<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 DECEMBER 27, 1997
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
- -------------------------------------------------------------------------------
(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
- -------------------------------------------------------------------------------
(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 No X
-------- --------
As of January 30, 1998, the number of shares of common stock outstanding was
4,574,100.
<PAGE> 2
DENALI INCORPORATED
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 27, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 28, 1997 and December 27, 1997 . . . . . . . . . . . . 1
Consolidated Statements of Operations - Three and Six Months Ended
December 28, 1996 and December 27, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Stockholders' Equity (Deficit) -
December 27, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows - Six Months Ended
December 28, 1996 and December 27, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements - December 27, 1997 . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, June 28,
1997 1997
------------ ----------
(Unaudited) (Note)
ASSETS (In thousands)
Current assets:
<S> <C> <C>
Cash $ 473 $ 330
Investment in equity securities 6,100 -
Accounts and notes receivable, net of allowances of
$729,000 at December 27, 1997 and $605,000
at June 28, 1997 17,376 17,376
Inventories 7,055 6,686
Income tax receivable - 40
Prepaid expenses 1,618 913
Deferred tax assets 780 934
---------- ----------
Total current assets 33,402 26,279
Property, plant and equipment, net 11,755 7,695
Assets held for sale 1,485 1,520
Notes receivable 178 907
Goodwill, net 5,743 1,620
Deferred tax assets 1,525 1,953
Other assets 1,287 1,110
--------- ----------
Total assets $ 55,375 $ 41,084
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 9,248 $ 10,173
Accrued liabilities 5,993 5,249
Income tax payable 275 -
Notes payable - 1,460
Current maturities of long-term debt 1,195 1,378
---------- ----------
Total current liabilities 16,711 18,260
Long-term debt, less current maturities 11,521 21,186
Other long-term liabilities 706 979
Series A Preferred Stock, redeemable at $250 per share,
$.01 par value:
Authorized shares - 16,000
Issued and outstanding shares - none at December 27, 1997
and 4,800 at June 28, 1997 - 1,200
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 4,498,640 at
December 27, 1997 and 2,184,910 at June 28, 1997 45 22
Additional paid-in capital 28,686 297
Retained deficit (2,294) (860)
---------- ----------
Total stockholders' equity (deficit) 26,437 (541)
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 55,375 $ 41,084
========== ==========
</TABLE>
See accompanying notes.
Note: The balance sheet at June 28, 1997 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
<PAGE> 4
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- ---------------------------
December 28, December 27, December 28, December 27,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 16,970 $ 24,914 $ 34,673 $ 46,893
Cost of sales 13,762 19,183 27,711 36,332
----------- ----------- ----------- ----------
Gross profit 3,208 5,731 6,962 10,561
Selling, general and administrative expenses 2,542 4,421 5,328 8,246
Non-recurring compensation expense - - - 2,312
----------- ----------- ----------- ----------
Operating income 666 1,310 1,634 3
Interest expense 495 486 993 1,093
Interest income (35) (27) (60) (47)
Other income, net (44) (84) (112) (226)
----------- ---------- ---------- ---------
Income (loss) before income taxes 250 935 813 (817)
Income tax expense 120 355 390 568
----------- ----------- ----------- ----------
Net income (loss) before extraordinary item 130 580 423 (1,385)
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $12 - 19 - 19
----------- ----------- ----------- ----------
Net income (loss) 130 561 423 (1,404)
Dividends on Series A Preferred Stock (30) - (60) (30)
----------- ---------- ----------- ---------
Net income (loss) attributable to common stock $ 100 $ 561 $ 363 $ (1,434)
=========== =========== =========== ==========
Net income (loss) per common share:
Income (loss) before extraordinary item $ 0.05 $ 0.18 $ 0.17 $ (0.52)
Extraordinary item - (0.01) - (0.01)
----------- ----------- ---------- ---------
Net income (loss) per common share $ 0.05 $ 0.17 $ 0.17 $ (0.53)
=========== =========== ========== =========
Net income (loss) per common share assuming dilution:
Income (loss) before extraordinary item $ 0.04 $ 0.17 $ 0.16 $ (0.52)
Extraordinary item - (0.01) - (0.01)
----------- ----------- ---------- ---------
Net income (loss) per common share
assuming dilution $ 0.04 $ 0.16 $ 0.16 $ (0.53)
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 5
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
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 25,994 - 26,017
Exercise of employee stock options 38 - 83 - 83
Dividends declared - - - (30) (30)
Net loss - - - (1,404) (1,404)
----- ------ ---------- -------- ------
Balance at December 27, 1997 4,499 $ 45 $ 28,686 $ (2,294) $ 26,437
