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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 1, 2000
Commission File Number 000-23353
Denali Incorporated
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0454641
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056
(Address of Principal Executive Offices) (Zip Code)
713-627-0933
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 15, 2000, there were 6,258,914 shares of Common Stock of the
Registrant outstanding. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $5.1 million
based upon the closing price of $1.219 on August 31, 2000.
Documents incorporated by reference. Certain portions of the Registrant's
definitive Proxy Statement for the 2000 Annual Meeting of Shareholders ("Proxy
Statement") are incorporated in Part III by reference.
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DENALI INCORPORATED
FORM 10-K FOR THE FISCAL YEAR ENDED JULY 1, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I
<S> <C> <C>
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 7
Item 3. Legal Proceedings.......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 10
Item 6. Selected Financial Data................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risks............... 27
Item 8. Financial Statements and Supplementary Data............................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 29
Item 11. Executive Compensation.................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 29
Item 13. Certain Relationships and Related Transactions............................ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 30
Signatures
Index to Exhibits
</TABLE>
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PART I
ITEM 1. BUSINESS
Denali Incorporated is a provider of products and services for fluids
handling. The Company believes that it is a leading manufacturer of fiberglass
composite underground storage tanks ("USTs") in the United States, steel
aboveground storage tanks ("ASTs") in the United States and engineered
fiberglass reinforced composites for handling corrosive fluids in the United
States and Europe. Fluids handling products and services are used in a wide
variety of applications, including in retail petroleum marketing and in
petroleum, chemical, pulp and paper, power generation and other industrial
process plants.
With the acquisition of Welna, N.V., a supplier of fiberglass composite
products in Europe, the Company believes it is the world's largest manufacturer
of specialty-engineered, corrosion-resistant fiberglass reinforced plastic
("FRP") products. Denali has over 19 manufacturing locations around the world
and distributes a wide range of engineered products and systems in the United
States and Europe.
As a result of the Company's recent operating losses and significantly
decreased cash flow from operations in fiscal 2000, the Company's liquidity has
reached extremely low levels. The Company has had to borrow under its bank
facilities during fiscal 2000 to cover these operating losses. In addition,
these operating losses have resulted in the Company's breaching the financial
covenants in its loan documents. The Company is currently pursuing a private
placement of equity and debt to raise additional capital and increase its
liquidity. This proposed transaction is described more fully in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Form 10-K. There can be no assurance that the
Company will be able to complete this proposed transaction. If the Company is
unable to complete this proposed transaction or otherwise raise significant
additional liquidity, the Company may be unable to continue to operate as a
going concern.
BACKGROUND
The Company was formed in 1994 to acquire the fiberglass composite UST
business of Owens Corning. Initially, the Company focused its efforts on
improving profitability, improving responsiveness to customers and developing
new products. The Company's management also realized that the fluids handling
industry was highly fragmented and that there would be significant opportunities
to consolidate the industry.
The Company's objective is to become a leading provider of a broad range of
products and services for fluids handling through strategic acquisitions and
internal growth. The Company believes that the fragmented nature of the fluids
handling industry, which is comprised of many companies with limited product
ranges or serving limited geographic areas, will provide continued growth
opportunities. The Company also believes that these opportunities provide the
Company with the ability to offer a comprehensive range of specialized solutions
for meeting its customers' fluids handling needs.
PRODUCTS AND SERVICES
The Company's operations are divided into two groups in the United States:
Containment Products and Engineered Products. For a discussion of certain
industry segment data, see Note 22 of Notes to the Consolidated Financial
Statements included herein.
Containment Products. The Company's Containment Products Group ("Containment
Solutions") specializes in the manufacture of fiberglass composite USTs and
steel ASTs, primarily for petroleum storage. The Company's products are marketed
under the Containment Solutions tradename.
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Engineered Products. The Company's Engineered Products Group ("Plasticon
Fluid Systems" or "PFS") provides engineered containment and material solutions
to a variety of industries, including chemical process, pulp and paper, power,
and water and wastewater. The Company markets its engineered FRP products under
the Ershigs, Fibercast and Belco tradenames and believes that it is a leading
domestic provider of engineered FRP products for corrosion-resistant
applications. In addition, SEFCO, a PFS company, is an integrated manufacturer
of engineered field-erected steel tanks and accessories for use in the water and
wastewater, agrochemical and petroleum industries and Plasti-Fab is a
manufacturer of FRP gates, metered manholes, shelters, flumes and systems for
use in the water/wastewater industries. The PFS group focuses its operations on
complex projects, where custom engineering and special manufacturing expertise
are critical.
The acquisition of Welna, which closed on July 1, 1999, has allowed the
Company to expand its products globally, primarily to Europe. Welna's operations
are divided into two groups: Plasticon Europe and Hanwel Europe.
Plasticon Europe. The Company's Plasticon Europe operation designs,
manufactures and installs FRP products including storage and transport tanks,
vessels and piping systems for corrosion-resistant applications. This operation
is similar in both markets and products to the Company's Engineered Products
Group.
Hanwel Europe. The Company's distribution operation, Hanwel Europe, supplies
a wide range of engineered products and systems including, but not limited to,
valves, expansion joints, tubes, suspension and support systems, filtration
systems and turbines for use in the power generation, water treatment, paper and
chemical processing industries.
ACQUISITION HISTORY
The Company has acquired twelve businesses since its inception. A brief
description of these acquisitions is as follows:
<TABLE>
<CAPTION>
Acquired Company Date Acquired Products
---------------- ------------- --------
<S> <C> <C>
Containment Solutions:
Fluid Containment, Inc. December 1994 Fiberglass USTs, oil/water separators,
manhole products
Hoover Containment, Inc. October 1995 Steel ASTs, lubricant storage tanks
Plasticon Fluid Systems:
Ershigs, Inc. February 1997 Engineered FRP products
SEFCO, Inc. October 1997 Field erected aboveground steel tanks
LaValley October 1997 Engineered FRP products
CC&E May 1998 Field constructed FRP products
Fibercast June 1998 FRP piping systems
Belco Manufacturing
Company, Inc. February 1999 Engineered FRP tanks, vessels, and piping
systems
Plasti-Fab, Inc. November 1998 Fiberglass-reinforced flumes and metering stations
Welna, N.V. July 1999 FRP pipe systems, vessels and other related
equipment, and distributor of high quality
products and engineered systems
Manantial Chile S.A. September 1999 Designs, equips, installs and commissions
industrial and municipal water and wastewater
plants
HP Valves Oldenzaal B.V.
(acquired by Welna, N.V.) November 1999 Medium and high-pressure valves
</TABLE>
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COMPETITION
The UST market is highly competitive and fragmented, with entrants from both
steel tank suppliers and another major fiberglass composite UST supplier. In
terms of revenues, steel tanks account for a majority of the United States UST
market. The remainder of this market is divided fairly evenly between the
Company and one other fiberglass composite UST supplier. Although steel USTs are
less expensive than fiberglass composite USTs, fiberglass composite USTs are not
subject to corrosion and do not expose the customer to corrosion leaks and
related environmental problems. When determining which product to acquire, one
of these two factors will generally control the purchase decision. Most of the
steel UST manufacturers are small, independent operations. The Company believes
that its quality of manufacturing, manufacturing control, product design,
testing procedures, history of performance and reliability, delivery capability,
customer responsiveness and experienced personnel are competitive advantages in
the UST market.
The Company's steel ASTs are sold in highly fragmented and competitive
markets, with over 240 steel AST manufacturers operating in North America.
Several competitors of the Company are divisions or subsidiaries of larger
companies with financial and other resources greater than those of the Company.
However, the Company believes that the majority of its competitors in this
market are local, individually owned manufacturing facilities. The Company
believes that it is the only national manufacturing company in this market,
operating facilities in Maryland, Pennsylvania and California and having
subcontracting agreements with quality manufacturing companies in North
Carolina, Indiana, Kansas and Nebraska. The Company's national presence reduces
transportation costs for products relative to single plant competitors that
compete on a national basis. However, local manufacturers have a competitive
advantage in transportation costs. The Company believes that its broad product
lines, product design, delivery capability, customer responsiveness and
experienced personnel are competitive advantages in the steel AST market.
With respect to engineered FRP products in the United States, the Company
participates in a highly fragmented market where it believes that most of its
competitors are small regional fabrication businesses, except for the
corrosion-resistant pipe and piping systems, which also compete with two large
public companies. The Company believes that its field-erection capabilities and
its performance warranty, together with its engineering capabilities, quality
reputation, history of performance and effective customer service, provide the
Company with competitive advantages in the engineered FRP products market.
With respect to engineered FRP products in Europe, the Company also
participates in a highly fragmented market where it believes that most of its
competitors are small regional fabrication businesses. The Company believes
that its quality reputation and engineering capabilities provide competitive
advantages. The Company's distribution operation also competes in a highly
competitive market characterized by numerous small independent operations. The
Company believes that a competitive advantage is achieved through its
operations' product quality and service responsiveness.
MARKETING AND CUSTOMERS
The Company takes a multifaceted approach to marketing its fiberglass
composite UST and steel AST products and services. The Company's sales staff
primarily supports an extensive network of Petroleum Equipment Industry ("PEI")
distributors and contractors. For significant national accounts, i.e. a major
oil company, the Company generally sells directly to the end user. The Company's
largest fiberglass composite UST customers are super-regional distribution
houses, hyper-markets and major oil companies; and typical customers for steel
ASTs include governments and quick-change lube centers. The Company has license
agreements with companies outside the United States to produce fiberglass
composite USTs using the Company's technology and continues to expand this
presence. The Company also has a joint venture in Venezuela to manufacture
fiberglass composite USTs.
The Company generally sells its engineered FRP products in both the United
States and Europe through a combination of direct field sales and a sales
representative network. The scope of the work performed by the Company is large
in nature and, unless characterized as a special situation, has long lead times
to order. The experienced sales force works closely with the customer in
designing the correct solution for the customer's need. The customer base of the
Company varies from year to year due to the project-oriented nature of the
Company's work in this area.
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The Company's distribution operation, through its inside sales staff,
markets its diverse products to an equally diverse customer base that ranges
from greenhouse agricultural producers to municipal incineration plants to pulp
and paper mills. This operation of the Company sells both into projects that
have long lead times and into the replacement market that has short lead times.
The customer base varies year to year due to the project-oriented nature of this
operation.
MATERIALS AND SUPPLIERS
Owens Corning and the Company are parties to a supply contract pursuant to
which the Company purchases from Owens Corning the fiberglass used in the
Company's composite products. The Company entered into a supply contract with
Owens Corning beginning January 1, 1998, to supply at least 90% of the
fiberglass requirements for two of the Company's subsidiaries, Containment
Solutions and Ershigs, through December 31, 1998. Effective January 1, 1999, the
contract was modified to obtain more favorable pricing levels based on certain
minimum volume purchases for the calendar years ended December 31, 1999 and
2000. In addition, this contract contains certain stabilizing pricing
parameters. The Company continues to negotiate with other vendors to ensure a
continued supply of fiberglass to the Company for its production needs. Owens
Corning filed for Chapter 11 bankruptcy protection on October 6, 2000. If the
supply of fiberglass from Owens Corning was abruptly halted, there is no
assurance that the Company could continue production without interruption.
The Company is a significant purchaser of resin. Resin is available in
adequate supply from many sources. The Company does not depend upon any single
supplier or source. The Company has identified additional resin suppliers during
the last year, which will allow for competitive bidding should a future pricing
or supply imbalance occur. The Company's ability to operate and to grow is
partially dependent upon its ability to obtain an adequate supply of resin and
fiberglass. The Company believes current market conditions, the above actions
and contractual arrangements make significant raw material cost deviations
unlikely during the next 12 months.
The Company's distribution operation has products that are generally under
long-term exclusive contracts. The Company continues to expand and seek
alternatives for its product offerings.
PATENTS AND TRADEMARKS
The Company owns numerous United States patents and has a number of
trademarks registered in the United States. Although the Company regards its
patents and trademarks to be of value, it believes that in most instances its
manufacturing and technical knowledge and experience are more important to its
competitive position than are its patents and trademarks. The Company does not
consider its business to be dependent on any one or more of such patents or
trademarks.
INSURANCE
The Company maintains a comprehensive insurance program providing various
types of coverage for its operations including, without limitation, commercial
general liability, commercial automobile liability, workers' compensation and
employment practices liability, directors and officers liability, business
interruption and property and casualty insurance. All policies are subject to
deductibles and other coverage limitations and are at limits and amounts of
insurance that, based on the Company's operating experience and consultations
with its independent insurance risk advisors, it believes are consistent with
customary practices and standards of companies engaged in similar businesses.
Although the Company's management believes that the Company's insurance is
adequate, there can be no assurance that the Company will be able to maintain
adequate insurance at rates which management considers commercially reasonable,
nor can there be any assurance such coverage will be adequate to cover all
claims that may arise.
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GOVERNMENT REGULATION
The Company is subject to numerous foreign, federal, state and local laws and
regulations relating to the protection of health, safety and the environment,
including the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the Clean Water Act, the Clean Air Act (including the 1990
Amendments), the Resource Conservation and Recovery Act ("RCRA"), and the
Occupational Safety and Health Act ("OSHA"). Each of these statutes provides for
the imposition of substantial civil and criminal penalties, as well as the
possibility of permit revocation and corrective action orders, for violations of
its requirements. These laws may also provide for retroactive, strict liability,
rendering a party liable for environmental damage without regard to its
negligence or fault.
The Company believes that it is in substantial compliance with such laws.
Nevertheless, risks of substantial costs and liabilities are inherent in certain
of its operations, and in certain products produced by the Company, as they are
with other enterprises engaged in similar businesses. Since its formation,
however, the Company's cost of complying with environmental and health and
safety laws and regulations has not been material, but the fact that such laws
or regulations are changed frequently makes predicting the cost or impact of
such laws and regulations on its future operations uncertain. Modification of
existing laws or regulations or the adoption of new laws or regulations
affecting the Company's operations could adversely affect the Company.
EMPLOYEES
At July 1, 2000, the Company had 1,710 full time employees. Four collective
bargaining agreements cover 233 employees in California, Pennsylvania, Texas and
Washington. All of these agreements expire between December 2000 and June 2003.
The Company considers its employee relations to be good.
RISK FACTORS
Need for Additional Capital and Liquidity. The Company has experienced and
expects to continue to experience substantial working capital needs to fund its
operations. As a result of the Company's recent operating losses and
significantly decreased cash flow from operations in fiscal 2000, the Company's
liquidity has reached extremely low levels. In addition, these operating results
have resulted in the Company's breaching the financial covenants in its loan
documents. The Company is pursuing a private placement transaction that
management believes will resolve the Company's liquidity crisis and provide
adequate working capital for the Company to continue to pursue its business
plan. However, if the Company is unable to complete this transaction or
otherwise raise additional capital and increase its liquidity, the Company may
be unable to continue operating as a going concern.
Dependence on Industry Spending. The prospects for the Company depend upon
the level of capital and maintenance expenditures by its industrial customers.
These industries historically have been cyclical in nature and vulnerable to
general downturns in the economy. No assurance can be given that the Company
will be able to increase or maintain its level of revenues in periods of
economic stagnation or downturn. Decreases in industry spending could have a
significant adverse effect upon the demand for the Company's products and
services and the Company's results of operations.
Ability to Manage Growth and Achieve Business Strategy. Since 1994, the
Company has completed twelve acquisitions of businesses in pursuit of its
strategic objectives. There can be no assurance that the Company will be able to
identify, acquire or manage profitably additional businesses or to integrate
successfully any acquired businesses into the Company without substantial costs,
delays or other operational or financial difficulties. Further, acquisitions
involve a number of special risks, including failure of the acquired business to
achieve expected results, diversion of management's attention, failure to retain
key personnel of the acquired business and risks associated with unanticipated
events or liabilities, some or all of which could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, there can be no assurance that the businesses the Company has acquired
or may acquire in the future will achieve anticipated net revenues and earnings.
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Risks Related to Internal Growth Strategy. Key elements of the Company's
strategy are to improve the profitability of its businesses and to continue to
expand the net revenues of such businesses. Although the Company intends to seek
to improve the profitability of such businesses by various means, including
reducing administrative and other costs, there can be no assurance that the
Company will be able to do so. The Company's ability to increase the net
revenues of such businesses will be affected by various factors, including
demand for products, the Company's ability to expand the range of products and
services offered by each of such businesses and the Company's ability to
successfully enter new markets. Many of these factors are beyond the control of
the Company, and there can be no assurance that the Company's strategies will be
successful or that it will be able to generate cash flow adequate for its
operations and to support internal growth.
Competition. The markets for the Company's products are fragmented and highly
competitive. Although none of the Company's competitors are considered dominant,
there are competitors that have significantly greater resources than the
Company, which, among other things, could be a competitive disadvantage to the
Company in securing certain projects.
International Expansion and Foreign Currency Transactions. The Company's
successful expansion into global markets has and will continue to depend on
numerous factors, many of which are beyond its control. In addition, global
expansion has increased the Company's exposure to certain risks inherent in
doing business outside the United States, including currency fluctuations,
especially the Euro, restrictions on the repatriation of profits, compliance
with foreign laws and standards and political risks. The majority of the
Company's contracts with respect to international revenues are denominated in
foreign currencies because of the Company's increased international presence;
therefore, the Company is subject to foreign exchange risks in the future. The
Company does not presently hedge exchange rate fluctuations, but, in the future,
may hedge rate fluctuations.
Potential for Product Liability Claims. Certain of the Company's products are
used in handling potentially hazardous materials. Based on the Company's
operating experience and consultation with its independent insurance risk
advisors, the Company carries insurance in amounts that it considers adequate.
However, catastrophic occurrences at locations where the Company's products are
used could in the future result in significant product liability claims against
the Company. In addition, a number of the Company's products are used to store
regulated substances such as petroleum. The release or leakage of such
substances from these products could also result in liability claims against the
Company.
Governmental Regulation. The Company is subject to various foreign, federal,
state and local laws and regulations relating to the protection of health,
safety and the environment. The Company's business involves environmental and
health and safety management issues typically associated with manufacturing
operations. Since formation of the Company, the Company's cost of complying with
such laws and regulations has not been material. However, future laws and
regulations may become more stringent and may require the Company to incur
significant additional costs.
Seasonality. The Company's operations are subject to seasonal variations in
weather conditions. Because most of the Company's customers' construction
activities take place outdoors, the number of projects in the United States
generally declines in the winter months due to an increase in rainy and cold
conditions. In addition, its customers in the United States often schedule the
completion of their projects during the summer months in order to take advantage
of the milder weather for the installation of their equipment and systems.
Conversely in Europe, the summer holiday season coincides with a decline in
business activity. As a result, a disproportionate amount of the Company's net
income, net revenues and gross profit has historically been earned during the
first and fourth quarters of the fiscal year. With the addition of Welna, some
of this seasonality will be modified. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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Reliance on Principal Supplier. The principal raw materials used by the
Company in its manufacture of fiberglass composite USTs are fiberglass and
resin. Although resin is available in adequate supply from a variety of sources,
substantial manufacturers of fiberglass are more limited in number. Because of
this limited market supply, the Company entered into a supply contract with
Owens Corning. The Company entered into a new supply contract with Owens Corning
beginning January 1, 1998 to supply at least 90% of the fiberglass requirements
for two of the Company's subsidiaries, Containment Solutions and Ershigs,
through December 31, 1998. Effective January 1, 1999, the contract was modified
to obtain more favorable pricing levels based on certain minimum volume
purchases for the calendar years ended December 31, 1999 and 2000. In addition,
this contract contains certain pricing stabilization terms. As a result of this
arrangement, the Company remains significantly dependent upon Owens Corning to
deliver quality product in accordance with and, as required by, the Company's
needs. On October 6, 2000, Owens Corning filed for Chapter 11 bankruptcy
protection. The announcement noted that Owens Corning had arranged a
debtor-in-possession credit line allowing Owens Corning to continue normal
business operations. While the Company has other sources of fiberglass supply,
there can be no assurance that those other suppliers can provide the required
quantities to enable the Company to continue normal production if the Owens
Corning fiberglass supply is suddenly disrupted.
Dependence on Key Personnel. The Company is dependent upon a limited number
of key management, technical and sales personnel. The Company's future success
will depend, in part, upon its ability to attract and retain highly qualified
personnel. The Company faces competition for such personnel from other companies
and organizations, and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The Company does not have
written employment agreements with its officers providing for specific terms of
employment, and officers and other key personnel could leave the Company's
employ with little or no prior notice. The Company's loss of key personnel,
especially if the loss is without advance notice, or the Company's inability to
hire or retain key personnel, could have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
does not carry any key man life insurance.
ITEM 2. PROPERTIES
The Company operates facilities throughout the United States, Europe and
South America and considers them to be in good operating condition and adequate
for their present uses. The Company believes that it has sufficient capacity to
meet its current and anticipated manufacturing requirements for its operations.
The following table sets forth the Company's principal manufacturing plants and
offices:
<TABLE>
<CAPTION>
Leased Lease
Approx. Area or Owned Expiration
(Sq. Ft.) Owned Acreage Date Uses
--------- ----- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Fiberglass Composite
Underground Storage Tanks
Conroe, TX(1) 130,000 Owned 65 N/A Manufacturing plant and
Containment Solutions Group
headquarters
Mount Union, PA 110,000 Owned 24 N/A Manufacturing plant
Bakersfield, CA(2) 73,000 Owned 20 N/A Manufacturing plant
Tualatin, OR 48,000 Leased N/A 2008 Manufacturing plant and
Administrative offices
Steel Aboveground Storage Tanks
Baltimore, MD 63,000 Leased N/A 2004 Manufacturing plant and
administrative offices
Bakersfield, CA(2) 73,000 Owned 20 N/A Manufacturing plant
Lebanon, PA 97,850 Leased N/A 2003 Manufacturing plant
</TABLE>
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<TABLE>
<CAPTION>
Leased Lease
Approx. Area or Owned Expiration
(Sq. Ft.) Owned Acreage Date Uses
--------- ----- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Engineered Fiberglass Reinforced
Composite Products
Bellingham, WA 63,000 Owned 6 N/A Manufacturing plant and
Administrative offices
Wilson, NC 47,000 Owned 4 N/A Manufacturing plant
Biloxi, MS 29,000 Owned 5 N/A Manufacturing plant
Belton, TX 87,400 Leased N/A 2008 Manufacturing plant and
administrative offices
Engineered Field-erected Steel Tanks
Tulsa, OK 33,000 Owned 12 N/A Manufacturing plant and
administrative offices
Fiberglass-reinforced Plastic Piping
Systems
Sand Springs, OK 244,058 Owned 16 N/A Manufacturing plant and
Plasticon Fluid Systems
headquarters
Industrial and Municipal Water and
Wastewater Products
Santiago, Chile 4,000 Leased N/A 2001 Administrative, sales and project
offices
Welna N.V.
Plasticon Europe:
Dinslaken, Germany 96,870 Owned 4 N/A Manufacturing plant
Oldenzaal, Netherlands 107,640 Owned 4 N/A Manufacturing plant
Hengelo, Netherlands 64,580 Owned 4 N/A Manufacturing plant
Oldenzaal, Netherlands 21,530 Owned 1 N/A Administrative offices
Heerenveen, Netherlands 59,200 Owned 2 N/A Manufacturing plant
Tilburg, Netherlands(3) 37,670 Owned 2 N/A Manufacturing plant
Torun, Poland 175,000 Owned 7 N/A Manufacturing plant and administrative
offices
La Roche-sur-Yon, France 96,870 Owned 9 N/A Manufacturing plant and administrative
offices
Beverly/Scunthorp, U.K. 32,290 Owned 1 N/A Manufacturing plant and administrative
offices
Bangpakong, Thailand 32,290 Leased N/A N/A Manufacturing plant and administrative
offices
Hanwel Europe:
Temse, Belgium 8,070 Owned .2 N/A Sales office
Waddinxveen, Netherlands 12,920 Leased N/A 2003 Sales office
Torun, Poland 10,764 Owned .3 N/A Sales office
</TABLE>
(1) In September 1999, the Company commenced the restructuring of certain
operations, including the closure of the Conroe, Texas, manufacturing
facility. Concurrent with this announcement, the manufacturing facility was
listed for sale and plans to vacate the facility were initiated. As of July
1, 2000, the manufacturing operations had been substantially vacated and
certain selling, general and administrative offices were maintained pending
relocation and there existed no contractual commitments for the sale of this
facility.
