<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 000-23353
-----------
Denali Incorporated
- -------------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 76-0454641
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1360 Post Oak Blvd., Suite 2250, Houston, Texas 77056
- -------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)
713-627-0933
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of April 30, 2000, the number of shares of common stock outstanding was
5,558,914.
<PAGE> 2
DENALI INCORPORATED
FORM 10-Q FOR THE QUARTER ENDED APRIL 1, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets............................................................. 1
Consolidated Statements of Operations................................................... 2
Consolidated Statements of Cash Flows................................................... 3
Notes to Consolidated Financial Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................... 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 14
Item 2. Changes in Securities and Use of Proceeds............................................... 14
Item 3. Defaults Upon Senior Securities......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................................... 14
Item 5. Other Information ...................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................ 15
Signatures ........................................................................................ 16
Index to Exhibits ........................................................................................ 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENALI INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, July 3,
2000 1999
----------- --------
(Unaudited) (Note)
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash $ 4,340 $ 1,824
Accounts receivable, net of allowances of
$1,042,000 at April 1, 2000 and $1,419,000
at July 3, 1999 39,459 38,862
Inventories 27,305 26,175
Income tax receivable 1,709 --
Prepaid expenses 3,370 4,052
Other receivables -- 2,591
Deferred tax assets 1,164 1,135
---------- -----------
Total current assets 77,347 74,639
Property, plant and equipment, net 46,170 46,938
Goodwill, net 51,276 50,651
Other assets 4,373 3,898
Assets held for sale 249 449
---------- -----------
Total assets $ 179,415 $ 176,575
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,284 $ 19,047
Accrued liabilities 11,687 15,777
Lines of credit 23,353 16,217
Income taxes payable -- 1,757
Current maturities of long-term debt 6,545 4,030
Long-term debt in technical default (Note 6) 58,334 --
Related party subordinated debt in technical default (Note 6) 3,999 --
---------- -----------
Total current liabilities 123,202 56,828
Long-term debt, less current maturities 13,110 68,002
Related party subordinated debt -- 3,980
Accrued pension costs 1,880 2,109
Minority interest 1,775 1,571
Deferred taxes 1,838 1,692
Other long-term liabilities 2,482 3,824
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
Authorized shares - 30,000,000
Issued and outstanding shares -5,558,914 at
April 1, 2000 and 5,423,215 at July 3, 1999 56 54
Additional paid-in capital 35,639 34,956
Other accumulated comprehensive loss (2,129) --
Retained earnings 1,562 3,559
---------- -----------
Total stockholders' equity 35,128 38,569
---------- -----------
Total liabilities and stockholders' equity $ 179,415 $ 176,575
========== ===========
</TABLE>
See accompanying notes.
Note: The balance sheet at July 3, 1999 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
1
<PAGE> 4
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- ---------------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 46,142 $ 36,328 $ 144,063 $ 110,216
Cost of revenues 37,161 27,667 110,702 82,649
----------- ----------- ----------- -----------
Gross profit 8,981 8,661 33,361 27,567
Selling, general and administrative expenses 8,962 7,065 28,882 20,571
Restructuring and non-recurring charge 190 - 2,681 -
Non-recurring compensation expense - - - 682
----------- ----------- ----------- -----------
Operating income (loss) (171) 1,596 1,798 6,314
Interest expense 2,426 925 6,646 2,210
Interest income - (23) (170) (35)
Other (income) expense, net 96 (66) (35) (173)
Put warrant valuation adjustment - - (1,198) -
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest (2,693) 760 (3,445) 4,312
Income tax (benefit) expense (983) 284 (1,701) 1,635
----------- ----------- ----------- -----------
Net income (loss) before minority interest
and extraordinary item (1,710) 476 (1,744) 2,677
Extraordinary loss on early extinguishment
of debt, net - (281) - (281)
Minority interest 61 - 253 -
----------- ----------- ----------- -----------
Net income (loss) $ (1,771) $ 195 $ (1,997) $ 2,396
=========== =========== =========== ===========
Net income (loss) per common share - basic
and diluted:
Income (loss) before extraordinary item $ (0.32) $ 0.10 $ (0.36) $ 0.55
Extraordinary item - (0.06) - (0.06)
----------- ---------- ----------- ----------
Net income (loss) per common share $ (0.32) $ 0.04 $ (0.36) $ 0.49
=========== ========== =========== ==========
Comprehensive income (loss):
Net income (loss) $ (1,771) $ 195 $ (1,997) $ 2,396
Currency translation adjustments (1,230) - (2,129) -
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (3,001) $ 195 $ (4,126) $ 2,396
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
DENALI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
----------------------------
April 1, March 27,
2000 1999
----------- ----------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,997) $ 2,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,679 1,813
Amortization 1,533 568
Deferred tax 654 --
Put warrant valuation adjustment (1,198) --
Provision for losses on accounts receivable 180 229
Gain on disposal of property, plant and equipment and
assets held for sale (280) --
Changes in operating assets and liabilities:
Accounts receivable (369) 1,273
Inventories (464) (3,911)
Prepaid expenses 3,346 (900)
Other assets and liabilities (237) 279
Accounts payable 196 (891)
Accrued liabilities (5,269) 1,652
Income tax receivable/payable (3,580) (572)
----------- ----------
Net cash provided by (used in) operating activities (3,806) 1,936
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (3,977) (6,702)
Purchases of property, plant and equipment (4,304) (1,718)
Proceeds from sale of property, plant and equipment and
assets held for sale 518 --
----------- ----------
Net cash used in investing activities (7,763) (8,420)
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit 14,727 (1,403)
Net borrowings (repayments) on term notes and other long-term debt (344) 9,559
Debt origination cost -- (1,740)
----------- ----------
Net cash provided by financing activities 14,383 6,416
Effect of exchange rate changes on cash (298) --
----------- ----------
Increase (decrease) in cash 2,516 (68)
Cash at beginning of period 1,824 175
----------- ----------
Cash at end of period $ 4,340 $ 107
=========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 6
DENALI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of Denali Incorporated and its
majority and wholly-owned subsidiaries (the "Company") included herein have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. The Company believes that the presentations and disclosures herein are
adequate to make the information not misleading. In the opinion of management,
the consolidated financial statements reflect all elimination entries and
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes included in the
Company's Form 10-K filed with the Securities and Exchange Commission on
September 15, 1999.
2. INVENTORIES
Inventories are summarized below (in thousands):
April 1, 2000 July 3, 1999
------------- ------------
Finished goods $ 10,095 $ 10,546
Raw materials 9,872 8,672
Work in process 7,338 6,957
---------- ---------
$ 27,305 $ 26,175
========== =========
3. PER SHARE INFORMATION
The following table sets forth the weighted average shares outstanding
for the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
------------ ------------- ------------ ----------
(Share data in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 5,559 4,918 5,504 4,867
Dilutive securities - employee stock options -- -- -- 2
------ ------- ------- ------
Weighted average common shares outstanding
assuming full dilution 5,559 4,918 5,504 4,869
====== ======= ======= ======
</TABLE>
Options to purchase 223,055 and 506,416 shares of common stock and
warrants to purchase zero and 534,873 shares of common stock were outstanding
as of March 27, 1999 and April 1, 2000, respectively, 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.
4
<PAGE> 7
4. 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 income. For the nine months ended
April 1, 2000, the Company had a foreign currency translation loss of
$2,129,000 which is recorded as comprehensive loss and is classified as a
separate component of stockholders' equity.
5. INCOME TAXES
The Company's provision for income taxes for the three months and nine
months ended April 1, 2000 differs from the U.S. statutory rate primarily due
to the put warrant valuation adjustment which is not taxable, non-deductible
goodwill amortization and other permanent differences.
