<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 000-23353
---------------------------------------------------------
Denali Incorporated
- --------------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 76-0454641
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(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 Officers) (Zip Code)
713-627-0933
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(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
------- -------
As of October 30, 1998, the number of shares of common stock outstanding was
4,828,743.
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DENALI INCORPORATED
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 26, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 27, 1998 and September 26, 1998...................... 1
Consolidated Statements of Operations - Three Months Ended
September 27, 1997 and September 26, 1998............................................... 2
Consolidated Statements of Cash Flows - Three Months Ended
September 27, 1997 and September 26, 1998............................................... 3
Notes to Consolidated Financial Statements - September 26, 1998......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 10
Item 2. Changes in Securities and Use of Proceeds............................................... 10
Item 3. Defaults Upon Senior Securities......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..................................... 10
Item 5. Other Information ...................................................................... 10
Item 6. Exhibits and Reports on Form 8-K........................................................ 10
Signatures ........................................................................................ 12
Index to Exhibits ........................................................................................ 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
-------------- --------
(Unaudited) (Note)
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash $ 587 $ 175
Accounts and notes receivable, net of allowances of
$760,000 at September 26, 1998 and $907,000
at June 27, 1998 24,122 23,465
Inventories 11,069 10,489
Prepaid expenses 1,106 1,152
Deferred tax assets 1,293 1,242
---------- -----------
Total current assets 38,177 36,523
Property, plant and equipment, net 20,130 20,270
Assets held for sale 449 449
Notes receivable 178 178
Goodwill, net 19,890 19,435
Deferred tax assets 1,947 1,947
Other assets 1,550 1,580
---------- -----------
Total assets $ 82,321 $ 80,382
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,144 $ 13,140
Accrued liabilities 5,856 7,180
Income taxes payable 795 620
Current maturities of long-term debt 1,442 1,442
---------- -----------
Total current liabilities 22,237 22,382
Long-term debt, less current maturities 29,264 28,454
Other long-term liabilities 861 872
Series A Preferred Stock, redeemable at $250 per share, $.01 par value:
Authorized shares - 1,004,800
Issued and outstanding shares - None at September 26, 1998
and June 27, 1998 - -
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 4,828,743 at
September 26, 1998 and June 27, 1998 48 48
Additional paid-in capital 29,187 29,187
Retained earnings (deficit) 724 (561)
---------- -----------
Total stockholders' equity 29,959 28,674
---------- -----------
Total liabilities and stockholders' equity $ 82,321 $ 80,382
========== ===========
</TABLE>
See accompanying notes.
Note: The balance sheet at June 27, 1998 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
1
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DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
----------------------------------
September 26, September 27,
1998 1997
-------------- ---------------
(In thousands, except per share amounts)
<S> <C> <C>
Net sales $ 35,535 $ 21,979
Cost of sales 26,769 17,149
----------- -----------
Gross profit 8,766 4,830
Selling, general and administrative expenses 6,189 3,825
Non-recurring compensation expense - 2,312
----------- -----------
Operating income (loss) 2,577 (1,307)
Interest expense 654 607
Interest income (12) (20)
Other income, net (138) (142)
----------- -----------
Income (loss) before income taxes 2,073 (1,752)
Income tax expense 788 213
----------- -----------
Net income (loss) 1,285 (1,965)
Dividends on Series A Preferred Stock - (30)
----------- ------------
Net income (loss) attributable to common stock $ 1,285 $ (1,995)
=========== ===========
Net income (loss) per common share $ 0.27 $ (0.91)
========== ===========
Net income (loss) per common share assuming dilution $ 0.27 $ (0.91)
========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
-------------------------------
September 26, September 27,
1998 1997
-------------- -------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,285 $ (1,965)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Non-recurring compensation expense - 2,312
Depreciation 577 271
Amortization 171 54
Provision for losses on accounts receivable 67 3
Changes in operating assets and liabilities:
Accounts receivable (499) 1,187
Inventories (580) (958)
Prepaid expenses 59 (513)
Other assets (74) (5)
Accounts payable 771 1,968
Accrued liabilities (1,413) (625)
Income tax receivable/payable 175 353
----------- ----------
Net cash provided by operating activities 539 2,082
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (542) -
Purchases of property, plant and equipment (395) (208)
Proceeds from sale of property, plant and equipment and
assets held for sale - 35
Payments on notes receivable - 7
----------- ----------
Net cash used in investing activities (937) (166)
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving lines of credit 1,045 (1,315)
Net borrowings (payments) on term notes and other long-term debt (235) (481)
----------- -----------
Net cash provided by (used in) financing activities 810 (1,796)
Increase in cash 412 120
Cash at beginning of period 175 330
----------- ----------
Cash at end of period $ 587 $ 450
=========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 6
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of Denali Incorporated and its
wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. In the opinion of management, the consolidated
financial statements reflect all elimination entries and adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes included in the
Company's Form 10-K filed with the Securities and Exchange Commission on
September 15, 1998.
