<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q



(Mark One)

(X)   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                For the Quarterly Period Ended DECEMBER 30, 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 January 31, 2001, the number of shares of common stock outstanding was
6,258,914.



<PAGE>   2


                               DENALI INCORPORATED
                FORM 10-Q FOR THE QUARTER ENDED DECEMBER 30, 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 ..................................................................    13

Item 3.           Quantitative and Qualitative Disclosure About Market Risk...............................    29


Part II.          Other Information

Item 1.           Legal Proceedings ......................................................................    30

Item 2.           Changes in Securities and Use of Proceeds...............................................    30

Item 3.           Defaults Upon Senior Securities.........................................................    30

Item 4.           Submission of Matters to a Vote of Security Holders.....................................    31

Item 5.           Other Information ......................................................................    31

Item 6.           Exhibits and Reports on Form 8-K........................................................    31

Signatures        ........................................................................................    32

Index to Exhibits ........................................................................................    33
</TABLE>


<PAGE>   3


                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                               DENALI INCORPORATED
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                               July 1,         December 30,
                                                                                 2000                2000
                                                                             -----------         -----------
                                                                                 (Note)          (Unaudited)
                                                                                      (In thousands)
<S>                                                                          <C>                 <C>
                               ASSETS
Current assets:
       Cash                                                                  $    2,940          $     5,923
       Accounts receivable, net of allowances of
              $1,821 at July 1, 2000 and
              $1,892 at December 30, 2000                                        40,289               35,431
       Inventories                                                               23,304               21,493
       Income tax receivable                                                      1,767                3,188
       Prepaid expenses                                                           2,171                1,807
       Other receivables                                                          3,509                1,775
                                                                             ----------          -----------
Total current assets                                                             73,980               69,617
Property, plant and equipment, net                                               39,647               33,011
Goodwill, net                                                                    54,685               49,409
Other assets                                                                      3,191                3,080
Assets held for sale                                                              1,594                2,982
                                                                             ----------          -----------
Total assets                                                                 $  173,097          $   158,099
                                                                             ==========          ===========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                                      $   20,839          $    19,717
       Accrued liabilities                                                       13,421               12,171
       Lines of credit                                                           21,361               16,879
       Current maturities of long-term debt                                      13,871               17,449
       Long-term debt in default                                                 61,217               60,973
       Related party subordinated debt in default                                 4,077                4,114
                                                                             ----------          -----------
Total current liabilities                                                       134,786              131,303
Long-term debt, less current maturities                                           3,894                2,264
Accrued pension costs                                                             1,350                2,011
Minority interest                                                                   595                  750
Deferred taxes                                                                    1,846                1,845
Other long-term liabilities                                                       3,260                1,528
Commitments and contingencies
Stockholders' equity:
       Common stock, $.01 par value
              Authorized shares - 30,000,000
              Issued and outstanding shares - 5,558,914  at
              July 1, 2000 and 6,258,914 at December 30, 2000                        55                   62
       Additional paid-in capital                                                35,640               37,173
       Other accumulated comprehensive loss                                      (2,232)              (2,692)
       Retained deficit                                                          (6,097)             (16,145)
                                                                             ----------          ------------
Total stockholders' equity                                                       27,366               18,398
                                                                             ----------          -----------
Total liabilities and stockholders' equity                                   $  173,097          $   158,099
                                                                             ==========          ===========
</TABLE>

                             See accompanying notes.

Note:    The balance sheet at July 1, 2000 has been derived from the audited
         financial statements at that date, but does not include all of the
         information and footnotes required by generally accepted accounting
         principles for complete financial statements.


                                        1


<PAGE>   4

                               DENALI INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                             Three months ended               Six months ended
                                                      ----------------------------     ----------------------------
                                                          January 1,  December 30,        January 1,  December 30,
                                                            2000            2000             2000            2000
                                                       -----------     -----------      -----------     -----------
                                                         (In thousands, except per share amounts)
<S>                                                    <C>             <C>
Net revenues                                           $    49,555     $    47,814      $    97,921     $    99,198
Cost of revenues                                            37,541          37,271           73,541          77,361
                                                       -----------     -----------      -----------     -----------
Gross profit                                                12,014          10,543           24,380          21,837
Selling, general and administrative expenses                10,713          10,503           19,920          19,916
Impairment of long-lived assets                                 --           5,195               --           6,233
Restructuring charges                                        1,091              --            2,491              --
                                                       -----------     -----------      -----------     -----------
Operating income (loss)                                        210          (5,155)           1,969          (4,312)
Interest expense                                             2,106           2,855            4,220           5,629
Interest income                                                (43)            (19)            (170)            (37)
Other income, net                                             (356)            (28)          (1,329)           (229)
                                                       ------------    -----------      ------------    ------------
Loss before income taxes and
  minority interest                                         (1,497)         (7,963)            (752)         (9,675)
Income tax (benefit) expense                                  (658)             72             (718)            350
                                                       -----------     -----------      -----------     -----------
Net loss before minority interest                             (839)         (8,035)             (34)        (10,025)
Minority interest                                              121              32              192              23
                                                       -----------     -----------      -----------     -----------
Net loss                                               $      (960)    $    (8,067)     $      (226)    $   (10,048)
                                                       ===========     ============     ===========     ============

Net loss per common share - basic
  and diluted                                          $     (0.17)    $    (1.29)      $     (0.04)    $    (1.63)
                                                       ===========     ===========      ===========     ===========

Comprehensive loss:
  Net loss                                             $      (960)    $    (8,067)     $      (226)    $   (10,048)
  Currency translation adjustments                          (2,020)          1,614             (899)           (460)
                                                       -----------     -----------      -----------     ------------
  Comprehensive loss                                   $    (2,980)    $    (6,453)     $    (1,125)    $   (10,508)
                                                       ===========     ============     ===========     ============
</TABLE>


                             See accompanying notes.



                                       2
<PAGE>   5



                               DENALI INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                        Six months ended
                                                                              ----------------------------------
                                                                                 January 1,      December 30,
                                                                                     2000               2000
                                                                              ---------------    ---------------
                                                                                      (In thousands)
<S>                                                                             <C>                <C>
Operating Activities:
Net loss                                                                         $      (226)      $  (10,048)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
       Depreciation                                                                    2,426            2,298
       Amortization                                                                    1,057            1,039
       Deferred tax                                                                     (245)              21
       Foreign currency exchange loss                                                     --               80
       Impairment of long-lived assets                                                    --            6,233
       Issuance of warrants to purchase common stock                                      --              140
       Put warrant valuation adjustment                                               (1,198)            (332)
       Provision for losses on accounts receivable                                        50              206
       Gain on disposal of property, plant and equipment and
           assets held for sale                                                         (280)             (35)
       Changes in operating assets and liabilities:
              Accounts receivable                                                      1,624            2,232
              Inventories                                                              1,816            1,132
              Prepaid expenses                                                         3,409              344
              Other receivables                                                           --            1,476
              Other assets and liabilities                                               382              266
              Accounts payable                                                        (2,998)            (667)
              Accrued liabilities                                                     (4,641)            (376)
              Income tax receivable/payable                                           (1,076)          (1,471)
                                                                                 -----------       -----------
Net cash provided by operating activities                                                100            2,538

Investing Activities:
Acquisitions, net of cash acquired                                                    (3,745)              --
Purchases of property, plant and equipment                                            (3,045)            (819)
Proceeds from sale of property, plant and equipment and
   assets held for sale                                                                  503            2,099
                                                                                 -----------       ----------
Net cash provided by (used in) investing activities                                   (6,287)           1,280

Financing Activities:
Proceeds from common stock issuance                                                       --            1,400
Net repayments under short-term lines of credit                                           --           (3,421)
Net borrowings under revolving lines of credit                                         6,468            1,665
Net borrowings (repayments) on term notes and other long-term debt                     1,955             (425)
                                                                                 -----------       -----------
Net cash provided by (used in) financing activities                                    8,423             (781)

Effect of exchange rate changes on cash                                                 (143)             (54)
                                                                                 ------------      -----------
Increase in cash                                                                       2,093            2,983
Cash at beginning of period                                                            1,824            2,940
                                                                                 -----------       ----------
Cash at end of period                                                            $     3,917       $    5,923
                                                                                 ===========       ==========
</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. Certain fiscal year 2000 amounts have been
reclassified to conform to fiscal year 2001 presentation.

       The unaudited results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
year. These unaudited 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 October 13, 2000.

2. GOING CONCERN ISSUES AND RESTRUCTURING PLAN

       The Company's unaudited consolidated financial statements for the six
months ended December 30, 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 incurred a net loss of $9.7
million for the twelve months ended July 1, 2000 and a net loss of $10.0 million
for the six months ended December 30, 2000. The Company also had debt in default
(see Note 11) and negative working capital of $60.8 million and $61.7 million,
respectively, at July 1, 2000 and December 30, 2000. These conditions reflect
the liquidity problems caused by the Company's significant debt burden and raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying unaudited 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 reduced demand for the Company's products in those
markets. Consequently, the Company experienced operating losses. In response to
the downturn in its operations during fiscal 2000, the Company reorganized each
of its business segments resulting in the closure of a manufacturing facility in
the United States, closure of two manufacturing facilities in The Netherlands
and elimination of certain domestic and European sales and management positions
(see Note 3).

       During the first half of fiscal 2001, a portion of the Company's steel
tank business suffered significant margin pressures due to increased
competition. In January 2001, the Company decided to cease operations at one of
its steel tank fabrication facilities in Lebanon, PA effective April 1, 2001.
The Company has not finalized its restructuring plan for this facility nor has
it finalized its estimate of the associated restructuring provision. In
addition, during the first half of fiscal 2001, the Company pursued further
restructuring initiatives in its European operations in response to continuing
over-capacity in its Plasticon Europe business segment. In January 2001, union
officials and the local workers council approved the Company's plan to close
Plasticon Europe's manufacturing facility in Heerenveen, The Netherlands.
Reductions in personnel were also approved for Plasticon Europe's manufacturing
facility in Dinslaken, Germany. When the planned restructuring initiatives for
both locations are implemented, approximately 40 manufacturing positions, or 7%
of the total European operations headcount, will be eliminated. The Company will
record a restructuring provision associated with its European operations of as
much as approximately $2.7 million during the remainder of fiscal year 2001.


                                       4
<PAGE>   7



       In July 2000, the Company signed a letter of intent with William Blair
Mezzanine Capital Fund III, L.P. ("Blair"), under which Blair proposed to invest
$23 million in the Company (the "Blair Transaction"). The Company and its
lenders viewed the Blair Transaction as a potential solution to the Company's
liquidity problems. During the week of November 27, 2000, Blair notified the
Company of its decision not to pursue the proposed investment. Due to the
termination of the Blair Transaction, the Company decided not to make scheduled
interest payments due on November 30, 2000 and initiated discussions with
lenders and other actions to develop and implement a "Restructuring Plan".

       The Company intends that its Restructuring Plan will protect and foster
the strengths and performance of the Company's underlying businesses and allow
the Company to restructure its balance sheet and strengthen its financial
position. In furtherance of this Restructuring Plan, and after consultations
with its lenders, the Company has retained financial advisors in the United
States, and has committed to retain advisors in Europe, to analyze and evaluate
the feasibility of the various financial and strategic alternatives that may be
available to the Company. The Company currently anticipates that its
Restructuring Plan could involve a variety of different elements, including, but
not limited to, the following: restructuring or refinancing of debt; issuance of
equity or other securities; divestitures of assets, business units or interests
therein; or merger or sale of the Company.