6. LONG-TERM DEBT
On January 12, 1999, the Company entered into a new senior credit
facility with a group of lenders to refinance its revolving and term credit
arrangements, as amended most recently on February 24, 2000, to provide working
capital and an acquisition line of credit. This senior credit facility provides
for a maximum of $25.0 million in a revolving credit facility due in January
2004, and a term loan up to $20.0 million with equal quarterly payments plus
interest of $500,000 the first year, $750,000 the second year, $1.0 million the
third year, $1.25 million the fourth year, and $1.5 million the fifth year. The
credit facility also provides for up to a $15.3 million acquisition term loan
with the first principal installment due 21 months following the closing of the
credit facility. As of April 1, 2000, the Company had outstanding indebtedness
of $17.2 million under the term loan, $21.9 million under the revolving lines
of credit and $15.3 million under the acquisition term loan. The revolving
credit notes and term loans provide for borrowings, at the Company's option, at
either the bank's prime rate plus margins of 1.25% to 2.75% or varying rates of
LIBOR plus 2.5% to 4.0% based on the domestic leverage ratio levels. The
acquisition term loans provide for borrowing, at the Company's option, at
either the bank's prime rate plus margins of 1.75% to 3.25% or at varying rates
of LIBOR plus 3.0% to 4.5% based on the domestic leverage ratio levels.
This senior credit facility provides availability for letters of
credit up to $10.0 million subject to availability of borrowing capacity under
the revolving credit notes. As of April 1, 2000, the Company had $1.7 million
of letters of credit outstanding. The senior credit facility requires the
Company to maintain certain financial covenants and requires an annual fee of
.50% on the unused portion of the revolving credit notes. The senior credit
facility is secured by substantially all of the assets of the Company's U.S.
subsidiaries.
On July 1, 1999, the Company issued $15 million, or $13.3 million net
of discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes"), bearing interest at 12%
and maturing in 2006. The subordinated notes were issued with detachable
warrants that enable 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 seven. 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 will
be amortized over the seven-year term of the subordinated notes as additional
interest expense and the liability will be adjusted to the fair value of the
warrants in future periods. At April 1, 2000, the liability had been reduced by
$1,198,000 to $535,000. This change has been recorded as a separate line item
on the consolidated statement of operations. The proceeds from the subordinated
notes issuance were used in the funding of the acquisition of Welna. The
subordinated notes require the Company to maintain certain financial covenants.
5
<PAGE> 8
6. LONG-TERM DEBT (CONTINUED)
As a result of the lower than expected operating results during the
first nine months of fiscal 2000, the Company was not in compliance with certain
of the financial covenants in both its senior credit facility and its senior
subordinated notes as of April 1, 2000. In addition, the Company has a
continuing covenant default with its subordinated note holders due to unresolved
breaches of second quarter covenant targets. The bank group agreed to waive
second quarter financial covenant defaults conditional on receipt of executed
waivers from the Company's subordinated note holders. Because a waiver agreement
has not yet been reached with the subordinated note holders, the Company
continues in technical default with its U.S. bank group. Due to the ongoing
default with the subordinated debt holders, the Company does not intend to seek
another short-term waiver with its U.S. bank group until the proposed Blair
transaction (see discussion below) is consummated. Because of existing technical
defaults, the Company has classified $58,334,000 of its long-term debt as
current liabilities at April 1, 2000. The Company expects to raise sufficient
capital through the Blair transaction to reduce its senior domestic leverage
ratio to acceptable levels for the U.S. bank group. The Company does not
anticipate that its lenders will accelerate the maturity of the loans or
discontinue the current revolving credit facility. However, if these events were
to occur or if the Company is not successful in raising additional equity, the
Company may be required to seek alternative financing or other remedies.
In June 1999, the Company entered into a new senior credit facility
("Senior Dutch Facility") with two Netherland financial institutions to finance
the acquisition of Welna. The new Senior Dutch Facility provides for two term
loans for a total facility of Dutch guilders (NLG) 25 million. Term Loan A
provides for borrowings of NLG 15 million with quarterly payments of NLG
625,000 beginning October 1, 1999. Term Loan B provides for borrowings of NLG
10 million with principal due at date of maturity (August 1, 2001). As of April
1, 2000, the Company had outstanding indebtedness of NLG 25.0 million, or
approximately $10.8 million. The term loans bear interest at Euribor plus
1.75%. The Senior Dutch Facility requires the Company to maintain certain
financial covenants. The Company is in compliance with all financial covenants
as of April 1, 2000. The facility is secured by substantially all of Welna's
assets.
In May 2000, the Company announced the signing of a letter of intent
with William Blair Mezzanine Capital Fund III, L.P. ("Blair") in which Blair
proposes to invest $28 million in Denali through a combination of $11.2 million
of 12% senior subordinated notes due June 2008, $8.8 million of convertible 12%
senior subordinated notes due June 2008, and $8 million of common equity. This
proposed investment is subject to certain conditions including satisfactory
completion of due diligence by Blair and shareholder approval.
7. ACQUISITIONS
On September 3, 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 for approximately $1.1 million in cash and 27,199
shares of common stock valued at $213,000.
In addition, on November 11, 1999, the Company acquired all of the
issued and outstanding stock of HP Valves, 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.
Both 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 value at the acquisition date.
In connection with the July 1, 1999 acquisition of Welna N.V., a Dutch
company formerly listed on the Official Market of the Amsterdam Stock Exchange,
the Company has adjusted the preliminary estimates of the fair market value of
the purchased assets and liabilities resulting in a NLG 750,000 or approximately
$350,000 decrease in goodwill.
8. RESTRUCTURING OF OPERATIONS
On October 11, 1999, the Company announced the restructuring of
certain operations, including the closure of the Conroe manufacturing facility.
In connection with this restructuring plan, the Company accrued and recorded as
expense $2,276,000 of involuntary termination benefits covering 96 employees.
These costs are included in the non-recurring restructuring charge totaling
$2,681,000 which is recorded as a separate line item on the consolidated
statement of operations. These termination benefits are related to employee
terminations associated with the Conroe manufacturing facility closure and
workforce reductions associated with the consolidation and reduction of selling,
general and administrative support in the U.S. and European operations. As of
April 1, 2000, termination benefits totaling $2,162,000 for 78 employees had
been paid and charged against this liability. Certain costs associated with this
plan had not yet been incurred as of April 1, 2000 and will result in additional
charges in the remaining months of fiscal 2000.
6
<PAGE> 9
9. COMMITMENTS AND CONTINGENCIES
The Company utilizes fiberglass, resin and steel as the primary raw
materials in its production processes. Fiberglass is occasionally in short
supply and subject to price fluctuations in response to market demands. The
Company entered into a supply agreement with a major supplier, which requires
two of the Company's subsidiaries, Containment Solutions, Inc. and Ershigs,
Inc. 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 ending 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. In management's opinion, recorded accruals for
environmental liabilities are appropriate based on existing facts and
circumstances. Under more adverse circumstances, however, this potential
liability could be higher. Current year expenditures were not material.
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion
of management, the ultimate liabilities resulting from such claims will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.
10. 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,
operating income and working capital efficiencies.
In fiscal year 1999, the Company operated in two industry segments:
Containment Solutions and Specialty Solutions. The Containment Solutions
segment specializes in the manufacture of fiberglass underground storage tanks
and steel reinforced aboveground storage tanks for fluids handling. The
Specialty Solutions 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 operated in only one geographic segment, the
United States. Beginning in fiscal year 2000, the Company, through its Welna
and Manantial subsidiaries, has global operations, with a primary concentration
in Europe. Welna is reported as an additional segment for segment reporting and
Manantial is reported in Specialty Solutions. All intersegment net revenues and
expenses are immaterial and have been eliminated in computing net revenues and
operating income.
7
<PAGE> 10
10. SEGMENT DATA (CONTINUED)
The following is a summary of the industry segment data for the nine
months ended March 27, 1999 and April 1, 2000 (in thousands):
<TABLE>
<CAPTION>
Net Operating
Revenues Income
--------- --------
Nine months ended March 27, 1999:
<S> <C> <C>
Containment Solutions.................. $ 70,525 $ 6,802
Specialty Solutions.................... 39,691 1,843
Corporate.............................. -- (1,649)
Non-recurring compensation charge -- (682)
--------- --------
Consolidated........................... $ 110,216 $ 6,314
========= ========
Nine months ended April 1, 2000:
Containment Solutions.................. $ 43,948 $ 2,359
Specialty Solutions.................... 50,077 1,917
Welna.................................. 50,038 1,997
Corporate.............................. -- (1,794)
Restructuring charge - Containment Solutions -- (500)
Restructuring charge - International... -- (1,390)
Restructuring charge - Corporate -- (791)
----------- --------
Consolidated........................... $ 144,063 $ 1,798
=========== ========
</TABLE>
Operating income reconciles to income before income taxes as shown on
the consolidated statements of operations as follows (in thousands):
<TABLE>
<CAPTION>
April 1, March 27,
2000 1999
-------- ---------
<S> <C> <C>
Total segment operating income $ 1,798 $ 6,314
Interest expense 6,646 2,210
Interest income (170) (35)
Other income, net (35) (173)
Put warrant valuation adjustment (1,198) --
-------- --------
Income (loss) before income taxes $ (3,445) $ 4,312
======== ========
</TABLE>
11. SEASONALITY
The Company's operating results are affected by the annual
construction season slowdown resulting from winter weather especially in the
period December through March. The underground fiberglass tank products are
especially impacted during the winter months. The Company believes that the
effects of seasonality will be less severe in the future, as the Company
continues to expand and diversify its product offerings.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Denali Incorporated is a provider of products and services for
handling critical fluids, which are liquids, liquid mixtures, and slurries that
are economically valuable or potentially hazardous to the environment. The
Company is a manufacturer of fiberglass-composite underground storage tanks;
steel aboveground storage tanks; and engineered fiberglass-reinforced
plastic-composite products for corrosion-resistant applications.