2. INVENTORIES
Inventories are summarized below (in thousands):
<TABLE>
<CAPTION>
September 26, 1998 June 27, 1998
------------------ -------------
<S> <C> <C>
Finished goods $ 4,595 $ 4,748
Raw materials 4,484 4,289
Work in process 1,990 1,452
---------- ---------
$ 11,069 $ 10,489
========== =========
</TABLE>
3. PER SHARE INFORMATION
The following table sets forth the weighted average shares outstanding
for the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended
--------------------------------
September 26, September 27,
1998 1997
--------------- --------------
(share data in thousands)
<S> <C> <C>
Weighted average common shares outstanding 4,829 2,185
Dilutive securities - employee stock options 8 -
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Weighted average common shares outstanding
assuming full dilution 4,837 2,185
======= =======
</TABLE>
4
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4. LONG-TERM DEBT
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. On October 29, 1998, this credit facility was amended
to increase the maximum revolving credit notes due in October 2002 from $23.0
million to $26.0 million. This facility also provides 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. As of
September 26, 1998, the Company had outstanding indebtedness of $5.7 million
under the term loans and $20.5 million under the revolving lines of credit. 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. 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. As of September 26, 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.
5. ACQUISITIONS
In the current fiscal year, the Company finalized the working capital
adjustment related to the CC&E acquisition, which resulted in an additional
$202,000 payment to the seller. In addition, the Company acquired a small
operation for approximately $340,000, which extended the geographical presence
of SEFCO. The pro forma effects of this acquisition were immaterial for
disclosure.
6. COMMITMENTS AND CONTINGENCIES
The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
that the supplier provide and the Company purchase at least 90% of the Company's
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.
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. In management's opinion, recorded accruals for
environmental liabilities 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.
5
<PAGE> 8
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.
7. SEASONALITY
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.
8. SUBSEQUENT EVENTS
In October 1998, Denali Incorporated entered into a letter of intent to
purchase the outstanding stock of Plasti-Fab Inc. Located in Tualatin, Oregon,
Plasti-Fab is a leader in providing fiberglass-reinforced flumes and metering
stations to the water and wastewater industries. Trailing 12 months revenue was
$4.5 million.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite underground storage tank
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 above-ground storage
tanks. 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 above-ground storage tank 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.
In February 1997, the Company acquired Ershigs, a manufacturer of
engineered fiberglass-reinforced plastic 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 fiberglass-reinforced
plastic products.
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, Ershigs and SEFCO form the Company's
Engineered Products Group known as Specialty Solutions.
RESULTS OF OPERATIONS
Three months ended September 26, 1998 compared with three months ended September
27, 1997
Net sales increased $13.6 million, or 62%, to $35.5 million in the
first quarter of fiscal 1999 from $22.0 million in the same quarter of fiscal
1998. A total of $8.4 million of the increase resulted from the inclusion of the
LaValley and SEFCO companies acquired in October 1997 and Fibercast acquired in
June 1998. The remaining $5.2 million increase in sales resulted from a 29%
increase in sales at Containment Solutions from $18.0 million in the fiscal 1998
period to $23.2 million in the fiscal 1999 period due to strong demand for the
Company's petroleum storage tank products.
7
<PAGE> 10
Gross profit increased $4.0 million, or 81%, to $8.8 million in the
fiscal 1999 period from $4.8 million in the fiscal 1998 period. $2.3 million of
the increase was related to the addition of LaValley, SEFCO and Fibercast with
the remaining $1.7 million primarily derived from increased gross profit at
Containment Solutions. Gross margin for the Company increased to 24.7% from 22%
in the prior year quarter due in part to an increase in the Containment
Solutions gross margins to 24.3% in the current fiscal period from 21.1% in the
prior fiscal period. The margins at Containment Solutions increased as a result
of better raw material pricing, price increases and manufacturing efficiencies
primarily resulting from increased volumes at its facilities. Also favorably
impacting margins in the quarter was the inclusion of the acquired companies at
Specialty Solutions with combined gross margins of 27.0%.