(2) Shared Facility
(3) In June 2000, the Company announced to its employees that the plant in
Tilburg, Netherlands, would be closed by October 2000. Production continued
at the plant through September 2000. The Company plans to move the
manufacturing equipment to its Torun, Poland, manufacturing plant during the
Company's fiscal 2001 second quarter.
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ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. The Company is not aware of any current or pending litigation
or proceedings that could have a material adverse effect on the Company's
operations, financial condition or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "DNLI". The Company's Common Stock commenced trading on November 21,
1997. The high and low sales prices per share for the periods indicated were as
follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Period from November 21, 1997 to December 27, 1997 $13.500 $12.250
Quarter Ended March 28, 1998 $17.000 $12.750
Quarter Ended June 27, 1998 $18.250 $14.875
Quarter Ended September 26, 1998 $16.500 $ 9.500
Quarter Ended December 26, 1998 $13.500 $ 9.000
Quarter Ended March 27, 1999 $14.000 $ 7.500
Quarter Ended July 3, 1999 $ 9.500 $ 6.625
Quarter Ended October 2, 1999 $ 9.375 $ 4.000
Quarter Ended January 1, 2000 $ 5.250 $ 3.000
Quarter Ended April 1, 2000 $ 4.625 $ 2.500
Quarter Ended July 1, 2000 $ 3.250 $ 1.656
</TABLE>
As of August 31, 2000, there were 50 holders of record of the outstanding
shares of Common Stock of the Company.
The Company does not currently intend to declare or pay dividends on its
Common Stock and expects to retain funds generated by operations for the
development and growth of the Company's business. The Company's future dividend
policy will be determined by the Company's Board of Directors on the basis of
various factors, including among other things, the Company's financial
condition, cash flows from operations, the level of its capital expenditures,
its future business prospects, the requirements of Delaware law and any
restrictions imposed by the Company's credit facilities. Under the Company's
credit facilities, distributions in the form of dividends and stock repurchases
are allowed only in connection with a permitted acquisition in accordance with
terms disclosed in the Company's loan agreement.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
June 29, June 28, June 27, July 3, July 1,
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net revenues................................. $53,354 $71,101 $99,897 $148,760 $189,917
Cost of revenues............................. 43,518 57,268 77,273 110,957 149,318
------- ------- ------- ------- --------
Gross profit................................. 9,836 13,833 22,624 37,803 40,599
Selling, general and administrative expenses. 9,604 11,874 20,155 27,926 38,619
Restructuring charges........................ -- -- -- -- 3,816
------- ------- ------- ------- --------
Operating income (loss)...................... 232 1,959 2,469 9,877 (1,836)
Interest expense............................. 1,783 2,058 1,614 3,199 9,209
Interest income.............................. (65) (111) (118) (124) (208)
Other income, net............................ (206) (598) (489) (453) (1,165)
------- ------- ------- ------- --------
Income (loss) before income taxes............ (1,280) 610 1,462 7,255 (9,672)
Income tax provision (benefit)............... (446) 293 1,352 2,854 (198)
------- ------- ------- ------- --------
Net income (loss) before minority interest and
extraordinary item......................... (834) 317 110 4,401 (9,474)
Minority interest............................ -- -- -- -- 182
------- ------- ------- ------- --------
Net income (loss) before extraordinary item.. (834) 317 110 4,401 (9,656)
Extraordinary income (loss) on early
extinguishment of debt, net of income tax.. -- -- 219 (281) --
------- ------- ------- ------- --------
Net income (loss)............................ (834) 317 329 4,120 (9,656)
Dividends on Series A Preferred Stock........ (120) (120) (30) -- --
------- ------- ------- ------- --------
Net income (loss) attributable to Common
Stock...................................... $ (954) $ 197 $ 299 $ 4,120 $ (9,656)
======= ======= ======= ======= ========
Net income (loss) per common share - basic
and diluted................................ $ (0.44) $ 0.09 $ 0.08 $ 0.84 $ (1.75)
======= ======= ======= ======= ========
Weighted average common shares outstanding
assuming dilution.......................... 2,185 2,198 3,875 4,888 5,518
======= ======= ======= ======= ========
CASH FLOW DATA:
Net cash provided by (used in) operating
activities................................. $ (109) $ 625 $ 3,854 $ 7,239 $ (3,209)
Net cash used in investing activities........ (5,430) (4,631) (31,126) (51,327) (7,340)
Net cash provided by financing activities.... 4,664 4,212 27,117 45,737 12,013
OTHER DATA:
Depreciation and amortization................ $ 913 $ 1,221 $ 1,692 $ 3,260 $ 6,960
EBITDA(2).................................... 1,416 3,889 7,080 14,396 8,928
</TABLE>
(1) The Company uses a 52- or 53-week year-end ending on the Saturday closest to
June 30. The fiscal year ended July 3, 1999 was a 53-week year.
(2) EBITDA represents consolidated net income before interest expense, income
tax, depreciation and amortization, restructuring charges, fiscal year 1998
non-cash compensation charge of $2,312,000, fiscal year 1999 non-recurring
compensation charge of $682,000, and fiscal year 2000 put warrant valuation
gain of $1,385,000. The Company believes that EBITDA is a meaningful measure
of its operating performance; however, EBITDA should not be considered in
isolation from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. In addition, EBITDA may
not be comparable to similarly titled measures reported by other companies.
11
<PAGE> 14
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
June 29, June 28, June 27, July 3, July 1,
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $ 5,649 $ 8,019 $14,141 $ 17,811 $(60,806)
Total assets................................. 30,318 41,084 80,382 176,575 173,193
Total debt................................... 18,661 24,024 29,896 92,229 104,420
Series A Preferred Stock (redeemable)........ 1,200 1,200 -- -- --
Stockholders' equity (deficit)............... $ (738) $ (541) $28,674 $ 38,569 $27,366
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this document.
OVERVIEW
Denali Incorporated is a provider of products and services for handling
critical fluids, which are liquids, liquid mixtures, and slurries that are
economically valuable or potentially hazardous to the environment. The Company
is a manufacturer of fiberglass-composite underground storage tanks; steel
aboveground storage tanks; and engineered fiberglass-reinforced
plastic-composite products for corrosion-resistant applications.
Since inception in 1994, the Company has acquired twelve 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 operates in four business segments described as follows:
Containment Products Group - "Containment Solutions"
The Company was formed in December 1994 to acquire certain assets and assume
certain liabilities of the fiberglass composite UST business of Owens Corning,
including five manufacturing facilities. The Company closed two of the
manufacturing facilities and significantly restructured the operations of this
business at the time of purchase.
In October 1995, the Company acquired certain assets and assumed certain
liabilities of Hoover Containment, Inc. ("Hoover"), a manufacturer of steel
rectangular ASTs. 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.
Engineered Products Group - "Plasticon Fluid Systems"
In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered FRP products, as the first of the Company's
Engineered Products Group. The acquisition was made in order to diversify the
Company's end- use markets for FRP products.
In October 1997, the Company acquired SEFCO Inc. ("SEFCO"), a manufacturer of
engineered field-erected aboveground steel tanks, and also acquired
GL&V/LaValley Industries, Inc. ("LaValley") (subsequently named "Ershigs
Biloxi"), a manufacturer of engineered FRP 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.
12
<PAGE> 15
In June 1998, the Company acquired Fibercast Company, a leading manufacturer
of fiberglass-reinforced plastic piping systems specializing in highly corrosive
environments. Certain selling, general and administrative functions have been
combined with Ershigs for purposes of efficiency.
In November 1998, the Company acquired Plasti-Fab, Inc., a leading provider
of fiberglass-reinforced gates, flumes and metering stations to the water and
wastewater industries.
In February 1999, the Company acquired Belco Manufacturing Company, Inc. and
certain assets and assumed certain liabilities of S. Jones Limited Partnership
(collectively "Belco"). Belco manufactures engineered fiberglass-reinforced
plastic tanks, vessels and piping systems. Belco's products are sold primarily
into the water/wastewater and oil and gas industries where corrosion-resistant
products are needed.
In September 1999, the Company acquired 67.5% of the issued and outstanding
stock of Manantial Chile S.A. ("Manantial"), a company that designs, equips,
installs and commissions industrial and municipal water and wastewater treatment
plants and systems.
Belco, Fibercast, Ershigs, SEFCO, Plasti-Fab and Manantial form the Company's
Engineered Products Group known as Plasticon Fluid Systems.
Plasticon Europe
On July 1, 1999, the Company acquired Welna, N.V., a company which operates
through two divisions, Plasticon Europe and Hanwel Europe. Plasticon Europe
designs, manufactures, and installs all forms of FRP pipe systems, vessels and
other related equipment requiring high levels of corrosion resistance. Plasticon
Europe's principal manufacturing locations are in the Netherlands, Poland, the
United Kingdom, France and Germany.
Hanwel Europe
Hanwel Europe is a distribution operation that specializes in high quality
products and engineered systems for power generation, water treatment, and paper
and chemical processing industries.
In November 1999, Welna, N.V. acquired HP Valves Oldenzaal B.V., a
manufacturer of medium and high-pressure valves.
RESULTS OF OPERATIONS
Our results of operations are affected by the level of economic activity in
the industries served by our customers, which in turn may be affected by other
factors, including the level of economic activity in the U.S. and foreign
markets they serve. The principal industries served by our clients are the
petroleum, petrochemical, chemical, water, wastewater, microelectronics,
pharmaceutical, and power generation industries. An economic slowdown in these
industries could result in a decrease in demand for our products and services,
which could adversely affect our operating results. During the fiscal year
ending July 1, 2000, domestic demand for petroleum UST's declined significantly;
and in Europe, capital spending in the process industry (petrochemicals and
chemicals) declined significantly, resulting in a decrease in the demand for our
products and services that are used in these markets.
This section should be read in conjunction with our consolidated financial
statements and accompanying footnotes included elsewhere.
13
<PAGE> 16
The following table sets forth certain operating statement information for
each of the Company's business segments for each of the periods presented (in
thousands):
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
June 27, July 3, July 1,
1998 1999 2000
------- -------- ------
<S> <C> <C> <C>
Net revenues:
Containment Solutions................. $71,487 $ 91,111 $ 57,196
Plasticon Fluid Systems............... 28,410 57,649 69,153
Plasticon Europe...................... -- -- 38,068
Hanwel Europe......................... -- -- 25,500
------- --------- ---------
Total net revenues.................. $99,897 $ 148,760 $ 189,917
======= ========= =========
Cost of revenues:
Containment Solutions................ $56,553 $ 68,385 $ 45,485
Plasticon Fluid Systems.............. 20,720 42,572 55,079
Plasticon Europe..................... -- -- 30,454
Hanwel Europe........................ -- -- 18,300
------- --------- ---------
Total cost of revenues............. $77,273 $ 110,957 $ 149,318
======= ========= =========
SG&A:
Containment Solutions................ $11,112 $ 13,791 $ 9,690
Plasticon Fluid Systems.............. 5,094 11,354 12,381
Plasticon Europe..................... -- -- 8,916
Hanwel Europe........................ -- -- 5,025
Corporate............................ 3,949 2,781 2,607
------- --------- ---------
Total SG&A......................... $20,155 $ 27,926 $ 38,619
======= ========= =========
Restructuring:
Containment Solutions................ $ -- $ -- $ 500
Plasticon Fluid Systems.............. -- -- --
Plasticon Europe..................... -- -- 1,652
Hanwel Europe........................ -- -- 873
Other................................ -- -- --
Corporate............................ -- -- 791
------- --------- ---------
Total restructuring................ $ -- $ -- $ 3,816
======= ========= =========
Operating income (loss):
Containment Solutions................ $ 3,822 $ 8,935 $ 1,521
Plasticon Fluid Systems.............. 2,596 3,723 1,693
Plasticon Europe..................... -- -- (2,954)
Hanwel Europe........................ -- -- 1,302
Corporate............................ (3,949) (2,781) (3,398)
------- --------- ---------
Total operating income (loss)...... $ 2,469 $ 9,877 $ (1,836)
======= ========= =========
</TABLE>
14
<PAGE> 17
The following table sets forth for fiscal 1998, 1999 and 2000, the percentage
relationship to net revenues of certain expenses and earnings:
<TABLE>
<CAPTION>
As a Percentage of Net Revenues
-------------------------------
Year Year Year
Ended Ended Ended
June 27, July 3, July 1,
1998 1999 2000
------- -------- ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ 100.0% 100.0% 100.0%
Cost of revenues........................ 77.4 74.6 78.6
----- ----- -----
Gross profit............................ 22.6 25.4 21.4
----- ----- -----
Selling, general and administrative
expenses ............................ 20.1 18.8 20.3
Restructuring charges................... -- -- 2.0
----- ----- -----
Operating income........................ 2.5 6.6 (0.9)
Interest expense........................ 1.6 2.1 4.9
Interest income......................... (0.1) (0.1) (0.1)
Other income, net....................... (0.5) (0.3) (0.6)
----- ----- -----
Income before income taxes.............. 1.5 4.9 (5.1)
Income tax provision (benefit).......... 1.4 1.9 (0.1)
----- ----- -----
Net income (loss) before extraordinary
item and minority interest........... 0.1 3.0 (5.0)
Minority interest....................... -- -- 0.1
----- ----- -----
Net income (loss) before extraordinary
item ................................ 0.1 3.0 (5.1)
===== ===== =====
</TABLE>
FISCAL 2000 COMPARED WITH FISCAL 1999
The Company's results of operations for fiscal 2000 were significantly
affected by the inclusion of acquired companies. The results of Welna (Plasticon
Europe and Hanwel Europe), Belco and Plasti-Fab were included for the full
fiscal year. The results for Manantial and HP Valves were also included for the
period from the dates of their acquisition, September 1999 and November 1999,
respectively. The results of Plasti-Fab and Belco were included for 31 and 21
weeks in fiscal 1999, respectively, following their acquisitions in November
1998 and February 1999. The acquisition of Welna on July 1, 1999 had no impact
on fiscal 1999 results.
Net Revenues. Consolidated net revenues increased by $41.2 million, or 28%,
in fiscal 2000 compared to fiscal 1999. The increase in net revenues is due to
the inclusion of $63.6 million and $1.2 million, respectively, in revenues for
the Welna and Manantial acquisitions in the Company's results in the current
fiscal year. The Plasticon Fluid Systems segment, excluding the Manantial
acquisition, had higher revenues of $10.3 million. Offsetting these increases
was a $33.9 million decrease in revenues from the Containment Solutions Group.
Net revenues for the Containment Solutions Group decreased by $33.9 million,
or 37% in fiscal 2000 compared to fiscal 1999. A significant decrease in demand
from its customers in the petroleum industry for UST's in fiscal 2000 compared
to fiscal 1999 resulted in the decline in the Containment Solutions Group's
revenues. The expiration of the regulatory compliance deadline in fiscal year
1999, which mandated the repair or replacement of underground storage tanks,
caused the significant decline in demand for Containment Solutions' products.
The Plasticon Fluid Systems Group had an increase in net revenues of $11.5
million, or 20% in fiscal 2000 compared to fiscal 1999. Of the total increase,
$7.6 million is attributable to the inclusion of the revenues for the Manantial
acquisition in fiscal 2000, Belco and Plasti-Fab for the full year in fiscal
2000, and $6.2 million is attributable to a 26% increase in activity at Ershigs.
The increased revenue at Ershigs is due to a significant improvement in certain
markets including the power industry.
The increases were offset by a $2.2 million decrease in net revenues at
SEFCO. SEFCO had lower net revenues in fiscal 2000 compared to fiscal 1999 due
to refocusing on the municipal market and decreasing its emphasis on industrial
markets that have historically been less profitable.
15
<PAGE> 18
Cost of Revenues. Consolidated cost of revenues increased by $38.4 million,
or 35%, in fiscal 2000 compared to fiscal 1999. The increase is due to the
inclusion of the cost of revenues of Welna of $48.8 million and Manantial of
$0.9 million in the Company's results in the current period and higher cost of
revenues in the Plasticon Fluid Systems Group, excluding the Manantial
acquisition, of $11.6 million. These increases were offset by a $22.9 million
decrease in cost of revenues for the Containment Solutions Group.
A deterioration in gross margins at both Containment Solutions and Plasticon
Fluid Systems Groups contributed significantly to the operating loss in fiscal
2000 compared to fiscal 1999. The decrease in the gross margin as a percentage
of sales for both segments had a negative impact of $6.6 million. The decrease
at Containment Solutions was due to the 39% decrease in activity without a
corresponding decrease in fixed overhead costs resulting in less favorable
absorption of fixed overhead costs. The decrease in Plasticon Fluid Systems
Group's gross margin in fiscal 2000 is due to approximately $1.2 million of
losses incurred on a large power industry contract by Ershigs and decreases in
margins at Belco, SEFCO and Ershigs due to poor execution of other large
projects.
Cost of revenues for the Containment Solutions Group decreased by $22.9
million, or 34% in fiscal 2000 compared to fiscal 1999. The decrease is directly
attributable to the decrease in revenues. However, the fiscal 2000 decrease in
cost of revenues did not fully offset the decrease in net revenues, resulting in
the Containment Solutions Group's gross margin, as a percentage of net revenues,
decreasing by 16% to 21% in fiscal 2000 from 25% in fiscal 1999. As noted above,
the deterioration in Containment Solutions Group's gross margins is due to the
impact of lower activity without a corresponding decrease in fixed overhead
costs.
Cost of revenues for the Plasticon Fluid Systems Group increased by $12.5
million, or 29% in fiscal 2000 compared to fiscal 1999. The inclusion of the
Manantial acquisition in fiscal 2000 and Belco and Plasti-Fab for the full year
in fiscal 2000 accounts for $6.8 million of the increase in cost of revenues and
higher activity at Ershigs accounts for $8.6 million, an increase of 53% over
fiscal 1999. These increases are offset by a $3.0 million decrease in cost of
revenues at SEFCO. The percentage increase in Ershigs' cost of revenues exceeded
the percentage increase in its revenues in fiscal 2000 compared to fiscal 1999,
impacting overall gross margins for the Plasticon Fluid Systems Group. The
Plasticon Fluid Systems Group's gross margin decreased by $1.0 million, or 7%,
to $14.1 million in fiscal 2000 from $15.1 million in fiscal 1999. As a
percentage of net revenues, Plasticon Fluid Systems' gross margin fell 23% to
20% in fiscal 2000 compared to 26% in fiscal 1999. Ershigs experienced the large
increase in cost of revenues due to an increase in revenue from the power
industry. However, the increase in revenues was offset by cost overruns of $1.2
million on a large contract for a power industry customer and poor execution on
other contracts.
Selling, General and Administrative Expense. Consolidated selling, general
and administrative expense increased by $10.7 million, or 38% in fiscal 2000
compared to fiscal 1999. Inclusion of the Welna and Manantial acquisitions in
fiscal 2000 accounts for $13.9 million and $0.5 million of the increase,
respectively. The Plasticon Fluid Systems Group, excluding the Manantial
acquisition, had a $0.5 million increase in fiscal 2000 compared to fiscal 1999.
The increase included an $800,000 allowance for a receivable from a Stone &
Webster subsidiary. Stone & Webster filed for bankruptcy protection in fiscal
year 2000 and certain of its assets and liabilities have been acquired by the
Shaw Group. As of October 6, 2000, the Company has been unsuccessful in
collecting amounts owed to the Company by Stone & Webster. These increases were
offset by a $4.1 million decrease in selling, general and administrative expense
for the Containment Solutions Group in fiscal 2000 compared to fiscal 1999.
Containment Solutions Group's selling, general and administrative expense
decreased by $4.1 million, or 30%, to $9.7 million in fiscal 2000 from $13.8
million in fiscal 1999. In response to the significant reduction in Containment
Solutions Group's revenues, the Company restructured its operations in the
second quarter of fiscal 2000 through the closure of its Conroe, Texas,
manufacturing facility and personnel reductions.
Plasticon Fluid Systems Group's selling, general and administrative expense
increased by $1.0 million, or 9%, in fiscal 2000 compared to fiscal 1999. The
increase is attributable to the inclusion of the acquisition of Manantial in
fiscal 2000 and Belco and Plasti-Fab acquisitions in the Plasticon Fluid Systems
Group's results for the full year in fiscal 2000.
16
<PAGE> 19
Restructuring. During the fiscal year ended July 1, 2000, the Company
implemented a plan in which it reorganized each of its business segments. A
portion of the plan involved the closure of the Containment Solutions Group's
Conroe, Texas, manufacturing facility, a Plasticon Europe manufacturing facility
in Tilburg, The Netherlands, and a Hanwel Europe facility in Hengelo, The
Netherlands. Additionally, certain domestic administrative functions were
consolidated into the Company's Tulsa, Oklahoma, location and certain domestic
and European sales and management positions were eliminated.
As a result of the Corporate-wide restructuring in fiscal 2000, the Company
recorded restructuring charges totaling $3.8 million ($0.69 per share), which
are shown as a separate line item on the consolidated statement of operations.
The fiscal 2000 restructuring charges include costs associated with involuntary
termination benefits for employees (111 total employee terminations planned, 70
terminated as of July 1, 2000), disposal of closed facilities and other
restructuring costs. The restructuring charges were $2.5 million for Welna, $0.5
million for the Containment Solutions Group and $0.8 million for Corporate.
The following is an analysis of the restructuring charges and cash outlays
from July 4, 1999 to July 1, 2000:
<TABLE>
<CAPTION>
Employee Disposal
(In thousands) Separations Costs Other Total
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Restructuring charges:
Balance at July 3, 1999 $ -- $ -- $ -- $ --
Fiscal 2000 charges 3,601 116 99 3,816
Fiscal 2000 cash outlays (2,374) -- (99) (2,473)
--------- --------- --------- ---------
Balance at July 1, 2000 $ 1,227 $ 116 $ -- $ 1,343
========= ========= ========= =========
</TABLE>
The Company expects to incur cash payments relating to employee terminations
and asset disposals at least equal to the remaining balance at July 1, 2000
during fiscal 2001.
Interest Expense. Consolidated interest expense increased by $6.0 million, or
188%, in fiscal 2000. Consolidated interest expense was $9.2 million in fiscal
2000 compared to $3.2 million in fiscal 1999. The inclusion of the results for
Welna in fiscal 2000 represents $3.9 million of the total increase. The
remainder of the increase is attributable to higher interest rates on the
Company's outstanding debt.
Interest Income. Consolidated interest income increased by $0.1 million, or
68%, in fiscal 2000. Consolidated interest income was $0.2 million in fiscal
2000 compared to $0.1 million in fiscal 1999. The inclusion of the results for
Welna in fiscal 2000 represents $0.2 million of the total increase. The increase
is offset by lower interest income from the Company's domestic operations due to
lower investable cash balances during fiscal 2000 versus fiscal 1999.
Other Income, Net. Other income, on a consolidated basis, increased by $0.7
million, or 157%, in fiscal 2000 to $1.2 million from $0.5 million. The increase
is primarily due to the effect of recognizing in income the revaluation of the
Company's put option liability for the warrants issued to the holders of its
Subordinated Notes.
