suit is settled, such a person shall be indemnified under
such law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of such suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Company, except that if such person is adjudged to be
liable in such a suit for negligence or misconduct in the performance of his
duty to the Company, he cannot be made whole even for expenses unless the court
determines that he is fully and reasonably entitled to indemnity for such
expenses.
Prior to consummation of this Offering, the Company will enter into
indemnification agreements with each of its directors that provide for
indemnification and expense advancement to the fullest extent permitted under
the Delaware General Corporation Law. Such indemnification agreements include
related provisions intended to facilitate the indemnitee's receipt of such
benefits, including certain provisions applicable to constituent corporations in
the event of certain mergers or acquisitions.
Delaware corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. The Company
has purchased and maintains a directors' and officers' liability policy for such
purposes.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.01 to this Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company has not issued any of its securities
that were not registered under the Securities Act of 1933 (the "Securities Act")
except as follows:
(a) On December 19, 1994, the Company issued 1,500,000 shares of
Common Stock, $.01 par value (the "Common Stock") to certain individuals
and entities in connection with the organization and initial capitalization
of the Company for an aggregate purchase price of $1,500,000.
(b) On April 12, 1995, the Company granted to Stephen T. Harcrow an
option to purchase 126,910 shares of Common Stock. No consideration was
paid in this transaction.
(c) On May 31, 1995, the Company issued 126,910 shares of Common Stock
to Stephen T. Harcrow upon his exercise of his stock option. Consideration
of $18,500 was paid to the Company in connection with this transaction.
(d) On April 2, 1996, the Company granted to R. Kevin Andrews, Melford
S. Carter, Jr. and Cathy L. Smith options to purchase in the aggregate
113,190 shares (37,730 shares each) of Common Stock pursuant to the
Company's 1996 Incentive Stock Option Plan. No consideration was paid in
this transaction.
(e) On September 18, 1997, the Company granted to certain employees of
the Company, effective as of effective date of this Registration Statement,
options to purchase in the aggregate 171,030 shares of Common Stock
pursuant to the Company's 1997 Incentive Stock Option Plan. No
consideration was paid in this transaction.
(f) On September 25, 1997, the Company issued options to acquire
254,643 shares of its Common Stock to holders of options to acquire 1,400
shares of the common stock of Containment Solutions, Inc.
II-2
<PAGE> 128
("CSI"), a wholly-owned subsidiary of the Company, in connection with a
merger of CSI with and into the Company.
Except for (a) above, the number of shares of Common Stock set forth above
have been adjusted to reflect (i) an 0.0008-for-one split effected in April 1995
and (ii) a 1,715-for-one split effected in September 1997. The transactions
described in paragraphs (a), (c) and (f) above were exempt from the registration
requirement of the Securities Act pursuant to Section 4(2) thereof as
transactions by an issuer not involving a public offering. The transactions
described in paragraphs (b), (d) and (e) above were exempt from the registration
requirement of the Securities Act pursuant to Section 2(3) thereof as
transactions not involving a "sale."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.01* -- Form of Underwriting Agreement.
3.01 -- Second Restated Certificate of Incorporation of the
Company.
3.02 -- Bylaws of the Company.
4.01* -- Specimen of Common Stock certificate.
4.02 -- See Exhibits 3.01 and 3.02 for provisions of the
Certificate of Incorporation and Bylaws of the Company
defining the rights of holders of Common Stock.
4.03 -- Loan and Security Agreement dated December 21, 1994, by
and between the Company and Fleet Capital Corporation
(successor in interest to Barclay Business Credit, Inc.)
regarding $11,000,000 credit facility.
4.04 -- Loan and Security Agreement dated October 27, 1995, by
and between the Company and Fleet Capital Corporation
(successor in interest to Shawmut Capital Corporation)
regarding $6,500,000 credit facility.
4.05 -- Loan and Security Agreement dated February 28, 1997, by
and between the Company and Fleet Capital Corporation
regarding $6,500,000 credit facility.
4.06 -- Junior Subordinated Note of the Company dated December
23, 1994, in the original principal amount of $7.5
million, payable to Owens Corning.
5.01* -- Legal Opinion of Hutcheson & Grundy, L.L.P., counsel to
the Company.
10.01 -- The Company's 1996 Incentive Stock Option Plan, as
amended.
10.02 -- The Company's 1997 Incentive Stock Option Plan.
10.03 -- Stock Purchase and Sale Agreement dated as of February
14, 1997, by and between the Company and Praxair, Inc.
10.04 -- Asset Purchase Agreement dated October 12, 1995, by and
between the Company, Hoover Group, Inc., Hoover
Containment Systems, Inc. and Hoover Containment, Inc.
10.05 -- Glass Fiber Reinforcement Products Purchase Agreement
dated December 23, 1994, by and between the Company and
Owens Corning.
10.06 -- Lease dated November 22, 1996, by and between the Company
and Baymeadow Limited Partnership (the "Baltimore
Lease").
10.07 -- First Amendment of Lease dated August 19, 1997, by and
between the Company and Baymeadow Limited Partnership
regarding the Baltimore Lease.
</TABLE>
II-3
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.08 -- Salary Continuation Agreement dated September 5, 1997, by
and between the Company and Stephen T. Harcrow.
10.09 -- Letter to Lee W. Orr dated March 31, 1997, confirming
offer of employment.
10.10 -- Consulting Agreement dated effective as of April 1, 1997,
by and between the Company and Edward de Boer.
10.11 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and R.
Kevin Andrews.
10.12 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and Melford
S. Carter, Jr.
10.13 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and Cathy
L. Smith.
10.14 -- Stock Purchase Agreement dated September 22, 1997, by and
between the Company and GL&V/LaValley Industries, Inc.
and GL&V LaValley Construction, Inc.
10.15 -- Stock Purchase Agreement dated September 19, 1997, by and
between the Company and SEFCO, Inc., Craig T. Sutton
Revocable Trust, Cedric I. Sutton and Charlotte A.
Shnurman.
10.16* -- Loan and Security Agreement dated October 24, 1997, by
and between the Company and NationsBank of Texas, N.A.
10.17*(1) -- Agreement dated November 3, 1997, by and between the
Company and Owens Corning.
11.01* -- Computation of Per Share Earnings.
21.01 -- Subsidiaries of the Company.
23.01* -- Consent of Ernst & Young LLP, independent auditors.
23.02* -- Consent of Gaynor and Fawcett, Inc., independent
auditors.
23.03* -- Consent of Leming, Schallner & Co., independent auditors.
23.04* -- Consent of Hutcheson & Grundy, L.L.P. (Reference is made
to Exhibit 5.01).
24.01 -- Power of attorney (included on the signature page
hereto).
27.01* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith. All other Exhibits have been previously filed.
(1) Confidential treatment applied for with respect to portions of this exhibit.
(b) Consolidated Financial Statement Schedules
* Schedule II -- Valuation and Qualifying Accounts
- ---------------
* Filed herewith.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as a part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-4
<PAGE> 130
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the Underwriters, at the
closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on November 4, 1997.
DENALI INCORPORATED
By: /s/ STEPHEN T. HARCROW
----------------------------------
Stephen T. Harcrow
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN T. HARCROW Chairman of the Board, November 4, 1997
- ----------------------------------------------------- Chief Executive Officer and
Stephen T. Harcrow Director (Principal
Executive Officer)
/s/ R. KEVIN ANDREWS* Chief Financial Officer November 4, 1997
- ----------------------------------------------------- (Principal Financial
R. Kevin Andrews Officer and Principal
Accounting Officer)
/s/ ERNEST H. COCKRELL* Director November 4, 1997
- -----------------------------------------------------
Ernest H. Cockrell
/s/ THOMAS D. SIMMONS, JR.* Director November 4, 1997
- -----------------------------------------------------
Thomas D. Simmons, Jr.
/s/ J. TAFT SYMONDS* Director November 4, 1997
- -----------------------------------------------------
J. Taft Symonds
/s/ STEPHEN M. YOUTS* Director November 4, 1997
- -----------------------------------------------------
Stephen M. Youts
*By: /s/ STEPHEN T. HARCROW
------------------------------------------------
Stephen T. Harcrow
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.01* -- Form of Underwriting Agreement.
3.01 -- Second Restated Certificate of Incorporation of the
Company.
3.02 -- Bylaws of the Company.
4.01* -- Specimen of Common Stock certificate.
4.03 -- Loan and Security Agreement dated December 21, 1994, by
and between the Company and Fleet Capital Corporation
(successor in interest to Barclay Business Credit, Inc.)
regarding $11,000,000 credit facility.
4.04 -- Loan and Security Agreement dated October 27, 1995, by
and between the Company and Fleet Capital Corporation
(successor in interest to Shawmut Capital Corporation)
regarding $6,500,000 credit facility.
4.05 -- Loan and Security Agreement dated February 28, 1997, by
and between the Company and Fleet Capital Corporation
regarding $6,500,000 credit facility.
4.06 -- Junior Subordinated Note of the Company dated December
23, 1994, in the original principal amount of $7.5
million, payable to Owens Corning.
5.01* -- Legal Opinion of Hutcheson & Grundy, L.L.P., counsel to
the Company.
10.01 -- The Company's 1996 Incentive Stock Option Plan, as
amended.
10.02 -- The Company's 1997 Incentive Stock Option Plan.
10.03 -- Stock Purchase and Sale Agreement dated as of February
14, 1997, by and between the Company and Praxair, Inc.
10.04 -- Asset Purchase Agreement dated October 12, 1995, by and
between the Company, Hoover Group, Inc., Hoover
Containment Systems, Inc. and Hoover Containment, Inc.
10.05 -- Glass Fiber Reinforcement Products Purchase Agreement
dated December 23, 1994, by and between the Company and
Owens Corning.
10.06 -- Lease dated November 22, 1996, by and between the Company
and Baymeadow Limited Partnership (the "Baltimore
Lease").
10.07 -- First Amendment of Lease dated August 19, 1997, by and
between the Company and Baymeadow Limited Partnership
regarding the Baltimore Lease.
10.08 -- Salary Continuation Agreement dated September 5, 1997, by
and between the Company and Stephen T. Harcrow.
10.09 -- Letter to Lee W. Orr dated March 31, 1997, confirming
offer of employment.
10.10 -- Consulting Agreement dated effective as of April 1, 1997,
by and between the Company and Edward de Boer.
10.11 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and R.
Kevin Andrews.
10.12 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and Melford
S. Carter, Jr.
10.13 -- Confidentiality and Non-Competition Agreement dated
September 5, 1997, by and between the Company and Cathy
L. Smith.
10.14 -- Stock Purchase Agreement dated September 22, 1997, by and
between the Company and GL&V/LaValley Industries, Inc.
and GL&V LaValley Construction, Inc.
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.15 -- Stock Purchase Agreement dated September 19, 1997, by and
between the Company and SEFCO, Inc., Craig T. Sutton
Revocable Trust, Cedric I. Sutton and Charlotte A.
Shnurman.
10.16* -- Loan and Security Agreement dated October 24, 1997, by
and between the Company and NationsBank of Texas, N.A.
10.17*(1) -- Agreement dated November 3, 1997, by and between the
Company and Owens Corning.
11.01* -- Computation of Per Share Earnings.
21.01 -- Subsidiaries of the Company.
23.01* -- Consent of Ernst & Young LLP, independent auditors.
23.02* -- Consent of Gaynor and Fawcett, Inc., independent
auditors.
23.03* -- Consent of Leming, Schallner & Co., independent auditors.
23.04* -- Consent of Hutcheson & Grundy, L.L.P. (Reference is made
to Exhibit 5.01).
24.01 -- Power of attorney
27.01* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith. All other Exhibits have been previously filed.
(1) Confidential treatment applied for with respect to portions of this Exhibit.
(b) Consolidated Financial Statement Schedules
* Schedule II -- Valuation and Qualifying Accounts
- ---------------
* Filed herewith.
<PAGE> 1
DRAFT
October 29, 1997
DENALI INCORPORATED
COMMON STOCK (PAR VALUE $.01 PER SHARE)
UNDERWRITING AGREEMENT
__________, 1997
Morgan Keegan & Company, Inc.
Rauscher Pierce Refsnes, Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Morgan Keegan & Company, Inc.
50 North Front Street
Memphis, Tennessee 38103
Ladies and Gentlemen:
Denali Incorporated, a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
2,100,000 shares (the "Primary Shares") of common stock, par value $.01 per
share ("Stock"), of the Company and, at the option of the Underwriters, up to
315,000 additional shares of Stock (the "Optional Shares"). The Primary Shares
and the Optional Shares herein collectively referred to as the "Shares."
1. The Company represents and warrants to, and
agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1
(File No. 333-36857) as amended by Amendment No. 1 filed on
November 4, 1997 (the "Initial Registration Statement") in
respect of the Shares has been filed with the Securities and
Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in
such form; no other document with respect to the Initial
Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of
the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if
any, has been issued and no proceeding for that purpose has
been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or
filed with the Commission pursuant to Rule 424(a) of the rules
and regulations of the Commission under the Securities Act of
1933, as amended (the "Act"), is hereinafter called a
"Preliminary Prospectus;" the various parts of the Initial
Registration Statement, any post-effective amendment thereto or
the Rule 462(b) Registration Statement including all exhibits
thereto and including the information contained in the form of
final prospectus
<PAGE> 2
filed with the Commission pursuant to Rule 424(b) under the
Act in accordance with Section 5(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the
registration statement at the time it was declared effective
or such part of the Rule 462(b) Registration Statement, if
any, became or hereafter becomes effective, each as amended at
the time such part of the registration statement became
effective, is hereinafter collectively called the
"Registration Statement;" and such final prospectus, in the
form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus");
(b) No order preventing or suspending
the use of any Preliminary Prospectus has been issued by the
Commission, and each Preliminary Prospectus, at the time of
filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the
Commission thereunder, and did not contain an untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the
foregoing shall not apply to statements or omissions made in
reliance upon information furnished in writing to the Company
by the Underwriters expressly for use therein;
(c) The Registration Statement conforms,
and the Prospectus and any further amendments or supplements
to the Registration Statement or the Prospectus will conform,
in all material respects to the requirements of the Act and
the rules and regulations of the Commission thereunder; the
Registration Statement does not and will not, as of the
applicable effective date as to the Registration Statement and
any amendment thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and the Prospectus, as of the date of such
Prospectus, does not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(d) The historical and pro forma
financial statements, together with related schedules and
notes, set forth in the Prospectus, comply as to form in all
material respects with the requirements of the Act. The
historical consolidated financial statements of the Company
and its subsidiaries set forth in the Prospectus present
fairly (subject, in the case of unaudited interim financial
information, to normal year-end adjustments) the consolidated
financial position of the Company and its subsidiaries at the
respective dates indicated and the consolidated results of
operations and cash flows of the Company and its subsidiaries
for the respective periods indicated and in accordance with
generally accepted accounting principles consistently applied
throughout such periods, unless otherwise reflected in the
notes to such financial statements. The historical
consolidated balance sheet of the Company set forth in the
Prospectus fairly presents its financial position at _______,
1997. The pro forma financial statements of the Company set
forth in the Prospectus have been prepared on a basis
consistent with the historical statements of the Company,
except for the pro forma adjustments specified therein. The
other financial and statistical information and data included
in the Prospectus are, in all material respects, accurately
presented and prepared on
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<PAGE> 3
a basis consistent with such historical and pro forma
financial statements and the books and records of the Company;
(e) The historical financial statements,
together with related notes, of Hoover Containment Systems,
Inc. ("Hoover"), Ershigs, Inc. ("Ershigs"), GL & V/La Valley
Construction, Inc. ("GL & V/La Valley") and SEFCO, Inc.
("SEFCO") (collectively, the "Acquired Companies"), set forth
in the Prospectus present fairly (subject, in the case of
unaudited interim financial information, to normal year-end
adjustments) the financial position of the Acquired Companies
at the respective dates indicated and the results of
operations and cash flows of the Acquired Companies for the
respective periods indicated and in accordance with generally
accepted accounting principles consistently applied throughout
such periods, unless otherwise reflected in the notes to such
financial statements. The historical balance sheet of Hoover
set forth in the Prospectus fairly presents its financial
position at December 31, 1994. The historical balance sheet
of Ershigs fairly presents its financial position at December
31, 1996. The historical balance sheet of GL & V/La Valley
set forth in the Prospectus fairly presents its financial
position at August 16, 1997. The historical balance sheet of
SEFCO set forth in the Prospectus fairly presents its
financial position at December 31, 1996;
(f) The Company maintains a system of
internal accounting control sufficient to provide reasonable
assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences;
(g) Neither the Company nor any of its
subsidiaries has sustained since the date of the latest
audited financial statements included in the Prospectus any
loss or interference with its business material to the Company
and its subsidiaries considered as one enterprise from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective
dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in
the capital stock or long-term debt of the Company or any of
its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change,
in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries considered as one enterprise,
otherwise than as set forth or contemplated in the Prospectus;
(h) The Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and
conduct its business as described in the Prospectus,
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<PAGE> 4
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases
properties or conducts any business except where the failure
so to qualify or to be in good standing would not have a
material adverse effect on the business affairs, business
prospects, assets, financial position or results of operations
of the Company and its subsidiaries considered as one
enterprise (a "Material Adverse Effect"); and each direct or
indirect subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation or has
been formed and is validly existing as a limited partnership,
as the case may be;
(i) The Company has authorized capital
stock as set forth in the Prospectus, and all of the issued
shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and
non-assessable and conform in all material respects to the
description of capital stock contained in the Prospectus; and
all of the issued shares of capital stock of, or partnership
or other equity ownership interest in, each subsidiary of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims except as disclosed in the
Prospectus;
(j) The Shares to be issued and sold by
the Company to the Underwriters hereunder have been duly and
validly authorized and, when issued and delivered against
payment therefor as provided herein, will be duly and validly
issued and fully paid and non-assessable and will conform to
the description of the Stock contained in the Prospectus;
(k) The issue and sale of the Shares to
be sold by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation
of the transactions herein contemplated will not conflict with
or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such action
result in any violation of the provisions of the Certificate
of Incorporation or By-laws of the Company or any applicable
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties;
and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration of the
Shares under the Act and under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and such consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Shares by
the Underwriters;
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<PAGE> 5
(l) Neither the Company nor any of its
subsidiaries is in violation of its Certificate of
Incorporation or By-laws or other organizational documents or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it
or any of its properties may be bound except to the extent it
would not result in a Material Adverse Effect;
(m) The statements set forth in the
Prospectus under the caption "Description of Capital Stock,"
insofar as they purport to constitute a summary of the terms
of the capital stock of the Company are accurate and complete
in all material respects;
(n) Except as described in the
Prospectus, the Company and its subsidiaries have good and
indefeasible title to all real property and good and
marketable title to all material properties and assets
described in the Prospectus as owned by the Company or its
subsidiaries and valid, subsisting and enforceable leases for
all of the properties and assets, real or personal, described
in the Prospectus as leased by them, in each case free and
clear of any security interests, mortgages, pledges, liens,
encumbrances or charges of any kind, other than those
described in the Prospectus;
(o) Other than as set forth in the
Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or to the best of the Company's knowledge of which any
property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any
of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect; and, to the best of the
Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others;
(p) The Company is not and, after giving
effect to the offering and sale of the Shares, will not be, an
"investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment
Company Act");
(q) Ernst & Young LLP, who have
certified certain financial statements of the Company and its
subsidiaries, are independent public accountants as required
by the Act and the rules and regulations of the Commission
thereunder;
(r) The Company (i) is in compliance
with any and all applicable federal, state and local laws and
regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or
waste, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required
of it under applicable Environmental Laws to conduct its
business and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except for
such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses
- 5 -
<PAGE> 6
or approvals that would not, singularly or in the aggregate,
have a Material Adverse Effect. There has been no storage,
disposal, generation, transportation, handling or treatment of
hazardous substances or solid wastes by the Company (or to the
knowledge of the Company, any of its predecessors in interest)
at, upon or from any of the property now or previously owned
or leased by the Company in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit
that would require remedial action by the Company under any
applicable law, ordinance, rule, regulation, order, judgment,
decree or permit, except for any violation or remedial action
which would not result in, or which would not be reasonably
likely to result in, singularly or in the aggregate with all
such violations and remedial actions, a Material Adverse
Effect; there has been no spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such
property or into the environment surrounding such property of
any solid wastes or hazardous substances due to or caused by
the Company, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would
not result in or would not be reasonably likely to result in,
singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings or
releases, a Material Adverse Effect; and the terms "hazardous
substances" and "solid wastes" shall have the meanings
specified in any applicable local, state or federal law or
regulation with respect to environmental protection;
(s) There are no persons with
registration or similar rights to require registration of any
securities of the Company under the Act because of the filing
of the Registration Statement or the sale of the Shares by the
Company to the Underwriters; and
(t) This Agreement has been duly
authorized, executed and delivered by the Company.
2. Subject to the terms and conditions herein
set forth, (a) the Company hereto agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to purchase
from the Company, at a purchase price per share of $____, the number of Primary
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Shares to be sold by the Company by a
fraction, the numerator of which is the aggregate number of Primary Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Primary Shares to be purchased by all of the Underwriters from the
Company hereunder and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the
Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
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<PAGE> 7
The Company hereby grants to the Underwriters the one-time right to
purchase at their election up to 315,000 Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
over-allotments in the sale of the Primary Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to
the Company, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release
of the Primary Shares, the several Underwriters propose to offer the Primary
Shares for sale upon the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each
Underwriter hereunder, in definitive form, and in such authorized denominations
and registered in such names as Morgan Keegan & Company, Inc., ("Morgan
Keegan") may request upon at least forty-eight hours' prior notice to the
Company, shall be delivered by or on behalf of the Company to Morgan Keegan for
the account of such Underwriter, against payment therefor in immediately
available funds. The Company will cause the certificates representing the
Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of Morgan Keegan, 50 N. Front Street, Memphis, Tennessee 38103 (the
"Designated Office"). The time and date of such delivery and payment shall be,
with respect to the Primary Shares, 8:30 a.m., Central Standard Time, on
________, 1997 or such other time and date as Morgan Keegan and the Company may
agree in writing, and with respect to the Option Shares, 8:30 a.m., Central
Standard Time, on the date specified by Morgan Keegan in the written notice
given by Morgan Keegan of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Morgan Keegan, the Company may agree
upon in writing. Such time and date for delivery of the Primary Shares is
herein called the "First Time of Delivery," such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery," and each such time and date for delivery is herein
called a "Time of Delivery."
(b) The documents to be delivered at
each Time of Delivery by or on behalf of the parties hereto
pursuant to Section 7 hereof, including the cross receipt for
the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(i) hereof will be delivered
at the offices of Vinson & Elkins L.L.P., 1001 Fannin, Suite
2300, Houston, Texas 77002 (the "Closing Location"), and the
Shares will be delivered at the Designated Office, all at Time
of Delivery. A meeting will be held at the Closing Location
at 2:00 p.m., Central Standard Time, on the Business Day next
preceding Time of Delivery, at which meeting the final drafts
of the documents to be delivered pursuant to the preceding
sentence will be available for review by the parties hereto.
For the purposes of this Section 4, "Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday that
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<PAGE> 8
is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to
close.
5. The Company agrees with each of the
Underwriters:
(a) To prepare the Prospectus in a form
approved by you and to file such Prospectus pursuant to Rule
424(b) under the Act not later than the Commission's close of
business on the second business day following the execution
and delivery of this Agreement, or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the
Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which reasonably shall be
disapproved by you promptly after reasonable notice thereof;
to advise you, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has
been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after
it receives notice thereof, of the issuance by the Commission
of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take
such action as you may reasonably request to cooperate with
the Underwriters to qualify the Shares for offering and sale
under the securities laws of such jurisdictions as you may
request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a
foreign corporation or as a dealer in securities, to file a
general consent to service of process in any jurisdiction or
to subject itself to taxation in any jurisdiction in which it
is not otherwise so subject;
(c) On the Business Day next succeeding
the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in such
quantities as you may from time to time reasonably request,
and, if the delivery of a prospectus is required at any time
prior to the expiration of nine months after the time of issue
of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred
as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to
each
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<PAGE> 9
Underwriter and to any dealer in securities as many copies as
you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance,
and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at
any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as
many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) If the Company elects to rely upon
Rule 462(b), the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b)
by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for
the payment of such fee pursuant to Rule 111(3a) under the
Act;
(e) To make generally available to its
security holders as soon as practicable, but in any event not
later than eighteen months after the effective date of the
Registration Statement (as defined in Rule 158(c) under the
Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with
Section 11(a) of the Act and the rules and regulations of the
Commission thereunder (including, at the option of the
Company, Rule 158);
(f) During the period beginning from the
date hereof and continuing to and including the date 180 days
after the date of the Prospectus, not to, directly or
indirectly, offer, sell, offer to sell, contract to sell,
grant any option to purchase, or otherwise dispose (or
announce any offer, sale, grant of any option to purchase or
other disposition) of, except as provided hereunder, any
securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that
are convertible into or exercisable or exchangeable for, or
that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to
employee stock option plans existing on the date of this
Agreement), without the prior written consent of Morgan
Keegan;
(g) To furnish to its stockholders as
soon as practicable after the end of each fiscal year an
annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial
information of the Company and its subsidiaries for such
quarter in reasonable detail;
(h) During a period of five years from
the effective date of the Registration Statement, to furnish
to you copies of all reports or other communications
(financial or other) furnished generally to stockholders, and
to deliver to you (i) as soon as they are available,
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<PAGE> 10
copies of any reports and financial statements furnished to or
filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed and
(ii) such additional information concerning the business and
financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company
and its subsidiaries are consolidated in reports furnished to
its stockholders generally or to the Commission);
(i) To use the net proceeds received by
it from the sale of the Shares pursuant to this Agreement in
the manner specified in the Prospectus under the caption "Use
of Proceeds;"
(j) To use all reasonable efforts to
list for quotation the Shares on the National Association of
Securities Dealers Automated Quotations National Market
("NASDAQ"); and
(k) To file with the Commission such
reports on Form SR as may be required by Rule 463 under the
Act.
6. The Company covenants and agrees with the
several Underwriters that (a) the Company will pay or cause to be paid, the
following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus and the Prospectus
and amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the blue sky survey;
(iv) all fees and expenses in connection with listing the Shares for quotation
on NASDAQ; (v) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the
sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the
cost and charges of any transfer agent or registrar and (viii) all other costs
and expenses incident to the performance of its obligations hereunder which are
not otherwise specifically provided for in this Section. It is understood,
that except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees
of their counsel, stock transfer taxes on resale of any of the Shares by them,
and any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters
hereunder, as to the Shares to be delivered at each Time of Delivery, shall be
subject, in their discretion, to the condition that all representations and
warranties of the Company herein are, at and as of such Time of Delivery, true
and correct, the
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<PAGE> 11
condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed
with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing by the rules
and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have
become effective by 10:00 p.m., Washington, D.C. time, on the
date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your
reasonable satisfaction;
(b) Vinson & Elkins L.L.P., counsel for
the Underwriters, shall have furnished to you such opinion or
opinions, dated such Time of Delivery, with respect to matters
as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Hutcheson & Grundy, L.L.P., counsel
for the Company, shall have furnished to you their written
opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly
incorporated and is validly existing as a
corporation in good standing under the laws
of the State of Delaware, with corporate
power and authority to own its properties and
conduct its business as described in the
Prospectus;
(ii) The Company has authorized
capital stock as set forth in the Prospectus
under the caption "Description of Capital
Stock" (except for subsequent issuances, if
any, pursuant to this Agreement [or pursuant
to reservations, agreements, employee benefit
plans or the exercise of convertible
securities or options referred to in the
Prospectus]); all of the issued and
outstanding shares of capital stock of the
Company (including the Shares being delivered
at such Time of Delivery) have been duly
authorized and validly issued and are fully
paid and non-assessable; and the Shares
conform, as to legal matters, in all material
respects to the description of the Shares
contained in the Prospectus under the caption
"Description of Capital Stock;"
(iii) The Company has been duly
qualified as a foreign corporation to
transact business and is in good standing
under the laws of each other jurisdiction in
which such qualification is required, except
where the failure so to qualify or to be in
good standing would not have a Material
Adverse Effect;
(iv) Each direct or indirect
subsidiary of the Company has been duly
incorporated and is validly existing as a
corporation in good standing under the laws
of its
- 11 -
<PAGE> 12
jurisdiction of incorporation or is duly
formed and validly existing as a limited
partnership, as the case may be, and all of
the issued shares of capital stock of, or
partnership or other equity ownership
interest in, each such subsidiary have been
duly and validly authorized and issued, are
fully paid and non-assessable, and to such
counsel's knowledge after due inquiry are
owned directly or indirectly by the Company),
free and clear of all liens, encumbrances,
equities or claims;
(v) To such counsel's knowledge
after due inquiry, there is no legal or
governmental proceeding which is required to
be disclosed in the Prospectus and is not
disclosed;
(vi) This Agreement has been duly
authorized, executed and delivered by the
Company;
(vii) The issue and sale of the
Shares being delivered at such Time of
Delivery to be sold by the Company and the
compliance by the Company with all of the
provisions of this Agreement and the
consummation of the transactions herein
contemplated will not conflict with or result
in a breach or violation of any of the terms
or provisions of, or constitute a default
under, any indenture, mortgage, deed of
trust, loan or credit agreement or other
agreement or instrument known to such counsel
to which the Company or any of its
subsidiaries is a party or by which the
Company or any of its subsidiaries is bound
or to which any of the property or assets of
the Company or any of its subsidiaries is
subject, nor will such action result in any
violation of the provisions of the
Certificate of Incorporation or By-laws of
the Company or any applicable statute or any
order, rule or regulation known to such
counsel after due inquiry of any court or
governmental agency or body having
jurisdiction over the Company or any of its
subsidiaries or any of their material
properties;
(viii) No consent, approval,
authorization or order of any court or
governmental agency is required to be
obtained by the Company for the issue and
sale of the Shares by the Company to the
Underwriters or the consummation by the
Company of the transactions contemplated by
this Agreement, except the registration under
the Act of the Shares, and such consents,
approvals, authorizations, registrations or
qualifications as may be required under state
securities or blue sky laws in connection
with the purchase and distribution of the
Shares by the Underwriters;
(ix) To the extent summarized
therein, all contracts and agreements
summarized in the Registration Statement and
the Prospectus are fairly summarized therein,
conform in all material respects to the
descriptions thereof contained therein, and,
to the extent such contracts or agreements or
any other material agreements are required
under the Act, or the rules and regulations
thereunder, to be filed, as exhibits to the
Registration Statement, they are so filed;
and such counsel does not know of any
contracts or other documents required to be
summarized or disclosed in the
- 12 -
<PAGE> 13
Prospectus or to be so filed as exhibits to
the Registration Statement, which have not
been so summarized or disclosed, or so filed;
(x) The Company is not an
"investment company" or an entity
"controlled" by an "investment company," as
such terms are defined in the Investment
Company Act;
(xi) To such counsel's knowledge
after due inquiry there are no persons with
registration or similar rights to have any
securities of the Company registered pursuant
to the Registration Statement; and
(xii) The Registration Statement
and each amendment or supplement thereto, as
of their respective effective dates and the
Prospectus as of its date, comply as to form
in all material respects with the
requirements of the Act and the rules and
regulations thereunder (it being understood
that such counsel need express no opinion as
to the financial statements and schedules or
other financial data in the Registration
Statement or the Prospectus); and nothing has
come to such counsel's attention that would
lead such counsel to believe that either the
Registration Statement or any amendment or
supplement thereto, at the time such
Registration Statement or amendment or
supplement became effective, or the
Prospectus or any amendment or supplement
thereto, as of its date and as of each Time
of Delivery, contains or contained any untrue
statement of a material fact or omitted or
omits to state a material fact required to be
stated therein or necessary to make the
statements therein, in light of the
circumstances under which they were made, not
misleading;
(d) On the date of the Prospectus at a
time prior to the execution of this Agreement, at 8:30 a.m.,
Central Standard Time, on the effective date of any
post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time
of Delivery, Ernst & Young LLP shall have furnished to you a
letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto;
(e) (i) Neither the Company nor any
of its subsidiaries shall have sustained since the date of the
latest audited financial statements included in the Prospectus
any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective
dates as of which information is given in the Prospectus there
shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or
any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is in the judgment
of the representatives of the Underwriters so material and
adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares
- 13 -
<PAGE> 14
being delivered at such Time of Delivery on the terms and in
the manner contemplated in the Prospectus;
(f) On or after the date hereof there
shall not have occurred any of the following: (i) a suspension
or material limitation in trading in securities generally on
the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking
activities declared by either federal or New York or Texas
state authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by
the United States of a national emergency or war, if the
effect of any such event specified in this clause (iv) in the
judgment of the representatives of the Underwriters makes it
impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated
in the Prospectus;
(g) The Shares at such Time of Delivery
shall have been approved for quotation on NASDAQ subject only
to official notice of issuance;
(h) The Company has obtained and
delivered to the Underwriters executed copies of an agreement
from each officer and director of the Company, substantially
to the effect set forth in Subsection 5(f) hereof in form and
substance satisfactory to you;
(i) The Company shall have furnished or
caused to be furnished to you at such Time of Delivery
certificates of officers of the Company on behalf of the
Company satisfactory to you as to the accuracy of the
representations and warranties of the Company herein at and as
of such Time of Delivery, as to the performance by the Company
of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, the Company shall
have furnished or caused to be furnished certificates as to
the matters set forth in subsections (a) and (e) of this
Section and the Company shall have furnished or caused to be
furnished to you such other documents as you may reasonably
request.
