SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended July 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-17430
DANZER CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-3431486
(State of other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
17500 York Road
Hagerstown, MD 21740
(Address of principal executive offices) (Zip Code)
(301) 582-2000
(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 [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at
$.0001 par value July 31, 2001
36,007,855 shares
DANZER CORPORATION AND SUBSIDIARIES
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Review by Independent Accountants 3
Condensed Consolidated Balance Sheets - July 31, 2001
and December 31, 2000 4
Condensed Consolidated Statements of Operations 5
Nine Months Ended July 31, 2001 and July 31, 2000
Three Months Ended July 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows 6
Nine Months Ended July 31, 2001 and July 31, 2000
Notes to Condensed Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
PART II - OTHER INFORMATION:
Item 2 - Changes in Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 31
Item 6 - Exhibits and Reports on Form 8-K 31
2
Review by Independent Accountants
---------------------------------
The consolidated statement of financial position as of July 31, 2001, the
consolidated statements of operations for the nine-month period ended July 31,
2001, and the consolidated statements of cash flows for the nine-month period
ended July 31, 2001, have been reviewed by the registrant's independent
accountants, Linton, Shafer & Company, P.A., whose report covering their review
of the financial statements follows.
Independent Accountants' Report
-------------------------------
Board of Directors
Danzer Corporation
We have reviewed the accompanying condensed consolidated balance sheet of Danzer
Corporation and Subsidiaries as of July 31, 2001, and the related condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended July 31, 2001. These financial statements are the
responsibility of the Company's management.
We have also reviewed the condensed balance sheet of U.S. Rubber Reclaiming,
Inc. (the accounting acquirer) as of December 31, 2000, and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended (not presented herein). These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
As discussed in Note 2 and 3, the Company has made an estimate of the Danzer
Corporation preliminary valuation of purchase price and a preliminary allocation
of purchase price. These estimates are material and are based upon the
information as described in the footnotes. The financial statements do not
include any adjustments that might result from the subsequent revision of these
estimates.
Linton, Shafer & Company, P.A.
September 4, 2001
Frederick, Maryland
3
DANZER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
December 31,
July 31, 2001 2000
(Unaudited) (Unaudited)
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 380,685 $ 217,266
Accounts receivable, net of allowances 3,835,851 1,739,573
Accounts receivable, related party 461,648 -
Inventories, net of reserves 5,946,314 677,027
Prepaid expenses and other current assets 1,238,978 582,180
--------------------------------
Total current assets 11,863,476 3,216,046
Property, plant and equipment, at cost, net 23,757,212 7,929,180
Other assets, including intangibles 15,168,874 76,200
--------------------------------
Total assets $50,789,562 $11,221,426
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $12,128,783 $ 2,797,001
Accounts payable 2,603,261 508,820
Accrued salaries and wages 486,411 51,536
Accrued expenses, other 392,950 113,936
Accounts payable, related parties 468,498 158,733
Deferred revenue 621,589 -
--------------------------------
Total current liabilities 16,701,492 3,630,026
Long-term debt, net of current portion 24,969,072 4,801,400
Due to related parties 1,840,958 -
Deferred compensation and income taxes 2,295,209 1,910,000
--------------------------------
Total liabilities 45,806,731 10,341,426
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.0001 per share;
40,000,000 shares authorized in 2001;
20,000,000 in 2000; 36,007,855 shares
outstanding in 2001 and 17,618,218 shares
outstanding in 2000 3,601 1,000
Preferred stock, Series C convertible
preferred stock, par value $.001,
4,500,000 authorized and 3,739,169 shares
issued and outstanding in 2001, no shares
issued and outstanding in 2000 3,739 -
Additional paid-in capital 5,842,043 879,000
Accumulated deficit (866,552) -
Less treasury stock at cost, 95,579 shares
in 2001 and 2000 - -
--------------------------------
Total stockholders' equity 4,982,831 880,000
--------------------------------
Total liabilities and stockholders' equity $50,789,562 $11,221,426
================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
DANZER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
Two Months Seven Months Combined Nine
Three Months Ended Ended Ended Nine Months Months
July 31, December 31, July 31, Ended Ended
----------------------- 2001 2001 July 31, July 31,
2001 2000 Preacquisition Postacquisition 2001 2000
----------------------- ------------------------------------------------------------
Net sales $4,934,872 $3,033,009 $1,998,213 $10,450,846 $12,449,059 $8,781,700
Cost of goods sold 4,311,953 2,512,684 1,890,293 9,076,431 10,966,724 7,517,026
----------------------- ----------------------------------------------------------
Gross profit 622,919 520,325 107,920 1,374,415 1,482,335 1,264,674
Selling, general and
administrative expenses 884,304 663,022 136,741 1,535,440 1,672,181 1,146,078
----------------------- ----------------------------------------------------------
Income (loss) from
operations (261,385) (142,697) (28,821) (161,025) (189,846) 118,596
Interest (expense), net (373,936) (136,228) (31,174) (772,560) (803,734) (390,731)
Other income, net 4,815 110,216 21,927 15,601 37,528 250,853
----------------------- ----------------------------------------------------------
Income (loss) before
income taxes (630,506) (168,709) (38,068) (917,984) (956,052) (21,282)
(Provision for) benefit
from income taxes 60,532 55,714 14,411 51,432 65,843 (6,879)
----------------------- ----------------------------------------------------------
Net income (loss) $ (569,974) $ (112,995) $ (23,657) $ (866,552) $ (890,209) $ (28,161)
======================= ==========================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
DANZER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
Two Months Seven Months Combined Nine
Ended Ended Nine Months Months
December 31, July 31, Ended Ended
2000 2001 July 31, July 31,
Preacquisition Postacquisition 2001 2000
-----------------------------------------------------------
Cash from operating activities:
Net income (loss) $ (23,657) $ (866,552) $ (890,209) $ (28,161)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operations:
Depreciation 90,508 653,492 744,000 409,290
Amortization 438 155,171 155,609 5,647
Loss (gain) on sale of assets - 22,267 22,267 -
(Increase) decrease in:
Accounts receivable (96,262) 977,819 881,557 (276,134)
Inventories 180,644 788,522 969,166 155,105
Prepaids and other current assets (91,694) (349,773) (441,467) (280,594)
Increase (decrease) in:
Accounts payable 111,055 (14,328) 96,727 455,492
Accrued expenses (54,021) (1,263,775) (1,317,796) (6,745)
Other current liabilities 10,093 (164,131) (154,038) (22,918)
Deferred revenue - (49,373) (49,373) -
---------------------------------------------------------
Total adjustments 150,761 755,891 906,652 439,143
---------------------------------------------------------
Cash provided by (used in) operations 127,104 (110,661) 16,443 410,982
---------------------------------------------------------
Cash from investing activities:
Payments to acquire subsidiaries,
net of cash acquired - (18,087,196) (18,087,196) -
Purchase of property and equipment (885,456) (885,456) (823,285)
Repayments from (advances to)
related party (117,836) (434,738) (552,574) -
---------------------------------------------------------
Cash provided by (used in)
investing activities (117,836) (19,407,390) (19,525,226) (823,285)
---------------------------------------------------------
(Continued)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
DANZER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
Two Months Seven Months Combined Nine
Ended Ended Nine Months Months
December 31, July 31, Ended Ended
2000 2001 July 31, July 31,
Preacquisition Postacquisition 2001 2000
-----------------------------------------------------------
Cash from financing activities:
Proceeds from long-term debt
borrowings - 15,681,442 15,681,442 -
Repayments of long-term debt (7,923) (723,228) (731,151) (260,457)
Net borrowings (repayments)
on credit line (50,000) 258,357 208,357 645,964
Advances from related parties - 1,161,099 1,161,099 -
Debt issuance cost - (76,200) (76,200) -
Issuance of common stock of
subsidiaries - 3,380,000 3,380,000 -
---------------------------------------------------------
Cash provided by (used in)
financing activities (57,923) 19,681,470 19,623,547 385,507
---------------------------------------------------------
Net increase (decrease) in
cash (48,655) 163,419 114,764 (26,796)
Cash beginning of period 265,921 217,266 265,921 209,305
---------------------------------------------------------
Cash end of period $217,266 $ 380,685 $ 380,685 $ 182,509
=========================================================
Supplemental disclosures of
cash flow information:
Interest paid $ 28,632 $ 740,562 $ 769,194 $ 390,731
Tax (refunds), net of
refunds received $ - $ (163,000) $ (163,000) $ 37,122
Noncash items:
Imputed seller note from
acquisition $ - $ 822,827 $ 822,827 $ -
Subordinated debt acquired
in acquisition $ - $ 3,250,000 $ 3,250,000 $ -
Debt converted to equity $ - $ 310,000 $ 310,000 $ -
Noncash dividend - reduction
in inventory $700,000 $ - $ 700,000 $ -
Noncash dividend - reduction
in retained earnings $700,000 $ - $ 700,000 $ -
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Danzer Corporation ("Danzer" or the "Company"), a publicly traded New York
Corporation, was reorganized through an Acquisition and Plan of Reorganization
with U.S. Rubber Reclaiming, Inc. and Related Entities ("U.S. Rubber
Companies"), which was consummated on June 21, 2001 (the "Effective Date"). The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary to present fairly the
information set forth therein have been included. The Acquisition and Plan of
Reorganization of Danzer with U.S. Rubber Companies (see Note 2, the
"Acquisition and Plan of Reorganization") was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Danzer subsequent to the Acquisition and Plan of
Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is deemed
to have acquired Danzer.
The fiscal 2000 financial information presented herein represents only the
----
financial results of U.S. Rubber Reclaiming, Inc.
All fiscal 2001 financial information presented in the Condensed Consolidated
Balance Sheet, Condensed Consolidated Statements of Operations, and Condensed
Consolidated Statements of Cash Flows represents the results for U.S. Rubber
Reclaiming for the periods stated and includes the financial results of Champion
Trailer, Inc. from January 1, 2001 through July 31, 2001, Pyramid Coach, Inc.
and DW Leasing, LLC on a combined basis from June 21, 2001 through July 31,
2001, and Danzer for the postmerger period extending from June 21, 2001 to July
31, 2001. In addition, the 2001 financial information presented in the
Condensed Consolidated Statements of Operations and Cash Flows do not include
the financial results of United Expressline, Inc., which was purchased on July
31, 2001. The operating results for the quarter and nine-month period ended
July 31, 2001, are not necessarily indicative of the results that may be
expected for any future periods.
The resulting entities, considered accounting subsidiaries of U.S. Rubber
Reclaiming (the accounting acquirer) and legal subsidiaries of Danzer after the
Acquisition and Plan of Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Danzer Corporation (Danzer, the legal acquirer), a holding company.
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The financial
statements also include the assets, liabilities, equity and results of
operations of D.W. Leasing, LLC. DW Leasing, LLC owns all coaches operated by
Pyramid. All intercompany transactions are eliminated in combination of this
entity.
8
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
All significant intercompany transactions and balances have been eliminated in
consolidation. Also see notes below for other significant accounting policies.
2. ACQUISITION AND PLAN OF REORGANIZATION
On June 21, 2001 ("Acquisition Date"), a change of control of the Registrant
occurred. Through an Acquisition Agreement and Plan of Reorganization dated
June 21, 2001 (the "Reorganization Agreement") by and among Danzer, Danzer
Industries, Inc., a wholly owned subsidiary of Danzer, and Obsidian Capital
Partners, LP ("Obsidian"), Timothy S. Durham (the newly elected Chairman of the
Board of Danzer), and other individual owners of Pyramid and Champion. On the
Acquisition Date, Danzer acquired: all of the outstanding capital stock of
Pyramid in exchange for 810,099 shares of Danzer Series C Convertible Preferred
Stock ("Danzer Preferred"); all of the outstanding capital stock of Champion for
135,712 shares of Danzer Preferred and all of the outstanding capital stock of
U.S. Rubber for 1,025,151 shares of Danzer Preferred. On July 31, 2001, Danzer
acquired all of the outstanding capital stock of United from Obsidian for
2,206,893 shares of Danzer Preferred.