Income Taxes. The Company's provision for income taxes differs from the U.S.
statutory rate of 34% due to valuation allowances recorded in fiscal 2000 on tax
assets, state taxes, non-deductible goodwill amortization, a non-taxable warrant
valuation adjustment and other permanent differences.
Net Income (Loss). Due to the factors noted above, net income (loss)
attributable to common stock decreased by $13.8 million from net income of $4.1
million in fiscal 1999 to a net loss of $9.7 million in fiscal 2000.
17
<PAGE> 20
FISCAL 1999 COMPARED WITH FISCAL 1998
The Company's results of operations for fiscal 1999 were significantly
affected by the inclusion of acquired companies. The results of SEFCO and
LaValley were included for a full year in fiscal 1999 versus 34 weeks in fiscal
1998. CC&E and Fibercast were included for a full year in fiscal year 1999
compared to seven and three weeks, respectively, in fiscal year 1998. The
results of Plasti-Fab and Belco were included for 31 and 21 weeks in fiscal
1999, respectively, following their purchases in November 1998 and February
1999. The acquisition of Welna on July 1, 1999 had no impact on fiscal 1999
results.
In addition, the Company utilizes a 52- or 53-week year-end ending on the
Saturday closest to June 30. The fiscal year ended July 3, 1999 was a 53-week
year.
Net Revenues. Consolidated net revenues for fiscal 1999 increased $48.9
million, or 49%, to $148.8 million in fiscal 1999 from $99.9 million in fiscal
1998. Of the total increase, $27.8 million is due to the effect of including a
full years' revenues in 1999 for acquisitions made in fiscal 1998 and revenues
recognized for 1999 acquisitions in the Plasticon Fluid Systems Group, $1.4
million in revenue growth for the Plasticon Fluid Systems Group's Ershigs unit
and a $19.6 million increase in revenues for the Containment Solutions Group.
The Containment Solutions Group had an increase in revenues of $19.6
million, or 28%, primarily due to an increase in UST demand from new
construction and replacement.
Revenues for the Plasticon Fluid Systems Group increased $29.2 million, or
103%, mainly because of the impact of fiscal 1998 and 1999 acquisitions. The
inclusion of the fiscal 1998 acquisitions of SEFCO and Fibercast in the
Plasticon Fluid Systems Group's results for a full fiscal year represents $21.5
million of the total revenue increase. Revenues from the fiscal 1999
acquisitions of Belco and Plasti-Fab account for $6.3 million of the total
revenue increase. The Ershigs unit of the Plasticon Fluid Systems Group had a
$1.4 million increase in revenues in fiscal 1999 compared to fiscal 1998.
Cost of Revenues. On a consolidated basis, cost of revenues increased by
$33.7 million, or 44%, to $111.0 million in fiscal 1999 from $77.3 million in
fiscal 1998. The increase is due to the impact of including a full years' cost
of revenues for fiscal 1998 acquisitions of $17.5 million, cost of revenues from
fiscal 1999 acquisitions of $4.1 million and a $11.8 million increase in cost of
revenues for the Containment Solutions Group.
The Containment Solutions Group had an increase in cost of revenues of $11.8
million, or 21%, primarily due to an increase in activity due to higher UST
demand from new construction and replacement.
The Plasticon Fluid Systems Group's cost of revenues increased by $21.9
million, or 106%, primarily due to the impact of fiscal 1998 and 1999
acquisitions. The inclusion of the fiscal 1998 acquisitions of SEFCO and
Fibercast in the Plasticon Fluid Systems Group's results for a full fiscal year
represents $17.5 million of the total increase in cost of revenues. Cost of
revenues from the fiscal 1999 acquisitions of Belco and Plasti-Fab account for
$4.1 million of the total increase.
Gross profit increased $15.2 million, or 67%, to $37.8 million in fiscal
1999 from $22.6 million in 1998. Gross margins, as a percent of net revenues,
for the Containment Solutions Group increased to 25% in fiscal 1999 as compared
to 21% in fiscal 1998 due primarily to operational improvements and volume
efficiencies. The gross margin at Plasticon Fluid Systems decreased slightly to
26% in fiscal 1999 from 27% in fiscal 1998. This slight decrease is the result
of changes in the product and job mix from the prior year.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $7.8 million, or 39%, to $27.9 million in
fiscal 1999 from $20.2 million in fiscal 1998. The increase is primarily
attributable to additional expenses from the acquired companies and increased
sales expense due to volume increases at Containment Solutions. Selling, general
and administrative expenses, as a percentage of net revenues, remained
consistent at 19% for fiscal 1999 compared to 20% in fiscal 1998.
18
<PAGE> 21
In fiscal year 1999, the Company recognized a $682,000 non-recurring
compensation charge in the second quarter relating to a salary continuation
agreement. In fiscal 1998, the Company recognized a $2.3 million non-recurring
compensation charge in the first quarter due to the exchange of subsidiary stock
options for Denali stock options.
Interest Expense. Interest expense in fiscal 1999 was $3.2 million compared
to $1.6 million in fiscal 1998. The increase was due to borrowings incurred to
finance the Company's acquisitions in late fiscal 1998 and fiscal 1999.
Income Taxes. The Company's provision for income taxes differs from the U.S.
statutory rate of 34% due to state taxes, non-deductible goodwill amortization
and other permanent differences. In fiscal 1998, the Company's provision for
income taxes differed from the U.S. statutory rate due to the non-recurring
compensation charge being non-deductible for income tax purposes.
Extraordinary Loss. The Company recognized an extraordinary loss on the
early extinguishment of debt, net of income tax, of $281,000 in the third
quarter of fiscal 1999.
Net Income. Net income attributable to common stock for fiscal 1999
increased from $299,000 in fiscal 1998 to $4.1 million in fiscal 1999. Earnings
per share, excluding the non-recurring compensation expense and extraordinary
items, increased 60% to $0.99 in fiscal 1999 from $0.62 in fiscal 1998 on a
diluted basis. Including the non-recurring compensation expense, fiscal 1999
earnings per diluted share were $0.90 before extraordinary items and $0.84 after
extraordinary items.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company experienced a greater than expected downturn
in its underground storage tank market. Additionally, in Europe, capital
spending in the petrochemical and chemical processing industry declined
significantly resulting in a decrease in the demand for the Company's products
in those markets. As a result, the Company has experienced recent operating
losses and significantly decreased cash flows from operations in fiscal 2000,
and the Company's liquidity has reached extremely low levels. The Company has
had to borrow under its bank facilities during fiscal 2000 to cover these
operating losses. In addition, these operating losses have resulted in the
Company breaching the financial covenants in most of its credit facilities as
well as defaulting on interest and principal payments on certain facilities (See
more detailed discussion of credit facilities and related defaults below).
During fiscal 2000, the Company implemented a plan in which it reorganized
each of its business segments resulting in the closure of a manufacturing
facility in the United States and two manufacturing facilities in the
Netherlands as well as the consolidation of several administrative functions
(See Note 4 to the financial statements). The reorganization plan was
implemented in an effort to better match Company resources with current demand
levels.
The Company is currently pursuing a private placement of equity and debt to
raise additional capital and increase its liquidity. This transaction is
described in more detail below under the section Blair Transaction.
As of October 6, 2000, the Company had $1.7 million of availability under
its U.S. bank facility and has been meeting its recent operating cash flow
needs. Management expects to generate additional cash flow by aggressively
managing its working capital model and management is exploring raising
additional cash from the sale of non-strategic assets.
There can be no assurance that the Company will be able to successfully
complete the Blair Transaction, the proposed restructuring of its credit
facilities or secure alternative financing or capital. If the Company is unable
to complete these transactions or otherwise raise additional capital and
increase its liquidity, the Company may not be able to continue to operate as a
going concern.
The Company's capital requirements historically relate primarily to
acquisitions of businesses in the critical fluids handling industry, debt
service, capital expenditures and working capital. The Company has made
aggregate cash payments for acquisitions, net of cash acquired, of approximately
$98.8 million since inception in December 1994. The source of this cash has
primarily been bank debt, along with proceeds from the sale of equity
securities, sale of idle assets and use of net working capital.
19
<PAGE> 22
CASH FLOW
The net cash provided by (used in) operating, investing and financing
activities for the fiscal years ended June 28, 1998, July 3, 1999 and July 1,
2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
June 28, 1998 July 3, 1999 July 1, 2000
------------- ------------ ------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ 3,854 $ 7,239 $ (3,209)
Investing activities (31,126) (51,327) (7,340)
Financing activities 27,117 45,737 12,013
</TABLE>
Net cash provided by operating activities decreased by $10.4 million for
fiscal 2000 compared to fiscal 1999. The decrease is primarily due to lower net
income in fiscal 2000 compared to fiscal 1999. Net cash provided by operations
in fiscal 1999 increased by $3.4 million over fiscal 1998. The increase is
primarily due to a $1.5 million increase in net income (adjusted to exclude the
non-cash, non-recurring compensation expense of $2.3 million in fiscal 1998) and
an increase in depreciation and amortization of $1.6 million related to
acquisitions made in late fiscal 1998 and in fiscal 1999. Capital expenditures
totaled $4.6 million and $2.9 million in fiscal 2000 and fiscal 1999,
respectively.
Net cash used in investing activities decreased $44.0 million in fiscal 2000
compared to fiscal 1999 due to a lower level of acquisition activity in fiscal
2000 and lower capital expenditures. Net cash used in investing activities
increased $20.2 million in fiscal 1999 compared to fiscal 1998 due primarily to
the Welna acquisition in fiscal 1999.
Cash flows provided by financing activities decreased approximately $33.7
million in fiscal 2000 due to a decrease in net borrowings of $29.2 million and
a decrease in proceeds from the issuance of common stock of $4.5 million. The
net borrowings incurred during fiscal 2000 were utilized to finance the
purchases of HP Valves and Manantial, and working capital needs. Cash flows
provided by financing activities increased by approximately $18.6 million in
fiscal 1999 compared to 1998 primarily due to an increase in net borrowings of
$39.3 million. The net borrowings incurred during fiscal 1999 were used
primarily to finance portions of the Plasti-Fab, Belco and Welna acquisitions.
The increase in fiscal 1999 net borrowings is offset by a decrease in the
proceeds from sales of equity of $22.1 million.
WORKING CAPITAL
At July 1, 2000, the Company had negative working capital of $60.8 million
compared to $17.8 million in working capital at July 3, 1999, a decrease of
$78.6 million. The decrease was primarily due to the reclassification of $65.3
million of debt in technical default from long-term to current debt. In
addition, current maturities of long-term debt increased $9.8 million.
PRINCIPAL DEBT INSTRUMENTS
At July 1, 2000, the Company had total borrowings of $104.4 million
outstanding under its principal credit facilities and debt instruments. The
Company is in default under the terms of its Domestic Credit Facility and
Subordinated Notes. At July 1, 2000, the Company was also in default under the
terms of its European Credit Facility.
In May 2000, the Company signed a letter of intent with William Blair
Mezzanine Capital Partners III, L.P. ("Blair") for the purpose of refinancing
its long-term obligations (the "Blair Transaction"). The Company entered into a
revised letter of intent with Blair in July 2000. See below for a separate
discussion of the Blair Transaction.
20
<PAGE> 23
DOMESTIC CREDIT FACILITY
The Company has a $57.55 million domestic senior credit facility (the
"Domestic Credit Facility") with a group of banks led by CIBC World Markets (the
"Domestic Senior Lenders") that expires on January 12, 2004. The Domestic Credit
Facility is comprised of $17.25 million of term loans, $15.3 million of
acquisition loans, and a revolving credit facility of $25.0 million. The
Domestic Credit Facility was available on January 12, 1999 when the Company
refinanced its then existing credit facilities. In connection with the
extinguishment of its old credit facility upon funding of the Domestic Credit
Facility, the Company recorded an extraordinary loss of $454,000 ($281,000 net
of tax) related to unamortized debt origination costs for the fiscal year ended
July 3, 1999.
The credit agreement covering the Domestic Credit Facility contains covenants
requiring the maintenance of financial conditions including domestic maximum
leverage, consolidated maximum leverage, domestic maximum senior leverage,
consolidated maximum senior leverage, domestic minimum interest coverage,
consolidated minimum interest coverage, domestic minimum fixed charge coverage
and consolidated minimum fixed charge coverage ratios. The Company was not in
compliance with these covenants beginning with the calendar quarter ended
December 31, 1999 and each calendar quarter thereafter. A waiver of default was
requested for the calendar quarter ended December 31, 1999, but the Company was
unable to meet one of the conditions stipulated in the waiver agreement, which
required the Company to obtain waivers of default from the holders of its 12%
subordinated notes (the "Subordinated Notes"). The Company was unable to obtain
a waiver of default from the holders of the Subordinated Notes for covenant
violations that occurred in the calendar quarter ended December 31, 1999. The
Company did not seek waivers for the reporting dates of March 31 and June 30,
2000. On June 30, 2000, the Company did not make a required principal payment of
$750,000 on the term loan portion of the Domestic Credit Facility. As of July 1,
2000, the Company is in violation of the credit agreement covering the Domestic
Credit Facility and although the Domestic Senior Lenders have not expressed
their intention to do so, they have the right to accelerate the maturity of this
obligation. Consequently, the Company has classified the total amount
outstanding under the Domestic Credit Facility as current liabilities in the
accompanying balance sheet.
The term loan portion of the Domestic Credit Facility bears interest at LIBOR
plus an applicable margin of 4.0%. The acquisition loans bear interest at LIBOR
plus applicable margins from 4.0% to 4.50%. The Company has no available
borrowing capacity for either the term or acquisition loans. Currently, both the
term and acquisition loans bear default interest of 2% in addition to the base
rate plus the applicable margin.
The principal amount of the revolving credit facility is $25.0 million at
July 1, 2000, or a defined borrowing base. At July 1, 2000, the revolving credit
facility bore interest at either LIBOR plus applicable margins from 3.50% to
4.0% or prime plus 2.25% (interest rates were between 12.31% and 14.25% at July
1, 2000). Currently, the revolving credit facility bears default interest of 2%
in addition to the base rate plus the applicable margin. Borrowings under the
revolving credit facility are based on 85% of eligible accounts receivable and
50% of eligible inventory, as defined in the credit agreement. At July 1, 2000,
the borrowing capacity under the revolving credit facility was $25.0 million and
availability was $3.75 million. At October 6, 2000, the borrowing capacity under
the revolving credit facility was $27.0 million and availability was $1.7
million.
The Domestic Credit Facility also contained a provision for letters of
credit, subject to availability, of up to $10 million. At July 1, 2000, the
Company had $1.7 million in letters of credit outstanding. The total
availability for letters of credit has since been reduced to the amount
outstanding under the credit facility.
21
<PAGE> 24
On February 24, 2000, the Domestic Credit Facility was amended and the
Domestic Senior Lenders agreed to waive the existing defaults due to the
Company's non-compliance, subject to the conditions noted below. The amendment
(a) increased the revolving credit facility commitment from $20 million to $25
million; (b) decreased the term loan commitment to $17.25 million and the
acquisition loan commitment to $15.3 million; (c) raised the applicable interest
rate margins on borrowings under the Domestic Credit Facility; and (d) required
the Company to secure $7.5 million in equity financing before July 31, 2000. The
proceeds from the equity financing would be applied to reduce the Company's
borrowings under the Domestic Credit Facility. Additionally, the Company issued
a series of warrants to the Domestic Senior Lenders entitling them the right to
purchase up to 1,000,000 shares of the Company's common stock at $0.01 per share
in the event that the Company is unsuccessful in obtaining the required equity
financing. A portion of the warrants are exercisable on the last day of each
month on which the required equity financing has not been obtained over a period
from July 31 to December 31, 2000. The amendment also required the Company to
obtain executed waivers of default relating to breaches of certain financial
covenants from the holders of its Subordinated Notes. The Company has been
unable to reach an agreement with the holders of the Subordinated Notes to waive
its default on the financial covenants contained in the subordinated note and
warrant purchase agreement. Due to the foregoing circumstance, the Company did
not seek waivers for its non-compliance with financial covenants noted above for
the calendar quarters ended March 31 or June 30, 2000.
On June 30, 2000, the Company did not make a required payment of principal
of $750,000 on its term notes. On the same date, the Company and its Domestic
Senior Lenders executed a forbearance agreement whereby unpaid principal
installments due were deferred until July 31, 2000 (the "Forbearance Period").
During the Forbearance Period, the borrowings under the Domestic Credit Facility
will bear default interest at 2% in addition to the base rate plus applicable
margin. In connection with the forbearance agreement, the Company agreed to
defer interest payments due to the holders of the Subordinated Notes.
On July 31, 2000, an extension of the forbearance agreement was obtained
through September 30, 2000. As part of the extension agreement, the Domestic
Senior Lenders (a) increased their revolving credit facility commitment from $25
million to $27 million until September 30, 2000; (b) deferred their rights to
exercise the warrants that were exercisable at July 31, 2000 and August 31,
2000; and (c) agreed to surrender the warrants upon consummation of the Blair
Transaction described below. On October 2, 2000, an extension of the forbearance
agreement was granted through October 31, 2000. In connection with the
extension, the Company obtained an agreement from the holders of its
Subordinated Notes to waive any default resulting solely from its failure to
make interest payments from June 30 to September 30, 2000. The Company continues
to be in default under the financial covenants under the Domestic Credit
Facility. Although the Domestic Senior Lenders have not expressed their intent
to accelerate the maturity of these borrowings, they retain the right to do so.
Upon consummation of the proposed Blair Transaction discussed in Note 3, the
Company will use the net proceeds obtained to reduce its borrowings under the
Domestic Credit Facility.
As part of the Blair Transaction discussed below, the Company is negotiating a
waiver of default and amendment to the Domestic Credit Facility. An agreement in
principle has been reached with the Domestic Senior Lenders as follows:
Principal Reductions
$20.85 million of the proceeds from the Blair Transaction will be
applied to reduce the outstanding borrowings under the Domestic Credit
Facility as follows:
o the outstanding borrowings under the existing term loans will be
reduced from $17.25 million to $6.7 million, or $10.55 million; and
o the amount outstanding under the revolving credit facility will be
reduced from $24.0 million to $13.7 million, or $10.3 million.
New Term Loan
The existing term loan and acquisition facilities will be consolidated
into a new $21.64 million term loan (the "New Term Loan"). The Domestic
Senior Lenders will grant a two-year moratorium on scheduled principal
payments for the New Term Loan. Proposed scheduled principal payments
will be $1 million in 2002 and $20.64 million in 2003.
22
<PAGE> 25
Revolving Credit Facility
The revolving credit facility commitment will revert from the current
$27 million commitment back to the $25 million commitment agreed to on
February 24, 2000. Simultaneous with the closing of the Blair
Transaction, availability under the revolving credit facility will be
$10 million. Any excess funds above the $10 million of availability will
be applied to reduce the amount outstanding under the New Term Loan.
Asset Dispositions
All proceeds received by the Company from asset dispositions will be
applied to reduce the principal balance outstanding under the New Term
Loan.
Revised Pricing Grid and Financial Covenants
From the effective date of the amendment until September 30, 2002, the
existing pricing grid for base rate and LIBOR loans will no longer be in
effect and all borrowings will bear interest at a rate of LIBOR plus
3.50%. A proposed pricing grid, tied to levels of domestic maximum
leverage ratios, will be reinstated on September 30, 2002.
The financial covenants for domestic total leverage, domestic senior
leverage and domestic fixed charge ratios will be modified setting forth
quarterly ratios from December 31, 2000 to September 30, 2003.
Additionally, the Company's ability to transfer cash to its non-domestic
operations will be restricted.
Although the Company has reached an agreement in principle with the Domestic
Senior Lenders, the Company has not yet entered into a binding agreement with
these lenders covering these matters and no assurances can be given that it will
be able to successfully consummate the arrangement being considered.
EUROPEAN SENIOR CREDIT FACILITY
In June 1999, the Company entered into a new senior credit facility (the
"European Credit Facility") with ABN Amro and ING Bank to finance the
acquisition of Welna. The European Credit Facility totals 25 million Dutch
guilders ("NLG") ($10.8 million) and is composed of two term loans. Term Loan A
provides for borrowings of NLG 15 million ($6.5 million) with quarterly payments
of NLG 625,000 ($270,469) beginning October 1, 1999. Term Loan B provides for
borrowings of NLG 10 million ($4.3 million) with principal due at the date of
maturity, August 1, 2001. As of July 1, 2000, the Company had indebtedness under
the European Credit Facility of NLG 23.1 million, or approximately $10 million,
outstanding. Both term loans bear interest at EURIBOR plus 1.75%. The facility
is secured by substantially all of Welna's assets.
The credit agreement covering the European Credit Facility stipulates
financial covenants requiring Welna to maintain specified levels of tangible net
worth and specified maximum leverage, minimum interest coverage and minimum debt
service coverage ratios. As of July 1, 2000, the Company was not in compliance
with these covenants. The Company has requested, but as of October 6, 2000, has
not received a waiver for these covenant violations from the European Senior
Lenders. Because of the foregoing, the Company has classified these obligations
as current liabilities in the accompanying consolidated balance sheet as of July
1, 2000.
12% SENIOR SUBORDINATED NOTES
On July 1, 1999, the Company issued $15.0 million, or $13.3 million net of
discount (of which $4.0 million is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet),
in 12% senior subordinated notes (the "Subordinated Notes"). The Subordinated
Notes have a maturity date of June 30, 2006. Interest is payable each calendar
quarter.
23
<PAGE> 26
The Subordinated Notes were issued with detachable warrants that entitle the
holders to purchase up to 534,873 common shares at $7.54 per share. The warrants
are exercisable immediately and expire in 2006. The warrants or warrant shares
also feature a put option that allows the holder to put up to 1/3 of the
warrants or warrant shares each year at fair market value beginning in year five
and expiring in year ten. The warrants were recorded at fair value of $1,733,000
based on the Black Scholes valuation model, which has been recorded as a
liability, and a related discount on the senior subordinated debt was recorded
for the same amount. This discount is being amortized over the seven-year term
of the Subordinated Notes as additional interest expense. The proceeds from the
issuance of the Subordinated Notes were used to fund the acquisition of Welna.
The purchase agreement related to the Company's Subordinated Notes contains
financial covenants for the maintenance of domestic maximum leverage, domestic
maximum senior leverage, minimum domestic interest coverage and minimum domestic
fixed charge ratios. Due to lower than expected operating results as of the
calendar quarter ending December 31, 1999 and each calendar quarter thereafter,
the Company was not in compliance with these covenants. The Company did not make
a scheduled interest payment due on June 30, 2000 on the Subordinated Notes of
approximately $450,000.
The Company requested, but did not receive, a waiver of default from the
holders of the Subordinated Notes for the covenant violations that occurred at
the end of the December 31, 1999 calendar quarter. The Company has not requested
waivers from the Subordinated Note holders for covenant violations for the
calendar quarters ending March 31 and June 30, 2000. The Company has received
executed waivers of default related solely to its failure to make required
interest payments for the periods ending June 30 and September 30, 2000. Because
of the foregoing, the Company has classified these obligations as current
liabilities in the accompanying consolidated balance sheet as of July 1, 2000.
As part of the Blair Transaction discussed below, the holders of the
Subordinated Notes will exchange their notes for a new class of subordinated
notes (the "Replacement Notes"). The Replacement Notes will bear interest at 12%
and will mature on December 31, 2008.
At issuance, the interest rate on the Replacement Notes will be divided into
a cash component of 10% and a payment-in-kind ("PIK") component of 2%. Interest
will be payable quarterly.