8.
(a) The Company will indemnify and hold
harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter
may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, or (ii) any untrue statement or alleged untrue
statement made by the Company in Section 1 of this Agreement
and will reimburse each Underwriter for any legal or other
- 14 -
<PAGE> 15
expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such action or claim as
such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to
the Company by any Underwriter through the representatives
expressly for use therein;
(b) Each Underwriter will indemnify and
hold harmless the Company against any losses, claims, damages
or liabilities to which the Company may become subject, under
the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in
any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to
the Company by such Underwriter through the representatives,
expressly for use therein; and will reimburse the Company for
any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such action
or claim as such expenses are incurred;
(c) Promptly after receipt by an
indemnified party under subsections (a) or (b) above of notice
of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but
the omission so to notify the indemnifying party shall not
relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel
to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection
for any legal expenses of other counsel or any other expenses,
in each case subsequently incurred by such indemnified party,
in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without
the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or
- 15 -
<PAGE> 16
contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such
action or claim and (ii) does not include a statement as to,
or an admission of, fault, culpability or failure to act, by
or on behalf of any indemnified party;
(d) If the indemnification provided for
in this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party under subsections (a) or (b)
above in respect of any losses, claims, damages or liabilities
(or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if
the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the
Company bears to the total underwriting discounts and
commissions received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company on the one
hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose)
or by any other method of allocation which does not take
account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any
- 16 -
<PAGE> 17
person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several, in proportion to
their respective underwriting obligations, and not joint.
(e) The obligations of the Company under
this Section 8 shall be in addition to any liability which the
Company may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 8 shall be in addition
to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company
(including any person who, with his or her consent, is named
in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the
Company within the meaning of the Act.
9.
(a) If any Underwriter shall default in
its obligation to purchase the Shares that it has agreed to
purchase hereunder at Time of Delivery you may in your
discretion arrange for you or another party or other parties
to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter
you do not arrange for the purchase of such Shares, then the
Company shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you
notify the Company that you have so arranged for the purchase
of such Shares, or the Company notifies you it has so arranged
for the purchase of such Shares, you or the Company shall have
the right to postpone Time of Delivery for a period of not
more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used
in this Agreement shall include any person substituted under
this Section with like effect as if such person had originally
been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any
arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters by you and the Company as provided
in subsection (a) above, the aggregate number of such Shares
which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company shall have the right to
require each non-defaulting Underwriter to purchase the number
of Shares which such Underwriter agreed to purchase hereunder
at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share
(based on the number of Shares which such Underwriter agreed
to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for
- 17 -
<PAGE> 18
which such arrangements have not been made; but nothing herein
shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any
arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters by you and the Company as provided
in subsection (a) above, the aggregate number of such Shares
which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such
Time of Delivery, or if the Company shall not exercise the
right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with
respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability
on the part of any non-defaulting Underwriter or the Company,
except for the expenses to be borne by the Company and the
Underwriters as provided in Section 6 hereof and the indemnity
and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability
for its default.
10. The respective indemnities, agreements,
representations, warranties and other statements of the Company and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or any officer or director or controlling
person of the Company and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated
pursuant to Section 9 hereof, the Company shall not then be under any liability
to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for
any other reason any Shares are not delivered by or on behalf of the Company as
provided herein, the Company will reimburse the Underwriters through you for
all out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on
behalf of each of the Underwriters, and the parties hereto shall be entitled to
act and rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by you jointly or by Morgan Keegan on behalf of you
as the representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Morgan
Keegan & Company, Inc., 50 North Front Street, Memphis, Tennessee 38103,
Attention: Mike Harris, telecopier number (901) 579-4355; and if to the Company
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement, Attention:
Steve Harcrow, telecopier number (713) 627-0937;
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<PAGE> 19
provided, however, that any notice to an Underwriter pursuant to Section 8(b)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters and the Company and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this
Agreement.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TENNESSEE.
16. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the representatives of the
Underwriters plus one for each counsel and the Custodian, of any counterparts
hereof, and upon the acceptance hereof by you, on behalf of each of the
Underwriters, this letter and such acceptance hereof shall constitute a binding
agreement among each of the Underwriters and the Company. It is understood
that your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters,
the form of which shall be submitted to the Company for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
- 19 -
<PAGE> 20
Very truly yours,
DENALI INCORPORATED
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
Accepted as of the date hereof
Morgan Keegan & Company, Inc.
Rauscher Pierce Refsnes, Inc.
By:
-----------------------------------
On behalf of each of the Underwriters
- 20 -
<PAGE> 21
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Total Number of Shares to be purchased
Primary Shares if Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ----------
<S> <C> <C>
Morgan Keegan & Company, Inc.
Rauscher Pierce Refsnes, Inc.
TOTAL ======= =======
</TABLE>
<PAGE> 22
ANNEX I
FORM OF COMFORT LETTER
Pursuant to Section 7(d) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries (including, but not limited to, Hoover,
Ershigs and GL & V/La Valley) within the meaning of the Act and the applicable
published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by them
and included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the Act
and the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro forma
financial information, financial forecasts and/or condensed financial
statements derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports thereon, copies
of which have been separately furnished to the representatives of the
Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
consolidated statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus as indicated in their
reports thereon, copies of which have been separately furnished to the
Representatives and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and accounting
matters regarding whether the consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations, nothing came to their attention that caused them to believe
that the consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the Act and
the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the Company
for the three most recent fiscal years included in the Prospectus agrees with
the corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such three fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them
- 1 -
<PAGE> 23
to believe that this information does not conform in all material respects with
the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of
Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of officials
of the Company and its subsidiaries responsible for financial and accounting
matters and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believe that:
(A) (i) the consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) [the unaudited financial statements which were not
included in the Prospectus but from which were derived any unaudited
financial statements referred to in clause (A) and] any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma condensed consolidated
financial statements included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock upon
exercise of options and stock appreciation rights, upon earn-outs of
performance shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in
- 2 -
<PAGE> 24
the consolidated long-term debt of the Company and its subsidiaries,
or any decreases in consolidated net current assets or stockholders'
equity or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with amounts shown in the latest balance sheet included in
the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives, which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by
the Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
- 3 -
<PAGE> 1
EXHIBIT 4.01
[DENALI LOGO]
DENALI INCORPORATED
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
NEW YORK, NEW YORK AND
RIDGEFIELD PARK, NJ CUSIP
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
ONE CENT ($0.01) OF COMMON STOCK OF
DENALI INCORPORATED
("Corporation") transferable on the books of the Corporation, in person or by
duly authorized attorney, upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be
subject to all of the provisions of the Certificate of Incorporation of the
Corporation and of the amendments thereto, to all of which the holder, by
acceptance hereof, assents. This Certificate shall not be valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
/s/______________ COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
PRESIDENT TRANSFER AGENT AND REGISTRAR
/s/_______________ BY
TREASURER AUTHORIZED SIGNATURE
DENALI INCORPORATED
CORPORATE
SEAL
1994
DELAWARE
<PAGE> 2
DENALI INCORPORATED
The Corporation will furnish, upon request and without charge, a full
statement of the designations and the powers, preference and rights, and the
qualifications, limitations or restrictions of the shares of each class of
stock authorized to be issued by it, and the variations in the relative rights
and preferences between the shares of each series of any preferred or special
class so far as the same have been fixed and determined, and the authority of
the Board of Directors to fix and determine the relative rights and preferences
of subsequent series of any preferred or special class. Such request may be
made to the Secretary of the Corporation or to the Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM-- as tenants in common UNIF GIFT MIN ACT -______ Custodian _________
TEN ENT-- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act _________________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby
------------------------------------
sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
INDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------------------
of the stock represented by the within Certificate and do hereby irrevocably constitute and
- --------------------------------------------------------------------------------------------------------
appoint
Attorney
- --------------------------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with full power of substitution
- --------------------------------------------------------------------------------------------------------
in the premises.
- ----------------
Dated
---------------------------------
X
-----------------------------------------------------------
NOTICE (SIGNATURE)
THE SIGNATURES TO THIS
ASSIGNMENT MUST CORRE-
SPOND WITH THE NAME(S)
AS WRITTEN UPON THE
FACE OF THE CERTIFICATE
IN EVERY PARTICULAR,
WITHOUT ALTERATION OR
ENLARGEMENT OR ANY X
CHANGE WHAT EVER. -----------------------------------------------------------
(SIGNATURE)
-------------------------------------------------------------
THE SIGNATURES SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION AS DEFINED IN RULE 17A-d-15 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
-------------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
--------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 5.01
HUTCHESON & GRUNDY, L.L.P.
1200 Smith Street, Suite 3300
Houston, Texas 77002
November 4, 1997
Denali Incorporated
1360 Post Oak Blvd., Suite 2470
Houston, Texas 77056
Gentlemen:
Denali Incorporated, a Delaware corporation (the "Company"), has filed
with the Securities & Exchange Commission (the "Commission") a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Registration Statement") relating to the proposed sale by the Company in a
public offering of an aggregate of up to 2,100,000 shares of Common Stock (the
"Securities") of the Company. Said Securities are proposed to be sold in a "firm
commitment" underwritten public offering pursuant to a proposed Underwriting
Agreement with Morgan Keegan & Company, Inc. and Rauscher Pierce Refsnes, Inc.
as the representatives of the underwriters named therein (the "Underwriters").
An additional 315,000 shares of Common Stock will be subject to an option from
the Company to the Underwriters, exercisable during a 30-day period after the
date of the Prospectus to cover over-allotments.
In connection with this opinion, we have examined original, photostatic
or certified copies of such records of the Company, certificates of officers of
the Company and of public officials, and such other documents as we have deemed
relevant. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such documents.
Based upon the foregoing and upon such matters of law as we have deemed
necessary and appropriate, we are of the opinion that the Securities proposed to
be sold to the public, pursuant to the Underwriting Agreement proposed to be
entered into by and between the Company and the Underwriters, have been duly and
validly authorized, and upon the delivery of the Securities and payment therefor
pursuant to the terms of the aforesaid Underwriting Agreement, the Securities
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to us under the caption "Legal
Matters." In giving this consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the general rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
HUTCHESON & GRUNDY, L.L.P.
By: /s/ E. SCOTT LINEBERRY
----------------------------
E. Scott Lineberry
<PAGE> 1
LOAN AND SECURITY AGREEMENT
Dated as of October 24, 1997
FLUID CONTAINMENT, INC., a Delaware corporation, HOOVER CONTAINMENT,
INC., a Delaware corporation, ERSHIGS, INC., a Washington corporation, SEFCO,
INC., an Oklahoma corporation, and NATIONSBANK OF TEXAS, N.A., a national
banking association, agree as follows:
ARTICLE 1 - DEFINITIONS
Section 1.1 Definitions. For the purposes of this Agreement:
"Account Debtor" means a Person who is obligated on a Receivable.
"Acquire", as applied to any Business Unit or Investment, means the
acquisition of such Business Unit or Investment by purchase, exchange, issuance
of stock or other securities, or by merger, reorganization or any other method.
"Affiliate" means, with respect to a Person, (a) any officer,
director, employee or managing agent of such Person, (b) any spouse, parents,
brothers, sisters, children and grandchildren of such Person, (c) any
association, partnership, trust, entity or enterprise in which such Person is a
director, officer or general partner, (d) any other Person that, (i) directly
or indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with, such given Person, (ii) directly or
indirectly beneficially owns or holds 10% or more of any class of voting stock
or partnership or other interest of such Person or any Subsidiary of such
Person, or (iii)10% or more of the voting stock or partnership or other
interest of which is directly or indirectly beneficially owned or held by such
Person or a Subsidiary of such Person. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities or partnership or other interests, by contract or
otherwise.
"Agency Account" means an account of any Borrower maintained by it
with a Clearing Bank pursuant to an Agency Account Agreement.
"Agency Account Agreement" means an agreement among a Borrower, the
Lender and a Clearing Bank (if other than the Lender) concerning the collection
of payments which represent the proceeds of Receivables or of any other
Collateral.
"Aggregate Letter of Credit Reserve" means the sum of the Letter of
Credit Reserves for all Borrowers.
<PAGE> 2
"Agreement" means this Agreement, including the Exhibits and Schedules
hereto, and all amendments, modifications and supplements hereto and thereto
and restatements hereof and thereof.
"Agreement Date" means the date as of which this Agreement is dated.
"Availability" means, as of the date of determination, the amount of
Revolving Credit Loans available to be borrowed by the Borrowers hereunder in
accordance with SECTION 2A.1 less the sum of the outstanding principal balance
of all Revolving Credit Loans hereunder as of such date.
"Benefit Plan" means an employee benefit plan as defined in Section
3(35) of ERISA (other than a Multiemployer Plan) in respect of which a Person
or any Related Company is, or within the immediately preceding 6 years was, an
"employer" as defined in Section 3(5) of ERISA, including such plans as may be
established after the Agreement Date.
"Borrowers" means the following (i) FCI, (ii) HCI, (iii) Ershigs, (iv)
SEFCO, (v) any other Affiliate of FCI, HCI, or Ershigs added as a "Borrower" to
this Agreement at the sole discretion of the Lender and upon the fulfillment of
the conditions described in SECTION 4.4 hereof, and (vi) the successors and
assigns of the foregoing, and "Borrower" means any of them.
"Borrowing Base" of any Borrower means at any time an amount equal to
the sum of:
(a) 85% (or such lesser percentage as the Lender may in the
exercise of its reasonable credit judgment determine from time to time) of
Eligible Receivables of such Borrower, plus
(b) the lesser of
(i) the sum of (A) 50% (or such lesser percentage as the
Lender may in the exercise of its reasonable credit judgment determine
from time to time) of the lesser of cost (computed on a
first-in-first-out basis) and fair market value of Eligible Inventory
of such Borrower that is raw materials Inventory and finished goods
Inventory at such time, plus (B) with respect only to determining the
Borrowing Base of Ershigs, the least of (1) 35% (or such lesser
percentage as the Lender may in its sole and absolute discretion
determine from time to time) of the lesser of cost (computed on a
first-in-first-out basis) and fair market value of Eligible Inventory
that is work-in-process Inventory approved by Lender in its sole and
absolute discretion ("Eligible Ershigs WIP"), (2) $1,400,000 of
Eligible Ershigs WIP, or (3) that portion of Eligible Ershigs WIP that
does not exceed 50% of Ershigs' total Eligible Inventory, or
(ii) $10,000,000.00 less the aggregate inventory component
of all other Borrowers' Borrowing Bases, minus
LOAN AND SECURITY AGREEMENT - PAGE 2
<PAGE> 3
(c) the Letter of Credit Reserve respecting all Letters of Credit
issued for the account of such Borrower, minus
(d) such other reserves as the Lender may determine from time to
time in the exercise of its reasonable credit judgment.
"Borrowing Base Certificate" means a certificate in the form of
EXHIBIT B attached hereto.
"Business Day" means (a) any day other than a Saturday, Sunday or
other day on which banks in the city in which the principal office of the
Lender is located are authorized to close, and (b) in respect of any
determination with respect to a LIBOR Loan, any day referred to in clause (a)
that is also a day on which trading is conducted in the London interbank
eurodollar market.
"Business Unit" means the assets constituting the business, or a
division or operating unit thereof, of any Person.
"Capital Expenditures" means, with respect to any Person, all
expenditures made and liabilities incurred for the acquisition of assets (other
than assets which constitute a Business Unit) which are not, in accordance with
GAAP, treated as expense items for such Person in the year made or incurred or
as a prepaid expense applicable to a future year or years.
"Capitalized Lease" means a lease that is required to be capitalized
for financial reporting purposes in accordance with GAAP.
"Capitalized Lease Obligation" means Indebtedness represented by
obligations under a Capitalized Lease, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"Clearing Bank" means the Lender and any other banking institution
with which an Agency Account has been established pursuant to an Agency Account
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" means and includes all of the right, title and interest
of each Borrower in and to each of the following, wherever located and whether
now or hereafter existing or now owned or hereafter acquired or arising:
(a) all Receivables,
(b) all Inventory,
(c) all Equipment,
LOAN AND SECURITY AGREEMENT - PAGE 3
<PAGE> 4
(d) all Contract Rights,
(e) all General Intangibles,
(f) all Deposit Accounts,
(g) all investment property,
(h) all instruments,
(i) all chattel paper,
(j) all goods,
(k) all documents,
(l) all goods and other property, whether or not delivered, (i)
the sale or lease of which gives or purports to give rise to any Receivable,
including, but not limited to, all merchandise returned or rejected by or
repossessed from customers, or (ii) securing any Receivable, including, without
limitation, all rights as an unpaid vendor or lienor (including, without
limitation, stoppage in transit, replevin and reclamation) with respect to such
goods and other properties,
(m) all Liens which secure or relate to any Collateral or are
acquired for the purpose of securing and enforcing any item thereof,
(n) all policies of insurance and certificates of insurance
pertaining to any and all items of Collateral,
(o) all files, correspondence, computer programs, tapes, disks and
related data processing software which contain information identifying or
pertaining to any of the Collateral or any Account Debtor or showing the
amounts thereof or payments thereon or otherwise necessary or helpful in the
realization thereon or the collection thereof,
(p) all cash deposited with the Lender or any Affiliate thereof or
which the Lender is entitled to retain or otherwise possess as collateral
pursuant to the provisions of this Agreement or any of the Security Documents,
and
(q) any and all products and cash and non-cash proceeds of the
foregoing (including, but not limited to, any claims to any items referred to
in this definition and any claims against third parties for loss of, damage to
or destruction of any or all of the Collateral or for proceeds payable under or
unearned premiums with respect to policies of insurance) in whatever form,
including, but not limited to, cash, negotiable instruments and other
instruments for the payment of money, chattel paper, security agreements and
other documents.
LOAN AND SECURITY AGREEMENT - PAGE 4
<PAGE> 5
"Contract Rights" means and includes, as to any Person, all of such
Person's then owned or existing and future acquired or arising rights under
contracts not yet earned by performance and not evidenced by an instrument or
chattel paper, to the extent that the same may lawfully be assigned, including,
without limitation, all rights to indemnification from PraxAir respecting the
Bellingham, Washington, site.
"Default" means any of the events specified in SECTION 11.1 that, with
the passage of time or giving of notice or both, would constitute an Event of
Default.
"Default Margin" means two percent (2.0%).
"Deposit Accounts" means any demand, time, savings, passbook or like
account maintained with a bank, savings and loan association, credit union or
like organization, other than an account evidenced by a certificate of deposit
that is an instrument under the UCC.
"Denali" means Denali Incorporated, a Delaware corporation.
"Disbursement Account" means, for any Borrower, the account maintained
by and in the name of such Borrower with the Lender for the purpose of
disbursing Revolving Credit Loan proceeds and amounts credited thereto pursuant
to SECTIONS 2A.2(b)(i) and 7.1(b)(ii).
"Dollar" and "$" means freely transferable United States dollars.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
in effect from time to time, and any successor statute.
"Effective Interest Rate" means the rate of interest per annum on the
Loans in effect from time to time pursuant to the provisions of SECTION 3.1(a),
(b) and (c).
"Eligible Inventory" means items of Inventory of a Borrower held for
sale in the ordinary course of the business of such Borrower (but not including
packaging or shipping materials or maintenance supplies) which are deemed by
the Lender in the exercise of its sole and absolute discretion to be eligible
for inclusion in the calculation of the Borrowing Base of such Borrower.
Unless otherwise approved in writing by the Lender, no Inventory shall be
deemed to be Eligible Inventory unless it meets all of the following
requirements: (a) such Inventory is owned by such Borrower, is subject to the
Security Interest, which is perfected as to such Inventory, and is subject to
no other Lien whatsoever other than a Permitted Lien; (b) such Inventory
consists of raw materials or finished goods and does not consist of
work-in-process, supplies or consigned goods, other than certain
work-in-process inventory of Ershigs approved by the Lender in its sole and
absolute discretion; (c) such Inventory is in good condition and meets all
standards applicable to such goods, their use or sale imposed by any
governmental agency, or department or division thereof, having regulatory
authority over such matters; (d) such Inventory is currently either usable or
saleable, at prices approximating at least the cost thereof, in the normal
course of such Borrower's business; (e) such Inventory is not obsolete or
returned or repossessed or used
LOAN AND SECURITY AGREEMENT - PAGE 5
<PAGE> 6
goods taken in trade; (f) such Inventory is located at one of the locations
listed in SCHEDULE 5.1(u) except as otherwise disclosed in writing to and
consented to by the Lender; (g) such Inventory is not experimental or test
Inventory; and (h) such Inventory is in the possession and control of such
Borrower and not any third party, or, if located in a warehouse or other
facility leased by such Borrower, the warehouseman or lessor has delivered to
the Lender a warehouseman's or landlord's waiver and consent in form and
substance satisfactory to the Lender.
"Eligible Receivable" means the unpaid portion of a Receivable payable
in Dollars to a Borrower net of any returns, discounts, claims, credits,
charges or other allowances, offsets, deductions, counterclaims, disputes or
other defenses and reduced by the aggregate amount of all reserves, limits and
deductions provided for in this definition and elsewhere in this Agreement
which is deemed by the Lender in the exercise of its sole and absolute
discretion to be eligible for inclusion in the calculation of the Borrowing
Base of such Borrower. Unless otherwise approved in writing by the Lender, no
Receivable shall be deemed an Eligible Receivable unless it meets all of the
following requirements: (a) such Receivable is owned by such Borrower and
represents a completed bona fide transaction which requires no further act
under any circumstances on the part of such Borrower to make such Receivable
payable by the Account Debtor; (b) such Receivable is not unpaid more than 90
days after the date of the original invoice or past due more than 60 days after
its due date, which shall not be later than 30 days after the invoice date; (c)
such Receivable does not arise out of any transaction with any Subsidiary,
Affiliate, creditor, lessor or supplier of such Borrower; (d) such Receivable
is not owing by an Account Debtor more than 50% of whose then-existing accounts
owing to such Borrower do not meet the requirements for eligibility set forth
in clause b above; (e) if the Account Debtor with respect thereto is located
outside of the United States of America, the goods which gave rise to such
Receivable were shipped after receipt by such Borrower from the Account Debtor
of an irrevocable letter of credit that (i) has been confirmed by a financial
institution acceptable to the Lender, (ii) is in form and substance acceptable
to the Lender, (iii) is payable in the full face amount of the face value of
the Receivable in Dollars at a place of payment located within the United
States, and (iv) has been duly delivered to the Lender; (f) such Receivable is
not subject to the Assignment of Claims Act of 1940, as amended from time to
time, or any applicable law now or hereafter existing similar in effect
thereto, as determined in the sole discretion of the Lender, or to any
provision prohibiting its assignment or requiring notice of or consent to such
assignment, unless such Receivable is duly assigned to the Lender in compliance
with all applicable governmental requirements so that the Lender is recognized
by the account debtor to have all of the rights of an assignee of such
Receivable; (g) such Borrower is not in breach of any express or implied
representation or warranty with respect to the goods the sale of which gave
rise to such Receivable; (h) the Account Debtor with respect to such Receivable
is not insolvent or the subject of any bankruptcy or insolvency proceedings of
any kind or of any other proceeding or action, threatened or pending, which
might, in the Lender's sole judgment, have a Materially Adverse Effect on such
Account Debtor; (i) the goods the sale of which gave rise to such Receivable
were shipped or delivered to the Account Debtor on an absolute sale basis and
not on a bill and hold sale basis (other than certain bill and hold sales by
FCI where such Receivables are approved in writing by the Lender in its sole
discretion and are supported by
LOAN AND SECURITY AGREEMENT - PAGE 6
<PAGE> 7
satisfactory signed customer authorizations and related documentation), a
consignment sale basis, a guaranteed sale basis, a sale or return basis or on
the basis of any other similar understanding, and such goods have not been
returned or rejected; (j) such Receivable is not owing by an Account Debtor who
or along with a group of affiliated Account Debtors has then-existing accounts
owing to such Borrower which exceed in face amount 25% of such Borrower's total
Eligible Receivables, to the extent of such excess; (k) such Receivable is
evidenced by an invoice or other documentation in form acceptable to the Lender
containing only terms normally offered by such Borrower, and dated no later
than the date of shipment; (l) such Receivable is a valid, legally enforceable
obligation of the Account Debtor with respect thereto and is not subject to any
present, or contingent (and no facts exist which are the basis for any future),
offset, deduction or counterclaim, dispute or other defense on the part of such
Account Debtor; (m) if such Receivable arises from the performance of services,
such services have been fully performed; and (n) such Receivable is subject to
the Security Interest, which is perfected as to such Receivable, and is subject
to no other Lien whatsoever other than a Permitted Lien and the goods giving
rise to such Receivable were not, at the time of the sale thereof, subject to
any Lien other than a Permitted Lien.
"Environmental Laws" means all federal, state, local and foreign laws
now or hereafter in effect relating to pollution or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals or industrial, toxic
or hazardous substances or wastes into the environment (including, without
limitation, ambient air, surface water, ground water or land) or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, removal, transport or handling of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances or wastes, and any and all
regulations, notices or demand letters issued, entered, promulgated or approved
thereunder.
"Equipment" means and includes, as to any Person, all of such Person's
then owned or existing and future acquired or arising equipment, machinery,
apparatus, motor vehicles, tractors, trailers, rolling stock, fittings, and
other tangible personal property (other than Inventory) of every kind and
description used in such Person's business operations or owned by such Person
or in which such Person has an interest and all parts, accessories and special
tools and all increases and accessions thereto and substitutions and
replacements therefor.
"Equipment Term Loan" means the Equipment Term Loan-Ershigs, the
Equipment Term Loan-FCI, the Equipment Term Loan-HCI, or the Equipment Term
Loan-Sefco and "Equipment Term Loans" means more than one of such loans.
"Equipment Term Loan-Ershigs" means the loan made to Ershigs pursuant
to SECTION 2B.1(c).
"Equipment Term Loan-FCI" means the loan made to FCI pursuant to
SECTION 2B.1(a).
"Equipment Term Loan-HCI" means the loan made to HCI pursuant to
SECTION 2B.1(b).
LOAN AND SECURITY AGREEMENT - PAGE 7
<PAGE> 8
"Equipment Term Loan-Sefco" means the loan made to SEFCO pursuant to
SECTION 2b.1(d).
"Equipment Term Note" means an Equipment Term Note made by any
Borrower payable to the order of the Lender evidencing the obligation of such
Borrower to pay the aggregate unpaid principal amount of the Equipment Term
Loan made to it by the Lender (and any promissory note or notes that may be
issued from time to time in substitution, renewal, extension, replacement or
exchange therefor, whether payable to the Lender or a different lender, whether
issued in connection with a Person becoming a lender after the Funding Date or
otherwise), in form and substance acceptable to Lender, and "Equipment Term
Notes" means more than one of such notes.
"Ershigs" means Ershigs, Inc., a Washington corporation.
"Event of Default" means any of the events specified in SECTION 11.1.
"FCI" means Fluid Containment, Inc., a Delaware corporation.
"Financing Statements" means the Uniform Commercial Code financing
statements executed and delivered by each Borrower to the Lender, naming the
Lender as secured party and such Borrower as debtor, in connection with this
Agreement.
"Funding Date" means the later of (a) the Agreement Date, and (b) the
first date on which all of the conditions set forth in SECTIONS 4.1 and 4.2
shall have been fulfilled or waived by the Lender.
"GAAP" means generally accepted accounting principles established by
the Financial Accounting Standards Board of the American Institute of Certified
Public Accountants and in effect in the United States from time to time,
applied on a basis consistent with that of the preceding fiscal year of such
Person, reflecting only such changes in accounting principles or practice with
which the independent public accountants of such Person concur.
"General Intangibles" means, as to any Person, all of such Person's
then owned or existing and future acquired or arising general intangibles,
choses in action and causes of action and all other intangible personal
property of such Person of every kind and nature (other than Receivables),
including, without limitation, Intellectual Property, corporate or other
business records, inventions, designs, blueprints, plans, specifications, trade
secrets, goodwill, computer software, customer lists, registrations, licenses,
franchises, tax refund claims, reversions or any rights thereto and any other
amounts payable to such Person from any Benefit Plan, Multiemployer Plan or
other employee benefit plan, rights and claims against carriers and shippers,
rights to indemnification, business interruption insurance and proceeds
thereof, property, casualty or any similar type of insurance and any proceeds
thereof, proceeds of insurance covering the lives of key employees on which
such Person is beneficiary, any letter of credit, guarantee, claims, security
interest or other security held by or granted to such Person to
LOAN AND SECURITY AGREEMENT - PAGE 8
<PAGE> 9
secure payment by an Account Debtor of any of the Receivables, and all rights
to indemnification from PraxAir respecting the Bellingham, Washington, site.
"Governmental Approvals" means all authorizations, consents,
approvals, permits, licenses and exemptions of, registrations and filings with,
and reports to, all governmental bodies, whether federal, state, local, foreign
national or provincial, and all agencies thereof.
"Governmental Authority" means any government or political subdivision
or any agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury or arbitrator, in
each case whether foreign or domestic.
"Guarantors" means Denali, Fluid Containment Property, Inc.,
Separation Solutions, Inc., Specialty Solutions, Inc., Containment Solutions,
Inc., Instrumentation Solutions, Inc., and the Borrowers, and "Guarantor" means
any of them.
"Guaranty", "Guaranteed" or to "Guarantee," as applied to any
obligation of another Person shall mean and include
(a) a guaranty (other than by endorsement of negotiable
instruments for collection in the ordinary course of business),
directly or indirectly, in any manner, of any part or all of such
obligation of such other Person, and
(b) an agreement, direct or indirect, contingent or
otherwise, and whether or not constituting a guaranty, the practical
effect of which is to assure the payment or performance (or payment of
damages in the event of nonperformance) of any part or all of such
obligation of such other Person whether by (i) the purchase of
securities or obligations, (ii) the purchase, sale or lease (as lessee
or lessor) of property or the purchase or sale of services primarily
for the purpose of enabling the obligor with respect to such
obligation to make any payment or performance (or payment of damages
in the event of nonperformance) of or on account of any part or all of
such obligation or to assure the owner of such obligation against
loss, (iii) the supplying of funds to, or in any other manner
investing in, the obligor with respect to such obligation, (iv)
repayment of amounts drawn down by beneficiaries of letters of credit,
or (v) the supplying of funds to or investing in a Person on account
of all or any part of such Person's obligation under a guaranty of any
obligation or indemnifying or holding harmless, in any way, such
Person against any part or all of such obligation.
"HCI" means Hoover Containment, Inc., a Delaware corporation.
"Indebtedness" of any Person means, without duplication, (a) all
Liabilities, (b) all obligations for money borrowed or for the deferred
purchase price of property or services or in respect of reimbursement
obligations under letters of credit, (c) all obligations represented by bonds,
debentures, notes and accepted drafts that represent extensions of credit, (d)
Capitalized Lease Obligations, (e) all obligations (including, during the
noncancellable term of any lease in
LOAN AND SECURITY AGREEMENT - PAGE 9
<PAGE> 10
the nature of a title retention agreement, all future payment obligations under
such lease discounted to their present value in accordance with GAAP) secured
by any Lien to which any property or asset owned or held by such Person is
subject, whether or not the obligation secured thereby shall have been assumed
by such Person, (f) all obligations of other Persons which such Person has
Guaranteed, including, but not limited to, all obligations of such Person
consisting of recourse liability with respect to accounts receivable sold or
otherwise disposed of by such Person, and (g) in the case of the Borrowers, the
Loans (without duplication).