Since inception in 1994, the Company has acquired 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.
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.
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. These two businesses form the Company's Containment
Products Group known as Containment Solutions.
Engineered Products Group - "Specialty Solutions"
In February 1997, the Company acquired Ershigs, Inc. ("Ershigs"), a
manufacturer of engineered FRP products, as the first of the Company's
Engineered Products Group.
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.
In June 1998, the Company acquired Fibercast Company, a leading
manufacturer of fiberglass-reinforced plastic piping systems specializing in
highly corrosive environments.
In November 1998, the Company acquired Plasti-Fab, Inc., a leader in
providing fiberglass-reinforced 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.
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.
Belco, Fibercast, Ershigs, SEFCO, Plasti-Fab and Manantial form the
Company's Engineered Products Group known as Specialty Solutions.
9
<PAGE> 12
On July 1, 1999, the Company acquired Welna, N.V., a company which
operates through two divisions. Welna Synthetics designs, manufactures, and
installs all forms of FRP pipe systems, vessels and other related equipment
requiring high levels of corrosion resistance. Welna Trade 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's operations had no effect on the Company's operating results
for fiscal year 1999. Welna's balance sheet has been consolidated as of July 3,
1999.
On November 11, 1999, the Company acquired all of the issued and
outstanding stock of HP Valves, a valve manufacturer located in Oldenzaal, The
Netherlands.
RESULTS OF OPERATIONS
Three months ended April 1, 2000 compared with three months ended March 27,
1999
Net revenues increased $9.8 million, or 27.0%, to $46.1 million in the
third quarter of fiscal 2000 from $36.3 million in the same quarter of fiscal
1999. Net revenues increased a total of $18.2 million in the fiscal 2000 period
from the inclusion of the new acquisitions (Welna, Manantial, HP Valves and
Belco). The remaining $8.4 million decrease in revenues resulted primarily from
a decrease in revenues at Containment Solutions of $10.3 million from $22.3
million in the fiscal 1999 period to $12.0 million in the fiscal 2000 period
due to less demand in the petroleum equipment industry. The decrease in demand
is the result of the majority of tank owners having met the 1998 Environmental
Protection Agency deadline mandating upgrades or replacement of all underground
storage tanks. Due to this market shift, the Company on October 11, 1999
announced a cost reduction plan designed to reduce operating expenses by $4.5
million annually. The plan includes the closure of a domestic manufacturing
facility and the elimination of related personnel and overhead costs and the
integration of other businesses to improve operating and administrative
efficiencies.
Gross profit increased $320,000, or 3.7%, to $9.0 million in the
fiscal 2000 period from $8.7 million in the fiscal 1999 period. Approximately
$3.8 million of the increase was related to the addition of the international
operations and Belco. This increase was offset by a $3.4 million decrease in
gross profit associated with the $10.3 million revenue decrease at Containment
Solutions. Gross margin for the Company decreased to 19.5% from 23.8% in the
prior year quarter primarily due to the decrease in sales volume at Containment
Solutions, partially offset by the inclusion of Welna with gross margins of
22.0%.
Selling, general and administrative expenses increased $1.9 million to
$9.0 million in the third quarter of fiscal 2000 from $7.1 million in the same
period last year. The increase is primarily attributable to additional expenses
associated with the new acquisitions, offset by decreases in sales and
marketing expenses at Containment Solutions and Specialty Solutions. Selling,
general and administrative expenses as a percentage of net revenues was 19.4%
for both periods reported.
The Company recognized a restructuring charge of $190,000 in the third
quarter of fiscal 2000 in connection with its restructuring plan. See Note 8 of
the Notes to the Consolidated Financial Statements for further discussion.
The Company's provision for income taxes differs from the U.S.
statutory rate due to state income taxes and other permanent differences.
Due to the above factors, net income decreased from $195,000
(including an extraordinary item of $281,000 loss) in the prior fiscal year
period to a loss of $1,771,000 in the current fiscal year period. Excluding the
impact of the restructuring charge in fiscal year 2000, the net loss was
$1,650,000, or $0.30 loss per share, versus $0.10 earnings per share in fiscal
year 1999, excluding the extraordinary item.
10
<PAGE> 13
Nine months ended April 1, 2000 compared with nine months ended March 27, 1999
Net sales increased $33.8 million, or 30.7%, to $144.0 million in the
first nine months of fiscal 2000 from $110.2 million in the same period of
fiscal 1999. A total of $57.5 million of the increase resulted from the
inclusion of the new acquisitions (Welna, Manantial, HP Valves, Belco and
Plasti-Fab). The remaining $23.7 million decrease in sales primarily resulted
from a $26.6 million decrease in sales at Containment Solutions from $70.5
million in the fiscal 1999 period to $43.9 million in the fiscal 2000 period
due to less demand in the petroleum equipment industry. The decrease at
Containment Solutions was offset by an increase at Specialty Solutions of
approximately $2.9 million.
Gross profit increased $5.8 million, or 21.0%, to $33.4 million in the
fiscal 2000 period from $27.6 million in the fiscal 1999 period. Approximately
$14.5 million of the increase was related to the new acquisitions. This
increase was offset by an $8.0 million decrease in gross profit at Containment
Solutions and a $0.7 million decrease at Specialty Solutions. Gross margin for
the Company decreased to 23.2% from 25.0% in the prior year period primarily
due to the decrease in sales volume at Containment Solutions, partially offset
by the inclusion of Welna with gross margins of 26.5%.
Selling, general and administrative expenses increased $8.3 million to
$28.9 million for the first nine months of fiscal 2000 from $20.6 million in
the same period last year. The increase is primarily attributable to additional
expenses associated with the new acquisitions, offset by decreased sales and
marketing expenses at Containment Solutions and Specialty Solutions.
The Company recognized a $682,000 non-recurring compensation charge in
the second quarter of fiscal 1999 related to a salary continuation agreement.
The Company recorded $2.7 million of restructuring charges during the
first nine months of fiscal 2000 in connection with its restructuring plan. See
Note 8 of the Notes to the Consolidated Financial Statements for further
discussion.
The Company's fiscal 2000 provision for income taxes differs from the
U.S. statutory rate due to the put warrant valuation adjustment, state income
taxes and other permanent differences. The Company's fiscal 1999 provision for
income taxes differs from the U.S. statutory rate due to state income taxes and
other permanent differences.
Due to the above factors, net loss in the first nine months of fiscal
2000 was $1,997,000, or $0.36 per share, compared with net income of $2,396,000
(including an extraordinary item loss of $281,000), or $0.49 per share, in the
prior year nine month period. Excluding the impact of the restructuring charge
and warrant valuation adjustments, the net loss was $1,493,000, or $0.27 loss
per share for the first nine months of fiscal 2000 compared to $3,100,000, or
$0.64 earnings per share for the same period last year, excluding the
non-recurring compensation charge and the extraordinary item.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 2000, exclusive of
acquisitions, the Company's operating activities used $0.8 million of cash to
increase its accounts receivable and inventories, $5.3 million of cash to
reduce its accrued liabilities, and $3.6 million to reduce its income tax
liabilities. Decreases in prepaid expenses provided $3.3 million of cash. The
Company borrowed $14.4 million with the cash used primarily to conclude the
purchase of HP Valves and Manantial and for payments associated with
restructuring operations and working capital additions.
