DENALI INC, 10-K405, 1998-09-15

DENALI INC
10-K405, 1998-09-15
BUSINESS SERVICES, NEC

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998

Commission File Number 000-23353
---------------------------------------------------------

Denali Incorporated
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Delaware 76-0454641
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

713-627-0933
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of September 1, 1998, there were 4,828,743 shares of Common Stock of the
Registrant outstanding. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $53.1 million
based upon the closing price of $11.00 on August 31, 1998.

Documents incorporated by reference. Certain portions of the Registrant's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders ("Proxy
Statement") are incorporated in Part III by reference.

<PAGE> 2

DENALI INCORPORATED
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 27, 1998

INDEX

Page No.
-------
PART I

<S> <C> <C>
Item 1. Business....................................................................................1
Item 2. Properties..................................................................................7
Item 3. Legal Proceedings...........................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.........................................8

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................9
Item 6. Selected Financial Data.....................................................................9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................11
Item 7A. Quantitative and Qualitative Disclosures About Market Risks................................17
Item 8. Financial Statements and Supplementary Data................................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................17

PART III

Item 10. Directors and Executive Officers of the Registrant.........................................18
Item 11. Executive Compensation.....................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................18
Item 13. Certain Relationships and Related Transactions.............................................18

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................19
</TABLE>

Signatures

Index to Exhibits

<PAGE> 3

PART I

ITEM 1. BUSINESS

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 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.

The Company's objective is to become a 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.

PRODUCTS AND SERVICES

The Company's operations are divided into two groups: Containment Products
and Engineered Products. For a discussion of certain industry segment data, see
Note 16 of Notes to the Consolidated Financial Statements included herein.

Containment Products. The Company's Containment Products Group, "Containment
Solutions", specializes in the manufacture of fiberglass composite USTs and
steel ASTs, primarily for petroleum storage. The Company's fiberglass composite
USTs, manhole products and oil/water separators are marketed under the Fluid
Containment tradename and its steel ASTs are marketed under the Hoover and
LubeCube(R) tradenames.

Engineered Products. The Company's Engineered Products Group, "Specialty
Solutions", provides engineered containment and material solutions to a variety
of industries, including chemical process, pulp and paper, power, and water and
wastewater. The Company markets its engineered fiberglass reinforced plastic
("FRP") products under the Ershigs and Fibercast tradenames 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 operation focuses its operations on
complex projects, where custom engineering and special manufacturing expertise
are critical.

<PAGE> 4

ACQUISITION HISTORY

The Company has acquired seven businesses since its inception. A brief
description of these acquisitions is as follows:

Acquired Company Date Acquired Products
---------------- ------------- --------
<S> <C> <C>
Containment Solutions:
Fluid Containment, Inc. December 1994 Fiberglass USTs, oil/water separators,
manhole products
Hoover Containment, Inc. October 1995 Steel ASTs, lubricant storage tanks
Specialty Solutions:
Ershigs, Inc. February 1997 Engineered FRP products
SEFCO, Inc. October 1997 Field erected aboveground steel tanks
LaValley October 1997 Engineered FRP products
CC&E May 1998 Field constructed FRP products
Fibercast June 1998 FRP piping systems
</TABLE>

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 the Company
and one other fiberglass composite UST supplier. 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. Most of the
steel UST manufacturers are small, independent operations, although several are
divisions or subsidiaries of larger corporations with financial resources
greater than that of the Company. 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.

The Company's steel ASTs are sold in highly fragmented and competitive
markets, with over 240 steel AST manufacturers operating in North America.
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. 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. 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 steel
AST market.

With respect to engineered FRP products, the Company participates in a
highly fragmented market where it believes that most of its competitors are
small regional fabrication businesses, except for the corrosion resistant pipe
and piping systems which also compete with two large public companies. The
Company believes that its field-erection capabilities and its performance
warranty, together with its engineering capabilities, quality reputation,
history of performance and effective customer service, provide the Company with
competitive advantages in the engineered FRP products market.

<PAGE> 5

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, 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

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 5% of the Company's fiberglass composite UST
net sales in fiscal 1998. 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.

The Company uses its sales staff and outside sales representatives to market
its steel AST products to the end user through a network of PEI distributors and
contractors. The customer base for its steel ASTs is broad, having over 900
accounts. In fiscal 1998, no customer accounted for greater than 6% of the
Company's steel AST net sales.

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.

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.

MATERIALS AND SUPPLIERS

Owens Corning and the Company were 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 was
required to supply and the Company was required to purchase at least 80% of the
Company's Containment Solutions group fiberglass requirements through December
31, 1997. The Company entered into a supply contract with Owens Corning
beginning January 1, 1998, to supply at least 90% of the fiberglass requirements
for two of the Company's subsidiaries, Fluid Containment and Ershigs, 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.

<PAGE> 6

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 12 months.

For the Company's steel fabrication businesses, the principal materials used
are standard steel shapes, steel plates, 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 with respect to these
materials.

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, based on the Company's operating experience and consultations
with its independent insurance risk advisors, it 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 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.

<PAGE> 7

EMPLOYEES

At June 27, 1998, the Company employed 930 employees. Four collective
bargaining agreements cover 299 employees in California, Pennsylvania, Texas and
Washington. All of these agreements expire between October 1998 and December
2001. The Company is currently negotiating with its Pennsylvania bargaining unit
to renew the agreement expiring in October 1998 and does not anticipate any
material adverse effect to its consolidated financial statements. The Company
considers its employee relations to be good.

RISK FACTORS

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 seven 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.

Need for Additional Capital, Leverage and Liquidity. The Company has
experienced and expects to continue to experience substantial working capital
needs to fund its 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.

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.

<PAGE> 8

Competition. The markets for the Company's products are fragmented and
highly competitive. Although none of the Company's competitors are 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.

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. Based on the Company's
operating experience and consultation with its independent insurance risk
advisors, 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.

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 entered into a supply contract with
Owens Corning pursuant to which the Company agreed to purchase, and Owens
Corning agreed to supply, at least 80% of the Company's fiberglass composite UST
requirements through December 31, 1997. The Company entered into a new supply
contract with Owens Corning beginning January 1, 1998 to supply at least 90% of
the fiberglass requirements for two of the Company's subsidiaries, Fluid
Containment and Ershigs, 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.

<PAGE> 9

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.

Stephen T. Harcrow, Chairman of the Board and Chief Executive Officer of the
Company, was diagnosed in January 1998 with enlarged lymphatic nodes within the
abdominal cavity determined to be malignant. Mr. Harcrow continues to perform
his duties as Chairman of the Board and Chief Executive Officer of the Company,
but there is no assurance as to how long he will be able to continue to do so.
Mr. Ed de Boer, Chief Operating Officer of the Company since November 1, 1997,
was elected President of the Company on January 29, 1998 and continues to serve
as Chief Operating Officer.

ITEM 2. PROPERTIES

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 following table
sets forth the Company's principal manufacturing plants and offices:

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
Solutions Group headquarters
Mount Union, PA(2)....................... 110,000 Owned Manufacturing plant
Bakersfield, CA(3)(4).................... 73,000 Owned Manufacturing plant

Steel Aboveground Storage Tanks
Baltimore, MD............................ 63,000 Leased(5) Manufacturing plant and
administrative offices
Bakersfield, CA(4) ...................... 73,000 Owned Manufacturing plant

Lebanon, PA.............................. 97,850 Leased(6) Manufacturing plant

Engineered Fiberglass Reinforced Composite
Products
Bellingham, WA........................... 63,000 Owned Manufacturing plant and
administrative offices
Wilson, NC............................... 47,000 Owned Manufacturing plant
Biloxi, MS............................... 29,000 Owned Manufacturing plant
</TABLE>

<PAGE> 10

Approximate Leased
Area or
(Sq.Ft.) Owned Uses
---------- ------- ----
<S> <C> <C> <C>
Engineered Field-Erected Steel Tanks
Tulsa, OK(7)............................. 33,000 Owned Manufacturing plant and
administrative offices

Fiberglass-reinforced Plastic Piping
Systems
Sand Springs, OK(8)...................... 244,058 Owned Manufacturing plant and Specialty
Solutions Group headquarters
</TABLE>

- ----------

(1) Facility is located on 65 acres.
(2) Facility is located on 24 acres.
(3) Facility is located on 20 acres.
(4) Shared facility.
(5) Lease expires in 2004.
(6) Lease expires in 2003.
(7) Facility is located on 12 acres.
(8) Facility is located on 16 acres.

ITEM 3. LEGAL PROCEEDINGS

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. 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

<PAGE> 11

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "DNLI". The Company's Common Stock commenced trading on November 21,
1997. The high and low sales prices per share for the periods indicated were as
follows:

High Low
---- ---
<S> <C> <C>
Period from November 21, 1997 to December 27, 1997 $13.500 $12.250
Quarter Ended March 28, 1998 $17.000 $12.750
Quarter Ended June 27, 1998 $18.250 $14.875
</TABLE>

As of August 31, 1998, there were 38 holders of record of the outstanding
shares of Common Stock of the Company.

The Company does not currently intend to declare or pay dividends on its
Common Stock and expects to retain funds generated by operations for the
development and growth of the Company's business. The Company's future dividend
policy will be determined by the Company's Board of Directors on the basis of
various factors, including among other things, the Company's financial
condition, cash flows from operations, the level of its capital expenditures,
its future business prospects, the requirements of Delaware law and any
restrictions imposed by the Company's credit facilities. Under the Company's
credit facilities, distributions in the form of dividends and stock repurchases
are limited to 25% of the Company's consolidated net income for the preceding
fiscal year.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.

9
<PAGE> 12

For the period
December 19,
1994 (date of
inception) to Year Ended Year Ended Year Ended
July 1, June 29, June 28, June 27,
1995 1996 1997 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................... $ 17,799 $ 53,354 $ 71,101 $ 99,897
Cost of sales ........................... 13,473 43,518 57,268 77,273
-------- -------- -------- --------
Gross profit ............................ 4,326 9,836 13,833 22,624
Selling, general and administrative
expenses ............................. 3,771 9,604 11,874 17,843
Non-recurring compensation expense ...... -- -- -- 2,312
-------- -------- -------- --------
Operating income ........................ 555 232 1,959 2,469
Interest expense ........................ 671 1,783 2,058 1,614
Interest income ......................... -- (65) (111) (118)
Other income, net ....................... (72) (206) (598) (489)
-------- -------- -------- --------
Income (loss) before income taxes ....... (44) (1,280) 610 1,462
Income tax provision (benefit) .......... (1) (446) 293 1,352
-------- -------- -------- --------
Net income (loss) before extraordinary
item ................................ (43) (834) 317 110
Extraordinary item ...................... -- -- -- 219
-------- -------- -------- --------
Net income (loss) ....................... (43) (834) 317 329
Dividends on Series A Preferred
Stock ............................... (60) (120) (120) (30)
-------- -------- -------- --------
Net income (loss) attributable to
Common Stock ........................ $ (103) $ (954) $ 197 $ 299
======== ======== ======== ========
Net income (loss) per common share -
basic and diluted ................... $ (0.05) $ (0.44) $ 0.09 $ 0.08
======== ======== ======== ========
Weighted average common shares
outstanding assuming dilution ....... 2,078 2,185 2,198 3,875
======== ======== ======== ========

CASH FLOW DATA:
Net cash provided by (used in)
operating activities ................ $ 3,789 $ (109) $ 625 $ 3,854
Net cash used in investing activities ... (7,527) (5,430) (4,631) (31,126)
Net cash provided by financing
activities .......................... 4,737 4,664 4,212 27,117

OTHER DATA:
Depreciation and amortization ........... $ 354 $ 913 $ 1,221 $ 1,692
EBITDA(1) ............................... 981 1,416 3,889 7,080

As of
-----------------------------------------------------
July 1, June 29, June 28, June 27,
1995 1996 1997 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 3,192 $ 5,649 $ 8,019 $ 14,141
Total assets............................... 21,814 30,318 41,084 80,382
Total debt................................. 13,810 18,661 24,024 29,896
Series A Preferred Stock (redeemable)...... 1,200 1,200 1,200 --
Stockholders' equity (deficit)............. $ 216 $ (738) $ (541) $ 28,674
</TABLE>

- ----------
(1) EBITDA represents consolidated net income before interest expense, income
tax, depreciation and amortization, non-recurring compensation expense and
extraordinary items. The Company believes that EBITDA is a meaningful
measure of its operating performance; however, EBITDA should not be
considered in isolation from or as a substitute for net income or cash flow
measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. In
addition, EBITDA may not be comparable to similarly titled measures reported
by other companies.