       The Company anticipates that its Restructuring Plan, regardless of the
form in which it may be implemented, would likely involve substantial dilution,
or potentially elimination, of the equity interest of current holders of the
Company's equity securities. The Company also anticipates that financial and
corporate reorganization of the Company, through bankruptcy courts or otherwise,
is likely whether or not a consensual debt restructuring agreement can be
reached.

       The Company faces serious liquidity problems caused by its significant
debt burden. Absent a restructuring of its debt, the Company projects that its
cash flows will be insufficient to support current debt balances and related
interest obligations. The Company's common stock was delisted from the NASDAQ
Stock Market on October 30, 2000 and the Company is considering deregistration
of its common stock under the Securities Exchange Act. The Company can provide
no assurance as to whether, or on what terms, the holders of the Company's debt
obligations may reach agreements regarding the Company's proposed Restructuring
Plan.

       If the Company is unable to restructure its debt or otherwise raise
additional capital and increase its liquidity, it will not be able to implement
its business plan as expressed throughout this document and its annual report on
Form 10-K and it may not be able to continue to operate as a going concern.

3. REORGANIZATION OF OPERATIONS

       During fiscal 2000, the Company recorded restructuring charges of $3.8
million. The following table analyzes the balances of these restructuring
reserves and related cash outlays from July 1, 2000 to December 30, 2000:

<TABLE>
<CAPTION>

                                                      Employee          Disposal
           (In thousands)                           Separations         Costs             Total
           --------------                           -----------       -----------      -----------
<S>                                                 <C>               <C>              <C>
     Restructuring charges:
     Balance at July 1, 2000                         $     1,227       $       116      $     1,343
       Fiscal 2001 cash outlays                             (901)             (116)          (1,017)
       Currency translation                                  (84)               --              (84)
                                                     -----------       -----------      -----------
     Balance at December 30, 2000                    $       242       $        --      $       242
                                                     ===========       ===========      ===========
</TABLE>


       The Company made cash payments totaling $901,000 to 19 employees whose
services were terminated and $116,000 for disposal costs during the first six
months of fiscal 2001. The cash payments made related to restructuring reserves
recognized in fiscal 2000. The Company expects to make cash payments at least
equal to the remaining amount reserved during fiscal year 2001.

                                        5


<PAGE>   8



4. RECENT ACCOUNTING PRONOUNCEMENTS

       In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The staff accounting bulletin is effective no later than the Company's
fourth quarter of fiscal year 2001. The Company has evaluated the effects of SAB
101 on its revenue recognition policies and has determined that it is not
material to its results of operations for the periods presented.

5. INVENTORIES

       Inventories are summarized below (in thousands):
<TABLE>
<CAPTION>


                                                                               July 1,              December 30,
                                                                                2000                   2000
                                                                             -----------------      -------------
<S>                                                                          <C>                     <C>
       Finished goods                                                        $      8,620            $    9,323
       Raw materials                                                                8,568                 9,118
       Work in process                                                              6,116                 3,052
                                                                             ------------            ----------
                                                                             $     23,304            $   21,493
                                                                             ============            ==========
</TABLE>


6. PER SHARE INFORMATION

       The following table sets forth the weighted average shares outstanding
for the computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>

                                                            Three Months Ended                Six Months Ended
                                                     -----------------------------     -----------------------------
                                                       January 1,    December 30,        January 1,    December 30,
                                                           2000            2000             2000           2000
                                                     ------------    -------------     ------------    -------------
                                                                           (Share data in thousands)
<S>                                                  <C>             <C>               <C>              <C>
Weighted average common shares outstanding                 5,520           6,259            5,476          6,149
Dilutive securities - employee stock options                   -               -                -              -
                                                          ------         -------          -------         ------
Weighted average common shares outstanding
   assuming full dilution                                  5,520           6,259            5,476          6,149
                                                          ======         =======          =======         ======
</TABLE>


       Options to purchase 492,055 and 409,274 shares of common stock and
warrants to purchase 534,873 and 1,534,873 shares of common stock were
outstanding as of January 1, 2000 and December 30, 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.

7. 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 three months and six
months ended December 30, 2000, the Company had a foreign currency translation
gain of $1.6 million and a loss of $0.4 million, respectively, which are
recorded as comprehensive income or loss and are classified as a separate
component of stockholders' equity. As of December 30, 2000, the Company had
other accumulated comprehensive loss of $2.7 million related to cumulative
foreign currency translation losses.

8. 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 2001 on tax assets,
state taxes, non-deductible goodwill amortization, a non-taxable warrant
valuation adjustment and other permanent differences.

                                        6


<PAGE>   9



9. IMPAIRMENT OF LONG-LIVED ASSETS

       At September 30, 2000, the Company determined that the carrying amount of
certain assets held for sale exceeded an estimate of their fair value.
Accordingly, for the three months ended September 30, 2000, the Company recorded
an impairment charge of $1.0 million to reduce the carrying value of goodwill
related to B.V. van Delden, a wholly-owned subsidiary that was acquired by Welna
B.V. in May 1997, to net realizable value. For the three months ended December
30, 2000, the Company recorded an impairment charge of $5.2 million to reduce
the carrying value of the net assets including goodwill of SEFCO, Inc., a
wholly-owned subsidiary (See Note 13).

10. DERIVATIVES AND HEDGING ACTIVITIES

       Effective July 2, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, and its amendment Statements 137 and 138 ("SFAS 133"). The statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income and are
recognized in the statement of operations when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.

       The Company uses derivative instruments to manage interest rate risks
related to a portion of its long-term European borrowings. The Company uses
fixed interest rate caps, designated as cash flow hedges, to hedge a portion of
the Company's floating rate borrowings in Europe which mature in 2001 and 2005.

       The amount of this derivative and hedging activity is not material to the
financial position and results of operations of the Company. Due to the
immaterial amount of this activity, the effect of adopting SFAS 133 on the
Company's results of operations and financial position was immaterial.

11. LONG-TERM DEBT

Domestic Credit Facility

       The Company has a $59.6 million senior credit facility (the "Domestic
Credit Facility") with a group of lenders led by CIBC World Markets Group (the
"Domestic Senior Lenders") consisting of a $17.3 million term loan facility, a
$15.3 million acquisition loan facility and a $27.0 million revolving credit
facility that expires on January 12, 2004. At December 30, 2000, the Company had
$56.0 million in borrowings outstanding under this facility.

       The Domestic Credit Facility also provides a letter of credit facility of
$1.7 million. At December 30, 2000, the Company had $1.7 million in letters of
credit outstanding.

       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.

       Beginning on June 30, 2000 and through December 31, 2000, the Company
failed to make required term loan facility principal payments of $750,000 at the
end of each calendar quarter for a total of $2.3 million. On September 30, 2000
and December 31, 2000, the Company did not make required acquisition loan
facility principal payments of $765,000 at the end of both calendar quarters for
a total of $1.5 million.

                                        7


<PAGE>   10


       In June 2000, the Company and the Domestic Senior Lenders executed a
forbearance agreement and subsequent extensions whereby the Domestic Senior
Lenders deferred unpaid principal installments until November 30, 2000 (the
"Forbearance Period"). One of the conditions of the forbearance agreement, as
extended, was the successful completion of the Blair Transaction. Upon the
termination of the Blair Transaction, the Domestic Senior Lenders canceled the
existing forbearance agreement and restricted the Company's ability to make
additional borrowings on the Domestic Credit Facility. Beginning in November
2000, the Company stopped making interest payments. Total unpaid interest at
December 31, 2000, was $1.7 million.

       At December 31, 2000, the Company exceeded its available borrowing
capacity under its revolving credit and letter of credit facilities and failed
to prepay or otherwise reduce its borrowings by the amount of the excess, as
required under the credit agreement for the Domestic Credit Facility. Aggregate
extensions of credit under the revolving credit and letter of credit facilities
are based on 85% of eligible accounts receivable and 50% of eligible inventory,
as defined in the credit agreement. At December 31, 2000, the Company's
borrowing base was $23.7 million and revolving credit borrowings and letters of
credit outstanding were $23.5 million and $1.7 million, respectively, or $25.2
million in total and $1.5 million in excess of its borrowing base. The terms of
the credit agreement for the Domestic Credit Facility require the Company to
prepay revolving credit borrowings and/or cash collateralize or replace letters
of credit in an amount equal to the excess of aggregate extensions of revolving
credit over its borrowing base. The Company failed to prepay its revolving
credit borrowings and/or cash collateralize or replace any of its letters of
credit in order to comply with the terms of the credit agreement. On December 1,
2000, the Domestic Senior Lenders ceased making further revolving credit loans
to the Company, and since that date the Company has made no payments of
principal or interest on the Domestic Credit Facility. On February 7, 2001, the
Company received a written notice from the Domestic Senior Lenders that the
Company's failure to make the required revolving credit facility prepayments,
cash collateralizations or replacements of letters of credit constitutes an
event of default under the credit agreement.

       Subsequent to the termination of the Blair Transaction, the Company has
held discussions with the Domestic Senior Lenders and pursued efforts to develop
financial elements of its proposed Restructuring Plan. The Company can provide
no assurances that it will reach an agreement with the Domestic Senior Lenders
regarding its proposed Restructuring Plan. However, with the concurrence of the
Domestic Senior Lenders, the Company has retained financial advisors to study
the feasibility of its restructuring proposals and to explore the various
financial alternatives that may be available to the Company. The Company intends
to present the results of the study and recommendations of the Company's
financial advisors to the Domestic Senior Lenders as a basis for further
negotiation regarding the Restructuring Plan. The outstanding borrowings under
the Domestic Credit Facility bear default interest at 2% in addition to the base
rate plus applicable margin. Although the Domestic Senior Lenders have not
expressed their intent to accelerate the maturity of these borrowings, they have
reserved the right to exercise all remedies available to them.

       At December 30, 2000, the Company had no borrowing availability under the
term loan and acquisition loan portions of the Domestic Credit Facility. As
noted above, the Company has exceeded its available borrowing capacity under its
revolving credit and letter of credit facilities.

       Without an influx of additional capital or a restructuring of the
Domestic Credit Facility, the Company does not expect to comply with the
financial covenants of its credit agreement during the remainder of fiscal 2001.
The Company has not requested and has not received waivers for its covenant
violations from the Domestic Senior Lenders and, as a result, has classified
these obligations as current liabilities in the accompanying unaudited
consolidated balance sheets as of July 1 and December 30, 2000.

Subordinated Notes

       On July 1, 1999, the Company issued $15.0 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,
$4.0 million was sold to certain directors of the Company. These amounts are
classified separately as related party subordinated debt on the Company's
unaudited consolidated balance sheets at July 1 and December 30, 2000.

                                        8


<PAGE>   11

       The note and warrant 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. As part of the forbearance
agreement then in force with its Domestic Senior Lenders, the Company did not
make scheduled quarterly interest payments of approximately $450,000 on the
Subordinated Notes that were due for the calendar quarters ended June 30 and
September 30, 2000 (approximately $900,000 in total). The Company further agreed
to make no payments to the holders of the Subordinated Notes through the
Forbearance Period. The Company did not make a scheduled interest payment of
approximately $450,000 on the Subordinated Notes due for the calendar quarter
ended December 31, 2000 (bringing the total of interest payments missed to
approximately $1.4 million as of that date).

