<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Date of Report (Date of earliest event reported): May 8, 1998
-------------------------------
Commission File Number 000-23353
----------------------------------------------------------
Denali Incorporated
- --------------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 76-0454641
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation of Organization) Identification No.)
1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056
- --------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)
713-627-0933
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Report of Independent Auditors
Balance Sheets as of September 30, 1997, September 30, 1996,
March 31, 1996 and March 31, 1995
Statements of Operations and Accumulated Deficit for the Years
Ended September 30, 1997 and March 31, 1996; the Six Months
Ended September 30, 1996 and Eight Months Ended March 31, 1995
Statements of Cash Flow for the Years Ended September 30, 1997
and March 31, 1996; the Six Months Ended September 30, 1996
and Eight Months Ended March 31, 1995
Notes to Financial Statements
Independent Accountants' Review Report
Balance Sheets as of March 31, 1998 and 1997
Statements of Operations and Accumulated Deficit for the Six
Months Ended March 31, 1998 and 1997
Statements of Cash Flow for the Six Months Ended March 31,
1998 and 1997
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet (Unaudited) as
of March 28, 1998
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the Nine Months Ended March 28, 1998
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited) for the Year Ended June 28, 1997
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
(c) Exhibits
10.1* Stock Purchase Agreement dated April 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and
Specialty Solutions, Inc.
10.2* Amendment to Stock Purchase Agreement dated
May 8, 1998 between Reinforced Plastic Systems Inc.,
CC&E/RPS, Inc., and Specialty Solutions, Inc.
23.1 Consent of Hellam, Varon & Co. Inc. P.S.
- --------------
* Previously filed
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENALI INCORPORATED
-------------------
(Registrant)
Date: July 20, 1998 /s/ R. KEVIN ANDREWS
--------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
3
<PAGE> 4
The Stockholder
C.C. & E./R.P.S., Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheets of the Redmond branch of C.C. &
E./R.P.S., Inc. (a wholly-owned subsidiary of Reinforced Plastic Systems, Inc.)
as of September 30, 1997, September 30, 1996, March 31, 1996 and March 31, 1995,
and the related statements of operations and accumulated deficit and cash flows
for the years and periods 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 audits 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 the Redmond branch of C.C. &
E./R.P.S., Inc. as of September 30, 1997, September 30, 1996, March 31, 1996 and
March 31, 1995, and the results of its operations and its cash flows for the
years and periods then ended in conformity with generally accepted accounting
principles.
HELLAM, VARON & CO. INC. P.S.
Bellevue, Washington
October 17, 1997, except for Note 13, as
to which the date is June 26, 1998
4
<PAGE> 5
CC&E/R.P.S., INC. - REDMOND BRANCH
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996 AND MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
September 30, March 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
Assets
------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 83,823 $ 193,527 $ 155,080 $ 59,136
Certificate of deposit - restricted (Note 4) 11,652 11,073 10,518 10,000
Contract receivables (Notes 3, 5 and 8) 664,540 444,071 1,417,934 1,017,690
Employee advances and other receivables -- 6,000 9,000 11,861
Due from German branch (Note 3) 8,190 -- -- --
Costs and estimated earnings in excess of billings
on uncompleted contracts (Notes 3 and 6) 15,855 987,113 522,382 194,015
Materials and supplies 20,200 80,325 80,325 --
Prepaid expenses 11,794 26,740 85,679 97,317
------------ ------------ ------------ ------------
Total current assets 816,054 1,748,849 2,280,918 1,390,019
------------ ------------ ------------ ------------
Property and equipment (Notes 3, 7 and 8) 956,085 1,606,908 1,293,659 757,342
Less accumulated depreciation 516,961 528,550 392,758 193,916
------------ ------------ ------------ ------------
439,124 1,078,358 900,901 563,426
------------ ------------ ------------ ------------
Other assets:
Dakota project costs (Note 12) -- 2,342,188 2,002,922 --
Deferred development costs 7,009 24,989 33,980 51,961
Contractor bond 4,700 4,700 4,700 4,700
Deposits and other 5,288 5,288 10,954 7,092
------------ ------------ ------------ ------------
16,997 2,377,165 2,052,556 63,753
------------ ------------ ------------ ------------
$ 1,272,175 $ 5,204,372 $ 5,234,375 $ 2,017,198
============ ============ ============ ============
Liabilities and Stockholder's Equity (Deficit)
- ----------------------------------------------
Current liabilities:
Bank overdraft $ -- $ -- $ -- $ 54,685
Short-term debt (Note 8) -- -- -- 110,774
Due to German branch (Note 3) -- 632,052 -- --
Due to parent (Note 3) 11,789,330 8,788,736 8,113,480 252,574
Accounts payable (Note 3) 590,111 2,520,212 2,091,359 657,423
Billings in excess of costs and
estimated earnings on uncompleted
contracts (Notes 3 and 6) 351,420 25,605 654,107 1,164,548
Provision for estimated loss on
uncompleted contracts (Note 3) -- -- 37,668 64,001
Accrued liabilities 189,077 450,226 588,562 221,919
------------ ------------ ------------ ------------
Total current liabilities 12,919,938 12,416,831 11,485,176 2,525,924
------------ ------------ ------------ ------------
Note payable, parent (Note 3) 200,000 200,000 200,000 200,000
------------ ------------ ------------ ------------
Stockholder's equity (deficit):
Common stock - par value $1 per share;
authorized 1,000 shares, issued and
outstanding 492 shares 492 492 492 492
Additional paid-in capital 196,308 196,308 196,308 196,308
Accumulated deficit (12,044,563) (7,609,259) (6,647,601) (905,526)
------------ ------------ ------------ ------------
Total stockholder's deficit (11,847,763) (7,412,459) (6,450,801) (708,726)
------------ ------------ ------------ ------------
Total liabilities and stockholder's deficit $ 1,272,175 $ 5,204,372 $ 5,234,375 $ 2,017,198
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 6
CC&E/R.P.S., INC. - REDMOND BRANCH
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED SEPTEMBER 30, 1997, SIX MONTHS ENDED SEPTEMBER 30, 1996,
YEAR ENDED MARCH 31, 1996 AND EIGHT MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Six Eight