<PAGE> 13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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

OVERVIEW

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

Since inception in 1994, the Company has acquired seven businesses. Due to
the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of current or
future periods. Each of the acquisitions has been accounted for under the
purchase method of accounting. Accordingly, the acquired businesses have been
included in the Company's results of operations from the date of acquisition.

Containment Products Group - "Containment Solutions"

The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite UST business of Owens
Corning, including five manufacturing facilities. The Company closed two of the
manufacturing facilities and significantly restructured the operations of this
business at the time of purchase.

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

Engineered Products Group - "Specialty Solutions"

In February 1997, the Company acquired Ershigs, a manufacturer of
engineered FRP products, as the first of the Company's Engineered Products
Group. Substantial operational changes were made upon the purchase of Ershigs,
including the closing of one of Ershigs' three manufacturing plants and the
restructuring of most of Ershigs' sales, general and administrative functions,
which enabled the Company to enhance profitability.

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

<PAGE> 14

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

In June 1998, the Company acquired Fibercast Company, a leading
manufacturer of fiberglass-reinforced plastic piping systems specializing in
highly corrosive environments. Fibercast will remain an autonomous operation
within the Specialty Solutions Group. Fibercast, Ershigs and SEFCO form the
Company's Engineered Products Group known as Specialty Solutions.

The following table indicates the Company's net sales by segment for fiscal
1996, 1997 and 1998:

Year Year Year
Ended Ended Ended
June 29, June 28, June 27,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net Sales by Segment:
Containment Solutions... $53.4 $64.8 $71.5
Specialty Solutions .... -- 6.3 28.4
----- ----- -----
Total net sales.. $53.4 $71.1 $99.9
===== ===== =====
</TABLE>

RESULTS OF OPERATIONS

The following table sets forth for fiscal 1996, 1997 and 1998, the
percentage relationship to net sales of certain expenses and earnings:
<TABLE>
<CAPTION>

As a Percentage of Net Sales
-------------------------------
Year Year Year
Ended Ended Ended
June 29, June 28, June 27,
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 81.6 80.5 77.4
----- ----- -----
Gross profit ............................... 18.4 19.5 22.6
----- ----- -----
Selling, general and administrative
expenses .................................. 18.0 16.7 17.8
Non-recurring compensation expense ......... -- -- 2.3
----- ----- -----
Operating income ........................... 0.4 2.8 2.5
Interest expense ........................... 3.3 2.9 1.6
Interest income ............................ (0.1) (0.2) (0.1)
Other income, net .......................... (0.4) (0.8) (0.5)
----- ----- -----
Income (loss) before income taxes .......... (2.4) 0.9 1.5
Income tax provision (benefit) ............. (0.8) 0.4 1.4
----- ----- -----
Net income (loss) .......................... (1.6)% 0.5% 0.1%
===== ===== =====
</TABLE>

FISCAL 1998 COMPARED WITH FISCAL 1997

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

<PAGE> 15

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

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

Selling, general and administrative expenses increased $5.9 million, or
50%, to $17.8 million in fiscal 1998 from $11.9 million in fiscal 1997,
excluding the $2.3 million compensation charge taken in fiscal 1998. The
increase is attributable to additional expenses associated with the acquired
companies at Specialty Solutions and increased sales and marketing expenses at
Containment Solutions. Selling, general and administrative expenses increased as
a percentage of net sales from 16.7% in fiscal 1997 to 17.8% in fiscal 1998.

The Company recognized a $2.3 million non-recurring compensation charge in
the first quarter of fiscal 1998 due to the exchange of subsidiary stock options
for Denali stock options.

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

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

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

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

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.

<PAGE> 16

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 Solutions 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. In fiscal 1996,
demand for fiberglass and resin exceeded supply, and the Company's principal
suppliers of fiberglass and resin increased prices. By fiscal 1997, additional
capacity was provided in the marketplace and prices declined. The gross profit
margin for the Company's Specialty Solutions 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.

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 Solutions group.

Due to the factors described above, net income for fiscal 1997 was
$197,000, or $0.09 per share, compared with a net loss of $954,000, or $(0.44)
per share, for fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 27, 1998 was $14.1 million, as compared to $8.0
million at June 28, 1997. Cash provided by operating activities was $3.8 million
for fiscal 1998 and $625,000 in fiscal 1997. The improvement in cash provided by
operating activities resulted primarily from a $2.3 million increase in net
income, adjusted to exclude the non-cash, non-recurring compensation expense of
$2.3 million in fiscal 1998. Capital expenditures totaled $3.1 million and
$600,000 in fiscal 1998 and fiscal 1997, respectively.

As further described in Note 6 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 $299,000 in October 1997. In fiscal 1998, the Company
prepaid a $7.5 million note payable to Owens Corning, originating from the
Company's acquisition of the fiberglass composite UST business of Owens Corning.
The early repayment resulted in gains of $975,000 for partial forgiveness of
principal and interest on the note. As a result of these transactions, the
Company incurred a net extraordinary gain of $353,000 ($219,000 net of tax) for
the fiscal year ended June 27, 1998.

<PAGE> 17

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 $29.2
million. As of June 27, 1998, the Company had outstanding indebtedness of $5.8
million under the term loans and $19.5 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 6 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 1.25% to 2.50%, depending on a leverage calculation,
or the prime rate plus a margin ranging from 0% to .25%. The Credit Facility has
a five-year term expiring in October 2002.

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 9.875% per annum, mature in February 2001
and are secured by the Company's Conroe, Texas manufacturing facility.

The Company assumed $3.5 million of term debt with a financial institution
in connection with its acquisition of Fibercast in June 1998. The term debt
bears interest at prime plus .50%. Monthly principal payments of $58,500 plus
interest are due monthly beginning August 1998 and the facility expires in
February 2001.

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 $47.2 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 1997 and 1998:

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 17,703 $ 16,970 $ 13,906 $ 22,522 $ 21,979 $ 24,914 $ 21,587 $ 31,417
Gross profit 3,754 3,208 2,088 4,783 4,830 5,731 4,295 7,768
Operating income 968 666 (542) 867 (1,307)* 1,310 313 2,153
(loss)
Income (loss) before
extraordinary item 293 130 (487) 381 (1,965) 580 135 1,360
Extraordinary item -- -- -- -- -- (19) 238 --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 293 $ 130 $ (487) $ 381 $ (1,965) $ 561 $ 373 $ 1,360
</TABLE>

* Results for the first quarter of fiscal 1998 include the non-recurring
compensation expense of $2.3 million.

<PAGE> 18

Fiscal Year ended June 28, 1997 Fiscal Year ended June 27, 1998
----------------------------------------------- --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic-net income
(loss) per share
before extra-
ordinary item $ 0.12 $ 0.05 $ (0.24) $ 0.16 $ (0.91) $ 0.18 $ 0.03 $ 0.28
Diluted-net income
(loss) per share
before extra-
ordinary item $ 0.12 $ 0.04 $ (0.24) $ 0.16 $ (0.91) $ 0.17 $ 0.03 $ 0.28
</TABLE>

IMPACT OF YEAR 2000 ISSUES

Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

The Company has completed the assessment of its computer software, hardware
and other systems, including embedded technology, relative to year 2000
compliance. The Company is currently updating some of its software and hardware
in order to improve the timeliness and quality of its business information
systems. A byproduct of these improvements includes year 2000 compliance
software in certain operating subsidiaries that otherwise are not year 2000
compliant today. Software selection at these subsidiaries has been completed and
implementation has begun with anticipated completion ranging from December 1998
to June 1999. With this schedule, the year 2000 issue is not expected to pose
significant operational problems for the Company's computer systems. Because
conversions for business reasons are leading to year 2000 compliance, the
Company does not expect incremental expense for year 2000 compliance.

The Company plans to complete its assessment of key vendors, customers and
other third parties by the end of calendar year 1998 in order to assess the
impact, if any, on the Company's business operations. The Company does not
anticipate that any interruptions in its customers' operations resulting from
year 2000 issues will have a material impact on the Company's operations or
financial results. With respect to suppliers, the Company relies on several key
suppliers for resin and fiberglass used in its operations, and interruptions in
these suppliers' operations resulting from year 2000 problems could impact the
Company's operations and financial results. However, there are alternative
suppliers for these materials, and the Company anticipates that it would be able
to obtain sufficient raw materials to continue to conduct its business.

Because the Company anticipates that it will complete its year 2000
remediation efforts in advance of December 31, 1999, it has not made any
contingency plans with respect to its operations and systems. However, if the
software changes and modifications of existing software are not made, or are not
completed timely, the year 2000 issue could have a material impact on the
operations of the Company. With respect to key suppliers, the Company has begun
to identify potential alternative suppliers of raw materials in the event that
its key suppliers suffer business interruptions as a result of year 2000
problems.

<PAGE> 19

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management, as well as assumptions made by and information
currently available to the Company's management. When used in this report, the
words, "anticipate", "believe", "estimate", "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
distribution networks, product introductions and acceptance, technological
change, changes in industry practices, onetime events and other factors
described herein. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is subject to market risk exposure related to changes in
interest rates on its senior credit facility, which includes revolving credit
notes and term notes. These instruments carry interest at a pre-agreed upon
percentage point spread from either the prime interest rate or LIBOR. Under its
senior credit facility, the Company may, at its option, fix the interest rate
for certain borrowings based on a spread over LIBOR for 30 days to 6 months. At
June 27, 1998, the Company had $28.7 million outstanding under its senior credit
facility. Based on this balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately
$287,000, or $.05 per diluted share, on an annual basis. The Company's objective
in maintaining these variable rate borrowings is the flexibility obtained
regarding early repayment without penalties and lower overall cost as compared
with fixed-rate borrowings.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

<PAGE> 20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item regarding directors is set forth in
the Proxy Statement under the caption entitled "Election of Directors" and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth in the Proxy Statement
under the caption "Executive Compensation" and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by this item is set forth in the Proxy Statement
under the captions "Election of Directors" and "Executive Compensation" and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth in the Proxy Statement
under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by reference.