       The Company sought, but did not obtain 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 and warrant purchase
agreement 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, June 30 and
September 30, 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 December 31, 2000. The Company continues to be in default of the
financial covenants contained in, and interest payment obligations under, the
note and warrant purchase agreement. 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 unaudited
consolidated balance sheets as of July 1 and December 30, 2000.

       As part of the Blair Transaction, the Company proposed to refinance the
Subordinated Notes with Replacement Notes and later, Junior Cumulative Preferred
Stock. Subsequent to the termination of the Blair Transaction, the Company has
held discussions with certain of the Subordinated Note holders. The Company can
provide no assurances that it will reach an agreement with the holders of the
Subordinated Notes regarding its proposed Restructuring Plan.

       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 holders of the
warrants or warrant shares also have put options. The put options allow 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 six months
ended December 30, 2000, the Company adjusted the fair value of the warrant put
option from $348,000 at July 1, 2000 to $16,000 and recorded a gain of $332,000
as other income in the statement of operations.

European Credit Facility

       The Company has a senior credit facility (the "European Credit Facility")
with ABN-AMRO and ING Bank (the "European Senior Lenders") with a principal
balance of 22.5 million Dutch guilders ("NLG"), or approximately $9.6 million
(translated at the December 30, 2000 NLG/USD exchange rate), outstanding as of
December 30, 2000. The Company has pledged the shares of its operating
subsidiary, Welna B.V., as collateral for the facility.

                                        9


<PAGE>   12

       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. Beginning on July 1, 2000 and
subsequent thereto, the Company was not in compliance with these covenants. The
Company requested but did not receive a waiver of certain of its violations of
the financial covenants of the credit agreement. The Company did not make
quarterly principal payments of NLG 625,000 ($267,048) due on October 1, 2000
and January 1, 2001 (a total of NLG 1,250,000 or $534,096). Beginning on July 1,
2000, the Company stopped making interest payments on the borrowings outstanding
under the European Credit Facility. Total unpaid interest was approximately NLG
764,000 or $307,000 at December 30, 2000.

       The Company negotiated with the European Senior Lenders to amend the
terms and conditions of the facility but was unable to reach an agreement for
such an amendment. The European Senior Lenders sent the Company a written notice
demanding repayment of all outstanding borrowings under the European Credit
Facility unless satisfactory arrangements for new capital were provided before
March 1, 2001. The Company held discussions with the European Senior Lenders and
obtained an extension of this repayment demand until April 1, 2001. In the event
the Company is unable to repay the amount of the outstanding borrowings, the
European Senior Lenders, as provided in the credit agreement covering the
European Credit Facility, have the right to appoint an investment bank to sell
the shares of Welna B.V. pledged as collateral. In exchange for the extension to
April 1, 2001 granted by the European Senior Lenders, the Company committed to
retain financial advisors to explore various alternatives that may be available
to the Company. The Company has agreed to provide its European Senior Lenders
with valuations of the Company's European operations prepared by the Company's
financial advisors and to explore financial alternatives and potential third
party transactions such as obtaining equity financing, sale or merger of the
Company's European operations or divestiture of certain business units. The
Company can provide no assurance that it will reach an agreement with any third
parties or the European Senior Lenders with regard to any such financial
alternatives or third party transactions. Because of the foregoing, the
outstanding amount of this obligation is classified as current liabilities in
the unaudited consolidated balance sheets as of July 1 and December 30, 2000.

European Five Year Term Loan

       In June 1999, as part of a NLG 40 million ($15.9 million) credit facility
granted by ABN-AMRO, the Company assumed an existing NLG 5 million, five year
term loan (the "European Five Year Term Loan") with an outstanding principal
balance of NLG 2,500,000 ($1,161,000 at July 3, 1999). The loan was payable in
NLG 500,000 ($213,639 at the December 30, 2000 NLG/USD exchange rate)
semi-annual installments with the final payment due on September 1, 2001. The
outstanding principal amount of this loan was NLG 1,500,000 ($640,916) at
December 30, 2000.

       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 February 10, 2001, has not
received a waiver for this covenant violation from the lender. On September 1,
2000, the Company failed to make a required semi-annual principal payment of NLG
500,000 ($213,639). Because of the foregoing, this obligation is classified as
current liabilities in the unaudited consolidated balance sheets as of July 1
and December 30, 2000.

       In February 2001, the Company and the lender agreed to an amendment to
the credit agreement wherein two subsidiaries of Welna B.V. were added as
parties to the agreement, the maturity date of the loan was extended to
September 1, 2002, required principal payments were deferred until September 1,
2001 and the minimum level of tangible net worth covenant was modified.


                                       10

<PAGE>   13


European Term Loan

       On November 30, 1999, the Company entered into an agreement with ING Bank
for a NLG 6,000,000 ($2,564,000) term loan (the "European Term Loan") to finance
the acquisition of HP Valves Oldenzaal B.V. ("HP Valves"). The term loan was
payable in sixteen quarterly installments of NLG 375,000 ($160,229) beginning on
April 1, 2000 with the final repayment due on January 1, 2004. At December 30,
2000, the Company owed NLG 5,250,000 ($2,243,000) of outstanding principal on
the term loan. The assets of HP Valves secure the term loan.

       The Company failed to make the NLG 375,000 ($160,229) quarterly principal
payments due on October 1, 2000 and January 1, 2001 (a total of NLG 750,000, or
$320,458). Because the lender has the right to accelerate the maturity of these
borrowings, the outstanding amount of this loan has been classified as current
liabilities in the unaudited consolidated balance sheet as of December 30, 2000.
The Company held discussions with the lender under the European Term Loan and
reached an informal agreement for the deferral of principal payments until
fiscal 2002.

12. STOCKHOLDERS' EQUITY

Common Stock

       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 11, 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 an amendment to the Domestic Credit Facility on
February 24, 2000, 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 became exercisable on the last day of each month in
which the required equity financing stipulated in the amendment was not
obtained.

       Until November 30, 2000, the Company and the Domestic Senior Lenders had
a forbearance agreement in effect (see Note 11). Included in the terms of the
forbearance agreement was the deferral of the Domestic Senior Lender's right to
exercise their warrants to purchase the Company's common stock for the periods
ended July 31 through November 30, 2000. As discussed in Note 11, the
forbearance agreement was canceled on November 30, 2000. As of February 12,
2001, the Domestic Senior Lenders had not exercised any of the warrants held and
the Company has not received any notice from the Domestic Senior Lenders
expressing their intention to exercise the warrants. The Company recognized a
$140,000 charge for the fair value of the warrants on the date the warrants
became exercisable which is included as part of Other Income in its unaudited
consolidated statements of operations for the three months and six months ended
December 30, 2000.

13. ASSETS HELD FOR SALE

       During the three months ended December 30, 2000, the Company adopted a
plan to dispose of the assets of SEFCO, Inc., which is part of its Plasticon
Fluid Systems business segment. Accordingly, the Company recorded an impairment
charge of $5.2 million to reduce the carrying value of the net assets of SEFCO,
Inc. to its net realizable value and reclassified the assets and liabilities as
Assets Held for Sale in its unaudited consolidated balance sheet as of December
30, 2000.

       During the six months ended December 30, 2000, the Company disposed of
the assets and liabilities of B.V. van Delden, which was part of its Hanwel
Europe business segment, and recorded an impairment charge of $1.0 million to
reduce the carrying value of its net assets to net realizable value.


                                       11

<PAGE>   14

14. 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 had a supply agreement with a major supplier, which required two of the
Company's subsidiaries, Containment Solutions and Ershigs, to make certain
minimum volume purchases for the calendar years ended December 31, 1999 and
2000. At the expiration of the supply agreement on December 31, 2000, the
Company and the major supplier executed a revised purchase agreement that
eliminated the Company's commitment for minimum volume purchases. 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 December 30, 2000
were $321,000 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.

15. SEGMENT DATA

       The following is a summary of the industry segment data for the six
months ended January 1, 2000 and December 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                                         Operating
                                                              Net Revenues              Income (Loss)
                                                              ------------              -------------
<S>                                                           <C>                       <C>
    Six months ended January 1, 2000:
         Containment Solutions                                  $    31,954                  $     2,241
         Plasticon Fluid Systems                                     33,186                        1,381
         Plasticon Europe                                            20,358                         (832)
         Hanwel Europe                                               12,423                        1,274
         Corporate                                                        -                       (2,095)
                                                                -----------                  ------------
         Consolidated                                           $    97,921                  $     1,969
                                                                ===========                  ===========

    Six months ended December 30, 2000:
         Containment Solutions                                  $    30,168                  $     1,289
         Plasticon Fluid Systems                                     38,733                       (3,272)
         Plasticon Europe                                            20,067                         (444)
         Hanwel Europe                                               10,230                           88
         Corporate                                                        -                       (1,973)
                                                                -----------                  -----------
         Consolidated                                           $    99,198                  $    (4,312)
                                                                ===========                  ===========
</TABLE>



                                       12


<PAGE>   15



       Operating income reconciles to income (loss) before taxes as shown on the
consolidated statements of operations as follows (in thousands):

<TABLE>
<CAPTION>


                                                            Six Months Ended            Six Months Ended
                                                             January 1, 2000            December 30, 2000
                                                            ----------------            -----------------
<S>                                                         <C>                         <C>
    Total segment operating income (loss)                       $     1,969                  $    (4,312)
    Interest expense                                                  4,220                        5,629
    Interest income                                                    (170)                         (37)
    Other income, net                                                (1,329)                        (229)
                                                                -----------                  ------------
    Loss before income taxes                                    $      (752)                 $    (9,675)
                                                                ===========                  ============
</TABLE>


16. 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.

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. We
manufacture fiberglass-composite underground storage tanks ("USTs"); steel
aboveground storage tanks ("ASTs"); and engineered fiberglass-reinforced
plastic-composite ("FRP") products for corrosion-resistant applications.

       We operate in four business segments described as follows:

CONTAINMENT PRODUCTS GROUP - "CONTAINMENT SOLUTIONS"

       The Containment Products Group ("Containment Solutions") specializes in
the manufacture of fiberglass composite USTs and steel ASTs, primarily for
petroleum storage. We market our products under the Containment Solutions
tradename.

ENGINEERED PRODUCTS GROUP - "PLASTICON FLUID SYSTEMS"

       Through our Engineered Products Group ("Plasticon Fluid Systems" or
"PFS"), we provide engineered containment and material solutions to a variety of
industries, including chemical process, pulp and paper, power, and water and
wastewater. PFS markets its engineered FRP products under the Ershigs, Fibercast
and Belco tradenames, and we believe that it is a leading domestic provider of
engineered FRP products for corrosion-resistant applications. In addition,
SEFCO, Inc., a PFS company ("SEFCO"), is an integrated manufacturer of
engineered field-erected steel tanks and accessories for use in the water and
wastewater, agrochemical and petroleum industries. Plasti-Fab, Inc., another PFS
company ("Plasti-Fab"), is a manufacturer of FRP gates, metered manholes,
shelters, flumes and systems for use in the water and wastewater industries. The
PFS group focuses its operations on complex projects, where custom engineering
and special manufacturing expertise are critical.

       In September 1999, we 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 in Chile.