Pursuant to the Reorganization Agreement, Danzer issued 4,177,855 shares of
the Danzer Preferred to Obsidian Capital Partners, LP, Timothy Durham, and other
individual owners of Pyramid and Champion ("Obsidian shareholders"). The shares
of Danzer Preferred are each convertible into 20 shares of common stock and
entitle the holder thereof to cast 20 votes per share at each regular or special
meeting of the Danzer shareholders. The holders of the Danzer Preferred vote as
a single class with the holders of Danzer's common stock. After the series
transactions contemplated by the Reorganization Agreement (the "Reorganization")
were completed on July 31, 2001, the Obsidian shareholders owned shares of the
capital stock of Danzer entitled to cast approximately 75.42% of the total votes
entitled to be cast by all Danzer shareholders and convertible into 75.42% of
all issued and outstanding capital stock of Danzer on a fully converted basis.
The preacquisition Danzer shareholders and their successors own common stock,
which constitutes the remaining capital stock representing 24.58% of the total
voting capital stock. Because U.S. Rubber Companies are so much larger than
Danzer, they will be treated, for accounting purposes, as the acquiror in the
Reorganization. Although for accounting purposes, U.S. Rubber has become the
registrant, for all other purposes, U.S. Rubber, Pyramid and Champion became
subsidiaries of Danzer on June 21, 2001 and United became a subsidiary of Danzer
on July 31, 2001. The registrant's name continues to be Danzer. In addition, the
U.S. Rubber Companies have each have opted to change its fiscal year to the
fiscal year (October 31) used by the Danzer prior to the Reorganization.
The Reorganization and subsequent acquisition of United Expressline, Inc., were
accounted for under the purchase method of accounting. U.S. Rubber, the largest
company owned by the Obsidian shareholders, was considered the acquirer for
accounting purposes and recorded Danzer's assets and liabilities based upon
their estimated fair values, under the purchase method of accounting for
business combinations. The operating results of Danzer have been included in the
accompanying consolidated financial statements from the date of acquisition.
Under the purchase method of accounting, the acquired assets and assumed
liabilities have been recorded at their estimated fair values at the date of the
acquisition. On a preliminary basis, the purchase price has been estimated at
$5.0 million (the trading market value on June 20, 2001 of the Danzer common
stock, plus acquisition costs of $403,000). Approximately $3.3 million has been
allocated to goodwill and other intangibles on a preliminary basis.
9
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITION AND PLAN OF REORGANIZATION, CONTINUED
The acquisition of Champion and Pyramid are also accounted for under the
purchase method of accounting; however, due to the related-party relationships
of the previous owners to the Company, the assets are recorded at net book
value, with no additional goodwill recognized beyond that recorded during the
original acquisition from unrelated third parties.
As discussed above, Champion and Pyramid were previously owned by individuals
some of whom are also members and managing directors of Obsidian Capital
Company, LLC, the General Partner of Obsidian Capital Partners, LLP. Champion
was acquired by the Obsidian shareholders on January 1, 2001 and Pyramid was
purchased by Danzer on June 21, 2001 as a part of the Reorganization. Purchase
accounting and goodwill allocations of $2.6 million and $1.8 million,
respectively, were recorded with respect to Champion and Pyramid, respectively,
when the managing members of the General Partner and others acquired those
entities from unrelated third parties.
3. ACQUISITION OF DANZER CORPORATION AND SUBSIDIARY
As previously described, the Reorganization will be treated, for accounting
purposes, as an acquisition of Danzer and its wholly owned subsidiary, Danzer
Industries, by U.S. Rubber. The following schedule is a description of
acquisition costs of the Danzer and Danzer Industries and the preliminary
purchase price allocation (in thousands):
Preliminary purchase price:
Common stock $4,618
Acquisition costs 403
------
Total preliminary purchase price $5,021
======
Preliminary purchase price allocations:
Tangible net assets acquired $1,733
Goodwill and intangibles acquired 3,288
------
Total preliminary allocation of purchase price $5,021
======
10
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITION OF UNITED EXPRESSLINE, INC.
As previously described, Danzer acquired United on July 31, 2001. The following
schedule is a description of acquisition costs of United and the preliminary
purchase price allocation (in thousands):
Purchase Price:
Cash to seller $11,050
Seller note 1,500
Liabilities assumed 1,670
Acquisition costs 705
-------
Total Purchase Price $14,925
=======
Purchase Price Allocation:
Current assets, including
Accounts receivable and inventory $ 5,544
Land 259
Buildings 1,136
Goodwill 5,428
Intangible assets 1,650
Other assets 908
-------
Total Purchase Price Allocation $14,925
=======
Condensed Balance Sheet of United Expressline, Inc.
at July 31, 2001 (date of acquisition)
(Unaudited)
Current assets $ 5,544
Property and equipment 1,896
Goodwill 5,428
Other assets 2,057
-------
Total $14,925
=======
Current liabilities $ 2,286
Short-term debt 3,098
Long-term debt 8,041
Shareholders' equity 1,500
-------
Total $14,925
=======
11
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. PRO FORMA INFORMATION
The unaudited condensed consolidated results of operations on a pro forma basis
as if the reorganization had occurred as of the beginning of the periods
projected are as follows:
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Danzer, Danzer
Industries, U.S. Rubber, Pyramid and DW Leasing on a combined basis. In
addition, Champion and United are treated as if the business combinations of
these entities occurred at the beginning of the periods presented. The schedule
below includes all depreciation, amortization and nonrecurring charges for all
entities for the periods shown.
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- ---------------------------
2001 2000 2001 2000
-------------------------- ---------------------------
Net sales $16,063,211 $17,535,201 $46,365,418 $49,455,358
Net income (loss) $(1,005,101) $ (423,517) $(2,320,059) $ (940,620)
Net income per share - basic $ (.03) $ (.01) $ (.06) $ (.03)
Net income per share - diluted $ (.01) $ - $ (.02) $ (.01)
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Reorganization been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
6. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out) or market and
are comprised of the following components:
July 31, December 31,
2001 2000
------------------------------
Raw materials $3,531 $ 850
Work-in-process 1,349 -
Finished goods 1,698 435
Valuation reserve (632) (608)
------------------------------
Total $5,946 $ 677
==============================
12
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE
The weighted average number of common shares outstanding has been adjusted for
all periods reported to reflect all common stock and all common stock
equivalents exchanged in the Acquisition and Reorganization.