Year Ended Months Ended Year Ended Months Ended
Sep. 30, 1997 Sep. 30, 1996 March 31, 1996 March 31, 1995
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Contract revenues earned (Note 3) $ 2,502,950 $ 2,637,274 $ 16,396,710 $ 3,408,181
Cost of revenues earned (Note 3) 2,280,289 2,854,037 20,811,880 3,278,804
------------ ------------ ------------ ------------
Gross profit (loss) 222,661 (216,763) (4,415,170) 129,377
Selling, general and administrative
expenses 703,453 514,778 1,091,426 356,123
------------ ------------ ------------ ------------
Operating loss (480,792) (731,541) (5,506,596) (226,746)
------------ ------------ ------------ ------------
Other income (expense):
Dakota loss (Note 12) (3,487,448) -- -- --
Interest expense (Note 3) (500,194) (240,684) (274,287) (23,895)
Gain on foreign currency exchange 28,252 9,514 -- --
Other income 4,878 1,053 38,808 6,941
------------ ------------ ------------ ------------
(3,954,512) (230,117) (235,479) (16,954)
------------ ------------ ------------ ------------
Net loss before income taxes (4,435,304) (961,658) (5,742,075) (243,700)
Income taxes (Note 9) -- -- -- --
------------ ------------ ------------ ------------
Net loss (4,435,304) (961,658) (5,742,075) (243,700)
Accumulated deficit:
Beginning of period (7,609,259) (6,647,601) (905,526) (661,826)
------------ ------------ ------------ ------------
End of period $(12,044,563) $ (7,609,259) $ (6,647,601) $ (905,526)
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE> 7
CC&E/R.P.S., INC. - REDMOND BRANCH
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997, SIX MONTHS ENDED SEPTEMBER 30, 1996,
YEAR ENDED MARCH 31, 1996 AND EIGHT MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Six Eight
Year Ended Months Ended Year Ended Months Ended
Sep. 30, 1997 Sep. 30, 1996 March 31, 1996 March 31, 1995
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,435,304) $ (961,658) $(5,742,075) $ (243,700)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 126,244 135,792 199,646 41,149
Provision for doubtful accounts -- -- -- (75,000)
Provision for estimated loss on
uncompleted contracts -- (37,668) (26,333) 64,001
Loss on sale of assets 1,806 -- -- --
(Increase) decrease in assets:
Contracts receivable (220,469) 973,863 (1,168,902) (851,681)
Costs and estimated earnings in excess
of billings 971,258 (464,731) (1,562,631) (164,674)
Dakota project costs (Note 12) 2,342,188 (339,266) -- --
Other assets 98,472 76,041 (53,209) (144,587)
Increase (decrease) in liabilities:
Accounts payable (1,930,101) 428,853 1,433,936 453,950
Billings in excess of costs and
estimated earnings 325,815 (628,502) (510,441) 1,139,681
Accrued liabilities (261,149) (138,336) 366,643 177,749
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (2,981,240) (955,612) (7,063,366) 396,888
----------- ----------- ----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (9,418) (313,249) (536,317) (376,089)
Proceeds from sale of assets (Note 2) 2,500 -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (6,918) (313,249) (536,317) (376,089)
Cash flows from financing activities:
Increase (decrease) in bank overdraft -- -- (54,685) 54,685
Net borrowings from parent and German
branch (Note 2) 2,878,454 1,307,308 7,860,906 252,574
Repayment of debt -- -- (110,774) (293,122)
----------- ----------- ----------- -----------
Net cash provided by financing activities 2,878,454 1,307,308 7,695,447 14,137
----------- ----------- ----------- -----------
Net increase (decrease) in cash (109,704) 38,447 95,764 34,936
Cash at beginning of period 193,527 155,080 59,316 24,380
----------- ----------- ----------- -----------
Cash at end of period $ 83,823 $ 193,527 $ 155,080 $ 59,316
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<PAGE> 8
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company, which began operations in 1990,
constructs fiberglass reinforced plastic industrial equipment for
chemical processing and environmental control as a general contractor
and a subcontractor. The Company stock was acquired by Reinforced
Plastic Systems, Inc. (RPS), a Canadian corporation, in August, 1994.
In December, 1995, the Company changed its legal name to C.C. &
E./R.P.S., Inc. The Company operates as Composite Construction &
Engineering, a division of Reinforced Plastic Systems, Inc. The Company
performs work at job sites throughout the United States, Canada and
Europe; the corporate offices are located in Redmond, Washington.
During April, 1996, the Company established a project management office
in Germany to administer European jobs. These financial statements
include only the operations of the Redmond branch. Prior to the
establishment of the German branch office, all work performed in Europe
was considered operations of the Redmond branch.
YEAR-END CHANGE - The stock of the Company was acquired by RPS on
August 1, 1994, resulting in an eight month reporting period from the
date of acquisition to March 31, 1995. The Company changed its fiscal
year-end in 1996 from March 31 to September 30, to conform with the
reporting period of its parent company. Accordingly, schedules
presented in these notes that provide comparative information, reflect,
where applicable, amounts for the year ended September 30, 1997, the
six months ended September 30, 1996, the year ended March 31, 1996 and
the eight months ended March 31, 1995.
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.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances at a
financial institution located in Western Washington. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000. At
various times during the periods, the Company's cash balances exceeded
these limits.
TRANSLATION OF FOREIGN CURRENCIES - Transactions with RPS are
translated from Canadian or German funds at a rate established by RPS,
which approximates the prevailing rate. Transactions with third parties
are translated at the exchange rate prevailing at the time of the
transaction.
COST AND REVENUE RECOGNITION - Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, measured by the
percentage of production costs incurred to date to estimated total cost
for each contract. This method is used because management considers
overall contract costs incurred to be the best available measure of
progress on these contracts. Revenues from time and material contracts
are recognized on the basis of costs incurred during the period plus
the gross profit earned, measured by the cost-to-cost method. For
financial statement purposes, no profit is recognized until a job is
approximately 40% complete. Because of inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates
used will change within the near term.