"Initial Loans" means the Revolving Credit Loans and the Term Loans
made to the Borrowers on the Funding Date.
"Installment Payment Date" means the first day of each month,
commencing, with respect to any Loan, on the first day of the month after the
initial advance of such Loan.
"Intellectual Property" means, as to any Person, all of such Person's
then owned existing and future acquired or arising patents, patent rights,
copyrights, works which are the subject of copyrights, trademarks, service
marks, trade names, trade styles, patent, trademark and service mark
applications, and all licenses and rights related to any of the foregoing and
all other rights under any of the foregoing, all extensions, renewals,
reissues, divisions, continuations and continuations-in-part of any of the
foregoing and all rights to sue for past, present and future infringements of
any of the foregoing.
"Interbank Offered Rate" means, with respect to any LIBOR Loan for the
Interest Period applicable thereto, the average (rounded upward to the nearest
one-sixteenth (1/16) of one percent) per annum rate of interest determined by
the Lender (each such determination to be conclusive and binding absent
manifest error) as of two Business Days prior to the first day of such Interest
Period from Telerate Page 3750 as the effective rate at which deposits in
immediately available funds in Dollars are being offered or quoted to major
banks in the interbank market for eurodollar deposits for a term comparable to
such Interest Period and in the amount of the LIBOR Loan. If such rate is
unavailable from such service, then such rate may be determined by the Lender
from any other interest rate reporting service of recognized standing that the
Lender shall select.
"Interest Expense" means interest on Indebtedness during the period
for which computation is being made, excluding (a) the amortization of fees and
costs incurred with respect to the closing of loans which have been capitalized
as transaction costs, and (b) interest paid in kind.
"Interest Payment Date" means the first day of each calendar month
commencing, with respect to any Loan, on the first day of the month after the
initial advance of such Loan, and continuing thereafter until the Secured
Obligations have been irrevocably paid in full.
"Interest Period" means, with respect to each LIBOR Loan, the period
commencing on the date of the making or continuation of or conversion to such
LIBOR Loan and ending one (1),
LOAN AND SECURITY AGREEMENT - PAGE 10
<PAGE> 11
two (2), three (3), or six (6) months thereafter, as the Borrowers may elect in
the applicable Notice of Borrowing or Notice of Conversion or Continuation;
provided, that:
(a) any Interest Period that would otherwise end on a day
that is not a Business Day shall, subject to the provisions of CLAUSE
(c) below, be extended to the next succeeding Business Day unless such
Business Day falls in the next calendar month, in which case such
Interest Period shall end on the immediately preceding Business Day;
(b) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall, subject to CLAUSE (c) below, end on the last Business
Day of a calendar month;
(c) any Interest Period that would otherwise end after
the Termination Date shall end on the Termination Date;
(d) no Interest Period applicable to a LIBOR Term Loan
may end after the next Installment Payment Date unless the aggregate
principal amount of Prime Rate Term Loans and LIBOR Term Loans having
Interest Periods ending prior to such Installment Payment Date is at
least equal to the amount of the principal repayment due hereunder on
such Installment Payment Date; and
(e) notwithstanding CLAUSE (c) above, no Interest Period
shall have a duration of less than one month.
"Inventory" means and includes, as to any Person, all of such Person's
then owned or existing and future acquired or arising (a) goods intended for
sale or lease or for display or demonstration, (b) work in process, and (c) raw
materials and other materials and supplies of every nature and description used
or which might be used in connection with the manufacture, packing, shipping,
advertising, selling, leasing or furnishing of goods or otherwise used or
consumed in the conduct of business.
"Investment" means, with respect to any Person: (a) the direct or
indirect purchase or acquisition of any beneficial interest in, any share of
capital stock of, evidence of Indebtedness of or other security issued by any
other Person, (b) any loan, advance or extension of credit to, or contribution
to the capital of, any other Person, excluding advances to employees in the
ordinary course of business for business expenses, (c) any Guaranty of the
obligations of any other Person, or (d) any commitment or option to take any of
the actions described in CLAUSES (a), (b) or (c) above.
"IRB Obligations" means the obligations of FCI to the Montgomery
County Industrial Development Corporation in connection with those certain
industrial revenue bonds issued by the Montgomery County Industrial Development
Corporation, in the principal amount of $1,000,000, due February 1, 2001.
LOAN AND SECURITY AGREEMENT - PAGE 11
<PAGE> 12
"LaValley" means GL&V/LaValley Construction, Inc., a Mississippi
corporation.
"Lender" means NationsBank of Texas, N.A., a national banking
association, and its successors and assigns.
"Lender's Office" means the office of the Lender specified in or
determined in accordance with the provisions of SECTION 12.1(c).
"Letter of Credit" means any letter of credit issued by the Lender for
the account of the requesting Borrower.
"Letter of Credit Facility" means the amount of $1,500,000.00.
"Letter of Credit Reserve" means, at any time, for any Borrower, 100%
of the sum of (i) the aggregate undrawn amount of all Letters of Credit
outstanding at such time for the account of such Borrower, plus (ii) the
aggregate amount of all drawings under Letters of Credit for the account of
such Borrower for which the Lender has not been reimbursed either directly or
through a Revolving Credit Loan made under SECTION 2A.2(a)(i)(e).
"Liabilities" means all liabilities of a Person determined in
accordance with GAAP and includable on a balance sheet of such Person prepared
in accordance with GAAP.
"LIBOR" means, with respect to the Interest Period applicable thereto,
a simple per annum interest rate determined pursuant to the following formula:
LIBOR = Interbank Offered Rate
------------------------------------------
1 - LIBOR Reserve Percentage
LIBOR shall be adjusted automatically as of the effective date of any change in
the LIBOR Reserve Percentage.
"LIBOR Loan" means a LIBOR Revolving Credit Loan or a LIBOR Term Loan.
"LIBOR Reserve Percentage" means, for any day, that percentage
(expressed as a decimal) which is in effect from time to time under Regulation
D of the Board of Governors of the Federal Reserve System, as such regulation
may be amended from time to time, or any successor regulation, as the maximum
reserve requirement (including, without limitation, any basic, supplemental,
emergency, special or marginal reserves) applicable to any member bank with
respect to Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by reference
to which the interest rate of any LIBOR Loan is determined), whether or not
Lender has any Eurocurrency liabilities subject to such reserve requirement at
that time. All LIBOR Loans shall be deemed to constitute Eurocurrency
liabilities and as such shall be deemed subject to reserve requirements without
the
LOAN AND SECURITY AGREEMENT - PAGE 12
<PAGE> 13
benefit of credits for proration, exceptions or offsets that may be available
from time to time to Lender.
"LIBOR Revolving Credit Loan" means any Revolving Credit Loan bearing
interest at the time in question determined with reference to LIBOR.
"LIBOR Term Loan" means that portion of the unpaid principal amount of
the Term Loan bearing interest at the time in question determined with
reference to LIBOR.
"Lien" as applied to the property of any Person means: (a) any
security interest, chattel mortgage, charge, mortgage, deed to secure debt,
deed of trust, lien, pledge, lease constituting a Capitalized Lease Obligation,
conditional sale or other title retention agreement, or other security
interest, security title or encumbrance of any kind in respect of any property
of such Person or upon the income or profits therefrom, (b) any arrangement,
express or implied, under which any property of such Person is transferred,
sequestered or otherwise identified for the purpose of subjecting the same to
the payment of Indebtedness or performance of any other obligation in priority
to the payment of the general, unsecured creditors of such Person, (c) any
Indebtedness which is unpaid more than 30 days after the same shall have become
due and payable and which if unpaid might by law (including, but not limited
to, bankruptcy and insolvency laws) or otherwise be given any priority
whatsoever over general unsecured creditors of such Person, (d) the filing of,
or any agreement to give, any financing statement under the UCC or its
equivalent in any jurisdiction, and (e) any reservation, exception,
encroachment, easement, right-of-way, covenant, condition, restriction, lease,
or other title exception and encumbrance affecting any interest in any kind of
property or asset, whether real, personal, tangible, or intangible.
"Loan" means any Revolving Credit Loan or any Term Loan, as well as
all such Loans collectively.
"Loan Documents" means, collectively, this Agreement, the Notes, the
Security Documents and each other instrument, agreement and document executed
and delivered by any Borrower, any Guarantor, or any other Obligor in
connection with this Agreement and each other instrument, agreement or document
referred to herein or contemplated hereby, including, without limitation, the
Equity Contribution Agreements, dated as of the date hereof (i) between Denali
and the Lender and (ii) among Denali and certain of its shareholders.
"Lockbox" means the U.S. Post Office Box(es) specified in, or pursuant
to, an Agency Account Agreement.
"Maximum Rate" means the maximum nonusurious interest rate, if any,
that at any time, or from time to time, may be contracted for, taken, reserved,
charged, or received on the Loans under the laws which are presently in effect
of the United States and the State of Texas applicable to Lender and such
indebtedness or, to the extent permitted by law, under such applicable laws of
the United States and the State of Texas which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws now
allow. To the
LOAN AND SECURITY AGREEMENT - PAGE 13
<PAGE> 14
extent that the Texas Credit Title, as amended (the "Act"), is relevant to any
holder of the Loans for the purposes of determining the Maximum Rate, each such
holder elects to determine such applicable legal rate under the Act pursuant to
the "monthly ceiling", from time to time in effect, as referred to and defined
in Chapter 1D of the Act, as modified by Article 1H.003 of the Act; subject,
however, to the limitations on such applicable ceiling referred to and defined
in the Act, and further subject to any right such holder may have subsequently,
under applicable law, to change the method of determining the Maximum Rate.
"Materially Adverse Effect" means any act, omission, event or
undertaking which would, singly or in the aggregate, have a materially adverse
effect upon (a) the business, assets, properties, liabilities, condition
(financial or otherwise), results of operations or business prospects of the
any member of any Borrower or any of its Subsidiaries, (b) upon the respective
ability of such Borrower or any of its Subsidiaries to perform any obligations
under this Agreement or any other Loan Document to which it is a party, or (c)
the legality, validity, binding effect, enforceability or admissibility into
evidence of any Loan Document or the ability of Lender to enforce any rights or
remedies under or in connection with any Loan Document; in any case, whether
resulting from any single act, omission, situation, status, event, or
undertaking, together with other such acts, omissions, situations, statuses,
events, or undertakings.
"Money Borrowed" means, as applied to Indebtedness, (a) Indebtedness
for money borrowed, (b) Indebtedness (i) represented by notes payable and
drafts accepted, that represent extensions of credit, (ii) constituting
obligations evidenced by bonds, debentures, notes or similar instruments, or
(iii) upon which interest charges are customarily paid (other than trade
Indebtedness) or that was issued or assumed as full or partial payment for
property, (c) Indebtedness that constitutes a Capitalized Lease Obligation, and
(d) Indebtedness that is such by virtue of CLAUSE (f) of the definition
thereof, but only to the extent that the obligations Guaranteed are obligations
that would constitute Indebtedness for Money Borrowed. "Money Borrowed" shall
not include Indebtedness arising from endorsing negotiable instruments in the
ordinary course of collection, or from Trade Payables.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which any Borrower or a Related Company is
required to contribute or has contributed within the immediately preceding 6
years.
"Net Cash Proceeds" means, with respect to any public or private
offering of securities, the gross cash received for the securities issued in
such offering, less customary underwriter's discounts and expenses of such
offering.
"Net Worth" of any Person means the total shareholders' equity
(including capital stock, additional paid-in capital and retained earnings,
after deducting treasury stock) which would appear as such on a balance sheet
of such Person prepared in accordance with GAAP.
"Note" means each of the Revolving Credit Notes, the Equipment Term
Notes, and the Real Estate Term Notes, and "Notes" means more than one of such
notes.
LOAN AND SECURITY AGREEMENT - PAGE 14
<PAGE> 15
"Notice of Borrowing" has the meaning set forth in SECTION
2A.2(a)(iii).
"Notice of Conversion or Continuation" has the meaning set forth in
SECTION 3.3.
"Obligor" means each Borrower, each Guarantor, each party to the
Security Documents (other than the Lender), and each other party at any time
primarily or secondarily, directly or indirectly, liable on any of the Secured
Obligations.
"Operating Lease" means any lease (other than a lease constituting a
Capitalized Lease Obligation) of real or personal property.
"Owens" means Owens-Corning Fiberglas Corporation.
"Owens Debt" means the Indebtedness of FCI to Owens in the principal
amount of $8,269,000.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
"Permitted Indebtedness for Money Borrowed" means (a) Permitted
Purchase Money Indebtedness, (b) Subordinated Indebtedness, (c) the IRB
Obligations, (d) Permitted Intercompany Loans, (e) the PraxAir Debt, (f) the
Loans, and (g) the Guaranties executed by each Guarantor in favor of the
Lender.
"Permitted Intercompany Loans" means intercompany loans made by any
Borrower to any other Borrower so long as, with respect to each such loan (i)
the Lender has given its prior, written consent to such loan, (ii) such
intercompany loan is evidenced by a promissory note which has been delivered in
pledge to the Lender as collateral security for the Secured Obligations
pursuant to documentation satisfactory to the Lender, (iii) the obligations of
the recipient in respect of such intercompany loan shall have been subordinated
to the prior payment in full in cash of the Secured Obligations pursuant to a
Subordination Agreement, (iv) the Borrower making such intercompany loan shall
have recorded same on its books, (v) the Borrower making and the recipient of
such intercompany loan shall each be Solvent at the time of such intercompany
loan and shall so represent to the Lender in a manner satisfactory to the
Lender, (vi) except to the extent such intercompany loan represents payment of
or reimbursement of expenses in the ordinary course of business by one Borrower
for or to another Borrower, after giving effect to the making of any such
intercompany loan, the Availability of the lending Borrower shall not be less
than $500,000, and (vii) immediately prior to and after giving effect to such
intercompany loan, no Default or Event of Default shall be continuing.
"Permitted Investments" means Investments of any Borrower in: (a)
demand deposit accounts, negotiable certificates of deposit, time deposits,
banker's acceptances, Eurodollar time deposits with maturities of one year or
less from the date of acquisition, and overnight bank deposits issued by the
Lender or any Affiliate of the Lender or by any United States bank or trust
company having capital, surplus and undivided profits in excess of
$250,000,000, (b) any direct
LOAN AND SECURITY AGREEMENT - PAGE 15
<PAGE> 16
obligation of the United States of America or any agency or instrumentality
thereof which has a remaining maturity at the time of purchase of not more than
one year and repurchase agreements relating to the same, (c) sales on credit in
the ordinary course of business on terms customary in the industry, (d) notes,
accepted in the ordinary course of business, evidencing overdue accounts
receivable arising in the ordinary course of business, provided such notes are
pledged to the Lender pursuant to documentation satisfactory to the Lender, (e)
Permitted Intercompany Loans, (f) Investments in the capital stock of
Subsidiaries, (g) commercial paper rated P-1 by Moody's Investors Service, Inc.
or A-1 by Standard & Poor's Ratings Group on the date of acquisition, (h)
securities with maturities of one year or less from the date of acquisition
backed by standby letters of credit issued by any United States bank (i) having
capital and surplus in excess of $250,000,000 and (ii) which has a short-term
commercial paper rating of P-1 by Moody's Investors Service, Inc. or A-1 by
Standard & Poor's Ratings Group, and (i) shares of money market mutual or
similar funds which invest primarily in assets satisfying the requirements of
clauses (a), (b), (g), or (h) hereof.
"Permitted Liens" means: (a) Liens securing taxes, assessments and
other governmental charges or levies (excluding any Lien imposed pursuant to
any of the provisions of ERISA) or the claims of materialmen, mechanics,
carriers, warehousemen or landlords for labor, materials, supplies or rentals
incurred in the ordinary course of business, but (i) in all cases, only if
payment shall not at the time be required to be made in accordance with SECTION
8.4, and (ii) in the case of warehousemen or landlords controlling locations
where Inventory is located, only if such liens have been waived or subordinated
to the Security Interest in a manner satisfactory to the Lender; (b) Liens
consisting of deposits or pledges made in the ordinary course of business in
connection with, or to secure payment of, obligations under workers'
compensation, unemployment insurance or similar legislation or under surety or
performance bonds, in each case arising in the ordinary course of business; (c)
Liens constituting encumbrances in the nature of zoning restrictions, easements
and rights or restrictions of record on the use of any Borrower's real estate,
which in the sole judgment of the Lender do not materially detract from the
value of such real estate or impair the use thereof in the business of such
Borrower; (d) Purchase Money Liens securing Permitted Purchase Money
Indebtedness; (e) Liens of the Lender arising under this Agreement and the
other Loan Documents; (f) the Lien on FCI's Conroe, Texas, manufacturing
facility, securing the IRB Obligations; (g) Liens arising out of or resulting
from any judgment or award, the time for the appeal or petition for rehearing
of which shall not have expired, or in respect of which each Borrower is fully
protected by insurance or in respect of which such Borrower shall at any time
in good faith be prosecuting an appeal or proceeding for a review and in
respect of which a stay of execution pending such appeal or proceeding for
review shall have been secured, and as to which appropriate reserves have been
established on the books of such Borrower; (h) the interest or title of a
lessor in assets leased to any Borrower, other than for Capitalized Lease
Obligations; and (i) deposits made to secure performance of leases (other than
for Capitalized Lease Obligations) or to secure statutory obligations.
"Permitted Purchase Money Indebtedness" means Purchase Money
Indebtedness secured only by Purchase Money Liens and Capitalized Lease
Obligations, incurred by the Borrowers after the Agreement Date, up to an
aggregate amount outstanding at any time equal to $500,000.
LOAN AND SECURITY AGREEMENT - PAGE 16
<PAGE> 17
"Person" means an individual, corporation, limited liability company,
partnership, joint venture, association, trust or unincorporated organization
or a government or any agency or political subdivision thereof.
"PraxAir Debt" means the Indebtedness of Ershigs to PraxAir, Inc. in
the principal amount of $1,000,000.
"Prime Rate" means during the period from the Funding Date through the
last day of the month in which the Funding Date falls, the per annum rate of
interest publicly announced by the Lender at its principal office as its "prime
rate" as in effect on the Funding Date, and thereafter during each succeeding
calendar month, means such "prime rate" as in effect on the last Business Day
of the immediately preceding calendar month. Any change in an interest rate
resulting from a change in the Prime Rate shall become effective as of 12:01
a.m. on the first day of the month following the month in which such change was
announced. The Prime Rate is a reference used by the Lender in determining
interest rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit to any debtor.
"Prime Rate Loan" means a Prime Rate Revolving Credit Loan or a Prime
Rate Term Loan.
"Prime Rate Revolving Credit Loan" means a Revolving Credit Loan
bearing interest at the time in question determined with reference to the Prime
Rate.
"Prime Rate Term Loan" means that portion of the unpaid principal
amount of a Term Loan bearing interest at the time in question determined with
reference to the Prime Rate.
"Purchase Money Indebtedness" means Indebtedness created to finance
the payment of all or any part of the purchase price (not in excess of the fair
market value thereof) of any tangible asset (other than Inventory) and incurred
at the time of or within 10 days prior to or after the acquisition of such
tangible asset.
"Purchase Money Lien" means any Lien securing Purchase Money
Indebtedness, but only if such Lien shall at all times be confined solely to
the tangible asset (other than Inventory) the purchase price of which was
financed through the incurrence of the Purchase Money Indebtedness secured by
such Lien.
"Real Estate Term Loan" means the Real Estate Term Loan-Ershigs, the
Real Estate Term Loan-FCI, or the Real Estate Term Loan-Sefco and "Real Estate
Term Loans" means more than one of such loans.
"Real Estate Term Loan-Ershigs" means the loan made to Ershigs
pursuant to SECTION 2B.1(f).
"Real Estate Term Loan-FCI" means the loan made to FCI pursuant to
SECTION 2B.1(e).
LOAN AND SECURITY AGREEMENT - PAGE 17
<PAGE> 18
"Real Estate Term Loan-Sefco" means the loan made to SEFCO pursuant to
SECTION 2B.1(g).
"Real Estate Term Note" means a Real Estate Term Note made by any
Borrower payable to the order of the Lender evidencing the obligation of such
Borrower to pay the aggregate unpaid principal amount of the Real Estate Term
Loan made to it by the Lender (and any promissory note or notes that may be
issued from time to time in substitution, renewal, extension, replacement or
exchange therefor, whether payable to the Lender or a different lender, whether
issued in connection with a Person becoming a lender after the Funding Date or
otherwise), in form and substance acceptable to Lender, and "Real Estate Term
Notes" means more than one of such note.
"Real Property" means the real property described on EXHIBIT E hereto
and all improvements and buildings thereon.
"Receivables" means and includes, as to any Person, all of such
Person's then owned or existing and future acquired or arising (a) accounts,
(b) chattel paper (including, without limitation, installment sales contracts
and personal property leases), (c) Contract Rights, (d) rights to the payment
of money or other forms of consideration of any kind including, but not limited
to, letters of credit and the right to receive payment thereunder, tax refunds,
insurance proceeds, notes, drafts, instruments, documents, acceptances and all
other debts, obligations and liabilities in whatever form from any Person and
guaranties, security and Liens securing payment thereof, and (c) cash and
non-cash proceeds of any of the foregoing.
"Related Company" means, as to any Person, any (a) corporation which
is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as such Person, (b) partnership or other trade or
business (whether or not incorporated) under common control (within the meaning
of Section 414(c) of the Code) with such Person, or (c) member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
such Person or any corporation described in clause (a) above or any
partnership, trade or business described in clause (b) above.
"Restricted Distribution" by any Person means (a) its retirement,
redemption, purchase, or other acquisition for value of any capital stock or
other equity securities or partnership interests issued by such Person, (b) the
declaration or payment of any dividend or distribution on or with respect to
any such securities or partnership interests, (c) any loan or advance by such
Person to, or other investment by such Person in, the holder of any of such
securities or partnership interests, and (d) any other payment by such Person
in respect of such securities or partnership interests.
"Restricted Payment" means (a) any redemption, repurchase or
prepayment or other retirement, prior to the stated maturity thereof or prior
to the due date of any regularly scheduled installment or amortization payment
with respect thereto, of any Indebtedness of a Person (other than the Secured
Obligations and trade debt), and (b) the payment by any Person of the principal
LOAN AND SECURITY AGREEMENT - PAGE 18
<PAGE> 19
amount of or interest on any Indebtedness (other than trade debt) owing to an
Affiliate of such Person.
"Revolving Credit Facility" means the facility for the Revolving
Credit Loans in the principal sum of $19,747,000.00.
"Revolving Credit Loans" means loans made to the Borrowers pursuant to
SECTION 2A.1.
"Revolving Credit Note" means a Revolving Credit Note made by a
Borrower payable to the order of the Lender evidencing the obligation of such
Borrower to pay the aggregate unpaid principal amount of all Revolving Credit
Loans made to it by the Lender (and any promissory note or notes that may be
issued from time to time in substitution, renewal, extension, replacement or
exchange therefor, whether payable to the Lender or a different lender, whether
issued in connection with a Person becoming a lender after the Funding Date or
otherwise), in form and substance acceptable to Lender, and "Revolving Credit
Notes" means more than one of such notes.
"Schedule of Equipment" means a schedule delivered by the Borrowers to
the Lender pursuant to the provisions of SECTION 7.14(c).
"Schedule of Inventory" means a schedule delivered by the Borrowers to
the Lender pursuant to the provisions of SECTION 7.14(b).
"Schedule of Receivables" means a schedule delivered by the Borrowers
to the Lender pursuant to the provisions of SECTION 7.14(a).
"Secured Obligations" means, in each case whether now in existence or
hereafter arising, (a) the principal of and interest and premium, if any, on
the Loans, (b) all reimbursement and other obligations relating to Letters of
Credit, and (c) all indebtedness, liabilities, obligations, overdrafts,
covenants and duties of each Borrower to the Lender or any Affiliate of the
Lender of every kind, nature and description, direct or indirect, absolute or
contingent, due or not due, contractual or tortious, liquidated or
unliquidated, and whether or not evidenced by any note and whether or not for
the payment of money under or in respect of this Agreement, any Note or any of
the other Loan Documents, including, without limitation, all Guarantees
executed by the Guarantors in favor of the Lender.
"Security Documents" means each of (a) the Financing Statements, and
(b) each other writing executed and delivered by any Person securing or
guaranteeing the Secured Obligations or evidencing such security.
"Security Interest" means the Liens of the Lender on and in the
Collateral effected hereby or by any of the Security Documents or pursuant to
the terms hereof or thereof.
"SEFCO" means SEFCO, Inc., an Oklahoma corporation.
LOAN AND SECURITY AGREEMENT - PAGE 19
<PAGE> 20
"Solvent" and "Solvency" means, as to any Person, on a particular
date, that on such date (a) the fair market value of the property of such
Person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person, (b) the present fair
salable value of the assets of such Person is not less than the amount that
will be required to pay the probable liability of such Person on its debts as
they become absolute and matured, (c) such Person does not intend, or believe
that it will, incur debts or liabilities beyond such Person's ability to pay as
such debts and liabilities mature, and (d) such Person is not engaged in a
business or transaction, and is not about to engage in a business or
transaction, for which such Person's property would constitute an unreasonably
small capital. The amount of contingent liabilities at any time shall be
computed as the amount that, in the light of all facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.
"Subordinated Indebtedness" means, with respect to any Borrower (a)
Indebtedness of such Borrower which is subordinated to the Secured Obligations
as set forth in the Subordination Agreements, and (b) any other Indebtedness
for Money Borrowed of such Borrower which is subordinated to the Secured
Obligations on terms and conditions acceptable to the Lender in its sole
discretion.
"Subordination Agreements" means the subordination agreements, in form
and substance acceptable to the Lender in its sole discretion, pursuant to
which Indebtedness of a Borrower is subordinated to the Secured Obligations.
"Subsidiary" when used to determine the relationship of a Person to
another Person, means a Person of which an aggregate of 50% or more of the
stock of any class or classes or 50% or more of other ownership interests is
owned of record or beneficially by such other Person or by one or more
Subsidiaries of such other Person or by such other Person and one or more
Subsidiaries of such Person, (i) if the holders of such stock or other
ownership interests (A) are ordinarily, in the absence of contingencies,
entitled to vote for the election of a majority of the directors (or other
individuals performing similar functions) of such Person, even though the right
so to vote has been suspended by the happening of such a contingency, or (B)
are entitled, as such holders, to vote for the election of a majority of the
directors (or individuals performing similar functions) of such Person, whether
or not the right so to vote exists by reason of the happening of a contingency,
or (ii) in the case of such other ownership interests, if such ownership
interests constitute a majority voting interest.
"Tangible Net Worth" means, as applied to any Person, the Net Worth of
such Person at the time in question, after deducting therefrom the amount of
all intangible items reflected therein, including all unamortized debt discount
and expense, unamortized research and development expense, unamortized deferred
charges, goodwill, Intellectual Property, unamortized excess cost of investment
in Subsidiaries over equity at dates of acquisition, and all similar items
which should properly be treated as intangibles in accordance with GAAP plus
Subordinated Indebtedness.
LOAN AND SECURITY AGREEMENT - PAGE 20
<PAGE> 21
"Term Loan" means any loan made to any Borrower pursuant to SECTION
2B.1, and "Term Loans" means more than one such loan.
"Termination Date" means the earliest of (i) the later of (a) the
fifth anniversary of the Agreement Date or (b) such later date to which the
termination of the Revolving Credit Facility shall be extended pursuant to
SECTION 2A.6, (ii) the termination of the Revolving Credit Facility pursuant to
SECTION 11.2, or (iii) the early termination of this Agreement by Borrowers
pursuant to SECTION 3.11.
"Termination Event" means (a) a "Reportable Event" as defined in
Section 4043(b) of ERISA, but excluding any such event as to which the
provision for 30 days' notice to the PBGC is waived under applicable
regulations, (b) the filing of a notice of intent to terminate a Benefit Plan
or the treatment of a Benefit Plan amendment as a termination under Section
4041 of ERISA, or (c) the institution of proceedings to terminate a Benefit
Plan by the PBGC under Section 4042 of ERISA or the appointment of a trustee to
administer any Benefit Plan.
"Texas Real Property" means the Real Property located in Conroe,
Texas, and in Gatesville, Texas.
"Trade Payables" means trade payables that are for goods furnished or
services rendered in the ordinary course of business and that are payable in
accordance with customary trade terms.
"Type" means, with respect to a Loan, its classification as a LIBOR
Loan or Prime Rate Loan.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the State of Texas.
"Unfunded Capital Expenditures" means Capital Expenditures which are
paid for by a Person other than with the proceeds of Indebtedness for Money
Borrowed (other than the Loans) incurred to finance such Capital Expenditures
and other than those represented by Capitalized Lease Obligations.
"Unfunded Vested Accrued Benefits" means, with respect to any Benefit
Plan at any time, the amount (if any) by which (a) the present value of all
vested nonforfeitable benefits under such Benefit Plan exceeds (b) the fair
market value of all Benefit Plan assets allocable to such benefits, as
determined using such reasonable actuarial assumptions and methods as are
specified in the Schedule B (Actuarial Information) to the most recent Annual
Report (Form 5500) filed with respect to such Benefit Plan.
LOAN AND SECURITY AGREEMENT - PAGE 21
<PAGE> 22
Section 1.2 Other Referential Provisions.
(a) All terms in this Agreement, the Exhibits and Schedules hereto
shall have the same defined meanings when used in any other Loan Documents,
unless the context shall require otherwise.
(b) Except as otherwise expressly provided herein, all accounting
terms not specifically defined or specified herein shall have the meanings
generally attributed to such terms under GAAP including, without limitation,
applicable statements and interpretations issued by the Financial Accounting
Standards Board and bulletins, opinions, interpretations and statements issued
by the American Institute of Certified Public Accountants or its committees.
(c) All personal pronouns used in this Agreement, whether used in
the masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
(d) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provisions of this Agreement.
(e) Titles of Articles and Sections in this Agreement are for
convenience only, do not constitute part of this Agreement and neither limit
nor amplify the provisions of this Agreement, and all references in this
Agreement to Articles, Sections, Subsections, paragraphs, clauses, subclauses,
Schedules or Exhibits shall refer to the corresponding Article, Section,
Subsection, paragraph, clause or subclause of, or Schedule or Exhibit attached
to, this Agreement, unless specific reference is made to the articles, sections
or other subdivisions or divisions of, or to schedules or exhibits to, another
document or instrument.
(f) Each definition of a document in this Agreement shall include
such document as amended, modified, supplemented or restated from time to time
in accordance with the terms of this Agreement.
(g) Except where specifically restricted, reference to a party to
a Loan Document includes that party and its successors and assigns permitted
hereunder or under such Loan Document.
(h) Unless otherwise specifically stated, whenever a time is
referred to in this Agreement or in any other Loan Document, such time shall be
the local time in the city in which the principal office of Lender is located.
(i) Whenever the phrase "to the knowledge of a Person" or words of
similar import relating to the knowledge of a Person are used herein, such
phrase shall mean and refer to (i) the actual knowledge of the President or
chief financial officer of such Person or (ii) the knowledge that such officers
would have obtained if they had engaged in good faith in the diligent
LOAN AND SECURITY AGREEMENT - PAGE 22
<PAGE> 23
performance of their duties, including the making of such reasonable specific
inquiries as may be necessary of the appropriate persons in a good faith
attempt to ascertain the accuracy of the matter to which such phrase relates.
(j) The terms accounts, chattel paper, documents, equipment,
instruments, investment property, general intangibles, goods and inventory, as
and when used (without being capitalized) in this Agreement or the Security
Documents, shall have the meanings given to such terms in the UCC.
Section 1.3 Exhibits and Schedules. All Exhibits and Schedules
attached hereto are by reference made a part hereof.