For the Third Quarter Ended
---------------------------------
July 31, 2001 July 31, 2000
---------------------------------
Net income (loss) $ (890,209) $ (28,161)
=================================
Weighted average number of common
shares - basic 36,007,855 17,760,015
Assumed conversion of preferred
stock - Series C 74,783,386 -
Assumed conversion of outstanding
warrants 200,000 650,000
Assumed conversion of outstanding
options 1,137,500 1,137,500
Assumed conversion of debentures 5,000,000 -
---------------------------------
Weighted average number of common
shares - diluted 117,128,741 19,527,515
=================================
Net income (loss) per share - basic $ (.02) $ -
=================================
Net income (loss) per share - diluted $ (.01) $ -
=================================
13
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS
As a part of the Acquisitions described in Notes 2, 3 and 4 and to provide
working capital, the Company has incurred the following debt as of July 31,
2001:
United Expressline, Inc.
------------------------
Debt
Amount
Lender Terms Collateral & Use (in thousands)
------------------------------------------------------------------------------------------------------------------------------------
First Indiana Bank Not to exceed $3,500,000 or First lien on assets of
Revolving Line of borrowing base, whichever is less, United (working capital
Credit with interest payable at prime + 3/4% loan) $ 3,098
First Indiana Bank $291,000 with principal repayable in First lien on United
Term Loan I monthly installments of $4,850 assets (finance
commencing September 2001, due July acquisition)
1, 2006, with interest payable at
prime + 1% 291
First Indiana Bank $1,116,000 with principal repayable First lien on United
Term Loan II in monthly installments of $6,200 assets (finance
commencing September 2001, due July acquisition)
1, 2006, with interest payable at
prime + 1% 1,116
First Indiana Bank $1,750,000 with principal repayable First lien on United
Loan III in monthly installments of $72,917 assets (finance
commencing September 2001, due July acquisition)
1, 2003, with interest payable at
prime + 2% 1,750
Huntington Capital $3,500,000 with interest payable Second lien on United
Investment Company monthly at a fixed rate of 14% per assets (finance
Senior Subordinated annum, principal due July 26, 2006 acquisition)
Note 3,500
Seller Note $1,500,000 with interest payable Subject to subordination
monthly at a fixed rate of 9% per agreement in favor of
annum, principal due July 27, 2006 Huntington Capital
Investment Company 1,500
Danzer Debentures See below Finance acquisition 500
--------------
Subtotal debt to finance United acquisition 11,755
--------------
14
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS, CONTINUED
Champion Trailer
----------------
Debt
Amount
Lender Terms Collateral & Use (in thousands)
----------------------------------------------------------------------------------------------------------------------
Bank One, Indiana Not to exceed $200,000 or borrowing First lien on all assets
N.A. ("Bank One") base, whichever is less, interest (working capital loan)
Revolving Line of payable at prime + 1/2%
Credit $ 200
Bank One Term Loan I $650,000 with principal repayable in First lien on all assets
monthly installments of $7,738 plus (finance acquisition)
interest at prime plus 3/4%, due
June 2005 541
Bank One Term Loan II $1,118,000 with principal repayable First lien on all assets
in monthly installments of $31,056 (finance acquisition)
plus interest at prime plus 1 1/4%,
due June 2003 683
The Markpoint Equity $1,250,000 with interest payable at Second lien on all assets
Fund Group (MEFG) a fixed rate of 13 1/2%, principal (finance acquisition)
Senior Subordinated due June 2005
Note 1,250
Warrant associated with the MEFG sub
debt 167
Less unamortized discount associated
with put warrant (125)
---------------
Subtotal Champion 2,716
---------------
15
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS, CONTINUED
U.S. Rubber
-----------
Debt
Amount
Lender Terms Collateral & Use (in thousands)
-----------------------------------------------------------------------------------------------------------------------
Bank One Revolving Not to exceed $3,000,000 or First lien on all assets
Line of Credit borrowing base, whichever is less, (working capital loan)
with interest payable at prime +
3/4% $2,160
Bank One Cap Ex Not to exceed $200,000, interest
Line payable at prime + 1% 200
Bank One Term Loan I $2,500,000 with principal repayable First lien on all assets
in monthly installments of $34,725 (finance acquisition)
plus interest at prime plus 1%,
balloon payment of principal and
accrued interest due November 2005 2,240
Bank One Term Loan II $500,000 with principal repayable in First lien on all assets
monthly installments of $2,778 plus (finance acquisition)
interest at prime plus 1%, balloon
payment of principal and accrued
interest due November 2005 496
Seller $1,750,000 with interest payable Secured by stock pledge
monthly at a fixed rate of 14% until agreement of U.S. Rubber
March 31, 2001 then 20% thereafter; stock by Danzer
interest payments deferred through
May 2001; principal and accrued
interest due December 2005 1,750
Seller 1,000,000 noninterest-bearing note Subordinate to bank debt
payable in 24 monthly installments (finance acquisition)
of $41,667 through December 2002;
interest imputed at 14% 599
Various Capital lease obligations 98
--------------
Subtotal U.S. Rubber 7,543
--------------
16
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS, CONTINUED
Pyramid Coach, Inc. and DW Leasing, LLC
---------------------------------------
Debt
Amount
Lender Terms Collateral & Use (in thousands)
-----------------------------------------------------------------------------------------------------------------------
Ford Motor Credit $39,104 repayable in monthly First lien on asset
Installment Loan installments of $667 including (purchase asset)
interest at .9% through October 2005 $ 33
Old National Bank Not to exceed $200,000, interest First lien on all assets
Revolving Line of payable monthly at prime plus 1%, (working capital loan)
Credit due July 2001 200
Various Installment $13,009,626 repayable in monthly First lien on assets
Loans installments totaling $197,000 financed (finance
including interest ranging from 8.5% acquisition and asset
to 13.1% through November 2007 and purchases)
applicable balloon payments
thereafter through December 2007 13,009
Former Shareholders $927,500 repayable in monthly DW Leasing and Pyramid
of Pyramid Coach, installments of $6,956 including Security Agreements
Inc. and Related interest at 9% through December 2003 (finance acuisition)
Companies with a balloon payment of $567,978
Installment Loans in January 2004. 928
--------------
Subtotal Pyramid and DW Leasing 14,170
--------------
17
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS, CONTINUED
Danzer Corporation
------------------
Debt
Amount
Lender Terms Collateral & Use (in thousands)
---------------------------------------------------------------------------------------------------------------------
Various 8% convertible debentures. Interest Unsecured, used to
only through June 2004, thereafter finance United
principal due monthly at $10 for acquisition.