Selling, general and administrative expenses increased $2.4 million to
$6.2 million in the first quarter of fiscal 1999 from $3.8 million in the same
period last year, excluding the $2.3 million compensation charge taken in the
first quarter of fiscal 1998. The increase is primarily 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 as a percentage of net sales
remained at 17.4% for both periods reported.
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.
The Company's fiscal 1998 provision for income taxes differs from the
U.S. statutory rate due to the non-recurring compensation charge, state income
taxes and other permanent differences. The Company's fiscal 1999 provision for
income taxes differs from the U.S. statutory rate due to state income taxes and
other permanent differences.
Due to the above factors, net income (loss) attributable to common
stock increased from $(1,995,000) in the prior fiscal year period to $1,285,000
in the current fiscal year period. Earnings per share increased 80%, excluding
the non-recurring compensation expense, from $.15 in the fiscal 1998 period to
$.27 in the fiscal 1999 period on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 26, 1998 was $15.9 million, as compared to
$14.1 million at June 27, 1998. Cash provided by operating activities for the
three months ended September 26, 1998 was $539,000 compared to $2.1 million for
the same period last year. The decrease in cash provided by operating activities
is primarily a result of an increase in accounts receivable due to increased
sales volume during the first quarter of fiscal year 1999. Capital expenditures
were $395,000 and $208,000 for the three months ended September 26, 1998 and
September 27, 1997, respectively. Acquisitions, net of cash acquired, includes a
working capital adjustment related to the purchase of CC&E that resulted in an
additional $202,000 payment to the seller.
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 $32.2
million. As of September 26, 1998, the Company had outstanding indebtedness of
$5.7 million under the term loans and $20.5 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 4 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'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 $47.7 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 cash provided by operations.
8
<PAGE> 11
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.
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 compliant 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 significant 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.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Form 10-Q 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.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
10.37 Amendment No. 2 to the Credit Agreement
dated as of October 29, 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.
10.38 Guaranty Reaffirmation dated October 29, 1998 of
Containment Solutions, Inc., Denali Management,
Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fibercast Company, Fluid Containment Property,
Inc., Instrumentation Solutions, Inc., Specialty
Solutions, Inc., Fluid Containment, Inc., SEFCO,
Inc. and Hoover Containment, Inc.
10.39 Revolving Note dated October 29, 1998 for
$26,000,000 payable to NationsBank, N.A.
27 Financial Data Schedule
B. Reports on Form 8-K
A Form 8-K/A was filed with the Commission on July 20, 1998.
The Form 8-K/A reported the acquisition of CC&E on May 8, 1998
and included the following financial statements and pro forma
financial information required by Item 7 "Financial Statements
and Exhibits":
10
<PAGE> 13
Financial Statements of CC&E:
Report of Independent Public Accountants
Balance Sheets as of March 31, 1998 (Unaudited),
December 31, 1997, 1996 and 1995
Statements of Operations and Retained Earnings for the
Three Months Ended March 31, 1998 and 1997 (Unaudited)
and the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flow for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) and the Years Ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
Unaudited Pro Forma Financial Information of Denali
Incorporated:
Pro Forma Condensed Consolidated Balance Sheet as of
March 28, 1998
Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended March 28, 1998
Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended June 28, 1997
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
A Form 8-K/A was filed with the Commission on August 13, 1998.
The Form 8-K/A reported the acquisition of Fibercast on June
5, 1998 and included the following financial statements and
pro forma financial information required by Item 7 "Financial
Statements and Exhibits":
Financial Statements of Fibercast Company:
Report of Independent Auditors
Balance Sheets as of September 30, 1997, September 30,
1996, March 31, 1996 and March 31, 1995
Statements of Operations and Accumulated Deficit for
the Years Ended September 30, 1997 and March 31, 1996;
the Six Months Ended September 30, 1996 and Eight
Months Ended March 31, 1995
Statements of Cash Flow for the Years Ended
September 30, 1997 and March 31, 1996; the Six Months
Ended September 30, 1996 and Eight Months Ended March
31, 1995
Notes to Financial Statements
Independent Accountants' Review Report
Balance Sheets as of March 31, 1998 and 1997
Statements of Operations and Accumulated Deficit for
the Six Months Ended March 31, 1998 and 1997
Statements of Cash Flow for the Six Months Ended March
31, 1998 and 1997
Notes to Financial Statements
Unaudited Pro Forma Financial Information of Denali
Incorporated:
Pro Forma Condensed Consolidated Balance Sheet as of
March 28, 1998
Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended March 28, 1998
Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended June 28, 1997
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENALI INCORPORATED
-------------------
(Registrant)
Date: November 9, 1998 /s/ R. Kevin Andrews
-------------------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
12
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.37 Amendment No. 2 to the Credit Agreement dated as of
October 29, 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.