===== ====== ========== ======== ========
</TABLE>
3
<PAGE> 6
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
-----------------------------
December 28, December 27,
1996 1997
----------- -----------
(In thousands)
Operating Activities:
<S> <C> <C>
Net income (loss) $ 423 $ (1,404)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-recurring compensation expense - 2,312
Depreciation 497 647
Amortization 84 119
Provision for losses on accounts receivable 36 64
Gain on sale of property, plant and equipment and
assets held for sale (41) (2)
Changes in operating assets and liabilities:
Accounts receivable (590) 3,822
Inventories 1,093 (241)
Prepaid expenses 359 (669)
Other assets (34) (441)
Accounts payable (609) (1,828)
Accrued liabilities (517) 91
Income tax receivable/payable 632 366
---------- ---------
Net cash provided by operating activities 1,333 2,836
Investing Activities:
Acquisitions, net of cash acquired - (9,610)
Purchases of property, plant and equipment (264) (486)
Proceeds from sale of property, plant and equipment and
assets held for sale 49 37
Payments on notes receivable 13 84
Purchases of equity securities (868) (6,100)
--------- --------
Net cash used in investing activities (1,070) (16,075)
Financing Activities:
Proceeds from common stock issuance - 26,017
Proceeds from exercise of stock options - 83
Redemption of preferred stock - (1,200)
Preferred dividends paid - (210)
Net borrowings (payments) under revolving lines of credit 106 (9,988)
Net (payments) on term notes and other long-term debt (324) (1,320)
--------- --------
Net cash provided by (used in) financing activities (218) 13,382
Increase in cash 45 143
Cash at beginning of period 124 330
---------- ---------
Cash at end of period $ 169 $ 473
========== =========
</TABLE>
See accompanying notes.
4
<PAGE> 7
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. 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 registration statement on Form S-1 filed with the SEC on November 20,
1997.
2. Significant Accounting Policies
Investments in Equity Securities
The Company determines the appropriate classification of investments in
equity securities at the time of purchase and confirms such designation as of
the balance sheet date. Marketable equity securities are classified as
available-for-sale securities and are stated at fair value, with any
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Realized gains and losses are recognized based on the
specific-identification method for equity securities sold. The Company's
investments are in a mutual fund that invests principally in high quality,
short-term U.S. dollar denominated money market instruments. As of December
27, 1997, the fair value of investments in equity securities, using quoted
market prices, approximates their carrying value.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported 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 necessary, restated to
conform to the Statement 128 requirements.
5
<PAGE> 8
3. Inventories
Inventories are summarized below (in thousands):
<TABLE>
<CAPTION>
December 27, 1997 June 28, 1997
----------------- -------------
<S> <C> <C>
Finished goods $2,811 $2,147
Raw materials 3,133 2,805
Work in process 1,111 1,734
------- -------
$7,055 $6,686
======= =======
</TABLE>
4. Income Taxes
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
The Company's provision for income taxes differs from the U.S. statutory rate
of 34% due primarily to the non-recurring compensation charge, discussed in
Note 7, being non-deductible for income tax purposes, state income taxes and
other permanent differences.
5. 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 Six months ended
--------------------------- ---------------------------
December 28, December 27, December 28, December 27,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(share data in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 2,185 3,212 2,185 2,699
Dilutive securities - employee stock options 94 300 94 -
------- ------ ------- ------
Weighted average common shares outstanding
assuming full dilution 2,279 3,512 2,279 2,699
======= ===== ====== ======
</TABLE>
6. 1997 Stock Option Plan
In September 1997, the Company adopted an incentive stock option plan
(the "1997 Plan"). The 1997 Plan permits the granting of both incentive stock
options and non-qualified stock option awards to all employees of the Company.
Awards to acquire up to an aggregate of 362,873 shares may be granted pursuant
to the 1997 Plan. The Board of Directors selects the employees who will
receive the awards, determines the type and terms of the awards to be granted
and interprets and administers the 1997 Plan.
In September 1997, the Company awarded options to acquire 171,030 shares
of the Company's common stock. An additional option for 7,700 shares was
granted in December 1997. Options for 149,813 shares vest 40% immediately and
the remainder over a four year period. The remaining options for 28,917 shares
vest ratably over four years. All of the options were granted at fair market
value.