ARTICLE 2 - REVOLVING CREDIT FACILITY
A. REVOLVING CREDIT FACILITY
Section 2A.1 Revolving Credit Loans. Upon the terms and subject
to the conditions of, and in reliance upon the representations and warranties
made under, this Agreement, the Lender shall make Revolving Credit Loans to
each Borrower from time to time from the Funding Date to the Termination Date,
as requested by such Borrower in accordance with the terms of SECTION 2A.2, in
an aggregate principal amount outstanding not to exceed at any time the lesser
of (a) the Revolving Credit Facility, minus the outstanding principal balance
of all Revolving Credit Loans to all other Borrowers, minus the Aggregate
Letter of Credit Reserve, or (b) the Borrowing Base of such Borrower. It is
expressly understood and agreed that the Lender may and at present intends to
use the lesser of the amounts referred to in the foregoing subclauses (a) and
(b) as a maximum ceiling on Revolving Credit Loans; provided, however, that it
is agreed that should Revolving Credit Loans exceed the ceiling so determined
or any other limitation set forth in this Agreement, such Revolving Credit
Loans shall nevertheless constitute Secured Obligations and, as such, shall be
entitled to all benefits thereof and security therefor. The principal amount
of any Revolving Credit Loan which is repaid may be reborrowed by the Borrowers
in accordance with the terms of this SECTION 2A.1. The Lender is hereby
authorized to record each repayment of principal of the Revolving Credit Loans
in its books and records, such books and records constituting prima facie
evidence of the accuracy of the information contained therein.
Section 2A.2 Manner of Borrowing Revolving Credit Loans.
Borrowings of the Revolving Credit Loans shall be made as follows:
(a) Requests for Borrowing.
(i) Prime Rate Revolving Credit Loans. A request for the
borrowing of a Prime Rate Revolving Credit Loan shall be made, or
shall be deemed to be made, in the following manner:
LOAN AND SECURITY AGREEMENT - PAGE 23
<PAGE> 24
(A) any Borrower may request a Prime Rate
Revolving Credit Loan by notifying the Lender, before 12:00
noon (Dallas, Texas, time) on the proposed borrowing date, of
its intention to borrow, specifying the effective date and
amount of such proposed Prime Rate Revolving Credit Loan;
(B) whenever a check is presented to the Lender
for payment against the Disbursement Account of any Borrower
in an amount greater than the then available balance in such
account, such presentation shall be deemed to be a request for
a Prime Rate Revolving Credit Loan on the date of such notice
in an amount equal to the excess of such check over such
available balance, and such request shall be irrevocable;
(C) unless payment is otherwise made by a
Borrower, the becoming due of any amount required to be paid
under this Agreement or any of the Notes as interest shall be
deemed to be a request for a Prime Rate Revolving Credit Loan
on the due date in the amount required to pay such interest,
and such request shall be irrevocable;
(D) unless payment is otherwise made by such
Borrower, the maturity of any Secured Obligation required to
be paid shall be deemed to be a request for a Prime Rate
Revolving Credit Loan on the due date in the amount required
to pay such Secured Obligation, and such request shall be
irrevocable; and
(E) whenever a drawing is made under a Letter of
Credit and such Borrower fails to reimburse the Lender
therefor, such failure to reimburse shall be deemed to be a
request for a Prime Rate Revolving Credit Loan on the date
such drawing is made in the amount so unreimbursed.
(ii) LIBOR Revolving Credit Loans. Any Borrower may
request a LIBOR Revolving Credit Loan by notifying the Lender (which
notice shall be irrevocable) not later than 12:00 noon (Dallas, Texas,
time) on the date two Business Days before the day on which the
requested LIBOR Revolving Credit Loan is to be made, specifying the
effective date and amount of such LIBOR Revolving Credit Loan and the
duration of the applicable Interest Period.
(iii) Notice of Borrowing. Any request for a Prime Rate
Revolving Credit Loan under SECTION 2A.2(a)(i)(A) or a LIBOR Revolving
Credit Loan under SECTION 2A.2(a)(ii) (a "Notice of Borrowing") shall
be made by telephone or in writing (including telecopy) and, in the
case of any telephonic notice, shall be immediately followed by a
written confirmation thereof in a form acceptable to the Lender,
provided that the failure to provide written confirmation shall not
invalidate any telephonic notice and, if such written confirmation
differs in any respect from the action taken by the Lender, the
records of the Lender shall control absent manifest error.
LOAN AND SECURITY AGREEMENT - PAGE 24
<PAGE> 25
(b) Disbursement of Loans. Each Borrower hereby irrevocably
authorizes the Lender to disburse the proceeds of each borrowing requested, or
deemed to be requested, pursuant to this SECTION 2A.2 as follows: (i) the
proceeds of each borrowing requested under SECTION 2A.2(a)(i)(A) or (B) or
SECTION 2A.2(ii) shall be disbursed by the Lender in lawful money of the United
States of America in immediately available funds, (A) in the case of the
initial borrowing, in accordance with the terms of the written instructions
from such Borrower to the Lender, and (B) in the case of each subsequent
borrowing, by credit to such Borrower's Disbursement Account or to such other
account as may be agreed upon by such Borrower and the Lender from time to
time; and (ii) the proceeds of each borrowing requested under SECTION
2A.2(a)(i)(C), (D) or (E) shall be disbursed by the Lender by way of direct
payment of the relevant principal, interest or other Secured Obligation, as the
case may be.
Section 2A.3 Repayment of Revolving Credit Loans. The Revolving
Credit Loans will be repaid as follows: (a) whether or not any Default or Event
of Default has occurred, the outstanding principal amount of all the Revolving
Credit Loans to each Borrower is due and payable, and shall be repaid by such
Borrower in full together with accrued and unpaid interest to the date of
repayment on such outstanding principal, on the Termination Date; (b) if at any
time the aggregate unpaid principal amount of the Revolving Credit Loans then
outstanding to any Borrower exceeds the lesser of the amounts referred to in
clauses (a) and (b) of SECTION 2A.1 for such Borrower, such Borrower shall
repay the Revolving Credit Loans in an amount sufficient to reduce the
aggregate unpaid principal amount of such Loans by an amount equal to such
excess, together with accrued and unpaid interest on the amount repaid to the
date of repayment; and (c) each Borrower hereby instructs the Lender to repay
the Revolving Credit Loans outstanding on any day in an amount equal to the
amount received by the Lender on such day pursuant to SECTION 7.1(b).
Section 2A.4 Revolving Credit Notes. The Revolving Credit Loans
and the obligation of each Borrower to repay such Loans shall be evidenced by a
Revolving Credit Note payable to the order of the Lender and duly and validly
executed and delivered by such Borrower.
Section 2A.5 Letter of Credit Facility. The Lender will, from
time to time, upon request by any Borrower, issue Letters of Credit provided
that (i) the Aggregate Letter of Credit Reserve at the time (including the
amount of the requested Letter of Credit) does not exceed the Letter of Credit
Facility, (ii) such Borrower would be entitled to an advance under SECTION 2A.1
in the amount of the requested Letter of Credit, and (iii) any Letter of Credit
issued hereunder shall have an expiration date no later than one year from
issuance and on or earlier than the Termination Date. Such Borrower shall
execute and deliver the Lender's customary Letter of Credit application for
each Letter of Credit, and each Letter of Credit shall be issued in form
satisfactory to Lender. If any Letter of Credit is presented for payment by
the beneficiary thereof, the Lender shall be entitled to cause an advance under
the Revolving Credit Facility to be made to reimburse the Lender for the
payment under such Letter of Credit, whether or not such Borrower would be
entitled to an advance for such amount pursuant to SECTION 2A.1. At the time
of the issuance of each Letter of Credit, such Borrower shall pay to Lender (A)
a Letter of Credit fee equal to the greater of (1) three percent (3.0%) per
annum on the face amount of the
LOAN AND SECURITY AGREEMENT - PAGE 25
<PAGE> 26
Letter of Credit or (2) a minimum letter of credit fee established by the
Lender, which, as of the Agreement Date is $300, but which may be changed by
the Lender in its sole discretion, plus (B) the Lender's customary transaction
and issuance fees.
Section 2A.6 Extension of Facility. The Termination Date shall be
automatically extended for successive one-year periods unless either the Lender
or the Borrowers provide to the other written notice of termination not less
than 90 days prior to the then effective Termination Date.
Section 2A.7 Termination of Loan Agreement. If no Loans have been
made hereunder within thirty (30) days after the Agreement Date, (i) the Lender
may at its option and in its sole discretion, terminate all commitments
hereunder and terminate this Agreement or (ii) the Borrowers may terminate this
Agreement.
B. TERM LOAN FACILITIES
Section 2B.1 Term Loan. Upon the terms and subject to the
conditions of, and in reliance upon the representations and warranties made
under, this Agreement, the Lender agrees to make the following Term Loans to
the Borrowers in an aggregate amount for all Term Loans up to $10,000,000:
(a) Equipment Term Loan-FCI. Subject to the terms and conditions
hereof, the Lender agrees to lend to FCI in a single advance on the Funding
Date the amount of $1,373,000 (the "Equipment Term Loan-FCI"). The Equipment
Term Loan-FCI shall be secured by the Collateral and the Real Property and
evidenced by an Equipment Term Note payable to the order of the Lender and duly
and validly executed and delivered by FCI. The Equipment Term Loan-FCI is due
and payable and shall be repaid in full by FCI in consecutive equal
installments of principal of $16,429.00 on successive Installment Payment
Dates, provided that the final installment payable on the fifth anniversary of
the Funding Date, shall be in the amount of the then unpaid balance of the
Equipment Term Loan-FCI.
(b) Equipment Term Loan-HCI. Subject to the terms and conditions
hereof, the Lender agrees to lend to HCI in a single advance on the Funding
Date the amount of $545,000 (the "Equipment Term Loan-HCI"). The Equipment
Term Loan-HCI shall be secured by the Collateral and the Real Property and
evidenced by an Equipment Term Note payable to the order of the Lender and duly
and validly executed and delivered by HCI. The Equipment Term Loan-HCI is due
and payable and shall be repaid in full by HCI in consecutive equal
installments of principal of $6,488.00 on successive Installment Payment Dates,
provided that the final installment payable on the fifth anniversary of the
Funding Date, shall be in the amount of the then unpaid balance of the
Equipment Term Loan-HCI.
(c) Equipment Term Loan-Ershigs. Subject to the terms and
conditions hereof, the Lender agrees to lend to Ershigs in a single advance on
the Funding Date the amount of $759,000 (the "Equipment Term Loan-Ershigs").
The Equipment Term Loan-Ershigs shall be secured by
LOAN AND SECURITY AGREEMENT - PAGE 26
<PAGE> 27
the Collateral and the Real Property and evidenced by an Equipment Term Note
payable to the order of the Lender and duly and validly executed and delivered
by Ershigs. The Equipment Term Loan-Ershigs is due and payable and shall be
repaid in full by Ershigs in consecutive equal installments of principal of
$9,035 on successive Installment Payment Dates, provided that the final
installment payable on fifth anniversary of the Funding Date, shall be in the
amount of the then unpaid balance of the Equipment Term Loan-Ershigs.
(d) Equipment Term Loan-Sefco. Subject to the terms and
conditions hereof, the Lender agrees to lend to SEFCO in a single advance on
the Funding Date the amount of $1,045,000 (the "Equipment Term Loan-Sefco").
The Equipment Term Loan-Sefco shall be secured by the Collateral and the Real
Property and evidenced by an Equipment Term Note payable to the order of the
Lender and duly and validly executed and delivered by SEFCO. The Equipment
Term Loan-Sefco is due and payable and shall be repaid in full by SEFCO in
consecutive equal installments of principal of $12,450 on successive
Installment Payment Dates, provided that the final installment payable on fifth
anniversary of the Funding Date, shall be in the amount of the then unpaid
balance of the Equipment Term Loan-Sefco.
(e) Real Estate Term Loan-FCI. Subject to the terms and
conditions hereof, the Lender agrees to make a loan to FCI in a single advance
on the Funding Date in the amount of $2,910,000 (the "Real Estate Term
Loan-FCI"). The Real Estate Term Loan-FCI shall be secured by the Collateral
and the Real Property and evidenced by a Real Estate Term Note payable to the
order of the Lender and duly and validly executed and delivered by FCI. The
Real Estate Term Loan- FCI is due and payable and shall be repaid in full by
FCI in consecutive equal installments of principal of $24,250 on successive
Installment Payment Dates, provided that the final installment payable on the
fifth anniversary of the Funding Date, shall be in the amount of the then
unpaid balance of the Real Estate Term Loan-FCI.
(f) Real Estate Term Loan-Ershigs. Subject to the terms and
conditions hereof, the Lender agrees to make a loan to Ershigs in a single
advance on the Funding Date in the amount of $2,288,000 (the "Real Estate Term
Loan- Ershigs"). The Real Estate Term Loan-Ershigs shall be secured by the
Collateral and the Real Property and evidenced by a Real Estate Term Note
payable to the order of the Lender and duly and validly executed and delivered
by Ershigs. The Real Estate Term Loan-Ershigs is due and payable and shall be
repaid in full by Ershigs in consecutive equal installments of principal of
$19,066 on successive Installment Payment Dates, provided that the final
installment payable on the fifth anniversary of the Funding Date, shall be in
the amount of the then unpaid balance of the Real Estate Term Loan-Ershigs.
(g) Real Estate Term Loan-Sefco. Subject to the terms and
conditions hereof, the Lender agrees to make a loan to SEFCO in a single
advance on the Funding Date in the amount of $345,000 (the "Real Estate Term
Loan-Sefco"). The Real Estate Term Loan-Sefco shall be secured by the
Collateral and the Real Property and evidenced by a Real Estate Term Note
payable to the order of the Lender and duly and validly executed and delivered
by SEFCO. The Real Estate Term Loan-Sefco is due and payable and shall be
repaid in full by SEFCO in consecutive equal installments of principal of
$2,875 on successive Installment Payment Dates,
LOAN AND SECURITY AGREEMENT - PAGE 27
<PAGE> 28
provided that the final installment payable on the fifth anniversary of the
Funding Date, shall be in the amount of the then unpaid balance of the Real
Estate Term Loan-Sefco.
(h) LaValley Term Loans. If LaValley becomes an Additional
Borrower hereunder and if there has been no change in the value of the
equipment and real property of LaValley from the most recent appraisals of such
equipment and real property, the Lender agrees to make (i) a term loan to
LaValley in the principal amount of $280,000 payable in monthly installments of
principal of $3,333 plus accrued but unpaid interest, with the outstanding
principal balance and all accrued but unpaid interest due and payable on the
fifth anniversary of the Funding Date and (ii) a term loan to LaValley in the
principal amount of $675,000, payable in monthly installments of principal of
$5,625 plus accrued but unpaid interest, with the outstanding principal balance
and all accrued but unpaid interest due and payable on the fifth anniversary of
the Funding Date.
Section 2B.2 Manner of Borrowing and Disbursing Term Loans. Each
Borrower shall give the Lender at least two Business Days' prior written notice
of the occurrence of the Funding Date, specifying the portion of any Term Loan
of such Borrower which will bear interest initially as a Prime Rate Term Loan
and the portion of such Term Loan which will bear interest initially as one or
more LIBOR Term Loans, and the duration of the applicable Interest Period(s)
with respect to any such LIBOR Term Loan(s). On the Funding Date, upon
satisfaction of the applicable conditions set forth in SECTIONS 4.1, 4.2, and
4.3, the Lender will disburse such Term Loan in same day funds in accordance
with the terms of the written instructions from such Borrower to the Lender.
Section 2B.4 Prepayment of Term Loan.
(a) Voluntary Prepayment. Each Borrower shall have the right at
any time and from time to time, upon at least 60 days' prior written notice to
the Lender in the case of a prepayment in full and upon at least five days'
prior written notice to the Lender in the case of a partial prepayment, to
prepay any Term Loan in whole or in part on any Business Day. Each partial
prepayment of any Term Loan shall be in a principal amount equal to $10,000 or
any integral multiple thereof and shall be applied to the principal
installments of such Term Loan in the inverse order of their maturities,
together with all amounts due under SECTION 3.7 as a result of such prepayment.
On the prepayment date, such Borrower shall pay interest on the amount prepaid,
accrued to the prepayment date. Any notice of prepayment given by any Borrower
hereunder shall be irrevocable, and the amount to be prepaid (including accrued
interest and any prepayment fees) shall be due and payable on the date
designated in the notice.
(b) Mandatory Prepayments. In the event any Borrower sells any of
its Equipment, the greater of the appraised value of such Equipment (based upon
the most recent appraisal received by the Lender) or any and all amounts
received by any Borrower as proceeds from the sale of any Equipment, net of
taxes and reasonable expenses incurred in selling such Equipment, to the extent
such proceeds exceed (i) $10,000 in the case of any single item of Equipment,
or (ii) $50,000 in the aggregate for all such Equipment sold during fiscal
year, shall be paid, immediately upon receipt by such Borrower, to the Lender,
and shall be applied to the principal
LOAN AND SECURITY AGREEMENT - PAGE 28
<PAGE> 29
installments of such Borrower's Equipment Term Loan in the inverse order of
their maturities; no payment is required under this section if the sales
proceeds are less than (i) $10,000 in the case of any single item of Equipment
or (ii) $50,000 in the aggregate for all such Equipment sold during any fiscal
year by all Borrowers. In the event any Borrower sells any parcel of its Real
Property, the greater of the appraised value of such parcel of Real Property or
any and all amounts received by any Borrower as proceeds from the sale of such
Real Property, net of commissions, taxes, and reasonable legal fees, shall be
paid, immediately upon receipt by such Borrower, to the Lender, and shall be
applied to the principal installments of such Borrower's Real Estate Term Loan
in the inverse order of their maturities. Together with any such payment, such
Borrower shall pay to the Lender all amounts due under SECTION 3.7 as a result
of such prepayment. On the prepayment date, such Borrower shall pay interest
on the amount prepaid, accrued to the prepayment date. Each Borrower shall
also be obligated to prepay all Term Loans of such Borrower in full together
with accrued and unpaid interest thereon (and all amounts due under SECTION 3.7
as a result of such prepayment) upon any termination of this Agreement pursuant
to SECTION 3.5 or otherwise or upon any acceleration of the Term Loan pursuant
to ARTICLE 11. Upon receipt of the payments due hereunder, the Lender shall
release all liens and security interests against the Equipment or parcel of
Real Property sold by executing releases and termination statements reasonably
requested by Borrowers. To the extent this provision conflicts with a similar
provision in any other Loan Document, this provision shall control.
ARTICLE 3 - GENERAL LOAN PROVISIONS
Section 3.1 Interest.
(a) (i) Prime Rate Revolving Credit Loans. Each Borrower
will pay interest on the unpaid principal amount of each Prime Rate
Revolving Credit Loan made to such Borrower for each day from the day
such Loan was made until such Loan is paid (whether at maturity, by
reason of acceleration or otherwise), or is converted to a Loan of a
different Type, at a rate per annum equal to the lesser of (A) the
Maximum Rate, or (B) the sum of one half of one percent (0.50%) plus
the Prime Rate, payable monthly in arrears on each Interest Payment
Date and on the Termination Date.
(ii) LIBOR Revolving Credit Loans. Each Borrower will pay
interest on the unpaid principal amount of each LIBOR Revolving Credit
Loan made to such Borrower for the Interest Period applicable thereto
at a rate per annum equal to the lesser of (A) the Maximum Rate, or
(B) the sum of two and three quarters percent (2.75%) plus LIBOR,
payable in arrears on each Interest Payment Date, on the last day of
such Interest Period, and when such LIBOR Revolving Credit Loan is
paid (whether at maturity, by reason of acceleration or otherwise).
(iii) Prime Rate Term Loans. Each Borrower will pay
interest on each Prime Rate Term Loan made to such Borrower at a rate
per annum equal to the lesser of (A) the Maximum Rate, or (B) the sum
of one half of one percent (0.50%) plus the Prime Rate,
LOAN AND SECURITY AGREEMENT - PAGE 29
<PAGE> 30
payable in arrears on each Interest Payment Date and when such Term
Loan is due (whether at maturity, by reason of acceleration or
otherwise).
(iv) LIBOR Term Loans. Each Borrower will pay interest on
each LIBOR Term Loan made to such Borrower for the Interest Period
applicable thereto at a rate per annum equal to the lesser of (A) the
Maximum Rate, or (B) the sum of three percent (3.0%) plus LIBOR,
payable in arrears on each Interest Payment Date, on the last day of
such Interest Period, and when such LIBOR Term Loan is due (whether at
maturity, by reason of acceleration or otherwise).
(b) Each Borrower shall pay interest on the unpaid principal
amount of each Secured Obligation of such Borrower other than a Loan for each
day from the day such Secured Obligation becomes due and payable until such
Secured Obligation is paid at the rate per annum applicable to Prime Rate
Revolving Credit Loans, payable on demand.
In the event any Borrower fails to make any interest payment within
five (5) days of the date when due, the Lender may, at its option but without
waiving any of its rights hereunder, make an advance under the Revolving Credit
Facility to pay such interest.
(c) From and after the occurrence of an Event of Default, the
unpaid principal amount of each Secured Obligation shall bear interest until
paid in full (or, if earlier, until such Event of Default is cured or waived in
writing by the Lender) at a rate per annum equal to the lesser of (A) the
Maximum Rate, or (B) the Default Margin plus the rate otherwise in effect under
SECTION 3.1(a) or (b), payable on demand. The interest rate provided for in
this SECTION 3.1(c) shall to the extent permitted by applicable law apply to
and accrue on the amount of any judgment entered with respect to any Secured
Obligation and shall continue to accrue at such rate during any proceeding
described in SECTION 11.1(f) or (g).
(d) The interest rates provided for in SECTIONS 3.1(a), (b) and
(c) shall be computed on the basis of a year of 360 days and the actual number
of days elapsed; provided, however, any calculation of the Maximum Rate shall
be computed on the basis of the actual days elapsed in a year of 365 or 366
days, as appropriate, unless the Texas Credit Title permits any applicable
interest rate ceiling to be calculated on the basis of a 360-day year and
twelve 30-day months.
(e) Notwithstanding anything contained herein, in the Notes or in
any other Loan Documents to the contrary, it is not intended by the Lender to
contract for, charge, receive, collect or apply interest calculated at a rate
in excess of the Maximum Rate. Further, Lender shall never be deemed to have
contracted for or be entitled to charge, receive, collect or apply as interest
on the Loans, any amount in excess of the amount permitted and calculated at
the Maximum Rate, and, in the event Lender ever contracts for, charges,
receives, collects or applies as interest any amount in excess of the amount
permitted and calculated at the Maximum Rate, such amount which would be
excessive interest shall be applied to the reduction of the unpaid principal
balance of the Loans, and, if the principal balance of the Loans has been paid
in full, any remaining excess shall forthwith be paid to Borrowers. In
determining whether or not the
LOAN AND SECURITY AGREEMENT - PAGE 30
<PAGE> 31
interest paid or payable under any specific contingency exceeds the Maximum
Rate, Borrowers and Lender shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment (other than payments
which are expressly designated as interest payments hereunder) as an expense,
fee, or premium, rather than as interest, (ii) exclude voluntary prepayments
and the effect thereof, and (iii) spread the total amount of interest
throughout the entire contemplated term of the Loans.
If, in any month, the Effective Interest Rate, absent the limitation
to the Maximum Rate, would have exceeded the Maximum Rate, then the Effective
Interest Rate for that month shall be the Maximum Rate, and if, in future
months, the Effective Interest Rate would otherwise be less than the Maximum
Rate, then the Effective Interest Rate shall remain at the Maximum Rate until
such time as the amount of interest paid hereunder equals the amount of
interest which would have been paid if the same had not been limited by the
Maximum Rate. In this connection, in the event that, upon payment in full of
the Secured Obligations, the total amount of interest paid or accrued under the
terms of this Agreement is less than the total amount of interest which would
have been paid or accrued if the Effective Interest Rate had at all times been
in effect, then the Borrowers shall, to the extent permitted by applicable law,
pay to the Lender an amount equal to the difference between (i) the lesser of
(A) the amount of interest which would have been charged if the Maximum Rate
had, at all times, been in effect and (B) the amount of interest which would
have accrued had the Effective Interest Rate, at all times, been in effect, and
(ii) the amount of interest actually paid or accrued under this Agreement.
In no event shall Chapter 346 of the Texas Finance Code (which
regulates certain revolving loan accounts and revolving tri-party accounts)
apply to any Note.
Section 3.2 Fees.
(a) Commitment Fee. In connection with and as consideration for
the Lender's commitment hereunder, subject to the terms hereof, to lend to the
Borrowers under the Revolving Credit Facility, the Borrowers shall, jointly and
severally, pay a fee to the Lender, from the Funding Date until the Termination
Date, in an amount equal to 0.375% per annum of the average daily unused
portion of the Revolving Credit Facility, payable monthly in arrears on the
first day of each month and on the date of any permanent reduction in the
Revolving Credit Facility.
(b) Closing Fee. Subject to SECTION 3.1(e), the Borrowers shall
pay to the Lender a closing fee in the amount of $167,470 in connection with
the establishment of the Revolving Credit Facility and in consideration of the
commitment to make the Loans made under this Agreement and in order to
compensate the Lender for the costs associated with structuring, processing,
approving and closing the Revolving Credit Facility and the Loans, but
excluding expenses for which the Borrowers have agreed elsewhere in this
Agreement to reimburse the Lender. One half of the closing fee shall be due
and payable on the Agreement Date and the balance of the closing fee shall be
due and payable on the earlier of the Funding Date or the date this Agreement
terminates pursuant to SECTION 2A.7 because either (i) Borrowers have
LOAN AND SECURITY AGREEMENT - PAGE 31
<PAGE> 32
terminated this Agreement pursuant to such section or (ii) the Lender has
terminated this Agreement pursuant to such section because Borrowers have not
met all of the conditions set forth in SECTIONS 4.1 AND 4.2 or because no
Borrower has requested a Loan.
(c) Administration Fee. For services performed by the Lender in
connection with its continuing administration hereof, subject to SECTION
3.1(e), the Borrowers shall, jointly and severally, pay to the Lender a
quarterly fee of $6,250, payable quarterly in advance on the Funding Date and
on the first day of each quarter thereafter, and continuing so long as any Loan
shall remain outstanding or the Revolving Credit Facility shall not have been
terminated.
(d) General. All fees shall be fully earned by the Lender when
due and payable and, except as otherwise set forth herein, shall not be subject
to refund or rebate. To the extent permitted under applicable law, the
Borrowers and Lender agree that all fees are for compensation for services and
are not, and shall not be deemed to be, interest or a charge for the use of
money.
Section 3.3 Notice of Conversion or Continuation of Loans.
Whenever any Borrower desires, subject to the provisions of SECTION 3.4, to
convert an outstanding Revolving Credit Loan or Term Loan into a Loan of a
different Type provided for in this Agreement or to continue all or a portion
of an outstanding LIBOR Revolving Credit Loan or LIBOR Term Loan for a
subsequent Interest Period, such Borrower shall notify the Lender (which notice
shall be irrevocable) in writing (including telecopy) not later than 2:00 p.m.
(Dallas, Texas, time) on the date two Business Days before the day on which a
proposed conversion of a LIBOR Loan into a Prime Rate Loan is to be effective
(which effective date shall be the last day of the Interest Period applicable
to such LIBOR Loan) and two Business Days before the day on which a proposed
conversion of a Prime Rate Loan into, or continuation of a LIBOR Loan as, a
LIBOR Loan is to be effective (and such effective date of any continuation
shall be the last day of the Interest Period for such LIBOR Loan). Each such
notice (a "Notice of Conversion or Continuation") shall (a) identify the Loan
to be converted or continued, including the Type thereof, the aggregate
outstanding principal balance thereof and, in the case of a LIBOR Loan, the
last day of the Interest Period therefor, (b) specify the effective date of
such conversion or continuation, (c) specify the principal amount of such Loan
to be converted or continued and, if converted, the Type or Types of Loan into
which conversion of such principal amount or specified portions thereof is to
be made, and (d) in the case of any conversion into or continuation as a LIBOR
Loan, the Interest Period to be applicable thereto.
Section 3.4. Conversion or Continuation. Provided that no Event
of Default shall have occurred and be continuing (but subject to the provisions
of SECTIONS 3.5 and 3.6), any Borrower may request that all or any part of any
outstanding Loan of one Type (a) be converted into a Loan or Loans of any other
Type provided for in this Agreement, or (b) be continued as a Loan or Loans of
the same Type, in the same aggregate principal amount, on any Business Day
(which, in the case of a conversion or continuation of a LIBOR Loan, shall be
the last day of the Interest Period applicable to such LIBOR Loan), upon notice
(which notice shall be irrevocable) given in
LOAN AND SECURITY AGREEMENT - PAGE 32
<PAGE> 33
accordance with SECTION 3.3, provided that nothing in this ARTICLE 3 shall be
construed to permit the conversion of a Revolving Credit Loan to a Term Loan or
vice versa.
Section 3.5 Duration of Interest Periods; Maximum Number of LIBOR
Loans; Minimum Increments.
(a) Subject to the provisions of the definition of "Interest
Period", the duration of each Interest Period applicable to a LIBOR Loan shall
be as specified in the applicable Notice of Borrowing or Notice of Conversion
or Continuation. Any Borrower may elect a subsequent Interest Period to be
applicable to any LIBOR Loan by giving a Notice of Conversion or Continuation
with respect to such Loan in accordance with SECTION 3.3.
(b) If the Lender does not receive a Notice of Conversion or
Continuation in accordance with SECTION 3.3 with respect to the continuation of
a LIBOR Loan within the applicable time limits specified in SECTION 3.3, or if,
when such notice must be given, an Event of Default exists or such Type of Loan
is not available, such Borrower shall be deemed to have elected to convert such
LIBOR Loan in whole into a Prime Rate Loan on the last day of the Interest
Period therefor.
(c) Notwithstanding the foregoing, no Borrower may select an
Interest Period that would end, but for the provisions of the definition
"Interest Period," after the Termination Date.
(d) In no event shall there be more than five (5) LIBOR Loans
outstanding hereunder at any time. For the purpose of this subsection (d),
each LIBOR Revolving Credit Loan and each LIBOR Term Loan having a distinct
Interest Period shall be deemed to be a separate Loan hereunder.
(e) Each LIBOR Loan shall be in a minimum amount of $500,000 or
increments of $1,000 in excess thereof.
Section 3.6 Changed Circumstances.
(a) If the introduction of or any change in or in the
interpretation of (in each case, after the date hereof) any law or regulation
makes it unlawful, or any Governmental Authority asserts, after the date
hereof, that it is unlawful, for the Lender to perform its obligations
hereunder to make or maintain LIBOR Loans, the Lender shall notify the
Borrowers of such event, and the right of the Borrowers to select LIBOR Loans
for any subsequent Interest Period or in connection with any subsequent
conversion of any Loan shall be suspended until the Lender shall notify the
Borrowers that the circumstances causing such suspension no longer exist, and,
if it is unlawful to maintain LIBOR Loans, the Borrowers shall forthwith prepay
in full all LIBOR Revolving Credit Loans then outstanding and shall convert
each LIBOR Term Loan into a Prime Rate Term Loan, and shall pay all interest
accrued thereon through the date of such prepayment or conversion; provided,
that if the date of such repayment or proposed conversion is not the last
LOAN AND SECURITY AGREEMENT - PAGE 33
<PAGE> 34
day of the Interest Period applicable to such LIBOR Loans, the Borrowers shall
also pay any amount due pursuant to SECTION 3.7.
(b) If the Lender shall, prior to the disbursement of any
requested Revolving Credit Loan or the effective date of any conversion or
continuation of an existing Loan to be made or continued as or converted into a
LIBOR Loan (each such requested Revolving Credit Loan made and Loan to be
converted or continued, a "Pending Loan"), notify the Borrowers that LIBOR will
not adequately reflect the cost to the Lender of making or funding such Pending
Loan as a LIBOR Loan or that the Interbank Offered Rate is not determinable
from any interest rate reporting service of recognized standing, then the right
of the Borrowers to select LIBOR Loans for such Pending Loan, any subsequent
Revolving Credit Loan, or in connection with any subsequent conversion or
continuation of any Loan, shall be suspended until the Lender shall notify the
Borrowers that the circumstances causing such suspension no longer exist, and
each Loan comprising each Pending Loan and each such subsequent Loan requested
to be made, continued or converted shall be made or continued as or converted
into a Prime Rate Loan.