8
<PAGE> 9
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
significant estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job
requirements, performance, conditions and estimated profitability,
including those arising from contract penalty provisions and final
contract settlements, may result in revisions to cost and income and
are recognized in the period in which the revisions are determined. An
amount equal to contract costs attributable to claims is included in
revenues when realization is probable and the amount can be estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
MATERIALS AND SUPPLIES - Materials and supplies are stated at the lower
of actual cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is computed using the straight-line method. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or
loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred; significant renewals and
betterments are capitalized.
DEFERRED DEVELOPMENT COSTS - Deferred development costs represent
engineering, marketing, license and travel costs incurred to expand
into new markets. These costs are expensed on the straight-line basis
over three years.
PRODUCT WARRANTY COSTS - Provision for estimated warranty costs is
recorded beginning in the year ended September 30, 1997 and
periodically adjusted to reflect actual experience. At September 30,
1997, accrued liabilities includes approximately $166,400 for estimated
warranty costs.
INCOME TAXES - Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between financial and tax
reporting. A deferred tax asset or liability is determined based on the
differences between the financial and tax bases of assets and
liabilities as measured by the expected tax rates which will be in
effect when these differences reverse. A valuation allowance is
provided for that portion of deferred tax assets for which it is likely
that a tax benefit will not be realized.
Temporary differences arise principally from depreciation methods,
long-term contracts and bad debt recognition.
9
<PAGE> 10
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Prior to July 31, 1993, the Company was taxed under the provisions of
Subchapter S of the Internal Revenue Code.
2. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes totaled $0, $(2,000), $2,000 and
$-0- for the periods ended September 30, 1997, September 30, 1996,
March 31, 1996 and March 31, 1995.
Cash paid for interest totaled $0, $739, $12,115, and $21,667 (net of
$0, $0, $0 and $3,978 capitalized) for the periods ended September 30,
1997, September 30, 1996, March 31, 1996 and March 31, 1995.
Supplemental disclosures of noncash investing and financing activities:
During the period ended September 30, 1997, due to German branch was
offset for property and equipment sold to the German affiliate at net
book value of $518,102.
3. RELATED PARTY TRANSACTIONS
The Company borrows and repays funds to RPS. These unsecured advances
bear interest at 4.75% at September 30, 1997.
The Company has borrowed $200,000 from RPS under a long-term note
agreement. The note requires monthly interest payments at a Canadian
prime rate (5.25% at September 30, 1997) until December, 1998. The note
will then be payable in 48 equal monthly installments. The note is
secured by a field winding machine.
Interest expense on advances and loans from RPS totaled $500,194,
$239,945, $264,239 and $11,937 for the periods ended September 30,
1997, September 30, 1996, March 31, 1996 and March 31, 1995.
Maturities of the $200,000 note in each of the next five years ending
September 30 (assuming interest of 5.25%), are as follows:
<TABLE>
<S> <C>
1998 $ --
1999 $38,498
2000 $47,600
2001 $50,662
2002 $53,921
</TABLE>
10
<PAGE> 11
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Certain of the Company's contracts are executed between RPS and the job
owner. The Company then subcontracts with RPS to perform the work. The
Company also purchases materials from RPS and other related companies
in the ordinary course of business. The financial statements include
the following balances and transactions with related companies:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues invoiced $ -- $1,176,125 $8,374,800 $2,589,462
Included in contracts receivable $ 20,147 $ 307,740 $1,681,149 $ 559,644
Costs and estimated earnings
in excess of billings $ -- $ -- $1,234,264 $ 154,075
Billings in excess of costs and
estimated earnings $ -- $ -- $ 197,261 $ 540,858
Estimated loss on jobs in progress $ -- $ -- $ 37,668 $ 64,001
Management fees paid $ 88,800 $ 44,400 $ 177,600 $ --
Materials and job costs incurred $ -- $ -- $1,434,994 $ 2,615
Equipment purchased $ -- $ 332,215 $ -- $ --
Included in accounts payable $ -- $ 332,215 $ 20,410 $ 2,615
</TABLE>
4. CERTIFICATE OF DEPOSIT - RESTRICTED
The certificate of deposit bears interest at 5.24% and matures August
31, 1998. Any penalties for early withdrawal would not have a material
effect on the financial statements. The certificate of deposit has been
assigned to a security company for a contractors bond.
5. CONTRACTS RECEIVABLE
Contracts receivable consist of the following:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Billed:
Completed contracts $ 23,522 $ 41,206 $ -- $ 2,636
Contracts in progress 543,143 218,800 1,238,211 860,234
Retentions 107,875 194,065 189,723 164,820
---------- ---------- ---------- ----------
674,540 454,071 1,427,934 1,027,690
Less allowance for
doubtful accounts 10,000 10,000 10,000 10,000
---------- ---------- ---------- ----------
$ 664,540 $ 444,071 $1,417,934 $1,017,690
========== ========== ========== ==========
</TABLE>
11
<PAGE> 12
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
At March 31, 1996, $520,219 of contracts in progress and $248,439 of
retentions related to a job which was in litigation at September 30,
1996 (Note 12), were reclassified as a long-term asset.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Costs incurred on uncompleted
contracts $ 1,430,864 $ 3,004,714 $ 20,752,173 $ 2,408,326
Estimated earnings (loss) 85,821 (113,320) (4,053,324) 20,336
------------ ------------ ------------ ------------
1,516,685 2,891,394 16,698,849 2,428,662
Less billings to date 1,852,250 1,929,886 15,596,310 3,399,195
------------ ------------ ------------ ------------
$ (335,565) $ 961,508 $ 1,102,539 $ (970,533)
============ ============ ============ ============
Included in accompanying
balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 15,855 $ 987,113 $ 522,382 $ 194,015
Long-term contracts (Note 12) -- -- 1,234,264 --
Billings in excess of costs
and estimated earnings on
uncompleted contracts (351,420) (25,605) (654,107) (1,164,548)
------------ ------------ ------------ ------------
$ (335,565) $ 961,508 $ 1,102,539 $ (970,533)
============ ============ ============ ============
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Machinery and equipment $ 810,418 $1,439,576 $1,137,319 $ 411,465
Office furniture and equipment 117,803 139,685 128,693 87,220
Vehicles 4,700 4,483 4,483 4,483
Portable building 12,911 12,911 12,911 12,911
Leasehold improvements 10,253 10,253 10,253 --
Assets under construction -- -- -- 241,263
---------- ---------- ---------- ----------
$ 956,085 $1,606,908 $1,293,659 $ 757,342
========== ========== ========== ==========
</TABLE>
Estimated useful lives range from 5 to 10 years for machinery and
equipment, 5 to 7 years for office furniture and equipment, 5 years for
vehicles, 10 years for portable building and the life of the lease for
leasehold improvements.
