<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 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
- -------------------------------------------------------------------------------
(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 X No
----- -----
As of January 30, 1999, the number of shares of common stock outstanding was
4,889,609.
<PAGE> 2
DENALI INCORPORATED
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 26, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets............................................................. 1
Consolidated Statements of Operations .................................................. 2
Consolidated Statements of Stockholders' Equity......................................... 3
Consolidated Statements of Cash Flows................................................... 4
Notes to Consolidated Financial Statements.............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................................... 13
Item 3. Defaults Upon Senior Securities......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
Item 5. Other Information ...................................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................................ 13
Signatures ........................................................................................ 15
Index to Exhibits ........................................................................................ 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, June 27,
1998 1998
---------- ----------
(Unaudited) (Note)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 158 $ 175
Accounts and notes receivable, net of allowances of
$838,000 at December 26, 1998 and $907,000
at June 27, 1998 27,592 23,465
Inventories 12,579 10,489
Income tax receivable 24 --
Prepaid expenses 1,465 1,152
Deferred tax assets 1,293 1,242
---------- ----------
Total current assets 43,111 36,523
Property, plant and equipment, net 20,824 20,270
Assets held for sale 449 449
Notes receivable 178 178
Goodwill, net 20,905 19,435
Deferred tax assets 1,947 1,947
Other assets 1,529 1,580
---------- ----------
Total assets $ 88,943 $ 80,382
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,660 $ 13,140
Accrued liabilities 8,176 7,180
Income tax payable -- 620
Current maturities of long-term debt 1,442 1,442
---------- ----------
Total current liabilities 25,278 22,382
Long-term debt, less current maturities 31,396 28,454
Other long-term liabilities 785 872
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 4,889,609 at
December 26, 1998 and 4,828,743 at June 27, 1998 49 48
Additional paid-in capital 29,795 29,187
Retained earnings (deficit) 1,640 (561)
---------- ----------
Total stockholders' equity 31,484 28,674
---------- ----------
Total liabilities and stockholders' equity $ 88,943 $ 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
<PAGE> 4
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- ----------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 38,353 $ 24,914 $ 73,888 $ 46,893
Cost of sales 28,213 19,183 54,982 36,332
---------- ---------- ---------- ----------
Gross profit 10,140 5,731 18,906 10,561
Selling, general and administrative expenses 7,317 4,421 13,506 8,246
Non-recurring compensation expense 682 -- 682 2,312
---------- ---------- ---------- ----------
Operating income 2,141 1,310 4,718 3
Interest expense 631 486 1,285 1,093
Interest income -- (27) (12) (47)
Other expense (income), net 31 (84) (107) (226)
---------- ---------- ---------- ----------
Income (loss) before income taxes 1,479 935 3,552 (817)
Income tax expense 563 355 1,351 568
---------- ---------- ---------- ----------
Net income (loss) before extraordinary item 916 580 2,201 (1,385)
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $12 -- 19 -- 19
---------- ---------- ---------- ----------
Net income (loss) 916 561 2,201 (1,404)
Dividends on Series A Preferred Stock -- -- -- (30)
---------- ---------- ---------- ----------
Net income (loss) attributable to common stock $ 916 $ 561 $ 2,201 $ (1,434)
========== ========== ========== ==========
Net income (loss) per common share:
Income (loss) before extraordinary item $ 0.19 $ 0.18 $ 0.45 $ (0.52)
Extraordinary item -- (0.01) -- (0.01)
---------- ---------- ---------- ----------
Net income (loss) per common share $ 0.19 $ 0.17 $ 0.45 $ (0.53)
========== ========== ========== ==========
Net income (loss) per common share assuming dilution:
Income (loss) before extraordinary item $ 0.19 $ 0.17 $ 0.45 $ (0.52)
Extraordinary item -- (0.01) -- (0.01)
---------- ---------- ---------- ----------
Net income (loss) per common share
assuming dilution $ 0.19 $ 0.16 $ 0.45 $ (0.53)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 5
DENALI INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(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 27, 1998 4,829 $ 48 $ 29,187 $ (561) $ 28,674
Issuance of common stock in
connection with the purchase
of Plasti-fab 61 1 608 -- 609
Net income -- -- -- 2,201 2,201
-------- -------- -------- -------- --------
Balance at December 26, 1998 4,890 $ 49 $ 29,795 $ 1,640 $ 31,484
======== ======== ======== ======== ========
</TABLE>
3
<PAGE> 6
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
-------------------------------
December 26, December 27,
1998 1997
-------------- -------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,201 $ (1,404)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-recurring compensation expense -- 2,312
Depreciation 1,154 647