each $1,000 outstanding. Conversion
price of $.10. $ 500
Wells Fargo Revolving credit line up to $1.15 Working capital and
million. Term mortgage loan in the real estate
amount of $600,000 914
-------------
Subtotal Danzer corporation 1,414
-------------
Total Debt 37,598
Less intercompany elimination (500)
Less current portion (12,129)
-------------
Long-term Debt $ 24,969
=============
U.S. Rubber is in technical default of certain financial loan covenants with
Bank One on its long-term debt. U.S. Rubber is working with Bank One to obtain
waivers of the covenant violations, but has not received a waiver as of the date
of this report filing. The noncurrent debt due Bank One in the amount of
$2,086,463 has been reclassified as current debt in the balance sheet until such
time as acceptable waivers or modifications have been obtained.
Champion Trailer is in technical default of certain financial loan covenants
with Markpoint on its long-term debt. Champion has received quarterly waivers
through June 30, 2001 of all defaults, but remains in default for the
classification of debt. The noncurrent debt due Markpoint in the amount of
$1,250,000 has been reclassified as current debt in the balance sheet until such
time as the waivers obtained are for a period longer than 90 days.
D.W. Leasing is in technical default of certain financial loan covenants with
two lenders, Regions Bank and Old National Bank. The lenders have given waivers
to D.W. Leasing for the quarter ended July 31,2001. The noncurrent debt due Old
National and Regions has been classified as long-term for the quarter ended July
31, 2001.
18
DANZER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCING ARRANGEMENTS, CONTINUED
In conjunction with the Acquisition of United, Danzer issued $500,000 of
unsecured 8% convertible debentures. Proceeds were advanced to United
Acquisition Corp. for use in acquiring assets of United Expressline as described
in Note 4. The debentures provide the holder with the right to convert, at any
time, all or part of the debenture into shares of common stock at a conversion
price of $.10 per share subject to adjustment as provided in the debenture
agreement. Interest is payable monthly. Monthly principal payments equal to
$10 for each $1,000 of remaining principal commence July 2004. Any unpaid
principal is due July 2008. The debentures also provide for optional redemption
by the holder under certain conditions after June 30, 2002. The Company also
has optional redemption rights at 101% of principal based on attaining certain
levels of earnings, trading volume and other factors.
9. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing; leasing of transportation equipment; and
butyl rubber processing. All sales are in North America primarily in the United
States. Selected information by segment follows (in thousands):
Third Quarter Ended Nine Months Ended
July 31 (Unaudited) July 31 (Unaudited)
----------------------- ------------------------
2001 2000 2001 2000
----------------------- ------------------------
Revenues
Trailer manufacturing $ 1,759 $ - $ 3,123 $ -
Leasing 499 - 499 -
Butyl rubber reclaiming 2,676 3,033 8,827 8,782
----------------------- ------------------------
Consolidated revenues $ 4,935 $ 3,033 $12,449 $ 8,782
======================= ========================
Segment Profit (Loss)
Trailer manufacturing $ (489) $ - $ (798) $ -
Leasing (6) - (6) -
Butyl rubber reclaiming (75) (113) (86) (28)
----------------------- ------------------------
Net loss $ (570) $ (113) $ (890) $ (28)
======================= ========================
Segment Assets
Trailer manufacturing $26,002 $ -
Leasing 15,194 -
Butyl rubber reclaiming 11,207 12,711
-----------------------
Total assets $52,403 $12,711
=======================
19
DANZER CORPORATION AND SUBSIDIARIES
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
This Quarterly Report on form 10Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Words such as "anticipates", "expects",
"plans", "believes", "seeks", "estimates" and similar expressions identify such
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. Factors which could
cause actual results to differ materially include those set forth in the
following discussion, and, in particular, the risks discussed below under the
subheading "Additional Risks Factors" unless required by law, the company
undertakes no obligation to update publicly forward-looking statements.
OVERVIEW
Since the Reorganization on June 21, 2001, Danzer's Management has focused on
creating consistent reporting systems and communication with each of its
subsidiaries. In addition Management has begun to address the transition of the
subsidiaries from closely held mostly nonaudited private companies to
subsidiaries of a public company. U.S. Rubber, Pyramid, Champion and United are
each subsidiaries of Danzer.
The majority voting shareholder of Danzer, Obsidian Capital Partners, L.P., a
Delaware limited partnership ("Obsidian") acquired U.S. Rubber in December of
2000, Champion in January 2001 and United in July 2001. Because each of its
newly acquired subsidiaries are such recent acquisitions, Management has only
begun the process of operational integration of the subsidiaries under Danzer,
as a holding company. Management intends to focus on the identification and
implementation of manufacturing and administrative efficiencies as well as
marketing and cross-selling opportunities. Management has no prior history in
effecting such an integration of subsidiaries under a holding company and its
ability to successfully accomplish this task will have a substantial impact on
future Company revenues and profits.
Each of the subsidiaries markets its products or services independently;
however, in the future Management expects that there will be cross-selling
opportunities for Champion, United, and Pyramid, as well as manufacturing and
other operational efficiencies that can be achieved between the subsidiaries.
For example, Danzer Industries has never sold its products into the southwestern
United States, but by utilizing Champion as a warehousing and staging facility,
Danzer Industries will be able to sell its products into the Southwest at
competitive prices.
On a consolidated basis Danzer revenue is down from the same period of the prior
year. This is primarily due to interruptions in production at USRR and softer
than expected repair business and sales at Champion.