The Company amended its U.S. credit facility on February 24, 2000. The
amendment requires the Company to raise at least $7.5 million in equity before
July 31, 2000 in order to reduce its senior debt leverage ratio. If Denali
fails to raise $7.5 million of equity, the banks will receive up to 1,000,000
warrants at nominal value to be issued on a schedule from August 2000 through
December 2000.
11
<PAGE> 14
In May 2000, the Company announced the signing of a letter of intent
with William Blair Mezzanine Capital Fund III, L.P. ("Blair") in which Blair
proposes to invest $28 million in Denali through a combination of $11.2 million
of 12% senior subordinated notes due June 2008, $8.8 million of convertible 12%
senior subordinated notes due June 2008, and $8 million of common equity. This
proposed investment is subject to certain conditions including satisfactory
completion of due diligence by Blair and shareholder approval.
The Company's Credit Facility as amended February 24, 2000 with its
principal lender provides for revolving lines of credit and secured term loans
of up to an aggregate of $57.5 million, including $32.5 million in outstanding
term loans and a $25 million revolving line of credit. As of April 1, 2000, the
Company had outstanding indebtedness of $21.9 million under the revolving lines
of credit. Borrowings under this Credit Facility are secured by liens on
substantially all of the Company's U.S. assets. See Note 6 of Notes to the
Consolidated Financial Statements for certain information regarding the Credit
Facility. The revolving credit facility and term loan provide for borrowings,
at the Company's option, at either the bank's prime rate plus margins of 1.25%
to 2.75% or varying rates of LIBOR plus 2.5% to 4.0% based on the domestic
leverage ratio levels. The acquisition term loan provides for borrowings, at
the Company's option, at either the bank's prime rate plus margins of 1.75% to
3.25%, or at varying rates of LIBOR plus 3.0% to 4.5% based on the domestic
leverage ratio levels. The Credit Facility has a five-year term expiring in
January 2004.
This senior credit facility provides availability for letters of
credit up to $10.0 million subject to availability of borrowing capacity under
the revolving credit notes. As of April 1, 2000, the Company had $1.7 million
of letters of credit outstanding. The senior credit facility requires the
Company to maintain certain financial covenants and requires an annual fee of
.50% on the unused portion of the revolving credit notes. The senior credit
facility is secured by substantially all of the assets of the Company's U.S.
subsidiaries.
On July 1, 1999, the Company issued $15 million, or $13.3 million net
of discount (of which $3,999,000 is to certain directors of the Company and is
classified separately as related party subordinated debt on the balance sheet)
in senior subordinated notes ("subordinated notes"), bearing interest at 12%
and maturing in 2006. The subordinated notes were issued with detachable
warrants that enable 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 seven. 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 will
be amortized over the seven-year term of the subordinated notes as additional
interest expense and the liability will be adjusted to the fair value of the
warrants in future periods. At April 1, 2000, the liability had been reduced by
$1,198,000 to $535,000. This change has been recorded as a separate line item
on the consolidated statement of operations. The proceeds from the subordinated
notes issuance were used in the funding of the acquisition of Welna. The
subordinated notes require the Company to maintain certain financial covenants.
As a result of the lower than expected operating results during the
first nine months of fiscal 2000, the Company was not in compliance with
certain of the financial covenants in both its senior credit facility and its
senior subordinated notes as of April 1, 2000. In addition, the Company has a
continuing covenant default with its subordinated note holders due to
unresolved breaches of second quarter covenant targets. The bank group agreed
to waive financial covenant defaults conditional on receipt of executed waivers
from the Company's subordinated note holders. Because a waiver agreement has
not yet been reached with the subordinated note holders, the Company continues
in technical default with its U.S. bank group. Due to the ongoing default with
the subordinated debt holders, the Company does not intend to seek another
short-term waiver with its U.S. bank group until the proposed Blair transaction
is consummated. Because of the existing technical defaults, the Company has
classified $58,334,000 of its long-term debt as current liabilities at April 1,
2000. As mentioned above, the Company, in cooperation with its U.S. bank group,
expects to raise sufficient capital to reduce its senior domestic leverage
ratio. The Company does not anticipate that its lenders will accelerate the
maturity of the loans or discontinue the current revolving credit facility.
However, if these events were to occur or if the Company is not successful in
raising additional equity, the Company may be required to seek alternative
financing or other remedies.
12
<PAGE> 15
In June 1999, the Company entered into a new senior credit facility
with two Netherlands financial institutions ("Senior Dutch Facility") to
finance the acquisition of Welna. The new Senior Dutch Facility provides for
two term loans for a total facility of Dutch guilders (NLG) 25 million. Term
Loan A provides for borrowings of NLG 15 million with quarterly payments of NLG
625,000 beginning October 1, 1999. Term Loan B provides for borrowings of NLG
10 million with principal due at date of maturity (August 1, 2001). As of April
1, 2000, the Company had outstanding indebtedness of NLG $25.0 million, or
approximately $10.8 million. The term loans bear interest at Euribor plus
1.75%. The Senior Dutch Facility requires the Company to maintain certain
financial covenants. The Company is in compliance with all financial covenants
as of April 1, 2000. The facility is secured by substantially all of Welna's
assets.
The Company also assumed approximately $15 million in debt, net of
cash acquired, with the acquisition of Welna on July 1, 1999. The debt bears
interest at an average of approximately 4.2% and consists primarily of lines of
credit facilities that are due on demand with various financial institutions.
The Company's capital requirements have primarily related to
acquisitions of businesses in the critical fluids handling industry. The
Company has made cash payments net of cash acquired for acquisitions of
approximately $98.3 million in the aggregate since inception in December 1994.
The source of this cash primarily has been bank debt along with proceeds from
the sale of idle assets and use of cash provided by operations. The Company
intends to focus on debt reduction and the integration of its prior and recent
acquisitions for the remainder of fiscal year 2000.
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-Q contains certain forward-looking statements as such
term is defined in the Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words, "anticipate", "believe", "estimate", "expect" and "intend"
and words or phrases of similar import, as they relate to the Company or its
subsidiaries or Company management, are intended to identify forward-looking
statements. Such statements reflect the current risks, uncertainties and
assumptions related to certain factors including, without limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates. Refer to
the Company's Form 10-K for the fiscal year ended July 3, 1999 for a detailed
discussion of these risks.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 24, 2000, the Company issued warrants to purchase a total
of 1,000,000 shares of its common stock in a private transaction exempt from
the registration provisions of the Securities Act pursuant to Section 4(2)
thereof as a transaction not involving a public offering. These warrants were
issued to the five banks that are lenders under the Company's domestic senior
credit facility as partial consideration for conditional waivers granted by
these banks for covenant violations by the Company under this credit facility.
The warrants become exercisable as follows: warrants to purchase 250,000 shares
become exercisable on July 31, 2000, warrants to purchase 250,000 shares become
exercisable on August 31, 2000, warrants to purchase 200,000 shares become
exercisable on September 30, 2000, warrants to purchase 100,000 shares become
exercisable on October 31, 2000, warrants to purchase 100,000 shares become
exercisable on November 30, 2000, and warrants to purchase 100,000 shares
become exercisable on December 31, 2000, in each instance if the Company has
not raised at least $7.5 million of equity by the applicable date. If the
Company has raised at least $7.5 million of equity by any of these dates, the
warrants that have not yet become exercisable will terminate. Any warrants that
become exercisable will expire on December 31, 2005. All of the warrants have
an exercise price of $0.01 per share. These banks were the only offerees in
this transaction, and no public solicitation was made. All offerees were
provided access to relevant information regarding the Company, and the warrant
certificates issued to each of them contain a restrictive legend prohibiting
transfer of the warrants or the shares issued upon their exercise in violation
of federal securities laws.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of April 1, 2000, the Company was in default on the Total Leverage
Ratio, Maximum Senior Leverage Ratio, Total Minimum Interest Coverage, Minimum
Fixed Charge Coverage, Maximum Domestic Leverage Ratio, Maximum Senior Domestic
Leverage Ratio, Minimum Domestic Interest Coverage and Minimum Domestic Fixed
Charge Coverage covenants with both its U.S. senior credit facility and senior
subordinated note holders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
14
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
10.72 Edward de Boer Severance Agreement dated
February 11, 2000
10.73 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
27 Financial Data Schedule
B. Reports on Form 8-K
None
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENALI INCORPORATED
-------------------
(Registrant)
Date: May 16, 2000 /s/ R. KEVIN ANDREWS
----------------------
R. Kevin Andrews
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.72 Edward de Boer Severance Agreement dated February 11, 2000
10.73 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
27 Financial Data Schedule
</TABLE>
17
<PAGE> 1
EXHIBIT 10.72
February 1, 2000
Mr. Edward de Boer
Dear Edward:
The purpose of this letter is to state our agreement concerning your
resignation and the termination of your employment with Denali, Incorporated
("Denali"). Our agreement, as stated in this letter, is intended to be legally
binding on and for the benefit of you and Denali (and its affiliates and
representatives). It is also our mutual intent that our agreement, as embodied
in this document, be a final compromise and disposition of any and all claims
or disputes, of any kind, which you have or may have, including those related
to your employment with Denali or the termination of such employment. This
letter agreement may be referred to by name as our "SEVERANCE AGREEMENT AND
RELEASE AND WAIVER OF ALL CLAIMS."