6
<PAGE> 9
7. Reorganization of Subsidiaries and Exchange of Stock Options
Effective in 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 the Company. 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 options for 1,400 shares outstanding at an exercise price
of $259. In September 1997, the Company exchanged the CSI options for options
for 254,643 shares of the Company's common stock at an exercise price of $1.42.
In connection with the exchange, the Company recognized a non-recurring
compensation charge in the quarter ended September 27, 1997 of approximately
$2.3 million.
8. Initial Public Offering
The Company filed a final registration statement with the SEC on November
20, 1997 to register the sale of shares of its common stock. In connection
with this initial public offering, the Company issued 2,276,000 shares and
received net proceeds of $26 million. The Company used the net proceeds of the
sale to repay a portion of the outstanding indebtedness under its credit
facilities, to repay $195,000 for a bank note payable, to repay $6.7 million of
a subordinated unsecured note payable to a supplier, to repay the $1.1 million
unsecured note payable (including interest) to a seller, to redeem the
outstanding shares of preferred stock totaling approximately $1.4 million,
including accrued and unpaid dividends, and to fund general working capital
purposes.
9. Common Stock
On September 23, 1997, the Company effected a 1,715-for-1 stock split.
All stockholders' equity balances and disclosures in the accompanying financial
statements have been retroactively restated for the stock split. The effect of
the stock split was to transfer an amount equal to the par value of the new
shares issued from additional paid-in capital to common stock.
10. 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.
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).
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. The acquisition was accounted for under the purchase
method of accounting whereby the assets and liabilities of the acquired company
were adjusted to their estimated fair values at the acquisition date. Under the
purchase agreement, the Company acquired net assets of $2.4 million in exchange
for $5.1 million in cash, which is net of $700,000 cash acquired, and incurred
approximately $100,000 in acquisition costs resulting in the recording of
goodwill of approximately $2.8 million. The consolidated financial statements
reflect all operations for the acquired company since the date of acquisition.
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. The
acquisition was accounted for under the purchase method of accounting whereby
the assets and liabilities of the acquired company were adjusted to their
estimated fair values at the acquisition date. Under the purchase agreement,
the Company acquired net assets of $3.0 million, subject to finalization, in
exchange for $4.3 million in cash and incurred approximately $100,000 in
acquisition costs resulting in the recording of goodwill of approximately $1.4
million. The consolidated financial statements reflect all operations for the
acquired company since the date of acquisition.
7
<PAGE> 10
The following unaudited results of operations have been prepared assuming
the acquisitions had occurred as of the beginning of the periods presented.
Those results are not necessarily indicative of results of future operations
nor of results that would have occurred had the acquisitions been consummated
as of the beginning of the periods presented.
<TABLE>
<CAPTION>
Six months ended
------------------------------
December 28, December 27,
1996 1997
----------- ------------
(In thousands, except per
share amounts)
<S> <C> <C>
Net sales $ 57,232 $ 52,925
Net income (loss) $ (508) $ (1,223)
Net income (loss) per common share assuming dilution $ (0.26) $ (0.46)
</TABLE>
11. 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. The new senior credit facility provides for a maximum of
$19.7 million revolving credit notes due in October 2002, and a maximum of $10.5
million in term loans with equal monthly payments of $100,000 plus interest due
in October 2002 or upon the termination of the revolving credit notes. The new
credit notes may be extended for an initial term of five years and may be
renewed in increments of one year thereafter, unless notice of termination is
provided by either party 90 days prior to an anniversary date. The new
revolving credit notes provide for borrowings, at the Company's option, at
either the Bank's prime rate plus 1/2% or LIBOR plus 2 3/4%. Borrowings under
the new revolving credit notes will be based on accounts receivable and
inventory as specified in the agreement's borrowing base formula. The new term
loans provide for borrowings, at the Company's option, at either the Bank's
prime rate plus 1/2% or LIBOR plus 3%. The new senior credit facility provides
availability for letters of credit up to $1.5 million subject to availability of
borrowing capacity under the revolving credit notes. The new senior credit
facility requires the Company's subsidiaries to maintain certain financial
covenants and requires an annual fee of 0.375% on the unused portion of the
revolving credit notes. The new senior credit facility is secured by accounts
receivable, property, equipment and general intangible assets of the Company's
subsidiaries.
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 a gain of $591,000 in November 1997 from the prepayment of a supplier
note. As a result of these transactions, the Company incurred a net
extraordinary loss of $31,000 ($19,000 net of tax) during the quarter ended
December 27, 1997.