18
<PAGE> 21

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Annual Report or
incorporated by reference:

1. Financial Statements

As to financial statements, reference is made to the Index to
Financial Statements on Page F-1 of this Annual Report.

2. Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or notes thereto.

3. Exhibits

The following exhibits are filed as part of this Annual Report.

Exhibit
Number Description of Exhibit
- ------ ----------------------

<PAGE> 22

10.8 Amendment to Stock Purchase Agreement dated May 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and Specialty
Solutions, Inc. (incorporated by reference to the Company's current
report on Form 8-K dated May 8, 1998).
10.9 Stock Purchase Agreement dated May 11, 1998 by and between William I.
Koch, Joan Granlund, Richard P. Callahan, as Custodian for Wyatt I.
Koch, under the Florida Uniform Transfer to Minors Act, Richard A.
Bird, Fibercast Company and Denali Incorporated (incorporated by
reference to the Company's current report on Form 8-K dated June 5,
1998).
10.10 Glass Fiber Reinforcement Products Purchase Agreement dated December
23, 1994, by and between the Company and Owens Corning (incorporated by
reference to the Registration Statement).
10.11 Agreement dated November 3, 1997, by and between the Company and Owens
Corning (incorporated by reference to the Registration Statement).
10.12 Lease dated November 22, 1996, by and between the Company and Baymeadow
Limited Partnership (the "Baltimore Lease") (incorporated by reference
to the Registration Statement).
10.13 First Amendment of Lease dated August 19, 1997, by and between the
Company and Baymeadow Limited Partnership regarding the Baltimore Lease
(incorporated by reference to the Registration Statement).
10.14 Salary Continuation Agreement dated September 5, 1997, by and between
the Company and Stephen T. Harcrow (incorporated by reference to the
Registration Statement).
10.15 Letter to Lee W. Orr dated March 31, 1997, confirming offer of
employment (incorporated by reference to the Registration Statement).
10.16 Consulting Agreement dated effective as of April 1, 1997, by and
between the Company and Edward de Boer (incorporated by reference to
the Registration Statement).
10.17 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and R. Kevin Andrews (incorporated by
reference to the Registration Statement).
10.18 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and Melford S. Carter, Jr. (incorporated by
reference to the Registration Statement).
10.19 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and Cathy L. Smith (incorporated by
reference to the Registration Statement).
10.20 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
(incorporated by reference to the Registration Statement).
10.21 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 (incorporated
by reference to the Registration Statement).
10.22 Loan and Security Agreement dated February 28, 1997, by and between the
Company and Fleet Capital Corporation regarding $6,500,000 credit
facility (incorporated by reference to the Registration Statement).
10.23 Junior Subordinated Note of the Company dated December 23, 1994, in the
original principal amount of $7.5 million, payable to Owens Corning
(incorporated by reference to the Registration Statement).
10.24 Loan and Security Agreement dated October 24, 1997, by and between the
Company and NationsBank of Texas, N.A. (incorporated by reference to
the Registration Statement).
10.25 First Amendment to Loan and Security Agreement dated as of October 31,
1997, by and between the Company and NationsBank of Texas, N.A.
(incorporated by reference to the Registration Statement).
10.26 Second Amendment to Loan and Security Agreement dated as of October 31,
1997, by and between the Company and NationsBank of Texas, N.A.
(incorporated by reference to the Registration Statement).

<PAGE> 23

10.27 Amended and Restated Credit Agreement dated March 23, 1998 among Denali
Incorporated, Ershigs Biloxi, Inc., Ershigs, Inc., Fluid Containment,
Inc., and SEFCO, Inc., and NationsBank of Texas, N.A., as agent, and
the financial institutions named therein (incorporated by reference to
the Company's quarterly report on Form 10-Q for the quarterly period
ending March 28, 1998 (the "10-Q")).
10.28 Form of Revolving Note of Denali Incorporated pursuant to Amended and
Restated Credit Agreement dated March 23, 1998 (incorporated by
reference to the 10-Q).
10.29 Guaranty dated March 23, 1998 of Denali Incorporated (incorporated by
reference to the 10-Q).
10.30 Subsidiary Guaranty dated March 23, 1998 of Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc. and
Hoover Containment, Inc. (incorporated by reference to the 10-Q).
10.31 Security Agreement dated March 23, 1998 between Denali Incorporated and
NationsBank of Texas, N.A., as agent (incorporated by reference to the
10-Q).
10.32 Security Agreement dated March 23, 1998 among Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc., Hoover
Containment, Inc. and NationsBank of Texas, N.A., as agent
(incorporated by reference to the 10-Q).
10.33 Pledge Agreement dated March 23, 1998 between Denali Incorporated and
NationsBank of Texas, N.A., as agent (incorporated by reference to the
10-Q).
10.34 Form of Pledge Agreement dated March 23, 1998 between NationsBank of
Texas, N.A., as agent, and each of Specialty Solutions, Inc., Fluid
Containment, Inc., and Ershigs, Inc. (incorporated by reference to the
10-Q).
10.35* Amendment No. 1 and Consent to the Credit Agreement dated as of June 5,
1998 among Denali Incorporated, Fluid Containment, Inc., Ershigs, Inc.,
Ershigs Biloxi, Inc., SEFCO, Inc., the Banks party to and defined in
the Credit Agreement, and NationsBank, N.A., as agent.
10.36* Assumption and Amendment to Loan Agreement dated as of June 5, 1998
among Bank of Oklahoma, N.A. Fibercast and Denali.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, independent auditors.
27.1* Financial Data Schedule

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

* Filed herewith

(b) Reports on Form 8-K

The Company filed the following reports on Form 8-K during the fourth
quarter of fiscal year 1998:

Form 8-K dated June 19, 1998 with respect to the acquisition of
Fibercast Company on June 5, 1998.

Form 8-K dated May 21, 1998 with respect to the acquisition of
CC&E on May 8, 1998.

<PAGE> 24

DENALI INCORPORATED
INDEX TO FINANCIAL STATEMENTS

<TABLE>

<S> <C>
Report of Independent Auditors.........................................................................F-2

Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998......................................F-3

Consolidated Statements of Operations for the Years Ended June 29, 1996, June 28, 1997
and June 27, 1998..................................................................................F-4

Consolidated Statements of Stockholders' Equity (Deficit) as of June 29, 1996, June 28, 1997
and June 27, 1998..................................................................................F-5

Consolidated Statements of Cash Flows for the Years Ended June 29, 1996, June 28, 1997
and June 27, 1998..................................................................................F-6

Notes to Consolidated Financial Statements.............................................................F-7
</TABLE>

F-1

<PAGE> 25

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Denali Incorporated

We have audited the accompanying consolidated balance sheets of Denali
Incorporated and subsidiaries (the "Company") as of June 28, 1997 and June 27,
1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended June 29, 1996, June 28,
1997 and June 27, 1998. Our audits also included the consolidated financial
statement schedule listed in the index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.

We 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 28, 1997 and June 27, 1998, and the
consolidated results of its operations and its cash flows for the years ended
June 29, 1996, June 28, 1997 and June 27, 1998 in conformity with generally
accepted accounting principles. Also in our opinion, the related consolidated
financial statement schedule, 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
July 31, 1998

F-2

<PAGE> 26

DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS

June June
28, 27,
1997 1998
---------- -------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 330 $ 175
Accounts receivable, net of allowances of $605,000 in
1997 and $907,000 in 1998................................... 17,376 23,465
Inventories..................................................... 6,686 10,489
Income tax receivable........................................... 40 --
Prepaid expenses................................................ 913 1,152
Deferred tax assets............................................. 934 1,242
---------- -------
Total current assets........................................ 26,279 36,523
Property, plant and equipment, net................................ 7,695 20,270
Assets held for sale.............................................. 1,520 449
Notes receivable.................................................. 907 178
Goodwill, net..................................................... 1,620 19,435
Deferred tax assets............................................... 1,953 1,947
Other assets...................................................... 1,110 1,580
---------- -------
Total assets...................................................... $ 41,084 $80,382
========== =======

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................ $ 10,173 $ 13,140
Accrued liabilities............................................. 5,249 7,180
Income taxes payable............................................ -- 620
Notes payable................................................... 1,460 --
Current maturities of long-term debt............................ 1,378 1,442
---------- -------
Total current liabilities................................... 18,260 22,382
Long-term debt, less current maturities........................... 21,186 28,454
Other long-term liabilities....................................... 979 872
Series A Preferred Stock, redeemable at $250 per share, $.01 par value:
Authorized shares -- 1,004,800
Issued and outstanding shares -- 4,800 at June 28, 1997
and none at June 27, 1998.................................... 1,200 --
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 2,184,910 at June 28,
1997 and 4,828,743 at June 27, 1998....................... 22 48
Additional paid-in capital...................................... 297 29,187
Retained deficit................................................ (860) (561)
---------- ---------
Total stockholders' equity (deficit).............................. (541) 28,674
---------- ---------
Total liabilities and stockholders' equity (deficit).............. $ 41,084 $ 80,382
========== =========
</TABLE>

See accompanying notes.

F-3

<PAGE> 27

DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended
------------------------------------
June 29, June 28, June 27,
1996 1997 1998
-------- -------- --------
(In thousands, except per share amounts)

<S> <C> <C> <C>
Net sales ........................................... $ 53,354 $ 71,101 $ 99,897
Cost of sales ....................................... 43,518 57,268 77,273
-------- -------- --------
Gross profit ........................................ 9,836 13,833 22,624
Selling, general, and administrative expenses ....... 9,604 11,874 17,843
Non-recurring compensation charge ................... -- -- 2,312
-------- -------- --------
Operating income .................................... 232 1,959 2,469
Interest expense .................................... 1,783 2,058 1,614
Interest income ..................................... (65) (111) (118)
Other income, net ................................... (206) (598) (489)
-------- -------- --------
Income (loss) before income taxes ................... (1,280) 610 1,462
Income tax expense (benefit) ........................ (446) 293 1,352
-------- -------- --------
Net income (loss) before extraordinary item ......... (834) 317 110
Extraordinary item on early extinguishment of
debt, net of income tax (see Note 6) .............. -- -- 219
-------- -------- --------
Net income (loss) ................................... (834) 317 329
Dividends on Series A Preferred Stock ............... (120) (120) (30)
-------- -------- --------
Net income (loss) attributable to Common Stock ...... $ (954) $ 197 $ 299
======== ======== ========

Net income (loss) per common share - basic:
Income (loss) before extraordinary item ........... $ (0.44) $ 0.09 $ 0.02
Extraordinary item ................................ -- -- 0.06
-------- -------- --------
Net income (loss) per common share ................ $ (0.44) $ 0.09 $ 0.08
======== ======== ========

Net income (loss) per common share assuming dilution:
Income (loss) before extraordinary item ........... $ (0.44) $ 0.09 $ 0.02
Extraordinary item ................................ -- -- 0.06
-------- -------- --------
Net income (loss) per common share ................ $ (0.44) $ 0.09 $ 0.08
======== ======== ========
</TABLE>

See accompanying notes.