TERMS
You have offered, and Denali has accepted, your resignation. You will
have no other duties or responsibilities for Denali, effective January 24,
2000. In return for your resignation and your waiver and release of any and all
claims, Denali will pay or provide to you the following severance benefits:
1. The gross amount, less withholding for taxes, of one hundred and
seventy-three thousand, three hundred and thirty-three and no/100 dollars
($173,333.00), in twelve equal monthly payments, paid on the normal pay date
for Denali, minus required tax withholding. Should you die during this term,
these payments will be made to your wife, but should she also die during this
term, these payments will be made to your surviving children, equally divided
among them.
2. Payment of an amount equal to the currently active monthly employee
premiums paid by Denali for continuation of your group medical and dental
insurance (the same coverage currently in place) until you become eligible for
health plan coverage in connection with other employment or for twelve months,
whichever occurs first. You will continue to be responsible for payment of the
active employee portion of this coverage.
3. Acceleration of your vesting in the (1) Incentive Stock Option
Agreement granted on November 20, 1997, to be fully vested with exercise rights
until June 30, 2000; (2) Incentive Stock Option Agreement granted on April 21,
1999, to be 25% vested with exercise rights until June 30, 2000; and (3)
Incentive Stock Option Agreement granted on July 28, 1999, to be 20% vested
with exercise rights until June 30, 2000.
This agreement does not alter, modify or restrict in any way any
rights you may have under COBRA to obtain continued coverage under Denali's
group health and dental plans.
RELEASE AND WAIVER OF ALL CLAIMS
1. In consideration of and in return for the severance payments and
benefits stated in this agreement, you hereby agree to release Denali,
Incorporated, including its current and former owners, subsidiaries and
affiliates, directors, officers, employees, agents and successors, and all
benefit plans sponsored by Denali or any of its affiliates ("Denali Parties"),
from liability
<PAGE> 2
for any and all claims, causes of action, liabilities, damages, and other
remedies, of any kind, whether now known or unknown, including, but not limited
to, any related to your employment by Denali and the termination of your
employment, as well as to any other matter. This release includes, but is not
limited to, claims or causes of action arising under federal and state fair
employment or discrimination laws (including but not limited to any rights or
claims you may have under Title VII of the Civil Rights Act of 1964, as
amended, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act, the Americans With Disabilities Act, the Employee Retirement Income
Security Act, and the Texas Commission on Human Rights Act), laws pertaining to
breach of employment contract, wrongful discharge, common law tort (e.g.,
negligence, infliction of emotional distress, defamation, assault, fraud,
etc.), and/or any other federal, state or local laws relating in any way to
your employment, events occurring during the course of your employment
(including to the date of your acceptance of this agreement), and/or the
termination of your employment with Denali. Our agreement is not intended to
indicate that any such claims exist or that, if they do exist, they are
meritorious. Rather, we are simply agreeing that, IN RETURN FOR DENALI'S
AGREEMENT TO THE SEVERANCE PAYMENTS AND BENEFITS STATED IN THIS LETTER, ANY AND
ALL POTENTIAL CLAIMS THAT YOU MAY HAVE AGAINST THE DENALI PARTIES, REGARDLESS
OF WHETHER THEY ACTUALLY EXIST, ARE EXPRESSLY AND FOREVER SETTLED, COMPROMISED
AND WAIVED. YOU ARE ADVISED TO CONSULT WITH AN ATTORNEY FOR ADVICE PRIOR TO
EXECUTING THIS AGREEMENT.
You represent to the Denali Parties that you (a) are legally and
mentally competent to make this agreement, (b) that you are the sole owner of
all potential claims that you may have against the Denali Parties and that no
portion of any such claim has been sold or assigned by you to any third party,
and (c) that you possess the exclusive right to receive all of the severance
payments and benefits enumerated in this agreement, (d) that you have been
advised to consult an attorney for advice prior to executing this agreement,
(e) you understand you have at least 21 days from the date this letter was
presented to you to consider whether to execute this agreement, and (f) you
have seven days to revoke this agreement after you execute it.
You acknowledge that the severance payment and benefits described in
this letter are valuable consideration to which you would not be undisputedly
entitled, but are solely in return for the waiver of rights and claims and your
other agreements as stated in this agreement.
<PAGE> 3
2. You agree, to the extent permitted by law, not to bring or
join any lawsuit or file any charge or claim against any of
the Denali Parties in any court or before any government
agency (except as necessary to protect your rights under this
agreement) relating to your employment, events occurring
during your employment, the termination of your employment,
or any other matter. You further agree that should you assert
before any court or government agency that the release and
waiver provisions of this agreement are void or unenforceable
for any reason, then Denali shall have the right, at its
option, to rescind this agreement, in which event you shall
be obligated to return to Denali all amounts paid to you as
severance benefits under this agreement. You also agree to
waive any right to future employment with any of the Denali
Parties and agree that you will not seek employment with them
in the future.
You acknowledge that you have already received all other wages or pay
to which you are entitled (including for vacation or other accrued paid leave
time).
COOPERATION
You agree to cooperate with Denali to the extent reasonably required
in all matters related to the orderly transfer to other Denali representatives
of pending matters on which you were working as of the date of the termination
of your employment. You also agree to act in good faith and to use reasonable
efforts to cooperate with any reasonable request by any representative of
Denali for information or assistance related to matters for which you had
responsibility in your former employment with Denali.
CONFIDENTIALITY
You agree not to disclose the terms of this Severance Agreement and
Release and Waiver of All Claims to any other person, except that you may
disclose such terms to your attorney, financial advisors and/or tax
accountants, and members of your immediate family. You also agree to refrain
from making public or private statements or comments relating to any of the
Denali Parties which are derogatory or which may tend to injure any such party
or person in its or their business, public or private affairs.
PROPRIETARY AND CONFIDENTIAL INFORMATION
In accordance with your existing and continuing obligations, you
acknowledge that Denali, Incorporated and its affiliates have developed and own
valuable "Proprietary and Confidential Information" which constitutes valuable
and unique property including, without limitation, concepts, ideas, plans,
strategies, analyses, surveys, and proprietary information related to the past,
present or anticipated business of Denali and its various related entities.
Except as may be required by law, you agree that you will not at any time
disclose to others, permit to be disclosed, use, permit to be used, copy or
permit to be copied, any such Proprietary and Confidential Information (whether
or not developed by you) without the prior written consent of an authorized
representative of Denali. Except as may be required by law, you further agree
to maintain in confidence any Proprietary and Confidential Information of third
parties received or of which you have knowledge as a result of your employment
with Denali. You agree that in the event of any actual or anticipated breach by
you of the provisions of this paragraph, Denali shall be entitled to inform all
potential or new employers of this agreement.
NON-ADMISSION
You agree that neither the contents of this Severance Agreement and
Release and Waiver of All Claims nor our communications concerning it or
related events constitutes an admission or evidence of wrongdoing of any type
by any of the Denali Parties.
<PAGE> 4
TAX LIABILITY
You understand and agree that you will be solely and exclusively
responsible for the entire amount of taxes (except the employer's portion of
Social Security taxes) due on all severance payments and benefits you receive
pursuant to this agreement and that Denali will follow its normal withholding
and reporting practices, as well as fully comply with all legal requirements,
with respect to such payments and benefits.