8
<PAGE> 11
12. 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.
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion
of management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the consolidated financial position, results
of operations or cash flows of the Company.
13. 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.
9
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Since inception in 1994, the Company has acquired five businesses. Due
to the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of current or
future periods. Each of the acquisitions has been accounted for under the
purchase method of accounting. Accordingly, the acquired businesses have been
included in the Company's results of operations from the date of acquisition.
The Company was formed in December 1994 to acquire certain assets and
assume certain liabilities of the fiberglass composite underground storage
tanks ("USTs") business of Owens Corning, including five manufacturing
facilities. The purchase price was $16.6 million consisting of $5.6 million in
cash, $9.3 million in notes payable and approximately $1.7 million in
acquisition costs. The Company significantly restructured the operations of
this business at the time of purchase. Two of the five manufacturing
facilities of the business were closed, resulting in a significant reduction in
fixed manufacturing overhead. Operating costs were significantly reduced
throughout the Company, in part through the elimination of approximately 20
management positions. The Company sold the two closed and idle manufacturing
facilities in fiscal 1996.
In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover Containment, Inc., a manufacturer of steel rectangular
aboveground storage tanks ("ASTs"). The purchase price of $5.5 million
consisted of $5.4 million in cash and acquisition costs of approximately
$100,000. 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.
In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered fiberglass reinforced products ("FRP"), as the first
of the Company's Engineered Products Group. The $6.1 million purchase price
consisted of $5.0 million in cash, $1.0 million in a note payable and
acquisition costs of approximately $80,000. Substantial operational changes
were made upon the purchase of Ershigs, including the closing of one of
Ershigs' three manufacturing plants and the restructuring of most of Ershigs'
sales, general and administrative functions, which enabled the Company to
enhance profitability.
In October 1997, the Company acquired SEFCO, Inc. ("SEFCO") for
approximately $5.1 million in net cash and $100,000 in direct acquisition
costs. SEFCO is a manufacturer of engineered field-erected aboveground steel
tanks. In October 1997, the Company also acquired GL&V LaValley Construction,
Inc. ("LaValley") for $4.3 million in cash and $100,000 in direct acquisition
costs. LaValley manufactures engineered FRP products. LaValley and SEFCO,
together with Ershigs, form the Company's Engineered Products Group.
Results of Operations
Three months ended December 27, 1997 compared with three months ended December
28, 1996
Net sales increased $7.9 million, or 47%, to $24.9 million in the
second quarter of fiscal 1998 from $17 million in the same quarter of fiscal
1997. $6.2 million of the increase resulted from the inclusion of the Ershigs,
LaValley and SEFCO companies acquired in February 1997 (Ershigs) and October
1997 (LaValley and SEFCO). The three acquired companies form the Company's
Engineered Products Group. The remaining $1.7 million increase in sales
resulted from a 10% increase in sales at the Company's Containment Products
Group from $17 million in the fiscal 1997 period to $18.7 million in the fiscal
1998 period due to strong demand for the Company's petroleum storage tank
products.
10
<PAGE> 13
Gross profit increased $2.5 million, or 79%, to $5.7 million in the
fiscal 1998 period from $3.2 million in the fiscal 1997 period. $1.7 million
of the increase was related to the addition of the Engineered Products Group
with the remaining $800,000 derived from increased gross profit in the
Containment Products Group. Gross margin for the Company increased to 23% from
18.9% in the prior year quarter due to an increase in the Containment Products
Group gross margins from 18.9% in the prior fiscal period to 21.3% in the
current fiscal period. The margins at the Containment Products Group increased
as a result of better raw material pricing and better volume through the
Group's facilities. Also favorably impacting margins in the quarter was the
inclusion of the higher margin Engineered Products Group in the fiscal 1998
period. The margins at the Engineered Products Group were 28.1% for the
quarter.
Selling, general and administrative expenses for the fiscal 1998
second quarter totaled $4.4 million (17.7% of revenues), compared with $2.5
million (15% of revenues) in the prior year fiscal period. $1.1 million of the
increase was due to the inclusion of the Engineered Products Group in the
fiscal 1998 period with the balance of the increase resulting from higher
Corporate expenses associated with the Company's growth and increased sales and
administrative expenses at the Containment Products Group.