Section 3.7 Payments Not at End of Interest Period; Failure to
Borrow. If for any reason any payment of principal with respect to any LIBOR
Loan is made on any day prior to the last day of the Interest Period applicable
to such LIBOR Loan or, after having given a Notice of Borrowing with respect to
any Revolving Credit Loan to be comprised of LIBOR Revolving Credit Loans or a
Notice of Conversion or Continuation with respect to any Loan to be continued
as or converted into a LIBOR Loan, such Loan is not made or is not continued as
or converted into a LIBOR Loan due to a Borrower's failure to borrow or to
fulfill the applicable conditions set forth in ARTICLE 4, such Borrower shall
pay to the Lender, in addition to any other amounts that may be due under this
Agreement, an amount (if a positive number) computed pursuant to the following
formula:
L = (R - T) x P x D
-------------------------
360
L = amount payable
R = interest rate applicable to the LIBOR Loan
unborrowed or prepaid
T = effective interest rate per annum at which
any readily marketable bonds or other obligations of the United States,
selected at the Lender's sole discretion, maturing on or near the last day of
the then applicable or requested Interest Period for such Loan and in
approximately the same amount as such Loan, can be purchased by the Lender on
the day of such payment of principal or failure to borrow
P = the amount of principal paid or the amount of
the requested Loan
D = the number of days remaining in the Interest
Period as of the date of such payment or the number of days in the requested
Interest Period
LOAN AND SECURITY AGREEMENT - PAGE 34
<PAGE> 35
Such Borrower shall pay such amount upon presentation by the Lender of a
statement setting forth the amount and the Lender's calculation thereof
pursuant hereto, which statement shall be deemed true and correct absent
manifest error.
Section 3.8 Increased Costs and Reduced Returns. The Borrowers
agree that if any law now or hereafter in effect and whether or not presently
applicable to the Lender or any request, guideline or directive of any
Governmental Authority (whether or not having the force of law and whether or
not failure to comply therewith would be unlawful) or the interpretation or
administration thereof by any Governmental Authority, shall either (a)(i)
impose, affect, modify or deem applicable any reserve, special deposit, capital
maintenance or similar requirement against any Loan, (ii) impose on the Lender
any other condition regarding any Loan, this Agreement, the Notes or the
facilities provided hereunder, or (iii) result in any requirement regarding
capital adequacy (including any risk-based capital guidelines) affecting the
Lender being imposed or modified or deemed applicable to the Lender, or (b)
subject the Lender to any taxes on the recording, registration, notarization or
other formalization of the Loans or the Notes, and the result of any event
referred to in clause (a) or (b) above shall be to increase the cost to the
Lender of making, funding or maintaining any Loan or to reduce the amount of
any sum receivable by the Lender or the Lender's rate of return on capital with
respect to any Loan to a level below that which the Lender could have achieved
but for such imposition, modification or deemed applicability (taking into
consideration the Lender's policies with respect to capital adequacy) by an
amount deemed by Lender (in the exercise of its discretion) to be material,
then, upon demand by the Lender, the Borrowers shall immediately pay to the
Lender additional amounts which shall be sufficient to compensate the Lender
for such increased cost, tax or reduced rate of return. A certificate of the
Lender to the Borrowers claiming compensation under this SECTION 3.8 shall be
final, conclusive and binding on all parties for all purposes in the absence of
manifest error. Such certificate shall set forth the nature of the occurrence
giving rise to such compensation, the additional amount or amounts to be paid
to it hereunder, and the method by which such amounts were determined. In
determining such amount, the Lender may use any reasonable averaging and
attribution methods.
Section 3.9 Manner of Payment. (a) Each payment (including
prepayments) by each Borrower on account of the principal of or interest on the
Loans or of any fee or other amounts payable to the Lender under this Agreement
or any Note shall be made not later than 1:30 p.m. (Dallas, Texas, time) on the
date specified for payment under this Agreement (or if such day is not a
Business Day, the next succeeding Business Day) to the Lender at the Lender's
Office, in Dollars, in immediately available funds and shall be made without
any set-off, counterclaim or deduction whatsoever.
(b) Each Borrower hereby irrevocably authorizes the Lender and
each Affiliate of the Lender to charge any account of any Borrower maintained
with the Lender or such Affiliate with such amounts as may be necessary from
time to time to pay any Secured Obligations which are not paid when due.
LOAN AND SECURITY AGREEMENT - PAGE 35
<PAGE> 36
Section 3.10 Statements of Account. The Lender will account to
the Borrowers within 30 days after the end of each calendar month with a
statement of Loans, charges and payments made pursuant to this Agreement during
such calendar month, and such account rendered by the Lender shall be deemed an
account stated as between the Borrowers and the Lender and shall be deemed
final, binding and conclusive unless the Lender is notified by the Borrowers in
writing to the contrary within 60 days after the date such account is delivered
to the Borrowers, save for manifest error. Any such notice shall be deemed an
objection only to those items specifically objected to therein. Failure of the
Lender to render such account shall in no way affect its rights hereunder.
Section 3.11 Termination of Agreement. On the Termination Date,
the Borrowers shall pay to the Lender, in same day funds, an amount equal to
the aggregate amount of all Loans outstanding on such date, together with
accrued interest thereon, all fees payable pursuant to SECTION 3.2 accrued from
the date last paid through the effective date of termination, any amounts
payable to the Lender pursuant to the other provisions of this Agreement,
including, without limitation, SECTIONS 3.7, 3.8, 11.2, 12.2 and 12.3, any and
all other Secured Obligations then outstanding, and an amount equal to the
Aggregate Letter of Credit Reserve to be held by the Lender as cash collateral
security for the payment of and to be applied to the payment of any amounts
which may thereafter become due with respect to any Letter of Credit, and
provide the Lender with an indemnification agreement in form and substance
satisfactory to the Lender with respect to returned and dishonored items and
such other matters as the Lender shall require. Upon 60 days prior written
notice to the Lender, the Borrowers may terminate this Agreement prior to the
date this Agreement would otherwise terminate, upon (i) payment of all Secured
Obligations, (ii) the fulfillment of all of the requirements set forth in the
previous sentence, and (iii) the payment of an early termination fee computed
as follows: (A) if such termination occurs on or prior to the first
anniversary of the Funding Date, 1.0% of the sum of (i) the Revolving Credit
Facility plus (ii) the sum of the outstanding principal balances of all Term
Loans as of such early termination date plus (iii) the sum of all principal
prepayments made on all Term Loans during the 90-day period immediately
preceding such early termination date, (B) if such termination occurs after the
first anniversary of the Funding Date but on or prior to the second anniversary
of the Funding Date, 0.75% of the sum of (i) the Revolving Credit Facility plus
(ii) the sum of the outstanding principal balances of all Term Loans as of such
early termination date plus (iii) the sum of all principal prepayments made on
all Term Loans during the 90-day period immediately preceding such early
termination date, and (C) if such termination occurs at any time thereafter,
0.50% of the sum of (i) the Revolving Credit Facility plus (ii) the sum of the
outstanding principal balances of all Term Loans as of such early termination
date plus (iii) the sum of all principal prepayments made on all Term Loans
during the 90-day period immediately preceding such early termination date. No
early termination fee will apply if (i) the Loans are financed by another
division of the Lender or (ii) if the Agreement is terminated pursuant to
SECTION 2A.7.
LOAN AND SECURITY AGREEMENT - PAGE 36
<PAGE> 37
ARTICLE 4 - CONDITIONS PRECEDENT
Section 4.1 Conditions Precedent to Execution of this Agreement.
Notwithstanding any other provision of this Agreement, the Lender's obligation
to execute this Agreement is subject to the fulfillment of each of the
following conditions:
(a) Closing Documents. The Lender shall have received each of the
following documents, all of which shall be satisfactory in form and substance
to the Lender and its counsel:
(1) this Agreement, duly executed and delivered by each
Borrower.
(2) certified copies of the articles of incorporation and
by-laws of each Borrower and each Guarantor as in effect on the
Agreement Date;
(3) certified copies of all corporate action, including
stockholder approval, if necessary, taken by each Borrower and each
Guarantor to authorize the execution, delivery and performance of this
Agreement and the other Loan Documents and the borrowings under this
Agreement;
(4) certificates of incumbency and specimen signatures
with respect to each of the officers of each Borrower and each
Guarantor that is authorized to execute and deliver this Agreement or
any other Loan Document on behalf of such Borrower or such Guarantor
or any document, certificate or instrument to be delivered in
connection with this Agreement or the other Loan Documents and to
request borrowings under this Agreement;
(5) certificates evidencing the good standing of each
Borrower and each Guarantor in the jurisdiction of its incorporation
and in each other jurisdiction in which it is qualified as a foreign
corporation to transact business dated as of a date as close to the
Agreement Date as practicable;
(6) a Schedule of Inventory, a Schedule of Receivables
and a Schedule of Equipment, each prepared as of a recent date;
(7) all environmental reports and surveys required by the
Lender and certified to the Lender, completed by a certified
environmental assessor selected by the Lender, which reports and
surveys shall be satisfactory to the Lender in its sole discretion;
(8) copies of all the financial statements referred to in
SECTION 5.1(m) and meeting the requirements thereof;
(9) a balance sheet of each Borrower as at July 31, 1997,
prepared by such Borrower on a pro forma basis, giving effect to the
transactions contemplated by this Agreement and setting forth the
assumptions on which such balance sheet was prepared;
LOAN AND SECURITY AGREEMENT - PAGE 37
<PAGE> 38
forecasted consolidated and consolidating financial statements
consisting of balance sheets, cash flow statements and income
statements of each Borrower, giving effect to the transactions
contemplated by this Agreement and reflecting projected borrowings
hereunder and setting forth the assumptions on which such forecasted
financial statements were prepared, covering the three-year period
commencing on July 1, 1997, and prepared on a monthly basis; and such
other evidence as the Lender shall require supporting the
representation and warranty of any Borrower set forth in SECTION
5.1(r);
(10) an agreement in form and substance satisfactory to
the Lender, by Denali to contribute as equity to the Borrowers the Net
Cash Proceeds of any initial public offering, private placement, or
capital contribution in lieu of an initial public offering or private
placement in amounts necessary to achieve the tests specified therein;
and
(11) an agreement in form and substance satisfactory to
the Lender, by shareholders of Denali acceptable to the Lender to
contribute up to $3,000,000.00 in cash equity to Denali by February
13, 1998, upon the occurrence of certain events.
(b) Solvency. The Lender shall have received a Solvency
Certificate from each Borrower and each Guarantor in the form of EXHIBIT F
hereto, together with all information requested therein, duly executed and
delivered by the chief financial officer or president of such Borrower or such
Guarantor.
(c) Fees. The Lender shall have received (i) an amount equal to
one-half of the closing fee described in SECTION 3.2(b) and (ii) reimbursement
for all fees and expenses incurred by or on behalf of the Lender, including,
without limitation, all legal fees and expenses, appraisal fees and expenses,
environmental assessment fees and expenses, and field examination fees and
expenses incurred up to the Agreement Date.
Section 4.2 Conditions Precedent to Initial Loan.
Notwithstanding any other provision of this Agreement, the Lender's obligation
to make the Initial Loans is subject to the fulfillment of each of the
following conditions prior to or contemporaneously with the making of such
Loan:
(a) Closing Documents. The Lender shall have received each of the
following documents, all of which shall be satisfactory in form and substance
to the Lender and its counsel:
(1) the Revolving Credit Notes duly executed and
delivered by the Borrowers, the Equipment Term Notes duly executed and
delivered by FCI and Ershigs, as appropriate, and the Real Estate Term
Notes, duly executed and delivered by FCI and Ershigs, as appropriate,
all dated the Funding Date;
(2) the Financing Statements duly executed and delivered
by each Borrower, and evidence satisfactory to the Lender that the
Financing Statements have been filed in each jurisdiction where such
filing may be necessary or appropriate to perfect the Security
Interest;
LOAN AND SECURITY AGREEMENT - PAGE 38
<PAGE> 39
(3) the Subordination Agreements, duly executed and
delivered by each Guarantor and each Borrower with respect to any
Indebtedness owed to such Person by any other Borrower and a
Subordination Agreement from Owens, together with copies of all
instruments evidencing the Subordinated Indebtedness, including,
without limitation, a note from FCI to Owens acceptable to the Lender
in its sole discretion respecting the Owens Debt, bearing a legend
evidencing the subordination thereof to the Secured Obligations;
(4) landlord's waiver and consent agreements duly
executed on behalf of each landlord of real property on which any
Collateral is located;
(5) an appraisal of all Equipment, prepared by an
appraiser satisfactory to the Lender, establishing values at levels
satisfactory to the Lender in its sole discretion to support the
Loans;
(6) appraisals of all Real Property, prepared by an
appraiser satisfactory to the Lender, establishing values at levels
satisfactory to the Lender in its sole discretion to support the
Loans;
(7) commitments to issue mortgagee title policies by a
title insurance company acceptable to the Lender, which commitments
shall be to insure the Lender's Lien in the Real Property (other than
the Texas Real Property) as a first and prior Lien (subject to
Permitted Liens) and shall be in all other respects satisfactory to
the Lender in its sole discretion, together with evidence of the
payment of premiums by Borrowers for such title insurance based on the
appraised value of the Real Property as of the Agreement Date;
(8) surveys of the Real Property (other than the Texas
Real Property), certified to the Lender, prepared by surveyors
acceptable to the Lender, which surveys shall be satisfactory to the
Lender in its sole discretion;
(9) certificates or binders of insurance relating to each
of the policies of insurance covering any of the Collateral together
with loss payable clauses which comply with the terms of SECTION
7.9(b);
(10) such Agency Account Agreements as shall be required
by the Lender duly executed by the applicable Clearing Bank and the
Borrower;
(11) Borrowing Base Certificates prepared as of the
Funding Date duly executed and delivered by the chief financial
officer of each Borrower;
(12) letters from each Borrower to the Lender requesting
the Initial Loans and specifying the method of disbursement;
LOAN AND SECURITY AGREEMENT - PAGE 39
<PAGE> 40
(13) a certificate of the secretary of each Borrower and
each Guarantor stating that (a) there has been no amendment to the
articles of incorporate or bylaws of such Borrower or such Guarantor
since the Agreement Date, (b) such Borrower or such Guarantor is in
existence and good standing in each jurisdiction in which it is
qualified as a foreign corporation to transact business, and (c) the
resolutions of the board of directors of such Borrower or such
Guarantor described in SECTION 4.1(a)(3) remain in full force and
effect;
(14) a certificate of the President of each Borrower
stating that, to the best of his knowledge and based on an examination
sufficient to enable him to make an informed statement, (a) all of the
representations and warranties made or deemed to be made under this
Agreement are true and correct as of the Funding Date, both with and
without giving effect to the Loans to be made at such time and the
application of the proceeds thereof, and (b) no Default or Event of
Default exists;
(15) a signed opinion of Hutcheson & Grundy, L.L.P.,
special counsel for each Borrower and each Guarantor, and of Cathy L.
Smith, general counsel of Denali collectively (i) opining as to such
matters in connection with this Agreement as the Lender or its counsel
may reasonably request and (ii) containing a waiver of any defense
based upon a lack of privity between such counsel and Lender;
(16) copies of each of the other Loan Documents duly
executed by the parties thereto with evidence satisfactory to the
Lender and its counsel of the due authorization, binding effect and
enforceability of each such Loan Document on each such party and such
other documents and instruments as the Lender may reasonably request;
(17) a guaranty agreement, in form and substance
acceptable to Lender, executed by each Guarantor, guaranteeing to the
Lender the payment of the Secured Obligations;
(18) copies of all filings made by Denali with the
Securities and Exchange Commission respecting the proposed initial
public offering of the capital stock of Denali;
(19) copies of contribution agreements among all
Guarantors;
(20) a pledge agreement in form and substance satisfactory
to the Lender, in favor of the Lender and securing the Secured
Obligations (i) from Denali, pledging its ownership interest in all of
its Subsidiaries, (ii) from Specialty Solutions, Inc. pledging its
ownership interest in Ershigs, and (iii) from FCI pledging its
ownership interest in SEFCO, together with the original stock
certificates representing the pledged shares and stock powers executed
in blank;
(21) Deeds of Trust and Mortgages granting a lien for the
benefit of the Lender (A) in the Real Property in Conroe, Texas,
Bakersfield, California, and Mount Union,
LOAN AND SECURITY AGREEMENT - PAGE 40
<PAGE> 41
Pennsylvania, duly executed and delivered by FCI, (B) in the Real
Property in Gatesville, Texas, Bellingham, Washington, and Wilson,
North Carolina, duly executed and delivered by Ershigs, and (C) in the
Real Property in Tulsa, Oklahoma, duly executed and delivered by
SEFCO, provided that the Deeds of Trust encumbering the Texas Real
Property or the Real Property located in Tulsa, Oklahoma, will not be
recorded until the Lender and FCI, Ershigs, or SEFCO, as appropriate,
have agreed to Exhibit B thereto;
(22) patent security agreements and assignments, trademark
security agreements and assignments, and copyright security agreements
and assignments from each Borrower respecting such Borrower's
Intellectual Property, to be filed with the U.S. Patent and Trademark
Office or the Copyright Office, as appropriate;
(23) security agreements from Denali and each subsidiary
of Denali that is not a Borrower, granting to the Lender a security
interest in and pledge of all of its assets;
(24) original certificates of title for all motor vehicles
of each Borrower;
(25) evidence satisfactory to the Lender is its sole
judgment that each Borrower possesses all Governmental Approvals
required under all applicable laws, including, without limitation, all
Environmental Laws; and
(26) a copy of the purchase agreement between PraxAir,
Inc. and Ershigs respecting the Bellingham, Washington, site which
purchase agreement contains an indemnification agreement from PraxAir,
Inc. to Ershigs.
(b) Availability. The Lender shall be provided with evidence
satisfactory to it that, as of the Funding Date, after giving effect to the
Initial Loans, combined Availability of all Borrowers will be not less than
$1,500,000.
(c) No Injunctions, Etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain
or prohibit or to obtain substantial damages in respect of or which is related
to or arises out of this Agreement or the consummation of the transactions
contemplated hereby or which, in the Lender's sole discretion, would make it
inadvisable to consummate the transactions contemplated by this Agreement.
(d) Material Adverse Change. As of the Funding Date, there shall
not have occurred any change which, in the Lender's sole discretion, has had or
may have a Materially Adverse Effect as compared to the condition of any
Borrower or any Guarantor presented by the most recent unaudited financial
statements of such Borrower or such Guarantor described in SECTION 5.1(m).
(e) Solvency. The Lender shall have received evidence
satisfactory to it that, after giving effect to the Initial Loans (i) each
Borrower has assets (excluding goodwill and other
LOAN AND SECURITY AGREEMENT - PAGE 41
<PAGE> 42
intangible assets not capable of valuation) having value, both at fair value
and at present fair saleable value, greater than the amount of its liabilities,
and (ii) each Borrower's assets are sufficient in value to provide such
Borrower with sufficient working capital to enable it profitably to operate its
business and to meet its obligations as they become due, (iii) each Borrower
has adequate capital to conduct the business in which it is and proposes to be
engaged, and (iv) each Borrower is otherwise Solvent.
(f) Release of Security Interests. The Lender shall have received
(i) evidence satisfactory to it of the assignment to the Lender or release and
termination of all Liens other than Permitted Liens or (ii) an agreement from
the holder of any such Lien to assign, release, or terminate such Lien.
Section 4.3 All Loans. The obligation of Lender to make any
Loan, including the Initial Loan, shall be subject to the fulfillment of the
following conditions precedent:
(a) all of the representations and warranties made or deemed to be
made under this Agreement shall be true and correct at such time both with and
without giving effect to the Loans to be made at such time and the application
of the proceeds thereof, except that representations and warranties which, by
their terms, are applicable only to the Funding Date shall be required to be
true and correct only as of the Funding Date,
(b) the corporate actions of each Borrower and each Guarantor
referred to in SECTION 4.2(a)(3) shall remain in full force and effect and the
incumbency of officers shall be as stated in the certificates of incumbency
delivered pursuant to SECTION 4.2(a)(4) or as subsequently modified and
reflected in a certificate of incumbency delivered to the Lender,
(c) no Default or Event of Default shall have occurred and be
continuing,
(d) the Lender may, without waiving any condition, consider the
conditions specified in SECTIONS 4.3(a), (b) and (c) fulfilled and a
representation by each Borrower to such effect made if no written notice to the
contrary is received by the Lender from such Borrower prior to the making of
the Loans then to be made; and
(e) the Lender shall have received such other agreements,
instruments, certificates and financing statements as the Lender may request in
order to perfect or protect its interests and rights in the real property and
under the Loan Documents.
Section 4.4 Conditions Precedent to Adding a Borrower.
Notwithstanding any other provision of this Agreement, the Lender's permitting
any Person to become an additional Borrower or obligor hereunder (an
"Additional Borrower") is subject to the fulfillment of each of the following
conditions prior to or contemporaneously with such Person's acceptance as an
Additional Borrower:
LOAN AND SECURITY AGREEMENT - PAGE 42
<PAGE> 43
(a) Closing Documents. The Lender shall have received all
documents required by it in its sole discretion, including, without limitation,
(i) the documents, items, and information described in SECTION 4.2 for the
Additional Borrower and (ii) an amendment substantially in the form of EXHIBIT
A, duly executed and delivered by each Borrower.
(b) No Injunctions, Etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain
or prohibit or to obtain substantial damages in respect of or which is related
to or arises out of this Agreement or the consummation of the transactions
contemplated hereby or which, in the Lender's sole discretion, would make it
inadvisable to consummate the transactions contemplated by this Agreement.
(c) Material Adverse Change. As of the effective date of the
amendment adding such Additional Borrower, there shall not have occurred any
change which, in the Lender's sole discretion, has had or may have a Materially
Adverse Effect as compared to the condition of the Additional Borrower
presented by the most recent unaudited financial statements of the Additional
Borrower described in SECTION 4.4(a)(19).
(d) Solvency. The Lender shall have received evidence
satisfactory to it that, after giving effect to the initial Loans or any pledge
of the assets of or any Guaranty from the Additional Borrower in favor of the
Lender (i) each Borrower and each Additional Borrower has assets (excluding
goodwill and other intangible assets not capable of valuation) having value,
both at fair value and at present fair saleable value, greater than the amount
of its liabilities, and (ii) each Borrower's and each Additional Borrower's
assets are sufficient in value to provide such Borrower with sufficient working
capital to enable it profitably to operate its business and to meet its
obligations as they become due, (iii) each Borrower and each Additional
Borrower has adequate capital to conduct the business in which it is and
proposes to be engaged, and (iv) each Borrower is otherwise Solvent.
(e) Release of Security Interests. The Lender shall have received
(i) evidence satisfactory to it of the assignment to the Lender or release and
termination of all Liens other than Permitted Liens or (ii) an agreement from
the holder of any such Lien to assign, release, or terminate such Lien.
(f) Sole Discretion. The Lender has, in its sole discretion,
given its prior, written consent to such Person's becoming an Additional
Borrower.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF THE BORROWERS
Section 5.1 Representations and Warranties. Each Borrower
jointly and severally represents and warrants to the Lender as follows:
LOAN AND SECURITY AGREEMENT - PAGE 43
<PAGE> 44
(a) Organization; Power; Qualification. Each Borrower is a
corporation, duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its properties and to carry on its business as now being and
hereafter proposed to be conducted and is duly qualified and authorized to do
business in each jurisdiction in which failure to be so qualified and
authorized would have a Materially Adverse Effect. The jurisdictions in which
each Borrower is qualified to do business as a foreign corporation are listed
on SCHEDULE 5.1(a).
(b) Subsidiaries and Ownership of the Borrowers. No Borrower has
any Subsidiaries. The outstanding stock of each Borrower has been duly and
validly issued and is fully paid and nonassessable and the number and owners of
such shares of capital stock of each Borrower are set forth on SCHEDULE 5.1(b).
(c) Authorization of Agreement, Notes, Loan Documents and
Borrowing. Each Borrower has the right and power and has taken all necessary
action to authorize it to execute, deliver and perform this Agreement and each
of the other Loan Documents to which it is a party in accordance with their
respective terms and to borrow hereunder. This Agreement and each of the other
Loan Documents to which it is a party have been duly executed and delivered by
the duly authorized officers of each Borrower and each is, or when executed and
delivered in accordance with this Agreement will be, a legal, valid and binding
obligation of each Borrower, enforceable in accordance with its terms, except
as limited by bankruptcy, insolvency or similar laws of general application
relating to the enforcement of creditors' rights and except to the extent
specific remedies may generally be limited by equitable principles.
(d) Compliance of Agreement, Notes, Loan Documents and Borrowings
with Laws, Etc. The execution, delivery and performance of this Agreement and
each of the other Loan Documents to which any Borrower is a party and the
borrowings hereunder do not and will not, by the passage of time, the giving of
notice or otherwise,
(i) require any Governmental Approval or violate any
applicable law relating to any Borrower or any of its Affiliates,
(ii) conflict with, result in a breach of or constitute a
default under (A) the articles or certificate of incorporation or
by-laws of any Borrower, (B) any indenture, agreement or other
instrument to which any Borrower is a party or by which any of its
property may be bound or (C) any Governmental Approval relating to any
Borrower, or,
(iii) result in or require the creation or imposition of
any Lien upon or with respect to any property now owned or hereafter
acquired by any Borrower other than the Security Interest.
(e) Business. Each Borrower is engaged principally in the
business described on SCHEDULE 5.1(e).
LOAN AND SECURITY AGREEMENT - PAGE 44
<PAGE> 45
(f) Compliance with Law; Governmental Approvals. Except as set
forth in SCHEDULE 5.1(f), each Borrower (i) has all Governmental Approvals,
including permits relating to federal, state and local Environmental Laws,
ordinances and regulations, required by any applicable law for it to conduct
its business, each of which is in full force and effect, is final and not
subject to review on appeal and is not the subject of any pending or, to the
knowledge of such Borrower, threatened attack by direct or collateral
proceeding, and (ii) is in compliance with each Governmental Approval
applicable to it and in compliance with all other applicable laws relating to
it, including, without being limited to, all Environmental Laws and all
occupational health and safety laws applicable to such Borrower or its
properties, except for instances of noncompliance which would not, singly or in
the aggregate, cause a Default or Event of Default or have a Materially Adverse
Effect and in respect of which adequate reserves have been established on the
books of such Borrower.
(g) Titles to Properties. Except as set forth in SCHEDULE 5.1(g),
each Borrower has good and marketable title to or a valid leasehold interest in
all its real estate and valid and legal title to or a valid leasehold interest
in all personal property and assets used in or necessary to the conduct of such
Borrower's business, including, but not limited to, those reflected on the
balance sheet of such Borrower delivered pursuant to SECTION 5.1(m)(ii).
(h) Liens. Except as set forth in SCHEDULE 5.1(h), none of the
properties and assets of any Borrower is subject to any Lien, except Permitted
Liens. Other than the Financing Statements, no financing statement under the
Uniform Commercial Code of any state which names any Borrower as debtor and
which has not been terminated has been filed in any state or other
jurisdiction, and no Borrower has signed any such financing statement or any
security agreement authorizing any secured party thereunder to file any such
financing statement, except to perfect those Liens listed in SCHEDULE 5.1(h)
and Permitted Liens.
(i) Indebtedness and Guaranties. Set forth on SCHEDULE 5.1(i) is
a complete and correct listing of all of each Borrower's (i) Indebtedness for
Money Borrowed, including, without limitation, any intercompany loans and (ii)
Guaranties. No Borrower is in default of any material provision of any
agreement evidencing or relating to such any such Indebtedness or Guaranty.
(j) Litigation. Except as set forth on SCHEDULE 5.1(j), there are
no actions, suits or proceedings pending (nor, to the knowledge of any
Borrower, are there any actions, suits or proceedings threatened, nor is there
any basis therefor) against or in any other way relating adversely to or
affecting any Borrower or any of its property in any court or before any
arbitrator of any kind or before or by any governmental body.
(k) Tax Returns and Payments. Except as set forth on SCHEDULE
5.1(k), all United States federal, state and local and foreign national,
provincial and local and all other tax returns of each Borrower required by
applicable law to be filed have been duly filed, and all United States federal,
state and local and foreign national, provincial and local and all other taxes,
assessments and other governmental charges or levies upon each Borrower and its
property, income, profits and assets which are due and payable have been paid,
except any such nonpay-
LOAN AND SECURITY AGREEMENT - PAGE 45
<PAGE> 46
ment which is at the time permitted under SECTION 8.4. The charges, accruals
and reserves on the books of each Borrower in respect of United States federal,
state and local taxes and foreign national, provincial and local taxes for all
fiscal years and portions thereof since the organization of such Borrower are
in the judgment of such Borrower adequate, and no Borrower knows of any reason
to anticipate any additional assessments for any of such years which, singly or
in the aggregate, might have a Materially Adverse Effect.
(l) Burdensome Provisions. No Borrower is a party to any
indenture, agreement, lease or other instrument, or subject to any charter or
corporate restriction, Governmental Approval or applicable law, compliance with
the terms of which might have a Materially Adverse Effect on such Borrower.
(m) Financial Statements. (i) Denali has furnished to the Lender
a copy of (i) its audited consolidated balance sheet as at June 30, 1997, and
the related consolidated statements of income, cash flow and retained earnings
for the twelve-month period then ended and (ii) Denali and each Borrower have
furnished to the Lender a copy of its consolidated and consolidating unaudited
balance sheet as at July 31, 1997, and the related consolidated and
consolidating statement of income for the one-month period then ended. Such
financial statements are complete and correct and present fairly and in all
material respects in accordance with GAAP, the financial position of Denali or
such Borrower, as appropriate, as at the dates thereof and the results of
operations of Denali or such Borrower for the periods then ended. Except as
disclosed or reflected in such financial statements, neither Denali nor any
Borrower has any material liabilities, contingent or otherwise, and there were
no material unrealized or anticipated losses of Denali or any Borrower.
(n) Adverse Change. Since the date of the financial statements
described in CLAUSE (i) of SECTION 5.1(m), (i) no change in the business,
assets, liabilities, condition (financial or otherwise), results of operations
or business prospects of any Borrower has occurred that has had, or may have, a
Materially Adverse Effect, and (ii) no event has occurred or failed to occur
which has had, or may have, a Materially Adverse Effect.
(o) ERISA. Neither any Borrower nor any Related Company maintains
or contributes to any Benefit Plan other than those listed on SCHEDULE 5.1(o).
Each Benefit Plan is in substantial compliance with ERISA, and neither any
Borrower nor any Related Company has received any notice asserting that a
Benefit Plan is not in compliance with ERISA. No material liability to the
PBGC or to a Multiemployer Plan has been, or is expected by any Borrower to be,
incurred by such Borrower or any Related Company.
(p) Absence of Defaults. No Borrower is in material default under
its articles or certificate of incorporation or by-laws, and no event has
occurred which has not been remedied, cured or waived (i) that constitutes an
Event of Default or, to the best of its knowledge, a Default or (ii) that
constitutes or that, with the passage of time or giving of notice, or both,
would constitute a default or event of default by any Borrower under any
material agreement (other than this Agreement) or judgment, decree or order to
which such Borrower is a party or by which such
LOAN AND SECURITY AGREEMENT - PAGE 46
<PAGE> 47
Borrower or any of its properties may be bound or which would require such
Borrower to make any payment thereunder prior to the scheduled maturity date
therefor.
(q) Accuracy and Completeness of Information. All written
information, reports and other papers and data produced by or on behalf of any
Borrower and furnished to the Lender were, at the time the same were so
furnished, complete and correct in all material respects to the extent
necessary to give the recipient a true and accurate knowledge of the subject
matter. No fact is known to any Borrower which has had, or may in the future
have (so far as such Borrower can foresee), a Materially Adverse Effect which
has not been set forth in the financial statements or disclosure delivered
prior to the Funding Date, in each case referred to in SECTION 5.1(m), or in
such written information, reports or other papers or data or otherwise
disclosed in writing to the Lender prior to the Funding Date. No document
furnished or written statement made to the Lender by any Borrower in connection
with the negotiation, preparation or execution of this Agreement or any of the
Loan Documents contains or will contain any untrue statement of a fact material
to the creditworthiness of any Borrower or omits or will omit to state a
material fact necessary in order to make the statements contained therein not
misleading.
(r) Solvency. In each case after giving effect to the
Indebtedness represented by the Loans outstanding and to be incurred and the
transactions contemplated by this Agreement, each Borrower is Solvent, having
assets of a fair value which exceeds the amount required to pay its debts
(including contingent, subordinated, unmatured and unliquidated liabilities) as
they become due, and each Borrower is able to and anticipates that it will be
able to meet its debts as they mature and has adequate capital to conduct the
business in which it is or proposes to be engaged.