SEVERABILITY
In the event that any provision of this agreement is determined in the
future to be invalid, void or unenforceable for any reason, such determination
shall not affect the validity and enforceability of all remaining provisions of
our agreement. The only exception is that a determination that the "Release and
Waiver of All Claims" portion of this agreement is unenforceable shall result
in the entire agreement becoming voidable, at the option of Denali, thereby
requiring the return to Denali of all payments and benefits given in
consideration for those release provisions.
ENTIRE AGREEMENT
This Severance Agreement and Release and Waiver of All Claims
supersedes, replaces and merges all previous agreements and discussions between
you and Denali relating to the same or similar subject matters and constitutes
the entire agreement between you and Denali with respect to its subject matter.
This Severance Agreement and Release and Waiver of All Claims may not be
changed or terminated orally, and no change, termination or waiver of any of
its provisions shall be binding unless made in writing and signed by all
parties.
REVIEW AND SIGNATURE
Your signature below will acknowledge that you have carefully read
this Severance Agreement and Release and Waiver of All Claims, that you have
had an adequate opportunity to consider it, and that you fully understand its
final and binding effect; that the only promises made to you to sign this
agreement are those stated in this document; and that you are signing this
document voluntarily and of your own free will, and that you understand and
agree to each of the terms of this Severance Agreement and Release and Waiver
of All Claims.
Sincerely yours,
DENALI, INCORPORATED
By /s/ RICHARD W. VOLK
-------------------
Richard W. Volk, CEO
AGREED TO and EXECUTED this 11TH day of February 2000.
/s/ EDWARD DE BOER
-------------------
Edward de Boer
<PAGE> 1
EXHIBIT 10.73
SECOND AMENDMENT AND WAIVER
SECOND AMENDMENT AND WAIVER, dated as of February 24, 2000
(this "Amendment"), to the Credit Agreement, dated as of January 12, 1999 (as
modified hereby and as further amended, supplemented or otherwise modified from
time to time, the "Credit Agreement"), among DENALI INCORPORATED, a Delaware
corporation (the "Borrower"), the several lenders from time to time parties
thereto (the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE, as administrative
agent (in such capacity, the "Administrative Agent") for the Lenders, and ING
(U.S.) CAPITAL LLC, as documentation agent (the "Documentation Agent").
RECITALS
The Borrower anticipates that it shall default in its
obligation to comply with certain financial covenants contained in the Credit
Agreement for the period ending on December 31, 1999. The Borrower has
requested the Administrative Agent and the Lenders to waive existing defaults
arising from such non-compliance and to amend certain provisions of the Credit
Agreement as set forth in this Amendment. The Administrative Agent, the
Documentation Agent and the Lenders parties hereto are willing to agree to such
waivers and amendments, but only on the terms and subject to the conditions set
forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Borrower, the Administrative Agent, the Documentation
Agent and the Lenders hereby agree as follows:
1. DEFINED TERMS. UNLESS OTHERWISE DEFINED HEREIN, TERMS DEFINED IN THE
CREDIT AGREEMENT ARE USED HEREIN AS THEREIN DEFINED.
2. AMENDMENTS. THE CREDIT AGREEMENT IS HEREBY AMENDED AS FOLLOWS:
(a) Section 1.1 is hereby amended by adding the following definitions to be
placed in alphabetical order:
"'Equity Investment': equity contributions into the Borrower
pursuant to the issuance of common or preferred stock of the Borrower
in a net amount of at least $7,500,000, pursuant to an equity offering
made for purposes of satisfying the requirements of this Agreement,
pursuant to terms satisfactory to the Administrative Agent, the
Documentation Agent and the Lenders."
"'Equity Investment Date': the date on which the Equity
Investment is consummated."
"'Second Amendment and Waiver': the Second Amendment and
Waiver, dated as of February 24, 2000, among the Borrower, the
Administrative Agent, the Documentation Agent and the Lenders parties
thereto."
<PAGE> 2
"'Second Amendment Effective Date': the date on which all
conditions precedent to the effectiveness of the Second Amendment and
Waiver have been satisfied."
(b) The definition of "Applicable Margin" contained in Section 1.1 of the
Credit Agreement is hereby amended by deleting such definition in its entirety
and substituting in lieu thereof the following new definition:
"'Applicable Margin': (a) with respect to each Revolving
Credit Loan and Term Loan, at any time on which the Domestic Leverage
Ratio, as most recently determined as of the date on which the
certificate containing such Domestic Leverage Ratio is delivered
pursuant to Section 9.2(a) hereof, is within any range set forth
below, the rate per annum set forth under the relevant column headings
opposite the applicable range below:
<PAGE> 3
<TABLE>
<CAPTION>
Domestic Leverage Ratio Base Rate Eurodollar Loans
Loans
------------ --------------------------------- ---------- ----------------
<S> <C> <C> <C>
Tier 7 greater than or equal to 4.25 2.75% 4.00%
------------ --------------------------------- ---------- ----------------
Tier 6 greater than or equal to 4.00 but 2.50% 3.75%
less than 4.25
------------ --------------------------------- ---------- ----------------
Tier 5 greater than or equal to 3.75 but 2.25% 3.50%
less than 4.00
------------ --------------------------------- ---------- ----------------
Tier 4 greater than or equal to 3.50 but 2.00% 3.25%
less than 3.75
------------ --------------------------------- ---------- ----------------
Tier 3 greater than or equal to 3.25 but 1.75% 3.00%
less than 3.50
------------ --------------------------------- ---------- ----------------
Tier 2 greater than or equal to 3.00 but 1.50% 2.75%
less than 3.25
------------ --------------------------------- ---------- ----------------
Tier 1 less than 3.00 1.25% 2.50%
------------ --------------------------------- ---------- ----------------
</TABLE>
provided, that in the event that the certificate containing the
determination of the Domestic Leverage Ratio is not delivered on the
date specified and otherwise in accordance with to Section 9.2(a)
hereof, the applicable margin shall be the highest rate per annum for
such Type of Loan set forth above from the date on which such
certificate was required to be delivered in accordance with Section
9.2(a) until such time as such certificate is delivered to the
Lenders; provided, further, that, notwithstanding anything to the
contrary contained in the Credit Agreement, during the period from and
including February 15, 2000 to May 15, 2000, the applicable margin
will be deemed to be at Tier 5 grid pricing; and
(b) with respect to each Acquisition Loan, at any time on
which the Domestic Leverage Ratio, as most recently determined as of
the date on which the certificate containing such Domestic Leverage
Ratio is delivered pursuant to Section 9.2(a) hereof, is within any
range set forth below, the rate per annum set forth under the relevant
column headings opposite the applicable range below:
<TABLE>
<CAPTION>
Domestic Leverage Ratio Base Rate Loans Eurodollar Loans
------------ ---------------------------------- --------------- ----------------
<S> <C> <C> <C>
Tier 7 greater than or equal to 4.25 3.25% 4.50%
------------ ---------------------------------- --------------- ----------------
Tier 6 greater than or equal to 4.00 but 3.00% 4.25%
less than 4.25
------------ ---------------------------------- --------------- ----------------
Tier 5 greater than or equal to 3.75 but 2.75% 4.00%
less than 4.00
------------ ---------------------------------- --------------- ----------------
Tier 4 greater than or equal to 3.50 but 2.50% 3.75%
less than 3.75
------------ ---------------------------------- --------------- ----------------
Tier 3 greater than or equal to 3.25 but 2.25% 3.50%
less than 3.50
------------ ---------------------------------- --------------- ----------------
Tier 2 greater than or equal to 3.00 but 2.00% 3.25%
less than 3.25
------------ ---------------------------------- --------------- ----------------
Tier 1 less than 3.00 1.75% 3.00%
------------ ---------------------------------- --------------- ----------------
</TABLE>
<PAGE> 4
provided, that in the event that the certificate containing the
determination of the Domestic Leverage Ratio is not delivered on the
date specified and otherwise in accordance with to Section 9.2(a)
hereof, the applicable margin shall be the highest rate per annum for
such Type of Loan set forth above from the date on which such
certificate was required to be delivered in accordance with Section
9.2(a) until such time as such certificate is delivered to the
Lenders; provided, further, that, notwithstanding anything to the
contrary contained in the Credit Agreement, during the period from and
including February 15, 2000 to May 15, 2000, the applicable margin
will be deemed to be at Tier 5 grid pricing.