Amortization 355 119
Provision for losses on accounts receivable 159 64
Gain on sale of property, plant and equipment and
assets held for sale -- (2)
Changes in operating assets and liabilities:
Accounts receivable (3,095) 3,822
Inventories (1,616) (241)
Prepaid expenses (280) (669)
Other assets (149) (441)
Accounts payable 1,914 (1,828)
Accrued liabilities 573 91
Income tax receivable/payable (644) 366
---------- ----------
Net cash provided by operating activities 572 2,836
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (1,757) (9,610)
Purchases of property, plant and equipment (1,166) (486)
Proceeds from sale of property, plant and equipment and
assets held for sale -- 37
Payments on notes receivable -- 84
Purchases of equity securities -- (6,100)
---------- ----------
Net cash used in investing activities (2,923) (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 2,915 (9,988)
Net payments on term notes and other long-term debt (581) (1,320)
---------- ----------
Net cash provided by financing activities 2,334 13,382
Increase (decrease) in cash (17) 143
Cash at beginning of period 175 330
---------- ----------
Cash at end of period $ 158 $ 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. 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>
December 26, 1998 June 27, 1998
----------------- -------------
<S> <C> <C>
Finished goods $ 5,474 $ 4,748
Raw materials 5,009 4,289
Work in process 2,096 1,452
---------- ---------
$ 12,579 $ 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 Six Months Ended
--------------------------- ---------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(share data in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,853 3,212 4,841 2,699
Dilutive securities - employee stock options -- 300 4 --
---------- ---------- ---------- ----------
Weighted average common shares outstanding
assuming full dilution 4,853 3,512 4,845 2,699
========== ========== ========== ==========
</TABLE>
5
<PAGE> 8
4. LONG-TERM DEBT
On October 24, 1997, the Company's subsidiaries entered into a senior
credit facility, as amended, with a 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 provided 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
December 26, 1998, the Company had outstanding indebtedness of $5.5 million
under the term loans and $22.4 million under the revolving lines of credit. The
revolving credit notes provided 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 revolving credit notes were based on
accounts receivable and inventory as specified in the agreement's borrowing base
formula. The term loans provided 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%.
On January 12, 1999, the Company entered into a new senior credit
facility with a group of lenders to refinance its revolving and term credit
arrangements mentioned above, to provide working capital, and provide an
acquisition line of credit. This new senior credit facility provides for a
maximum of $20.0 million in revolving credit facility due in January 2004, and a
term loan up to $20.0 million with equal quarterly payments plus interest of
$500,000 the first year, $750,000 the second year, $1.0 million the third year,
$1.25 million the fourth year, and $1.5 million the fifth year. The credit
facility also provides for up to a $35.0 million acquisition term loan with the
first principal installment due 21 months following the closing of the credit
facility. The new revolving credit notes and term loans provide for borrowings,
at the Company's option, at either the lender's prime rate plus a margin of
1.75% or varying rates of LIBOR plus 3.0%. The acquisition term loans provide
for borrowing, at the Company's option, at either the lender's prime rate plus a
margin of 2.25% or at varying rates of LIBOR plus 3.5%.
This new senior credit facility provides availability for letters of
credit up to $10.0 million subject to availability of borrowing capacity under
the revolving credit notes. The new senior credit facility requires the Company
to maintain certain financial covenants and requires an annual fee of .50% on
the unused portion of the revolving credit notes and .75% on the unused portion
of the acquisition term loan. This new senior credit facility is secured by
substantially all of the 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 January
1999, the Company will record an extraordinary charge of $454,000 ($281,000 net
of tax) related to unamortized debt origination costs.
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 100% of the
outstanding stock of a business for approximately $340,000, which extended the
geographical presence of SEFCO. On November 23, 1998, Denali Incorporated
completed the acquisition of 100% of 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. The pro forma effects of these acquisitions were immaterial for
disclosure.
6
<PAGE> 9
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 certain minimum volumes 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, the ultimate liabilities resulting from such claims will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.
Upon the disability and subsequent resignation of Mr. Harcrow during the
second quarter of fiscal year 1999, the Company has begun to make payments
pursuant to the Salary Continuation Agreement between the Company and Mr.
Harcrow. The Company recognized a charge of $682,000 in the second quarter of
fiscal year 1999 as a result of Mr. Harcrow's disability triggering the payments
under the Salary Continuation Agreement.