12
<PAGE> 13
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Depreciation charged to expense was $126,244, $135,792, $198,842 and
$38,035 in the periods ended September 30, 1997, September 30, 1996,
March 31, 1996 and March 31, 1995. Assets under construction at March
31, 1995 represent a field winder and two mandrels which were completed
and used in construction during 1996.
8. SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Note payable with a financing
company; requiring monthly
principal payments of $30,774
plus interest at prime plus 1.5%,
secured by assets of the
Company. The note was paid
in full in April, 1995 $ -- $ -- $ -- $ 30,774
Note payable with a former
owner, requiring monthly
principal payments of $5,000
beginning August, 1995, plus
interest at 7.75% -- -- -- 40,000
Note payable with a former
owner, requiring monthly
principal payments of $5,000
beginning August, 1995, plus
interest at 7.75% -- -- -- 40,000
---------- ---------- ---------- ----------
$ -- $ -- $ -- $ 110,774
========== ========== ========== ==========
</TABLE>
9. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current federal $ -- $ -- $ -- $ --
Deferred federal (1,196,200) (192,700) (1,413,300) (51,200)
Valuation allowance 1,196,200 192,700 1,413,300 51,200
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
13
<PAGE> 14
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The components of deferred tax assets (liabilities) computed in accordance with
SFAS 109 are as follows:
<TABLE>
<CAPTION>
9/30/97 9/30/96 3/31/96 3/31/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net deferred tax items:
Accounts receivable
valuation reserve $ 2,500 $ 2,500 $ 2,500 $ 2,500
Estimated loss on jobs
in progress -- -- 9,400 16,000
Inventory capitalization 113,000 24,200 104,800 12,900
Net operating loss
carryforward 2,800,000 1,675,000 1,390,400 29,200
Depreciation (44,100) (26,500) (24,600) (9,400)
Valuation allowance (2,871,400) (1,675,200) (1,482,500) (51,200)
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
An effective tax rate of 25% is used to estimate deferred taxes based
on management's expectation of future taxable income.
At September 30, 1997, the Company has net operating loss (NOL)
carryforwards for federal income tax purposes of approximately
$11,200,000 which are available to offset future federal taxable income
through fiscal 2012. No benefit for these carryforwards has been
recognized in the financial statements based upon the earnings history
of the Company.
The Tax Reform Act of 1986 contains provisions that limit the NOL
carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. A change in ownership of a company of greater than
50% within a three-year period results in an annual limitation on the
company's ability to utilize its NOLs prior to the ownership change.
Due to changes in ownership that took place in August, 1994, the
Company's use of its operating loss carryforward is subject to such
limitation. The cumulative NOL earned for tax years through December
31, 1994, approximates $294,000. The Company does not expect to utilize
these in a material amount before their expiration in various years
through 2009 and therefore, these amounts are excluded from the
calculation for deferred income taxes.
14
<PAGE> 15
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
10. LEASES
The Company leases its Redmond facility under a long-term lease
agreement, classified as an operating lease, which expires on March 31,
2000. The lease, which began in March, 1995, provides for a free rent
period in September, 1997. Accordingly, deferred lease expense is
recorded to provide a constant expense over the life of the lease. The
lease requires the Company to pay its share of common area charges and
performance under the lease is guaranteed by RPS (Note 3).
Additionally, the Company leases certain vehicles, office furniture and
equipment under operating leases.
The following is a schedule of future minimum lease payments as of
September 30, 1997:
<TABLE>
<CAPTION>
Year ending
September 30 Amount
------------ --------
<S> <C>
1998 $ 87,664
1999 80,567
2000 34,342
--------
$202,573
========
</TABLE>
Rent expense amounted to $80,923, $38,373, $72,010 and $23,386 for the
periods ended September 30, 1997, September 30, 1996, March 31, 1996
and March 31, 1995.
11. PROFIT-SHARING PLAN
During February, 1996, the Company established a profit-sharing (401k)
plan covering substantially all of its nonunion U.S. employees who have
met minimum age and length of service requirements. The Company matches
a percentage of employee contributions, subject to certain limitations.
Profit-sharing expense amounted to $30,225, $18,037, $4,813 and $0 for
the periods ended September 30, 1997, September 30, 1996, March 31,
1996 and March 31, 1995.
15
<PAGE> 16
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
12. DAKOTA PROJECT COSTS
In 1995, the Company and its parent, Reinforced Plastic Systems, Inc.,
commenced legal action against Dakota Gasification Company (DGC) for
wrongful termination of a contract.
In 1996, DGC responded to the Company's action by denying the wrongful
termination suit and commencing their own claim for breach of contract.
As of September 30, 1996, the Company had not recognized any profit or
loss related to this contract, and had recorded manufacturing and
litigation costs incurred in excess of billings of $1,573,530 and
contracts receivable of $768,658 totaling $2,342,188 on its balance
sheet in relation to the DGC project. At March 31, 1996, the Company
had recorded manufacturing and litigation costs incurred in excess of
billings of $1,234,264 and contracts receivable of $768,658 totaling
$2,002,922 on its balance sheet in relation to the DGC project.
The outcome of the suit and countersuit was indeterminable at September
30, 1996, and accordingly no gain or loss had been recorded in the
financial statements.
During August, 1997, the Company and its parent entered into a Release
and Settlement Agreement with both DGC and the Company's bonding
company in order to avoid further litigation expense. The agreement
specifies, among other things, that the settlement is a compromise and
is not to be construed as admissions of liability of any parties.
Accordingly, amounts on the balance sheet at September 30, 1996
totaling $2,342,188, in addition to costs incurred during the year
ended September 30, 1997 (primarily related to litigation expenses) of
$1,145,260 have been charged to income in 1997.
13. SUBSEQUENT EVENT
In May, 1998, all the Company's stock was purchased by Specialty
Solutions, Inc. a wholly-owned subsidiary of Denali Incorporated,
located in Bellingham, Washington. Unsecured advances were paid in full
in connection with the sale through a capital contribution by the
parent company of RPS.