10.38 Guaranty Reaffirmation dated October 29, 1998 of Containment
Solutions, Inc., Denali Management, Inc., Ershigs Biloxi,
Inc., Ershigs, Inc., Fibercast Company, Fluid Containment
Property, Inc., Instrumentation Solutions, Inc., Specialty
Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc. and
Hoover Containment, Inc.
10.39 Revolving Note dated October 29, 1998 for $26,000,000 payable
to NationsBank, N.A.
27 Financial Data Schedule
13
<PAGE> 1
EXHIBIT 10.37
AMENDMENT NO. 2
This Amendment No. 2 dated as of October 29, 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, as amended by
Amendment No. 1 and Consent dated as of June 5, 1998 (as so amended, the "Credit
Agreement").
B. The Borrowers have requested that the Banks agree to increase the
Revolving Commitments under the Credit Agreement and to make certain other
amendments to the Credit Agreement.
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. Amendments.
(a) Section 5.22 of the Credit Agreement is hereby deleted in its
entirety.
(b) Section 5.3 is amended by adding the following sentence at the end
of such Section:
Prior to the occurrence of an Event of Default, the Banks
shall be responsible for any costs and expenses of any such audit,
except that during the period from January 1, 1999 through December 31,
2000, the Agent or any of its agents or representatives thereof may
conduct one field audit of the Credit Parties' accounting procedures
with respect to the Credit Parties' Receivables and Inventory at the
Company's cost and expense.
Section 3. Increase in Revolving Commitments. The Borrowers, the Agent,
and the Banks hereby agree that the Revolving Commitments of the Banks under the
Credit Agreement shall be modified to reflect the Revolving Commitments for the
Banks set forth on the attached Schedule 1 and upon the effectiveness of this
Agreement pursuant to Section 5 below, each such Bank's Revolving Commitment
shall be the Revolving Commitment set forth on the attached Schedule 1 and
replace for all purposes the amount provided below each such Bank's name on the
signature pages of the Credit Agreement.
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;
(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
<PAGE> 2
(c) as of the effectiveness of this Agreement, no Default or Event of
Default has occurred and is continuing.
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;
(c) the following documents shall have been executed and delivered to
the Agent:
(i) Replacement Revolving Notes to each of the Banks whose
Revolving Commitment has increased under the terms of this Agreement in
the maximum principal amount of such Bank's Revolving Commitment after
such increase; and
(ii) A Guarantors' reaffirmation in form satisfactory to the
Agent; and
(d) the Borrowers shall have paid all reasonable expenses payable to
the Agent and the Banks under the Loan Documents, including all reasonable
attorneys' fees which have been invoiced, and any fees agreed on between the
Company and the Agent 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> 3
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
<PAGE> 4
AGENT AND BANK:
NATIONSBANK, N.A., as Agent and Bank
By: /S/ Mark W. Montgomery
--------------------------
Mark W. Montgomery
Vice President
<PAGE> 5
Schedule 1
Revolving Commitments
Bank Revolving Commitment
---- --------------------
NationsBank, N.A. $26,000,000
<PAGE> 1
EXHIBIT 10.38
October 29, 1998
NationsBank, N.A., as Agent, and
the Banks party to the Credit Agreement referred to below
700 Louisiana
Houston, Texas 77002
Re: Credit Facility Provided by NationsBank, N.A. (successor by
merger to Nations Bank of Texas, N.A.), as Agent ("Agent"), to
Denali Incorporated, a Delaware corporation ("Borrower")
Ladies and Gentlemen:
This letter is being provided to you in connection with Amendment No. 2 dated as
of October 29, 1998 ("Amendment Agreement"), amending the Amended and Restated
Credit Agreement dated as of March 23, 1998, as amended by Amendment No. 1 and
Consent dated as of June 5, 1998 (as amended, the "Credit Agreement"), among the
Borrower, the Banks party thereto, and the Agent. Capitalized terms used herein
but not defined herein shall have the meanings specified by the Credit
Agreement.