                                       13


<PAGE>   16

PLASTICON EUROPE

       Our Plasticon Europe business segment designs, manufactures and installs
FRP products including storage and transport tanks, vessels and piping systems
for corrosion-resistant applications. Plasticon Europe is similar to PFS in
terms of both its markets and products. 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, B.V. acquired HP Valves Oldenzaal B.V. ("HP
Valves"), a manufacturer of medium and high-pressure valves, which is included
as part of Hanwel Europe.

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 fiscal 2000, we experienced a greater than expected downturn in
the underground storage tank market. Additionally, in Europe, capital spending
in the petrochemical and chemical processing industry declined significantly
resulting in reduced demand for our products in those markets. In the
underground storage tank market during the first half of fiscal 2001, the
fiberglass composite UST component has stabilized at the fiscal 2000 levels.
However, in the steel UST and AST market, competitive pressures have increased,
resulting in lower revenues and margins. In Europe, conditions are improving
modestly in the petrochemical and chemical processing industry. Activity in the
power generation, water, wastewater, microelectronics and oil and gas sectors
have shown significant increases and contributed to improved results for PFS.
Offsetting these increases in PFS's activity in the first half of fiscal 2001 is
a downturn in the domestic chemical and petrochemical markets, primarily
affecting Fibercast Company, a PFS company ("Fibercast").

       This section should be read in conjunction with our consolidated
financial statements included elsewhere.

       The following table sets forth certain operating statement information
for each of the Company's business segments for each of the periods presented.


<TABLE>
<CAPTION>

                                        Three Months Ended               Six Months Ended
                                     January 1,   December 30,        January 1,    December 30,
                                       2000          2000               2000            2000
                                     ----------   ------------        ----------    ------------
<S>                                  <C>           <C>                <C>            <C>
Net revenues:
Containment Solutions................ $ 15,233     $ 14,357           $ 31,954      $ 30,168
Plasticon Fluid Systems..............   16,691       19,107             33,186        38,733
Plasticon Europe.....................   11,209        9,692             20,358        20,067
Hanwel Europe........................    6,422        4,658             12,423        10,230
                                      --------     --------           --------      --------
  Total net revenues................. $ 49,555     $ 47,814           $ 97,921      $ 99,198
                                      ========     ========           ========      ========
Cost of revenues:
Containment Solutions................ $ 11,800     $ 11,784           $ 24,309      $ 24,227
Plasticon Fluid Systems..............   13,101       14,831             25,894        30,568
Plasticon Europe.....................    8,436        7,565             15,214        15,749
Hanwel Europe........................    4,204        3,091              8,124         6,817
                                      --------     --------           --------      --------
  Total cost of revenues............. $ 37,541     $ 37,271           $ 73,541      $ 77,361
                                      ========     ========           ========      ========

</TABLE>


                                       14


<PAGE>   17

<TABLE>
<CAPTION>


                                                          Three Months Ended                Six Months Ended
                                                     ----------------------------      ----------------------------
                                                      January 1,     December 30,         January 1,  December 30,
                                                        2000              2000             2000           2000
                                                     -----------     ------------      -----------   --------------
<S>                                                 <C>               <C>              <C>           <C>
     SG&A:
       Containment Solutions................         $   2,387         $   2,303        $   4,904         $   4,652
       Plasticon Fluid Systems..............             3,250             3,334            5,911             6,242
       Plasticon Europe.....................             2,615             2,335            4,776             4,762
       Hanwel Europe........................             1,677             1,142            3,025             2,287
       Corporate............................               784             1,389            1,304             1,973
                                                     ---------         ---------        ---------         ---------
         Total SG&A.........................         $  10,713         $  10,503        $  19,920         $  19,916
                                                     =========         =========        =========         =========
     Impairments of long-lived assets:
       Containment Solutions................         $      --         $      --        $      --         $      --
       Plasticon Fluid Systems..............                --             5,195               --             5,195
       Plasticon Europe.....................                --                --               --                --
       Hanwel Europe........................                --                --               --             1,038
       Corporate............................                --                                 --
                                                     ---------         ---------        ---------         ---------
         Total impairments..................         $      --         $   5,195        $      --         $   6,233
                                                     =========         =========        =========         =========
     Restructuring:
       Containment Solutions................         $      --         $      --        $     500         $      --
       Plasticon Fluid Systems..............                --                --               --                --
       Plasticon Europe.....................               300                --            1,200                --
       Hanwel Europe........................                --                --               --                --
       Corporate............................               791                --              791                --
                                                     ---------         ---------        ---------         ---------
         Total restructuring................         $   1,091         $      --        $   2,491         $      --
                                                     =========         =========        =========         =========
     Operating income (loss):
       Containment Solutions................         $   1,046         $     270        $   2,241         $   1,289
       Plasticon Fluid Systems..............               340            (4,253)           1,381            (3,272)
       Plasticon Europe.....................              (142)             (208)            (832)             (444)
       Hanwel Europe........................               541               425            1,274                88
       Corporate............................            (1,575)           (1,389)          (2,095)           (1,973)
                                                     ---------         ----------       ---------         ----------
         Total operating income (loss)......         $     210         $  (5,155)       $   1,969         $  (4,312)
                                                     =========         =========        =========         =========
</TABLE>

Three months ended December 30, 2000 compared with three months ended January 1,
2000

       The inclusion of acquired companies and exclusion of disposed companies
did not significantly affect our results of operations for the three months
ended December 30, 2000. The results for Manantial and HP Valves were included
from their dates of acquisition, September 1999 and November 1999, respectively.

       Net Revenues. Consolidated net revenues for the three months ended
December 30, 2000 were $47.8 million compared to $49.6 million for the three
months ended January 1, 2000, a decrease of $1.8 million, or 3%. The decrease in
net revenues is due to decreases for Containment Solutions, Plasticon Europe and
Hanwel Europe of $0.9 million, $1.5 million and $1.8 million, respectively.
Higher net revenues for Plasticon Fluid Systems offset these decreases in net
revenues by $2.4 million.

       Net revenues for the three months ended December 30, 2000 would have been
$2.8 million higher if foreign currency denominated net revenues (primarily
Plasticon Europe and Hanwel Europe) were translated at the exchange rate used
for the three months ended January 1, 2000. The reduction in the U.S. dollar
value of foreign net revenues in the second quarter of fiscal 2001 is a result
of the weakening of the exchange rate between the Dutch guilder, the functional
currency of Plasticon Europe and Hanwel Europe, and the U.S. dollar.

     Net revenues for Containment Solutions declined to $14.4 million for the
three months ended December 30, 2000 compared with $15.2 million for the three
months ended January 1, 2000, a decrease of $0.8 million, or 5%. The decrease in
net revenues is due to pricing pressures resulting from increased competition in
Containment Solutions' steel tank product line.

                                       15


<PAGE>   18

       Plasticon Fluid Systems' net revenues rose $2.4 million, or 14%, for the
three months ended December 30, 2000 compared with the three months ended
January 1, 2000. The increase is primarily attributable to $3.7 million, $0.6
million and $0.2 million in higher net revenues for Ershigs, Inc., a PFS company
("Ershigs"), Belco Manufacturing Company, Inc. ("Belco") and SEFCO,
respectively. Offsetting these increases was a $2.1 million decrease in net
revenues for Fibercast.

       Ershigs benefited from a fabrication project associated with the
construction of a fiber optic manufacturing facility. We expect revenues
associated with this project to continue through the remainder of fiscal 2001.
SEFCO continues to experience an increased level of activity related to its
municipal water and wastewater customers. In fiscal 2000, SEFCO refocused its
business to concentrate on the municipal markets and during the second quarter
of fiscal 2001 experienced greater success in securing new projects in those
markets. Belco benefited from increased activity in the oil and gas exploration
and production sector, which represents a significant portion of its customer
base. Fibercast's primary market is the chemical and petrochemical sector and
this market has experienced a significant downturn. Additionally, for the three
months ended January 1, 2000, Fibercast had revenues from a contract to supply
pipe for a large project that was completed in the third quarter of fiscal 2000.
Fibercast was unable to obtain new contracts in the second quarter of fiscal
2001 to compensate for this reduction of revenues.

       For the three months ended December 30, 2000, Plasticon Europe's net
revenues decreased by $1.5 million, or 13%, to $9.7 million compared with $11.2
million of net revenues for the three months ended January 1, 2000. If Plasticon
Europe's net revenues, all of which were denominated in foreign currency, were
translated at the average exchange rate used for the three months ended January
1, 2000 its net revenues would have been $0.4 million higher. Plasticon Europe's
local currency revenues have benefited from a slight increase in activity by its
chemical and petrochemical industry customers.

       Net revenues of Hanwel Europe for the three months ended December 30,
2000 were $4.7 million, down $1.7 million, or 27% from $6.4 million for the
three-month period ended January 1, 2000. The decrease is partly due to the
effects of a stronger U.S. dollar. Hanwel Europe's net revenues for the three
months ended December 30, 2000 would have been $0.9 million higher if translated
using the average exchange rate for the three months ended January 1, 2000. The
disposal of one of Hanwel Europe's distribution companies in fiscal 2000 and
lower sales in one of its product lines during the second quarter of fiscal 2001
account for the remainder of the decrease in net revenues.

       Cost of Revenues. Consolidated cost of revenues decreased $0.3 million,
or 1%, for the three months ended December 30, 2000 compared with the three
months ended January 1, 2000. Lower cost of revenues for Plasticon Europe and
Hanwel Europe account for $0.8 million and $1.1 million of the decrease,
respectively. Offsetting these decreases was a $1.7 million increase in cost of
revenues for Plasticon Fluid Systems.

       Consolidated gross margin decreased by $1.5 million. Consolidated gross
margin as a percentage of net revenues declined to 22% for the three months
ended December 30, 2000 compared with 24% for the three months ended January 1,
2000, a decrease of 8%. Decreases in gross margins for Containment Solutions,
Plasticon Europe and Hanwel Europe were $0.9 million, $0.6 million and $0.7
million, respectively. These decreases were offset by a $0.7 million increase in
gross margin at Plasticon Fluid Systems.

       Cost of revenues for Containment Solutions was unchanged for the three
months ended December 30, 2000 compared with the three months ended January 1,
2000. Gross margin declined by $0.9 million. As a percentage of net revenues,
Containment Solutions' gross margin decreased 22% to 18% for the three months
ended December 30, 2000 compared with 23% for the three months ended January 1,
2000. The decrease in margin is mainly due to pricing pressures resulting from
increased competition in the steel tank product line.



                                       16


<PAGE>   19

       Plasticon Fluid Systems' cost of revenues increased by $1.7 million, or
13%, for the three months ended December 30, 2000 compared with the three months
ended January 1, 2000. Higher levels of activity at Ershigs, Belco and SEFCO
accounted for $2.1 million, $0.4 million and $0.2 million of the increase,
respectively. Fibercast had a decrease in cost of revenues of $0.9 million that
offset these increases. Plasticon Fluid Systems' gross margin increased $0.7
million. As a percentage of net revenues, Plasticon Fluid System's gross margin
remained unchanged.

       The increase in Ershigs' cost of revenues is due to higher activity.
Ershigs significantly improved its execution on projects for the three months
ended December 30, 2000 compared with the three months ended January 1, 2000,
and as a result, its gross margin increased by $1.6 million. As a percentage of
net revenues, gross margin improved by 109% to 23% for the three months ended
December 30, 2000 compared to 11% for the three months ended January 1, 2000.
The change is due to the impact of cost overruns on a large project underway
during the three months ended January 1, 2000.