F-4

<PAGE> 28

DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Deficit Total
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
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)
Exchange of employee stock
options.......................... -- -- 2,312 -- 2,312
Issuance of common stock ......... 2,276 23 25,969 -- 25,992
Exercise of employee stock
options.......................... 368 3 609 -- 612
Dividends declared ............... -- -- -- (30) (30)
Net income ....................... -- -- -- 329 329
-------- -------- -------- -------- --------
Balance at June 27, 1998 ........... 4,829 $ 48 $ 29,187 $ (561) $ 28,674
======== ======== ======== ======== ========
</TABLE>

See accompanying notes.

F-5

<PAGE> 29

DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended
------------------------------------
June 29, June 28, June 27,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................... $ (834) $ 317 $ 329
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-recurring compensation expense ................ -- -- 2,312
Depreciation ...................................... 790 1,043 1,436
Amortization ...................................... 123 178 256
Provision for losses on accounts receivable ....... 55 176 93
Deferred tax expense .............................. 4 25 236
(Gain) loss on disposal of property, plant and
equipment and assets held for sale ............. 210 (447) (89)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable ............................ 22 (3,377) (85)
Inventories .................................... (1,250) 1,238 (1,612)
Prepaid expenses ............................... (372) (90) (92)
Other assets ................................... (43) (57) (212)
Accounts payable ............................... 1,323 886 1,223
Accrued liabilities ............................ 671 264 (652)
Income tax receivable/payable .................. (808) 469 711
-------- -------- --------
Net cash provided by (used in)
operating activities .............................. (109) 625 3,854
INVESTING ACTIVITIES
Acquisitions net of cash acquired ................... (5,427) (4,825) (29,770)
Purchases of property, plant and equipment .......... (942) (600) (3,071)
Proceeds from sale of property, plant and equipment
and assets held for sale .......................... 1,363 208 899
Payments on notes receivable ........................ 13 81 816
Purchases of equity securities ...................... (437) (593) --
Proceeds from sale of equity securities ............. -- 1,098 --
-------- -------- --------
Net cash used in investing activities ............... (5,430) (4,631) (31,126)
FINANCING ACTIVITIES
Proceeds from common stock issuance ................. -- -- 25,992
Proceeds from exercise of stock options ............. -- -- 612
Redemption of preferred stock ....................... -- -- (1,200)
Dividends paid ...................................... (90) -- (210)
Net borrowings under revolving lines of credit ...... 4,065 2,848 8,990
Proceeds from term notes and long-term debt ......... 2,019 2,200 10,398
Principal payments on term notes and long-term
debt .............................................. (1,233) (685) (17,016)
Debt origination costs .............................. (97) (151) (449)
-------- -------- --------
Net cash provided by financing activities ........... 4,664 4,212 27,117
-------- -------- --------
Increase (decrease) in cash ......................... (875) 206 (155)
Cash at beginning of period ......................... 999 124 330
-------- -------- --------
Cash at end of period ............................... $ 124 $ 330 $ 175
======== ======== ========
</TABLE>

See accompanying notes.

F-6

<PAGE> 30

DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998

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 aboveground storage tanks, and engineered
fiberglass reinforced plastic products for corrosion resistant applications.
Currently, the Company's products are primarily marketed in the United States.

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.

CASH AND CASH EQUIVALENTS

The Company considers all cash accounts and money market accounts with an
original maturity less than 90 days to be cash and cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, prepaid expenses, accounts receivable, and
other current assets and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying value of the Company's
revolving lines of credit and notes payable approximates fair value because the
rates on such lines are primarily variable, based on current market.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation arrangements using the
intrinsic value method under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.

INVENTORIES

Inventories are determined using actual cost or a standard cost method based
on a first-in, first-out ("FIFO") basis. Inventory is stated at the lower of
cost or market.

F-7

<PAGE> 31

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:

Buildings and improvements 25 years
Machinery and equipment 3 to 10 years

GOODWILL

Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Goodwill is being amortized on a straight-line
basis over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the discounted cash flows. The Company also has negative goodwill
of approximately $1.1 million resulting from the acquisition of Ershigs in
February 1997. The negative goodwill is being amortized primarily over the
estimated life of the related deferred tax assets, which is estimated to be 15
years. Accumulated amortization was $69,000 and $168,000 for the years ended
June 28, 1997 and June 27, 1998, respectively. Amortization expense was $27,000,
$42,000 and $99,000 for the years ended June 29, 1996, June 28, 1997 and June
27, 1998.

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.

ADVERTISING

The Company expenses all advertising costs as incurred. Advertising costs
incurred were $330,000, $402,000 and $582,000 for the years ended June 29, 1996,
June 28, 1997 and June 27, 1998, respectively.

F-8

<PAGE> 32

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 $492,000, $319,000 and $458,000 for the
years ended June 29, 1996, June 28, 1997 and June 27, 1998, 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 years ended June 29, 1996, June 28, 1997 and June 27,
1998.

PER SHARE INFORMATION

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaces the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the Statement 128 requirements.

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

Years Ended
----------------------------------
June 29, June 28, June 27,
1996 1997 1998
------ ----- -----
(Share data in thousands)

<S> <C> <C> <C>
Weighted average common shares outstanding........... 2,185 2,185 3,736
Dilutive securities - employee stock options......... -- 13 139
----- ----- -----
Weighted average common shares outstanding
assuming full dilution............................. 2,185 2,198 3,875
===== ===== =====
</TABLE>

CAPTIVE INSURANCE PROGRAM

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

F-9
<PAGE> 33

ACCOUNTING CHANGES

In 1997 and 1998, the FASB issued Statement No. 130, Reporting Comprehensive
Income, Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, and Statement No. 132, Employers' Disclosures About
Pensions and Other Post-Retirement Benefits. These statements, which are
effective for fiscal years 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 February 28, 1997, the Company acquired all of the issued and
outstanding stock of Ershigs, Inc. ("Ershigs"), a manufacturer of
fiberglass-reinforced plastic composites for corrosion-resistant applications.
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 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). Upon finalization of the deferred tax assets related to the purchase
allocation in 1998, the Company reversed the $1.1 million valuation allowance
preliminarily recorded in 1997 and recorded negative goodwill. The negative
goodwill is being amortized primarily over the estimated life of the related
deferred tax assets, which is estimated to be 15 years.

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

In connection with the fiscal 1998 acquisitions, the Company acquired net
assets of $9.8 million in exchange for $28.5 million in cash, which is net of
$700,000 cash acquired, and incurred approximately $450,000 in acquisition
costs resulting in the recording of goodwill of approximately $19 million. The
Company also paid down $1.1 million of bank and seller debt and assumed $3.5
million of bank debt in connection with the Fibercast acquisition. In addition,
the seller in the CC&E acquisition may receive contingent payments of up to
$400,000 based on an increase in the level of bookings, payment of which will
be recorded as an increase to goodwill.

F-10

<PAGE> 34

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

The following unaudited results of operations have been prepared assuming
the acquisitions had occurred as of the beginning of the periods presented.
Those results are not necessarily indicative of results of future operations nor
of results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented.

June 28, June 27,
1997 1998
--------- ------------
(In thousands except per share data)

<S> <C> <C>
Net sales ...................................... $ 130,391 $ 125,390
Net loss before extraordinary item ............. $ (4,231) $ (2,142)
Net loss ....................................... $ (4,231) $ (1,923)
Net loss per common share - basic and diluted... $ (1.99) $ (0.52)
</TABLE>

ASSETS HELD FOR SALE

Assets held for sale are recorded on the balance sheet at amounts equal to
estimated net realizable values adjusted for anticipated earnings or losses,
interest and other carrying costs until sale.

Assets held for sale of $3.6 million were identified in December 1994, the
date of acquisition of the tank group from Owens Corning, consisting primarily
of two manufacturing facilities and related manufacturing equipment. The two
manufacturing facilities were closed in early 1995 and had insignificant
operations after the date of acquisition. One manufacturing facility was sold in
December 1995 at its previously recorded net realizable value. The other
manufacturing facility was sold in June 1996, with the Company recognizing a
loss of $208,000 due to a decline in the market value of the property during
1996. Certain of the manufacturing equipment was sold during the year ended June
28, 1997 under licensing arrangements with the Company recognizing a gain on the
sale of the equipment of $312,000. During fiscal year 1998, manufacturing
equipment with a book value of $250,000 was sold through an international joint
venture with the Company recognizing a gain of $107,000. At June 27, 1998, the
remaining assets held for sale of $449,000 consist of certain manufacturing
equipment which the Company primarily expects to sell under similar license
arrangements or through an international joint venture.

Assets held for sale of $820,000 were identified at the date of acquisition
of Ershigs consisting primarily of a manufacturing facility and related
manufacturing equipment. The manufacturing facility was closed in May 1997 with
operating losses of $68,000 eliminated from the Company's results of operations
for the year ended June 28, 1997. In January 1998, the assets were sold with the
Company recognizing no gain or loss.

4. INVENTORIES

Inventories consisted of the following:
<TABLE>
<CAPTION>

June 28, June 27,
1997 1998
------- -------
(In thousands)

<S> <C> <C>
Finished goods... $ 2,147 $ 4,748
Raw materials.... 2,805 4,289
Work in process.. 1,734 1,452
------- -------
$ 6,686 $10,489
======= =======
</TABLE>

F-11

<PAGE> 35

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

June 28, June 27,
1997 1998
------- --------
(In thousands)
<S> <C> <C>
Land...................................... $ 1,089 $ 2,110
Buildings and improvements................ 3,685 6,966
Machinery and equipment................... 5,062 14,024
Construction in progress.................. 22 769
------- --------
9,858 23,869
Less accumulated depreciation............. (2,163) (3,599)
------- --------
Property, plant and equipment, net........ $ 7,695 $ 20,270
======= ========
</TABLE>

6. LONG-TERM DEBT

Long-term debt is summarized below:

June June
28, 27,
1997 1998
---- ----
(In thousands)
<S> <C> <C>
Revolving credit note with a financial institution, interest payable
monthly at 30-day LIBOR plus 2.5% (8.16% at June 27, 1998), due October
31, 2002, secured by substantially all assets of the Company's
subsidiaries.................................................................. $ -- $ 19,400
Revolving credit note with a financial institution, interest payable
quarterly at prime (8.5% at June 27, 1998), due October 31, 2002,
secured by substantially all assets of the Company's subsidiaries............. -- 55
Term note with a financial institution, due in monthly installments of
$51,816, plus interest at 30-day LIBOR plus 2.5% (8.16% at June 27,
1998) through October 24, 2002, with remaining balance of $3,079 due
October 24, 2002, secured by substantially all assets of the
Company's subsidiaries........................................................ -- 5,785
Term note with a financial institution, due in monthly installments of
$58,500, plus interest at prime plus 0.5% beginning August 1, 1998 (9.0%
at June 27, 1998) through February 7, 2001, secured by property,
plant and equipment of Fibercast.............................................. -- 3,500
Term note with a seller, due in monthly installments of $5,591, including
interest at 8%, through January 16, 2001, secured by all assets of
purchased facility............................................................ -- 156
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")............................................... 4,830 --
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....................... 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").................................................. 3,663 --
</TABLE>