As a result of the Company refinancing its credit facilities in
October 1997, the Company paid prepayment penalties of $323,000 and charged to
expense unamortized debt organization costs of $299,000. In addition, the
Company realized a gain of $591,000 in the 1998 fiscal quarter from the
prepayment of a supplier note. As a result of these transactions, the Company
incurred a net extraordinary loss of $31,000 ($19,000 net of tax) in the second
quarter of fiscal 1998.
The Company's 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.
Due to the above factors, net income before extraordinary charges
increased from $130,000 in the prior fiscal year period to $580,000 in the
current fiscal year period. Earnings per diluted share before extraordinary
item increased from $0.04 to $0.17. Net income after extraordinary item and
earnings per diluted share for the second quarter of fiscal 1998 were $561,000
and $0.16, respectively.
Six months ended December 27, 1997 compared with six months ended December 28,
1996
Net sales increased $12.2 million, or 35%, to $46.9 million in the
first six months of fiscal 1998 from $34.7 million in the same period of fiscal
1997. $10.2 million of the increase resulted from the inclusion in the fiscal
1998 period of the Company's Engineered Products Group. The remaining $2
million increase in sales resulted from a 5.8% increase in sales at the
Company's Containment Products Group from $34.7 million in the fiscal 1997
period to $36.7 million in the fiscal 1998 period due to strong demand for the
Company's petroleum storage tank products.
Gross profit increased $3.6 million, or 52%, to $10.6 million in the
fiscal 1998 period from $7.0 million in the fiscal 1997 period. $2.8 million
of the increase was related to the addition of the Engineered Products Group
with the remaining $800,000 derived from increased gross profit in the
Containment Products Group. Gross margin for the Company increased to 22.5%
from 20.1% in the prior year period due in part to an increase in the
Containment Products Group gross margins from 20.1% in the prior fiscal period
to 21.2% in the current fiscal period. The margins at the Containment Products
Group increased as a result of better raw material pricing and better volume
through the Group's facilities. Also favorably impacting margins in the six
months was the inclusion of the higher margin Engineered Products Group in the
fiscal 1998 period. The margins at the Engineered Products Group were 27.2%
for the period.
11
<PAGE> 14
Selling, general and administrative expenses for the first six months
of fiscal 1998 totaled $8.2 million (17.6% of revenues) compared to $5.3
million (15.4% of revenues) in the prior fiscal period. $2 million of the
increase was due to the inclusion of the Engineered Products Group in the
fiscal 1998 period with the remaining increase resulting from higher Corporate
expenses associated with the Company's growth and increased sales and
administrative expenses at the Containment Products Group.
The Company recognized a $2.3 million non-recurring compensation
charge in the first quarter of fiscal 1998 due to the exchange of subsidiary
stock options for Denali stock options.
Interest expense increased $100,000 from $1.0 million in the first six
months of the prior year to $1.1 million in the current year period due to the
addition of debt resulting from the Engineered Products Group acquisitions.
The Company's 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.
As a result of the Company refinancing its credit facilities in
October 1997, the Company paid prepayment penalties of $323,000 and charged to
expense unamortized debt organization costs of $299,000. In addition, the
Company realized a gain of $591,000 in the 1998 fiscal quarter from the
prepayment of a supplier note. As a result of these transactions, the Company
incurred a net extraordinary loss of $31,000 ($19,000 net of tax) in the second
quarter of fiscal 1998.
Due to the above factors, net loss before extraordinary charges in the
first six months of fiscal 1998 was $(1,385,000), or $(0.52) per diluted share,
compared with net income of $423,000, or $0.16 per diluted share, in the prior
year six month period. Net income and earnings per diluted share for the first
six months of fiscal 1998 before the $2.3 million non-recurring compensation
charge were $927,000 and $0.33, respectively, before extraordinary item. Net
loss after extraordinary item and loss per diluted share for the six months of
fiscal 1998 were $(1,404,000) and $(0.53), respectively.
Liquidity and Capital Resources
As further described in Note 8 to the Denali Incorporated Consolidated
Financial Statements, the Company received net proceeds of $26 million, after
expenses, from its initial public offering completed in the second quarter.
Working capital at December 27, 1997 was $16.7 million, as compared to
$8.0 million at June 28, 1997. The increase in working capital is primarily
due to the October 1997 acquisitions, excess proceeds from the initial public
offering and improved operating cash flow. Cash provided by operating
activities for the six months ended December 31, 1997 was $2.8 million compared
to $1.3 million for the same period last year. The improvement in cash
provided by operating activities is primarily a result of a $485,000 increase
in net income, before an adjustment of $2.3 million for a non-recurring
compensation charge, along with increased collections of accounts receivable.