       Cost of revenues for Belco increased due to higher activity and net
revenues from its customers in the oil and gas sector. Gross margin showed a
$0.1 million improvement in the three months ended December 30, 2000 when
compared with the three months ended January 1, 2000. SEFCO's cost of revenues
increased due to higher activity and its gross margin increased by $0.1 million
for the three months ended December 30, 2000 compared with the three months
ended January 1, 2000.

       Fibercast's cost of revenues decreased due to lower activity as noted in
the discussion of net revenues above. Gross margin decreased by $1.1 million,
partially offsetting the increase in gross margins at Ershigs, Belco and SEFCO.

       Plasticon Europe's cost of revenues decreased by $0.9 million, or 11%,
for the three months ended December 30, 2000 compared with the three months
ended January 1, 2000. The decrease is due to the effect of currency translation
noted above. If Plasticon Europe's cost of revenues were translated at the
average exchange rate for the three months ended January 1, 2000, its cost of
revenues would have been $0.6 million higher. The increase is attributable to an
increase in activity. Gross margin for the three months ended December 30, 2000
declined by $0.6 million when compared with the three months ended January 1,
2000. Gross margin as a percentage of net revenues decreased by 12% to 22% for
the three months ended December 30, 2000 compared with 25% for the three months
ended January 1, 2000. The decreases are due to a mix of lower margin jobs in
the second quarter of fiscal 2001 when compared to the same period in fiscal
2000.

       Hanwel Europe's cost of revenues decreased by $1.1 million, or 6%, to
$3.1 million for the three months ended December 30, 2000 compared with $4.2
million for the three months ended January 1, 2000. The decrease is partly due
to the effect of foreign currency translation. If Hanwel Europe's cost of
revenues were translated at the average exchange rate for the three months ended
January 1, 2000, its cost of revenues would have been $0.6 million higher. The
remainder of the decrease is due to dispositions and declines in activity as
noted above.

       Selling, general and administrative expense. Consolidated selling,
general and administrative expense ("SG&A") for the three months ended December
30, 2000, was $10.5 million, $0.2 million or 2% lower than SG&A for the three
months ended January 1, 2000 of $10.7 million. Plasticon Europe and Hanwel
Europe had decreases in SG&A of $0.3 million and $0.5 million, respectively.
These decreases were offset by a $0.6 million increase in Corporate SG&A.

       Plasticon Europe's SG&A for the three months ended December 30, 2000
decreased by $0.3 million, or 11% to $2.3 million compared with $2.6 million for
the three months ended January 1, 2000. The decrease is primarily due to the
effect of currency translation. If Plasticon Europe's SG&A was translated at the
average exchange rate for the three months ended January 1, 2000, its SG&A would
have been $0.5 million higher.


                                       17


<PAGE>   20

       Hanwel Europe's SG&A decreased by $0.5 million, or 29%, to $1.1 million
for the three months ended December 30, 2000 compared with $1.7 million for the
three months ended January 1, 2000. The decrease is partly due to the effect of
foreign currency translation. If Hanwel Europe's SG&A were translated at the
average exchange rate for the three months ended January 1, 2000, its SG&A would
have been $0.2 million higher. The remainder of the decrease is due to the
effect of dispositions and cost reduction initiatives undertaken in the second
quarter of fiscal 2000.

       Corporate SG&A increased by $0.6 million, or 75% to $1.4 million for the
three months ended December 30, 2000 compared with $0.8 million for the three
months ended January 1, 2000. During the three month period ended December 30,
2000, the Company charged to expense professional fees of $0.5 million related
to the Blair Transaction and $0.3 million in professional fees related to its
Restructuring Plan, a total of $0.8 million. These increases were offset by the
effect of the Company's cost reduction initiatives undertaken in the second
quarter of fiscal 2000.

       Impairment of Long-lived Assets. For the three months ended December 30,
2000, Plasticon Fluid Systems recorded an impairment charge of $5.2 million to
reduce the carrying value of the net assets of SEFCO to its net realizable value
upon the Company's determination to sell the subsidiary. We reclassified this
amount as Assets Held for Sale in our unaudited consolidated balance sheet as of
December 30, 2000. SEFCO is a manufacturer of engineered field-erected
aboveground steel tanks we acquired in October 1997.

       Restructuring. The following is an analysis of the restructuring reserves
and cash outlays from September 30, 2000 to December 30, 2000:

<TABLE>
<CAPTION>

                                                     Employee           Disposal
                                                    Separations          Costs             Total
                                                    -----------         --------       -----------
                                                                     (In thousands)
<S>                                                 <C>                <C>             <C>    <
     Restructuring charges:
     Balance at September 30, 2000                   $       531       $        --      $       531
       Fiscal 2001 cash outlays                             (109)               --             (109)
       Currency translation and other                       (180)               --             (180)
                                                     ------------      -----------      ------------
     Balance at December 30, 2000                    $       242       $        --      $       242
                                                     ===========       ===========      ===========
</TABLE>


       The Company made cash payments totaling $109,000 to two employees whose
services were terminated during the first three months of fiscal 2001. The cash
payments made related to restructuring reserves recognized in fiscal 2000. The
Company expects to disburse the remaining amount reserved during fiscal year
2001.

       Interest Expense. Consolidated interest expense increased by $0.8
million, or 38%, to $2.9 million for the three months ended December 30, 2000
compared with $2.1 million for the three months ended January 1, 2000. The
increase is due to higher interest rates, which includes default interest.

       Other Income, Net. Other Income, on a consolidated basis, decreased by
$0.3 million for the three months ended December 30, 2000 compared with the
three month period ended January 1, 2000. The decrease is primarily due to the
effect of recognizing a lower amount in income for the revaluation of the
Company's put option liability for the warrants issued to the holders of its
Subordinated Notes.

       Net Loss. Due to the factors noted above, the Company's net loss
increased by $7.1 million to $8.1 million for the three month period ended
December 30, 2000 compared with a net loss of $1.0 million for the three month
period ended January 1, 2000.

Six months ended December 30, 2000 compared with six months ended
January 1, 2000

       The inclusion of acquired companies and exclusion of disposed companies
did not significantly affect our results of operations for the six months ended
December 30, 2000. The results for Manantial and HP Valves were included from
their dates of acquisition, September 1999 and November 1999, respectively.

                                       18
<PAGE>   21

       Net Revenues. Consolidated net revenues for the six months ended December
30, 2000 were $99.2 million compared to $97.9 million for the six months ended
January 1, 2000, an increase of $1.3 million, or 1%. The increase in net
revenues is due to higher net revenues for Plasticon Fluid Systems of $5.5
million. Lower net revenues for Containment Solutions, Plasticon Europe and
Hanwel Europe offset the increase in net revenues by $1.7 million, $0.3 million
and $2.2 million, respectively.

       Net revenues for the six months ended December 30, 2000 would have been
$5.3 million higher if foreign currency denominated net revenues (primarily
Plasticon Europe and Hanwel Europe) were translated at the exchange rate used
for the six months ended January 1, 2000. The reduction in the U.S. dollar value
of foreign net revenues in the first six months of fiscal 2001 is a result of
the weakening of the exchange rate between the Dutch guilder, the functional
currency of Plasticon Europe and Hanwel Europe, and the U.S. dollar.

       Net revenues for Containment Solutions declined to $30.2 million for the
six months ended December 30, 2000 compared with $32.0 million for the six
months ended January 1, 2000, a decrease of $1.8 million, or 6%. The decrease in
net revenues is due to pricing pressures resulting from increased competition in
Containment Solutions' steel tank product line.

       Plasticon Fluid Systems' net revenues rose $5.5 million, or 15%, for the
six months ended December 30, 2000 compared with the six months ended January 1,
2000. The increase is primarily attributable to $6.3 million, $1.0 million and
$0.7 million in higher net revenues for Ershigs, Belco and SEFCO, respectively.
Fibercast had a decrease in net revenues of $2.7 million that offset these
increases.

       Ershigs benefited from a fabrication project associated with the
construction of a fiber optic manufacturing facility. We expect revenues
associated with this project to continue through the remainder of fiscal 2001.
Belco benefited from higher activity by its customers in the oil and gas
industry in the first six months of fiscal 2001. SEFCO had an increased level of
activity related to its municipal water and wastewater customers. In fiscal
2000, SEFCO refocused its business to concentrate on the municipal markets.
During the first six months of fiscal 2001, SEFCO experienced greater success in
securing new projects in those markets. A slowdown in the petrochemical and
chemical industry had a significant negative effect on Fibercast's net revenues
for the six months ended December 30, 2000 compared with the six months ended
January 1, 2000. Additionally, for the six months ended January 1, 2000,
Fibercast had revenues related to a contract to supply pipe for a large project
that was completed in the third quarter of fiscal 2000. Fibercast was unable to
obtain new contracts during first half of fiscal 2001 to compensate for this
reduction in revenues.

       For the six months ended December 30, 2000, Plasticon Europe's net
revenues decreased by $0.3 million, or 1%, to $20.1 million compared with $20.4
million in net revenues for the six months ended January 1, 2000. Exchange rate
fluctuations account for the decrease in net revenues. If Plasticon Europe's net
revenues, all of which were denominated in foreign currency, were translated
using the average exchange rate for the six months ended January 1, 2000 net
revenues would have increased by $3.2 million. Capital expenditures made by
Plasticon Europe's customers in the chemical and petrochemical industries
increased during the first half of fiscal 2001, resulting in increased revenue
for Plasticon Europe.

       Net revenues of Hanwel Europe for the six months ended December 30, 2000
were $10.2 million, down $2.2 million, or 18% from $12.4 million for the
six month period ended January 1, 2000. The decrease is primarily due to the
effects of a stronger U.S. dollar. Hanwel Europe's net revenues for the six
months ended December 30, 2000 would have been $1.8 million higher if translated
using the average exchange rate for the six months ended January 1, 2000. The
disposal of one of Hanwel Europe's distribution companies in fiscal 2000 and
lower sales in one of its product lines in the first six months of fiscal 2001
account for the remainder of the decrease in net revenues.

                                       19


<PAGE>   22

       Cost of Revenues. Consolidated cost of revenues rose $3.8 million, or 5%,
for the six months ended December 30, 2000 compared with the six months ended
January 1, 2000. Higher cost of revenues for Plasticon Fluid Systems and
Plasticon Europe account for $4.7 million and $0.5 million of the increase,
respectively. These increases were offset by decreases of $0.1 million and $1.3
million for Containment Solutions and Hanwel Europe, respectively.

       Consolidated gross margin decreased by $2.5 million. Consolidated gross
margin as a percentage of net revenues declined to 22% for the six months ended
December 30, 2000 compared with 25% for the six months ended January 1, 2000, a
decrease of 12%. Decreases in gross margins for Containment Solutions, Plasticon
Europe and Hanwel Europe were $1.7 million, $0.8 million and $0.9 million,
respectively. An increase in Plasticon Fluid System's gross margin of $0.9
million offset these decreases.

       Cost of revenues for Containment Solutions decreased by $0.1 million,
less than 1%, for the six months ended December 30, 2000 compared with the six
months ended January 1, 2000. The decrease is attributable to the decrease in
revenues noted above. Gross margin declined by $1.7 million. As a percentage of
net revenues, Containment Solutions' gross margin decreased 17% to 20% for the
six months ended December 30, 2000 compared with 24% for the six months ended
January 1, 2000. The decrease in margins is mainly due to pricing pressures
resulting from increased competition in the steel tank product line.