(s) Status of Receivables. Each Receivable reflected in the
computations included in any Borrowing Base Certificate meets the criteria
enumerated in the definition of Eligible Receivables, except as disclosed in
such Borrowing Base Certificate or as disclosed in a timely manner in a
subsequent Borrowing Base Certificate or otherwise in writing to the Lender.
(t) Chief Executive Office. The chief executive office of each
Borrower and the books and records relating to the Receivables are located at
the address or addresses set forth on SCHEDULE 5.1(t); except as set forth
SCHEDULE 5.1(t), no Borrower has maintained its chief executive office or the
books and records relating to any Receivables at any other address at any time
during the five (5) years immediately preceding the Agreement Date.
(u) Status of Inventory. All Inventory included in any Borrowing
Base Certificate delivered to the Lender pursuant to SECTION 7.14(d) meets the
criteria enumerated in the definition of Eligible Inventory, except as
disclosed in such Borrowing Base Certificate or in a subsequent Borrowing Base
Certificate or as otherwise specifically disclosed in writing to the Lender.
All Inventory is in good condition, meets all standards imposed by any
governmental agency or department or division thereof having regulatory
authority over such goods, their use or sale, and is currently saleable in the
normal course of such Borrower's business, except to the extent reserved
against in the financial statements delivered pursuant to ARTICLE 9 or as
disclosed
LOAN AND SECURITY AGREEMENT - PAGE 47
<PAGE> 48
on a Schedule of Inventory delivered to the Lender pursuant to SECTION 7.14(b).
Set forth on SCHEDULE 5.1(u) is the (i) address (including street, city, county
and state) of each facility at which Inventory is located, (ii) the approximate
quantity in Dollars of the Inventory customarily located at each such facility,
and (iii) if the facility is leased or is a third party warehouse or processor
location, the name of the landlord or such third party warehouseman or
processor. All Inventory is located on the premises set forth on SCHEDULE
5.1(u) or is in transit to one of such locations, except as otherwise disclosed
in writing to the Lender. No Borrower has located Inventory at premises other
than those set forth on SCHEDULE 5.1(u) at any time preceding the Agreement
Date.
(v) Equipment. All Equipment is in good order and repair in all
material respects. Set forth on SCHEDULE 5.1(v) is the (i) address (including
street, city, county and state) of each facility at which Equipment (other than
motor vehicles) is located, (ii) the approximate value of Equipment located at
such facility; and (iii) if such facility is leased, the name of the landlord.
Except as set forth on SECTION 5.1(v), no Borrower has located Equipment at
premises other than those set forth on SCHEDULE 5.1(v) at any time preceding
the Agreement Date.
(w) Corporate and Fictitious Names; Trade Names. Except as
otherwise disclosed on SCHEDULE 5.1(w), during the one-year period preceding
the Agreement Date, no Borrower has been known as or used any corporate or
fictitious name other than the corporate name of such Borrower on the Funding
Date. All trade names or styles under which any Borrower sells Inventory or
Equipment or creates Receivables, or to which instruments in payment of
Receivables are made payable, are listed on SCHEDULE 5.1(w).
(x) Federal Regulations. No Borrower is engaged, principally or
as one of its important activities, in the business of extending credit for the
purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted
terms is defined or used in Regulations G and U of the Board of Governors of
the Federal Reserve System).
(y) Investment Company Act. No Borrower is an "investment
company" or a company "controlled" by an "investment company" (as each of the
quoted terms is defined or used in the Investment Company Act of 1940, as
amended).
(z) Employee Relations. No Borrower is, except as set forth on
SCHEDULE 5.1(z), party to any collective bargaining agreement nor has any labor
union been recognized as the representative of any Borrower's employees; no
Borrower knows of any pending, threatened or contemplated strikes, work
stoppage or other labor disputes involving its employees or those of its
Subsidiaries.
(aa) Intellectual Property. Each Borrower owns or possesses all
Intellectual Property required to conduct its business as now and presently
planned to be conducted without, to its knowledge, conflict with the rights of
others, and SCHEDULE 5.1(aa) lists all Intellectual Property owned by each
Borrower.
LOAN AND SECURITY AGREEMENT - PAGE 48
<PAGE> 49
Section 5.2 Survival of Representations and Warranties, Etc. All
representations and warranties set forth in this ARTICLE 5 and all statements
contained in any certificate, financial statement or other instrument delivered
by or on behalf of any Borrower pursuant to or in connection with this
Agreement or any of the Loan Documents (including, but not limited to, any such
representation, warranty or statement made in or in connection with any
amendment thereto) shall constitute representations and warranties made under
this Agreement. All representations and warranties made under this Agreement
shall be made or deemed to be made at and as of the Agreement Date, at and as
of the Funding Date and at and as of the date of each Loan, except that
representations and warranties which, by their terms are applicable only to one
such date shall be deemed to be made only at and as of such date. All
representations and warranties made or deemed to be made under this Agreement
shall survive and not be waived by the execution and delivery of this
Agreement, any investigation made by or on behalf of the Lender or any
borrowing hereunder.
ARTICLE 6 - SECURITY INTEREST
Section 6.1 Security Interest. (a) To secure the payment,
observance and performance of all Secured Obligations, each Borrower hereby,
jointly and severally, mortgages, pledges and assigns all of the Collateral to
the Lender for itself and as agent for any Affiliate of the Lender and grants
to the Lender for itself and as agent for any Affiliate of the Lender a
continuing security interest in, and a continuing Lien upon, all of such
Borrower's right, title and interest in and to the Collateral.
(b) As additional security for all of the Secured Obligations,
each Borrower grants to the Lender for itself and as agent for any Affiliate of
the Lender a security interest in, and assigns to the Lender for itself and as
agent for any Affiliate of the Lender all of such Borrower's right, title and
interest in and to, any deposits or other sums at any time credited by or due
from the Lender and each Affiliate of the Lender to such Borrower, with the
same rights therein as if the deposits or other sums were credited by or due
from the Lender.
Section 6.2 Continued Priority of Security Interest. (a) The
Security Interest granted by the Borrowers shall at all times be valid,
perfected and enforceable against each Borrower and all third parties in
accordance with the terms of this Agreement, as security for the Secured
Obligations, and the Collateral shall not at any time be subject to any Liens
that are prior to, on a parity with or junior to the Security Interest, other
than Permitted Liens.
(b) Each Borrower shall, at its sole cost and expense, take all
action that may be necessary or desirable, or that the Lender may request, to
maintain at all times the validity, perfection, enforceability and rank of the
Security Interest in the Collateral in conformity with the requirements of
SECTION 6.2(a) or to enable the Lender to exercise or enforce its rights
hereunder, including, but not limited to: (i) paying all taxes, assessments
and other claims lawfully levied or assessed on any of the Collateral, except
to the extent that such taxes, assessments and other claims constitute
Permitted Liens, (ii) diligently seeking to obtain, after the Agreement Date,
landlords', mortgagees' or mechanics' releases, subordinations or waivers,
LOAN AND SECURITY AGREEMENT - PAGE 49
<PAGE> 50
(iii) delivering to the Lender, endorsed or accompanied by such instruments of
assignment as the Lender may specify, and stamping or marking in such manner as
the Lender may specify, any and all chattel paper, instruments, letters and
advices of guaranty and documents evidencing or forming a part of the
Collateral, and (iv) executing and delivering financing statements, pledges,
designations, hypothecation, notices and assignments, in each case in form and
substance satisfactory to the Lender, relating to the creation, validity,
perfection, maintenance or continuation of the Security Interest under the UCC
or other applicable law.
(c) The Lender is hereby authorized to file one or more financing
or continuation statements or amendments thereto without the signature of or in
the name of any Borrower for any purpose described in SECTION 6.2(b). A
carbon, photographic or other reproduction of this Agreement or of any of the
Security Documents or of any financing statement filed in connection with this
Agreement is sufficient as a financing statement, to the extent permitted by
applicable law.
(d) Each Borrower shall mark its books and records as may be
necessary or appropriate to evidence, protect and perfect the Security Interest
and shall cause its financial statements to reflect the Security Interest.
ARTICLE 7 - COLLATERAL COVENANTS
Until the Revolving Credit Facility has been terminated and all the
Secured Obligations have been indefeasibly paid in full, unless the Lender
shall otherwise consent in the manner provided in SECTION 12.10, each Borrower
jointly and severally covenants and agrees as follows:
Section 7.1 Collection of Receivables. (a) Each Borrower shall
(i) immediately, upon receipt, stamp all payments with an endorsement stamp
with the name and number of a Depository Account established at Lender, and
(ii) cause all moneys, checks, notes, drafts and other payments relating to or
constituting proceeds of Receivables, or of any other Collateral, to be
forwarded to a Lockbox for deposit in an Agency Account in accordance with the
procedures set out in the corresponding Agency Account Agreement, and in
particular such Borrower will (A) advise each Account Debtor to address all
remittances with respect to amounts payable on account of any Receivables to a
specified Lockbox, and (B) stamp all invoices relating to any such amounts with
a legend satisfactory to the Lender indicating that payment is to be made to
such Borrower via a specified Lockbox.
(b) Each Borrower and the Lender shall cause all collected
balances in each Agency Account to be transmitted daily by wire transfer or
depository transfer check or Automated Clearing House transfer in accordance
with the procedures set forth in the corresponding Agency Account Agreement to
the Lender at the Lender's Office (i) for application, on account of the
Secured Obligations, as provided in SECTION 11.3, such credits to be entered on
the second Business Day following receipt and to be conditioned upon final
payment in cash or solvent credits of the items giving rise thereto, and (ii)
with respect to any balance remaining after such application, so long as no
Default or Event of Default has occurred and is continuing, for transfer
LOAN AND SECURITY AGREEMENT - PAGE 50
<PAGE> 51
to such Borrower's Disbursement Account or such other account of such Borrower
as such Borrower and the Lender may agree.
(c) Any moneys, checks, notes, drafts or other payments referred
to in CLAUSE (a) of this SECTION 7.1 which are received by or on behalf of any
Borrower will be held in trust for the Lender and will be delivered to the
Lender at the Lender's Office as promptly as possible in the exact form
received, together with any necessary endorsements.
Section 7.2 Verification and Notification. The Lender shall have
the right (a) at any time and from time to time, in the name of the Lender or
in the name of each Borrower, to verify the validity, amount or any other
matter relating to any Receivables by mail, telephone, facsimile, e-mail, hand
delivery or otherwise, and (b) after the occurrence and during the continuance
of a Default or an Event of Default, to notify the Account Debtors or obligors
under any Receivables of the assignment of such Receivables to the Lender and
to direct such Account Debtor or obligors to make payment of all amounts due or
to become due thereunder directly to the Lender and, upon such notification and
at the expense of each Borrower, to enforce collection of any such Receivables
and to adjust, settle or compromise the amount or payment thereof, in the same
manner and to the same extent as such Borrower might have done.
Section 7.3 Disputes, Returns and Adjustments. (a) In the event
amounts due and owing under (i) any Receivable in excess of $50,000
individually or (ii) any Receivables in excess of $100,000 in the aggregate are
in dispute between any Account Debtor and any Borrower, such Borrower shall
provide the Lender with prompt written notice thereof.
(b) Each Borrower shall notify the Lender promptly of all material
returns and credits in excess of $50,000 in respect of any Receivable, which
notice shall specify the Receivables affected.
(c) Each Borrower may, in the ordinary course of business and
prior to a Default or an Event of Default, grant any extension of time for
payment of any Receivable or compromise, compound or settle the same for less
than the full amount thereof or release wholly or partly any Person liable for
the payment thereof or allow any credit or discount whatsoever thereon;
provided that (i) no such action results in the reduction of more than $50,000
in the amount payable with respect to any Receivable or of more than $200,000
with respect to all Receivables in any fiscal year of such Borrower, and (ii)
the Lender is promptly notified of the amount of such adjustments and the
Receivable(s) affected thereby.
Section 7.4 Invoices. (a) No Borrower will use any invoices
except invoices in the forms delivered to the Lender prior to the Agreement
Date, unless such Borrower shall have given the Lender not less than 45 days'
prior notice of the intended use of a different form of invoice together with a
copy of such different form.
(b) Upon the request of the Lender, each Borrower shall deliver to
the Lender, at such Borrower's expense, copies of customers' invoices or the
equivalent, original shipping and
LOAN AND SECURITY AGREEMENT - PAGE 51
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delivery receipts or other proof of delivery, customers' statements, the
original copy of all documents, including, without limitation, repayment
histories and present status reports, relating to Receivables and such other
documents and information relating to the Receivables as the Lender shall
specify.
Section 7.5 Delivery of Instruments. In the event (i) any
Receivable in an amount in excess of $50,000 is, or Receivables in excess of
$100,000 in the aggregate are, at any time evidenced by a promissory note or
notes, trade acceptance or any other instrument for the payment of money or
(ii) any other obligation to any Borrower in excess of $50,000 at any time is
evidenced by any instrument, such Borrower will immediately thereafter deliver
such instruments to the Lender, appropriately endorsed to the Lender, provided
that, (a) promptly after written notice if a Default has occurred and is
continuing and (b) immediately if an Event of Default has occurred and is
continuing, each Borrower shall deliver all such promissory notes, trade
acceptances, and other instruments to the Lender, appropriately endorsed to the
Lender.
Section 7.6 Sales of Inventory. All sales of Inventory will be
made in compliance with all requirements of applicable law.
Section 7.7 Returned Goods. The Security Interest in the
Inventory shall, without further act, attach to the cash and non-cash proceeds
resulting from the sale or other disposition thereof and to all Inventory which
is returned to a Borrower by customers or is otherwise recovered.
Section 7.8 Ownership and Defense of Title. (a) Except for
Permitted Liens, each Borrower shall at all times be the sole owner of each and
every item of Collateral pledged by it and shall not create any Lien on, or
sell, lease, exchange, assign, transfer, pledge, hypothecate, grant a security
interest or security title in or otherwise dispose of, any of the Collateral or
any interest therein, except for sales of Inventory in the ordinary course of
business, for cash or on open account or on terms of payment ordinarily
extended to its customers and except as otherwise expressly contemplated
herein. The inclusion of "proceeds" of the Collateral under the Security
Interest shall not be deemed a consent by the Lender to any other sale or other
disposition of any part or all of the Collateral.
(b) Each Borrower shall defend its title in and to the Collateral
and shall defend the Security Interest in the Collateral against the claims and
demands of all Persons.
(c) In addition to, and not in derogation of, the foregoing and
the requirements of any of the Security Documents, each Borrower shall (i)
protect and preserve all properties material to its business, including
Intellectual Property and maintain all tangible property in good and workable
condition in all material respects, with reasonable allowance for wear and
tear, and (ii) from time to time make or cause to be made all needed and
appropriate repairs, renewals, replacements and additions to such properties
necessary for the conduct of its business, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times.
LOAN AND SECURITY AGREEMENT - PAGE 52
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Section 7.9 Insurance. (a) Each Borrower shall at all times
maintain insurance on the Inventory and Equipment against loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other hazards as the
Lender shall reasonably specify, in amounts and under policies issued by
insurers acceptable to the Lender. All premiums on such insurance shall be
paid by such Borrower and copies of the policies delivered to the Lender. No
Borrower will use or permit the Inventory or Equipment to be used in violation
of any applicable law or in any manner which might render inapplicable any
insurance coverage.
(b) All insurance policies required under SECTION 7.9(a) shall
name the Lender as an additional named insured and shall contain "New York
standard" loss payable clauses in the form submitted to each Borrower by the
Lender, or otherwise in form and substance satisfactory to the Lender, naming
the Lender as loss payee as its interests may appear, and providing that (i)
all proceeds thereunder shall be payable to the Lender, (ii) no such insurance
shall be affected by any act or neglect of the insured or owner of the property
described in such policy, and (iii) such policy and loss payable clauses may
not be cancelled, amended or terminated unless at least 30 days' prior written
notice is given to the Lender.
(c) Any proceeds of insurance referred to in this SECTION 7.9
which are paid to the Lender shall be, at the option of the Lender in its sole
discretion, either (i) applied to rebuild, restore or replace the damaged or
destroyed property, or (ii) applied to the payment or prepayment of the Secured
Obligations, provided, however, that if (A) no Default or Event of Default has
occurred and is continuing, (B) the property damaged is Equipment or
improvements on real property, (C) the aggregate amount of such proceeds do not
exceed $100,000 with respect to Equipment or $150,000 with respect to
improvements on real property, and (D) if (1) Borrowers desire to rebuild,
restore, or replace such property, (2) the rebuilding, restoration, or
replacement can be and is commenced within 30 days after receipt of such
proceeds and (a) with respect to Equipment, can be and is completed within 60
days after receipt of such proceeds and (b) with respect to improvements on
real property, can be and is completed within 120 days after receipt of such
proceeds, and (3) Borrowers, during such 60- or 120-day period, as appropriate,
continue to work diligently to complete such rebuilding, restoration, or
replacement, then Borrowers shall have the option to apply the proceeds as set
forth in clauses (i) and (ii) hereof.
(d) Each Borrower shall at all times maintain, in addition to the
insurance required by SECTION 7.9(a) or any of the Security Documents,
insurance with responsible insurance companies against such risks and in such
amounts as is customarily maintained by similar businesses or as may be
required by applicable law, including such public liability, products
liability, third party property damage and business interruption insurance as
is consistent with reasonable business practices, and from time to time deliver
to the Lender upon its request a detailed list of the insurance then in effect,
stating the names of the insurance companies, the amounts and rates of the
insurance, the dates of the expiration thereof and the properties and risks
covered thereby.
Section 7.10 Location of Offices and Collateral. (a) No Borrower
will change the location of its chief executive office or the place where it
keeps its books and records relating to
LOAN AND SECURITY AGREEMENT - PAGE 53
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the Collateral or change its name, identity or corporate structure without
giving the Lender 30 days' prior written notice thereof.
(b) All Inventory, other than Inventory in transit to any such
location, and all Equipment, other than motor vehicles, will at all times be
kept by the Borrowers at one of the locations set forth in SCHEDULES 5.1(u) and
5.1(v), respectively, and shall not, without the prior written consent of the
Lender, be removed therefrom except, so long as no Event of Default shall have
occurred and be continuing, for sales of Inventory permitted under SECTION 7.8.
(c) If any Inventory is in the possession or control of any of any
Borrower's agents or processors, such Borrower shall notify such agents or
processors of the Security Interest and, upon the occurrence of an Event of
Default and shall instruct them (and cause them to acknowledge such
instruction) to hold all such Inventory for the account of the Lender, subject
to the instructions of the Lender.
Section 7.11 Records Relating to Collateral. (a) Each Borrower
will at all times keep complete and accurate records of (i) Inventory on a
basis consistent with past practices of such Borrower, itemizing and describing
the kind, type and quantity of Inventory and such Borrower's cost therefor and
a current price list for such Inventory, and (ii) all other Collateral.
(b) Each Borrower will take a physical listing of all Inventory,
wherever located, at least annually.
Section 7.12 Inspection. The Lender (by any of its officers,
employees or agents) shall have the right, to the extent that the exercise of
such right shall be within the control of any Borrower, at any time or times
during normal business hours (i) with one day's prior notice if no Default or
Event of Default has occurred and is continuing and (ii) without notice if a
Default or an Event of Default has occurred and is continuing to (a) visit the
properties of any Borrower, inspect the Collateral and the other assets of any
Borrower and its Subsidiaries and inspect and make extracts from the books and
records of any Borrower and its Subsidiaries, including, but not limited to,
management letters prepared by independent accountants, all during customary
business hours at such premises, (b) discuss any Borrower's business, assets,
liabilities, financial condition, results of operations and business prospects,
insofar as the same are reasonably related to the rights of the Lender
hereunder or under any of the Loan Documents, with any Borrower's and its
Subsidiaries' (i) principal officers, (ii) independent accountants and other
professionals providing services to any Borrower, and (iii) any other Person
(except that any such discussion with any third parties shall be conducted only
in accordance with the Lender's standard operating procedures relating to the
maintenance of confidentiality of confidential information of borrowers), and
(c) verify the amount, quantity, value and condition of, or any other matter
relating to, any of the Collateral and in this connection to review, audit and
make extracts from all records and files related to any of the Collateral.
Each Borrower will deliver or cause to be delivered to the Lender any
instrument necessary to authorize an independent accountant or other
professional to have discussions of the type outlined above with the Lender or
for the Lender to obtain records from any service bureau maintaining records on
behalf of such Borrower.
LOAN AND SECURITY AGREEMENT - PAGE 54
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Section 7.13 Maintenance of Equipment. Each Borrower shall
maintain all physical property that constitutes Equipment in reasonably good
and workable condition in all material respects, with reasonable allowance for
wear and tear, and shall exercise proper custody over all such property.
Section 7.14 Information and Reports.
(a) Schedule of Receivables. Each Borrower shall deliver to the
Lender (i) on or before the Funding Date, a Schedule of Receivables as of a
date not more than three (3) Business Days prior to the Funding Date setting
forth a detailed aged trial balance of all of its then existing Receivables,
specifying the name of and the balance due from (and any rebate due to) each
Account Debtor obligated on a Receivable so listed, and (ii) no later than
fifteen (15) days after the end of each accounting month of such Borrower, a
Schedule of Receivables as of the last Business Day of such Borrower's
immediately preceding accounting month setting forth (A) a detailed aged trial
balance of all such Borrower's then existing Receivables, specifying the name
of and the balance due from (and any rebate due to) each Account Debtor
obligated on a Receivable so listed and (B) a reconciliation to the Schedule of
Receivables delivered in respect of the next preceding accounting month.
(b) Schedule of Inventory. Each Borrower shall deliver to the
Lender on or before the Funding Date, and no later than fifteen (15) days after
the end of each accounting month of such Borrower thereafter, a Schedule of
Inventory as of the last Business Day of the immediately preceding accounting
month of such Borrower, itemizing and describing the kind, type, quantity and
location of Inventory and the cost thereof.
(c) Schedule of Equipment. Each Borrower shall deliver to the
Lender on or before the Funding Date and thereafter on such subsequent dates as
may be requested by the Lender, a Schedule of Equipment, describing each item
of such Equipment and the location, cost and then current book value thereof.
(d) Borrowing Base Certificate. Each Borrower shall deliver to
the Lender a Borrowing Base Certificate in the form of EXHIBIT B (i) with each
request for an advance hereunder prepared as of the close of business on the
immediately preceding Business Day, and (ii) not less often than one (1)
Business Day after the last day of each week of such Borrower prepared as of
the close of business on the last Business Day of such week.
(e) Notice of Diminution of Value. The Borrowers shall give
prompt notice to the Lender of any matter or event which has resulted in, or
may result in, the actual or potential diminution in excess of $50,000 in the
value of any of the Collateral.
(f) Certification. Each of the schedules delivered to the Lender
pursuant to this SECTION 7.14 shall be certified by the Chief Financial Officer
of each Borrower to be true, correct and complete as of the date indicated
thereon.
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(g) Other Information. The Lender may, in its discretion, from
time to time require the Borrowers to deliver the schedules described in
SECTION 7.14(a), (b), (c) and (d) more or less often and on different schedules
than specified in such Section, and the Borrowers will comply with such
requests. The Borrowers shall also furnish to the Lender such other
information with respect to the Collateral as the Lender may from time to time
reasonably request.
Section 7.15 Power of Attorney. Each Borrower hereby jointly and
severally appoints the Lender as its attorney, with power (a) to endorse the
name of such Borrower on any checks, notes, acceptances, money orders, drafts
or other forms of payment or security that may come into the Lender's
possession, and (b) to sign the name of such Borrower on any invoice or bill of
lading relating to any Receivables, Inventory or other Collateral, on any
drafts against customers related to letters of credit, on schedules and
assignments of Receivables furnished to the Lender by such Borrower, on notices
of assignment, financing statements and other public records relating to the
perfection or priority of the Security Interest or verifications of account and
on notices to or from customers.
ARTICLE 8 - AFFIRMATIVE COVENANTS
Until the Revolving Credit Facility has been terminated and all the
Secured Obligations have been indefeasibly paid in full, unless the Lender
shall otherwise consent in the manner provided for in SECTION 12.10, each
Borrower, jointly and severally, covenants and agrees as follows:
Section 8.1 Preservation of Corporate Existence and Similar
Matters. Each Borrower shall preserve and maintain its corporate existence,
rights, franchises, licenses and privileges in the jurisdiction of its
incorporation and qualify and remain qualified as a foreign corporation and
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification or
authorization.
Section 8.2 Compliance with Applicable Law. Each Borrower shall
comply with all applicable laws relating to it except for instances of
noncompliance which would not, singly or in the aggregate have a Materially
Adverse Effect.
Section 8.3 Conduct of Business. Each Borrower shall engage only
in businesses in substantially the same fields as the businesses conducted on
the Funding Date.
Section 8.4 Payment of Taxes and Claims. Each Borrower shall pay
or discharge when due (a) all taxes, assessments and governmental charges or
levies imposed upon it or upon its income or profits or upon any properties
belonging to it, and (b) all lawful claims of materialmen, mechanics, carriers,
warehousemen and landlords for labor, materials, supplies and rentals which, if
unpaid, might become a Lien on any of properties of such Borrower or such
Subsidiary, except that this SECTION 8.4 shall not require the payment or
discharge of any such tax, assessment, charge, levy or claim which is being
contested in good faith by appropriate proceedings and for which adequate
reserves have been established on the appropriate books.
LOAN AND SECURITY AGREEMENT - PAGE 56
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Section 8.5 Accounting Methods and Financial Records. Each
Borrower shall maintain a system of accounting, and keep such books, records
and accounts (which shall be true and complete), as may be required or as may
be necessary to permit the preparation of financial statements in accordance
with GAAP consistently applied.
Section 8.6 Use of Proceeds. (a) Use the proceeds of (i) the
Initial Loans to pay in full each Borrower's secured Indebtedness and to pay
the amounts indicated in SCHEDULE 8.6 to the Persons indicated therein, other
than the IRB Obligations, the Owens Debt, or the PraxAir Debt and (ii) all
subsequent Loans only for working capital, general business purposes, and
acquisitions approved by the Lender and (b) not use any proceeds of such Loans
(i) to purchase or carry, or to reduce or retire or refinance any credit
incurred to purchase or carry, any margin stock (within the meaning of
Regulation G or U of the Board of Governors of the Federal Reserve System) or
for any other purpose which would involve a violation of such Regulation G or U
or Regulation T or X of such Board of Governors, (ii) for payments in respect
of Subordinated Indebtedness, or (iii) for any other purpose prohibited by law
or by the terms and conditions of this Agreement, provided, that if Ershigs may
use proceeds of Loans to repay the PraxAir Debt if (x) after giving effect to
such payment, Availability would be at least $1,500,000 and (y) no Default or
Event of Default has occurred and is continuing or would occur after giving
effect to such payment.
Section 8.7 Hazardous Waste and Substances; Environmental
Requirements.
(a) Each Borrower shall in addition to, and not in derogation of,
the requirements of SECTION 8.2 and of the Security Documents, comply (except
for instances of noncompliance which would not, singly or in the aggregate have
a Materially Adverse Effect) with all laws, governmental standards and
regulations applicable to it or to any of its assets in respect of occupational
health and safety laws, rules and regulations and Environmental Laws, promptly
notify the Lender of its receipt of any notice of a violation of any such law,
rule, standard or regulation and indemnify and hold the Lender harmless from
all loss, cost, damage, liability, claim and expense incurred by or imposed
upon the Lender on account of any failure to perform its obligations under this
SECTION 8.7.
(b) Whenever any Borrower gives notice to the Lender pursuant to
this SECTION 8.7 with respect to a matter that reasonably could be expected to
result in liability to such Borrower in excess of $250,000 in the aggregate,
such Borrower shall, at the Lender's request and such Borrower's expense, (i)
cause an independent environmental engineer acceptable to the Lender to conduct
such tests of the site where the noncompliance or alleged noncompliance with
Environmental Laws has occurred and prepare and deliver to the Lender a report
setting forth the results of such tests, a proposed plan to bring such Borrower
into compliance with such Environmental Laws and an estimate of the costs
thereof, and (ii) provide to the Lender a supplemental report of such engineer
whenever the scope of the noncompliance or the response thereto or the
estimated costs thereof shall materially change.
LOAN AND SECURITY AGREEMENT - PAGE 57
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(c) Once each fiscal year or more often upon the reasonable
request of the Lender or at any time after the occurrence and during the
continuance of an Event of Default, each Borrower shall deliver to the Lender a
report, certified by such Borrower's environmental officer, (i) certifying
compliance (except for instances of noncompliance which would not, singly or in
the aggregate have a Materially Adverse Effect) with all applicable
Environmental Laws, (ii) identifying any inspections conducted at any facility
owned or operated by such Borrower by any federal, state or local regulatory
agency, (iii) providing copies of documents pertaining to such inspections, and
detailing the results of such inspections, and (iv) providing the dates of any
filings or submissions made to any federal, state or local regulatory body and,
if requested, supplying copies of such filings or submissions.
(d) With respect to the Real Property located in Bellingham,
Washington, Ershigs (i) shall implement its Action Plan, attached hereto as
EXHIBIT G, and complete the items required thereunder by the deadlines set
forth therein and (ii) upon receipt by Ershigs of such information, shall
promptly notify the Lender respecting any state of federal efforts pertaining
to the Oeser facility or the Little Squalicum Creek.
(e) With respect to the Real Property located in Wilson, North
Carolina, Ershigs shall (i) continue to implement its Corrective Action Plan to
the extent required by the North Carolina Division of Water Quality, (ii) seek
approval to terminate corrective action and close its remediation efforts,
(iii) provide the Lender with (A) results from quarterly sampling conducted
pursuant to the Corrective Action Plan, (B) semi-annual reports submitted
pursuant to the Corrective Action Plan, and (C) any submissions seeking to
terminate corrective action or to seek approval to close its remediation
efforts, and (iv) implement its Action Plan, attached hereto as EXHIBIT G and
complete the items required thereunder by the deadlines set forth therein.
(f) With respect to the Real Property located in Tulsa, Oklahoma,
SEFCO will implement its Action Plan, attached hereto as EXHIBIT H, and
complete the items required thereunder by the deadlines set forth therein.
(g) With respect to the Real Property located in Mt. Union,
Pennsylvania, FCI will (i) implement its Action Plan, attached hereto as
EXHIBIT G, and complete the items required thereunder by the deadlines set
forth therein and (ii) complete the sampling specified in the sampling plan
attached hereto as EXHIBIT I and report the results of such sampling to the
Lender within thirty (30) days after the Agreement Date.
(h) With respect to the Real Property located in Bakersfield,
California, Ershigs will (i) implement its Action Plan, attached hereto as
EXHIBIT G, and complete the items required thereunder by the deadlines set
forth therein and (ii) complete the sampling specified in the sampling plan
attached hereto as EXHIBIT J and report the results of such sampling to the
Lender within thirty (30) days after the Agreement Date.
Section 8.8 Accuracy of Information. All written information,
reports, statements and other papers and data furnished to the Lender, whether
pursuant to ARTICLE 9 or any other
LOAN AND SECURITY AGREEMENT - PAGE 58
<PAGE> 59
provision of this Agreement or any of the other Loan Documents, shall be, at
the time the same is so furnished, complete and correct in all material
respects to the extent necessary to give the Lender true and accurate knowledge
of the subject matter.
Section 8.9 Revisions or Updates to Schedules. Should any of the
information or disclosures provided on any of the Schedules originally attached
hereto become outdated or incorrect in any material respect, the Borrowers
shall provide promptly to the Lender such revisions or updates to such
Schedule(s) as may be necessary or appropriate to update or correct such
Schedule(s), provided that no such revisions or updates to any Schedule(s)
shall be deemed to have cured any breach of warranty or representation
resulting from the inaccuracy or incompleteness of any such Schedule(s) unless
and until the Lender, in its sole discretion, shall have accepted in writing
such revisions or updates to such Schedule(s).
Section 8.10 Texas Real Property.
(a) Within thirty (30) days after the Funding Date, the Borrowers
shall deliver to the Lender commitments to issue mortgagee title policies by a
title insurance company acceptable to the Lender, which commitments shall be to
insure the Lender's Lien in the Texas Real Property as a first and prior Lien
(subject to Permitted Liens) and shall be in all other respects satisfactory to
the Lender in its sole discretion.
(b) Within thirty (30) days after so requested by the Lender, the
Borrowers shall deliver to the Lender surveys of the Texas Real Property,
certified to the Lender, prepared by surveyors acceptable to the Lender, which
surveys shall be satisfactory to the Lender in its sole discretion.