As to the PIK component, the Company may issue additional Replacement Notes
to the note holders in an original principal amount equal to the amount of PIK
interest instead of paying cash. Under the terms of the Replacement Notes, the
Company's right to pay this portion of the interest by issuing additional notes
will terminate when Consolidated Domestic EBITDA for the preceding twelve month
period equals or exceeds $14.0 million.
Although the Company has an agreement in principle with noteholders to
refinance its obligations under the Subordinated Notes, the Company can provide
no assurance that it can successfully complete the transaction as proposed.
OTHER LONG-TERM OBLIGATIONS
The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business. The IRBs bear interest at 9.875% per annum, mature in February 2001
and are secured by the Company's Conroe, Texas manufacturing facility. These
bonds were repaid during fiscal year 1999.
The Company assumed $3.5 million of term debt with a financial institution in
connection with its acquisition of Fibercast in June 1998. The term debt bears
interest at prime plus 0.50%. Monthly principal payments of $58,500 plus
interest are due monthly beginning August 1998 and the facility expires in
February 2001. This note was refinanced under the terms of the new senior credit
facility on January 12, 1999.
24
<PAGE> 27
SHORT-TERM BORROWINGS
The Company has a total of $26.3 million in commitments under various
short-term credit facilities. At July 1, 2000, the Company had outstanding
short-term borrowings of $21.4 million.
DOMESTIC OVERDRAFT FACILITY
The Company entered into an overdraft facility with the Bank of Oklahoma on
June 30, 1999. The facility provided for borrowings of up to $1 million. The
facility bears interest at prime plus 2%. At July 1, 2000, the Company had
outstanding borrowings under this facility of $0.6 million. The facility was
canceled effective July 21, 2000.
EUROPEAN SHORT-TERM CREDIT FACILITIES
The Company has $25.3 million in commitments under the short-term credit
facilities described below. At July 1, 2000, the Company had $20.8 million in
borrowings outstanding under these facilities.
In June 1999, the Company entered into an NLG 25 million ($10.8 million)
working capital facility with ABN-AMRO. The working capital facility bears
interest monthly at the higher of one-month average EURIBOR or 2.50%, plus 0.75%
(5.097% at July 1, 2000). The Company had approximately NLG 18.5 million, or
$8.0 million, outstanding under the working capital facility at July 1, 2000.
The unused portion of this facility is NLG 6.5 million, or $2.8 million.
The credit agreement for the loan contains a covenant specifying a minimum
level of tangible net worth to be maintained by the Company's European
operations. At July 1, 2000, the Company was not in compliance with this
covenant. The Company has requested, but as of October 6, 2000, has not received
a waiver for this covenant violation from the lender.
The lender has the right to cancel the working capital facility immediately
and demand repayment of the amount outstanding. Although the lender has not
canceled the working capital facility, the lender retains the right to do so.
In August 1999, the Company entered into an NLG 5 million ($2.2 million)
working capital facility with ING Bank. This facility bears interest at EURIBOR
plus 0.4% (4.728% at July 1, 2000). The Company had approximately NLG 5.0
million, or $2.2 million, outstanding under the facility at July 1, 2000.
The agreement for the credit facility stipulates financial covenants
requiring the Company's European operations to maintain a specified level of
minimum tangible net worth and minimum consolidated interest coverage ratio. At
July 1, 2000, the Company was not in compliance with these covenants. The
Company has requested, but as of October 6, 2000, has not received a waiver for
these covenant violations.
The lender has the right to cancel the working capital facility immediately
and demand repayment of the amount outstanding. Although the lender has not
canceled the working capital facility, the lender retains the right to do so.
In April 2000, the Company obtained a short-term loan of NLG 10 million ($4.7
million) from ABN-AMRO. The loan was due on July 25, 2000 and bears interest
monthly at 4.60%. At July 1, 2000, the outstanding principal amount of the loan
was NLG 10 million ($4.7 million).
The Company also has separate working capital facilities for their
subsidiaries in Germany, Poland and France. These facilities provide for
borrowings up to DM 14.58 million ($7.1 million), SEK 2.1 million ($0.3
million), and FFR 2.0 million ($0.2 million). These facilities bear interest at
various fixed and variable interest rates, ranging from approximately 8.25% to
13.0% at July 1, 2000. As of July 1, 2000, the Company has approximately $5.9
million outstanding under these facilities. The unused portion of these
facilities is approximately $1.7 million. These facilities are due on demand.
25
<PAGE> 28
BLAIR TRANSACTION
In May 2000, the Company signed a letter of intent with Blair Mezzanine
Capital Fund III, L.P., under which Blair proposed to invest $28,000,000 in the
Company through a combination of subordinated debt, convertible subordinated
debt, and common stock. However, the Company's results of operations during the
fiscal fourth quarter 2000 did not meet Blair's expectations, and Blair withdrew
its original investment proposal in late June 2000. In July 2000, the Company
and Blair entered into a revised letter of intent under which Blair proposes to
invest $23,000,000 in the Company, comprised of $18,000,000 of 12% Senior
Subordinated Notes due 2008, 5,000 shares of 8% Senior Cumulative Redeemable
Preferred Stock, $1,000 liquidation preference per share, and warrants to
purchase up to 3,880,645 shares of Denali common stock with an exercise price of
$2.26 per share.
Also as part of the proposed transaction, the Company will issue $15,000,000
in principal amount of its 12% Senior Subordinated Notes due 2008 to the holders
of the Company's currently outstanding subordinated debt in exchange for all
$15,000,000 in principal amount of the Company's currently outstanding
subordinated debt, and will issue warrants to purchase up to 534,873 shares of
its common stock with an exercise price of $2.26 per share to these holders in
exchange for a like number of currently outstanding common stock purchase
warrants with an exercise price of $7.54 per share. The notes issued in exchange
for the Company's currently outstanding subordinated debt will contain an
interest deferral feature. Under this interest deferral feature, the Company may
pay cash interest at the rate of 10% per annum and may pay the remaining 2% per
annum interest by issuing additional notes until the Company's U.S. operations
generate annual earnings before interest, taxes and depreciation of $14,000,000
or more.
There can be no assurance that the Company will be able to successfully
complete these transactions. If the Company is unable to complete these
transactions or otherwise raise additional capital and increase its liquidity,
the Company may be unable to continue to operate as a going concern.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced significant fluctuations in its quarterly
results of operations. These fluctuations have been attributable to timing of
acquisitions and seasonality. The Company's quarterly operating results are
affected by the annual construction season slowdown resulting from winter
weather especially in the period December through March. The fiberglass
composite UST business is especially impacted during the winter months. The
following table represents the Company's selected unaudited quarterly
consolidated statements of operations for each quarter in fiscal 1999 and 2000:
<TABLE>
<CAPTION>
Fiscal Year Ended July 3, 1999 Fiscal Year Ended July 1, 2000
------------------------------------------------ -------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
-------- --------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 35,535 $ 38,353 $ 36,328 $ 38,544 $ 48,366 $ 49,555 $ 46,142 $ 45,854
Gross profit 8,766 10,140 8,661 10,236 12,366 12,014 8,981 7,238
Operating income
(loss) 2,577 2,141* 1,596 3,563 1,762 210 (171) (3,637)
Income (loss) before
minority interest and
extraordinary items 1,285 916 476 1,724 805 (839) (1,710) (7,730)
Minority interest -- -- -- -- 71 121 61 (71)
Extraordinary
items -- -- (281) -- -- -- -- --
-------- --------- --------- --------- --------- --------- -------- ---------
Net income (loss) $ 1,285 $ 916 $ 195 $ 1,724 $ 734 $ (960) $ (1,771) $ (7,659)
======== ========= ========= ========= ========= ========= ======== ==========
</TABLE>
* Results for the second quarter of fiscal 1999 include non-recurring
compensation expenses of $682,000. In addition, the Company uses a 52- or
53-week year-end ending on the Saturday closest to June 30. The fiscal year
ended July 3, 1999 was a 53-week year.
26
<PAGE> 29
<TABLE>
<CAPTION>
Fiscal Year Ended July 3, 1999 Fiscal Year Ended July 1, 2000
------------------------------------------------ -------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
-------- --------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income
(loss) per share
before extraordinary
items $0.27 $0.19 $0.10 $0.35 $0.14 $(0.17) $(0.32) $(1.38)
Diluted net income
(loss) per share
before extraordinary
items $0.27 $0.19 $0.10 $0.35 $0.14 $(0.17) $(0.32) $(1.38)
</TABLE>
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Company is
currently evaluating issues raised by the introduction and initial
implementation of the Euro on January 1, 2002. The Company does not expect costs
of system modifications to be material, nor does it expect the introduction and
use of the Euro to materially and adversely affect its financial condition or
results of operations. The Company will continue to evaluate the impact of the
Euro introduction.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management, as well as assumptions made by and information
currently available to the Company's management. When used in this report, the
words, "anticipate", "believe", "estimate", "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
distribution networks, product introductions and acceptance, technological
change, changes in industry practices, onetime events and other factors
described herein. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risk exposure related to changes in interest
rates on its senior domestic and foreign credit facilities, which includes
revolving credit notes and term notes. These instruments carry interest at a
pre-agreed upon percentage point spread from either the prime interest rate,
LIBOR, or EURIBOR. Under its senior domestic credit facilities, the Company may,
at its option, fix the interest rate for certain borrowings based on a spread
over LIBOR for 30 days to 6 months. At July 3, 1999 and July 1, 2000, the
Company had $75.1 million and $88.8 million, respectively, outstanding under its
senior credit facilities. Based on these balances, an immediate change of one
percent in the interest rate would cause a change in interest expense, after
considering the effects of its interest rate swap agreement, of approximately
$751,000 and $828,000 or $0.09 and $0.09, net of tax, per diluted share,
respectively, on an annual basis. The Company's objective in maintaining these
variable rate borrowings is the flexibility obtained regarding early repayment
without penalties and lower overall cost as compared with fixed-rate borrowings.
27
<PAGE> 30
Beginning in fiscal year 2000, the Company, through its subsidiary Welna, has
had manufacturing and sales activities in foreign jurisdictions. In 1999, the
Company manufactured its products only in the United States. With the addition
of Welna, the Company now has manufacturing and sales facilities in The
Netherlands, Germany, Poland, France and the United Kingdom. In addition, the
Company now has sales activities in Belgium and Thailand. As a result, the
Company's financial results may be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are primarily exposed to changes in exchange rates between the
Dutch Guilder and the Polish Zloty and Swedish Krona (non-Euro countries). When
the Dutch Guilder strengthens against the Polish Zloty and Swedish Krona, the
value of non-functional currency sales decreases. When the Dutch guilder
weakens, the functional currency amount of sales increases. The Company does not
currently hedge its net investment in foreign operations.
The Company has exposure to price fluctuations associated with its primary
raw materials, including fiberglass, resin and steel. The Company's supply
agreement with a major supplier of fiberglass holds pricing constant for the
period from January 1, 1998 through June 30, 1999 and subsequently contains
certain stabilizing pricing parameters through its expiration on December 31,
2000. In addition, the Company does not have any long-term purchase agreements
nor does it depend upon any single supplier or source for its resin or steel
requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors will be set forth
in the Proxy Statement under the caption entitled "Election of Directors" and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be set forth in the Proxy
Statement under the captions "Election of Directors" and "Executive
Compensation" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the Proxy
Statement under the caption "Certain Relationships and Related Transactions" and
is incorporated herein by reference.
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements
As to financial statements, reference is made to the Index to
Financial Statements of this Annual Report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or notes thereto.
3. Exhibits
The following exhibits are filed as part of this Annual Report.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's registration statement
on Form S-1, registration statement no. 333-36857 (the "Registration
Statement")).
3.2 Bylaws of the Company (incorporated by reference to the Registration
Statement).
4.1 Specimen of Common Stock certificate (incorporated by reference to
the Registration Statement).
10.1 The Company's 1996 Incentive Stock Option Plan, as amended
(incorporated by reference to the Registration Statement).
10.2 The Company's 1997 Incentive Stock Option Plan (incorporated by
reference to the Registration Statement).
10.3 Stock Purchase Agreement dated April 8, 1998 between Reinforced
Plastic Systems Inc., CC&E/RPS, Inc., and Specialty Solutions, Inc.
(incorporated by reference to the Company's current report on Form
8-K dated May 8, 1998).
10.4 Amendment to Stock Purchase Agreement dated May 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and Specialty
Solutions, Inc. (incorporated by reference to the Company's current
report on Form 8-K dated May 8, 1998).
10.5 Stock Purchase Agreement dated May 11, 1998 by and between William
I. Koch, Joan Granlund, Richard P. Callahan, as Custodian for Wyatt
I. Koch, under the Florida Uniform Transfer to Minors Act, Richard
A. Bird, Fibercast Company and Denali Incorporated (incorporated by
reference to the Company's current report on Form 8-K dated June 5,
1998).
10.6 Glass Fiber Reinforcement Products Purchase Agreement dated December
23, 1994, by and between the Company and Owens Corning (incorporated
by reference to the Registration Statement).
10.7 Agreement dated November 3, 1997, by and between the Company and
Owens Corning (incorporated by reference to the Registration
Statement).
10.8 Lease dated November 22, 1996, by and between the Company and
Baymeadow Limited Partnership (the "Baltimore Lease") (incorporated
by reference to the Registration Statement).
10.9 First Amendment of Lease dated August 19, 1997, by and between the
Company and Baymeadow Limited Partnership regarding the Baltimore
Lease (incorporated by reference to the Registration Statement).
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C>
10.10 Salary Continuation Agreement dated September 5, 1997, by and
between the Company and Stephen T. Harcrow (incorporated by
reference to the Registration Statement).
10.11 Letter to Lee W. Orr dated March 31, 1997, confirming offer of
employment (incorporated by reference to the Registration
Statement).
10.12 Confidentiality and Non-Competition Agreement dated September 5,
1997, by and between the Company and R. Kevin Andrews (incorporated
by reference to the Registration Statement).
10.13 Confidentiality and Non-Competition Agreement dated September 5,
1997, by and between the Company and Cathy L. Smith (incorporated by
reference to the Registration Statement).
10.14 Amended and Restated Credit Agreement dated March 23, 1998 among
Denali Incorporated, Ershigs Biloxi, Inc., Ershigs, Inc., Fluid
Containment, Inc., and SEFCO, Inc., and NationsBank of Texas, N.A.,
as agent, and the financial institutions named therein (incorporated
by reference to the Company's quarterly report on Form 10-Q for the
quarterly period ending March 28, 1998 (the "3rd Quarter 1998
10-Q")).
10.15 Form of Revolving Note of Denali Incorporated pursuant to Amended
and Restated Credit Agreement dated March 23, 1998 (incorporated by
reference to the 3rd Quarter 1998 10-Q).
10.16 Guaranty dated March 23, 1998 of Denali Incorporated (incorporated
by reference to the 3rd Quarter 1998 10-Q).
10.17 Subsidiary Guaranty dated March 23, 1998 of Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc. and
Hoover Containment, Inc. (incorporated by reference to the 3rd
Quarter 1998 10-Q).
10.18 Security Agreement dated March 23, 1998 between Denali Incorporated
and NationsBank of Texas, N.A., as agent (incorporated by reference
to the 3rd Quarter 1998 10-Q).
10.19 Security Agreement dated March 23, 1998 among Containment Solutions,
Inc., Denali Management, Inc., Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment Property, Inc., Instrumentation Solutions, Inc.,
Specialty Solutions, Inc., Fluid Containment, Inc., SEFCO, Inc.,
Hoover Containment, Inc. and NationsBank of Texas, N.A., as agent
(incorporated by reference to the 3rd Quarter 1998 10-Q).
10.20 Pledge Agreement dated March 23, 1998 between Denali Incorporated
and NationsBank of Texas, N.A., as agent (incorporated by reference
to the 3rd Quarter 1998 10-Q).
10.21 Form of Pledge Agreement dated March 23, 1998 between NationsBank of
Texas, N.A., as agent, and each of Specialty Solutions, Inc., Fluid
Containment, Inc., and Ershigs, Inc. (incorporated by reference to
the 3rd Quarter 1998 10-Q).
10.22 Amendment No. 1 and Consent to the Credit Agreement dated as of June
5, 1998 among Denali Incorporated, Fluid Containment, Inc., Ershigs,
Inc., Ershigs Biloxi, Inc., SEFCO, Inc., the Banks party to and
defined in the Credit Agreement, and NationsBank, N.A., as agent
(incorporated by reference to the Company's annual report on Form
10-K for the fiscal year ending June 27, 1998 (the "1998 10-K"))
10.23 Assumption and Amendment to Loan Agreement dated as of June 5, 1998
among Bank of Oklahoma, N.A., Fibercast Company and Denali
Incorporated (incorporated by reference to the 1998 10-K)
10.24 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 (incorporated
by reference to the Company's quarterly report on Form 10-Q for the
quarterly period ending September 26, 1998 (the "1st Quarter 1999
10-Q"))
10.25 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.
(incorporated by reference to the 1st Quarter 1999 10-Q)
10.26 Revolving Note dated October 29, 1998 for $26,000,000 payable to
NationsBank, N.A. (incorporated by reference to the 1st Quarter 1999
10-Q)
10.27 Credit Agreement (the "New Credit Agreement") among Denali
Incorporated, Canadian Imperial Bank of Commerce, as administrative
agent, and ING (U.S.) Capital LLC, as documentation agent, dated as
of January 12, 1999 (incorporated by reference to the Company's
quarterly report on Form 10-Q for the quarterly period ending March
27, 1999 (the "3rd Quarter 1999 10-Q))
</TABLE>
31
<PAGE> 34
<TABLE>
<S> <C>
10.28 Stock Purchase Agreement dated February 3, 1999 by and between Steve
Jones, Belco Manufacturing Company, Inc. and Containment Solutions,
Inc. (incorporated by reference to the Company's Form 8-K dated
February 18, 1999)
10.29 Asset Purchase Agreement dated February 3, 1999 by and between Tiger
Trucking LLC, S. Jones Limited Partnership and Containment
Solutions, Inc. (incorporated by reference to the Company's Form 8-K
dated February 18, 1999)
10.30 Term Note pursuant to the New Credit Agreement between Denali
Incorporated and Bank of Oklahoma N.A. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.31 Form of Term Note pursuant to the New Credit Agreement between
Denali Incorporated and each of Key Corporate Capital Inc., ING
(U.S.) Capital LLC, and CIBC Inc. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.32 Acquisition Loan Note pursuant to the New Credit Agreement between
Denali Incorporated and Bank of Oklahoma N.A. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.33 Form of Acquisition Loan Note pursuant to the New Credit Agreement
between Denali Incorporated and each of Key Corporate Capital Inc.,
ING (U.S.) Capital LLC, and CIBC Inc. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.34 Revolving Credit Note pursuant to the New Credit Agreement between
Denali Incorporated and Bank of Oklahoma N.A. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.35 Form of Revolving Credit Note pursuant to the New Credit Agreement
between Denali Incorporated and each of Key Corporate Capital Inc.,
ING (U.S.) Capital LLC, and CIBC Inc. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.36 Pledge Agreement dated January 12, 1999 between Denali Incorporated,
Containment Solutions Services, Inc., Instrumentation Solutions,
Inc., Denali Management Inc., Denali Holdings Management, L.L.C.,
Denali Operating Management, Ltd., Containment Solutions, Inc.,
Specialty Solutions, Inc., Ershigs, Inc., SEFCO, Inc., Fibercast
Company, Plasti-Fab Inc. and Canadian Imperial Bank of Commerce, as
administrative agent and issuing lender (incorporated by reference
to the 3rd Quarter 1999 10-Q)
10.37 Security Agreement dated January 12, 1999 between Denali
Incorporated, Containment Solutions Services, Inc., Instrumentation
Solutions, Inc., Denali Management Inc., Denali Holdings Management,
L.L.C., Denali Operating Management, Ltd., Containment Solutions,
Inc., Specialty Solutions, Inc., Ershigs, Inc., SEFCO, Inc.,
Fibercast Company, Plasti-Fab Inc. and Canadian Imperial Bank of
Commerce, as administrative agent and issuing lender (incorporated
by reference to the 3rd Quarter 1999 10-Q)
10.38 Guarantee dated January 12, 1999 between Containment Solutions
Services, Inc., Instrumentation Solutions, Inc., Denali Management
Inc., Denali Holdings Management, L.L.C., Denali Operating
Management, Ltd., Containment Solutions, Inc., Specialty Solutions,
Inc., Ershigs, Inc., SEFCO, Inc., Fibercast Company, Plasti-Fab Inc.
and Canadian Imperial Bank of Commerce, as administrative agent and
issuing lender (incorporated by reference to the 3rd Quarter 1999
10-Q)
10.39 Form of Assignment and Acceptance Agreement pursuant to the New
Credit Agreement between Denali Incorporated and Canadian Imperial
Bank of Commerce, as administrative agent and each of Key Corporate
Capital Inc., ING (U.S.) Capital LLC, and CIBC Inc. dated March 15,
1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.40 Term Note pursuant to the New Credit Agreement between Denali
Incorporated and Southwest Bank of Texas, N.A. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.41 Form of Term Note pursuant to the New Credit Agreement between
Denali Incorporated and each of Key Corporate Capital Inc., ING
(U.S.) Capital LLC, and CIBC Inc. dated March 15, 1999 (incorporated
by reference to the 3rd Quarter 1999 10-Q)
10.42 Acquisition Note pursuant to the New Credit Agreement between Denali
Incorporated and Southwest Bank of Texas, N.A. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.43 Form of Acquisition Note pursuant to the New Credit Agreement
between Denali Incorporated and each of Key Corporate Capital Inc.,
ING (U.S.) Capital LLC, and CIBC Inc. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.44 Revolving Credit Note pursuant to the New Credit Agreement between
Denali Incorporated and Southwest Bank of Texas, N.A. dated March
15, 1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
</TABLE>
32
<PAGE> 35
<TABLE>
<S> <C>
10.45 Form of Revolving Credit Note pursuant to the New Credit Agreement
between Denali Incorporated and each of Key Corporate Capital Inc.,
ING (U.S.) Capital LLC, and CIBC Inc. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.46 Offer Document by Denali Incorporated to shareholders of Welna, N.V.
(incorporated by reference to the Company's Form 8-K dated July 14,
1999)
10.47 Roll-over Loans Facility Agreement between Denali Welna Europe B.V.
and ABN AMRO Bank N.V. and ING Bank N.V. dated June 11, 1999 for NLG
25,000,000 (incorporated by reference to the Company's annual report
on Form 10-K for the fiscal year ending July 3, 1999 (the "1999
10-K"))
10.48 Credit Agreement between Welna, N.V., Welna Kunststoffen B.V., B.V.
Twentse Kunststoffenindustrie Plasticon, Plasticon Haven B.V.,
Woodcap B.V., Kialite-Plasticon B.V., Onroerend-Goed Maatschappij
Plasticon B.V., Hanwel B.V., Plasticon Projects B.V., Welna Handel
B.V., Plasticon Heerenveen B.V., B.V. van Delden, Gimex B.V. and ABN
AMRO Bank N.V. dated June 11, 1999 for NLG 40,000,000 (incorporated
by reference to the 1999 10-K)
10.49 Working Capital Credit Facility between Welna, N.V., Welna
Kunststoffen B.V., B.V. Twentse Kunststoffenindustrie Plasticon,
Plasticon Haven B.V., Woodcap B.V., Kialite-Plasticon B.V.,
Onroerend-Goed Maatschappij Plasticon B.V., Hanwel B.V., Plasticon
Projects B.V., Welna Handel B.V., Plasticon Heerenveen B.V., B.V.
van Delden, Gimex B.V. and ING Bank dated June 11, 1999 for NLG
5,000,000 (incorporated by reference to the 1999 10-K)
10.50 Amendment and Waiver dated June 30, 1999 to the Credit Agreement
dated January 12, 1999 among Denali Incorporated and Canadian
Imperial Bank of Commerce, as administrative agent for the Lenders
and ING (U.S.) Capital LLC, as documentation agent (incorporated by
reference to the 1999 10-K)
10.51 Note and Warrant Purchase Agreement dated as of June 30, 1999
between Denali Incorporated and the Variable Annuity Life Insurance
Company, A.G. Investment Advisory Services, Inc., EMC Equity Fund,
L.P., Cockrell Investment Partners, L.P., Simmons Family Trust,
Thomas Dudley Simmons, Jr. Marital Trust, Thomas Dudley Simmons,
Jr., Joel V. Staff, Symonds Trust Co., Ltd., Anne Allen Symonds
Revocable Trust, William A. Monteleone, Jr., C. Richard Everett,
Fred H. Levine and Jay H. Golding Profit Sharing Plan (incorporated
by reference to the 1999 10-K)
10.52 Form of Common Stock Registration Rights Agreement between Denali
Incorporated and the Variable Annuity Life Insurance Company, A.G.