RESULTS OF SUBSIDIARY OPERATIONS
Prior to the Reorganization, Danzer conducted substantially all of its business
operations through Danzer Industries, Inc. ("DII" or "Danzer Industries") its
wholly owned subsidiary. Danzer Industries is engaged in the design and
manufacture of truck bodies. The Danzer Industries business can be broken down
into two general categories: private label products which are sold directly to
Danzer Industries' largest customer; and proprietary products which are marketed
under the Morrison brand. Sales are expected to be strong in the 4th Quarter and
DII has negotiated and closed a new Credit Agreement with Bank of America
Commercial Finance Corporation ("BOACFC") whereby BOACFC agreed to lend DII
$1,000,000 in a mortgage loan secured by a lien on Danzer Industries' facility
and a
20
DANZER CORPORATION AND SUBSIDIARIES
$1,000,000 Revolving Credit Facility, both of these loans will provide Danzer
Industries with increased liquidity for expected increases in inventories. This
new credit facility replaces DII's prior credit facility. Danzer Industries has
generated positive earnings for the nine months ended July 31, 2001.
U.S. Rubber is engaged in reclaiming scrap butyl rubber into butyl reclaim for
resale to manufacturers of tires and other rubber based products. Because of
the widespread tire recalls at Bridgestone/Firestone and Goodyear, demand for
U.S. Rubber's products has increased significantly over prior periods. However,
U.S. Rubber has not been able to fully take advantage of this demand. First,
U.S. Rubber undertook a complete renovation of its 12" extruder (a key element
of U.S. Rubber's manufacturing process) in January of this year. In the first
half of 2001, U.S. Rubber has expended over $850,000 in this and other major
renovations and the 12" extruder is expected to be fully operational by mid-
September 2001.These renovations have resulted in lower than normal production
through the period ended July 31, 2001. Second, U.S. Rubber obtains its raw
material inventory through an extensive collection system consisting of small
rubber collectors and large scrap tire recyclers. U.S. Rubber has experienced
competition for its raw material inventory from Korean buyers and other overseas
buyers. This competition will have the end result of higher raw material costs;
however, U.S. Rubber has begun this fiscal year, a series of price increases
that Management believes will allow U.S. Rubber to maintain and even increase
its margins despite the higher raw material cost. The competition for raw
material inventory has also contributed to the lower than expected production
rates and gross margins.
Champion manufactures, sells and repairs transport specialty trailers used
primarily in the auto racing industry. Champion has experienced a reduction of
its lucrative repair business resulting in losses through the period ended July
31, 2001. Although Champion has developed an order backlog for the fall of 2001
of more than $1.5 million, and has over $4,500,000 in outstanding quotes for new
business, it must recapture some if not all of its repair business in order to
meet profit expectations. Management is introducing a new bill of materials and
has contracted with a series of new vendors in order to reduce Champion's
operating costs to reverse the loss experience Champion has had since its
acquisition from the previous owner. Further, substantial marketing efforts
have been made to increase the repair business to former levels. Champion owes
$1,161,000 of subordinated debt to Obsidian Capital Partners, LP, the majority
shareholder of Danzer. At the closing of the Acquisition and Plan of
Reorganization, Danzer committed to assume this debt and convert the debt
obligation to equity on the Champion balance sheet; Danzer's commitment includes
the agreement to convert the subordinated debt owed to OCP to Danzer Series C
Preferred Stock at a conversion rate to be determined between Danzer and OCP at
the time of conversion. Danzer intends to conclude these agreements in
September 2001.
United Expressline, Inc. manufactures and sells general use cargo trailers and
specialty trailers used in the racing industry and for other special uses.
United was acquired by Danzer at a second closing as provided under the
Acquisition Agreement and Plan of Reorganization. The closing occurred July 31,
2001. On a proforma basis United will account for over 57% of Danzer's
consolidated revenue. United's prior year financial statements were unaudited;
however, Management has undertaken a substantial review and compilation of
United's financial information in order to complete necessary audits in timely
fashion. Completion of this task is a prerequisite to the Company's timely
filing of its reports; therefore, Management has committed to both extraordinary
expenses and Management attention to complete this task. Preacquisition United
was consistently profitable and Management expects this trend to continue.
United operates two separate production lines in two separate facilities one in
Northern Indiana, the other in Southern Michigan. Management believes that
there are operational savings available in the consolidation of administrative
functions performed at these two facilities and in the consolidation of some
manufacturing and marketing operations with Champion and Pyramid.
21
DANZER CORPORATION AND SUBSIDIARIES
Pyramid is engaged in the leasing of luxury bus coaches with specialized
interior finishes, and used for travel by country and western and rock bands,
entertainment personalities, and other business enterprises for travel and
entertainment. The buses are leased on both short-term (weekly and monthly) and
long-term leases. Utilization for the first four months of 2001 was softer than
expected; however, beginning in April 2001, utilization has steadily increased
from 70.7% to 96.8% in July, and Pyramid's fleet has increased by seven new
luxury coaches. This increased utilization and increased fleet count will
result in Pyramid reporting results better than Management's projections. The
financial information herein includes the results of operations of D.W. Leasing,
LLC ("DW Leasing") as well as Pyramid. DW Leasing is owned by Parties closely
affiliated with Danzer and Obsidian. At the time of the closing of the
Acquisition, Pyramid and DW Leasing conducted cooperative operations through a
management agreement, cross-guarantees of debt and shared management. It is
Management's intention, after transfer of a substantial part of DW Leasing's
assets and liabilities to Obsidian Leasing, Inc., a Mississippi corporation
("Obsidian Leasing") in a IRC (S)351 exchange, to acquire Obsidian Leasing
through the exchange of Series C Preferred Stock for all of the capital stock of
Obsidian Leasing. The planned transaction is conditioned upon the consents of
various lenders who have financed the luxury coaches that are titled in DW
Leasing. Management is currently seeking such consents, and expects to close
the above referenced agreements in September or October of 2001.