An employee of the Company worked under the terms of an employment
agreement in effect at the date of sale. The Company paid $75,000 as
settlement to terminate the agreement.
16
<PAGE> 17
The Stockholder
C.C. & E./R.P.S., Inc.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
We have reviewed the accompanying balance sheets of the Redmond branch of
C.C.&E./R.P.S., Inc. (a wholly-owned subsidiary of Reinforced Plastic Systems,
Inc.) as of March 31, 1998 and 1997, and the related statements of operations
and accumulated deficit and cash flows for the six months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of C.C. & E./R.P.S., Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
HELLAM, VARON & CO. INC. P.S.
Bellevue, Washington
June 26, 1998
17
<PAGE> 18
C.C. & E./R.P.S., INC. - REDMOND BRANCH
BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets March 31,
------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 149,653 $ 33,712
Certificate of deposit - restricted (Note 4) 11,652 11,073
Contracts receivable (Notes 3 and 5) 381,480 343,096
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 6) 32,321 358,639
Prepaid expenses 61,373 89,579
------------ ------------
Total current assets 636,479 836,099
------------ ------------
Property and equipment (Note 7) 956,685 968,701
Less accumulated depreciation 573,082 456,352
------------ ------------
383,603 512,349
------------ ------------
Other assets:
Deferred development costs -- 15,999
Contractor bond 4,700 4,700
Deposits 5,288 5,288
------------ ------------
9,988 25,987
------------ ------------
$ 1,030,070 $ 1,374,435
============ ============
Liabilities and Stockholder's Equity (Deficit)
----------------------------------------------
Current liabilities:
Due to related parties (Note 3) $ 12,765,245 $ 10,273,891
Accounts payable 216,366 1,441,341
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 6) 222,801 23,624
Accrued liabilities:
Payroll and business taxes 10,604 97,915
Provision for loss on Dakota project (Note 11) -- 611,074
Other 94,372 175,842
------------ ------------
Total current liabilities 13,309,388 12,623,687
------------ ------------
Note payable, parent (Note 3) -- 200,000
------------ ------------
Stockholder's equity (deficit):
Common stock - par value $1 per share;
authorized 1,000 shares, issued and
outstanding 492 shares 492 492
Additional paid-in capital 196,308 196,308
Accumulated deficit (12,476,118) (11,646,052)
------------ ------------
Total stockholder's deficit (12,279,318) (11,449,252)
------------ ------------
Total liabilities and stockholder's deficit $ 1,030,070 $ 1,374,435
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANTS' REVIEW
REPORT.
18
<PAGE> 19
C.C. & E./R.P.S., INC. - REDMOND BRANCH
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Six Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Contract revenues earned $ 1,252,933 $ 1,156,013
Cost of revenues earned 1,048,935 1,083,621
------------ ------------
Gross profit 203,998 72,392
Selling, general and administrative expenses 304,486 411,792
------------ ------------
Operating loss (100,488) (339,400)
------------ ------------
Other income (expense):
Dakota loss (Note 11) -- (3,487,448)
Interest expense (Note 3) (331,073) (236,962)
Gain (loss) on foreign currency exchange (98) 21,302
Other 105 5,715
------------ ------------
(331,066) (3,697,393)
------------ ------------
Net loss before income taxes (431,554) (4,036,793)
Income taxes (Note 8) -- --
------------ ------------
Net loss (431,554) (4,036,793)
Accumulated deficit:
Beginning of period (12,044,564) (7,609,259)
------------ ------------
End of period $(12,476,118) $(11,646,052)
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANTS' REVIEW
REPORT.
19
<PAGE> 20
C.C. & E./R.P.S., INC. - REDMOND BRANCH
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Six Months Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (431,554) $(4,036,793)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 63,129 53,440
Loss on sale of assets -- 1,806
(Increase) decrease in assets:
Contracts receivable 283,060 100,975
Costs and estimated earnings in
excess of billings on uncompleted contracts (16,465) 628,474
Dakota project costs (Note 11) -- 2,342,188
Other assets (29,380) 23,486
Increase (decrease) in liabilities:
Accounts payable (373,745) (1,078,873)
Billings in excess of costs and
estimated earnings on uncompleted contracts (128,619) (1,981)
Accrued liabilities (84,099) 434,607
----------- -----------
Net cash used in operating activities (717,673) (1,532,671)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (600) (849)
Proceeds from sale of assets (Note 2) -- 2,500
----------- -----------
Net cash provided by (used in) investing activities (600) 1,651
----------- -----------
Cash flows from financing activities:
Net borrowings from parent and affiliate (Note 2) 784,102 1,371,205
----------- -----------
Net cash provided by financing activities 784,102 1,371,205
----------- -----------
Net increase (decrease) in cash 65,829 (159,815)
Cash at beginning of period 83,824 193,527
----------- -----------
Cash at end of period $ 149,653 $ 33,712
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANTS' REVIEW
REPORT.
20
<PAGE> 21
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company, which began operations in 1990,
constructs fiberglass reinforced plastic industrial equipment for
chemical processing and environmental control as a general contractor
and a subcontractor. The Company stock was acquired by Reinforced
Plastic Systems, Inc. (RPS), a Canadian corporation, in August, 1994.
In December, 1995, the Company changed its legal name to C.C. &
E./R.P.S., Inc. The Company operates as Composite Construction &
Engineering, a division of Reinforced Plastic Systems, Inc. The Company
performs work at job sites throughout the United States, Canada and
Europe. The corporate offices were located in Redmond, Washington (Note
12). During April, 1996, the Company established a project management
office in Germany to administer European jobs. These financial
statements include only the operations of the Redmond branch. Prior to
the establishment of the German branch office, all work performed in
Europe was considered operations of the Redmond branch.
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.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances at a
financial institution located in Western Washington. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000. At
various times during the year, the Company's cash balances exceeded
these limits.
COST AND REVENUE RECOGNITION - Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, measured by the
percentage of production costs incurred to date to estimated total cost
for each contract. This method is used because management considers
overall contract costs incurred to be the best available measure of
progress on these contracts. Revenues from time and material contracts
are recognized on the basis of costs incurred during the period plus
the gross profit earned, measured by the cost-to-cost method. For
financial statement purposes, no profit is recognized until a job is
approximately 40% complete. Because of inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates
used will change within the near term.