ARTICLE 9 - INFORMATION
Until the Revolving Credit Facility has been terminated and all the
Secured Obligations have been indefeasibly paid in full, unless the Lender
shall otherwise consent in the manner set forth in SECTION 12.10, each
Borrower, jointly and severally, covenants and agrees to furnish, or cause to
be furnished, to the Lender at the Lender's Office:
Section 9.1 Financial Statements.
(a) Audited Year-End Statements. As soon as available, but in any
event within one hundred twenty (120) days after the end of each fiscal year of
Denali, copies of the consolidated and consolidating audited balance sheet of
Denali as at the end of such fiscal year and the related audited statements of
income, shareholders' equity and cash flow for such fiscal year, in each case
setting forth in comparative form the figures for the previous year of Denali
and in each case including all Borrowers in such consolidating financial
statements, together with a certificate of independent public accountants of
recognized standing acceptable to the Lender stating, without material
qualification, that in the course of their audit of Denali and its
Subsidiaries, such accountants obtained no knowledge that an Event of Default
or Default, has occurred and is
LOAN AND SECURITY AGREEMENT - PAGE 59
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continuing, or if, in the opinion of such accountants, an Event of Default or
Default has occurred and is continuing, a statement as to the nature thereof.
(b) Monthly Financial Statements. As soon as available, but in
any event within thirty (30) days after the end of each accounting month of
Denali, copies of (i) the consolidated and consolidating unaudited balance
sheet of Denali as at the end of such month and the related unaudited
consolidated and consolidating statements of income and cash flow of Denali for
such month and for the portion of the fiscal year of Denali, in each case
including all Borrowers in such consolidating financial statements, and (ii)
the unaudited balance sheet of each Borrower as at the end of such month and
the related unaudited statements of income and cash flow for each Borrower for
such month and for the portion of the fiscal year of such Borrower through such
month, certified by the chief financial officer of Denali or such Borrower, as
appropriate, to the best of his knowledge as having been prepared in accordance
with GAAP and presenting fairly the financial condition and results of
operations of Denali or such Borrower, as appropriate, as at the date thereof
and for the periods ended on such date, subject to normal year-end audit
adjustments.
(c) Projected Financial Statements. As soon as available, but in
any event within 90 days prior to the end of each fiscal year of each Borrower,
forecasted financial statements, prepared by such Borrower, consisting of
balance sheets, cash flow statements and income statements of such Borrower,
reflecting projected borrowings hereunder and setting forth the assumptions on
which such forecasted financial statements were prepared, covering the one-year
period until the next fiscal year end.
All such financial statements shall be complete and correct in all material
respects and all such financial statements referred to in clauses (a) and (b)
shall be prepared in accordance with GAAP (except, with respect to interim
financial statements, for the omission of footnotes) applied consistently
throughout the periods reflected therein.
Section 9.2 Accountants' Certificate. Together with each
delivery of financial statements required by SECTION 9.1(a), a certificate of
the accountants who performed the audit in connection with such statements (a)
stating that they have reviewed this Agreement and that, in making the audit
necessary to the issuance of a report on such financial statements, they have
obtained no knowledge of any Default or Event of Default or, if such
accountants have obtained knowledge of a Default or Event of Default,
specifying the nature and period of existence thereof, and (b) setting forth
the calculations necessary to establish whether or not the Borrowers were in
compliance with the covenants contained in SECTIONS 10.1 and 10.5 as of the
date of such statements.
Each Borrower authorizes the Lender to discuss the financial condition
of the Borrowers with its independent certified public accountants and agrees
that such discussion or communication shall be without liability to either the
Lender or such Borrower's independent certified public accountants. On or
before the Funding Date, and at any time thereafter upon request from Lender,
each Borrower shall, and shall cause Denali to, deliver a letter on its
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letterhead addressed to such accountants authorizing them to comply with the
provisions of this SECTION 9.2.
Section 9.3 Officer's Certificate. Together with each delivery
of financial statements required by SECTION 9.1(a) and (b), a certificate of
each Borrower's President or chief financial officer, in the form of EXHIBIT C
attached hereto, (a) stating that, based on an examination sufficient to enable
him to make an informed statement, no Default or Event of Default exists or, if
such is not the case, specifying such Default or Event of Default and its
nature, when it occurred, whether it is continuing and the steps being taken by
the Borrowers with respect to such Default or Event of Default, and (b) setting
forth the calculations necessary to establish whether or not the Borrowers were
in compliance with the covenants contained in SECTIONS 10.1 and 10.5 as of the
date of such statements.
Section 9.4 Copies of Other Reports. (a) Promptly upon receipt
thereof, copies of all reports, if any, submitted to any Borrower, Denali, or
its Board of Directors by its independent public accountants, including,
without limitation, all management reports.
(b) From time to time and promptly upon each request, such
forecasts, data, certificates, reports, statements, opinions of counsel,
documents or further information regarding the business, assets, liabilities,
financial condition, results of operations or business prospects of each
Borrower as the Lender may reasonably request. The rights of the Lender under
this SECTION 9.4(b) are in addition to and not in derogation of its rights
under any other provision of this Agreement or any Loan Document.
(c) If requested by the Lender, statements in conformity with the
requirements of Federal Reserve Form G-1 or U-1 referred to in Regulations G
and U, respectively, of the Board of Governors of the Federal Reserve System.
Section 9.5 Notice of Litigation and Other Matters. Prompt
notice of:
(a) the commencement, to the extent any Borrower is aware of the
same, of all proceedings and investigations by or before any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any other way relating adversely to, or adversely
affecting, any Borrower or any Affiliate of any Borrower or any of their
respective property, assets or businesses which might, singly or in the
aggregate, cause a Default or an Event of Default or have a Materially Adverse
Effect,
(b) any amendment of the articles of incorporation or by-laws of
any Borrower or Guarantor,
(c) any change in the business, assets, liabilities, financial
condition, results of operations or business prospects of any Borrower or any
Affiliate of any Borrower which has had or may have any Materially Adverse
Effect and any change in the executive officers of any Borrower, and
LOAN AND SECURITY AGREEMENT - PAGE 61
<PAGE> 62
(d) any (i) Default or Event of Default, or (ii) event that, with
the passage of time or giving of notice or both, would constitute a default or
event of default by any Borrower under any material agreement (other than this
Agreement) to which it is a party or by which it or any of its property may be
bound if the exercise of remedies thereunder by the other party to such
agreement would have, either individually or in the aggregate, a Materially
Adverse Effect.
Section 9.6 ERISA. As soon as possible and in any event within
30 days after any Borrower knows, or has reason to know, that:
(a) any Termination Event with respect to a Benefit Plan has
occurred or will occur,
(b) the aggregate present value of the Unfunded Vested Accrued
Benefits under all Plans has increased to an amount in excess of $0, or
(c) any Borrower is in "default" (as defined in Section 4219(c)(5)
of ERISA) with respect to payments to a Multiemployer Plan required by reason
of its complete or partial withdrawal (as described in Section 4203 or 4205 of
ERISA) from such Multiemployer Plan,
a certificate of the President or the chief financial officer of such Borrower
setting forth the details of such of the events described in CLAUSES (a)
through (c) as applicable and the action which is proposed to be taken with
respect thereto and, simultaneously with the filing thereof, copies of any
notice or filing which may be required by the PBGC or other agency of the
United States government with respect to such of the events described in
CLAUSES (a) through (c) as applicable.
Section 9.7 Solvency Certificates. From time to time upon
request of the Lender, a solvency certificate of such Borrower in the form of
EXHIBIT F hereto, completed by the chief financial officer or president of such
Borrower.
ARTICLE 10 - NEGATIVE COVENANTS
Until the Revolving Credit Facility has been terminated and all the
Secured Obligations have been indefeasibly paid in full, unless the Lender
shall otherwise consent in the manner set forth in SECTION 12.10, each Borrower
jointly and severally covenants and agrees that no Borrower will directly or
indirectly:
Section 10.1 Financial Covenants.
(a) Maximum Liabilities to Tangible Net Worth. Permit the ratio
of the Borrowers' (i) combined total Liabilities less Subordinated Debt to (ii)
combined Tangible Net Worth at the end of any fiscal quarter:
(i) from the Funding Date to and including December 31,
1997, to be greater than 8.5 to 1;
LOAN AND SECURITY AGREEMENT - PAGE 62
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(ii) from January 1, 1998, to and including June 30, 1998,
to be greater than 6.5 to 1;
(iii) from July 1, 1998, to and including December 31,
1998, to be greater than 5.5 to 1;
(iv) from January 1, 1999, to and including June 30, 1999,
to be greater than 4.5 to 1; and
(v) from and after July 1, 1999, to be greater than 4.0
to 1.
(b) Minimum Tangible Net Worth.
(i) Permit the Tangible Net Worth of Ershigs at any time:
(A) from the Funding Date to and
including December 31, 1997, to be less than
$1,900,000;
(B) from January 1, 1998, to and
including June 30, 1998, to be less than $1,950,000;
(C) from July 1, 1998, to and including
December 31, 1998, to be less than $2,100,000;
(D) from January 1, 1999, to and
including June 30, 1999, to be less than $2,225,000;
and
(E) from and after July 1, 1999, to be
less than $2,400,000.
(ii) Permit the Tangible Net Worth of FCI at any time:
(A) from the Funding Date to and
including December 31, 1997, to be less than
$5,300,000;
(B) from January 1, 1998, to and
including June 30, 1998, to be less than $5,500,000;
(C) from July 1, 1998, to and including
December 31, 1998, to be less than $6,200,000;
(D) from January 1, 1999, to and
including June 30, 1999, to be less than $7,000,000;
and
(E) from and after July 1, 1999, to be
less than $8,000,000.
LOAN AND SECURITY AGREEMENT - PAGE 63
<PAGE> 64
(iii) Permit the Tangible Net Worth of HCI at any time:
(A) from the Funding Date to and
including December 31, 1997, to be less than negative
$800,000;
(B) from January 1, 1998, to and
including June 30, 1998, to be less than negative
$650,000;
(C) from July 1, 1998, to and including
December 31, 1998, to be less than negative $300,000;
(D) from January 1, 1999, to and
including June 30, 1999, to be less than $0; and
(E) from and after July 1, 1999, to be
less than $350,000.
(iv) Permit the Tangible Net Worth of SEFCO at any time:
(A) from the Funding Date to and
including June 30, 1998, to be less than negative
$2,700,000;
(B) from July 1, 1998, to and including
December 31, 1998, to be less than negative
$2,400,000;
(C) from January 1, 1999, to and
including June 30, 1999, to be less than negative
$2,100,000; and
(D) from and after July 1, 1999, to be
less than negative $1,800,000.
Where the minimum amount forth above for any period is a negative
number, this covenant shall be breached if the absolute value of the actual
negative Tangible Net Worth for such period is greater than the absolute value
of the minimum amount for such period set forth above.
(c) Minimum Fixed Charge Coverage Ratio. Permit, as of the end of
any quarter, the ratio of (i) the Borrowers' combined earnings, plus (A)
interest, income taxes, depreciation, and amortization expenses deducted in
determining such earnings, less (B) the Borrowers' combined cash taxes,
dividends, Unfunded Capital Expenditures, and maintenance Capital Expenditures,
each measured for the immediately preceding twelve months to (ii) the sum of
the Borrowers' combined (A) interest expense for the immediately preceding
twelve months and (B) the current maturities of long-term indebtedness for the
twelve months commencing on any such determination date, to be less than 1.1 to
1 at any time.
LOAN AND SECURITY AGREEMENT - PAGE 64
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(d) Minimum Net Income.
(i) Permit Ershigs for any fiscal quarter to have net
income less than $0 for such fiscal quarter.
(ii) Permit FCI for (i) the fiscal quarter ending March
31, 1998, to have net losses in excess of $275,000 or (ii) any
other fiscal quarter to have net income less than $0 for such
fiscal quarter.
(iii) Permit FCI to have net income less than $0 for (A)
the three fiscal quarters ending March 31, 1998, or (B) for
the fiscal year ending June 30, 1998.
(iv) Permit HCI for any fiscal quarter to have net income
less than $0 for such fiscal quarter.
(v) Permit SEFCO for any fiscal quarter to have net
income less than $0 for such fiscal quarter.
As used in this SECTION 10.1(d), net income and net loss shall mean
the net income (or net loss) of such Person for the period in question after
giving effect to deduction of or provision for all operating expenses, all
taxes and reserves (including reserves for deferred taxes and all other proper
deductions), all determined in accordance with GAAP, provided that there shall
be excluded the net income (or net loss) of any Person accrued prior to the
date it becomes a Subsidiary of, or is merged into or consolidated with, the
Person whose net income is being determined or a Subsidiary of such Person.
Section 10.2 Indebtedness. Create, assume, or otherwise become or
remain obligated in respect of, or permit or suffer to exist or to be created,
assumed or incurred or to be outstanding any Indebtedness for Money Borrowed,
except for Permitted Indebtedness for Money Borrowed.
Section 10.3 Guaranties. Become or remain liable with respect to
any Guaranty of any obligation of any other Person (excluding the guaranties by
each Borrower of the Secured Obligations).
Section 10.4 Investments. Acquire, after the Agreement Date, any
Business Unit or Investment or, after such date, permit any Investment to be
outstanding, other than Permitted Investments, provided that, subject to the
satisfaction by LaValley and all other parties hereto of the conditions set
forth in SECTION 4.4, Ershigs may acquire LaValley.
Section 10.5 Capital Expenditures. Make or incur any Capital
Expenditures, except that the Borrowers may, on a combined basis, make or incur
Capital Expenditures in any fiscal year in an amount not to exceed, in the
aggregate, $1,000,000.
LOAN AND SECURITY AGREEMENT - PAGE 65
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Section 10.6 Restricted Distributions and Payments, Etc. Declare
or make any Restricted Distribution or Restricted Payment, other than payments
permitted by the Subordination Agreements.
Section 10.7 Merger, Consolidation and Sale of Assets. Merge or
consolidate with any other Person or sell, lease or transfer or otherwise
dispose of all or a substantial portion of its assets to any Person.
Section 10.8 Transactions with Affiliates. Effect any transaction
with any Affiliate on a basis less favorable to a Borrower than would be the
case if such transaction had been effected with a Person not an Affiliate.
Section 10.9 Liens. Create, assume or permit or suffer to exist
or to be created or assumed any Lien on any of the property or assets of any
Borrower, real, personal or mixed, tangible or intangible, except for Permitted
Liens.
Section 10.10 Operating Leases. Enter into any lease other than a
Capitalized Lease which would cause the annual payment obligations of all
Borrowers on a combined basis under all leases (other than Capitalized Leases)
to exceed $1,100,000 in the aggregate.
Section 10.11 Benefit Plans. Permit, or take any action which
would result in, the aggregate present value of the Unfunded Vested Accrued
Benefits under all Benefit Plans of any Borrower to exceed $0.
Section 10.12 Sales and Leaseback. Enter into any arrangement with
any Person providing for the leasing from such Person of real or personal
property which has been or is to be sold or transferred, directly or
indirectly, by any Borrower to such Person.
Section 10.13 Amendments of Other Agreements. Amend in any way the
interest rate or principal amount or schedule of payments of principal and
interest with respect to any Indebtedness (other than the Secured Obligations)
other than to reduce the interest rate or extend the schedule of payments with
respect thereto.
Section 10.14 Minimum Availability. Permit Availability to be less
than $1,500,000 in the aggregate at any time.
ARTICLE 11 - DEFAULT
Section 11.1 Events of Default. Each of the following shall
constitute an Event of Default, whatever the reason for such event and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment or order of any court or any order, rule or regulation
of any governmental or nongovernmental body:
LOAN AND SECURITY AGREEMENT - PAGE 66
<PAGE> 67
(a) Payment Default. Any Borrower shall default in any payment of
principal of, or interest on, any Loan or Note when and as due (whether at
maturity, by reason of acceleration or otherwise) or any other Secured
Obligation.
(b) Misrepresentation. Any representation or warranty made or
deemed to be made by any Borrower under this Agreement or any other Loan
Document or any amendment hereto or thereto shall at any time prove to have
been incorrect or misleading in any material respect when made.
(c) Default in Performance. Any Borrower (a) shall default in the
performance or observance of any covenant set forth in Section 7.9(d), Section
7.14(a), Section 7.14(b), Section 7.14(c), Section 7.14(e), Section 7.14(f),
Section 8.4, Section 9.1, Section 9.2, Section 9.3, or Section 9.4 and such
failure shall not have been cured within ten (10) days after the earlier of (i)
notice from the Lender to such Borrower of such default or (ii) the date when
such Borrower should have known of such default or (b) shall default in the
performance or observance of any other term, covenant, condition or agreement
contained herein.
(d) Indebtedness Cross-Default. (i) Any Borrower shall fail to
pay when due and payable the principal of or interest on any Indebtedness
(other than the Loans, Notes, or Trade Payables) where the principal amount of
such Indebtedness is in excess of $100,000, or (ii) with respect to any such
Indebtedness (A) the maturity thereof shall have been accelerated in accordance
with the provisions of any indenture, contract or instrument providing for the
creation of or concerning such Indebtedness, or (B) it shall have been required
to be prepaid prior to the stated maturity thereof, or (iii) any event shall
have occurred and be continuing which would permit any holder or holders of
such Indebtedness, any trustee or agent acting on behalf of such holder or
holders or any other Person to accelerate such maturity, or (iv) any Borrower
shall fail to pay any Trade Payable within ninety (90) days of the invoice
date.
(e) Other Cross-Defaults. Any Borrower shall default in the
payment when due or in the performance or observance of any material obligation
or condition of any agreement, contract or lease (other than the Security
Documents or any such agreement, contract or lease relating to Indebtedness),
if the exercise of remedies thereunder by the other party to such agreement
could have a Materially Adverse Effect.
(f) Voluntary Bankruptcy Proceeding. Any Obligor shall (i)
commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (ii) commence a proceeding seeking to take advantage of
any other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii)
consent to or fail to contest in a timely and appropriate manner any petition
filed against it in an involuntary case under such bankruptcy laws or other
laws, (iv) apply for or consent to, or fail to contest in a timely and
appropriate manner, the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of a substantial part
of its property, domestic or foreign, (v) admit in writing its inability to pay
its debts as they become due, (vi) make a
LOAN AND SECURITY AGREEMENT - PAGE 67
<PAGE> 68
general assignment for the benefit of creditors, or (vii) take any corporate
action for the purpose of authorizing any of the foregoing.
(g) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against any Obligor in any court of competent jurisdiction
seeking (i) relief under the federal bankruptcy laws (as now or hereafter in
effect) or under any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or adjustment of debts, or (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of any
Obligor or of all or any substantial part of the assets, domestic or foreign,
of any Obligor, and such case or proceeding shall continue undismissed or
unstayed for a period of 60 consecutive calendar days, or an order granting the
relief requested in such case or proceeding against any Obligor (including, but
not limited to, an order for relief under such federal bankruptcy laws) shall
be entered.
(h) Loan Documents. (i) A default shall occur in the performance
or observance of any covenant set forth in Section 10 of that certain
Unconditional Guaranty dated the date hereof in favor of the Lender or in
Section 4.2(A), (B), (C), or (D) of any mortgage or deed of trust dated on or
about the Agreement Date respecting Real Property located in California, North
Carolina, Mississippi, Oklahoma, Texas, and Oklahoma, or in Section 3.2(A),
(B), (C), or (D) of the mortgage dated on or about the Agreement Date
respecting the Real Property located in Pennsylvania, and such failure shall
not have been cured within ten (10) days after the earlier of (A) notice from
the Lender to such Obligor of such default or (B) the date when such Obligor
should have known of such default or (ii) any other default or event of default
under any other Loan Document shall occur or any Obligor shall default in the
performance or observance of any material term, covenant, condition or
agreement contained in, or the payment of any other sum covenanted to be paid
by any Obligor under, any such Loan Document or any representation or warranty
made or deemed to be made by any Obligor under any other Loan Document or any
amendment hereto or thereto shall at any time prove to have been incorrect or
misleading in any material respect when made; or any provision of this
Agreement, or of any other Loan Document after delivery thereof hereunder,
shall for any reason cease to be valid and binding, other than a nonmaterial
provision rendered unenforceable by operation of law, or any Obligor or other
party thereto (other than the Lender) shall so state in writing; or this
Agreement or any other Loan Document, after delivery thereof hereunder, shall
for any reason (other than any action taken independently by the Lender and
except to the extent permitted by the terms thereof) cease to create a valid,
perfected and, except as otherwise expressly permitted herein, first priority
Lien on, or security interest in, any of the Collateral purported to be covered
thereby.
(i) Judgment. Any judgment or order for the payment of money
which is not fully covered by insurance and which with respect to any such
judgment or order exceeds $100,000 in amount or with respect all such judgments
and/or orders exceeds $250,000 in amount in the aggregate shall be entered
against any Obligor or Obligors by any court and any such judgment or order
shall continue undischarged or unstayed for 30 days.
LOAN AND SECURITY AGREEMENT - PAGE 68
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(j) Attachment. Any undischarged warrant or writ of attachment or
execution or similar process which with respect to any such warrant, writ, or
process exceeds $50,000 in value or with respect to all such warrants, writs,
and/or processes exceed $250,000 in value in the aggregate shall be issued
against any property of any Obligor or Obligors and any such warrant or process
shall continue undischarged or unstayed for 30 days.
(k) ERISA. (i) Any Termination Event with respect to a Benefit
Plan of any Borrower shall occur that, after taking into account the excess, if
any, of (A) the fair market value of the assets of any other Benefit Plan with
respect to which a Termination Event occurs on the same day (but only to the
extent that such excess is the property of such Borrower) over (B) the present
value on such day of all vested nonforfeitable benefits under such other
Benefit Plan, results in an Unfunded Vested Accrued Benefit in excess of $0,
(ii) any Benefit Plan shall incur an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA) for which a waiver
has not been obtained in accordance with the applicable provisions of the Code
and ERISA, or (iii) any Borrower is in "default" (as defined in Section
4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting
from such Borrower's complete or partial withdrawal (as described in Section
4203 or 4205 of ERISA) from such Multiemployer Plan.
(l) Qualified Audits. The independent certified public
accountants retained by Denali shall refuse to deliver an opinion in accordance
with SECTION 9.1(a) with respect to the annual financial statements of Denali.
(m) Change of Control. (i) Any of the shareholders of Denali that
have executed the agreement described in SECTION 4.1(a)(11) hereof shall cease
to own, beneficially and of record, the amount and percentage of the capital
stock of Denali owned on the Agreement Date, unless capital stock is sold by
Denali in either an initial public offering which raises at least $16,000,000
in Net Cash Proceeds or a private placement which raises at least $3,000,000 in
Net Cash Proceeds, (ii) Denali shall cease to own, beneficially and of record,
100% of the outstanding capital stock of FCI, HCI, and Specialty Solutions,
Inc., or (iii) Specialty Solutions, Inc. shall cease to own, beneficially and
of record, 100% of the outstanding capital stock of Ershigs.
(n) Material Adverse Change. There occurs any act, omission,
event, undertaking or circumstance or series of acts, omissions, events,
undertakings or circumstances which have, or in the sole judgment of the Lender
would have, either individually or in the aggregate, a Materially Adverse
Effect.
(o) Change in Management. Stephen Harcrow shall for any reason
cease to be the Chairman of the Board of Denali or a principal operational
officer of each Borrower and 60 days shall have elapsed during which time no
replacement satisfactory to the Lender shall have been appointed.
LOAN AND SECURITY AGREEMENT - PAGE 69
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(p) Guaranties. Any guarantor of the Secured Obligations shall
(i) repudiate its obligations under, or commit an anticipatory breach of, its
guaranty of the Secured Obligations dated on or about the Agreement Date and
executed for the benefit of Lender, or (ii) attempt to terminate such guaranty,
or (iii) commence any legal proceeding to terminate or hold invalid in any
respect such guaranty.
(q) Owens Debt. FCI and Owens shall have failed by November 15,
1999, to renegotiate the Owens Debt on terms and with documentation
satisfactory in form and substance to the Lender in its sole and absolute
discretion.
(r) PraxAir Debt. Ershigs and PraxAir shall have failed by
February 18, 1998, either (i) to renegotiate the PraxAir Debt on terms and with
documentation satisfactory in form and substance to the Lender in its sole and
absolute discretion or (ii) to pay the outstanding principal balance of and all
accrued interest on the PraxAir Debt.
(s) Surveys. Borrowers shall have failed to have deleted from the
title policies delivered in respect of the Real Property (other than the Texas
Real Property) the survey exceptions contained therein within thirty (30) days
after the Agreement Date.
Section 11.2 Remedies.
(a) Automatic Acceleration and Termination of Facilities. Upon
the occurrence of an Event of Default specified in SECTION 11.1(g) or (h), (i)
the principal of and the accrued and unpaid interest on the Loans and the Notes
at the time outstanding, and all other amounts owed to the Lender under this
Agreement or any of the Loan Documents and all other Secured Obligations, shall
thereupon become due and payable without presentment, demand, protest or other
notice of any kind, all of which are expressly waived, anything in this
Agreement or any of the Loan Documents to the contrary notwithstanding, and
(ii) the Revolving Credit Facility and the commitment of the Lender to make
advances thereunder or under this Agreement shall immediately terminate.
(b) Other Remedies. If any Event of Default (other than as
specified in SECTION 11.1(f) or (g)) shall have occurred and be continuing, the
Lender, in its sole and absolute discretion, may do any one or more of the
following:
(i) declare the principal of and accrued and unpaid
interest on the Loans and the Notes at the time outstanding, and all
other amounts owed to the Lender under this Agreement or any of the
Loan Documents and all other Secured Obligations, to be forthwith due
and payable, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any
kind, all of which are expressly waived, anything in this Agreement or
the Loan Documents to the contrary notwithstanding; and
LOAN AND SECURITY AGREEMENT - PAGE 70
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(ii) terminate the Revolving Credit Facility and any
commitment of the Lender to make advances or issue Letters of Credit
hereunder.
(c) Further Remedies. If any Event of Default shall have occurred
and be continuing, the Lender, in its sole and absolute discretion, may do any
of the following:
(i) notify, or request the Borrowers to notify, in
writing or otherwise, any Account Debtor or obligor with respect to
any one or more of the Receivables to make payment to the Lender or
any agent or designee of the Lender, at such address as may be
specified by the Lender, and, if, notwithstanding the giving of any
notice, any Account Debtor or other such obligor shall make payments
to a Borrower, such Borrower shall hold all such payments it receives
in trust for the Lender, without commingling the same with other funds
or property of, or held by, such Borrower and shall deliver the same
to the Lender or any such agent or designee immediately upon receipt
by such Borrower in the identical form received, together with any
necessary endorsements;
(ii) settle or adjust disputes and claims directly with
Account Debtors and other obligors on Receivables for amounts and on
terms which the Lender considers advisable and in all such cases only
the net amounts received by the Lender in payment of such amounts,
after deductions of costs and attorneys' fees, shall constitute
Collateral, and no Borrower shall have any further right to make any
such settlements or adjustments or to accept any returns of
merchandise;
(iii) enter upon any premises on which Inventory or
Equipment may be located and, without resistance or interference by
any Borrower, take physical possession of any or all thereof and
maintain such possession on such premises or move the same or any part
thereof to such other place or places as the Lender shall choose,
without being liable to any Borrower on account of any loss, damage or
depreciation that may occur as a result thereof, so long as the Lender
shall act reasonably and in good faith;
(iv) require the Borrowers to and the Borrowers shall,
without charge to the Lender, assemble the Inventory and Equipment and
maintain or deliver it into the possession of the Lender or any agent
or representative of the Lender at such place or places as the Lender
may reasonably designate;
(v) at the expense of the Borrowers, cause any of the
Inventory and Equipment to be placed in one or more public or field
warehouses, and the Lender shall not be liable to any Borrower on
account of any loss, damage or depreciation that may occur as a result
thereof, so long as the Lender shall act reasonably and in good faith;
(vi) without notice, demand or other process, and without
payment of any rent or any other charge, enter any Borrower's premises
and, without breach of the peace, until the Lender completes the
enforcement of its rights in the Collateral, take possession of such
premises or place custodians in exclusive control thereof, remain on
such premises
LOAN AND SECURITY AGREEMENT - PAGE 71
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and use the same and any of such Borrower's equipment, for the purpose
of (A) completing any work in process, preparing any Inventory for
disposition and disposing thereof, and (B) collecting any Receivable,
and the Lender is hereby granted a license or sublicense and all other
rights as may be necessary, appropriate or desirable to use the
Intellectual Property in connection with the foregoing, and the rights
of each Borrower under all licenses and franchise agreements shall
inure to the Lender's benefit (provided, however, that any use of any
federally registered trademarks as to any goods shall be subject to
the control as to the quality of such goods of the owner of such
trademarks and the goodwill of the business symbolized thereby);
(vii) exercise any and all of its rights under any and all
of the Security Documents;
(viii) apply any cash Collateral to the payment of the
Secured Obligations in any order in which the Lender may elect or use
such cash in connection with the exercise of any of its other rights
hereunder or under any of the Security Documents;
(ix) establish or cause to be established one or more
Lockboxes or other arrangement for the deposit of proceeds of
Receivables, and, in such case, each Borrower shall cause to be
forwarded to the Lender at the Lender's Office, on a daily basis,
copies of all checks and other items of payment and deposit slips
related thereto deposited in such Lockboxes, together with collection
reports in form and substance satisfactory to the Lender; and
(x) exercise all of the rights and remedies of a secured
party under the UCC (whether or not the UCC is applicable) and under
any other applicable law, including, without limitation, the right,
without notice except as specified below and with or without taking
the possession thereof, to repossess the Collateral and to sell the
Collateral or any part thereof in one or more parcels at public or
private sale, at any location chosen by the Lender, for cash, on
credit or for future delivery and at such price or prices and upon
such other terms as the Lender may deem commercially reasonable. The
Borrowers agree that, to the extent notice of sale shall be required
by law, at least 10 DAYS' NOTICE to the Borrowers of the time and
place of any public sale or the time after which any private sale is
to be made shall constitute reasonable notice, but notice given in any
other reasonable manner or at any other reasonable time shall also
constitute reasonable notification. The Lender shall not be obligated
to make any sale of Collateral regardless of notice of sale having
been given. The Lender may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place
to which it was so adjourned.
Section 11.3 Application of Proceeds. All proceeds from each sale
of, or other realization upon, all or any part of the Collateral following an
Event of Default shall be applied or paid over as follows:
LOAN AND SECURITY AGREEMENT - PAGE 72
<PAGE> 73
(a) First: to the payment of all costs and expenses incurred in
connection with such sale or other realization, including attorneys' fees,
(b) Second: to the payment of the Secured Obligations (with the
Borrowers and each Obligor remaining liable for any deficiency) in any order
which the Lender may elect,
(c) Third: to the creation of a fund in an amount equal to the
Aggregate Letter of Credit Reserve, which fund shall be held by the Lender as
security for and applied to the payment of any amounts which may thereafter
become due under the Letter of Credit Facility, and
(d) Fourth: the balance (if any) of such proceeds shall be paid
to the Borrowers or, subject to any duty imposed by law or otherwise, to
whomsoever is entitled thereto.
THE BORROWERS AND EACH OBLIGOR SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY
DEFICIENCY REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH
INTEREST THEREON AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE
HEREUNDER ON SUCH SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF
THE SECURED OBLIGATIONS.
Section 11.4 Power of Attorney. In addition to the authorizations
granted to the Lender under SECTION 7.15 or under any other provision of this
Agreement or any of the Loan Documents, upon and after an Event of Default,
each Borrower hereby irrevocably designates, makes, constitutes and appoints
the Lender (and all Persons designated by the Lender from time to time) as such
Borrower's true and lawful attorney and agent in fact, and the Lender or any
agent of the Lender may, without notice to such Borrower, and at such time or
times as the Lender or any such agent in its sole discretion may determine, in
the name of such Borrower or the Lender,
(a) demand payment of the Receivables, enforce payment thereof by
legal proceedings or otherwise, settle, adjust, compromise, extend or renew any
or all of the Receivables or any legal proceedings brought to collect the
Receivables, discharge and release the Receivables or any of them and exercise
all of such Borrower's rights and remedies with respect to the collection of
Receivables,
(b) prepare, file and sign the name of such Borrower on any proof
of claim in bankruptcy or any similar document against any Account Debtor or
any notice of Lien, assignment or satisfaction of Lien or similar document in
connection with any of the Collateral,
(c) endorse the name of such Borrower upon any chattel paper,
document, instrument, notice, freight bill, bill of lading or similar document
or agreement relating to the Receivables, the Inventory or any other
Collateral,
(d) use the stationery of such Borrower, open such Borrower's
mail, notify the post office authorities to change the address for delivery of
such Borrower's mail to an address
LOAN AND SECURITY AGREEMENT - PAGE 73
<PAGE> 74
designated by the Lender and sign the name of such Borrower to verifications of
the Receivables and on any notice to the Account Debtors,
(e) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
Receivables, Inventory or other Collateral to which such Borrower or any
Subsidiary of such Borrower has access.