NET SALES
Truck Body and Trailer Sales
----------------------------
Danzer Industries, United Expressline, and Champion Trailer comprise the
entities that manufacture and sell truck bodies and trailers. Revenue in this
segment for the nine months ended July 31, 2000 and the three months ended July
31, 2000 was $0, as all of these entities were purchased during 2001. Net sales
for the nine months ended July 31, 2001, and the three months ended July 31,
2001 were $3,123,442 and $1,759,491, respectively. The net sales for these
periods represents seven months of sales for Champion, one month of Danzer and
no sales for United, as it was purchased on July 31, 2001. This segment's
ability to maintain and increase sales depends on many factors not within
Management's control. They include planned capital expenditures by end users in
a very uncertain capital spending economic period, pricing policies by
competitors, Champion's ability to gain market share from Featherlite in the
racing divisions of NASCAR, IRL, drag racing and other related markets, United's
and Danzer's ability to maintain market share, while the integration into the
Obsidian management team begins, and the overall health of the economy and in
this industry has the potential of all having an effect on net sales for this
segment.
Danzer Industries' manufacturing staffing during July 2001 was at a level to
produce 30 units per week inclusive of Mobile Tool and Morrison truck bodies.
Danzer is currently working with a floating Morrison backlog which changes daily
and a set number of 20 Mobile Tool units per week. Morrison units fluctuate
depending upon booked orders and orders for standard units received during the
2-3 week period. Management anticipatse the current Mobile Tool purchase order
will be completed by August 30, 2001. No other orders are expected within the
next several weeks. Therefore, under current backlog conditions, Management
anticipates a workforce reduction of 35-40% during the last week of August 2001.
This condition is expected to prevail for the balance of 2001, unless production
requirements for Morrison units increase substantially prior to receipt of the
next purchase order from Mobile Tool for VERIZON units.
22
DANZER CORPORATION AND SUBSIDIARIES
During the month of September 2001, Danzer Industries expects to produce a total
of 30 Morrison truck bodies per week for sales and stock inventory. Stock
inventory will be closely managed to assure that we are not overstocking while
maintaining adequate stocking levels of popular sizes and models.
Rubber Sales
------------
U.S. Rubber comprises the entity that remanufactures butyl rubber for resale to
tire and other rubber product manufacturers. Net sales for the periods reported
in this segment are as follows:
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
July 31, 2001 July 31, 2000 July 31, 2001 July 31, 2000
------------------------------------ ------------------------------------
Rubber net sales $2,676,784 $3,033,009 $8,827,108 $8,781,700
==================================== ====================================
Net sales in this segment for the nine months ended July 31, 2001 as compared to
July 31, 2001 increased 1% in the amount of $45,408. Net sales in this segment
for the three months ended July 31, 2001 as compared to July 31, 2000 decreased
11.7% in the amount of $356,155. This modest increase was due to U.S. Rubber's
refusal to accept all orders, due to its renovation of its 12" extruder and the
shortage of necessary raw materials to meet order demand.
Coach Leasing
-------------
Pyramid Coach and DW Leasing comprise the entities that lease luxury bus coaches
on daily, weekly, monthly and long-term leases. Revenue from leasing of such
coaches during the 2000 period was $0, as Pyramid was not purchased until June
21, 2001. Pyramid and DW Leasing, for the nine months and three months ended
July 31, 2001, had net revenue of $498,508, which represents one month of
leasing income of coaches.
COST OF GOODS SOLD
Truck Bodies and Trailer Segment
--------------------------------
The Cost of Goods Sold includes all direct and indirect costs of manufacturing
the truck bodies and trailers, including handling, shipping and all indirect
production-related costs. Cost of Goods Sold for this segment for the nine
months and three months ended July 31, 2000 was $0. Cost of Goods Sold for the
nine months and three months ended July 31, 2001 was $2,816,462 and $1,633,176,
respectively.
During the month of July 2001, Danzer was able to negotiate a 15% price
reduction on blank material by changing vendors. This factor will be needed to
offset the expected lower orders from Mobile Tool under its purchase order.
23
DANZER CORPORATION AND SUBSIDIARIES
Rubber Segment
--------------
Cost of goods sold in this segment are as follows:
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
July 31, 2001 July 31, 2000 July 31, 2001 July 31, 2000
------------------------------------ ------------------------------------
Rubber cost of sales $2,471,845 $2,512,684 $7,943,329 $7,517,026
==================================== ====================================
Manufacturing costs have increased from the prior year for the nine-month and
three-month period due to the 12" extruder renovation and Rubber inefficiencies
of mixing poor raw material with quality raw material, due to buying
competition.
Coach Segment
-------------
Cost of revenue for this segment represents the direct cost of leasing luxury
bus coaches, including salaries, commissions, rent, drivers, and related
interest costs. The segment cost of revenue in the amount of $206,932
represents one month's cost of revenue for the nine-month and three-month
periods ended July 31, 2001 included herein.
GROSS PROFIT
Truck Bodies and Trailers Segment
---------------------------------
Gross profit and gross profit percentage in this segment for the nine months
ended July 31, 2000 was $0, as this segment's entities were purchased during
2001. Gross profit and gross profit percentage for the nine months and three
months ended July 31, 2001 were as follows:
Three Months Nine Months
------------------------- -------------------------
Amount Percentage Amount Percentage
------------------------- -------------------------
Truck bodies and trailers $126,315 7.2% $306,980 9.8%
========================= =========================
The low gross profit and gross profit percentage for this segment is due to
Champion's low repair sales and an inability to complete trailers, booked by the
previous owner, in a reasonable period.
Rubber Segment
--------------
Gross profit and gross profit percentage for the nine months ended July 31, 2001
as compared to July 31, 2000, decreased $380,895 and 4.4%, respectively. Gross
profit and gross profit percentage for the three months ended July 31, 2001 as
compared to the July 31, 2000 three-month period, decreased $315,296 and 9.5%.
These reductions were due to lower sales and higher cost of sales, associated
with the extruder renovation project and the lack of and higher raw material
cost, which have affected productivity, as well as the cost of raw materials.
Coach Segment
-------------
The coach segment gross profit and gross profit percentage for 2000 period was
$0, as Pyramid was not purchased until June 21, 2001. For the nine months and
three months ended July 31, 2001, the coach segment had gross profit and gross
profit percentage of $291,576 and 58.49%.