F-12

<PAGE> 36

<TABLE>
<S> <C> <C>
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..................................................................... 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..................................................................... 400 --
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
$20,000 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............................................................. 1,640 --
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 --
-------- --------
22,564 29,896
Less current maturities......................................................... 1,378 1,442
-------- --------
Long-term debt due after one year............................................... $ 21,186 $ 28,454
======== ========
</TABLE>

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 its wholly-owned subsidiaries, Fluid Containment, Inc., Hoover
Containment, Inc. and Ershigs, and to finance the acquisitions of LaValley and
SEFCO. This credit facility was amended and restated on March 23, 1998 and
further amended on June 5, 1998 in connection with the Company's acquisition of
Fibercast Company. As of June 27, 1998, the Company had outstanding indebtedness
of $5.8 million under the term loans and $19.5 million under the revolving
credit notes. This amended and restated credit facility provides for a maximum
of $23.0 million revolving credit notes due in October 2002, and a maximum of
$6.2 million in term loans with equal monthly payments of $51,816 plus interest
due in October 2002 or upon the termination of the revolving credit notes. The
new revolving credit notes provide for borrowings, at the Company's option, at
either the Bank's prime rate or varying rates of LIBOR plus a margin ranging
from 1.25% to 2.5%. 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 term loans provide for borrowings, at the Company's
option, at either the Bank's prime rate plus a margin ranging from 0% to .25% or
varying rates of LIBOR plus a margin ranging from 1.25% to 2.5%. The new senior
credit facility provides availability for letters of credit up to $5.0 million
subject to availability of borrowing capacity under the revolving credit notes.
Letters of credit issued under this facility totaled $839,000 reducing the
amount available for letters of credit to $4.2 million. The new senior credit
facility requires the Company's subsidiaries to maintain certain financial
covenants and requires an annual fee of .25% on the unused portion of the
revolving credit notes. At June 27, 1998, the unused portion of the revolving
credit line was $3.5 million. As of June 27, 1998, the Company was in compliance
with all required financial covenants. The new senior credit facility is secured
by substantially all of the assets of the Company's subsidiaries. Under the
Company's credit facilities, distributions in the form of dividends and stock
repurchases are limited to 25% of the Company's consolidated net income for the
preceding fiscal year.

The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business in December 1994. In addition, the Company assumed $3.5 million of term
debt with a financial institution in connection with its acquisition of
Fibercast in June 1998. The term debt bears interest at prime plus .50%.

F-13

<PAGE> 37

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

Scheduled maturities of long-term debt at June 27, 1998 based on the terms
of the new senior credit facility are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year:
1999................ $ 1,442
2000................ 1,321
2001................ 3,822
2002................ 622
2003................ 22,689
----------
Total $ 29,896
==========
</TABLE>

The Company paid interest on its long-term debt of $904,000, $1,181,000 and
$1,662,000 during the years ended June 29, 1996, June 28, 1997 and June 27,
1998, respectively.

7. NOTES PAYABLE

Notes payable are summarized below:
<TABLE>
<CAPTION>

June 28, June 27,
1997 1998
-------- -------
(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 $82,000, $15,000 and $87,000 for
the years ended June 29, 1996, June 28, 1997 and June 27, 1998, respectively.

8. COMMITMENTS AND CONTINGENCIES

The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
two of the Company's subsidiaries, Fluid Containment and Ershigs, to purchase at
least 90% of their fiberglass requirements from the supplier. The contract
expires on December 31, 2000. In addition, the Company continues to negotiate
with other vendors to ensure a continued supply of fiberglass to meet the
Company's production needs. The Company is also a significant purchaser of resin
and steel. The Company does not depend upon any single supplier or source for
steel or resin requirements.

F-14

<PAGE> 38

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 27, 1998 were
$651,000 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, the ultimate liabilities resulting from such claims will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.

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 death or
disability, the Company shall pay three years salary and health insurance for
Mr. Harcrow's family over that same period. 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.

9. LEASES

The Company leases certain manufacturing facilities, machinery and
equipment, and office space under operating leases. Future minimum payments on
operating leases are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year:
1999.................... $ 861
2000.................... 737
2001.................... 634
2002.................... 499
2003 and thereafter 440
--------
Total......... $ 3,171
========
</TABLE>

Total rental expense was $725,000, $1,028,000 and $1,204,000 for the years
ended June 29, 1996, June 28, 1997 and June 27, 1998, respectively.

10. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

F-15

<PAGE> 39

June 28, June 27,
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Tax over financial reporting basis of net book value
of property, plant and equipment ................ $ 1,886 $ 564
Expenses accrued for financial reporting not yet
deductible for tax .............................. 1,518 1,775
Net operating loss and other carryforwards ......... 663 1,718
Other .............................................. 203 219
------- -------
Total deferred tax assets ............................ 4,270 4,276
Deferred tax liabilities:
Financial reporting over tax basis of goodwill ..... -- 310
Other .............................................. 285 93
------- -------
Total deferred tax liabilities ....................... 285 403
------- -------
Valuation allowance .................................. (1,098) (684)
------- -------
Net deferred tax assets .............................. $ 2,887 $ 3,189
======= =======
</TABLE>

Net deferred tax assets increased $2.3 million in fiscal 1997 and decreased
$560,000 in fiscal 1998 due to acquisitions. In addition, net deferred tax
assets increased an additional $1.1 million in fiscal 1998 when the Company
reversed the June 28, 1997 valuation allowance and recognized negative goodwill
resulting from the finalization of the deferred tax assets related to the
purchase allocation of Ershigs.

The Company has net operating loss carryforwards of approximately $4.7
million that expire through 2017 that are available to offset future taxable
income of certain acquired subsidiaries. The June 27, 1998 valuation allowance
represents net operating loss carryforwards acquired in May 1998 as a result of
the CC&E acquisition, the future realization of which is uncertain. Any benefits
that are ultimately realized will be recorded as a reduction of goodwill.

The components of income tax expense are as follows:

June 29, June 28, June 27,
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal .................................. $ (474) $ 231 $ 1,025
State .................................... 24 38 91
------- ------- -------
Total current income tax expense (benefit).. (450) 269 1,116
------- ------- -------
Deferred income tax expense (benefit):
Federal .................................. 72 (3) 338
State .................................... (68) 27 (102)
------- ------- -------
Total deferred income tax expense .......... 4 24 236
------- ------- -------
Total income tax expense (benefit) ......... $ (446) $ 293 $ 1,352
======= ======= =======
</TABLE>

The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:

June 29, June 28, June 27,
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Expected income tax (benefit) expense
at 34% .................................. $ (435) $ 207 $ 497
State income taxes, net of federal benefit. (48) 48 116
Non-recurring compensation charge ......... -- -- 786
Other, net ................................ 37 38 (47)
------- ------- -------
Reported total income tax expense
(benefit) ................................. $ (446) $ 293 $ 1,352
======= ======= =======

</TABLE>

F-16

<PAGE> 40

The Company paid $329,000, $236,000 and $723,000 of income taxes during the
years ended June 29, 1996, June 28, 1997 and June 27, 1998, respectively.

11. STOCKHOLDERS' EQUITY

On September 23, 1997, the Company effected a 1,715-for-1 stock split. All
stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.

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

12. INCENTIVE STOCK OPTION PLAN

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

In September 1997, the Company adopted an incentive stock option plan (the
"1997 Plan"). The 1997 Plan permits the granting of both incentive stock options
and non-qualified stock option awards to all employees of the Company. Awards to
acquire up to an aggregate of 362,873 shares may be granted pursuant to the 1997
Plan. The Board of Directors selects the employees who will receive the awards,
determines the type and terms of the awards to be granted and interprets and
administers the 1997 Plan.

In November 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. An additional option for 7,700 shares was granted in
December 1997. Options for 142,113 shares vest 40% immediately and the remainder
over a four-year period. The remaining options for 36,617 shares vest ratably
over four years. All of the options were granted at fair market value. At June
27, 1998, there were 184,143 shares available for future grants under the 1997
Plan.

Effective September 1997, the Company completed a reorganization of its
subsidiaries. As part of the reorganization, one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997, the CSI stock option
plan had 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options for a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company recognized a compensation charge in the quarter
ended September 27, 1997 of approximately $2.3 million.

F-17

<PAGE> 41

A summary of Denali's stock option activity and related information for the
years ended June 29, 1996, June 28, 1997 and June 27, 1998 follows:

<TABLE>
<CAPTION>
Fiscal Year Weighted Fiscal Year Weighted Fiscal Year Weighted
1996 Average 1997 Average 1998 Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- ------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year -- -- 113,190 2.22 113,190 2.22
Granted 113,190 2.22 -- -- 433,373 6.19
Exercised -- -- -- -- (367,833) 1.67
--------- ----- ------- ------ -------- ----
Outstanding-end of
year 113,190 2.22 113,190 2.22 178,730 12.99
Exercisable-end of
year 113,190 2.22 113,190 2.22 56,845 13.00
Weighted average
grant date fair
value per option $3,806 $-0- $6.94
</TABLE>

All options have five year terms and are exercisable based on four year
vesting terms. Exercise price per share for options outstanding at June 27, 1998
ranges from $12.88 - $13.00 and the average remaining contractual life was 4.5
years.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-Based Compensation
("FAS 123"), which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to July
1, 1995 under the fair value method of FAS 123. The fair value for options
granted prior to June 28, 1997 was estimated at the date of grant using a
minimum value option pricing model. The fair value of options granted subsequent
to June 28, 1997 was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions for fiscal 1998: risk-free interest
rate of 5.3%, a dividend yield of 0%, volatility factors of the expected market
price of the Company's common stock of 26% and a weighted average expected life
of the option of four years.

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

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

Fiscal Year
------------------------------------------
1996 1997 1998
--------- -------- -------

<S> <C> <C> <C>
Pro forma net income (in thousands).............. $ (834) $ 317 $ 43
Pro forma earnings per share - basic and
diluted...................................... $ (0.44) $ 0.09 $ 0.003
</TABLE>

F-18

<PAGE> 42

13. GAIN SHARING PLAN

The Company has a gain sharing plan that covers all employees of the Company
who have satisfied minimum employment standards. For the years ended June 29,
1996, June 28, 1997 and June 27, 1998, the Company made a gain sharing
contribution equally to all eligible employees totaling $111,000, $144,000 and
$347,000, respectively. Distributions are currently based on 5% of quarterly
operating earnings.

14. RETIREMENT PLANS

During fiscal year 1995, the Company adopted a defined-contribution
retirement plan, Fluid Containment 401(k) Retirement Plan (the "Plan"), that
covers all eligible employees of the Company. Effective July 1, 1997, the Plan
was amended to include all eligible employees of Ershigs. Effective January 1,
1998, the Plan was amended to include all eligible employees of Ershigs-Biloxi
and SEFCO. 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 $236,000, $277,000 and $444,000 for the
years ended June 29, 1996, June 28, 1997 and June 27, 1998, respectively.

15. 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 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.