Investment Advisory Services, Inc., EMC Equity Fund, L.P., Cockrell
Investment Partners, L.P., Simmons Family Trust, Thomas Dudley
Simmons, Jr. Marital Trust, Thomas Dudley Simmons, Jr., Joel V.
Staff, Symonds Trust Co., Ltd., Anne Allen Symonds Revocable Trust,
William A. Monteleone, Jr., C. Richard Everett, Fred H. Levine and
Jay H. Golding Profit Sharing Plan (incorporated by reference to the
1999 10-K)
10.53 Form of Subscription Agreement between Denali Incorporated and the
Variable Annuity Life Insurance Company, A.G. Investment Advisory
Services, Inc., EMC Equity Fund, L.P., Cockrell Investment Partners,
L.P., Simmons Family Trust, Thomas Dudley Simmons, Jr. Marital
Trust, Thomas Dudley Simmons, Jr., Joel V. Staff, Symonds Trust Co.,
Ltd., Anne Allen Symonds Revocable Trust, William A. Monteleone,
Jr., C. Richard Everett, Fred H. Levine and Jay H. Golding Profit
Sharing Plan (incorporated by reference to the 1999 10-K)
10.54 Roll-over Loans Facility Agreement, as amended, between Denali
International Holdings B.V. and ABN AMRO Bank N.V. and ING Bank N.V.
dated July 1999 for NLG 25,000,000 (incorporated by reference to the
1999 10-K)
10.55 Lease agreement between Steven Jones and Belco Manufacturing
Company, Inc. dated January 1, 1998 (incorporated by reference to
the 1999 10-K)
10.56 Amendment to lease agreement between Steven Jones and Belco
Manufacturing Company, Inc. dated February 3, 1999 (incorporated by
reference to the 1999 10-K)
10.57 Letter of severance agreement between Henk A. Kroes and Welna N.V.
dated October 4, 1999 (incorporated by reference to the Company's
quarterly report on Form 10-Q for the quarterly period ending
January 1, 2000 (the "2nd Quarter 2000 10-Q"))
10.58 Severance Agreement and Release and Waiver of All Claims between
Denali Incorporated and Melford S. Carter, Jr. dated December 3,
1999 (incorporated by reference to the 2nd Quarter 2000 10-Q)
10.59 Edward de Boer Severance Agreement dated February 11, 2000
(incorporated by reference to the Company's quarterly report on Form
10-Q for the quarterly period ending April 1, 2000 (the "3rd Quarter
2000 10-Q"))
</TABLE>
33
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<TABLE>
<S> <C>
10.60 Second Amendment and Waiver to the Credit Agreement among Denali
Incorporated, Canadian Imperial Bank of Commerce, as administrative
agent, and ING (U.S.) Capital LLC, as documentation agent, dated as
of January 12, 1999 (incorporated by reference to the 3rd Quarter
2000 10-Q)
10.61* Waiver Agreement dated June 30, 2000 relating to the Note and
Warrant Purchase Agreement dated as of June 30, 1999
10.62* Forbearance Agreement among Denali Incorporated, Canadian Imperial
Bank of Commerce, as administrative agent, and ING (U.S.) Capital
LLC, as documentation agent, dated June 30, 2000
10.63* Forbearance Extension Agreement among Denali Incorporated, Canadian
Imperial Bank of Commerce, as administrative agent, and ING (U.S.)
Capital LLC, as documentation agent, dated July 31, 2000
10.64* Loan Agreement between Welna B.V., Welna Kunststoffen B.V., B.V.
Twentse Kunststoffenindustrie Plasticon, Plasticon Haven B.V.,
Woodcap B.V., Kialite-Plasticon B.V., Onroerend-Goed Maatschappij
Plasticon B.V., Hanwel B.V., Plasticon Projects B.V., Welna Handel
B.V., Plasticon Heerenveen B.V., B.V. Agentuur - en
Kahdelmaatschappij G.W.J.J. van Delden, Gimex Technische Keramiek
B.V., and ING Bank N.V. for NLG 6 Million dated September 4, 2000
10.65* Waiver Agreement dated September 27, 2000 relating to the Note and
Warrant Purchase Agreement dated as of June 30, 1999
10.66* Second Forbearance Extension Agreement among Denali Incorporated,
Canadian Imperial Bank of Commerce, as administrative agent, and ING
(U.S.) Capital LLC, as documentation agent, dated September 30, 2000
21.1* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
</TABLE>
-------------------------------------------------------------------------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the fourth
quarter of fiscal year 2000:
None
34
<PAGE> 37
DENALI INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors...................................................... F-1
Consolidated Balance Sheets as of July 3, 1999 and July 1, 2000..................... F-2
Consolidated Statements of Operations for the Years Ended June 27, 1998,
July 3, 1999 and July 1, 2000.................................................... F-3
Consolidated Statements of Stockholders' Equity as of June 27, 1998, July 3, 1999
and July 1, 2000................................................................. F-4
Consolidated Statements of Cash Flows for the Years Ended June 27, 1998,
July 3, 1999 and July 1, 2000 ................................................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
</TABLE>
35
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Denali Incorporated
We have audited the accompanying consolidated balance sheets of Denali
Incorporated and subsidiaries (the "Company") as of July 3, 1999 and July 1,
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended June 27, 1998, July 3, 1999 and July
1, 2000. Our audits also included the consolidated financial statement schedule
listed in the index at Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Denali
Incorporated and subsidiaries at July 3, 1999 and July 1, 2000, and the
consolidated results of its operations and its cash flows for the years ended
June 27, 1998, July 3, 1999 and July 1, 2000, in conformity with accounting
principles generally accepted in the United States. Also in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Denali
Incorporated will continue as a going concern. As more fully described in Note
3, the Company has incurred a recent operating loss and has a working capital
deficit. In addition, the Company has not complied with certain covenants of
debt agreements with banks and subordinated notes. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Houston, Texas
September 29, 2000
F-1
<PAGE> 39
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 3, July 1,
1999 2000
-------- ---------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................. $ 1,824 $ 2,940
Accounts receivable, net of allowances of $1,419,000
in 1999 and $1,470,000 in 2000 .................... 38,862 40,435
Inventories ........................................... 26,175 23,304
Prepaid expenses ...................................... 4,052 2,171
Income tax receivable ................................. -- 1,717
Other receivables ..................................... 2,591 3,509
Deferred tax assets ................................... 1,135 --
-------- ---------
Total current assets .............................. 74,639 74,076
Property, plant and equipment, net ...................... 46,938 39,647
Goodwill, net ........................................... 50,651 54,685
Other assets ............................................ 3,898 3,191
Assets held for sale .................................... 449 1,594
-------- ---------
Total assets ............................................ $176,575 $ 173,193
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 19,047 $ 20,839
Accrued liabilities ................................... 15,777 13,517
Lines of credit ....................................... 16,217 21,361
Income taxes payable .................................. 1,757 --
Current maturities of long-term debt .................. 4,030 13,871
Long-term debt in technical default ................... -- 61,217
Related party subordinated debt in technical default .. -- 4,077
-------- ---------
Total current liabilities ......................... 56,828 134,882
Long-term debt, less current maturities ................. 67,980 3,894
Related party subordinated debt ......................... 4,002 --
Accrued pension costs ................................... 1,277 1,350
Minority interest ....................................... 1,571 595
Deferred taxes .......................................... 1,692 1,846
Other long-term liabilities ............................. 4,656 3,260
Series A Preferred Stock, redeemable at
$250 per share, $.01 par value:
Authorized shares -- 1,004,800
Issued and outstanding shares - none .................. -- --
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized shares -- 30,000,000
Issued and outstanding shares -- 5,423,215 at
July 3, 1999 and 5,558,914 at July 1, 2000 ...... 54 55
Additional paid-in capital ............................ 34,956 35,640
Accumulated other comprehensive loss .................. -- (2,232)
Retained earnings (deficit) ........................... 3,559 (6,097)
-------- ---------
Total stockholders' equity .............................. 38,569 27,366
-------- ---------
Total liabilities and stockholders' equity .............. $176,575 $ 173,193
======== =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 40
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
----------------------------------
June 27, July 3, July 1,
1998 1999 2000
-------- --------- ---------
(In thousands, except
per share amounts)
<S> <C> <C> <C>
Net revenues ................................. $ 99,897 $ 148,760 $ 189,917
Cost of revenues ............................. 77,273 110,957 149,318
-------- --------- ---------
Gross profit ................................. 22,624 37,803 40,599
Selling, general, and administrative
expenses................................... 20,155 27,926 38,619
Restructuring charge ......................... -- -- 3,816
-------- --------- ---------
Operating income (loss) ...................... 2,469 9,877 (1,836)
Interest expense ............................. 1,614 3,199 9,209
Interest income .............................. (118) (124) (208)
Other income, net ............................ (489) (453) (1,165)
-------- --------- ---------
Income (loss) before income taxes ............ 1,462 7,255 (9,672)
Income tax expense (benefit) ................. 1,352 2,854 (198)
-------- --------- ---------
Net income (loss) before minority
interest and extraordinary item ............ 110 4,401 (9,474)
Minority interest ............................ -- -- 182
-------- --------- ---------
Net income (loss) before extraordinary item .. 110 4,401 (9,656)
Extraordinary income (loss) on early
extinguishment of debt, net of income tax .. 219 (281) --
-------- --------- ---------
Net income (loss) ............................ 329 4,120 (9,656)
Dividends on Series A Preferred Stock ........ (30) -- --
-------- --------- ---------
Net income (loss) attributable to
Common Stock............................... $ 299 $ 4,120 $ (9,656)
======== ========= =========
Net income (loss) per common share - basic
and diluted:
Income (loss) before extraordinary item .... $ 0.02 $ 0.90 $ (1.75)
Extraordinary item ......................... 0.06 (0.06) --
-------- --------- ---------
Net income (loss) per common share ......... $ 0.08 $ 0.84 $ (1.75)
======== ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 41
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Common Retained Other
Stock Stock Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Loss Total
------ ------ ------- ------- ------- --------
(In thousands)
<S> <C> <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 25,969 -- -- 25,992
Exercise of employee stock options ............. 368 3 609 -- -- 612
Dividends declared ............................. -- -- -- (30) -- (30)
Net income ..................................... -- -- -- 329 -- 329
----- --- ------- ------- ------- --------
Balance at June 27, 1998 ......................... 4,829 $48 $29,187 $ (561) $ -- $ 28,674
Issuance of common stock for
acquisitions ................................ 105 1 1,108 -- -- 1,109
Issuance of common stock in a private
placement ................................... 489 5 4,505 -- -- 4,510
Income tax benefit related to incentive
stock option plans .......................... -- -- 156 -- -- 156
Net income ..................................... -- -- -- 4,120 -- 4,120
----- --- ------- ------- ------- --------
Balance at July 3, 1999 .......................... 5,423 $54 $34,956 $ 3,559 $ -- $ 38,569
Issuance of common stock for
acquisitions ................................ 136 1 684 -- -- 685
Net income ..................................... -- -- -- (9,656) -- (9,656)
Foreign currency translation adjustment ........ -- -- -- -- (2,232) (2,232)
----- --- ------- ------- ------- --------
Comprehensive loss ............................. -- -- -- -- -- (11,888)
----- --- ------- ------- ------- --------
Balance at July 1, 2000 .......................... 5,559 $55 $35,640 $(6,097) $(2,232) $ 27,366
===== === ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
June 27, July 3, July 1,
1998 1999 2000
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................... $ 329 $ 4,120 $ (9,656)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Compensation expense .............................................. 2,312 -- --
Depreciation ...................................................... 1,436 2,535 4,799
Amortization ...................................................... 256 725 2,161
Provision for losses on accounts receivable ....................... 93 397 604
Deferred tax expense .............................................. 236 248 2,474
Gain on disposal of property, plant and
equipment and assets held for sale ............................. (89) (31) (28)
Put warrant valuation adjustment .................................. -- -- (1,385)
Impairment of investment in joint venture ......................... -- -- 151
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ............................................ (85) 2,163 (2,121)
Inventories .................................................... (1,612) (4,731) 2,585
Other receivables .............................................. -- -- 1,164
Prepaid expenses ............................................... (92) (502) (448)
Other assets and liabilities ................................... (212) 1,720 791
Accounts payable ............................................... 1,223 39 1,712
Accrued liabilities ............................................ (652) 159 (2,479)
Income tax payable (receivable) ................................ 711 397 (3,533)
-------- -------- --------
Net cash provided by (used in) operating
activities ........................................................ 3,854 7,239 (3,209)
INVESTING ACTIVITIES
Acquisitions, net of cash acquired .................................. (29,770) (48,518) (4,442)
Purchases of property, plant and equipment .......................... (3,071) (2,886) (4,646)
Proceeds from sale of property, plant and
equipment and assets held for sale ................................ 899 77 1,748
Payments on notes receivable ........................................ 816 -- --
-------- -------- --------
Net cash used in investing activities ............................... (31,126) (51,327) (7,340)
FINANCING ACTIVITIES
Proceeds from common stock issuance ................................. 25,992 4,525 --
Proceeds from exercise of stock options ............................. 612 -- --
Redemption of preferred stock ....................................... (1,200) -- --
Dividends paid ...................................................... (210) -- --
Net borrowings (repayments) under revolving
lines of credit ................................................... 8,990 (8,455) 10,830
Net borrowings under short-term lines of credit ..................... -- -- 3,834
Proceeds from term notes and long-term debt ......................... 10,398 48,949 4,152
Proceeds from subordinated debt ..................................... -- 15,000 --
Principal payments on term notes and long-term
debt .............................................................. (17,016) (11,441) (6,803)
Debt origination costs .............................................. (449) (2,841) --
-------- -------- --------
Net cash provided by financing activities ........................... 27,117 45,737 12,013
-------- -------- --------
Increase (decrease) in cash ......................................... (155) 1,649 1,464
Effect of exchange rate changes on cash ............................. -- -- (348)
Cash at beginning of period ......................................... 330 175 1,824
-------- -------- --------
Cash at end of period ............................................... $ 175 $ 1,824 $ 2,940
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2000
1. THE COMPANY
ORGANIZATION AND BASIS OF PRESENTATION
Denali Incorporated ("Denali" or the "Company"), a Delaware corporation, was
incorporated on December 19, 1994, and through its wholly and majority owned
subsidiaries is primarily engaged in the design, manufacture, installation and
sale of fiberglass composite underground storage tanks, steel aboveground
storage tanks, and engineered fiberglass reinforced plastic products for
corrosion-resistant applications. The Company's products were primarily marketed
in the United States during the fiscal year ended July 3, 1999. On July 1, 1999,
the Company acquired Welna, N.V. ("Welna"), which is headquartered in The
Netherlands. Welna is a provider of engineered fluid handling products to the
chemical, petrochemical, pulp and paper, water/wastewater, microelectronics and
environmental process industries. Beginning in fiscal 2000, the addition of
Welna expanded the Company's products and services globally, primarily to
Europe.
The Company uses a 52- or 53-week year ending on the Saturday closest to
June 30. The fiscal year ended July 3, 1999 was a 53-week year.
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The Consolidated Financial Statements include the accounts of Denali and its
wholly and majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all cash accounts and money market accounts with an
original maturity less than 90 days to be cash and cash equivalents.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries use the local currency as their
functional currency. Financial statements of these subsidiaries are translated
into U.S. dollars using the exchange rate at the balance sheet dates for assets
and liabilities and a weighted average exchange rate for each period for
revenues, expenses, gains and losses and cash flows. The impact of currency
fluctuations is recorded as comprehensive loss. For the twelve months ended July
1, 2000, the Company had net foreign currency translation losses of $2,232 which
are recorded as a comprehensive loss and are classified as a separate component
of stockholders' equity.
F-6
<PAGE> 44
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, prepaid expenses, accounts receivable, and
other current assets and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying value of the Company's
revolving lines of credit and notes payable approximates fair value because the
rates on such lines are primarily variable, based on current market.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements using the
intrinsic value method under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
INVENTORIES
Inventories are determined using actual cost or a standard cost method based
on a first-in, first-out ("FIFO") basis. Inventory is stated at the lower of
cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed by
the straight-line method using rates based on the estimated useful lives of the
related assets. Estimated useful lives used for depreciation purposes are as
follows:
Buildings and improvements 20 to 39 years
Machinery and equipment 3 to 10 years
GOODWILL
Goodwill represents the excess cost of companies acquired over the fair value
of their tangible assets. Goodwill is being amortized on a straight-line basis
over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of the discounted cash flows. The Company also has negative goodwill
of approximately $1.1 million resulting from the acquisition of Ershigs in
February 1997. The negative goodwill is being amortized primarily over the life
of the related assets, which is estimated to be 15 years. Accumulated
amortization was $616,000 and $1,864,000 for the years ended July 3, 1999 and
July 1, 2000, respectively. Amortization expense was $99,000, $448,000 and
$1,248,000 for the years ended June 27, 1998, July 3, 1999 and July 1, 2000.
REVENUES FROM LICENSE ARRANGEMENTS
The Company has certain license agreements whereby it receives royalties
equal to the greater of a certain percentage of the licensee's sales for
products based on the Company's proprietary technology and processes or a
guaranteed amount as specified in the agreements. The agreements expire between
2000 and 2011. The Company recognizes the actual royalties due or the guaranteed
amount under these license agreements in the period of the licensee's sales.
REVENUE RECOGNITION
Revenues from sales of products fabricated at plant locations are recognized
using the units-of-delivery method of accounting.
F-7
<PAGE> 45
Revenues from certain long-term construction contracts are recognized on the
percentage-of-completion method. Earned revenue is based on the percentage that
incurred costs to date are to total estimated costs after giving effect to the
most recent estimates of total cost. The cumulative impact of revisions in total
cost estimates during the progress of work is reflected in the period in which
these changes become known. Earned revenue reflects the original contract price
adjusted for agreed-upon claim and change order revenue, if any.
Losses expected to be incurred on jobs in process, after consideration of
estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known. Selling and administrative expenses are
charged to income in the period incurred and are not allocated to contracts in
progress.
ADVERTISING
The Company expenses all advertising costs as incurred. Advertising costs
incurred were $582,000, $748,000 and $758,000 for the years ended June 27, 1998,
July 3, 1999 and July 1, 2000, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
RESEARCH AND DEVELOPMENT COSTS
The costs of materials and equipment that are acquired for research and
development activities, and which have alternative future uses, are capitalized
and depreciated over the period of future benefit. All other research and
development costs are charged against earnings in the period incurred. Research
and development costs expensed were $458,000, $798,000 and $409,000 for the
years ended June 27, 1998, July 3, 1999 and July 1, 2000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that could potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company periodically
evaluates the creditworthiness of its customers and generally does not require
collateral. The Company's customer base consists of major commercial
organizations and independent sub-contractors. No customer accounted for 10% or
more of revenues for the years ended June 27, 1998, July 3, 1999 and July 1,
2000.
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>
Years Ended
-----------------------------------
June 27, July 3, July 1,
1998 1999 2000
----------- ---------- ---------
(Share data in thousands)
<S> <C> <C> <C>
Weighted average common shares outstanding.... 3,736 4,886 5,518
Dilutive securities - employee stock options
and warrants................................ 139 2 --
------- ------ ------
Weighted average common shares outstanding
assuming full dilution...................... 3,875 4,888 5,518
======= ====== ======
</TABLE>
Options to purchase 377,674 shares of common stock and warrants to purchase
534,873 shares of common stock were outstanding as of July 1, 2000, but were not
included in the computation of diluted earnings per share because their assumed
exercise would have been anti-dilutive to earnings per share.
F-8
<PAGE> 46
CAPTIVE INSURANCE PROGRAM
In January 1996, the Company entered into a captive insurance program for its
workers' compensation and automobile coverages. The program provides for certain
reinsurance on claims over $250,000 and aggregate insurance for the total claims
exposure of the captive company. The Company uses actuarial determined
information provided by the captive insurance company to determine its estimated
liability. In February 2000, the Company changed to a fully-insured program for
its workers' compensation coverage.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("FAS 133"). The Company is required to adopt FAS 133 effective the beginning of
fiscal year 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company is in the process of
completing its analysis of the impact of this statement on its results of
operations or financial position and is therefore not able to quantify the
effect.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"), which the Company is required to adopt in the second quarter of fiscal
year 2001. SAB 101 clarifies how existing revenue recognition rules should be
applied. The Company is currently evaluating their revenue recognition policies
and the effect of adoption.
3. MANAGEMENT'S PLAN AND PROPOSED DEBT RESTRUCTURING
The Company's consolidated financial statements for the fiscal year ended
July 1, 2000 have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred a net loss of $9.7 million and a cash
deficit from operations of $3.2 million for the fiscal year ended July 1, 2000.
The Company also has negative working capital of $61 million and has debt in
default (See Note 9). These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
During fiscal 2000, the Company experienced a greater than expected downturn
in its underground storage tank market. Additionally, in Europe, capital
spending in the petrochemical and chemical processing industry declined
significantly resulting in a decrease in the demand for the Company's products
in those markets. As a result, the Company has experienced recent operating
losses. During fiscal 2000, the Company implemented a plan in which it
reorganized each of its business segments resulting in the closure of a
manufacturing facility in the United States and two manufacturing facilities in
the Netherlands as well as the consolidation of several administrative functions
(See Note 4). The reorganization plan was implemented in an effort to better
match Company resources with current demand levels.
In May 2000, the Company signed a letter of intent with Blair Mezzanine
Capital Fund III, L.P., under which Blair proposed to invest $28 million in the
Company through a combination of subordinated debt, convertible subordinated
debt, and common stock. However, the Company's results of operations during the
fiscal fourth quarter 2000 did not meet Blair's expectations, and Blair withdrew
its original investment proposal in late June 2000. In July 2000, the Company
and Blair entered into a revised letter of intent under which Blair proposes to
invest $23 million in the Company, comprised of $18 million of 12% Senior
Subordinated Notes due 2008, 5,000 shares of 8% Senior Cumulative Redeemable
Preferred Stock, $1,000 liquidation preference per share, and warrants to
purchase up to 3,880,645 shares of Denali common stock with an exercise price of
$2.26 per share.
F-9
<PAGE> 47
Also as part of the proposed transaction, the Company will issue $15 million
in principal amount of its 12% Senior Subordinated Notes due 2008 to the holders
of the Company's currently outstanding subordinated debt in exchange for all $15
million in principal amount of the Company's currently outstanding subordinated
debt, and will issue warrants to purchase up to 534,873 shares of its common
stock with an exercise price of $2.26 per share to these holders in exchange for
a like number of currently outstanding common stock purchase warrants with an
exercise price of $7.54 per share. The notes issued in exchange for the
Company's currently outstanding subordinated debt will contain an interest
deferral feature. Under this interest deferral feature, the Company may pay cash
interest at the rate of 10% per annum and may pay the remaining 2% per annum
interest by issuing additional notes until the Company's U.S. operations
generate annual earnings before interest, taxes and depreciation of $14 million
or more.