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
On February 3, 1999, Denali Incorporated acquired 100% of the outstanding
stock of the Belco Manufacturing Companies ("Belco"). Located in Belton, Texas,
Belco is a manufacturer of engineered fiberglass-reinforced plastic tanks,
vessels, and piping systems, and their products are primarily sold into the
water/wastewater and oil and gas industries where corrosion-resistant products
are needed.
7
<PAGE> 10
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 eight 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. In October 1995, the Company acquired certain assets
and assumed certain liabilities of Hoover, a manufacturer of steel rectangular
above-ground storage tanks. In November 1998, the Company acquired Plasti-Fab, a
leader in providing fiberglass-reinforced flumes and metering stations to the
water and wastewater industries. These three 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. 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 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 December 26, 1998 compared with three months ended December
27, 1997
Net sales increased $13.4 million, or 54%, to $38.4 million in the
second quarter of fiscal 1999 from $24.9 million in the same quarter of fiscal
1998. A total of $6.4 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 $7.0 million increase in sales resulted primarily from
a 35% increase in sales at Containment Solutions from $18.7 million in the
fiscal 1998 period to $25.3 million in the fiscal 1999 period due to strong
demand for the Company's petroleum storage tank products.
Gross profit increased $4.4 million, or 77%, to $10.1 million in the
fiscal 1999 period from $5.7 million in the fiscal 1998 period. $1.8 million of
the increase was related to the addition of LaValley, SEFCO and Fibercast with
the remaining $2.6 million primarily derived from increased gross profit at
Containment Solutions. Gross margin for the Company increased to 26.4% from 23%
in the prior year quarter due in part to an increase in the Containment
Solutions gross margins to 26.6% in the current fiscal period from 21.3% 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 29.0%.
8
<PAGE> 11
Selling, general and administrative expenses increased $2.9 million to
$7.3 million in the second quarter of fiscal 1999 from $4.4 million in the same
period last year, excluding the $682,000 compensation charge taken in the second
quarter of fiscal 1999. 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.
The Company recognized a $682,000 non-recurring compensation charge in
the second quarter of fiscal 1999 associated with a salary continuation
agreement.
The Company's provision for income taxes differs from the U.S.
statutory rate due to 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 income attributable to common stock
increased from $561,000, or $0.16 per diluted share, in the prior fiscal year
period to $916,000, or $0.19 per diluted share, in the current fiscal year
period. Earnings per share increased 75%, excluding the non-recurring
compensation expense of $682,000 ($423,000 net of tax), from $0.16 in the fiscal
1998 period to $.28 in the fiscal 1999 period on a diluted basis.
Six months ended December 26, 1998 compared with six months ended December 27,
1997
Net sales increased $27.0 million, or 58%, to $73.9 million in the
first six months of fiscal 1999 from $46.9 million in the same quarter of fiscal
1998. A total of $14.8 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 $12.2 million increase in sales primarily resulted
from a 32% increase in sales at Containment Solutions from $36.7 million in the
fiscal 1998 period to $48.6 million in the fiscal 1999 period due to strong
demand for the Company's petroleum storage tank products.
Gross profit increased $8.3 million, or 79%, to $18.9 million in the
fiscal 1999 period from $10.6 million in the fiscal 1998 period. $4.1 million of
the increase was related to the addition of LaValley, SEFCO and Fibercast with
the remaining $4.2 million primarily derived from increased gross profit at
Containment Solutions. Gross margin for the Company increased to 25.6% from
22.5% in the prior year period due in part to an increase in the Containment
Solutions gross margins to 25.5% in the current fiscal period from 21.2% 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 27.8%.
Selling, general and administrative expenses increased $5.3 million to
$13.5 million for the first six months of fiscal 1999 from $8.2 million in the
same period last year, excluding the $682,000 non-recurring compensation charge
taken in the second quarter of fiscal 1999 and 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.
The Company recognized a $682,000 non-recurring compensation charge in
the second quarter of fiscal 1999 related to a salary continuation agreement and
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.
9
<PAGE> 12
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.
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 income in the first six months of fiscal
1999 was $2,201,000, or $0.45 per diluted share, compared with net loss before
extraordinary item of $(1,385,000), or $(0.52) per diluted share, in the prior
year six month period. Net income and earnings per diluted share for the first
six months of fiscal 1999 before the compensation charge of $682,000 ($423,000
net of tax) were $2,624,000 and $0.54, respectively. 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 $0.31, respectively before
extraordinary item, and were $908,000 and $0.30, respectively, including the
extraordinary item.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 26, 1998 was $17.8 million, as compared to
$14.1 million at June 27, 1998. Cash provided by operating activities for the
six months ended December 26, 1998 was $572,000 compared to $2.8 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 six months of fiscal year 1999. Capital expenditures
were $1,166,000 and $486,000 for the six months ended December 26, 1998 and
December 27, 1997, respectively.