The undersigned (the "Guarantors") have executed either the Subsidiary Guaranty
dated as of March 23, 1998 or the Joinder Agreement dated as of June 5, 1998
(collectively, the "Guaranty"), guaranteeing the full payment of the Borrowers'
obligations under the Credit Agreement and certain other amounts as described in
the Guaranty. Each Guarantor has reviewed the Amendment Agreement and related
documents ("Amendment Documents") and hereby approves them. Each Guarantor
represents and warrants that it has no defenses to the enforcement of the
Guaranty, and that according to its terms the Guaranty will continue in full
force and effect to guarantee the Borrowers' obligations under the Credit
Agreement and the other amounts described in the Guaranty following the
execution of the Amendment Documents. The delivery of this letter does not
indicate or establish a requirement that the Guaranty requires the Guarantors'
approval of amendments to the Credit Agreement, but rather has been furnished to
the Agent and the Banks as a courtesy at the Agent's request.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Executed as of the date first above written.
Very truly yours,
CONTAINMENT SOLUTIONS, INC.
DENALI MANAGEMENT, INC.
ERSHIGS BILOXI, INC.
ERSHIGS, INC.
FIBERCAST COMPANY
FLUID CONTAINMENT PROPERTY, INC.
INSTRUMENTATION SOLUTIONS, INC.
SPECIALTY SOLUTIONS, INC.
By: /S/ R. Kevin Andrews
--------------------------
R. Kevin Andrews
Treasurer
<PAGE> 2
FLUID CONTAINMENT, INC.
SEFCO, INC.
HOOVER CONTAINMENT, INC.
By: /S/ Cathy L. Smith
---------------------------
Cathy L. Smith
Secretary
<PAGE> 1
EXHIBIT 10.39
REVOLVING NOTE
$26,000,000 Houston, Texas October 29, 1998
For value received, the undersigned DENALI INCORPORATED, a Delaware
corporation ("Company"), hereby promises to pay to the order of NationsBank,
N.A. ("Bank"), the principal amount of Twenty-Six Million and No/100 Dollars
($26,000,000) or, if less, the aggregate outstanding principal amount of the
Revolving Advances (as defined in the Credit Agreement referred to below) made
by the Bank to the Company, together with accrued but unpaid interest on the
principal amount of each such Revolving Advance from the date of such Revolving
Advance until such principal amount is paid in full, at such interest rates, and
at such times, as are specified in the Credit Agreement.
This Revolving Note is one of the Revolving Notes referred to in, and
is entitled to the benefits of, and is subject to the terms of, the Amended and
Restated Credit Agreement dated as of March 23, 1998 (as the same may be
amended, restated, modified, or supplemented from time to time, the "Credit
Agreement"), among the Company, the other Borrowers party thereto, the financial
institutions parties thereto ("Banks"), and NationsBank of Texas, N.A., as agent
for the Banks ("Agent"). Capitalized terms used herein but not defined herein
shall have the meanings specified by the Credit Agreement. The Credit Agreement
(a) provides for, among other things, the making of Revolving Advances by the
Bank to the Company from time to time, the indebtedness of the Company resulting
from each such Revolving Advance being evidenced by this Revolving Note, and (b)
contains provisions for, among other things, acceleration of the maturity of
this Revolving Note upon the happening of certain events stated in the Credit
Agreement and for prepayments of principal prior to the maturity of this
Revolving Note upon the terms and conditions specified in the Credit Agreement.
This Revolving Note is issued in renewal and increase of the Revolving Note
dated March 23, 1998 in the principal amount of $23,000,000 executed by the
Company to the order of the Bank.
Both principal and interest are payable to the Agent in the currency,
at the times, in the locations, and in the manner specified in the Credit
Agreement. The Bank shall record all Revolving Advances and payments of
principal made under this Revolving Note, but no failure of the Bank to make
such recordings shall affect the Company's repayment obligations under this
Revolving Note.
It is contemplated that because of prepayments there may be times when
no indebtedness is owed under this Revolving Note. Notwithstanding such
prepayments, this Revolving Note shall remain valid and shall be in force as to
Revolving Advances made pursuant to the Credit Agreement after such prepayments.
It is the intention of the Bank and the Company to conform strictly to
any applicable usury laws. Accordingly, the terms of the Credit Agreement
relating to the prevention of usury will be strictly followed.
EXECUTED as of the date first above written.
DENALI INCORPORATED
By: /s/ R. Kevin Andrews
--------------------
Name: R. Kevin Andrews
Title: CFO/Treasurer
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