In connection with the proposed Blair transaction, the Company and the
Domestic Senior Lenders will execute an agreement for a waiver of default and
amendment to the Domestic Credit Facility. Net proceeds from the Blair
Transaction of $20.85 million will be applied to reduce borrowings under the
term loan by $10.91 million (from $17.25 million to $6.34 million) and revolving
credit facility by $9.94 million. Outstanding borrowings, after repayments,
under the acquisition and term loans will be consolidated into a new term loan
(the "New Term Loan") of $21.64 million. The Domestic Senior Lenders will grant
a two-year moratorium on scheduled principal payments for the New Term Loan.
Proposed scheduled principal payments will be $1 million in 2002 and $20.64
million in 2003. The revolving credit facility commitment will revert from the
$27 million existing commitment to $25 million and availability under the
facility will be an amount not to exceed $10 million.
Consummation of the proposed investment is subject to certain conditions
including satisfactory completion of due diligence by Blair and the approval by
the Company's Domestic Senior Lenders, the holders of the Subordinated Notes and
shareholders.
As of October 6, 2000, the Company had $1.7 million of availability under
its U.S. bank facility and has been meeting its operating cash flow needs.
Management expects to generate additional cash flow by aggressively managing its
working capital model and management is exploring raising additional cash from
the sale of non-strategic assets.
There can be no assurance that the Company will be able to successfully
complete the Blair Transaction, the proposed restructuring of its credit
facilities or secure alternative financing or capital. If the Company is unable
to complete these transactions or otherwise raise additional capital and
increase its liquidity, the Company may not be able to continue to operate as a
going concern.
4. RESTRUCTURING OF OPERATIONS
During the fiscal year ended July 1, 2000, the Company implemented a plan in
which it reorganized each of its business segments. A portion of the plan
involved the closure of the Containment Solutions Group's Conroe, Texas,
manufacturing facility, a Plasticon Europe manufacturing facility in Tilburg,
The Netherlands, and a Hanwel Europe facility in Hengelo, The Netherlands.
Additionally, certain domestic administrative functions were consolidated into
the Company's Tulsa, Oklahoma, location and certain domestic and European sales
and management positions were eliminated.
As a result of the Corporate-wide restructuring in fiscal 2000, the Company
recorded restructuring charges totaling $3.8 million ($0.69 per share), which
are shown as a separate line item on the consolidated statement of operations.
The fiscal 2000 restructuring charges include costs associated with involuntary
termination benefits for employees (111 total employee terminations planned, 70
terminated as of July 1, 2000), disposal of closed facilities and other
restructuring costs.
F-10
<PAGE> 48
The following is an analysis of the restructuring charges and cash outlays
from July 4, 1999 to July 1, 2000:
<TABLE>
<CAPTION>
Employee Disposal
(In thousands) Separations Costs Other Total
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Restructuring charges:
Balance at July 3, 1999 $ -- $ -- $ -- $ --
Fiscal 2000 charges 3,601 116 99 3,816
Fiscal 2000 cash outlays (2,374) -- (99) (2,473)
--------- --------- --------- ---------
Balance at July 1, 2000 $ 1,227 $ 116 $ -- $ 1,343
========= ========= ========= =========
</TABLE>
The Company expects to incur cash payments relating to employee terminations
and asset disposals at least equal to the remaining balance at July 1, 2000
during fiscal 2001.
5. ACQUISITIONS
Effective October 1997, the Company acquired all of the issued and
outstanding stock of SEFCO, Inc. ("SEFCO"), a manufacturer of engineered
field-erected steel tanks and accessories for use in the municipal, agrochemical
and petroleum industries. Effective October 1997, the Company acquired all of
the issued and outstanding stock of GL&V/LaValley Construction, Inc.
("LaValley"), a manufacturer and installer of fiberglass-reinforced plastic
products. Effective May 1998, the Company purchased all of the issued and
outstanding stock of CC&E/RPS, Inc. ("CC&E"), a leading North American field
constructor of fiberglass-reinforced plastic products. Effective June 1998, the
Company acquired 100% of the issued and outstanding stock of Fibercast Company
("Fibercast"), a leading manufacturer of fiberglass-reinforced plastic piping
systems specializing in highly corrosive environments.
In connection with the fiscal 1998 acquisitions, the Company acquired net
assets of $9.8 million in exchange for $28.5 million in cash, which is net of
$700,000 cash acquired, and incurred approximately $450,000 in acquisition costs
resulting in the recording of goodwill of approximately $19 million. The Company
also paid down $1.1 million of bank and seller debt and assumed $3.5 million of
bank debt in connection with the Fibercast acquisition. During fiscal 1999, the
seller in the CC&E acquisition received contingent payments of $202,000 based on
an increase in the level of bookings, which was recorded as an increase to
goodwill. In addition, approximately $919,000 of purchase price adjustments were
recorded, resulting in an increase to goodwill.
Effective November 23, 1998, the Company acquired all of the issued and
outstanding stock of Plasti-Fab, Inc. ("Plasti-Fab"), a manufacturer of FRP
gates, metered manholes and flumes for use in the waste/wastewater industries.
Effective February 3, 1999, the Company acquired all of the outstanding stock of
Belco Manufacturing Company, Inc. and certain assets and assumed certain
liabilities of S. Jones Limited Partnership (collectively "Belco"). Belco
manufactures FRP tanks, ducting, piping, scrubbers and dampers primarily for the
industrial water/wastewater industries.
Effective July 1, 1999, the Company completed its tender offer for the
publicly held shares of Welna N.V. ("Welna"), a Dutch company listed on the
Official Market of the Amsterdam Stock Exchange. Denali purchased substantially
all of the outstanding stock of Welna. The consolidated balance sheet as of July
3, 1999 includes the effect of the acquisition of Welna; however, there was no
effect on the statement of operations in fiscal year 1999. The consolidated
balance sheet includes minority interest, which represents minority ownership in
certain Welna subsidiaries.
Welna currently operates through two major divisions. Plasticon Europe
designs, manufactures and installs all forms of FRP pipe systems, vessels and
other related equipment requiring high levels of corrosion resistance. Hanwel
Europe is a distribution operation that specializes in high quality products and
engineered systems for power generation, water treatment and paper and chemical
processing industries. Welna markets its products through its subsidiaries in
The Netherlands, Germany, United Kingdom, Belgium, Sweden, France, Poland and
Thailand.
F-11
<PAGE> 49
In connection with the fiscal 1999 acquisitions, the Company acquired net
assets of $37.6 million in exchange for $47.2 million in cash, which is net of
$2.6 million cash acquired, and incurred approximately $2.1 million in
acquisition costs resulting in the recording of goodwill of approximately $30.2
million. The allocation of the purchase price to assets and liabilities acquired
for the acquisitions was based initially on preliminary estimates of fair market
value. During the fiscal year ended July 1, 2000, the fair market value of the
assets and liabilities of Welna was adjusted by $3.6 million for finalization in
the fair value of certain manufacturing facilities, inventory and other
receivables. The Company issued 594,189 common shares for the fiscal 1999
acquisitions valued at $5.6 million. The Company also assumed approximately $15
million of bank debt, net of cash acquired, in connection with the Welna
acquisition.
On September 3, 1999, the Company acquired 67.5% of the issued and
outstanding stock of Manantial Chile S.A., a company that designs, equips,
installs and commissions industrial and municipal water and wastewater treatment
plants and systems for approximately $1.1 million in cash and 27,139 shares of
common stock valued at $213,000.
On November 11, 1999, the Company acquired all of the issued and outstanding
stock of HP Valves Oldenzaal B.V., a valve manufacturer located in Oldenzaal,
The Netherlands for $2.8 million in cash, assumption of $1.4 million of debt,
and 108,500 shares of common stock valued at $472,000.
All of the acquisitions described above were accounted for under the purchase
method of accounting whereby the assets and liabilities were adjusted to their
estimated fair values at the acquisition date. The consolidated financial
statements reflect all operations for the acquired companies since the date of
acquisition. The pro forma effects of the fiscal year 2000 acquisitions are
immaterial, and therefore, not presented.
6. ASSETS HELD FOR SALE
Assets held for sale are recorded on the balance sheet at amounts equal to
estimated net realizable values adjusted for anticipated earnings or losses,
interest and other carrying costs until sale.
When the Company purchased the tank group from Owens Corning in 1994, it
identified $3.6 million in assets held for sale. At July 3, 1999, $449,000
remained to be sold, which represented manufacturing equipment that the Company
expected to sell under licensing agreements or through joint ventures. During
fiscal year 2000, the Company sold the remaining equipment and recognized no
gain or loss.
As part of the restructuring of its domestic operations discussed in Note 4,
the Company has classified its Conroe, Texas, manufacturing facility as assets
held for sale. The net book value of this facility is approximately $1.6
million. Management expects to realize at least this amount from the sale of the
facility.
7. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 3, July 1,
1999 2000
----------- -----------
(In thousands)
<S> <C> <C>
Finished goods................... $ 10,546 $ 8,620
Raw materials.................... 8,672 8,568
Work in process.................. 6,957 6,116
-------- --------
$ 26,175 $ 23,304
======== ========
</TABLE>
F-12
<PAGE> 50
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
July 3, July 1,
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Land................................. $6,678 $ 5,509
Buildings and improvements........... 22,198 17,853
Machinery and equipment.............. 22,603 26,205
Construction in progress............. 1,330 311
------ --------
52,809 49,878
Less accumulated depreciation........ (5,871) (10,231)
------ ---------
Property, plant and equipment, net... $ 46,938 $ 39,647
======== ========
</TABLE>
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 3, July 1,
1999 2000
--------- --------
(In thousands)
<S> <C> <C>
Domestic credit facility
Term note (a).................... $ 19,000 $ 17,250
Acquisition note (b)............. 17,200 15,300
Revolving credit facility (c).... 11,000 21,245
--------- --------
47,200 53,795
--------- --------
12% Senior subordinated notes, net
of discount (d).................. 13,267 13,515
European senior credit facility
Term loan A (e).................. 7,049 5,680
Term loan B (f).................. 4,700 4,327
--------- --------
11,749 10,007
--------- --------
European 5-year term loan (g)...... 1,161 649
European term loan (h)............. -- 2,434
Sellers notes (i).................. 2,109 2,109
Unsecured Term notes (j)........... 526 550
--------- --------
76,012 83,059
Less current maturities............ (4,030) (13,871)
Less long-term debt in technical
default.......................... -- (65,294)
--------- --------
Total long-term debt............... $ 71,982 $ 3,894
========= ========
</TABLE>
(a) Available at January 12, 1999. Total commitment $17.25 million. Due in
quarterly installments 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. Interest accrues at LIBOR plus 4.0% plus an additional 2%
while in default (12.69% at July 1, 2000) through 2004. Secured by
substantially all assets of the Company's domestic subsidiaries.
(b) Available at January 12, 1999. Total commitment $15.3 million. Beginning on
September 30, 2000, the note is payable quarterly. Payments 1-6 are equal to
5% of the outstanding principal amount. Payments 7-10 are equal to 7.5% and
payments 11-14 are equal to 10%. Interest is payable at LIBOR plus
applicable margins from 4.0% to 4.5% plus an additional 2% while in default
(13.2% at July 1, 2000). Secured by substantially all assets of the
Company's domestic subsidiaries.
(c) Available at January 12, 1999. Total commitment $25 million. Principal due
December 31, 2003. Interest payable monthly at either LIBOR plus applicable
margins of 3.5% to 4.0% or prime plus 2.25% plus an additional 2% while in
default (at rates between 12.31% and 14.25% at July 1, 2000). Eight LIBOR
tranches in effect at July 1, 2000. Secured by substantially all assets of
the Company's domestic subsidiaries.
(d) Principal amount $15,000. Net of unamortized discount of $1,733 and $1,485
at July 3, 1999 and July 1, 2000, respectively. Principal due July 1, 2006.
Interest payable quarterly.
(e) Due in quarterly installments of NLG 625,000 ($270,469) beginning on October
1, 1999. Interest payable quarterly at EURIBOR plus 1.75% (4.721% at July 1,
2000) through August 2005. Secured by the assets of Welna.
(f) Principal due August 1, 2001. Interest payable quarterly at EURIBOR plus
1.75% (6.298% at July 1, 2000). Secured by the assets of Welna.
F-13
<PAGE> 51
(g) Final principal payment due September 1, 2001. Payable in semi-annual
installments of NLG 500,000 ($216,375). Interest payable quarterly at 4.965%
through September 1, 2000 and 5% thereafter. The interest rate on this term
loan is fixed at 5.0% via an interest rate option agreement.
(h) Available at November 30, 1999. Principal due in sixteen quarterly
installments of NLG 375,000 ($162,281) beginning on April 1, 2000. Interest
payable quarterly at EURIBOR plus 1.25% (5.798% at July 1, 2000). Secured by
the assets of HP Valves Oldenzaal B.V.
(i) Notes payable issued pursuant to the Plasti-Fab and Belco acquisitions. The
Plasti-Fab note, issued in the amount of $609,000, bears interest at 8.25%
and is due in November 2003. The Belco note, issued in the amount of
$1,500,000, bears interest at 8.5% and is due in February 2004.
(j) Various unsecured term notes. Principal due between 2001 and 2003. Interest
payable quarterly ranging from 4.965% to 8.5%.
DOMESTIC CREDIT FACILITY
The Company has a $57.55 million senior credit facility (the "Domestic
Credit Facility") with a group of lenders led by CIBC World Markets Group (the
"Domestic Senior Lenders") that expires on January 12, 2004. The Domestic Credit
Facility includes covenants requiring the maintenance of financial conditions
including domestic maximum leverage, consolidated maximum leverage, domestic
maximum senior leverage, consolidated maximum senior leverage, domestic minimum
interest coverage, consolidated minimum interest coverage, domestic minimum
fixed charge coverage and consolidated minimum fixed charge coverage ratios.
Beginning with the calendar quarter ended December 31, 1999 and each calendar
quarter thereafter, the Company was not in compliance with these covenants.
On February 24, 2000, the Domestic Credit Facility was amended and the
Domestic Senior Lenders agreed to waive the existing defaults due to the
Company's non-compliance subject to the conditions noted below. The amendment
(a) increased the revolving credit facility commitment from $20 million to $25
million; (b) decreased the term loan commitment to $17.25 million and the
acquisition loan commitment to $15.3 million; (c) raised the applicable interest
rate margins on borrowings under the Domestic Credit Facility; and (d) required
the Company to secure $7.5 million in equity financing before July 31, 2000. The
proceeds from the equity financing would be applied to reduce the Company's
borrowings under the Domestic Credit Facility. Additionally, the Company issued
a series of warrants to the Domestic Senior Lenders entitling them the right to
purchase up to 1,000,000 shares of the Company's common stock at $0.01 per share
in the event that the Company is unsuccessful in obtaining the required equity
financing. A portion of the warrants are exercisable on the last day of each
month on which the required equity financing has not been obtained over a period
from July 31 to December 31, 2000. The amendment also required the Company to
obtain executed waivers of default relating to breaches of certain financial
covenants from the holders of its Subordinated Notes. The Company has been
unable to reach an agreement with the holders of the Subordinated Notes to waive
its default on the financial covenants contained in the purchase agreement. Due
to the foregoing circumstance, the Company did not seek waivers for its
non-compliance with financial covenants noted above for the calendar quarters
ended March 31 or June 30, 2000.
On June 30, 2000, the Company did not make a required payment of principal
of $750,000 on its term notes. On the same date, the Company and its Domestic
Senior Lenders executed a forbearance agreement whereby unpaid principal
installments due were deferred until July 31, 2000 (the "Forbearance Period").
During the Forbearance Period, the borrowings under the Domestic Credit Facility
will bear default interest at 2% in addition to the base rate plus applicable
margin. In connection with the forbearance agreement, the Company agreed to
defer interest payments due to the holders of the Subordinated Notes.
On July 31, 2000, an extension of the forbearance agreement was obtained
through September 30, 2000. As part of the extension agreement, the Domestic
Senior Lenders (a) increased their revolving credit facility commitment from $25
million to $27 million until September 30, 2000; (b) deferred their rights to
exercise the warrants that were exercisable at July 31, 2000 and August 31,
2000; and (c) agreed to surrender the warrants upon consummation of the Blair
Transaction described below. On October 2, 2000, an extension of the forbearance
agreement was granted through October 31, 2000. The forbearance extension
provides for a deferral of the bank group's right to exercise any warrants held
by the lenders that are exercisable July 31, 2000, August 31, 2000 or September
30, 2000. In connection with the extension, the Company obtained an agreement
from the holders of its Subordinated Notes to waive any default resulting solely
from its failure to make interest payments from June 30 to September 30, 2000.
The Company continues to be in default under the financial covenants under the
Domestic Credit Facility. Although the Domestic Senior Lenders have not
expressed their intent to accelerate the maturity of these borrowings, they
retain the right to do so. Upon consummation of the proposed Blair Transaction
discussed in Note 3, the Company will use the net proceeds obtained to reduce
its borrowings under the Domestic Credit Facility.
F-14
<PAGE> 52
Without completion of the proposed recapitalization, the Company does not
anticipate that it will be in compliance with these covenants during fiscal
2001. The Company has not requested and has not received waivers for these
covenant violations from the Domestic Senior Lenders and, as a result, has
classified these obligations as current liabilities in the accompanying
consolidated balance sheet as of July 1, 2000.
The Domestic Credit Facility provides availability for issuance of letters of
credit. As of July 1, 2000, the Company had $1.7 million in letters of credit
outstanding. As of February 2000, the amount available for letters of credit
under the Domestic Credit Facility was reduced from $10 million to the amount
then outstanding, $1.7 million.
SENIOR SUBORDINATED NOTES
On July 1, 1999, the Company issued $15 million, or $13.3 million net of
discount, in senior subordinated notes ("Subordinated Notes") bearing interest
at 12% and maturing in 2006. Of the total Subordinated Notes issued, $4,002,000
were sold to certain directors of the Company. These amounts are classified
separately as related party subordinated debt on the Company's consolidated
balance sheet for the fiscal years ended July 3, 1999 and July 1, 2000. The
proceeds from the subordinated debt issuance were used to fund the acquisition
of Welna.
The purchase agreement related to the Company's Subordinated Notes contains
financial covenants for the maintenance of domestic maximum leverage ratios,
domestic maximum senior leverage ratios, minimum domestic interest coverage and
minimum domestic fixed charge ratios. As of the calendar quarter ending December
31, 1999 and each calendar quarter thereafter, the Company did not comply with
these covenants. The Company did not make a scheduled interest payment due on
June 30, 2000 on the Subordinated Notes of approximately $450,000.
The Company has sought, but has not obtained an agreement from the
Subordinated Note holders, to waive the default resulting from the Company's
non-compliance with the financial covenants contained in the note purchase
agreement. As part of its forbearance agreement with its Domestic Senior
Lenders, the Company did not make a required interest payment of approximately
$450,000 on the Subordinated Notes that was due on June 30, 2000 and further
agreed to make no payments to holders of the Subordinated Notes through the
Forbearance Period. As noted above, on July 31, 2000, the holders of the
Subordinated Notes agreed to waive any default resulting solely from the
non-payment of interest due for the period from June 30 to September 30, 2000.
On September 27, 2000, an extension of the waiver agreement was granted through
December 31, 2000. The Company continues to be in default under the financial
covenants under the Subordinated Notes. Although the note holders have not
expressed their intent to accelerate the maturity of these borrowings, they
retain the right to do so. Because of the foregoing, the Company has classified
these obligations as current liabilities in the accompanying consolidated
balance sheet as of July 1, 2000.
In connection with its proposed recapitalization, the Company will exchange
Replacement Notes for the existing Subordinated Notes. The maturity date of the
Replacement Notes will be extended to December 31, 2008. The Replacement Notes
will bear interest at 12%, but 2% of such interest will be in the form of PIK
interest whereby the Company will issue Replacement Notes with a principal
amount equal to the amount of PIK interest.
The Subordinated Notes were issued with detachable warrants that enable the
holder to purchase up to 534,873 common shares at $7.54 per share. The warrants
are exercisable immediately and expire in 2006. The warrants or warrant shares
also feature a put option. The put option allows the holder to put up to 1/3 of
the warrants or warrant shares each year at fair market value beginning in year
five and expiring in year ten. At the date of issuance, the fair value of the
warrants was $1,733,000 based on the Black-Scholes valuation model. The fair
value of the warrants was recorded as a liability and a corresponding amount was
recorded as a discount on the Subordinated Notes. The discount is being
amortized over the seven-year term of the Subordinated Notes as additional
interest expense. During the fiscal year ended July 1, 2000, the Company
adjusted the fair value of the warrant put option to $348,000 and recorded a
gain of $1,385,000 as other income in the statement of operations. Upon
successful completion of the Blair transaction, new warrants with an exercise
price of $2.26 per share will be issued in exchange for the currently
outstanding warrants, which have an exercise price of $7.54 per share.
F-15
<PAGE> 53
EUROPEAN CREDIT FACILITY
In June 1999, the Company entered into a new senior credit facility
("European Credit Facility") with ABN-AMRO and ING Bank (the "European Senior
Lenders") to finance the acquisition of Welna. The European Credit Facility
provides for two term loans for a total facility of Dutch guilders (NLG) 25
million ($10.8 million).
Term Loan A provides for borrowings of NLG 15 million ($6.5 million) with
quarterly payments of NLG 625,000 ($270,469) beginning October 1, 1999. Term
Loan B provides for borrowings of NLG 10 million ($4.3 million) with principal
due at date of maturity (August 1, 2001).
As of July 1, 2000, the Company had outstanding indebtedness of NLG 23.1
million, or approximately $10 million. The term loans bear interest at EURIBOR
plus 1.75%. The facility is secured by substantially all of Welna's assets.
The agreement for the European Credit Facility stipulates financial
covenants requiring the Company's European operations to maintain specified
levels of tangible net worth, maximum leverage ratio, and minimum interest
coverage and debt service coverage ratios. At July 1, 2000, the Company was not
in compliance with these covenants. The Company has requested but, as of October
6, 2000, has not received a waiver for these covenant violations from the
European Senior Lenders. Consequently, these obligations are classified as
current liabilities in the consolidated balance sheet as of July 1, 2000.
EUROPEAN FIVE YEAR TERM LOAN
In June 1999, as part of a NLG 40 million ($17.3 million) credit facility
granted by ABN-AMRO, the Company assumed an existing NLG 5 million, five year
term loan with an outstanding principal balance of NLG 2,500,000 ($1,161,000 at
July 3, 1999). The loan is payable in NLG 500,000 ($216,375) semi-annual
installments with the final payment due on September 1, 2001.
At July 1, 2000, the Company had NLG 1,500,000 ($649,000) of outstanding
principal on this loan. The five year term loan bears interest at 4.965% through
September 1, 2000 and 5.0% thereafter.
The credit agreement for the loan contains a covenant specifying a minimum
level of tangible net worth to be maintained by the Company's European
operations. At July 1, 2000, the Company was not in compliance with this
covenant. The Company has requested, but as of October 6, 2000, has not received
a waiver for this covenant violation from the lender. As a result, this
obligation is classified as current liabilities in the consolidated balance
sheet as of July 1, 2000.
EUROPEAN TERM LOAN
On November 30, 1999, the Company entered into an agreement with ING Bank
for a NLG 6,000,000 ($2,596,000) term loan to finance the acquisition of HP
Valves Oldenzaal B.V. ("HP Valves"). The term loan is payable in sixteen
quarterly installments of NLG 375,000 ($162,281) beginning on April 1, 2000 with
the final repayment due on January 1, 2004.