       Plasticon Fluid Systems' cost of revenues increased by $4.7 million, or
18%, for the six months ended December 30, 2000 compared with the six months
ended January 1, 2000. Higher levels of activity at Ershigs, Belco and SEFCO
accounted for $4.8 million, $0.7 million and $0.5 million of the increase,
respectively. A decrease in Fibercast's cost of revenues of $1.3 million offset
these increases. Plasticon Fluid Systems' gross margin increased $0.9 million,
primarily due to improved performance at Ershigs. As a percentage of net
revenues, Plasticon Fluid Systems' gross margin fell 5% to 21% for the six
months ended December 30, 2000 compared with 22% for the six months ended
January 1, 2000.

       The increase in Ershigs' cost of revenues is due to higher activity.
Because of improvements in project execution for the three months ended December
30, 2000, Ershigs' gross margin increased by $1.5 million for the six months
ended December 30, 2000 when compared with the six months ended January 1, 2000.

       Plasticon Europe's cost of revenues increased by $0.5 million, or 4%, for
the six months ended December 30, 2000 compared with the six months ended
January 1, 2000. Exchange rate fluctuations significantly affected the amount of
the increase in U.S. dollars. If Plasticon Europe's cost of revenues were
translated at the average exchange rate for the six months ended January 1, 2000
cost of revenues would have increased by $3.3 million. The increase is
attributable to higher net revenues from an increase in activity. Gross margin
for the six months ended December 30, 2000 fell by $0.8 million when compared
with the six months ended January 1, 2000. Gross margin as a percentage of net
revenues decreased by 12% to 22% for the six months ended December 30, 2000
compared with 25% for the six months ended January 1, 2000. The decreases are
due to a mix of lower margin jobs in the first six months of fiscal 2001 when
compared to the same period in fiscal 2000.

       Hanwel Europe's cost of revenues decreased by $1.3 million, or 16%, to
$6.8 million for the six months ended December 30, 2000 compared with $8.1
million for the six months ended January 1, 2000. The decrease is primarily due
to the effects of a stronger U.S. dollar. If Hanwel Europe's cost of revenues
were translated at the average exchange rate for the three months ended January
1, 2000, its cost of revenues would have been $1.2 million higher. The remainder
of the decrease is due to the effect of dispositions and declines in activity as
noted above.

       Impairment of Long-lived Assets. For the three months ended September 30,
2000, Hanwel Europe recorded an impairment charge of $1.0 million to reduce the
carrying value of the goodwill related to B.V. van Delden, an electronic
components distributor acquired in May 1997, to an amount equal to its estimated
net realizable value upon the Company's determination to sell the subsidiary.


                                       20
<PAGE>   23

       For the three months ended December 30, 2000, Plasticon Fluid Systems
recorded an impairment charge of $5.2 million to reduce the carrying value of
the net assets of SEFCO to its net realizable value upon the Company's
determination to sell the subsidiary. We reclassified this amount as Assets Held
for Sale in our unaudited consolidated balance sheet as of December 30, 2000.
SEFCO is a manufacturer of engineered field-erected aboveground steel tanks we
acquired in October 1997.

       Restructuring. The following is an analysis of the restructuring reserves
and cash outlays from July 1, 2000 to December 30, 2000:

<TABLE>
<CAPTION>


                                                      Employee         Disposal
                                                    Separations          Costs            Total
                                                    -----------       -----------      -----------
                                                                        (In thousands)
<S>                                                 <C>                <C>              <C>
     Restructuring charges:
     Balance at July 1, 2000                         $     1,227       $       116      $     1,343
       Fiscal 2001 cash outlays                             (901)             (116)          (1,017)
       Currency translation                                  (84)               --              (84)
                                                     ------------      -----------      ------------
     Balance at December 30, 2000                    $       242       $        --      $       242
                                                     ===========       ===========      ===========
</TABLE>


       The Company made cash payments totaling $901,000 to 19 employees whose
services were terminated and $116,000 for disposal costs during the first six
months of fiscal 2001. The cash payments made related to restructuring reserves
recognized in fiscal 2000. The Company expects to disburse the remaining amount
reserved during fiscal year 2001.

       Interest Expense. Consolidated interest expense increased by $1.4
million, or 33%, to $5.6 million for the six months ended December 30, 2000
compared with $4.2 million for the six months ended January 1, 2000. The
increase is due to higher interest rates, which includes default interest.

       Other Income, Net. Other income, on a consolidated basis, decreased by
$1.0 million for the six months ended December 30, 2000 compared with the
six month period ended January 1, 2000. The decrease is primarily due to the
effect of recognizing a lower amount in income for the revaluation of the
Company's put option liability for the warrants issued to the holders of its
Subordinated Notes.

       Net Loss. Due to the factors noted above, the Company's net loss
increased by $9.8 million to $10.0 million for the six month period ended
December 30, 2000 compared with a net loss of $0.2 million for the six month
period ended January 1, 2000.

LIQUIDITY AND CAPITAL RESOURCES

       Beginning in fiscal 2000, we have experienced liquidity problems caused
by a greater than expected downturn in the underground storage tank market in
the United States, adverse market developments in Europe and our significant
debt burden. Consequently, we have experienced recent operating losses and
significantly decreased cash flows from operations, and our liquidity has
reached extremely low levels. We had to borrow under our bank facilities to
cover our operating losses until our banks stopped advancing funds in December
2000. In addition to defaults on interest and principal payments, our operating
losses caused us to breach the financial covenants in our credit facilities.
Since then, we have financed the Company with operating cash flow and have made
no interest or principal payments. With respect to our European Credit Facility,
the European Senior Lenders demanded payment of all amounts outstanding under
the facility before April 1, 2001. We have committed to retain financial
advisors to explore various alternatives that may be available to us in order to
decrease the amount of our European debt outstanding through the sale of equity
securities or the merger or sale of all or part of our European operations. (See
detailed discussion of credit facilities and related defaults below.)

       During the twelve months ended July 1, 2000, we implemented a
reorganization plan in an effort to match our resources with current and
projected demand levels. During fiscal 2001, we are pursuing further
restructuring initiatives in our domestic and European operations.

                                       21


<PAGE>   24



       A portion of our domestic steel tank business has suffered significant
margin pressures due to increased competition during the first half of fiscal
2001. In January 2001, we decided to cease operations at one of our steel tank
fabrication facilities, in Lebanon, PA, effective April 1, 2001. As of February
12, 2001, we have not finalized the restructuring plan for this facility nor
have we finalized our estimate of the associated restructuring provision.
Revenues associated with this facility were approximately $4.6 million for the
twelve months ended July 1, 2000 and $1.8 million for six months ended December
30, 2000. For the six months ended December 30, 2000, the Lebanon, PA facility
had a negative gross margin of $0.1 million. Therefore, the closure of this
facility would have no material effect on consolidated gross margin. We estimate
that annual reductions in manufacturing costs from the closure of this facility
will be approximately $3.8 million.

       In our European operations, we are making further cost reduction efforts
in response to continuing over-capacity in our Plasticon Europe business
segment. In January 2001, union officials and the local workers council approved
our plan to close Plasticon Europe's manufacturing facility in Heerenveen, The
Netherlands. Reductions in personnel were also approved for Plasticon Europe's
manufacturing facility in Dinslaken, Germany. When the planned restructuring
initiatives for both locations are implemented, approximately 40 manufacturing
positions, or 7% of our total European operations headcount, will be eliminated.
We will record an associated restructuring provision of as much as approximately
$2.7 million during fiscal year 2001. The planned restructuring would have
little effect on future revenues, as production would be moved to one of
Plasticon Europe's remaining facilities. We estimate that annual reductions of
Plasticon Europe's manufacturing costs will be approximately $1.5 million.

       In August 2000, we completed a private placement of 700,000 shares of
common stock at $2.00 per share to two of the Company's founding directors.

       During calendar 2000, we pursued a private placement of equity and debt
with Blair to raise additional capital and increase our liquidity. During the
week of November 27, 2000, Blair advised us by written notice of its election
not to pursue an investment in the Company. Subsequently, we have held
discussions with the Domestic Senior Lenders, European Senior Lenders and
certain of the Subordinated Note holders concerning a Restructuring Plan. In
consultation with the Domestic Senior Lenders, we have engaged financial
advisors in the United States, and we have made a commitment to the European
Senior Lenders to hire financial advisors in Europe, in order, among other
things, to analyze and evaluate various financial and strategic alternatives
that may be available to us. (For more discussion, see the sections below
entitled "Principal Debt Instruments" and "Restructuring Plan".)

       As of February 12, 2001, we had no availability under our Domestic Credit
Facility (see Note 11) but we have been meeting our recent operating cash flow
needs primarily with cash generated from improved working capital management and
the suspension of required interest and principal payments on the Domestic
Credit Facility, the Subordinated Notes and the European Credit Facility. In
Europe, we had NLG 2.9 million ($1.2 million) in availability under our primary
working capital facility as of February 12, 2001. Management believes that
unless a Restructuring Plan is completed, net cash provided from these sources
may not be sufficient to fund our future cash requirements. As part of our
Restructuring Plan, we expect to generate additional cash flow from one or more
of the following: restructuring or refinancing of debt; issuance of equity or
other securities; divestitures of non-strategic assets, business units or
interests therein; or merger or sale of the Company.

       At December 30, 2000, we had $5.9 million in cash. Included in the $5.9
million in cash at December 30, 2000 is $1.1 million in cash of a 90%-owned
European subsidiary that is prohibited from making loans or advances to the
Company. Additionally, $1.4 million in cash is held by several wholly-owned
European subsidiaries that are subject to credit agreements with foreign banks
that restrict payments of loans or advances to the Company by those
subsidiaries.


                                       22

<PAGE>   25

       We are engaged in discussions with our creditors regarding the
development and implementation of a Restructuring Plan to address the
uncertainties described herein. However, we cannot provide any assurances that
we will be successful in negotiations with our creditors or other third parties
or that we will be able to obtain new financing or funds, from divestitures or
otherwise, sufficient to meet our future cash requirements and continue as a
going concern. We anticipate that our Restructuring Plan, regardless of the form
in which it may be implemented, would likely involve substantial dilution, or
potentially elimination, of the equity interest of current holders of the
Company's equity securities. The Company's common stock was delisted from the
NASDAQ Stock Market on October 30, 2000 and we are considering deregistration of
our common stock under the Securities Exchange Act. Even if we are successful in
obtaining all necessary creditor approvals with respect to a Restructuring Plan,
implementation of any such plan may require additional actions with respect to
the reorganization of the Company. In the absence of a financial and corporate
reorganization, through bankruptcy courts or otherwise, management will not be
able to implement its business plan as expressed throughout this document and
its most recent annual report filed on Form 10-K. We also anticipate that
financial and corporate reorganization of the Company, through bankruptcy courts
or otherwise, is likely whether or not a consensual debt restructuring can be
reached with our lenders and the holders of our Subordinated Notes.

Cash Flow

       The net cash provided by (used in) operating, investing and financing
activities for the six months ended January 1, 2000 and December 30, 2000 is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                  Six Months Ended
                                                                           -------------------------------
                                                                           January 1,         December 30,
                                                                              2000                2000
                                                                              ----                ----
<S>                                                                       <C>                   <C>
Cash provided by (used in):
Operating activities                                                      $        100            $ 2,538
Investing activities                                                            (6,287)             1,280
Financing activities                                                             8,423               (781)
</TABLE>

       Net cash provided by operating activities increased by $2.4 million for
the six months ended December 30, 2000 compared with the six months ended
January 1, 2000. The increase is primarily due to the effect of improved working
capital management and suspension of interest payments on our Domestic Credit
Facility, Subordinated Notes and European Credit Facility.