21
<PAGE> 22
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
significant estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job
requirements, performance, conditions and estimated profitability,
including those arising from contract penalty provisions and final
contract settlements, may result in revisions to cost and income and
are recognized in the period in which the revisions are determined. An
amount equal to contract costs attributable to claims is included in
revenues when realization is probable and the amount can be estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is computed using the straight-line method. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or
loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred; significant renewals and
betterments are capitalized.
DEFERRED DEVELOPMENT COSTS - Deferred development costs represent
engineering, marketing, license and travel costs incurred to expand
into new markets. These costs are expensed on the straight-line basis
over three years.
PRODUCT WARRANTY COSTS - Provision for estimated warranty costs is
recorded annually and periodically adjusted to reflect actual
experience. Accrued liabilities include $65,000 and $113,000 for
estimated warranty costs at March 31, 1998 and March 31, 1997,
respectively.
INCOME TAXES - Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between financial and tax
reporting. A deferred tax asset or liability is determined based on the
differences between the financial and tax bases of assets and
liabilities as measured by the expected tax rates which will be in
effect when these differences reverse. A valuation allowance is
provided for that portion of deferred tax assets for which it is likely
that a tax benefit will not be realized.
Temporary differences arise principally from depreciation methods,
long-term contracts and bad debt recognition.
Prior to July 31, 1993, the Company was taxed under the provisions of
Subchapter S of the Internal Revenue Code.
22
<PAGE> 23
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES - Transactions with RPS are
translated from Canadian or German funds at a rate established by RPS,
which approximates the prevailing rate. Transactions with third parties
are translated at the exchange rate prevailing at the time of the
transaction.
2. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Cash paid for both interest and income taxes totaled $-0- in each of
the six months ended March 31, 1998 and 1997.
Supplemental disclosures of noncash investing and financing activities:
During the six months ended March 31, 1997, payable to affiliate was
offset for property and equipment sold to the German affiliate at net
book value of $518,102.
3. RELATED PARTY TRANSACTIONS
The Company borrows and repays funds to RPS. These unsecured advances
of $12,565,245 at March 31, 1998 and $9,929,860 at March 31, 1997
currently bear interest at 6.15%. They were paid in full subsequent to
March 31, 1998 through a capital contribution by the parent company of
RPS.
The Company owed the German branch $344,031 at March 31, 1997 for job
expenses paid on behalf of the Redmond branch. Amounts due from the
German branch of $8,190 were collected during the six months ended
March 31, 1998 and $288,021 due to the German branch was paid during
the six months ended March 31 1997.
The Company has borrowed $200,000 from RPS under a long-term note
agreement. The note requires monthly interest payments at a Canadian
prime rate (6.15% at March 31, 1998) until December, 1998. The note is
secured by a field winding machine and was paid in full subsequent to
March 31, 1998.
Interest expense on advances and loans from RPS totaled $330,562 and
$236,962 for the six months ended March 31, 1998 and 1997,
respectively.
Certain of the Company's contracts are executed between RPS and the job
owner. The Company then subcontracts with RPS to perform the work. The
Company paid management fees to RPS totaling $23,147 and $44,400 for
the six months ended March 31, 1998 and 1997, respectively.
Contracts receivable includes $-0- and $648,243 due from RPS at March
31, 1998 and 1997, respectively.
23
<PAGE> 24
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
4. CERTIFICATE OF DEPOSIT - RESTRICTED
The certificate of deposit bears interest at 5.32% and matures August
31, 1998. Any penalties for early withdrawal would not have a material
effect on the financial statements. The certificate of deposit has been
assigned to a security company for a contractors bond.
5. CONTRACTS RECEIVABLE
Contracts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Billed:
Completed contracts $198,958 $ 34,245
Contracts in progress 2,109 3,852
Retentions 180,413 304,999
-------- --------
$381,480 $343,096
======== ========
</TABLE>
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 1,399,989 $ 3,760,657
Estimated earnings 293,481 184,651
----------- -----------
1,693,470 3,945,308
Less billings to date 1,883,950 3,610,293
----------- -----------
$ (190,480) $ 335,015
=========== ===========
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 32,321 $ 358,639
Billings in excess of costs and estimated
earnings on uncompleted contracts (222,801) (23,624)
----------- -----------
$ (190,480) $ 335,015
=========== ===========
</TABLE>
24
<PAGE> 25
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
1998 1997 useful lives
-------- -------- -------------
<S> <C> <C> <C>
Machinery and equipment $810,419 $810,419 5-10 years
Office furniture and equipment 118,402 130,635 5-7 years
Vehicles 4,700 4,483 5 years
Portable building 12,911 12,911 10 years
Leasehold improvements 10,253 10,253 Life of lease
-------- --------
$956,685 $968,701
======== ========
</TABLE>
Depreciation charged to expense was $56,121 and $44,450 for the six
months ended March 31, 1998 and 1997, respectively.
8. INCOME TAXES
The components of income tax expense for the six months ended March 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current federal $ -- $ --
Deferred federal (100,000) (700,000)
Valuation allowance 100,000 700,000
--------- ---------
$ -- $ --
========= =========
</TABLE>
The components of deferred tax assets (liabilities) computed in accordance with
SFAS 109 are as follows:
<TABLE>
<S> <C> <C>
Net deferred tax items:
Inventory capitalization $ 113,000 $ 68,000
Net operating loss carryforward 2,638,000 2,238,000
Depreciation (46,000) (35,000)
Valuation allowance (2,705,000) (2,271,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
An effective tax rate of 25% is used to estimate deferred taxes based on
management's expectation of future taxable income.
25
<PAGE> 26
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
At March 31, 1998, the Company has net operating loss (NOL)
carryforwards for federal income tax purposes of approximately
$11,000,000 which are available to offset future federal taxable income
through fiscal 2012. No benefit for these carryforwards has been
recognized in the financial statements based upon the earnings history
of the Company.
The Tax Reform Act of 1986 contains provisions that limit the NOL
carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. A change in ownership of a company of greater than
50% within a three-year period results in an annual limitation on the
company's ability to utilize its NOLs prior to the ownership change.