At July 1, 2000, the Company had NLG 5,625,000 ($2,434,000) of outstanding
principal on the term loan. The term loan bears interest at EURIBOR plus 1.25%
(5.798% at July 1, 2000) and is secured by the assets of HP Valves.
EUROPEAN CREDIT GUARANTY FACILITY
In June 1999, as part of the NLG 40 million ($17.3 million) credit facility
noted above, the Company was granted an NLG 12.5 million ($5.4 million) credit
guaranty facility for the purpose of obtaining credit guarantees for its
European subsidiaries outside The Netherlands. The facility was increased to NLG
12.7 million ($5.5 million) during fiscal 2000.
As of July 1, 2000, the Company had NLG 12.7 million ($5.5 million) of
outstanding guarantees.
F-16
<PAGE> 54
OTHER/EXTINGUISHMENTS
The Company assumed $1.0 million in Industrial Revenue Bonds ("IRBs") in
connection with its acquisition of the Owens Corning fiberglass composite UST
business in December 1994. In addition, the Company assumed $3.5 million of term
debt with a financial institution in connection with its acquisition of
Fibercast in June 1998. During the fiscal year ended July 3, 1999, the Company
repaid both notes.
Upon funding of the Domestic Credit Facility in January 1999, the Company
terminated its then existing revolving and term credit arrangements. In
connection with the refunding of its debt, the Company recorded an extraordinary
charge of $454,000 ($281,000 net of tax) related to unamortized debt origination
costs in the fiscal year ended July 3, 1999.
During the fiscal year ended June 27, 1998, the Company terminated its then
existing revolving and term credit arrangement. In connection with the
extinguishment of this debt, the Company paid prepayment penalties of $323,000
and charged to expense unamortized debt origination costs of $299,000.
Separately, the Company realized gains of $591,000 and $384,000 in November 1997
and March 1998, respectively, from the prepayment of a seller note. As a result
of these transactions, the Company recognized a net extraordinary gain of
$353,000 ($219,000 net of tax).
Scheduled maturities of long-term debt at July 1, 2000 are as follows (in
thousands):
Fiscal year:
2001............. $ 79,165
2002............. 649
2003............. 1,258
2004............. 1,987
2005............. --
---------
Total $ 83,059
=========
The Company paid interest on its long-term debt of $1,662,000, $3,118,000 and
$7,959,000 during the years ended June 27, 1998, July 3, 1999 and July 1, 2000,
respectively.
10. LINES OF CREDIT
In June 1999, the Company entered into an NLG 40 million ($17.3 million)
credit facility with ABN-AMRO that includes an NLG 25 million ($10.8 million)
working capital facility for its European subsidiaries (see Note 9 for a
discussion of the five year term loan and credit guaranty facility). The working
capital facility bears interest monthly at the higher of one-month average
EURIBOR or 2.50%, plus 0.75% (5.097% at July 1, 2000). The Company had
approximately NLG 18.5 million, or $8.0 million, outstanding under the working
capital facility at July 1, 2000. The unused portion of this facility is NLG 6.5
million, or $2.8 million.
The credit agreement for the working capital facility contains a covenant
specifying a minimum level of tangible net worth to be maintained by the
Company's European operations. At July 1, 2000, the Company was not in
compliance with this covenant. The Company has requested, but as of October 6,
2000, has not received a waiver for this covenant violation from the lender.
In August 1999, the Company entered into an NLG 5 million ($2.2 million)
working capital facility with ING Bank. This facility bears interest at EURIBOR
plus 0.4% (4.728% at July 1, 2000). The Company had approximately NLG 5.0
million, or $2.2 million, outstanding under the facility at July 1, 2000.
The agreement for the credit facility stipulates financial covenants
requiring the Company's European operations to maintain a specified minimum
level of tangible net worth and minimum consolidated interest coverage ratio. At
July 1, 2000, the Company was not in compliance with these covenants. The
Company has requested, but as of October 6, 2000, has not received a waiver for
these covenant violations.
F-17
<PAGE> 55
In April 2000, the Company obtained a short-term loan of NLG 10 million ($4.7
million) from ABN-AMRO. The loan was due on July 25, 2000 and bears interest
monthly at 4.60%. At July 1, 2000, the outstanding principal amount of the loan
was NLG 10 million ($4.7 million).
The Company also has separate working capital facilities for their
subsidiaries in Germany, Poland and France. These facilities provide for
borrowings up to DM 14.58 million ($7.1 million), SEK 2.1 million ($0.3
million), and FFR 2.0 million ($0.2 million). These facilities bear interest at
various fixed and variable interest rates, ranging from approximately 8.25% to
13.0% at July 1, 2000. As of July 1, 2000, the Company has approximately $5.9
million outstanding under these facilities. The unused portion of these
facilities is approximately $1.7 million. These facilities are due on demand.
The Company also had a $1.0 million domestic overdraft facility with the Bank
of Oklahoma as of July 1, 2000. At July 1, 2000, the outstanding principal
amount of the loan was $0.6 million.
11. 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 required
two of the Company's subsidiaries, Containment Solutions and Ershigs, to
purchase at least 90% of their fiberglass requirements from the supplier. The
contract expired on December 31, 1998. Effective January 1, 1999, the contract
was modified to obtain more favorable pricing levels based on certain minimum
volume purchases for the calendar years ended December 31, 1999 and 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. Accrued environmental liabilities at July 1, 2000 were
$395,000 and, in management's opinion, such accruals are appropriate based on
existing facts and circumstances. Under more adverse circumstances, however,
this potential liability could be higher. Current year expenditures were not
material.
While the effect on future results of the items noted above 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 Stephen T. Harcrow, the
Company's former president, 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.
F-18
<PAGE> 56
12. LEASES
The Company leases certain manufacturing facilities, machinery and equipment,
and office space under operating leases. Future minimum payments on operating
leases are as follows (in thousands):
Fiscal year:
2001............... $1,963
2002............... 1,855
2003............... 1,572
2004............... 1,314
2005 and thereafter 376
-------
Total.... $ 7,080
=======
Total rental expense was $1,204,000, $1,570,000 and $2,166,000 for the years
ended June 27, 1998, July 3, 1999 and July 1, 2000, respectively.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
July 3, July 1,
1999 2000
---------- ---------
<S> <C> <C>
Deferred tax assets:
Expenses accrued for financial reporting not
yet deductible for tax...................... $ 2,364 $ 1,926
Net operating loss and other carryforwards.... 2,143 3,566
Other......................................... 112 316
------- --------
Total deferred tax assets....................... 4,619 5,808
Deferred tax liabilities:
Book over tax basis of net book value of
property, plant and equipment............... 3,409 2,861
Expenses deducted for tax, but not accrued
for book.................................... 552 383
Other......................................... 237 43
------- --------
Total deferred tax liabilities.................. 4,198 3,287
------- --------
Valuation allowance............................. (978) (4,367)
------- --------
Net deferred tax liabilities.................... $ (557) $ (1,846)
======= ========
</TABLE>
F-19
<PAGE> 57
The Company has net operating loss carryforwards of approximately $10.5
million that expire through 2017 that are available to offset future taxable
income. These carryforwards are subject to certain limitations that would limit
the carryforwards to approximately $5.3 million. The July 3, 1999 valuation
allowance primarily represents net operating loss carryforwards acquired in May
1998 as a result of the CC&E acquisition, the future realization of which is
uncertain. Any benefits that are ultimately realized will be recorded as a
reduction of goodwill. The July 1, 2000 allowance primarily represents an
allowance for the net deferred tax asset in the U.S., which consists primarily
of net operating losses, and for the international operations, an allowance for
deferred tax assets relating to net operating losses, except for The Netherlands
which had taxable income.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
June 27, July 3, July 1,
1998 1999 2000
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal............................... $ 1,025 $ 2,378 $ (2,424)
State................................. 91 228 --
Foreign............................... -- -- (248)
------- -------- --------
Total current income tax expense (benefit) 1,116 2,606 (2,672)
------- -------- --------
Deferred income tax expense (benefit):
Federal............................... 338 222 2,631
State................................. (102) 26 310
Foreign............................... -- -- (467)
------- -------- --------
Total deferred income tax expense....... 236 248 2,474
------- -------- --------
Total income tax expense (benefit)...... $ 1,352 $ 2,854 $ (198)
======= ======== ========
</TABLE>
The reconciliation of income tax expense computed at U.S. federal statutory
tax rates to the reported tax expense is as follows:
<TABLE>
<CAPTION>
June 27, July 3, July 1,
1998 1999 2000
------------ ----------- ----------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense (benefit) at 34% $ 497 $ 2,467 $ (3,288)
State income taxes, net of federal benefit 116 254 (160)
Non-deductible goodwill amortization...... -- -- 575
Stock warrant valuation................... -- -- (464)
Valuation allowance....................... -- -- 2,952
Non-recurring compensation charge......... 786 -- --
Other, net................................ (47) 133 187
------- ------- --------
Reported total income tax expense (benefit) $ 1,352 $ 2,854 $ (198)
======= ======= ========
</TABLE>
The Company paid $723,000, $2,175,000 and $1,520,000 of income taxes during
the years ended June 27, 1998, July 3, 1999 and July 1, 2000, respectively.
14. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company completed an initial public offering in November 1997. The net
proceeds to the Company from the sale of the 2,276,000 shares of common stock
offered by the Company (after deducting underwriting discounts and commissions
of $2.1 million) were $27.5 million.
F-20
<PAGE> 58
During 1999, the Company received proceeds of $4.5 million from the issuance
of 489,189 common shares in a private placement. The proceeds were used to fund
the acquisition of Welna.
In September 1999, the Company issued and sold 27,199 shares of common stock
valued at $213,000 in a private transaction. The shares were issued as partial
consideration for the acquisition by the Company of 67.5% of the shares of
Manantial Chile, S.A. Manantial Chile, S.A. designs, equips, installs and
commissions industrial and municipal water and wastewater treatment plants and
systems.
In November 1999, the Company issued 108,500 shares of common stock valued
at $472,000 in a private transaction. The shares were issued as partial
consideration for the acquisition of all of the issued and outstanding stock of
HP Valves Oldenzaal B.V., a valve manufacturer located in Oldenzaal, the
Netherlands.
Subsequent to year-end in August 2000, the Company completed a private
placement of 700,000 shares of common stock at $2.00 per share to two of its
founding directors.
WARRANTS TO ACQUIRE COMMON STOCK
As discussed in Note 9, the Company issued warrants to purchase 534,873
common shares at $7.54 per share in connection with the issuance of the
Subordinated Notes.
In connection with the February 24, 2000 amendment to the Domestic Credit
Facility discussed in Note 9, the Company issued warrants to its Domestic Senior
Lenders entitling them to the right to purchase up to 1,000,000 shares at a
price of $0.01 per share. Beginning on July 31, 2000, and until December 31,
2000, a portion of the warrants are exercisable on the last day of each month in
which the required equity financing stipulated in the amendment has not been
obtained. On July 31, 2000, the Domestic Senior Lenders agreed to defer their
right to exercise their warrants to purchase 250,000 shares on July 31 and
August 31, 2000, respectively. On October 2, 2000, an extension of the
forbearance agreement was granted through October 31, 2000. The forbearance
extension provides for a deferral of the Domestic Senior Lenders' right to
exercise any warrants they hold that are exercisable on July 31, 2000, August
31, 2000 and September 30, 2000. The Domestic Senior Lenders further agreed to
surrender their warrants at the time the proposed Blair Transaction is
consummated. Due to the contingency as to the ultimate exercisability of the
warrants, no value has been recorded to the warrants at the date of grant. The
Company will recognize a charge for fair value of the warrants upon resolution
of the contingent terms if the warrants become exercisable.
15. INCENTIVE STOCK OPTION PLAN
Effective February 14, 1996, the Company adopted an incentive stock option
plan (the "Plan") for certain key employees. Denali reserved 367,833 shares of
common stock for purposes of the Plan, all of which have been granted and
exercised as of June 27, 1998.
Effective September 1997, the Company completed a reorganization of its
subsidiaries. As part of the reorganization, one of the Company's subsidiaries,
Containment Solutions, Inc. ("CSI") was merged into Denali. As a result, the
outstanding options to purchase common stock of CSI were exchanged for options
to purchase common stock of the Company. At June 28, 1997, the CSI stock option
plan had 1,400 options outstanding at an exercise price of $259. In September
1997, the Company exchanged the CSI options for a total of 254,643 options to
purchase the Company's common stock at an exercise price of $1.42. In connection
with the exchange, the Company recognized a compensation charge in the quarter
ended September 27, 1997 of approximately $2.3 million. All of the option
holders were management employees and the Company included the charge in
selling, general and administrative expense.
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.
F-21
<PAGE> 59
In November 1997, the Company awarded options to acquire 171,030 shares of
the Company's common stock. An additional option for 7,700 shares was granted in
December 1997. The remaining 184,143 shares were granted during fiscal year
1999. Options for 142,113 shares vest 40% immediately and the remainder over a
four-year period. The remaining options for 220,760 shares vest ratably over
four years. All of the options were granted at fair market value. During fiscal
year 2000, 161,021 of the issued and outstanding options were terminated leaving
201,852 outstanding at exercise prices ranging from $8.57 to $14.50 per share.
In October 1999, the Company adopted an incentive stock option plan (the
"1999 Plan"). The 1999 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 300,000 shares may be granted pursuant to the 1999
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 1999 Plan.
In fiscal year 2000, the Company awarded options to acquire 239,182 shares of
the Company's common stock at fair market value. Approximately one half of the
options vest in the first year and the remainder vest ratably over the next four
years.
Also during fiscal 2000, 63,360 options were canceled under the 1999 Plan
leaving 175,822 options outstanding under the 1999 Plan at July 1, 2000.
A summary of Denali's stock option activity and related information for the
years ended June 27, 1998, July 3, 1999 and July 1, 2000 follows:
<TABLE>
<CAPTION>
Fiscal Year Weighted Fiscal Year Weighted Fiscal Year Weighted
1998 Average 1999 Average 2000 Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year 113,190 2.22 178,730 12.99 362,873 11.45
Granted 433,373 6.19 184,143 9.95 239,182 5.74
Exercised (367,833) 1.67 -- -- -- --
Canceled -- -- -- -- (224,381) 10.81
-------- ---- ------- ----- ---------- -----
Outstanding-end of
year 178,730 12.99 362,873 11.45 377,674 8.22
Exercisable-end of
year 56,845 13.00 87,316 13.00 101,134 10.86
Weighted average
grant date fair
value per option $6.94 $5.85 $5.15
</TABLE>
All options issued prior to the 1999 Plan have five year terms and are
exercisable based on four year vesting terms. The 1999 Plan options have ten
year terms and five year vesting terms, with the exception of 100,000 shares
issued to the Company's CEO, which vest completely after one year. Exercise
price per share for all options outstanding at July 1, 2000 ranges from $2.72-
$14.50 and the average remaining contractual life was 6.0 years.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"),
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to July 1, 1995
under the fair value method of FAS 123. The fair value for options granted prior
to June 28, 1997 was estimated at the date of grant using a minimum value option
pricing model. The fair value of options granted subsequent to June 28, 1997 was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions for June 27, 1998, July 3, 1999, and July 1, 2000,
respectively: risk-free interest rate of 5.3%, 5.6% and 6.6%, a dividend yield
of 0%, volatility factors of the expected market price of the Company's common
stock of 26%, 74% and 65%, and a weighted average expected life of the option of
four years in fiscal years 1998 and 1999 and eight years in fiscal year 2000.
F-22
<PAGE> 60
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, as if the Company had accounted for its employee stock
options granted subsequent to July 1, 1995 under the fair value method
prescribed by FAS No. 123, follows:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Pro forma net income (in thousands)...... $ 43 $ 3,642 $(10,111)
Pro forma earnings per share - basic and
diluted.............................. $ 0.003 $ 0.750 $ (1.83)
</TABLE>
16. GAIN SHARING PLAN
The Company has a gain sharing plan that covers all employees of the Company
who have satisfied minimum employment standards. For the years ended June 27,
1998, July 3, 1999 and July 1, 2000, the Company made a gain sharing
contribution equally to all eligible employees totaling $347,000, $762,000 and
$197,000, respectively. Distributions are currently based on 5% of quarterly
operating earnings.
17. RETIREMENT PLANS
During fiscal year 1995, the Company adopted a defined-contribution
retirement plan, Fluid Containment 401(k) Retirement Plan (the "Plan"), that
covers all eligible employees of the Company. Effective July 1, 1997, the Plan
was amended to include all eligible employees of Ershigs. Effective January 1,
1998, the Plan was amended to include all eligible employees of Ershigs Biloxi
and SEFCO. Effective January 1, 1999, the Plan was amended to include all
eligible employees of Fibercast and Plasti-Fab. The Plan allows employees to
defer up to 15% of their compensation, with the Company matching 50% of the
first 6% of the participant's contribution. Participants are immediately and
fully vested in employer contributions. The Company's matching contribution was
$444,000, $640,000 and $623,000 for the years ended June 27, 1998, July 3, 1999
and July 1, 2000, respectively.
18. PENSION PLANS
The Company, through its Welna subsidiary, sponsors pension plans that cover
the majority of the employees of Welna. Generally, these plans provide defined
pension benefits based on years of service and final average pay.
Since Welna was acquired on July 1, 1999 and its results were not included
in the statement of operations for the fiscal year ended July 3, 1999, the
periodic pension cost is only disclosed for the fiscal year ended July 1, 2000.
<TABLE>
<CAPTION>
Fiscal Year Ended
July 1, 2000
------------
(In thousands)
<S> <C>
Service cost on benefits earned during the year $ 524
Interest cost on projected benefit obligation 457
Actual return on plan assets (484)
Net amortization and deferral 2
-------
Net periodic pension cost $ 499
=======
</TABLE>
F-23
<PAGE> 61
The actuarial present value of benefit obligations and funded status of the
Company's defined benefit plans, as of the fiscal years ended July 3, 1999 and
July 1, 2000, was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
July 3, 1999 July 1, 2000
------------ ------------
(In thousands)
<S> <C> <C>
Accumulated benefit obligation at end of fiscal year
Vested portion $ 5,053 $ 4,477
Non-vested portion 1,314 1,100
------- -------
6,367 5,577
Impact of future salary increases 2,350 3,272
------- -------
Projected benefit obligation 8,717 8,849
Plan assets at fair value, primarily government securities 7,440 7,499
------- -------
Projected benefit obligation in excess of plan assets (1,277) (1,350)
Unrecognized net gain (loss) -- --
------- -------
Net pension liability $(1,277) $(1,350)
======= =======
</TABLE>
Assumptions used in developing the projected benefit obligation for each
fiscal year are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
July 3, 1999 July 1, 2000
------------ ------------
<S> <C> <C>
Discount rate 5% 5%
Rate of increase in compensation 3-5% 3-5%
Rate of return on plan assets 6% 6%
</TABLE>
Pension plan assets are invested primarily in government securities.
19. SWAP AGREEMENT
The Company, through its Welna subsidiary, uses an interest rate swap to
manage interest rate risk related to a portion of its borrowings. The table
below reflects the notional amount outstanding, maturity date and the receiving
rate of the interest rate hedge agreement. (Notional amounts provide an
indication of the extent of the Company's involvement in such agreements, but do
not represent its exposure to market risk.) Any amounts received under the
agreement from the counter party are accounted for as a reduction of interest
expense. The fair value of the swap agreement was immaterial at July 1, 2000.
<TABLE>
<CAPTION>
Notional Maturity Receiving
Amount Date Interest Rate
------ ---- -------------
<S> <C> <C> <C>
(In thousands)
Interest rate swap (1)
Pay fixed $5,409 2005 4.25%
</TABLE>
(1) Notional amount of NLG 12,500 converted to U.S. dollars at July 1, 2000.
F-24
<PAGE> 62
20. SUBSEQUENT EVENTS
As discussed in Note 9, the Company is in violation of its financial
covenants in both the United States and Europe at the end of fiscal year 2000.
In addition, the Company did not make scheduled principal payments to the
Domestic Senior Lenders as of June 2000 and September 2000, nor did the Company
make scheduled interest payments to the subordinated note holders as of June
2000 and September 2000. The Company has requested a waiver agreement from the
European Senior Lenders, but as of the date of this filing, has not yet received
such waiver. The Company has received executed forbearance agreements with the
Domestic Senior Lenders through October 31, 2000 for the missed principal
payments and with the subordinated note holders through December 31, 2000 for
the missed interest payments.
In August 2000, the Company completed a private placement of 700,000 shares
of common stock at $2.00 per share to two of its founding directors with
proceeds used for working capital requirements.
As discussed in Note 3, the Company signed a revised letter of intent with
Blair Mezzanine Capital Fund III, L.P., under which Blair proposed to invest
$23,000,000 in the Company through a combination of subordinated debt and
preferred stock. In connection with the Blair investment, the Company has
reached a preliminary agreement with the Domestic Senior Lenders and the
subordinated note holders concerning the use of proceeds and post-transaction
terms expected by the respective parties. Consummation of the proposed
investment is subject to certain conditions including satisfactory completion of
due diligence by Blair and the approval by the Company's Domestic Senior
Lenders, subordinated note holders and shareholders.
21. SEASONALITY AND INFLATION
The Company's operating results are affected by the annual construction
season slowdown resulting from winter weather especially in the period December
through March. The underground fiberglass tank products are especially impacted
during the winter months. The Company believes that the effects of seasonality
will be less severe in the future, as the Company continues to expand and
diversify its product offerings.
The effect of inflation on the Company's operations was not significant
during the periods presented in the consolidated financial statements.
22. SEGMENT DATA
The Company has adopted Statement of Financial Accounting Standards No. 131 -
"Disclosures About Segments of an Enterprise and Related Information" that
requires disclosure of financial and descriptive information about the Company's
reportable operating segments. The operating segments presented are the segments
of the Company for which separate financial information is available and
operating performance is evaluated regularly by senior management in deciding
how to allocate resources and in assessing performance. The Company evaluates
the performance of its operating segments based on revenues and operating
income.
The accounting policies of the segments are the same as those described in
Note 2 - 'Significant Accounting Policies'. All intersegment net revenues and
expenses are immaterial and have been eliminated in computing net revenues and
operating income.
F-25
<PAGE> 63
The Company operates in four industry segments: Containment Solutions,
Plasticon Fluid Systems, Plasticon Europe and Hanwel Europe. As part of the
Company's restructuring, some of the Company's U.S. operating units were
realigned. Segment data has retroactively been restated to reflect this change.
The Containment Solutions segment specializes in the manufacture of fiberglass
underground storage tanks and steel reinforced aboveground storage tanks for
fluids handling. The Plasticon Fluid Systems segment provides engineered
solutions for the containment of fluids, specializes in fiberglass reinforced
plastic products for corrosion-resistant applications and engineered metal
products for the municipal and industrial markets. For fiscal 1999, except for
certain revenues with respect to license agreements with manufacturers located
outside of the United States, which revenues are not material as considered in
relation to the Company's total net revenues, the Company operates in only one
geographic segment, the United States. Beginning in fiscal year 2000, the
Company, through its Welna subsidiary, began global operations, with a primary
concentration in Europe. Welna is reported as two segments: Plasticon Europe and
Hanwel Europe. Plasticon Europe designs, manufactures, and installs all forms of
FRP pipe systems, vessels and other related equipment requiring high levels of
corrosion resistance. Plasticon Europe's principal manufacturing locations are
in the Netherlands, Poland, the United Kingdom, France and Germany. Hanwel
Europe is a distribution operation that specializes in high quality products and
engineered systems for power generation, water treatment, and paper and chemical
processing industries.