The principal uses of cash for the six months ended December 27, 1997
were to fund acquisitions (net of cash acquired) of $9.6 million, net repayment
of bank debt of $10.0 million, redemption of Series A Preferred Stock totaling
$1.4 million, including accrued and unpaid dividends, and capital
expenditures of $486,000.
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 $30.2
million. As of December 27, 1997, the Company had outstanding indebtedness of
$10.0 million under the term loans and $500,000 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 11 of Notes to the
Consolidated Financial Statements for certain information regarding the credit
facility. The credit facility bears interest per annum at varying rates of
LIBOR plus a margin ranging from 2 3/4% to 3% or the prime rate plus 1/2%.
The credit facility has a five year term.
12
<PAGE> 15
The Company also has $1.0 million in Industrial Revenue Bonds ("IRBs")
assumed in connection with its acquisition of the Owens Corning fiberglass
composite UST business. The IRBs bear interest at 9.9% per annum, mature in
February 2001 and are secured by the Company's Conroe, Texas manufacturing
facility.
The Company anticipates that its operating cash flows and available
line of credit will be adequate to fund future capital commitments and working
capital requirements for the next 12 months.
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 is currently assessing the impact of the year 2000 on its
computer software, hardware and other systems, including those of vendors,
customers and other third parties. The Company anticipates completing its
assessment no later than June 1998. Also, the Company believes that with
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for its computer
systems. The potential expense to ensure that all of the computer and other
systems are year 2000 compliant cannot be determined until such an assessment is
completed.
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.
13
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 12 to Notes to Consolidated
Financial Statements in Part I of this report is incorporated by reference
thereto.
Item 2. Changes in Securities
On November 20, 1997, the Securities and Exchange Commission declared
the Company's registration statement on Form S-1, File No. 333-36857,
effective, and the offering commenced on that date. Such registration
statement registered the sale at an offering price of $13.00 per share for
2,100,000 shares of common stock by the Company, and the sale, pursuant to
over-allotment options granted to the underwriters, of up to an additional
315,000 shares of common stock by the Company for an aggregate of 2,415,000
shares of common stock registered at an aggregate offering price of
$31,395,000. On November 21, 1997, the Company sold 2,100,000 shares of the
Company's common stock. On December 3, 1997, the underwriters purchased an
additional 176,000 shares of common stock from the Company pursuant to the
over-allotment options, at which time the offering was terminated with an
aggregate of 2,276,000 shares of common stock sold at an aggregate price of
$29,588,000. The Company received $27,500,000 of the total proceeds. Morgan
Keegan & Company, Inc. and Rauscher Pierce Refsnes, Inc. were the underwriters
of the offering.
Total expenses incurred were approximately $3.6 million, consisting of
$2.1 million of underwriting discounts and commissions, and approximately $1.5
million of accounting, legal and other expenses. After deducting the Company's
underwriting commissions and other expenses, the net proceeds to the Company
were approximately $26.0 million. None of such expenses were paid directly or
indirectly to directors or officers of the Company or to any person owning 10%
or more of any class of equity securities of the Company or to any affiliates
of the Company.
Of the approximately $26.0 million of net proceeds to the Company from
the offering, the Company repaid approximately $11.7 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
supplier, 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.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
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 will continue to serve as Chief Operating Officer.
14
<PAGE> 17
<TABLE>
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December 27, 1997.
</TABLE>
15
<PAGE> 18
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: February 10, 1998 /s/ R. Kevin Andrews
-------------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-27-1997
<CASH> 473
<SECURITIES> 6,100
<RECEIVABLES> 18,105
<ALLOWANCES> 729
<INVENTORY> 7,055
<CURRENT-ASSETS> 33,402
<PP&E> 14,563
<DEPRECIATION> 2,808
<TOTAL-ASSETS> 55,375
<CURRENT-LIABILITIES> 16,711
<BONDS> 11,521
0
0
<COMMON> 45
<OTHER-SE> 26,392
<TOTAL-LIABILITY-AND-EQUITY> 55,375
<SALES> 46,893
<TOTAL-REVENUES> 46,893
<CGS> 36,332
<TOTAL-COSTS> 46,890
<OTHER-EXPENSES> (226)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,093
<INCOME-PRETAX> (817)
<INCOME-TAX> 568
<INCOME-CONTINUING> (1,385)
<DISCONTINUED> 0
<EXTRAORDINARY> (19)
<CHANGES> 0
<NET-INCOME> (1,404)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