Due to changes in ownership that took place in August, 1994, the
Company's use of its operating loss carryforward is subject to such
limitation. The cumulative NOL earned for tax years through December
31, 1994, approximates $294,000. The Company does not expect to utilize
these in a material amount before their expiration in various years
through 2009 and therefore, these amounts are excluded from the
calculation for deferred income taxes.
9. LEASES
The Company leases its Redmond facility under a long-term lease
agreement, classified as an operating lease, which expires March 31,
2000. The lease, which began in March, 1995, provides for a free rent
period in September, 1997. Accordingly, deferred lease expense is
recorded to provide a constant expense over the life of the lease. The
lease requires the Company to pay its share of common area charges and
performance under the lease is guaranteed by RPS (Note 3).
The following is a schedule of future minimum lease payments as of
March 31, 1998:
<TABLE>
<CAPTION>
Twelve months
ending March 31 Amount
--------------- -------
<S> <C>
1999 $63,456
2000 15,864
-------
$79,320
=======
</TABLE>
Rent expense amounted to $39,486 and $35,666 for the six months ended
March 31, 1998 and 1997, respectively.
10. PROFIT-SHARING PLAN
During February, 1996, the Company established a profit-sharing (401k)
plan covering substantially all of its nonunion U.S. employees who have
met minimum age and length of service requirements. The Company matches
a percentage of employee contributions, subject to certain limitations.
Profit-sharing expense amounted to $8,526 and $18,211 for the six
months ended March 31, 1998 and 1997, respectively.
26
<PAGE> 27
C.C. & E./R.P.S., INC. - REDMOND BRANCH
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. DAKOTA PROJECT COSTS
In 1995, the Company and its parent, Reinforced Plastic Systems, Inc.,
commenced legal action against Dakota Gasification Company (DGC) for
wrongful termination of a contract.
In 1996, DGC responded to the Company's action by denying the wrongful
termination suit and commencing their own claim for breach of contract.
During August, 1997, the Company and its parent entered into a Release
and Settlement Agreement with both DGC and the Company's bonding
company in order to avoid further litigation expense. The agreement
specifies, among other things, that the settlement is a compromise and
is not to be construed as admissions of liability of any parties.
Accordingly, amounts on the balance sheet in addition to costs incurred
and litigation expenses have been charged to income in 1997.
12. SUBSEQUENT EVENT
Subsequent to March 31, 1998, all the Company's stock was purchased by
Specialty Solutions, Inc., a wholly-owned subsidiary of Denali
Incorporated, located in Bellingham, Washington.
An employee of the Company worked under the terms of an employment
agreement in effect at the date of sale. The Company paid $75,000 as
settlement to terminate the agreement.
27
<PAGE> 28
DENALI INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF MARCH 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
------------------------
Denali
Incorporated CC&E(1) Adjustments Pro Forma
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 369 $ 150 $ (35)(a) $ 484
Investment in equity securities 310 11 -- 321
Accounts receivable, net 15,161 414 -- 15,575
Inventories 8,057 -- -- 8,057
Income tax receivable 111 -- -- 111
Prepaid expenses 1,819 61 -- 1,880
Deferred tax assets 769 -- -- 769
-------- -------- -------- --------
Total current assets 26,596 636 (35) 27,197
Property, plant and equipment, net 12,637 384 726(c) 13,747
Assets held for sale 699 -- -- 699
Notes receivable 178 -- -- 178
Goodwill, net 5,714 -- 658(b) 6,372
Deferred tax assets 1,530 -- -- 1,530
Other assets 1,264 10 -- 1,274
-------- -------- -------- --------
Total assets $ 48,618 $ 1,030 $ 1,349 $ 50,997
======== ======== ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 9,049 $ 216 $ -- $ 9,265
Accrued liabilities 4,472 328 385(c) 5,185
Payable to affiliates -- 12,765 (12,765)(b) --
Current maturities of long-term debt 740 -- -- 740
-------- -------- -------- --------
Total current liabilities 14,261 13,309 (12,380) 15,190
Long-term debt, less current maturities 6,421 -- 1,450(a) 7,871
Other long-term liabilities 616 -- -- 616
Commitments and contingencies
Stockholders' equity (deficit):
Common stock 48 1 (1)(b) 48
Additional paid-in capital 29,193 196 (196)(b) 29,193
Retained deficit (1,921) (12,476) 12,476(b) (1,921)
-------- -------- -------- --------
Total stockholders' equity (deficit) 27,320 (12,279) 12,279 27,320
-------- -------- -------- --------
Total liabilities and stockholders' equity $ 48,618 $ 1,030 $ 1,349 $ 50,997
======== ======== ======== ========
(1) Unaudited balance sheet as of March 31, 1998.
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE> 29
DENALI INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED MARCH 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
---------------------------------------------------
Denali
Incorporated LaValley(1) SEFCO(1) CC&E(2) Adjustments Pro Forma
------------ ----------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 68,480 $ 2,952 $ 3,080 $ 2,098 $ -- $ 76,610
Cost of sales 53,634 2,362 2,070 1,754 87(f)
(67)(g) 59,840
-------- -------- -------- -------- -------- --------
Gross profit 14,846 590 1,010 344 (20) 16,770
SG&A expense 12,218 410 638 450 (245)(h)
44(i) 13,515
Non-recurring
compensation expense 2,312 -- -- -- 2,312
-------- -------- -------- -------- -------- --------
Operating income (loss) 316 180 372 (106) 181 943
Interest expense 1,302 46 -- -- 314(j) 1,662
Interest income (105) -- (17) -- 17 (105)
Other (income) expense, net (278) (38) (4) 469 -- 149
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes (603) 172 393 (575) (150) (763)
Provision (benefit) for
income taxes 647 65 178 1 (302)(k) 589
-------- -------- -------- -------- -------- --------
Net income (loss) before
extraordinary item (1,250) 107 215 (576) 152 (1,352)
Extraordinary income on
early extinguishment of
debt, net of income tax 219 219
-------- --------
Net loss (1,031) (1,133)
Dividends on Series A
Preferred Stock (30) (30)
-------- --------
Net loss attributable to
common stock $ (1,061) $ (1,163)
======== ========
Net loss per common share:
Loss before extraordinary item $ (0.38) $ (0.41)
Extraordinary item 0.07 0.07
-------- --------
Net loss per common share $ (0.31) $ (0.34)
======== ========
Number of shares used to
compute net loss per share 3,374 3,374
======== ========
</TABLE>
(1) Reflects results of LaValley's and SEFCO's operations for the period
from July 1, 1997 to October 31, 1997 (unaudited), the date of
acquisition by the Company. LaValley's and SEFCO's results of
operations subsequent to October 31, 1997 are reflected in the Denali
Incorporated historical results.