16. SEGMENT DATA

The Company operates in two industry segments: Containment Solutions and
Specialty Solutions. The Containment Solutions segment, which provides
containment solutions for critical fluids, specializes in the manufacture of
fiberglass underground storage tanks and steel reinforced aboveground storage
tanks. The Specialty Solutions 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 years
ended June 29, 1996, June 28, 1997 and June 27, 1998:

F-19

<PAGE> 43

Depreciation
Net Operating Identifiable Capital and
Sales Income Assets Expenditures Amortization
--------- ------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended June 29, 1996:
Containment Solutions.................. $ 53,354 $ 430 $ 28,350 $ 912 $ 908
Specialty Solutions.................... -- -- -- --
Corporate.............................. -- (198) 1,968 30 5
--------- ------- -------- --------- --------
Consolidated........................... $ 53,354 $ 232 $ 30,318 $ 942 $ 913
========= ======= ======== ========= ========
Year ended June 28, 1997:
Containment Solutions.................. $ 64,817 $ 2,080 $ 29,934 $ 523 $ 1,199
Specialty Solutions.................... 6,284 81 9,791 33 13
Corporate.............................. -- (202) 1,359 44 9
--------- ------- -------- --------- --------
Consolidated........................... $ 71,101 $ 1,959 $ 41,084 $ 600 $ 1,221
========= ======= ======== ========= ========
Year ended June 27, 1998:
Containment Solutions.................. $ 71,487 $ 3,822 $ 33,564 $ 2,108 $ 1,257
Specialty Solutions.................... 28,410 2,596 45,838 785 412
Corporate.............................. -- (1,637) 980 178 23
Non-recurring compensation charge...... -- (2,312) -- -- --
--------- ------- -------- --------- --------
Consolidated........................... $ 99,897 $ 2,469 $ 80,382 $ 3,071 $ 1,692
========= ======= ======== ========= ========
</TABLE>

F-20

<PAGE> 44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 14th
day of September, 1998.

DENALI INCORPORATED
(Registrant)

By: /s/ R. KEVIN ANDREWS
---------------------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated and on the 14th day of September, 1998:

SIGNATURE TITLE
--------- ------

<S> <C>
/s/ STEPHEN T. HARCROW Director, Chairman and Chief Executive Officer
---------------------------------- (Principal Executive Officer)
(Stephen T. Harcrow)

/s/ R. KEVIN ANDREWS Chief Financial Officer
---------------------------------- (Principal Financial Officer and
(R. Kevin Andrews) Principal Accounting Officer)

/s/ PHILIP J. BURGUIERES Director
----------------------------------
(Philip J. Burguieres)

/s/ ERNEST H. COCKRELL Director
----------------------------------
(Ernest H. Cockrell)

/s/ THOMAS D. SIMMONS, JR. Director
----------------------------------
(Thomas D. Simmons, Jr.)

/s/ JOEL V. STAFF Director
----------------------------------
(Joel V. Staff)

/s/ J. TAFT SYMONDS Director
----------------------------------
(J. Taft Symonds)

/s/ STEPHEN M. YOUTS Director
----------------------------------
(Stephen M. Youts)
</TABLE>

<PAGE> 45

DENALI INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

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 27, 1998
Allowance for Doubtful Accounts........ $ 605 $ 93 $ 276 $ 67 $ 907
Fiscal Year Ended June 28, 1997
Allowance for Doubtful Accounts........ $ 114 $ 176 $ 575 $ 260 $ 605
Fiscal Year Ended June 29, 1996
Allowance for Doubtful Accounts........ $ 89 $ 55 $ -- $ 30 $ 114
</TABLE>

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

(A) Uncollectible accounts written off, net of recoveries.
(B) Allowance for doubtful accounts resulting from the acquisition of Ershigs
during FY 1997 and the acquisitions of LaValley and Fibercast during FY
1998.

<PAGE> 46

INDEX TO EXHIBITS

Exhibit
Number Description of Exhibit
- ------ ----------------------

3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's registration statement on
Form S-1, registration statement no. 333-36857 (the "Registration
Statement")).
3.2 Bylaws of the Company (incorporated by reference to the Registration
Statement).
4.1 Specimen of Common Stock certificate (incorporated by reference to the
Registration Statement).
10.1 The Company's 1996 Incentive Stock Option Plan, as amended
(incorporated by reference to the Registration Statement).
10.2 The Company's 1997 Incentive Stock Option Plan (incorporated by
reference to the Registration Statement).
10.3 Stock Purchase and Sale Agreement dated as of February 14, 1997, by and
between the Company and Praxair, Inc. (incorporated by reference to the
Registration Statement).
10.4 Asset Purchase Agreement dated October 12, 1995, by and between the
Company, Hoover Group, Inc., Hoover Containment Systems, Inc. and
Hoover Containment, Inc. (incorporated by reference to the Registration
Statement).
10.5 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 (incorporated by reference to the
Registration Statement).
10.6 Stock Purchase Agreement dated September 22, 1997, by and between the
Company and GL&V/LaValley Industries, Inc. and GL&V LaValley
Construction, Inc. (incorporated by reference to the Registration
Statement).
10.7 Stock Purchase Agreement dated April 8, 1998 between Reinforced Plastic
Systems Inc., CC&E/RPS, Inc., and Specialty Solutions, Inc.
(incorporated by reference to the Company's current report on Form 8-K
dated May 8, 1998).
10.8 Amendment to Stock Purchase Agreement dated May 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and Specialty
Solutions, Inc. (incorporated by reference to the Company's current
report on Form 8-K dated May 8, 1998).
10.9 Stock Purchase Agreement dated May 11, 1998 by and between William I.
Koch, Joan Granlund, Richard P. Callahan, as Custodian for Wyatt I.
Koch, under the Florida Uniform Transfer to Minors Act, Richard A.
Bird, Fibercast Company and Denali Incorporated (incorporated by
reference to the Company's current report on Form 8-K dated June 5,
1998).
10.10 Glass Fiber Reinforcement Products Purchase Agreement dated December
23, 1994, by and between the Company and Owens Corning (incorporated by
reference to the Registration Statement).
10.11 Agreement dated November 3, 1997, by and between the Company and Owens
Corning (incorporated by reference to the Registration Statement).
10.12 Lease dated November 22, 1996, by and between the Company and Baymeadow
Limited Partnership (the "Baltimore Lease") (incorporated by reference
to the Registration Statement).
10.13 First Amendment of Lease dated August 19, 1997, by and between the
Company and Baymeadow Limited Partnership regarding the Baltimore Lease
(incorporated by reference to the Registration Statement).
10.14 Salary Continuation Agreement dated September 5, 1997, by and between
the Company and Stephen T. Harcrow (incorporated by reference to the
Registration Statement).
10.15 Letter to Lee W. Orr dated March 31, 1997, confirming offer of
employment (incorporated by reference to the Registration Statement).
10.16 Consulting Agreement dated effective as of April 1, 1997, by and
between the Company and Edward de Boer (incorporated by reference to
the Registration Statement).

<PAGE> 47

10.17 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and R. Kevin Andrews (incorporated by
reference to the Registration Statement).
10.18 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and Melford S. Carter, Jr. (incorporated by
reference to the Registration Statement).
10.19 Confidentiality and Non-Competition Agreement dated September 5, 1997,
by and between the Company and Cathy L. Smith (incorporated by
reference to the Registration Statement).
10.20 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
(incorporated by reference to the Registration Statement).
10.21 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 (incorporated
by reference to the Registration Statement).
10.22 Loan and Security Agreement dated February 28, 1997, by and between the
Company and Fleet Capital Corporation regarding $6,500,000 credit
facility (incorporated by reference to the Registration Statement).
10.23 Junior Subordinated Note of the Company dated December 23, 1994, in the
original principal amount of $7.5 million, payable to Owens Corning
(incorporated by reference to the Registration Statement).
10.24 Loan and Security Agreement dated October 24, 1997, by and between the
Company and NationsBank of Texas, N.A. (incorporated by reference to
the Registration Statement).
10.25 First Amendment to Loan and Security Agreement dated as of October 31,
1997, by and between the Company and NationsBank of Texas, N.A.
(incorporated by reference to the Registration Statement).
10.26 Second Amendment to Loan and Security Agreement dated as of October 31,
1997, by and between the Company and NationsBank of Texas, N.A.
(incorporated by reference to the Registration Statement).
10.27 Amended and Restated Credit Agreement dated March 23, 1998 among Denali
Incorporated, Ershigs Biloxi, Inc., Ershigs, Inc., Fluid Containment,
Inc., and SEFCO, Inc., and NationsBank of Texas, N.A., as agent, and
the financial institutions named therein (incorporated by reference to
the Company's quarterly report on Form 10-Q for the quarterly period
ending March 28, 1998 (the "10-Q")).
10.28 Form of Revolving Note of Denali Incorporated pursuant to Amended and
Restated Credit Agreement dated March 23, 1998 (incorporated by
reference to the 10-Q).
10.29 Guaranty dated March 23, 1998 of Denali Incorporated (incorporated by
reference to the 10-Q).
10.30 Subsidiary Guaranty dated March 23, 1998 of Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc. and
Hoover Containment, Inc. (incorporated by reference to the 10-Q).
10.31 Security Agreement dated March 23, 1998 between Denali Incorporated and
NationsBank of Texas, N.A., as agent (incorporated by reference to the
10-Q).
10.32 Security Agreement dated March 23, 1998 among Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc., Hoover
Containment, Inc. and NationsBank of Texas, N.A., as agent
(incorporated by reference to the 10-Q).
10.33 Pledge Agreement dated March 23, 1998 between Denali Incorporated and
NationsBank of Texas, N.A., as agent (incorporated by reference to the
10-Q).
10.34 Form of Pledge Agreement dated March 23, 1998 between NationsBank of
Texas, N.A., as agent, and each of Specialty Solutions, Inc., Fluid
Containment, Inc., and Ershigs, Inc. (incorporated by reference to the
10-Q).
10.35* Amendment No. 1 and Consent to the Credit Agreement dated as of June 5,
1998 among Denali Incorporated, Fluid Containment, Inc., Ershigs, Inc.,
Ershigs Biloxi, Inc., SEFCO, Inc., the Banks party to and defined in
the Credit Agreement, and NationsBank, N.A., as agent.

<PAGE> 48

10.36* Assumption and Amendment to Loan Agreement dated as of June 5, 1998
among Bank of Oklahoma, N.A. Fibercast and Denali.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, independent auditors.
27.1* Financial Data Schedule

- ----------

* Filed herewith

<PAGE> 1

EXHIBIT 10.35

AMENDMENT NO. 1 AND CONSENT

This Amendment No. 1 and Consent dated as of June 5, 1998 ("Agreement")
is among Denali Incorporated, a Delaware corporation, Fluid Containment, Inc., a
Delaware corporation, Ershigs, Inc., a Washington corporation, Ershigs Biloxi,
Inc., a Mississippi corporation, and SEFCO, Inc., an Oklahoma corporation
(collectively, "Borrowers"), the banks party to the Credit Agreement described
below ("Banks"), and NationsBank, N.A. (successor by merger to NationsBank of
Texas, N.A.), as agent for the Banks ("Agent").

INTRODUCTION

A. The Borrowers, the Agent, and the Banks are parties to the Amended
and Restated Credit Agreement dated as of March 23, 1998 (the "Credit
Agreement").