       Net cash provided by investing activities was $1.3 million for the six
months ended December 30, 2000 compared with net cash used in investing
activities of $6.3 million for the six months ended January 1, 2000, an increase
of $7.6 million. The increase is due to a lower level of acquisition activity,
higher proceeds from asset dispositions and lower capital expenditures. Capital
expenditures totaled $0.8 million for the six months ended December 30, 2000
compared with $3.0 million for the six months ended January 1, 2000.

       Cash used in financing activities decreased approximately $9.2 million
for the six months ended December 30, 2000 to $0.8 million compared with cash
provided by financing activities of $8.4 million for the six months ended
January 1, 2000. The decrease is due to a decrease in net borrowings of $10.6
million. The decrease in net borrowings was offset by an increase in proceeds
from the issuance of common stock of $1.4 million. Net borrowings incurred
during the six months ended December 30, 2000 were used for working capital
needs.

Working Capital

       At December 30, 2000, the Company had negative working capital of $61.7
million compared to $60.8 million in negative working capital at July 1, 2000, a
decrease of $0.9 million. The decrease is primarily due to the effect of
reclassifying the current assets and liabilities of SEFCO as Assets Held for
Sale, partially offset by the use of $1.4 million in proceeds from issuance of
common stock to bolster the Company's liquidity.

                                       23


<PAGE>   26

Principal Debt Instruments

       At December 30, 2000, we had total borrowings of $101.7 million
outstanding under our credit facilities and debt instruments. We are in default
under the terms of our Domestic Credit Facility, Subordinated Notes and European
Credit Facility.

Domestic Credit Facility

       We have a $59.6 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 $17.3 million of term loans, $15.3 million of acquisition loans,
and a revolving credit facility of $27.0 million. At December 30, 2000, we had
$56.0 million in borrowings outstanding under this facility.

       The Domestic Credit Facility also provides a letter of credit facility of
$1.7 million. At December 30, 2000, we had $1.7 million in letters of credit
outstanding.

       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. We failed to
comply with these covenants beginning with the calendar quarter ended December
31, 1999 and each calendar quarter thereafter. We were unable to meet the
conditions necessary to obtain a waiver for the covenant violations that
occurred in the calendar quarter ended December 31, 1999 and did not seek
waivers for the reporting dates of March 31, June 30, September 30 and December
31, 2000.

       We ceased making scheduled interest and principal payments under the
Domestic Credit Facility. Beginning on June 30, 2000 and through December 31,
2000, we failed to make required term loan facility principal payments of
$750,000 at the end of each calendar quarter for a total of $2.3 million. On
September 30, 2000 and December 31, 2000, we did not make required acquisition
loan facility principal payments of $765,000 at the end of both calendar
quarters for a total of $1.5 million. Beginning on November 30, 2000, we stopped
making monthly interest payments. Total unpaid interest at December 31, 2000 was
$1.7 million.

       We executed a forbearance agreement and subsequent extensions with our
Domestic Senior Lenders whereby unpaid principal installments due were deferred
until November 30, 2000 (the "Forbearance Period"). One of the conditions to the
forbearance agreement, as extended, was the successful completion of the Blair
Transaction. Upon the termination of the Blair Transaction, the Domestic Senior
Lenders canceled the existing forbearance agreement and restricted the Company's
ability to make additional borrowings on the Domestic Credit Facility.

       At December 31, 2000, we exceeded our available borrowing capacity under
our revolving credit and letter of credit facilities and failed to prepay or
otherwise reduce our borrowings by the amount of the excess, as required under
the credit agreement for the Domestic Credit Facility. Aggregate extensions of
credit under the revolving credit and letter of credit facilities are based on
85% of eligible accounts receivable and 50% of eligible inventory, as defined in
the credit agreement. At December 31, 2000, our borrowing base was $23.7 million
and revolving credit borrowings and letters of credit outstanding were $23.5
million and $1.7 million, respectively, or $25.2 million in total and $1.5
million in excess of the borrowing base. The terms of the credit agreement for
the Domestic Credit Facility require us to prepay revolving credit borrowings
and/or cash collateralize or replace letters of credit in an amount equal to the
excess of aggregate extensions of revolving credit over our borrowing base. We
failed to prepay our revolving credit borrowings and/or cash collateralize or
replace any of our letters of credit in order to comply with the terms of the
credit agreement. On December 1, 2000, the Domestic Senior Lenders ceased making
further revolving credit loans to the Company, and since that date the Company
has made no payments of principal or interest on the Domestic Credit Facility.
On February 7, 2001, we received a written notice from the Domestic Senior
Lenders that our failure to make the required revolving credit facility
prepayments, cash collateralizations or replacements of letters of credit
constitutes an event of default under the credit agreement.

                                       24


<PAGE>   27

       As of December 30, 2000, we continued to be in violation of the credit
agreement covering the Domestic Credit Facility. Although the Domestic Senior
Lenders have not exercised the right to accelerate the maturity of this
obligation, they have reserved the right to exercise all remedies available to
them. Consequently, we have classified the total amount outstanding under the
Domestic Credit Facility as current liabilities in our consolidated financial
statements for the twelve months ended July 1, 2000 and our unaudited
consolidated financial statements for the six months ended December 30, 2000.

       Subsequent to the termination of the Blair Transaction, and as part of
our Restructuring Plan, we initiated, and are currently engaged in, discussions
with the Domestic Senior Lenders. The Company can provide no assurances that it
will reach an agreement with the Domestic Senior Lenders regarding its proposed
Restructuring Plan. However, with the concurrence of the Domestic Senior
Lenders, we retained financial advisors in the United States in order, among
other things, to analyze and evaluate the feasibility of various financial and
strategic alternatives that may be available to us. We intend to present the
results of the study and recommendations of our financial advisors to the
Domestic Senior Lenders as a basis for further negotiation regarding the
Restructuring Plan. The outstanding borrowings under the Domestic Credit
Facility bear default interest at 2% in addition to the base rate plus
applicable margin.

       At December 30, 2000, we had no borrowing availability under the term
loan and acquisition loan portions of the Domestic Credit Facility. As noted
above, at December 31, 2000, we exceeded our available borrowing capacity under
our revolving credit and letter of credit facilities.

European Senior Credit Facility

       Through our wholly-owned subsidiary, Denali International Holdings B.V.
("DIH"), we have a senior credit facility (the "European Credit Facility") with
ABN-AMRO and ING Bank (the "European Senior Lenders"). The European Credit
Facility totals 25 million Dutch guilders ("NLG") ($10.7 million translated at
the December 30, 2000 USD/NLG exchange rate) and is composed of two term loans.
Term Loan A provides for borrowings of NLG 15 million ($6.4 million) with
quarterly payments of NLG 625,000 ($267,048) 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 December 30, 2000, we had
indebtedness under the European Credit Facility of NLG 22.5 million, or
approximately $9.6 million, outstanding. Under the terms of the European Credit
Facility, DIH pledged all of the outstanding common stock of its operating
subsidiary, Welna B.V., as collateral for the loans.

       The credit agreement covering the European Credit Facility stipulates
financial covenants requiring DIH to maintain specified levels of tangible net
worth and specified maximum leverage, minimum interest coverage and minimum debt
service coverage ratios. Beginning on July 1, 2000 and subsequent thereto, we
did not comply with these covenants.

       We requested, but did not receive, a waiver for the covenant violations
that occurred on July 1, 2000. We have not requested waivers for the September
30 and December 31, 2000 reporting dates.

       We ceased making scheduled principal and interest payments on the
European Credit Facility. On October 1, 2000 and January 1, 2001, we did not
make required quarterly principal payments of NLG 625,000 ($267,048) due on Term
Loan A (a total of NLG 1,250,000, or $534,096). Beginning on July 1, 2000, we
have failed to make interest payments of approximately NLG 349,000 ($143,000)
and NLG 415,000 ($164,000) due on Term Loans A and B, respectively
(approximately NLG 764,000 or $307,000 in total at December 30, 2000).

                                       25


<PAGE>   28

       The European Senior Lenders have demanded repayment of all outstanding
borrowings under the European Credit Facility unless satisfactory arrangements
for new capital were provided before March 1, 2001. We have held discussions
with the European Senior Lenders and obtained an extension of this repayment
demand until April 1, 2001. In the event we are unable to repay the amount of
the outstanding borrowings, the European Senior Lenders have advised us that
after that date they intended to appoint an investment bank to sell the shares
of Welna B.V. which are pledged as collateral for the European Credit Facility.
In exchange for the extension to April 1, 2001 granted by the European Senior
Lenders, we have committed to retain financial advisors to explore various
alternatives that may be available to us. We have agreed to provide the European
Senior Lenders with valuations of our European operations prepared by our
financial advisors and to explore financial alternatives and potential third
party transactions such as obtaining equity financing, sale or merger of our
European operations or divestiture of certain business units. However, we cannot
provide any assurances that we will be successful in our negotiations with the
European Senior Lenders concerning a Restructuring Plan and the refinancing of
our obligations under the European Credit Facility.

       Because of the foregoing, the total amount outstanding amount under the
European Credit Facility is classified as current liabilities in our
consolidated financial statements for the twelve months ended July 1, 2000 and
our unaudited consolidated financial statements for the six months ended
December 30, 2000.

Senior Subordinated Notes

       The Company has $15.0 million face value, or $13.6 million net of
discount (of which $4.1 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") outstanding. The
Subordinated Notes have a maturity date of June 30, 2006. Interest is payable
each calendar quarter.

       The note and warrant purchase agreement contains financial covenants for
the maintenance of specified 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, we did not comply
with these covenants. We did not make scheduled quarterly interest payments of
approximately $450,000 that were due June 30, 2000 through December 31, 2000 on
the Subordinated Notes, or approximately $1.4 million in total.

       We 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. We have not requested waivers from
the Subordinated Note holders for covenant violations for the calendar quarters
ending March 31, June 30 and September 30, 2000. We have received executed
waivers of default, and associated extensions, related solely to our failure to
make required interest payments for the periods ending June 30 through December
31, 2000. As part of our Restructuring Plan, we are engaged in discussions with
certain holders of the Subordinated Notes, who have not yet expressed their
intention to exercise their right to accelerate the maturity of the Subordinated
Notes, but retain the right to do so.

       Subsequent to the termination of the Blair Transaction, we have held
discussions with certain of the Subordinated Note holders regarding our proposed
Restructuring Plan. However, we can provide no assurances that we will reach an
agreement with the holders of the Subordinated Notes concerning a Restructuring
Plan and the refinancing of our obligations under the Subordinated Notes.

       Because of the foregoing, we have classified the total amount outstanding
under the Subordinated Notes as current liabilities in our consolidated
financial statements for the twelve months ended July 1, 2000 and our unaudited
consolidated financial statements for the six months ended December 30, 2000.

European Short-term Credit Facilities

       We have $24.9 million in commitments under the short-term credit
facilities described below. At December 30, 2000, we had $16.9 million in
borrowings outstanding under these facilities.

                                       26


<PAGE>   29

       We have a NLG 25 million ($10.7 million translated at the December 30,
2000 exchange rate) working capital facility with ABN-AMRO. We had approximately
NLG 14.0 million, or $6.0 million, outstanding under the working capital
facility at December 30, 2000. The unused portion of this facility is NLG 11.0
million, or $4.7 million and the amount available is NLG 2.9 million, or $1.2
million.