(2) Reflects results for CC&E's operations for the period from July 1, 1997
to March 31, 1998 (unaudited).
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE> 30
DENALI INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
TWELVE MONTHS ENDED JUNE 28, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------
Denali
Incorporated Ershigs(1) LaValley(2) SEFCO(3) CC&E(4) Adjustments Pro Forma
------------ ---------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 71,101 $ 15,918 $ 7,877 $ 10,032 $ 2,675 $ -- $ 107,603
Cost of sales 57,268 14,889 6,353 7,602 2,966 (162)(d)
(146)(e)
176 (f)
(206)(g) 88,740
--------- --------- --------- --------- --------- --------- ---------
Gross profit (loss) 13,833 1,029 1,524 2,430 (291) 338 18,863
SG&A expense 11,874 3,184 1,157 1,485 849 162 (d)
(17)(e)
(480)(h)
106 (i) 18,320
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) 1,959 (2,155) 367 945 (1,140) 567 543
Interest expense 2,058 329 174 -- 526 836 (j) 3,923
Interest income (111) -- -- (45) -- 45 (111)
Other (income) expense, net (598) 47 23 (16) 3,445 -- 2,901
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes 610 (2,531) 170 1,006 (5,111) (314) (6,170)
Provision (benefit) for income
taxes 293 (962) 79 362 -- (2,240)(k) (2,468)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) 317 (1,569) 91 644 (5,111) 1,926 (3,702)
Dividends on Series A Preferred
Stock (120) (120)
--------- ---------
Net income (loss) attributable
to common stock $ 197 $ (3,822)
========= =========
Net income (loss) per common
share $ 0.09 $ (1.74)
========= ========
Number of shares used to
compute net income (loss)
per share 2,198 2,198
========= ========
</TABLE>
(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).
(4) Reflects results of CC&E's operations for the period from July 1, 1996
to June 30, 1997 (unaudited).
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE> 31
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
March 28, 1998. The pro forma condensed consolidated statement of
operations assumes all Acquisitions described in Note 3 were
consummated as of the beginning of the periods 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 periods presented or that
might be attained in the future. Certain information normally included
in the 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
("SEC"). 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 in the
Company's Prospectus dated November 20, 1997 and Quarterly Report on
Form 10-Q for the quarterly period ended March 28, 1998, previously
filed with the SEC.
2. EARNINGS PER SHARE
Pro forma earnings per share were computed by dividing net income (or
loss) applicable to common stock by the weighted average number of
shares of common stock, common stock equivalents outstanding during the
period and the dilutive effect of common stock equivalents issued
within one year prior to the Offering. The number of shares of common
stock and common stock equivalents has been retroactively adjusted for
the 1715-for-1 stock split. Common stock equivalents consisted of the
number of shares issuable on exercise of the outstanding stock options
less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of
the common stock during the period. The dilutive effect of common stock
issued within one year prior to the Offering for the periods prior to
issuance was determined in the same manner except that the Offering
price of $13 per share was used for the repurchase price.
3. ACQUISITIONS
The acquisitions by the Company have been accounted for as purchases
and, accordingly, the results of operations of the acquired companies
have been included in the consolidated results of operations of the
Company from the date of acquisition.
31
<PAGE> 32
DENALI INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 aboveground storage tanks. 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.
In October 1997, the Company acquired LaValley Construction, Inc.
("LaValley") for approximately $3.9 million in cash and acquisition
costs of approximately $100,000. LaValley manufactures engineered FRP
products.
In May 1998, the Company purchased 100 percent of the outstanding stock
of CC&E, a leading North American field constructor of
fiberglass-reinforced plastic products. The purchase price totaled
$1,600,000.00 in cash. Reinforced Plastic Systems may also receive
contingent payments of up to $400,000.00 based on an increase in the
level of bookings as defined in the purchase agreement.
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. Payments of any contingent
consideration as described above will increase the amount of goodwill
related to such acquisition.
32
<PAGE> 33
DENALI INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. ADJUSTMENTS OF 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 acquisition of CC&E described in Note 3 as if it had occurred as of
March 28, 1998 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 periods presented:
(a) To reflect the acquisition of CC&E and the borrowings under
the Company's senior credit agreement to fund this
acquisition, net of cash acquired at CC&E.
(b) To reflect, in connection with the acquisition of CC&E, 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 CC&E, the
estimated fair market value of assets purchased and
liabilities assumed.
(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
the acquisition of Ershigs.
(f) To reflect the change in depreciation expense resulting from
the purchase accounting step-up of the acquisitions of
LaValley and CC&E 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, SEFCO and CC&E, 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, SEFCO and CC&E in excess of
historical interest expense.
(k) To reflect the change in income taxes related to pro forma
adjustments.
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
10.1* Stock Purchase Agreement dated April 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and Specialty
Solutions, Inc.
10.2* Amendment to Stock Purchase Agreement dated May 8, 1998
between Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and
Specialty Solutions, Inc.
23.1 Consent of Hellam, Varon & Co. Inc. P.S.
- --------------
</TABLE>
* Previously filed
<PAGE> 1
EXHIBIT 23.1
C.C.&E./R.P.S., INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the Registration Statement (Form S-8
No. 333-51783) pertaining to the Denali Incorporated 1997 Incentive Stock Option
Plan of our report dated October 17, 1997, except for Note 13, as to which the
date is June 26, 1998, with respect to the financial statements of
C.C.&E./R.P.S., Inc., included in the Current Report on Form 8-K/A of Denali
Incorporated.
HELLAM, VARON & CO. INC. P.S.
Bellevue, Washington
July 20, 1998