B. The Borrowers have requested that the Banks agree to make certain
amendments to the Credit Agreement in connection with the Company's proposed
acquisition of all of the issued and outstanding stock of Fibercast Company, a
Delaware corporation ("Fibercast"), under the terms of the Stock Purchase
Agreement dated as of May 11, 1998 ("Purchase Agreement") among the Company, the
Fibercast stockholders, and Fibercast.

THEREFORE, the Borrowers, the Agent, and the Banks hereby agree as
follows:

Section 1. Definitions. Unless otherwise defined in this Agreement,
terms used in this Agreement which are defined in the Credit Agreement shall
have the meanings assigned to such terms in the Credit Agreement.

Section 2. Amendment.

(a) In Section 1.1, the definition of "Applicable Margin" is amended in
its entirety to read as follows:

"Applicable Margin" means, with respect to interest rates and
letter of credit fees and as of any date of its determination, an
amount equal to the percentage amount per annum set forth in the table
below opposite the applicable ratio of (a) the consolidated Funded Debt
of the Company as of the end of the fiscal quarter then most recently
ended to (b) the consolidated EBITDA of the Company as of the end of
the four quarter period ending on the last day of such fiscal quarter,
as determined below:

Funded Debt to Applicable Margin for Applicable Margin for Applicable Letter of
EBITDA LIBOR Tranches Prime Rate Tranches Credit Fees
------------------ ------------------------- --------------------------- -----------------------
<S> <C> <C> <C>
less than 1.00 1.25% 0.00% 1.25%

greater than or equal
to 1.00 but less
than 1.50 1.50% 0.00% 1.50%

greater than or equal
to 1.50 but less
than 2.00 1.75% 0.00% 1.75%
</TABLE>

<PAGE> 2

<TABLE>
<S> <C> <C> <C>
greater than or equal to
2.00 but less than 2.50 2.00% 0.00% 2.00%

greater than or equal to
2.50 but less than 3.00 2.25% 0.00% 2.00%

greater than or equal
to 3.00 2.50% 0.25% 2.00%
</TABLE>

Beginning on June 5, 1998, the foregoing ratio shall be deemed to be
greater than or equal to 3.00 to 1.00 until August 15, 1998. For each
subsequent period from and including any Reset Date, beginning with
August 15, 1998, to but not including the next Reset Date to occur, the
Applicable Margin for that period shall be based upon the foregoing
ratio calculated as of the end of the last day of the Company's fiscal
quarter immediately preceding such Reset Date. Upon any change in the
Applicable Margin, the Agent shall promptly notify the Company and the
Banks of the new Applicable Margin.

(b) In Section 1.1, the definition of "EBITDA" is amended:

(i) by deleting "For the purposes of calculating the Fixed
Charge Coverage Ratio only," in the last sentence and

(ii) by adding the following to the end of the last sentence:

and may not, in the case of add backs in respect of Fibercast
Company, exceed $552,000 for the fiscal quarters ending
September 30, 1997 and December 31, 1997 and $413,000 for the
fiscal quarters ending March 31, 1998 and June 30, 1998

"Funded Debt" means the outstanding principal amount of all
indebtedness for borrowed money of any Person, but in any event shall
include, without duplication any obligation with respect to the
principal component of a Capital Lease.

(d) In Section 1.1, the definition of "Interest Hedge Agreements" is
amended in its entirety to read as follows:

"Interest Hedge Agreement" means any Derivative between a
Borrower and any financial institution providing for the exchange of
risks related to price changes in the interest rate on the Revolving
Advances or any Term Loan under this Agreement.

(e) In Section 1.1, paragraph (e) of the definition of "Permitted Debt"
is amended by adding "the assets of" before "any Credit Party" in the third
line.

(f) In Section 1.1, paragraph (a) of the definition of "Permitted
Investments" is amended by adding "and" before "(ii)".

(g) In Section 1.1, the definition of "Permitted Liens" is amended:

(i) by deleting "and" at the end of paragraph (g);

(ii) by substituting "; and" for the period at the end of
paragraph (h); and

(iii) by adding the following new paragraph (i):

<PAGE> 3

(i) Liens permitted by paragraph (e) of the definition of
"Permitted Debt."

(h) In Section 1.1, the definition of "Total Liabilities" is deleted.

(i) In paragraph (b) of Section 2.3, the following is added to the end
of the first sentence:

; provided that the letter of credit fees for any Letter of Credit
shall not be less than $500.00.

(j) Paragraph (a) of Section 5.5 is amended in its entirety to read as
follows:

(a) Funded Debt to EBITDA. The Company shall not permit the
ratio of (i) its consolidated Funded Debt as of the end of any fiscal
quarter to (b) its consolidated EBITDA for the four fiscal quarters
then ended to greater than (i) for the fiscal quarter ending September
30, 1998, 3.25; (ii) for the fiscal quarter ending December 31, 1998,
3.00; (iii) for the fiscal quarter ending March 31, 1999, 2.75; and
(iv) for each fiscal quarter ending thereafter, 2.50.

(k) In Section 5.5, clause (C) of paragraph (b) is amended in its
entirety to read as follows:

(C) the greater of (1) $2,000,000 and (2) 20% of (y) the Revolving
Commitment on such day minus (z) the amount determined under clause (a)
of the definition of "Borrowing Base" on such day;

(l) The following new Section 5.22 is added:

5.22 Interest Rate Protection. The Company shall enter into
Interest Hedge Agreements on or before December 31, 1998 to fix the
rate of interest at a level reasonably acceptable to the Agent on at
least $10,000,000 of the Revolving Advances and Term Loans for three
years unless on or before December 31, 1998 the Company shall have
received at least $15,000,000 in net cash proceeds from the sale of its
capital stock or the issuance of any Debt.

(m) Exhibit C to the Credit Agreement shall be replaced with Exhibit C
attached to this Agreement.

Section 3. Consent. Upon the effectiveness of this Agreement, the Banks
and the Agent consent to the acquisition of Fibercast under the terms of the
Purchase Agreement, as amended with the consent of the Banks and the Agent.

Section 4. Representations and Warranties. The Borrowers represent and
warrant to the Agent and the Banks that, after giving effect hereto:

(a) the representations and warranties of the Borrowers set forth in
the Credit Agreement and in the other Loan Documents are true and correct in all
material respects as of the date of this Agreement, except those that by their
terms relate only to a specific date;

<PAGE> 4

(b) (i) the execution, delivery, and performance of this Agreement are
within the corporate power and authority of the Borrowers and have been duly
authorized by appropriate proceedings, and (ii) this Agreement constitutes a
legal, valid, and binding obligation of the Borrowers enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the rights of creditors
generally and general principles of equity; and

Section 5. Effectiveness. This Agreement shall become effective and the
Credit Agreement shall be amended as provided in this Agreement upon the
occurrence of the following conditions precedent:

(a) the Borrowers and the Banks shall have delivered duly and validly
executed originals of this Agreement to the Agent;

(b) the representations and warranties in this Agreement shall be true
and correct in all material respects;

(i) a duly completed Acquisition Certificate regarding the
acquisition of Fibercast;

(ii) a duly completed Borrowing Base and Compliance Certificate
giving effect to the acquisition of Fibercast;

(iii) a Joinder Agreement by Fibercast in the form of Exhibit J to
the Credit Agreement revised to also add Fibercast as a party to the
Security Agreement executed by the Company's Subsidiaries;

(iv) an amendment to the Company's Pledge Agreement pledging all
of the issued and outstanding capital stock of Fibercast, share
certificates evidencing such capital stock, and stock powers in blank
for such share certificates;

(v) a Guarantors' reaffirmation in form satisfactory to the
Agent;

(vi) appropriate UCC-1 financing statements for filing in each
jurisdiction required by the Security Agreement after the joinder of
Fibercast;

(vii) (A) a secretary's certificate of Fibercast certifying true
copies of Fibercast's articles of incorporation, bylaws, and
resolutions authorizing its execution and delivery of the documents
required by this Agreement and specimen signatures of Fibercast's
officers authorized to sign such documents and (B) certificates of
existence and good standing for Fibercast from Delaware and Oklahoma;

(viii) a true copy of the Purchase Agreement and all amendments
thereto; and

(ix) such lien releases and amendment and revolving credit
termination documentation as the Agent may request from the Bank of
Oklahoma and Fibercast;

<PAGE> 5

(d) the Agent shall have received a legal opinion from counsel to the
Borrowers in form and substance reasonably satisfactory to the Agent;

(e) contemporaneously with or before the effectiveness of this
Agreement, the Company's acquisition of Fibercast shall have been consummated in
accordance with the terms of the Purchase Agreement and all governmental
approvals required in connection therewith shall have been received; and

(f) the Borrowers shall have paid all reasonable expenses payable to
the Bank under the Loan Documents, including all attorneys' fees which have been
invoiced, and any fees agreed on between the Company and the Bank in connection
with this Agreement.

Section 6. Effect on Loan Documents.

(a) Except as amended herein, the Credit Agreement and the Loan
Documents remain in full force and effect as originally executed. Nothing herein
shall act as a waiver of any of the Agent's or Banks' rights under the Loan
Documents, as amended, including the waiver of any Default or Event of Default,
however denominated.

(b) This Agreement is a Loan Document for the purposes of the
provisions of the other Loan Documents. Without limiting the foregoing, any
breach of representations, warranties, and covenants under this Agreement may be
a Default or Event of Default under other Loan Documents.

Section 7. Choice of Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas.

Section 8. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original.

PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, A
LOAN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN THE LOAN AGREEMENT EXCEEDS
$50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN AGREEMENT IS IN WRITING AND
SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY'S AUTHORIZED REPRESENTATIVE. THE
RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE PRECEDING
PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN LOAN AGREEMENT, AND ANY
PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THE
LOAN AGREEMENT. THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS DEFINED IN THE
CREDIT AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG 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 AMONG THE
PARTIES.

<PAGE> 6

EXECUTED to be effective as of the date first above written.

BORROWERS:

DENALI INCORPORATED

By: /s/ R. KEVIN ANDREWS
------------------------
R. Kevin Andrews
Treasurer

ERSHIGS BILOXI, INC.

By: /s/ R. KEVIN ANDREWS
------------------------
R. Kevin Andrews
Treasurer

FLUID CONTAINMENT, INC.

By: /s/ CATHY L. SMITH
------------------------
Cathy L. Smith
Secretary

ERSHIGS, INC.

By: /s/ R. KEVIN ANDREWS
------------------------
R. Kevin Andrews
Treasurer

SEFCO, INC.