Section 11.5 Miscellaneous Provisions Concerning Remedies.
(a) Rights Cumulative. The rights and remedies of the Lender
under this Agreement, the Note and each of the Loan Documents shall be
cumulative and not exclusive of any rights or remedies which it or they would
otherwise have. In exercising such rights and remedies, the Lender may be
selective and no failure or delay by the Lender in exercising any right shall
operate as a waiver of such right nor shall any single or partial exercise of
any power or right preclude its other or further exercise or the exercise of
any other power or right.
(b) Waiver of Marshalling. The Borrowers hereby, jointly and
severally, waive any right to require any marshalling of assets and any similar
right.
(c) Limitation of Liability. Nothing contained in this ARTICLE 11
or elsewhere in this Agreement or in any of the Loan Documents shall be
construed as requiring or obligating the Lender or any agent or designee of the
Lender to make any demand or to make any inquiry as to the nature or
sufficiency of any payment received by it or to present or file any claim or
notice or take any action with respect to any Receivable or any other
Collateral or the moneys due or to become due thereunder or in connection
therewith or to take any steps necessary to preserve any rights against prior
parties, and neither the Lender nor any of its agents or designees shall have
any liability to any Borrower for actions taken pursuant to this ARTICLE 11,
any other provision of this Agreement or any of the Loan Documents, so long as
the Lender or such agent or designee shall act reasonably and in good faith.
(d) Appointment of Receiver. In any action under this ARTICLE 11,
the Lender shall be entitled to the appointment of a receiver, without notice
of any kind whatsoever, to take possession of all or any portion of the
Collateral and to exercise such power as the court shall confer upon such
receiver.
Section 11.6 Trademark License. The Borrowers hereby, jointly and
severally, grant to the Lender the nonexclusive right and license to use the
trademarks listed on SCHEDULE 5.1(aa) and any other trademark then used by any
Borrower, for the purposes set forth in SECTION 11.2(c)(vi) and for the purpose
of enabling the Lender to realize on the Collateral and to permit any purchaser
of any portion of the Collateral through a foreclosure sale or any other
exercise of the Lender's rights and remedies under the Loan Documents to use,
sell or otherwise dispose of the Collateral bearing any such trademark. Such
right and license is granted free of charge, without the requirement that any
monetary payment whatsoever be made to any Borrower or any other Person by the
Lender. Each Borrower hereby represents, warrants, covenants and agrees
LOAN AND SECURITY AGREEMENT - PAGE 74
<PAGE> 75
that it presently has, and shall continue to have, the right, without the
approval or consent of others, to grant the license set forth in this SECTION
11.6.
ARTICLE 12 - MISCELLANEOUS
Section 12.1 Notices.
(a) Method of Communication. Except as specifically provided in
this Agreement or in any of the Loan Documents, all notices and the
communications hereunder and thereunder shall be in writing or by telephone
subsequently confirmed in writing. Notices in writing shall be delivered
personally or sent by overnight courier service, by certified or registered
mail, postage pre-paid, or by facsimile transmission and shall be deemed
received, in the case of personal delivery, when delivered, in the case of
overnight courier service, on the next Business Day after delivery to such
service, in the case of mailing, on the third day after mailing (or, if such
day is a day on which deliveries of mail are not made, on the next succeeding
day on which deliveries of mail are made) and, in the case of facsimile
transmission, upon transmittal; provided that in the case of notices to the
Lender, the Lender shall be charged with knowledge of the contents thereof only
when such notice is actually received by the Lender. A telephonic notice to
the Lender as understood by the Lender will be deemed to be the controlling and
proper notice in the event of a discrepancy with or failure to receive a
confirming written notice.
(b) Addresses for Notices. Notices to any party shall be sent to
it at the following addresses, or any other address of which all the other
parties are notified in writing.
If to FCI:
Fluid Containment, Inc.
1360 Post Oak Blvd., Suite 2470
Houston, Texas 77056
Facsimile No.: 713-627-0937
If to HCI:
Hoover Containment, Inc.
1360 Post Oak Blvd., Suite 2470
Houston, Texas 77056
Facsimile No.: 713-627-0937
If to Ershigs:
Ershigs, Inc.
1360 Post Oak Blvd., Suite 2470
Houston, Texas 77056
Facsimile No.: 713-627-0937
LOAN AND SECURITY AGREEMENT - PAGE 75
<PAGE> 76
If to SEFCO:
SEFCO, Inc.
1360 Post Oak Blvd., Suite 2470
Houston, Texas 77056
Facsimile No.: 713-627-0937
If to the Lender:
NationsBank of Texas, N.A.
c/o NationsBank Business Credit
901 Main Street, 6th Floor
Dallas, Texas 75202
Attention: Region Manager
Facsimile No.: (214) 508-3501
(c) Lender's Office. The Lender hereby designates its office
located at 901 MAIN STREET, 6TH FLOOR, DALLAS, TEXAS 75202, or any subsequent
office which shall have been specified for such purpose by written notice to
the Borrowers, as the office to which payments due are to be made and at which
Loans will be disbursed.
Section 12.2 Expenses. Each Borrower, jointly and severally,
agrees to pay or reimburse on demand all reasonable costs and expenses incurred
by the Lender, including, without limitation, the reasonable fees and
disbursements of counsel, in connection with (a) the negotiation, preparation,
execution, delivery, administration, enforcement and termination of this
Agreement and each of the other Loan Documents, whenever the same shall be
executed and delivered, including, without limitation, (i) the out-of-pocket
costs and expenses incurred in connection with the administration and
interpretation of this Agreement and the other Loan Documents, (ii) the costs
and expenses of appraisals of the Collateral, (iii) the costs and expenses of
lien searches, and (iv) taxes, fees and other charges of filing the Financing
Statements and continuations and the costs and expenses of taking other actions
to perfect, protect, and continue the Security Interest; (b) the preparation,
execution and delivery of any waiver, amendment, supplement or consent by the
Lender relating to this Agreement or any of the Loan Documents; (c) sums paid
or obligations incurred in connection with the payment of any amount or taking
any action required of any Borrower under the Loan Documents that such Borrower
fails to pay or take; (d) fees for inspections and verifications of the
Borrower's operations and books and records and of the Collateral conducted
from time to time by Lender including, without limitation, standard per diem
fees charged by the Lender plus out of pocket expenses for travel, lodging, and
meals; (e) costs and expenses of forwarding loan proceeds, collecting checks
and other items of payment, and establishing and maintaining each Disbursement
Account, Agency Account and Lockbox; (f) costs and expenses of preserving and
protecting the Collateral; (g) consulting with and obtaining opinions and
appraisals from one or more Persons, including personal property appraisers,
accountants and lawyers, concerning the value of any Collateral for the Secured
Obligations or related to the nature, scope or value of any right or remedy of
the Lender hereunder or under any of the Loan Documents, including any review
of factual matters in connection therewith, which expenses shall include the
fees and disbursements of such
LOAN AND SECURITY AGREEMENT - PAGE 76
<PAGE> 77
Persons; and (h) costs and expenses paid or incurred to obtain payment of the
Secured Obligations, enforce the Security Interest, sell or otherwise realize
upon the Collateral, and otherwise enforce the provisions of the Loan
Documents, or to prosecute or defend any claim in any way arising out of,
related to, or connected with, this Agreement or any of the Loan Documents,
which expenses shall include the reasonable fees and disbursements of counsel
and of experts and other consultants retained by the Lender.
The foregoing shall not be construed to limit any other provisions of the Loan
Documents regarding costs and expenses to be paid by the Borrowers. The
Borrowers hereby authorize the Lender to debit their respective loan accounts
(by increasing the principal amount of the Revolving Credit Loan) in the amount
of any such costs and expenses owed by the Borrowers when due.
Section 12.3 Stamp and Other Taxes. Each Borrower will pay any
and all stamp, registration, recordation and similar taxes, fees or charges and
shall indemnify the Lender against any and all liabilities with respect to or
resulting from any delay in the payment or omission to pay any such taxes, fees
or charges, which may be payable or determined to be payable in connection with
the execution, delivery, performance or enforcement of this Agreement and any
of the Loan Documents or the perfection of any rights or security interest
thereunder.
Section 12.4 Set-off. In addition to any rights now or hereafter
granted under applicable law, and not by way of limitation of any such rights,
upon and after the occurrence of any Default or Event of Default, the Lender
and any participant with the Lender in the Loans are hereby authorized by each
Borrower at any time or from time to time, without notice to such Borrower or
to any other Person, any such notice being hereby expressly waived, to set off
and to appropriate and to apply any and all deposits (general or special, time
or demand, including, but not limited to, indebtedness evidenced by
certificates of deposit, whether matured or unmatured) and any other
indebtedness at any time held or owing by the Lender or any participant to or
for the credit or the account of any Borrower against and on account of the
Secured Obligations irrespective or whether or not (a) the Lender shall have
made any demand under this Agreement or any of the Loan Documents, or (b) the
Lender shall have declared any or all of the Secured Obligations to be due and
payable as permitted by SECTION 11.2 and although such Secured Obligations
shall be contingent or unmatured.
Section 12.5 Litigation. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, LENDER AND EACH BORROWER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY
WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY
COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST ANY BORROWER OR THE
LENDER ARISING OUT OF THIS AGREEMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF
OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN ANY BORROWER AND
THE LENDER OF ANY KIND OR NATURE. EACH BORROWER AND THE LENDER HEREBY AGREE
THAT THE FEDERAL COURT OF THE NORTHERN DISTRICT OF TEXAS OR, AT THE OPTION OF
THE LENDER, ANY COURT IN WHICH
LOAN AND SECURITY AGREEMENT - PAGE 77
<PAGE> 78
THE LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY AND WHICH SITS IN A
JURISDICTION IN WHICH A BORROWER TRANSACTS BUSINESS SHALL HAVE NON-EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY BORROWER
AND THE LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR THE LOAN
DOCUMENTS OR TO ANY MATTER ARISING THEREFROM. EACH BORROWER EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING
COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND
COMPLAINT OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE
OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET
FORTH IN SECTION 12.1(b), WHICH SERVICE SHALL BE DEEMED MADE UPON RECEIPT
THEREOF. THE NON- EXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL
NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH
FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE THE SAME IN
ANY APPROPRIATE JURISDICTION.
Section 12.6 Reversal of Payments. To the extent any Borrower
makes a payment or payments to the Lender or the Lender receives any payment or
proceeds of the Collateral for any Borrower's benefit, which payment(s) or
proceeds or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside and/or required to be repaid to a
trustee, receiver or any other party under any bankruptcy law, state or federal
law, common law or equitable cause, then, the Lender shall have the continuing
and exclusive right to apply, reverse and re-apply any and all payments to any
portion of the Secured Obligations, and, to the extent of such payment or
proceeds received, the Secured Obligations or part thereof intended to be
satisfied shall be revived and continued in full force and effect, as if such
payment or proceeds had not been received by the Lender.
Section 12.7 Injunctive Relief. Each Borrower recognizes that, in
the event any Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, any remedy of law may prove to
be inadequate relief to the Lender; therefore, each Borrower agrees that the
Lender, at the Lender's option, shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages.
Section 12.8 Accounting Matters. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by
each Borrower to determine whether it is in compliance with any covenant
contained herein, shall, unless there is an express written direction or
consent by the Lender to the contrary, be performed in accordance with GAAP.
Section 12.9 Assignment; Participation. All the provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and
LOAN AND SECURITY AGREEMENT - PAGE 78
<PAGE> 79
assigns, except that no Borrower may assign or transfer any of its rights under
this Agreement. The Lender may assign to one or more Persons reasonably
satisfactory to Borrowers, or sell participations to one or more Persons
reasonably satisfactory to Borrowers in, all or a portion of its rights and
obligations hereunder and under the Notes and, in connection with any such
assignment or sale of a participation, may assign its rights and obligations
under the Security Documents. The Lender may, in connection with any
assignment or proposed assignment or sale or proposed sale of a participation,
disclose to the assignee or proposed assignee or participant or proposed
participant any information relating to the Borrowers furnished to the Lender
by or on behalf of the Borrowers.
Section 12.10 Amendments. Any term, covenant, agreement or
condition of this Agreement or any of the other Loan Documents may be amended
or waived and any departure therefrom may be consented to if, but only if, such
amendment, waiver or consent is in writing signed by the Lender and, in the
case of an amendment, by the Borrowers. Unless otherwise specified in such
waiver or consent, a waiver or consent given hereunder shall be effective only
in the specific instance and for the specific purpose for which given.
Section 12.11 Performance of the Borrowers' Duties. Each
Borrower's obligations under this Agreement and each of the Loan Documents
shall be performed by such Borrower at its sole cost and expense. If any
Borrower shall fail to do any act or thing which it has covenanted to do under
this Agreement or any of the Loan Documents, the Lender may (but shall not be
obligated to) do the same or cause it to be done either in the name of the
Lender or in the name and on behalf of such Borrower, and each Borrower hereby
irrevocably authorizes the Lender so to act.
Section 12.12 Indemnification. Each Borrower, jointly and
severally, shall indemnify, defend, and save harmless Lender and its officers,
directors, employees, agents, and attorneys, and each of them (the "Indemnified
Parties") from and against all claims, actions, suits, and other legal
proceedings, damages, costs, interest, charges, counsel fees, and other
expenses and penalties which any of the Indemnified Parties may sustain or
incur by reason of or arising out of (i) the execution and delivery of this
Agreement or any of the Loan Documents, (ii) the consummation of the
transactions contemplated thereby or hereby, (iii) the exercise by the Lender
of any right or remedy granted to it under this Agreement or any of the Loan
Documents, (iv) any claim, and the prosecution or defense thereof, arising out
of or in any way connected with this Agreement or any of the Loan Documents,
(v) the collection or enforcement of the Secured Obligations or any of them,
(vi) any untrue statement or alleged untrue statement of any material fact by
any Borrower or any Affiliate in any document or schedule filed with the
Securities and Exchange Commission or any other governmental body, (vii) any
omission or alleged omission to state any material fact required to be stated
in any document or schedule set forth in clause (vi) of this SECTION 12.12 or
necessary to make the statements made therein not misleading in light of the
circumstances under which made, or (viii) any acts or omissions, or alleged
acts or omissions of any Borrower, any Affiliate, or their agents related to
the acquisition, purchase, or sale of the securities or assets of any such
Person, or the financing thereof, which are alleged to violate any federal
securities law or any law of any other jurisdiction applicable thereto, other
than losses resulting from such Indemnified Party's gross negligence or willful
LOAN AND SECURITY AGREEMENT - PAGE 79
<PAGE> 80
misconduct, BUT SPECIFICALLY INCLUDING ANY AND ALL LOSSES ARISING FROM ANY
INDEMNIFIED PARTY'S ORDINARY NEGLIGENCE.
Section 12.13 All Powers Coupled with Interest. All powers of
attorney and other authorizations granted to the Lender and any Persons
designated by the Lender pursuant to any provisions of this Agreement or any of
the Loan Documents shall be deemed coupled with an interest and shall be
irrevocable so long as any of the Secured Obligations remain unpaid or
unsatisfied or the Revolving Credit Facility has not been terminated.
Section 12.14 Survival. Notwithstanding any termination of this
Agreement, (a) until all Secured Obligations have been paid in full and the
Revolving Credit Facility terminated, the Lender shall retain its Security
Interest and shall retain all rights under this Agreement and each of the
Security Documents with respect to the Collateral as fully as though this
Agreement had not been terminated, and (b) the indemnities to which the Lender
is entitled under the provisions of this ARTICLE 12 and any other provision of
this Agreement and the Loan Documents shall continue in full force and effect
and shall protect the Lender against events arising after such termination as
well as before.
Section 12.15 Severability of Provisions. Any provision of this
Agreement or any other Loan Document which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remainder of such provision or the remaining provisions hereof or thereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 12.16 Governing Law. This Agreement and the Notes shall be
construed in accordance with and governed by the law of the State of Texas.
Section 12.17 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and shall be binding upon all parties, their successors and assigns, and all of
which taken together shall constitute one and the same agreement.
Section 12.18 Reproduction of Documents. This Agreement, each of
the Loan Documents and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by the Lender, and (c) financial statements,
certificates and other information previously or hereafter furnished to the
Lender, may be reproduced by the Lender by any photographic, photostatic,
microcard, microfilm, miniature photographic or other similar process, and the
Lender may destroy any original document so reproduced. Each party hereto
stipulates that, to the extent permitted by applicable laws any such
reproduction shall be as admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original shall be in
existence and whether or not such reproduction was made by such Lender in the
regular course of business), and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
LOAN AND SECURITY AGREEMENT - PAGE 80
<PAGE> 81
Section 12.19 Funds Transfer Services.
(a) Each Borrower acknowledges that the Lender has made available
to it a description of security procedures regarding funds transfers executed
by the Lender or an affiliate bank at the request of such Borrower (the
"SECURITY PROCEDURES"), a copy of which is attached hereto as EXHIBIT D. The
Borrowers and the Lender agree that the Security Procedures are commercially
reasonable. Each Borrower further acknowledges that the full scope of the
Security Procedures which the Lender or such affiliate bank offers and strongly
recommends for funds transfers is available only if such Borrower communicates
directly with the Lender or such affiliate bank as applicable in accordance
with said procedures. If such Borrower attempts to communicate by any other
method or otherwise not in accordance with the Security Procedures, the Lender
or such affiliate bank, as applicable, shall not be required to execute such
instructions, but if the Lender or such affiliate bank, as applicable, does so,
such Borrower will be deemed to have refused the Security Procedures that the
Lender or such affiliate bank, as applicable, offers and strongly recommends,
and such Borrower will be bound by any funds transfer, whether or not
authorized, which is issued in such Borrower's name and accepted by the Lender
or such affiliate bank, as applicable, in good faith. The Lender or such
affiliate bank, as applicable, may modify the Security Procedures at such time
or times and in such manner as the Lender or such affiliate bank, as
applicable, in its sole discretion, deems appropriate to meet prevailing
standards of good banking practice. By continuing to use the Lender's or such
affiliate bank's, as applicable, wire transfer services after receipt of any
modification of the Security Procedures, each Borrower agrees that the Security
Procedures, as modified, are likewise commercially reasonable. Each Borrower
further agrees to establish and maintain procedures to safeguard the Security
Procedures and any information related thereto.
(b) The Lender or such affiliate bank, as applicable, will
generally use the Fedwire funds transfer system for domestic funds transfers,
and the funds transfer system operated by the Society for Worldwide
International Financial Telecommunication (SWIFT) for international funds
transfers. International funds transfers may also be initiated through the
Clearing House InterBank Payment System (CHIPs) or international cable.
However, the Lender or such affiliate bank, as applicable, may use any means
and routes that the Lender or such affiliate bank, as applicable, in its sole
discretion, may consider suitable for the transmission of funds. Each payment
order, or cancellation thereof, carried out through a funds transfer system or
a clearing house will be governed by all applicable funds transfer system rules
and clearing house rules and clearing arrangements, whether or not the Lender
or such affiliate bank, as applicable, is a member of the system, clearing
house or arrangement and each Borrower acknowledges that the Lender's or such
affiliate bank's, as applicable, right to reverse, adjust, stop payment or
delay posting of an executed payment order is subject to the laws, regulations,
rules, circulars and arrangements described herein.
Section 12.20 Consent to Advertising and Publicity. The Borrowers
agree that the Lender may issue and disseminate to the public information
describing the credit accommodation entered into pursuant to this Agreement,
including the name and address of the Borrowers and the amount and a general
description of the credit facilities provided hereunder.
LOAN AND SECURITY AGREEMENT - PAGE 81
<PAGE> 82
Section 12.21 Final Agreement. This Agreement and the other Loan
Documents are intended by the parties hereto as the final, complete and
exclusive expression of the agreement among them with respect to the subject
matter hereof and thereof. This Agreement and the other Loan Documents
supersede any and all prior oral or written agreements between the parties
hereto relating to the subject matter hereof and thereof.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in Dallas, Texas, by their duly authorized officers in several
counterparts all as of the day and year first written above.
BORROWERS:
Fluid Containment, Inc.
By: /s/ ROBERT B. BENNETT
----------------------------------------
Name: Robert B. Bennett
--------------------------------------
Title: President
-------------------------------------
Hoover Containment, Inc.
By: /s/ ROBERT B. BENNETT
----------------------------------------
Name: Robert B. Bennett
--------------------------------------
Title: Chairman
-------------------------------------
Ershigs, Inc.
By: /s/ R. KEVIN ANDREWS
----------------------------------------
Name: R. Kevin Andrews
--------------------------------------
Title: Treasurer
-------------------------------------
LOAN AND SECURITY AGREEMENT - PAGE 82
<PAGE> 83
SEFCO, Inc.
By: /s/ CRAIG T. SALTON
----------------------------------------
Name: Craig T. Salton
--------------------------------------
Title: President
-------------------------------------
LENDER:
NATIONSBANK OF TEXAS, N.A.
By: /s/ CATHY SHERRILL
----------------------------------------
Name: Cathy Sherrill
--------------------------------------
Title: Vice President
-------------------------------------
LOAN AND SECURITY AGREEMENT - PAGE 83
<PAGE> 84
EXHIBITS AND SCHEDULES
EXHIBIT A FORM OF AMENDMENT
EXHIBIT B FORM OF BORROWING BASE CERTIFICATE
EXHIBIT C FORM OF COMPLIANCE CERTIFICATE
EXHIBIT D WIRING INSTRUCTIONS
EXHIBIT E REAL PROPERTY
EXHIBIT F FORM OF SOLVENCY CERTIFICATE
EXHIBIT G ACTIONS PLANS - OTHER LOCATIONS
EXHIBIT H ACTION PLAN - TULSA
EXHIBIT I SAMPLING PLAN - MT. UNION
EXHIBIT J SAMPLING PLAN - BAKERSFIELD
<TABLE>
<S> <C>
SCHEDULE 5.1(a) Jurisdictions in Which Borrower is Qualified as a Foreign Corporation
SCHEDULE 5.1(b) Borrower's Capital Stock
SCHEDULE 5.1(e) Borrower's Business
SCHEDULE 5.1(f) Exceptions to Governmental Approvals
SCHEDULE 5.1(g) Non Lien Title Exceptions and Defects and Property Disposed of Out of Ordinary Course of Business
SCHEDULE 5.1(h) Liens
SCHEDULE 5.1(i) Indebtedness for Money Borrowed and Guaranties
SCHEDULE 5.1(j) Litigation
SCHEDULE 5.1(k) Tax Returns and Payments
SCHEDULE 5.1(o) ERISA
SCHEDULE 5.1(t) Location of Chief Executive Office
SCHEDULE 5.1(u) Locations of Inventory
SCHEDULE 5.1(v) Locations of Equipment
SCHEDULE 5.1(w) Corporate and Fictitious Names
SCHEDULE 5.1(z) Employee Relations
SCHEDULE 5.1(aa) Proprietary Rights
</TABLE>
LOAN AND SECURITY AGREEMENT - PAGE 94
<PAGE> 1
EXHIBIT 10.17
Owens Corning
13909 East Laurel Lane
Scottsdale, AZ 85259
602.314.210 FAX 314.0940
Transmitted by Facsimile
To: Mr. Robert B. Bennett Date: November 3, 1997
From: Thomas R. DeGroff No. of pages: 2
RE: LETTER OF INTENT RE: PRICING AND SUPPLY
Below is a summary of the price and supply commitment from Owens Corning to
Denali (Fluid Containment, Inc./Ershigs Inc.) in return for the volume
commitment also summarized below.
1. Time - January 1, 1998 through December 31, 2000. Owens Corning and Denali
agree to use the Producer Price Index - Commodities not seasonally adjusted
intermediate materials supplies and components. On [Confidential Treatment
Requested], we will use the [Confidential Treatment Requested] average annual
increase or decrease to determine pricing for the next twelve-month period.
On [Confidential Treatment Requested], we will use the [Confidential
Treatment Requested] average annual increase or decrease to determine pricing
for the following [Confidential Treatment Requested] period. On each
adjustment Owens Corning agrees to limit the maximum increase to
[Confidential Treatment Requested] and Denali agrees to limit the price
decrease to [Confidential Treatment Requested].
2. Pricing for the period January 1, 1998 through [Confidential Treatment
Requested]. Owens Corning will [Confidential Treatment Requested] all items
[Confidential Treatment Requested] per pound January 1, 1998 and hold same
through [Confidential Treatment Requested].
3. Owens Corning will [Confidential Treatment Requested] Denali [Confidential
Treatment Requested] a pound on a quarterly basis provided Denali purchases
[Confidential Treatment Requested] pounds annually. Purchasing goals have
been established using Denali purchasing history. First and second quarter
minimum purchases equal [Confidential Treatment Requested] each, third
quarter equals [Confidential Treatment Requested] and [Confidential
Treatment Requested] in the fourth quarter. Reconciliation will take place
at the end of the calendar year.
<PAGE> 2
4. The January 1, 1998 base price for the items Denali purchases; 495 Gun
Roving, [Confidential Treatment Requested]; 366 Type 30, [Confidential
Treatment Requested], 723 Chopped Strand Mat, [Confidential Treatment
Requested]; 24 oz. Woven Roving [Confidential Treatment Requested]. Denali
has the option to purchase for the Ershigs locations either on a direct
basis or through an Owens Corning distributor. Prices from the distributor
will be capped at a [Confidential Treatment Requested] premium.
5. Denali agrees to purchase 90% of their fiberglass requirements from Owens
Corning.
6. Owens Corning and Denali agree to recognize the current meet or release
clause as per attached.
/s/ THOMAS R. DEGROFF
- ----------------------------
Thomas R. DeGroff
Region Sales Manager
/s/ ROBERT BENNETT
- ----------------------------
Robert Bennett
President
<PAGE> 3
14. MEET OR RELEASE
If Buyer is offered a product of quality similar to one or all of the
Products, in a quantity equal to [Confidential Treatment Requested] of the
quantity of the Product(s) to be manufactured, sold and delivered by Seller
during the [Confidential Treatment Requested], for delivery over the next
[Confidential Treatment Requested], at a delivered price for the next
[Confidential Treatment Requested] which is lower than the price, including the
cost of delivery to Buyer, then in effect under this Agreement, Seller shall,
upon receipt of satisfactory evidence from Buyer of terms and conditions of the
competitive price, [Confidential Treatment Requested], either meet such lower
price or permit Buyer to accept the offer. If Seller elects to meet the lower
price, Seller shall so notify Buyer, in which event the price of the Product(s)
shall be revised to such lower price for a period of time equal to that in
which the competitive price would have remained in effect.
If Seller elects not to meet the lower price, Buyer is released for the
[Confidential Treatment Requested] period to purchase the quantities of the
Product(s) offered by the competitive source and any quantity of product
purchased in response to the competitive offer shall be in satisfaction of the
requirement to purchase an equivalent quantity of the Product(s) hereunder.
<PAGE> 1
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS OF DENALI INCORPORATED
<TABLE>
<CAPTION>
FOR THE PERIOD
THREE MONTHS ENDED YEAR ENDED DECEMBER 19, 1994
----------------------------- ----------------------- (DATE OF INCEPTION)
SEPTEMBER 27, SEPTEMBER 28, JUNE 28, JUNE 29, TO JULY 1,
1997 1996 1997 1996 1995
------------- ------------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding............ 2,184,910 2,184,910 2,184,910 2,184,910 2,078,491
Net effect of dilutive stock
options -- based on the treasury
stock method using average market
price............................... 102,790 39 12,627 -- --
----------- ---------- ---------- ---------- ----------
Total........................ 2,287,700 2,184,949 2,197,537 2,184,910 2,078,491
=========== ========== ========== ========== ==========
Net income (loss)..................... $(1,965,000) $ 293,000 $ 317,000 $ (834,400) $ (43,000)
Preferred stock dividends............. (30,000) (30,000) (120,000) (120,000) (60,000)
----------- ---------- ---------- ---------- ----------
Net income (loss) available for common
shareholders........................ $(1,995,000) $ 263,000 $ 197,000 $ (954,000) $ (103,000)
=========== ========== ========== ========== ==========
Per share amount...................... $ (0.87) $ 0.12 $ 0.09 $ (0.44) $ (0.05)
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
THREE MONTHS ENDED YEAR ENDED DECEMBER 19, 1994
----------------------------- ----------------------- (DATE OF INCEPTION)
SEPTEMBER 27, SEPTEMBER 28, JUNE 28, JUNE 29, TO JULY 1,
1997 1996 1997 1996 1995
------------- ------------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
FULLY DILUTED
Average shares outstanding............ 2,184,910 2,184,910 2,184,910 2,184,910 2,078,491
Net effect of dilutive stock
options -- based on the treasury
stock method using ending market
price............................... 102,790 39 12,627 -- --
----------- ---------- ---------- ---------- ----------
Total........................ 2,287,700 2,184,949 2,197,537 2,184,910 2,078,491
=========== ========== ========== ========== ==========
Net income (loss)..................... $(1,965,000) $ 293,000 $ 317,000 $ (834,000) $ (43,000)
Preferred stock dividends............. (30,000) (30,000) (120,000) (120,000) (60,000)
----------- ---------- ---------- ---------- ----------
Net income (loss) available for common
shareholders........................ $(1,995,000) $ 263,000 $ 197,000 $ (954,000) $ (103,000)
=========== ========== ========== ========== ==========
Per share amount...................... $ (0.87) $ 0.12 $ 0.09 $ (0.44) $ (0.05)
=========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts", "Summary
Consolidated Financial Data" and "Selected Consolidated Financial Data" and to
the use of our reports dated August 27, 1997 (except for Notes 7 and 18 as to
which the date is November 3, 1997), with respect to the consolidated financial
statements and schedule of the Company, dated September 12, 1997 with respect to
the financial statements of Hoover Containment Systems, Inc., dated September
22, 1997 with respect to the financial statements of Ershigs, Inc., and dated
September 9, 1997 with respect to the financial statements of GL&V/LaValley
Construction, Inc. included in Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-36857) and related Prospectus of Denali Incorporated.
ERNST & YOUNG LLP
Houston, Texas
November 3, 1997
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1996 relating to the financial statements
of SEFCO, Inc. in the Registration Statement (Form S-1 No. 333-36857) and
related Prospectus of Denali Incorporated.
GAYNOR AND FAWCETT, INC.
Tulsa, Oklahoma
November 3, 1997
<PAGE> 1
Exhibit 23.03
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 22, 1997 relating to the financial statements
of SEFCO, Inc. in the Registration Statement (Form S-1 No. 333-36857) and
related Prospectus of Denali Incorporated.
LEMING, SCHALLNER & CO.
Tulsa, Oklahoma
November 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-27-1998 JUN-28-1997
<PERIOD-END> SEP-27-1997 JUN-28-1997
<CASH> 450 330
<SECURITIES> 0 0
<RECEIVABLES> 16,813 17,981
<ALLOWANCES> 627 605
<INVENTORY> 7,644 6,686
<CURRENT-ASSETS> 26,640 26,279
<PP&E> 10,066 9,858
<DEPRECIATION> 2,435 2,163
<TOTAL-ASSETS> 41,289 41,084
<CURRENT-LIABILITIES> 19,729 17,688
<BONDS> 19,607 21,758
0 0
1,200 1,200
<COMMON> 22 22
<OTHER-SE> (246) (563)
<TOTAL-LIABILITY-AND-EQUITY> 41,289 41,084
<SALES> 21,979 71,101
<TOTAL-REVENUES> 21,979 71,101
<CGS> 17,149 57,268
<TOTAL-COSTS> 23,286 69,142
<OTHER-EXPENSES> (142) (598)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 607 2,058
<INCOME-PRETAX> (1,752) 610
<INCOME-TAX> 213 293
<INCOME-CONTINUING> (1,965) 317
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,965) 317
<EPS-PRIMARY> (0.87) .09
<EPS-DILUTED> (0.87) .09
</TABLE>