       The credit agreement for the loan contains a covenant specifying a
minimum level of tangible net worth to be maintained by our European operations.
At June 30, September 30 and December 31, 2000, the Company did not comply with
this covenant. We have requested, but as of February 10, 2001, have not received
a waiver for this covenant violation from the lender. The lender, however, has
agreed to modify certain covenants and defer certain amortization of term debt
through a loan amendment executed January 5, 2001. 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.

       We have an NLG 5 million ($2.1 million) working capital facility with ING
Bank. We had approximately NLG 5.0 million, or $2.1 million, outstanding under
the facility at December 30, 2000.

       The agreement for the credit facility stipulates financial covenants
requiring our European operations to maintain a specified level of minimum
tangible net worth and minimum consolidated interest coverage ratio. At June 30,
September 30 and December 31, 2000, we did not comply with these covenants.
Based on recent discussions, the lender has verbally agreed to amend certain
covenants. We have requested, but as of February 12, 2001, have not received a
written 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.

       We have a short-term loan of NLG 10 million ($4.3 million) from ABN-AMRO.
At December 30, 2000, the outstanding principal amount of the loan was NLG 10
million ($4.3 million).

       We also have separate working capital facilities for our subsidiaries in
Germany and France. These facilities provide for borrowings up to DM 10.75
million ($5.2 million) and FFR 18.0 million ($2.6 million). As of December 30,
2000, we have approximately $4.5 million outstanding under these facilities. The
unused portion of these facilities is approximately $2.6 million. These
facilities are due on demand.

Restructuring Plan

       In July 2000, we signed a letter of intent with William Blair Mezzanine
Capital Fund III, L.P. ("Blair"), under which Blair proposed to invest $23
million in the Company (the "Blair Transaction"). The Blair Transaction was
viewed by the Company, its Domestic Senior Lenders and its European Senior
Lenders as a potential solution to our liquidity problems. During the week of
November 27, 2000, Blair notified us of its decision not to pursue the proposed
investment. Due to the termination of the Blair Transaction, we decided not to
make scheduled interest and principal payments on November 30, 2000 and
initiated discussions with our lenders and other actions to develop and
implement a Restructuring Plan.

       Our Restructuring Plan, in general, is intended to accomplish two primary
objectives: to protect and foster the strengths and performance of our
underlying businesses; and to restructure our balance sheet and strengthen our
financial position. In furtherance of our Restructuring Plan, and after
consultations with our lenders, we have retained financial advisors in the
United States and committed to retain financial advisors in Europe in order,
among other things, to analyze and evaluate the feasibility of the various
financial and strategic alternatives that may be available to us. We currently
anticipate that our Restructuring Plan could involve a variety of different
elements, including, but not limited to the following: restructuring or
refinancing of debt; issuances of equity or other securities; divestitures of
assets, business units or interests therein; or merger or sale of the Company.
We also anticipate that financial and corporate reorganization of the Company,
through bankruptcy courts or otherwise, is likely whether or not a consensual
debt restructuring agreement can be reached.

                                       27

<PAGE>   30

       As of February 12, 2001, the Company has continued to make payments to
its suppliers in a manner consistent with historical practice. Management
believes that the Company's relationships with its suppliers are generally
favorable and that maintaining favorable relationships with our suppliers is
essential to our continued operation as a going concern and a key element of our
pursuit and implementation of our Restructuring Plan.

       In January 2001, our board of directors granted to certain of the
Company's key management employees retention bonus awards in order to
incentivize them to continue to perform services for the Company that are
essential to the continued operation of the Company as a going concern and the
Company's pursuit and implementation of its Restructuring Plan. Each retention
bonus award consists of a cash amount payable in two equal installments. The
first such installment is payable to a participant who remains employed by the
Company from the date of the granting of the retention bonus award through June
30, 2001. The second such installment is payable to a participant who remains
employed by the Company from June 30, 2001 through December 31, 2001. The
retention bonus awards also provide severance, and in some instances, change in
control protections for the participants.

       We anticipate that our Restructuring Plan, regardless of the form in
which it may be implemented, would likely involve substantial dilution, or
potentially elimination, of the equity interest of current holders of our equity
securities. Our common stock was delisted from the NASDAQ Stock Market on
October 30, 2000, and we are considering deregistering our common stock under
the Securities Exchange Act. Deregistration would likely have an adverse effect
on the limited remaining marketability of our outstanding shares of common
stock. However, deregistration would eliminate the diversions of financial and
management resources incident to ongoing compliance with regulatory requirements
under the Securities Exchange Act.

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 forward-looking statements as 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 forward-looking
statements involve uncertainties and other factors, and the actual results and
performance of the Company may be materially different from future results or
performance expressed or implied by such statements. Cautionary statements
regarding the risks associated with such forward-looking statements include,
without limitation, those statements included or referred to under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Quantitative and Qualitative Disclosures about Market Risk." Certain of such
risks and uncertainties relate to the highly leveraged nature of the Company,
the restrictions imposed on the Company by certain indebtedness, the Company's
defaults under debt instruments, the potential acceleration of indebtedness and
the potential pursuit of foreclosure or other remedies by lenders, the potential
disposition of assets of the Company to reduce indebtedness, the sensitivity of
the Company to adverse trends in the general economy, the high degree of
competition in the Company's industry, the volatility of the Company's quarterly
results and the Company's seasonality, the dependence of the Company on key
suppliers and customers, the dependence of the Company on key personnel, the
interest rate environment, governmental regulation and supervision, distribution
networks, product introductions and acceptance, technological change, changes in
industry practice, and onetime events, among others. The Company's ability to
successfully implement its Restructuring Plan, as described in this report, and
continue as a going concern is dependent, among other things, upon reducing its
indebtedness and reorganizing its capital structure as discussed in this
document.

                                       28
<PAGE>   31

       The foregoing cautionary statements expressly qualify all written or oral
forward-looking statements attributable to the Company.

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 1, 2000 for a detailed
discussion of these risks.


                                       29
<PAGE>   32

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        Not applicable

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

       On August 4, 2000, the Company issued and sold 700,000 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 shares were issued to one director and five
entities controlled by or affiliated with two directors of the Company for a
cash price of $2.00 per share, for an aggregate offering price of $1,400,000.
The Company paid no underwriter discounts or commissions. Specifically, Cockrell
Investment Partners, L.P., Cockrell Equity Partners, L.P., Thomas D. Simmons,
Jr., Simmons Family Trust, Thomas Dudley Simmons, Jr. Marital Trust and Simmons
1987 Basket Trust acquired 532,200, 67,800, 33,333, 33,333, 16,667, and 16,667
shares, respectively. Mr. Ernest Cockrell, a director of the Company, is 35.3%
owner and the Chairman of the general partner of Cockrell Investment Partners,
L.P. and is 35.4% owner and the Chairman of the general partner of Cockrell
Equity Partners, L.P. Mr. Thomas Simmons, a director of the Company, is
Co-Trustee of the Simmons Family Trust, Trustee of the Thomas Dudley Simmons,
Jr. Marital Trust, and manager of the Simmons 1987 Basket Trust. These
purchasers were the only offerees in these transactions, and no public
solicitation was made. All offerees were provided access to relevant information
regarding the Company, and the share certificates issued to each of them contain
a restrictive legend prohibiting transfer of the shares in violation of federal
securities laws.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

       As of December 30, 2000, the Company was in default on the Consolidated
Leverage Ratio, Maximum Senior Leverage Ratio, Consolidated 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 on both its Domestic Credit
Facility and Subordinated Notes.

       Beginning on June 30, 2000 and through December 31, 2000, the Company
failed to make required term loan facility payments on the Domestic Credit
Facility of $750,000 at the end of each calendar quarter for a total of $2.3
million. On September 30, 2000 and December 30, 2000, the Company did not make
required acquisition loan facility principal payments on the Domestic Credit
Facility of $765,000 at the end of both calendar quarters for a total of $1.5
million. On November 30, 2000, the Company stopped making interest payments on
the Domestic Credit Facility. Total unpaid interest at December 31, 2000 was
$1.7 million. The total arrearage on this indebtedness as of December 31, 2000,
was $5.5 million.

       Beginning on June 30, 2000 and through December 31, 2000, the Company
stopped making required quarterly interest payments due of approximately
$450,000 on the Subordinated Notes. The total arrearage on this indebtedness as
of December 31, 2000 is approximately $1.4 million.

       Beginning on July 1, 2000 and subsequent thereto, the Company was not in
compliance with the minimum tangible net worth, maximum leverage ratio and
minimum interest coverage and debt service coverage ratio covenants in the
agreement governing its European Credit Facility with ABN-AMRO and ING Bank. The
Company's wholly-owned subsidiary, Denali International Holdings B.V., failed to
make scheduled principal payments of NLG 625,000 ($267,048) due on October 1,
2000 and January 1, 2001 on the European Credit Facility (a total of NLG
1,250,000 or $534,096). Beginning on July 1, 2000, the Company stopped making
interest payments on the borrowings outstanding under the European Credit
Facility. Total unpaid interest is approximately NLG 764,000 or $307,000. The
total arrearage on this indebtedness as of December 31, 2000 is NLG 1,557,000
($841,096).


                                       30

<PAGE>   33

       At July 1, 2000, the Company did not comply with the minimum tangible net
worth covenant in the agreement governing the European Five Year Term Loan with
ABN-AMRO. On September 1, 2000, the Company's wholly-owned subsidiary Welna B.V.
failed to make a scheduled principal payment of NLG 500,000 ($213,639) on the
European Five Year Term Loan with ABN-AMRO. The total arrearage on this
indebtedness as of December 31, 2000 is NLG 500,000 ($213,639).

       On October 1, 2000 and January 1, 2001, the Company failed to make NLG
375,000 ($160,229) quarterly principal payments due on its European Term Loan
with ING Bank. The total arrearage on this indebtedness as of December 31, 2000
is NLG 750,000 ($320,458).

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 5. OTHER INFORMATION

        Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

         A.       Exhibits

                  10.67        Third Forbearance Extension Agreement among
                               Denali Incorporated, Canadian Imperial Bank of
                               Commerce, as administrative agent, and ING (U.S.)
                               Capital LLC, as documentation agent, dated
                               November 6, 2000 (incorporated by reference to
                               the Company's quarterly report on Form 10-Q for
                               the period ending September 30, 2000)


         B.       Reports on Form 8-K

                  None


                                       31

<PAGE>   34

                                   SIGNATURES


       Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                       Denali Incorporated
                                       -------------------
                                          (Registrant)




Date: February 20, 2001                /s/ R. KEVIN ANDREWS
                                       -----------------------------------
                                       R. Kevin Andrews
                                       Chief Financial Officer
                                         (Principal Financial Officer and
                                          Principal Accounting Officer)



                                       32
<PAGE>   35


                                INDEX TO EXHIBITS




Exhibit
Number            Description of Exhibit
-------           ----------------------
   10.67          Third Forbearance Extension Agreement among Denali
                  Incorporated, Canadian Imperial Bank of Commerce, as
                  administrative agent, and ING (U.S.) Capital LLC, as
                  documentation agent, dated November 6, 2000 (incorporated by
                  reference to the Company's quarterly report on Form 10-Q for
                  the period ending September 30, 2000)


*    Filed herewith.


                                       33