By: /s/ R. KEVIN ANDREWS
------------------------
R. Kevin Andrews
Treasurer

AGENT AND BANK:

NATIONSBANK, N.A., as Agent and Bank

By: /s/ MARK W. MONTGOMERY
------------------------
Mark W. Montgomery
Vice President

<PAGE> 1

EXHIBIT 10.36

ASSUMPTION AND AMENDMENT TO LOAN AGREEMENT

THIS AGREEMENT, made this 5th day of June, 1998, by, between and among
Bank of Oklahoma, N.A. (hereinafter called "Lender"), Fibercast Company, a
Delaware corporation (hereinafter called "Borrower"), and Denali Incorporated, a
Delaware corporation (hereinafter called "Assignee"), with respect to the
following:

WHEREAS:

A. Borrower is indebted to Lender for a loan in the amount of
$3,500,000 (the "Loan") as reflected by that certain Promissory Note
dated February 2, 1996, in the stated original principal face amount of
$5,000,000 (hereinafter called "Note") a copy of which is attached
hereto as Exhibit "A", as well as that certain Loan Agreement by and
between Lender and Borrower dated February 7, 1996, as subsequently
amended by that certain First Amendment to Loan Agreement, dated
February 7, 1997, and Second Amendment to Loan Agreement, dated
February 7, 1998 (the "Loan Agreement") which Note and Loan Agreement
are secured by that certain Real Estate Mortgage and Security Agreement
dated March 31, 1986 recorded in Book 4933 at Page 460 of the records
of the County Clerk of Tulsa County, Oklahoma, as amended on March 30,
1992 and on February 7, 1996, and by that certain Security Agreement
dated March 31, 1986, as amended (hereinafter collectively the
"Security Agreement"; and,

B. Assignee has purchased the capital stock of Borrower; and,

C. Assignee is willing to assume the payment of the indebtedness due
and owing from Borrower to Lender and assume all obligations past,
present or future, arising out of or by reason of the Note and the Loan
Agreement, as subsequently amended, and any other documents related to
the Note or the Loan including other than the Security Agreement
(collectively referred to as the "Loan Documents"); and,

D. The parties hereto wish to amend and modify certain provisions of
the Loan Agreement and Promissory Note as more particularly set forth
herein.

W I T N E S S E T H

NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, and upon the express condition that the security
interests held by Lender pursuant to the Security Agreement are valid, first
security interests now existing, or hereafter created or acquired, and that the
execution of this Agreement will not impair such security interest, it is hereby
agreed as follows:

<PAGE> 2

1. The "WHEREAS" clauses of this Agreement which are, by reference,
incorporated into and made a part of the body of this Agreement as if
set out in full, shall be deemed and held to be contractual in nature
and not mere recitals.

2. Assignee hereby covenants, promises and agrees (a) to pay the Note
at the times, and in the manner in all respects as therein provided, as
same may be modified or amended from time to time, (b) to perform each
and all of the covenants, agreements and obligations of the Note, at
the time, and in the manner in all respects as therein provided, as
same may be modified or amended from time to time, and (c) to execute
and deliver to Lender a replacement note in the form of Exhibit "B"
attached hereto in the original principal amount of $3,500,000, being
the principal balance of the Note at the time this Assumption Agreement
is executed, and accruing interest as set forth therein, maturing on
February 7, 2001 (hereinafter called the "Replacement Note", together
with all renewals, extensions, and changes in form thereof), which
shall constitute a renewal of, and substitution for, the Note.

3. All the property described in the Security Agreement shall remain in
all respects subject to the security interest created by the Security
Agreement and Loan Documents, except the Lender hereby releases its
security interest in all now owned or hereafter acquired inventory and
accounts of the Borrower and any proceeds therefrom. Except as provided
in the preceding sentence, nothing herein contained and nothing done
pursuant hereto, shall affect or be construed to affect the priority of
the security interest, charge or encumbrance of the Security Agreement
over other liens, charges, encumbrances or conveyances, nor shall
anything herein contained or done in pursuance hereof affect or be
construed to affect any security or instrument held by Lender as
security for or evidence of the other indebtedness owed Lender by
Borrower except as herein stated.

4. Assignee waives any and all rights, claims or setoffs, if any,
against Lender, its successors and assigns, arising out of or by reason
of the Note, the Security Agreements and the Loan Documents.

5. Denali Incorporated and Fibercast Company are collectively referred
to as the "Borrower" in the Loan Agreement.

6. Paragraph 1.1 of the Loan Agreement is stricken in its entirety and
in its place the following paragraph shall be inserted:

1.1 Subject to the terms of this Agreement the Bank agrees to
loan Borrower the sum of $3,500,000 in the form of a term loan
(the "Term Loan") which shall be repaid pursuant to the terms
of the Note attached hereto as Exhibit "A".

7. Paragraph 1.2 of the Loan Agreement is stricken in its entirety.
<PAGE> 3

8. Paragraph 1.3 is stricken in its entirety and in its place the
following paragraph shall be added :

1.3 Borrower shall execute to Bank a promissory note
evidencing the Term Loan, payable to the order of the Bank in
the principal amount of $3,500,000 in the form of Exhibit "A"
hereto (the "Term Note" or "Note"), with appropriate
insertions. The Note shall bear interest and be payable as
described therein.

9. Exhibit "B" hereto is substituted for Exhibit "A" to the Loan
Agreement.

10. Section 1.4 of the Loan Agreement is deleted in its entirety.

11. Section 2.1 of the Loan Agreement is amended such that the words
"accounts receivable" and "inventory" are deleted therefrom.

12. Paragraph 3.1 is deleted and in its place the following shall be
substituted:

3.1 Conditions Precedent. The making of the Term Loan
hereunder shall be conditioned upon the following:

13. Paragraphs 3.1.2 and 3.1.4 are deleted in their entirety.

14. Paragraphs 3.2, 3.2.1, 3.2.2, and 3.3 are deleted in their
entirety.

15. Paragraph 4.4, beginning with the words "no material adverse
change" to the end of the paragraph is deleted.

16. The words "Except for security interest granted to NationsBank,
N.A. in inventory and accounts receivable and a second lien interest in
equipment" are added at the beginning of paragraphs 4.6, 4.8, 6.3, and
6.6.

17. Paragraph 5.1 is deleted in its entirety. The Assignee shall
deliver the Lender the same information required under Section 5.2 of
the Credit Agreement referred to below.

18. Paragraphs 5.6, 5.11, 5.12, and 5.13 are deleted in their entirety
and in their place, Paragraphs 5.5 and all subparagraphs thereto and
all paragraphs referenced therein as are stated in that certain Amended
and Restated Credit Agreement among Denali Incorporated, Ershigs
Biloxi, Inc., Ershigs, Inc., Fluid Containment, Inc., and Sefco, Inc.,
The Financial Institutions named in such Credit Agreement, and
NationsBank of Texas, N.A. as Agent for the Banks dated March 23, 1998,
as such paragraphs are amended by that certain Amendment No. 1 and
Consent dated June 5, 1998, (the "Credit Agreement") are inserted are
inserted as if restated in their entirety hereby.

<PAGE> 4

19. Paragraphs 6.1, 6.1.1, 6.1.2, 6.1.3, 6.2, 6.5, 6.7, 6.9, and 6.10
are deleted in their entirety.

20. Paragraph 8.2 is deleted; Paragraph 8.3 is replaced with Section
6.1(g) of the Credit Agreement; Paragraphs 8.4 and 8.5 are replaced
with Section 6.1(f) of the Credit Agreement; Paragraph 8.7 is deleted;
Paragraph 8.8 is replaced with Section 6.1(e) of the Credit Agreement,
except that the words "(other than the Credit Obligations)" where found
in such paragraph are stricken therefrom and are not adopted hereby;
and Paragraph 8.10 is amended in its entirety to ready as follows:

8.10 General Default. (i) Any breach by the Borrower of
any of the covenants in paragraph 5.3, 5.5 of the Credit
Agreement as hereby adopted, and Section 6;

(ii) any breach by the Borrower of any other
covenants in this Agreement, the Note, the Security Agreement,
or the Mortgage and such breach is not cured within 30 days
following the receipt of written notice thereof from the Bank;
or,

(iii) any written representation or warranty made by
the Borrower or any officer thereof in this Agreement, the
Note, the Security Agreement, or the Mortgage proves to have
been false or erroneous in any material respect at the time it
was made or deemed made.

21. Paragraph 9.2 is amended to provide that notices to the Borrower
shall be given as follows:

To the Borrower:

Denali Incorporated
1360 Post Oak, Suite 2250
Houston, Texas 77056

To the Lender (Bank):

Bank of Oklahoma, N.A.
Attn: Steve Pattison
Post Office Box 2300
Tulsa, Oklahoma 74192

22. The following Paragraph shall be added to the Loan Agreement:

<PAGE> 5

9.11 This document may be executed and returned by facsimile
transmission and shall be deemed to have the same effect and
be accorded the same dignity as if executed by all parties on
the original document and shall be binding upon the parties
hereto as if fully executed upon such original document.

23. That certain Revolving Line of Credit facility, as evidenced by
that certain Letter Agreement between Borrower and Lender, dated
February 6, 1996, as subsequently amended is terminated.

24. All of the grants, covenants, terms, conditions and agreements
hereof shall be binding upon and inure to the benefit of all of the
assigns and successors of the parties hereto.

25. Neither this Agreement nor any provision hereof maybe changed,
altered, waived, amended, discharged or terminated orally, but only by
an instrument reduced to writing, signed by all parties hereto.

EXECUTED the date and year first written hereinabove.

"Assignee" "Borrower"

DENALI INCORPORATED FIBERCAST COMPANY

By: /s/ R. KEVIN ANDREWS By: /s/ R. KEVIN ANDREWS
----------------------- ----------------------
Its: TREASURER Its: VICE PRESIDENT
--------------------- ---------------------

"Lender"

BANK OF OKLAHOMA, N.A.

/s/ STEVE WRIGHT
- -----------------------------------
Steve Wright, Vice President

<PAGE> 1

EXHIBIT 21.1

DENALI INCORPORATED SUBSIDIARIES

Jurisdiction
Subsidiary Name of Incorporation
- --------------- ----------------
<S> <C>
Containment Solutions, Inc. Delaware

Denali Management, Inc. Delaware

Ershigs Biloxi, Inc. Mississippi

Ershigs Construction, Inc. Delaware

Ershigs, Inc. Washington

Fibercast Company Delaware

Fluid Containment Property, Inc. Delaware

Fluid Containment, Inc. Delaware

Hoover Containment, Inc. Delaware

Instrumentation Solutions, Inc. Delaware

SEFCO, Inc. Oklahoma

Separation Solutions, Inc. Delaware

Specialty Solutions, Inc. Delaware
</TABLE>

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

* All subsidiaries are, directly or indirectly, owned 100% by Denali
Incorporated.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the 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 July 31, 1998, with respect to the consolidated
financial statements and schedule of Denali Incorporated included in the Annual
Report (Form 10-K) for the year ended June 27, 1998.

ERNST & YOUNG LLP

Houston, Texas
September 14, 1998

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> JUN-27-1998
<CASH> 175
<SECURITIES> 0
<RECEIVABLES> 24,372
<ALLOWANCES> 907
<INVENTORY> 10,489
<CURRENT-ASSETS> 36,523
<PP&E> 23,869
<DEPRECIATION> 3,599
<TOTAL-ASSETS> 80,382
<CURRENT-LIABILITIES> 22,382
<BONDS> 28,454
0
0
<COMMON> 48
<OTHER-SE> 28,626
<TOTAL-LIABILITY-AND-EQUITY> 80,382
<SALES> 99,897
<TOTAL-REVENUES> 99,897
<CGS> 77,273
<TOTAL-COSTS> 97,428
<OTHER-EXPENSES> (489)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,614
<INCOME-PRETAX> 1,462
<INCOME-TAX> 1,352
<INCOME-CONTINUING> 110
<DISCONTINUED> 0
<EXTRAORDINARY> 219
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> .08
<EPS-DILUTED> .08

</TABLE>