(c) The definition of "Acquisition Loan Commitment Termination Date"
contained in Section 1.1 of the Credit Agreement is hereby amended by deleting
such definition in its entirety and replacing in lieu thereof the following new
definition:
"'Acquisition Loan Commitment Termination Date': the Second
Amendment Effective Date."
(d) Section 6.5(c) of the Credit Agreement is hereby amended by adding
the following provision at the end thereof:
"Notwithstanding anything to the contrary in this Section,
the Borrower shall prepay the Loans and reduce the Commitments in an
amount equal to 100% of the Equity Investment to be allocated as set
forth below. The first $7,500,000 of the amounts relating to the
Equity Investment so prepaid shall be applied pro rata to the
outstanding Term Loans and the Acquisition Loans to the installments
of principal thereof pro rata over the remaining installments. Amounts
relating to the Equity Investment in excess of $7,500,000 so prepaid
shall be applied to the prepayment of any Revolving Credit Loans
and/or cash collateralization of any Letters of Credit but without a
concomitant reduction of the Revolving Credit Commitments. Without
changing the order of priority of payments outlined above, the amounts
prepaid shall be applied first to Base Rate Loans and second to
Eurodollar Loans."
(e) Schedule 1 of the Credit Agreement is hereby amended by deleting
such Schedule in its entirety and substituting in lieu thereof a new Schedule 1
attached hereto.
(f) Schedule 3.2 of the Credit Agreement is hereby amended by (i)
deleting the phrase "the first payment date to occur following the Acquisition
Loan Commitment Termination Date" commencing on the second line thereof and
substituting in lieu thereof "September 30, 2000" and (ii) deleting the phrase
"the Acquisition Loan Commitment Termination Date" commencing on the fifth line
thereof and substituting in lieu thereof "September 30, 2000".
3. Equity Investment. (a) The Borrower shall arrange and cause to be
invested in the Borrower the Equity Investment, which shall be consummated on
or prior to July 31, 2000.
<PAGE> 5
(b) On the Second Amendment Effective Date, the Borrower shall issue
to each Lender, pro rata based upon such Lender's aggregate outstanding
Commitment and aggregate outstanding principal amount of its Loans, a series of
warrants to purchase common stock of the Borrower substantially in the forms of
Exhibits A-1 through A-6 attached hereto, with appropriate insertions and
completions (the "Warrants"). In the event that the Equity Investment does not
occur on or prior to July 31, 2000, the Warrants shall entitle each Lender to
purchase its ratable portion of 250,000 shares of common stock of the Borrower
at a price equal to $0.01 per share. In the event that the Equity Investment
does not occur on or prior to August 31, 2000, the Warrants shall entitle each
Lender to purchase its ratable portion of an additional 250,000 shares of
common stock of the Borrower at a price equal to $0.01 per share. In the event
that the Equity Investment does not occur on or prior to September 30, 2000,
the Warrants shall entitle each Lender to purchase its ratable portion of an
additional 200,000 shares of common stock of the Borrower at a price equal to
$0.01 per share. In the event that the Equity Investment does not occur on or
prior to October 31, 2000, the Warrants shall entitle each Lender to purchase
its ratable portion of an additional 100,000 shares of common stock of the
Borrower at a price equal to $0.01 per share. In the event that the Equity
Investment does not occur on or prior to November 30, 2000, the Warrants shall
entitle each Lender to purchase its ratable portion of an additional 100,000
shares of common stock of the Borrower at a price equal to $0.01 per share. In
the event that the Equity Investment does not occur on or prior to December 31,
2000, the Warrants shall entitle each Lender to purchase its ratable portion of
an additional 100,000 shares of common stock of the Borrower at a price equal
to $0.01 per share.
(c) The Company shall promptly notify the Administrative Agent in
writing upon the consummation of the Equity Investment and the occurrence of
the Equity Investment Date, such notice to set forth the amount of the Equity
Investment and such other information relevant thereto as the Administrative
Agent may reasonably request. Upon receipt of such notice, the Administrative
Agent shall notify each Lender thereof.
(d) The Lenders acknowledge that neither the Warrants nor the shares
of the Borrower's common stock issuable upon exercise of the Warrants have been
registered under the Securities Act of 1933, as amended (the "Act"). The
Lenders agree that (i) no public distribution of the Warrants or shares
issuable upon exercise of the Warrants will be made in violation of the Act,
and (ii) during such period as the delivery of a prospectus with respect to the
Warrants or such shares may be required by the Act, no public distribution of
the Warrants or such shares will be made in a manner or on terms different from
those set forth in, or without delivery of, a prospectus then meeting the
requirements of Section 10 of the Act and in compliance with all applicable
state securities laws. The Lenders further agree that if any distribution of
any of the Warrants or such shares is proposed to be made by them otherwise
than by delivery of a prospectus meeting the requirements of Section 10 of the
Act, such action shall be taken only after submission to the Company of an
opinion of counsel, reasonably satisfactory in form and substance to the
Company's counsel, to the effect that the proposed distribution will not be in
violation of the Act or of applicable state law.
4. COMMITMENT CHANGES.
(a) On the Second Amendment Effective Date, the aggregate Revolving
Credit Commitments shall be increased from $20,000,000 to $25,000,000.
(b) On the Second Amendment Effective Date, the unused Acquisition
Loan Commitments shall be terminated.
<PAGE> 6
(c) On the Second Amendment Effective Date, the Borrower shall be
deemed to have requested and the Lenders shall be deemed to have made Revolving
Credit Loans in the amount of $3,000,000, the proceeds of which shall be
automatically applied to the outstanding principal balance of the Acquisition
Loans, thus reducing the aggregate outstanding principal balance of the
Acquisition Loans to $15,300,000.
(d) On the earlier to occur of (i) July 31, 2000 and (ii) the Equity
Investment Date, the Borrower shall be deemed to have requested and the Lenders
shall be deemed to have made Revolving Credit Loans in the amount of
$2,000,000, the proceeds of which shall be automatically applied to the
outstanding principal balance of the Acquisition Loans.
5. Waivers. Each of the Administrative Agent, the Documentation Agent and
each of the Lenders hereby waives any Default or Event of Default under Section
11(c) of the Credit Agreement relating solely to the failure of the Borrower to
comply with the financial covenants contained in Section 10.1 of the Credit
Agreement as of December 31, 1999; provided, that this waiver shall cease to be
effective if the Domestic Leverage Ratio of the Borrower as of December 31,
1999 shall exceed 4.35 to 1.00 or the Senior Domestic Leverage Ratio of the
Borrower as of December 31, 1999 shall exceed 4.25 to 1.00. The foregoing
Waiver shall only be effective upon the receipt by the Administrative Agent of
a fully executed and delivered, unconditional waiver by the holders of the
Permanent Subordinated Debt, in form and substance satisfactory to the
Administrative Agent, the Documentation Agent and the Lenders.
6. Forbearance and Reservation of Rights. The Administrative Agent, the
Documentation Agent and the Lenders hereby advise the Borrower that, except as
set forth in Section 5 hereof, the Administrative Agent, the Documentation
Agent and the Lenders do not waive any Default or Event of Default which may
exist and that the current non-exercise of rights, remedies, powers and
privileges by the Administrative Agent, the Documentation Agent or the Lenders
under the Loan Documents and applicable law with respect to such Defaults or
Events of Default, if any, shall not be, and shall not be construed as, a
waiver thereof, and each of the Administrative Agent, the Documentation Agent
and the Lenders reserves its rights (i) fully to invoke any and all such
rights, remedies, powers and privileges under the Loan Documents and applicable
law at any time the Administrative Agent, the Documentation Agent and the
Lenders deem appropriate in respect of any Defaults or Events of Default that
may exist, (ii) to refuse to make available any further extensions of credit
except in strict accordance with the terms of the Loan Documents and (iii) to
require that all Loans bear interest at the rates specified in the Loan
Agreement. Nothing in this Amendment, and no extension of credit made by any
Lender on or after the date of any such Event of Default (whether prior to or
after the date of this Amendment) shall be construed as an acknowledgment or
determination by the Administrative Agent, the Documentation Agent or any
Lender that no Default or Event of Default has occurred or is continuing or
that such Defaults or Events of Default have been waived.