On January 12, 1999, the Company entered into a new senior credit
facility with a group of lenders to refinance its revolving and term credit
arrangements, to provide working capital, and provide an acquisition line of
credit. This new senior credit facility provides for a revolving line of credit
and a secured term loan of up to an aggregate of $75.0 million, including an up
to $35.0 million acquisition term loan. 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 new revolving credit facility and term loan provide for
borrowings, at the Company's option, at either the Bank's prime rate plus a
margin of 1.75% or varying rates of LIBOR plus 3.0%. The acquisition term loan
provides for borrowing, at the Company's option, at either the Bank's prime rate
plus a margin of 2.25% or at varying rates of LIBOR plus 3.5%. The credit
facility has a five-year term expiring in January 2004.
As of December 26, 1998, the Company had outstanding indebtedness of
$5.5 million under the term loans and $22.4 million under the revolving lines of
credit with the former lender. Also, the unused portion of the revolving line of
credit with the former lender was $2.5 million at December 26, 1998.
The Company also had $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 assumed $3.5 million of term debt with a financial
institution in connection with its acquisition of Fibercast in June 1998. At
December 26, 1998, the Company had outstanding indebtedness of $3.2 million
remaining on this term note. This note was refinanced under the terms of the new
senior credit facility on January 12, 1999.
10
<PAGE> 13
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 $48.9 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.
The Company intends to seek additional capital as necessary to fund
acquisitions through one or more funding sources that may include borrowings
under the acquisition term loan of the new credit agreement, 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 for subsidiaries owned at the beginning of fiscal 1999. The Company
plans to complete the same assessment for operations acquired to date by July
1999. 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.
The Company's fiscal year 2000 begins July 4, 1999. Thus, our financial/
accounting software may need to be year 2000 compliant by that date. Software
selection at these subsidiaries has been completed and implementation has begun
with anticipated completion ranging from March 1999 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 fiscal year 1999 in order to assess the
impact, if any, on the Company's business operations. This timing is planned for
both existing operations and acquisitions completed to date. 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.
11
<PAGE> 14
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.
12
<PAGE> 15
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
The Company's Annual Meeting of Stockholders was held on October 21,
1998. Matters voted upon at the Annual Meeting, and the results of the votes,
are as follows:
1. The election of two Class A directors to serve until the 2001
Annual Meeting.
<TABLE>
<CAPTION>
No. of No. of
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Stephen T. Harcrow 4,105,931 2,600
Stephen M. Youts 4,105,931 2,600
</TABLE>
2. To approve the appointment of Ernst & Young LLP as independent
certified public accountants for the Company for the fiscal
year ending July 3, 1999.
<TABLE>
<CAPTION>
No. of No. of No. of
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
<S> <C> <C> <C>
4,102,331 3,000 3,200
</TABLE>
ITEM 5. OTHER INFORMATION
On January 15, 1999, Edward de Boer was appointed President and Chief
Executive Officer (CEO) of Denali Incorporated. Mr. de Boer previously held the
position of President and Chief Operating Officer of Denali Incorporated and
succeeds the late Stephen T. Harcrow as CEO.
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.
13
<PAGE> 16
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 was filed with the Commission on December 15, 1998
announcing the disability and resulting resignation of Stephen T.
Harcrow, chairman of the board and chief executive officer.
14
<PAGE> 17
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 9, 1999 /S/ R. KEVIN ANDREWS
-----------------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
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
</TABLE>
- ----------------------
* Filed herewith
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> DEC-26-1998
<CASH> 158
<SECURITIES> 0
<RECEIVABLES> 28,430
<ALLOWANCES> 838
<INVENTORY> 12,579
<CURRENT-ASSETS> 43,111
<PP&E> 25,577
<DEPRECIATION> 4,753
<TOTAL-ASSETS> 88,943
<CURRENT-LIABILITIES> 25,278
<BONDS> 31,396
0
0
<COMMON> 49
<OTHER-SE> 31,435
<TOTAL-LIABILITY-AND-EQUITY> 88,943
<SALES> 73,888
<TOTAL-REVENUES> 73,888
<CGS> 54,982
<TOTAL-COSTS> 69,170
<OTHER-EXPENSES> (107)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,285
<INCOME-PRETAX> 3,552
<INCOME-TAX> 1,351
<INCOME-CONTINUING> 2,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,201
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