For the fiscal year ended July 3, 1999, Welna was included in the
presentation of required asset information since Welna's assets and liabilities
are included in the consolidated balance sheet. The following is a summary of
the industry segment data for the years ended June 27, 1998, July 3, 1999 and
July 1, 2000:
<TABLE>
<CAPTION>
Depreciation
Net Operating Total Capital and
Revenues Income (Loss) Assets Expenditures Amortization
-------- ------------- ------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended June 27, 1998:
Containment Solutions........... $ 71,487 $ 3,822 $ 33,564 $ 2,108 $ 1,257
Plasticon Fluid Systems......... 28,410 2,596 45,838 785 412
Corporate....................... -- (3,949) 980 178 23
--------- -------- -------- ------- -------
Consolidated.................... $ 99,897 $ 2,469 $ 80,382 $ 3,071 $ 1,692
========= ======== ======== ======= =======
Year ended July 3, 1999:
Containment Solutions........... $ 91,111 $ 8,935 $ 34,330 $ 1,495 $ 1,425
Plasticon Fluid Systems......... 57,649 3,723 60,159 1,313 1,682
Plasticon Europe................ -- -- 61,713 -- --
Hanwel Europe................... -- -- 18,873 -- --
Corporate....................... -- (2,781) 1,500 78 153
--------- -------- -------- ------- -------
Consolidated.................... $ 148,760 $ 9,877 $176,575 $ 2,886 $ 3,260
========= ======== ======== ======= =======
Year ended July 1, 2000:
Containment Solutions........... $ 57,196 $ 1,521 $ 28,263 $ 353 $ 1,325
Plasticon Fluid Systems......... 69,153 1,693 63,255 1,219 2,274
Plasticon Europe................ 38,068 (2,954) 55,797 2,932 2,214
Hanwel Europe................... 25,500 1,302 23,693 127 899
Corporate....................... -- (3,398) 2,185 15 248
--------- -------- -------- ------- -------
Consolidated.................... $ 189,917 $ (1,836) $173,193 $ 4,646 $ 6,960
========= ======== ======== ======= =======
</TABLE>
F-26
<PAGE> 64
Operating income reconciles to income before income taxes as shown on the
consolidated statements of operations as follows (in thousands):
<TABLE>
<CAPTION>
June 27, July 3, July 1,
1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Total segment operating income (loss) $ 2,469 $ 9,877 $ (1,836)
Interest expense 1,614 3,199 9,209
Interest income (118) (124) (208)
Other income, net (489) (453) (1,165)
---------- ----------- -----------
Income (loss) before income taxes $ 1,462 $ 7,255 $ (9,672)
========== =========== ============
</TABLE>
Information about the Company's operations in different geographical regions
for the fiscal years ended June 27, 1998, July 3, 1999 and July 1, 2000 is shown
below (in thousands). As noted above, for the fiscal years ended June 27, 1998
and July 3, 1999, revenues were generated primarily in the United States.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
June 27, July 3, July 1,
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Net revenues
United States $ 99,897 $ 148,760 $ 125,190
Europe -- -- 63,568
Other countries -- -- 1,159
--------- --------- ---------
Total net revenues $ 99,897 $ 148,760 $ 189,917
========= ========= =========
Long-lived assets(1)
United States $ 20,270 $ 22,133 $ 19,499
Europe -- 24,805 20,044
Other countries -- -- 104
--------- --------- ---------
Total long-lived assets $ 20,270 $ 46,938 $ 39,647
========= ========= =========
</TABLE>
(1) Long-lived assets include property, plant and equipment, net of
accumulated depreciation.
F-27
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 12th
day of October, 2000.
DENALI INCORPORATED
(Registrant)
By: /s/ R. KEVIN ANDREWS R. Kevin Andrews
---------------------------------------- Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated and on the 12th day of October, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ RICHARD W. VOLK Chairman of the Board, President and Chief Executive Officer
----------------------------------------
(Richard W. Volk)
/s/ R. KEVIN ANDREWS Chief Financial Officer
---------------------------------------- (Principal Financial Officer and
(R. Kevin Andrews) Principal Accounting Officer)
/s/ ERNEST H. COCKRELL Director
----------------------------------------
(Ernest H. Cockrell)
/s/ BOB ELFRING Director
----------------------------------------
(Bob Elfring)
/s/ THOMAS D. SIMMONS, JR. Director
----------------------------------------
(Thomas D. Simmons, Jr.)
/s/ JOEL V. STAFF Director
----------------------------------------
(Joel V. Staff)
/s/ J. TAFT SYMONDS Director
----------------------------------------
(J. Taft Symonds)
/s/ STEPHEN M. YOUTS Director
----------------------------------------
(Stephen M. Youts)
</TABLE>
F-28
<PAGE> 66
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ -----------------------
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's registration
statement on Form S-1, registration statement no. 333-36857 (the
"Registration Statement")).
3.2 Bylaws of the Company (incorporated by reference to the
Registration Statement).
4.1 Specimen of Common Stock certificate (incorporated by reference
to the Registration Statement).
10.1 The Company's 1996 Incentive Stock Option Plan, as amended
(incorporated by reference to the Registration Statement).
10.2 The Company's 1997 Incentive Stock Option Plan (incorporated by
reference to the Registration Statement).
10.3 Stock Purchase Agreement dated April 8, 1998 between Reinforced
Plastic Systems Inc., CC&E/RPS, Inc., and Specialty Solutions,
Inc. (incorporated by reference to the Company's current report
on Form 8-K dated May 8, 1998).
10.4 Amendment to Stock Purchase Agreement dated May 8, 1998 between
Reinforced Plastic Systems Inc., CC&E/RPS, Inc., and Specialty
Solutions, Inc. (incorporated by reference to the Company's
current report on Form 8-K dated May 8, 1998).
10.5 Stock Purchase Agreement dated May 11, 1998 by and between
William I. Koch, Joan Granlund, Richard P. Callahan, as Custodian
for Wyatt I. Koch, under the Florida Uniform Transfer to Minors
Act, Richard A. Bird, Fibercast Company and Denali Incorporated
(incorporated by reference to the Company's current report on
Form 8-K dated June 5, 1998).
10.6 Glass Fiber Reinforcement Products Purchase Agreement dated
December 23, 1994, by and between the Company and Owens Corning
(incorporated by reference to the Registration Statement).
10.7 Agreement dated November 3, 1997, by and between the Company and
Owens Corning (incorporated by reference to the Registration
Statement).
10.8 Lease dated November 22, 1996, by and between the Company and
Baymeadow Limited Partnership (the "Baltimore Lease")
(incorporated by reference to the Registration Statement).
10.9 First Amendment of Lease dated August 19, 1997, by and between
the Company and Baymeadow Limited Partnership regarding the
Baltimore Lease (incorporated by reference to the Registration
Statement).
10.10 Salary Continuation Agreement dated September 5, 1997, by
and between the Company and Stephen T. Harcrow (incorporated by
reference to the Registration Statement).
10.11 Letter to Lee W. Orr dated March 31, 1997, confirming offer of
employment (incorporated by reference to the Registration
Statement).
10.12 Confidentiality and Non-Competition Agreement dated September 5,
1997, by and between the Company and R. Kevin Andrews
(incorporated by reference to the Registration Statement).
10.13 Confidentiality and Non-Competition Agreement
dated September 5, 1997, by and between the Company and Cathy L.
Smith (incorporated by reference to the Registration Statement).
10.14 Amended and Restated Credit Agreement dated March 23, 1998
among Denali Incorporated, Ershigs Biloxi, Inc., Ershigs, Inc.,
Fluid Containment, Inc., and SEFCO, Inc., and NationsBank of
Texas, N.A., as agent, and the financial institutions named
therein (incorporated by reference to the Company's quarterly
report on Form 10-Q for the quarterly period ending March 28,
1998 (the "3rd Quarter 1998 10-Q")).
10.15 Form of Revolving Note of Denali Incorporated pursuant to Amended
and Restated Credit Agreement dated March 23, 1998 (incorporated
by reference to the 3rd Quarter 1998 10-Q).
10.16 Guaranty dated March 23, 1998 of Denali Incorporated
(incorporated by reference to the 3rd Quarter 1998 10-Q).
<PAGE> 67
10.17 Subsidiary Guaranty dated March 23, 1998 of Containment
Solutions, Inc., Denali Management, Inc., Ershigs Biloxi, Inc.,
Ershigs, Inc., Fluid Containment Property, Inc., Instrumentation
Solutions, Inc., Specialty Solutions, Inc., Fluid Containment,
Inc., SEFCO, Inc. and Hoover Containment, Inc. (incorporated by
reference to the 3rd Quarter 1998 10-Q).
10.18 Security Agreement dated March 23, 1998 between Denali
Incorporated and NationsBank of Texas, N.A., as agent
(incorporated by reference to the 3rd Quarter 1998 10-Q).
10.19 Security Agreement dated March 23, 1998 among Containment
Solutions, Inc., Denali Management, Inc., Ershigs Biloxi, Inc.,
Ershigs, Inc., Fluid Containment Property, Inc., Instrumentation
Solutions, Inc., Specialty Solutions, Inc., Fluid Containment,
Inc., SEFCO, Inc., Hoover Containment, Inc. and NationsBank of
Texas, N.A., as agent (incorporated by reference to the 3rd
Quarter 1998 10-Q).
10.20 Pledge Agreement dated March 23, 1998 between Denali Incorporated
and NationsBank of Texas, N.A., as agent (incorporated by
reference to the 3rd Quarter 1998 10-Q).
10.21 Form of Pledge Agreement dated March 23, 1998 between NationsBank
of Texas, N.A., as agent, and each of Specialty Solutions, Inc.,
Fluid Containment, Inc., and Ershigs, Inc. (incorporated by
reference to the 3rd Quarter 1998 10-Q).
10.22 Amendment No. 1 and Consent to the Credit Agreement dated as
of June 5, 1998 among Denali Incorporated, Fluid Containment,
Inc., Ershigs, Inc., Ershigs Biloxi, Inc., SEFCO, Inc., the Banks
party to and defined in the Credit Agreement, and NationsBank,
N.A., as agent (incorporated by reference to the Company's annual
report on Form 10-K for the fiscal year ending June 27, 1998 (the
"1998 10-K"))
10.23 Assumption and Amendment to Loan Agreement dated as of June 5,
1998 among Bank of Oklahoma, N.A., Fibercast Company and Denali
Incorporated (incorporated by reference to the 1998 10-K)
10.24 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
(incorporated by reference to the Company's quarterly report on
Form 10-Q for the quarterly period ending September 26, 1998 (the
"1st Quarter 1999 10-Q"))
10.25 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.
(incorporated by reference to the 1st Quarter 1999 10-Q)
10.26 Revolving Note dated October 29, 1998 for $26,000,000 payable to
NationsBank, N.A. (incorporated by reference to the 1st Quarter
1999 10-Q)
10.27 Credit Agreement (the "New Credit Agreement") among Denali
Incorporated, Canadian Imperial Bank of Commerce, as
administrative agent, and ING (U.S.) Capital LLC, as
documentation agent, dated as of January 12, 1999 (incorporated
by reference to the Company's quarterly report on Form 10-Q for
the quarterly period ending March 27, 1999 (the "3rd Quarter 1999
10-Q))
10.28 Stock Purchase Agreement dated February 3, 1999 by and between
Steve Jones, Belco Manufacturing Company, Inc. and Containment
Solutions, Inc. (incorporated by reference to the Company's Form
8-K dated February 18, 1999)
10.29 Asset Purchase Agreement dated February 3, 1999 by and between
Tiger Trucking LLC, S. Jones Limited Partnership and Containment
Solutions, Inc. (incorporated by reference to the Company's Form
8-K dated February 18, 1999)
10.30 Term Note pursuant to the New Credit Agreement between Denali
Incorporated and Bank of Oklahoma N.A. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.31 Form of Term Note pursuant to the New Credit Agreement between
Denali Incorporated and each of Key Corporate Capital Inc., ING
(U.S.) Capital LLC, and CIBC Inc. dated January 12, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.32 Acquisition Loan Note pursuant to the New Credit Agreement
between Denali Incorporated and Bank of Oklahoma N.A. dated
January 12, 1999 (incorporated by reference to the 3rd Quarter
1999 10-Q)
10.33 Form of Acquisition Loan Note pursuant to the New Credit
Agreement between Denali Incorporated and each of Key Corporate
Capital Inc., ING (U.S.) Capital LLC, and CIBC Inc. dated January
12, 1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.34 Revolving Credit Note pursuant to the New Credit Agreement
between Denali Incorporated and Bank of Oklahoma N.A. dated
January 12, 1999 (incorporated by reference to the 3rd Quarter
1999 10-Q)
<PAGE> 68
10.35 Form of Revolving Credit Note pursuant to the New Credit
Agreement between Denali Incorporated and each of Key Corporate
Capital Inc., ING (U.S.) Capital LLC, and CIBC Inc. dated January
12, 1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.36 Pledge Agreement dated January 12, 1999 between Denali
Incorporated, Containment Solutions Services, Inc.,
Instrumentation Solutions, Inc., Denali Management Inc., Denali
Holdings Management, L.L.C., Denali Operating Management, Ltd.,
Containment Solutions, Inc., Specialty Solutions, Inc., Ershigs,
Inc., SEFCO, Inc., Fibercast Company, Plasti-Fab Inc. and
Canadian Imperial Bank of Commerce, as administrative agent and
issuing lender (incorporated by reference to the 3rd Quarter 1999
10-Q)
10.37 Security Agreement dated January 12, 1999 between Denali
Incorporated, Containment Solutions Services, Inc.,
Instrumentation Solutions, Inc., Denali Management Inc., Denali
Holdings Management, L.L.C., Denali Operating Management, Ltd.,
Containment Solutions, Inc., Specialty Solutions, Inc., Ershigs,
Inc., SEFCO, Inc., Fibercast Company, Plasti-Fab Inc. and
Canadian Imperial Bank of Commerce, as administrative agent and
issuing lender (incorporated by reference to the 3rd Quarter 1999
10-Q)
10.38 Guarantee dated January 12, 1999 between Containment Solutions
Services, Inc., Instrumentation Solutions, Inc., Denali
Management Inc., Denali Holdings Management, L.L.C., Denali
Operating Management, Ltd., Containment Solutions, Inc.,
Specialty Solutions, Inc., Ershigs, Inc., SEFCO, Inc., Fibercast
Company, Plasti-Fab Inc. and Canadian Imperial Bank of Commerce,
as administrative agent and issuing lender (incorporated by
reference to the 3rd Quarter 1999 10-Q)
10.39 Form of Assignment and Acceptance Agreement pursuant to the New
Credit Agreement between Denali Incorporated and Canadian
Imperial Bank of Commerce, as administrative agent and each of
Key Corporate Capital Inc., ING (U.S.) Capital LLC, and CIBC Inc.
dated March 15, 1999 (incorporated by reference to the 3rd
Quarter 1999 10-Q)
10.40 Term Note pursuant to the New Credit Agreement between Denali
Incorporated and Southwest Bank of Texas, N.A. dated March 15,
1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.41 Form of Term Note pursuant to the New Credit Agreement between
Denali Incorporated and each of Key Corporate Capital Inc., ING
(U.S.) Capital LLC, and CIBC Inc. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.42 Acquisition Note pursuant to the New Credit Agreement between
Denali Incorporated and Southwest Bank of Texas, N.A. dated March
15, 1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.43 Form of Acquisition Note pursuant to the New Credit Agreement
between Denali Incorporated and each of Key Corporate Capital
Inc., ING (U.S.) Capital LLC, and CIBC Inc. dated March 15, 1999
(incorporated by reference to the 3rd Quarter 1999 10-Q)
10.44 Revolving Credit Note pursuant to the New Credit Agreement
between Denali Incorporated and Southwest Bank of Texas, N.A.
dated March 15, 1999 (incorporated by reference to the 3rd
Quarter 1999 10-Q)
10.45 Form of Revolving Credit Note pursuant to the New Credit
Agreement between Denali Incorporated and each of Key Corporate
Capital Inc., ING (U.S.) Capital LLC, and CIBC Inc. dated March
15, 1999 (incorporated by reference to the 3rd Quarter 1999 10-Q)
10.46 Offer Document by Denali Incorporated to shareholders of Welna,
N.V. (incorporated by reference to the Company's Form 8-K dated
July 14, 1999)
10.47 Roll-over Loans Facility Agreement between Denali Welna Europe
B.V. and ABN AMRO Bank N.V. and ING Bank N.V. dated June 11, 1999
for NLG 25,000,000 (incorporated by reference to the Company's
annual report on Form 10-K for the fiscal year ending July 3,
1999 (the "1999 10-K"))
10.48 Credit Agreement between Welna, N.V., Welna Kunststoffen B.V.,
B.V. Twentse Kunststoffenindustrie Plasticon, Plasticon Haven
B.V., Woodcap B.V., Kialite-Plasticon B.V., Onroerend-Goed
Maatschappij Plasticon B.V., Hanwel B.V., Plasticon Projects
B.V., Welna Handel B.V., Plasticon Heerenveen B.V., B.V. van
Delden, Gimex B.V. and ABN AMRO Bank N.V. dated June 11, 1999 for
NLG 40,000,000 (incorporated by reference to the 1999 10-K)
10.49 Working Capital Credit Facility between Welna, N.V., Welna
Kunststoffen B.V., B.V. Twentse Kunststoffenindustrie Plasticon,
Plasticon Haven B.V., Woodcap B.V., Kialite-Plasticon B.V.,
Onroerend-Goed Maatschappij Plasticon B.V., Hanwel B.V.,
Plasticon Projects B.V., Welna Handel B.V., Plasticon Heerenveen
B.V., B.V. van Delden, Gimex B.V. and ING Bank dated June 11,
1999 for NLG 5,000,000 (incorporated by reference to the 1999
10-K)
<PAGE> 69
10.50 Amendment and Waiver dated June 30, 1999 to the Credit Agreement
dated January 12, 1999 among Denali Incorporated and Canadian
Imperial Bank of Commerce, as administrative agent for the
Lenders and ING (U.S.) Capital LLC, as documentation agent
(incorporated by reference to the 1999 10-K)
10.51 Note and Warrant Purchase Agreement dated as of June 30, 1999
between Denali Incorporated and the Variable Annuity Life
Insurance Company, A.G. Investment Advisory Services, Inc., EMC
Equity Fund, L.P., Cockrell Investment Partners, L.P., Simmons
Family Trust, Thomas Dudley Simmons, Jr. Marital Trust, Thomas
Dudley Simmons, Jr., Joel V. Staff, Symonds Trust Co., Ltd., Anne
Allen Symonds Revocable Trust, William A. Monteleone, Jr., C.
Richard Everett, Fred H. Levine and Jay H. Golding Profit Sharing
Plan (incorporated by reference to the 1999 10-K)
10.52 Form of Common Stock Registration Rights Agreement between Denali
Incorporated and the Variable Annuity Life Insurance Company,
A.G. Investment Advisory Services, Inc., EMC Equity Fund, L.P.,
Cockrell Investment Partners, L.P., Simmons Family Trust, Thomas
Dudley Simmons, Jr. Marital Trust, Thomas Dudley Simmons, Jr.,
Joel V. Staff, Symonds Trust Co., Ltd., Anne Allen Symonds
Revocable Trust, William A. Monteleone, Jr., C. Richard Everett,
Fred H. Levine and Jay H. Golding Profit Sharing Plan
(incorporated by reference to the 1999 10-K)
10.53 Form of Subscription Agreement between Denali Incorporated and
the Variable Annuity Life Insurance Company, A.G. Investment
Advisory Services, Inc., EMC Equity Fund, L.P., Cockrell
Investment Partners, L.P., Simmons Family Trust, Thomas Dudley
Simmons, Jr. Marital Trust, Thomas Dudley Simmons, Jr., Joel V.
Staff, Symonds Trust Co., Ltd., Anne Allen Symonds Revocable
Trust, William A. Monteleone, Jr., C. Richard Everett, Fred H.
Levine and Jay H. Golding Profit Sharing Plan (incorporated by
reference to the 1999 10-K)
10.54 Roll-over Loans Facility Agreement, as amended, between Denali
International Holdings B.V. and ABN AMRO Bank N.V. and ING Bank
N.V. dated July 1999 for NLG 25,000,000 (incorporated by
reference to the 1999 10-K)
10.55 Lease agreement between Steven Jones and Belco Manufacturing
Company, Inc. dated January 1, 1998 (incorporated by reference to
the 1999 10-K)
10.56 Amendment to lease agreement between Steven Jones and Belco
Manufacturing Company, Inc. dated February 3, 1999 (incorporated
by reference to the 1999 10-K)
10.57 Letter of severance agreement between Henk A. Kroes and Welna
N.V. dated October 4, 1999 (incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarterly period
ending January 1, 2000 (the "2nd Quarter 2000 10-Q"))
10.58 Severance Agreement and Release and Waiver of All Claims between
Denali Incorporated and Melford S. Carter, Jr. dated December 3,
1999 (incorporated by reference to the 2nd Quarter 2000 10-Q)
10.59 Edward de Boer Severance Agreement dated February 11, 2000
(incorporated by reference to the Company's quarterly report on
Form 10-Q for the quarterly period ending April 1, 2000 (the "3rd
Quarter 2000 10-Q"))
10.60 Second Amendment and Waiver to the Credit Agreement among Denali
Incorporated, Canadian Imperial Bank of Commerce, as
administrative agent, and ING (U.S.) Capital LLC, as
documentation agent, dated as of January 12, 1999 (incorporated
by reference to the 3rd Quarter 2000 10-Q)
10.61* Waiver Agreement dated June 30, 2000 relating to the Note and
Warrant Purchase Agreement dated as of June 30, 1999
10.62* Forbearance Agreement among Denali Incorporated, Canadian
Imperial Bank of Commerce, as administrative agent, and ING
(U.S.) Capital LLC, as documentation agent, dated June 30, 2000
10.63* Forbearance Extension Agreement among Denali Incorporated,
Canadian Imperial Bank of Commerce, as administrative agent, and
ING (U.S.) Capital LLC, as documentation agent, dated July 31,
2000
10.64* Loan Agreement between Welna B.V., Welna Kunststoffen
B.V., B.V. Twentse Kunststoffenindustrie Plasticon, Plasticon
Haven B.V., Woodcap B.V., Kialite-Plasticon B.V., Onroerend-Goed
Maatschappij Plasticon B.V., Hanwel B.V., Plasticon Projects
B.V., Welna Handel B.V., Plasticon Heerenveen B.V., B.V. Agentuur
- en Kahdelmaatschappij G.W.J.J. van Delden, Gimex Technische
Keramiek B.V., and ING Bank N.V. for NLG 6 Million dated
September 4, 2000
10.65* Waiver Agreement dated September 27, 2000 relating to the Note
and Warrant Purchase Agreement dated as of June 30, 1999
10.66* Second Forbearance Extension Agreement among Denali Incorporated,
Canadian Imperial Bank of Commerce, as administrative agent, and
ING (U.S.) Capital LLC, as documentation agent, dated September
30, 2000
<PAGE> 70
21.1* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
--------------------------------------------------------------------------------
* Filed herewith
<PAGE> 71
DENALI INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions End
of Period Expenses Describe(B) Describe(A) of Period
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended July 1, 2000
Allowance for Doubtful Accounts.. $1,419 $604 $ -- $553 $1,470
Fiscal Year Ended July 3, 1999
Allowance for Doubtful Accounts.. $907 $397 $567 $452 $1,419
Fiscal Year Ended June 27, 1998
Allowance for Doubtful Accounts.. $605 $ 93 $276 $ 67 $907
</TABLE>
------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Allowance for doubtful accounts resulting from the acquisitions of LaValley
and Fibercast during FY 1998 and the acquisitions of Belco and Welna during
FY 1999.