7. Amendment Fee. The Borrower shall pay to the Administrative Agent
for the account of each Lender that executes this Second Amendment and Waiver
on or before March 1, 2000, an amendment fee in an aggregate amount equal to
$145,750 (the "Amendment Fee"). Such Amendment Fee shall be due and payable
upon the earlier of (i) July 31, 2000, or (ii) the Equity Investment Date.
<PAGE> 7
8. Effectiveness. This Amendment shall become effective upon the
satisfaction of the following conditions precedent:
(a) this Amendment shall have been duly executed and delivered by the
Borrower, the Administrative Agent, Lenders and each of the Guarantors;
(b) the Administrative Agent shall have received replacement Revolving
Credit Notes for each Lender holding a Revolving Credit Commitment, duly
executed and delivered by the Borrower;
(c) the Administrative Agent shall have been reimbursed for all fees
and expenses required to be paid pursuant to the Credit Agreement or this
Amendment; and
(d) the Administrative Agent shall have received any other documents
relating hereto that shall be reasonably requested by the Administrative Agent.
9. Warrant Delivery. The Borrower shall deliver a Warrant for each Lender,
duly executed by the Borrower, to the Administrative Agent no later than 14
calendar days following the Second Amendment Effective Date. Failure to deliver
such Warrants during such period shall constitute an Event of Default under the
Credit Agreement.
10. Representations and Warranties. To induce the Administrative Agent, the
Documentation Agent and the Lenders to enter into this Amendment, the Borrower
hereby represents and warrants to the Administrative Agent, the Documentation
Agent and the Lenders that, after giving effect to the amendments and waivers
provided for herein, and other than as set forth in Section 5 hereof, the
representations and warranties contained in the Credit Agreement and the other
Loan Documents will be true and correct in all material respects as if made on
and as of the date hereof and that, other than as set forth in Section 5
hereof, no Default or Event of Default will have occurred and be continuing.
11. No Other Amendments or Waivers. Except as expressly amended or waived
hereby, the Credit Agreement, the Notes and the other Loan Documents shall
remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
12. Counterparts. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
13. Expenses. The Borrower agrees to pay and reimburse the Administrative
Agent for all of the out-of-pocket costs and expenses incurred by the
Administrative Agent in connection with the preparation, execution and delivery
of this Amendment, including, without limitation, the fees and disbursements of
Cadwalader, Wickersham & Taft, counsel to the Administrative Agent.
14. Applicable Law. this Amendment shall be governed by, and construed
and interpreted in accordance with, the law of the state of New York.
[SIGNATURE PAGES FOLLOW]
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered as of the day and year first above
written.
DENALI INCORPORATED.
By: /s/ R. KEVIN ANDREWS
---------------------------------------
Name: R. Kevin Andrews
Title: Vice President/CFO
CANADIAN IMPERIAL BANK OF COMMERCE,
as Administrative Agent
By: /s/ CHERYL R. ROOT
---------------------------------------
Name: Cheryl R. Root
Title: Executive Director
CIBC World Markets Corp.
ING (U.S.) CAPITAL LLC,
as Documentation Agent and as a Lender
By: /s/ BILL REDMOND
---------------------------------------
Name: Bill Redmond
Title: Vice President
CIBC INC.,
as a Lender
By: /s/ CHERYL L. ROOT
---------------------------------------
Name: Cheryl L. Root
Title: Executive Director
CIBC World Markets Corp.
KEY CORPORATE CAPITAL INC.,
as a Lender
By: /s/ MICHAEL F. LAPHAM
---------------------------------------
Name: Michael F. Lapham
Title: Vice President
<PAGE> 9
BANK OF OKLAHOMA N.A.,
as a Lender
By: /s/ PAMELA J. BEEN
---------------------------------------
Name: Pamela J. Been
Title: Assistant Vice President
SOUTHWEST BANK OF TEXAS, N.A.,
as a Lender
By: /s/ CY CLARK
--------------------------------------
Name: Cy Clark
Title: Senior Vice President
<PAGE> 10
The undersigned guarantors hereby consent and agree to the foregoing
Amendment:
CONTAINMENT SOLUTIONS, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
CONTAINMENT SOLUTIONS SERVICES, INC.
By: /s/ JANICE C. MCCORMICK
-----------------------
Name: Janice C. McCormick
Title: Assistant Secretary
INSTRUMENTATION SOLUTIONS, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
DENALI MANAGEMENT, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
SPECIALTY SOLUTIONS, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
BELCO MANUFACTURING COMPANY, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
<PAGE> 11
ERSHIGS, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
SEFCO, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
FIBERCAST COMPANY
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
PLASTI-FAB, INC.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
DENALI HOLDINGS MANAGEMENT L.L.C.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary
DENALI OPERATING MANAGEMENT, LTD.
By: /s/ JANICE C. MCCORMICK
------------------------
Name: Janice C. McCormick
Title: Assistant Secretary of
Denali Management Inc.
and Denali Holdings
Management L.L.C.,
General Partners
<PAGE> 12
SCHEDULE 1
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
Lender and Lending Offices Term Loan Acquisition Loan Revolving Credit
Commitment Commitment Commitment
----------------------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
$4,200,000 $3,570,000 $5,833,333.34
CIBC Inc.
Applicable Lending Offices:
Base Rate Loans and Eurodollar
Loans:
425 Lexington Avenue
New York, New York 10017
Attention: Agency
Services/Brian Foote
Telephone: 212-856-3704
Telecopy: 212-856-3763
----------------------------------- -------------------- ---------------------- ----------------------
ING (U.S.) Capital LLC
Applicable Lending Offices: $4,200,000 $3,570,000 $5,833,333.33
Base Rate Loans and Eurodollar
Loans:
55 East 52nd Street
New York, New York 10055
Attention: Lisa H. Cummings
Telephone: 212-409-1676
Telecopy: 212-486-6341
----------------------------------- -------------------- ---------------------- ----------------------
Key Corporate Capital Inc.
Applicable Lending Offices: $4,200,000 $3,570,000 $5,833,333.33
Base Rate Loans and Eurodollar
Loans:
127 Public Square
Cleveland, Ohio 44114
Attention: Cindy Aukerman
Telephone: 216-689-3656
Telecopy: 216-689-3298
----------------------------------- -------------------- ---------------------- ----------------------
Bank of Oklahoma, N.A.
Applicable Lending Offices: $3,600,000 $3,060,000 $5,000,000.00
Base Rate Loans and Eurodollar
Loans:
Bank of Oklahoma Tower
8 S.E. One Williams Center
Tulsa, Oklahoma 74172
Attention: Laurie Brumbough
Telephone: 918-588-6675
Telecopy: 918-295-0400
----------------------------------- -------------------- ---------------------- ----------------------
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Term Loan Acquisition Loan Revolving Credit
Lender & Lending Offices Commitment Commitment Commitment
----------------------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
SouthWest Bank of Texas, N.A. $1,800,000 $1,530,000 $2,500,000.00
Applicable Lending Offices:
Base Rate Loans and Eurodollar
Loans:
4 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
Attention: Brooks McGee
Telephone: 713-235-8826
Telecopy:
----------------------------------- -------------------- ---------------------- ----------------------
Total: $18,000,000 $15,300,000 $25,000,000
=========== =========== ===========
(Unused Commitment is
Terminated as of
February 24, 2000)
==================
----------------------------------- -------------------- ---------------------- ----------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-END> APR-01-2000
<CASH> 4,340
<SECURITIES> 0
<RECEIVABLES> 40,501
<ALLOWANCES> 1,042
<INVENTORY> 27,305
<CURRENT-ASSETS> 77,347
<PP&E> 55,708
<DEPRECIATION> 9,538
<TOTAL-ASSETS> 179,415
<CURRENT-LIABILITIES> 123,202
<BONDS> 13,110
0
0
<COMMON> 56
<OTHER-SE> 35,072
<TOTAL-LIABILITY-AND-EQUITY> 179,415
<SALES> 144,063
<TOTAL-REVENUES> 144,063
<CGS> 110,702
<TOTAL-COSTS> 142,265
<OTHER-EXPENSES> (35)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,646
<INCOME-PRETAX> (3,445)
<INCOME-TAX> (1,701)
<INCOME-CONTINUING> (1,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,997)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