24
DANZER CORPORATION AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
Selling, general and administrative expenses are higher for the nine months
ended July 31, 2001 versus the nine-month period ended July 31, 2000 due to the
purchase and inclusion of Champion SG&A for seven months and the inclusion of
Danzer and Pyramid for one month. This is offset by the cost of settlement of a
commissioned sales person paid in June 2000 in the amount of $409,000.
Selling, general and administrative expenses are higher for the three months
ended July 31, 2000 versus the three months ended July 31, 2000 due to the
purchase and inclusion of Champion, Danzer and Pyramid's SG&A. This is offset
by the $409,000 settlement with a commissioned salesperson paid in the quarter
ended July 31,2000.
INTEREST EXPENSE
The Company's interest expense is a very high percentage when calculated as a
percentage of net sales, as all acquisitions were made utilizing traditional and
nontraditional lending sources and low investment capital by Danzer. For the
nine-month period ended July 31, 2000, the percentage of interest expense to net
sales of 4.4% was lower than the 7.4% for the comparable period ended July 31,
2001, reflecting the additional cost of making the Champion and Pyramid
acquisitions. For the three-month period ended July 31, 2000, the percentage of
interest expense to sales of 4.5% was lower than the 7.6% for the comparable
period ended July 31, 2001.
INCOME TAX PROVISION
The income tax provision for the nine-month period ended July 31, 2000 decreased
by $58,964 to a benefit for the nine-month period ended July 31, 2001. The
income tax benefit is created primarily through the differences in U.S. Rubber's
depreciation expense. Quarterly tax provisions/benefits are based on the
estimated effective tax rate for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Each of the subsidiaries of Danzer have separate revolving credit agreements and
term loan borrowings through which each subsidiary finances its operations along
with cash generated from operations. The high principal balances of some of
these loans reflect the fact that Obsidian highly leveraged the acquisition of
each of Champion, U.S. Rubber, Pyramid, and United. Each of these subsidiaries
will utilize its excess cash in the foreseeable future to pay off this
acquisition financing. On a consolidated basis, as of July 31, 2001, the
Company had approximately $380,000 of cash and cash equivalents. U.S. Rubber
has an available $3,000,000 revolving line of credit with Bank One, Indiana,
N.A.; Champion has an available $200,000 revolving line of credit with Bank One,
Indiana; United has an available $3,500,000 revolving line of credit with First
Indiana Bank, N.A.; and Danzer Industries has an available $1,000,000 revolving
line of credit with Bank of America Commercial finance Corporation ("BOACFC"),
as well as a new $1,000,000 mortgage term loan, the proceeds of which are
available for Company operations. Each of USRR and Champion should increase the
availability under its existing revolving credit facilities in order to meet the
expanded inventory requirements at each subsidiary in the second half of 2001.
Management has begun to address these liquidity issues by working to increase
raw material inventory levels at U.S. Rubber and by funding losses at Champion
through intercompany advances and finished goods financing through DW Leasing
(an affiliate).
25
DANZER CORPORATION AND SUBSIDIARIES
DEBT ISSUES
Among the company's subsidiaries, U.S. Rubber, Champion, and Pyramid have
violated certain requirements and covenants in their debt agreements relating to
maintaining certain minimum ratios and levels of earnings to funded debt and
fixed charge coverage. Management has brought these violations to the attention
of its lenders and is currently in discussion with its lenders to seek waivers
of the violations and/or to amend the covenants to less restrictive ratios in
order to bring these subsidiaries into compliance with their respective debt
instrument requirements. None of the subsidiaries' lenders have declared a
default and they have allowed each of U.S. Rubber, Champion, and Pyramid to
remain in violation of these agreements. In the instance of each U.S. Rubber
and Champion, were a default to be declared, the Company has the right to
enforce a capital contribution agreement with Obsidian Capital Partners, LP up
to $1,000,000 to fund the respective subsidiaries' shortfall. Such payments, if
any, would be applied directly to reduce the respective subsidiaries' debt
obligations to Bank One. Obsidian has a similar agreement with First Indiana
Bank, N.A. in respect of United's loan covenants.
U.S. Rubber's Senior Credit Facility is with Bank One, Indiana, NA; U.S. Rubber
has a Revolving Credit Facility in the maximum amount of $3,000,000 and a term
credit facilities of $200,000, $2,500,000, and $500,000, respectively. These
credit facilities were primarily used for acquisition financing when U.S. Rubber
was acquired on December 29, 2000. In addition, U.S. Rubber has a subordinated
debt obligation to SerVaas, Inc. (the "Seller") in the amount of $1,750,000 and
a subordinated raw material supply agreement with the Seller with a remaining
purchase obligation of $800,000. Management has reached agreement with SerVaas,
Inc. for the company to acquire the Subordinated Note and Supply Agreement for
$1,550,000. Counsel for the Company is in the process of completing the
documentation of this purchase, the net effect of which will be to reduce U.S.
Rubber's liabilities by $1,000,000. This reduction in liability will be
accounted for as an adjustment to Purchase Price.
Management has begun discussion with Bank One in respect of the violations by
U.S. Rubber of the negative covenants of (i) Fixed charge coverage ratio and
(ii) Funded debt to EBITDA ratio. Management has requested a waiver of these
violations and/or an amendment of the Credit Agreement to less restrictive
ratios that would be consistently achievable by U.S. Rubber. In addition,
Management has notified Bank One of loans and advances made to Champion (a
sister subsidiary) in violation of the Credit Agreement and the inclusion of
ineligible accounts in the Borrowing Base Certificates submitted to Bank One
under the Revolving Credit facility in the months of June and July 2001. Bank
One has not declared a default in respect of these violations and Management
expects to receive a waiver of these violations as requested.
Champion's Senior Credit facility is also with Bank One, Champion is not in
violation of its Senior Credit facility; however, Champion is also indebted to
Markpoint Equity Fund IV under a subordinated credit facility in the amount of
$1,250,000. Champion has been in violation of the funded debt to EBITDA
negative covenant of the Markpoint Credit Agreement since the inception of the
loan. This is primarily because the credit agreement's definition of funded
debt includes all subordinated debt, a fact which Management disputes.
Management brought this violation to Markpoint's attention at the time of its
first quarter submission of financial information and again prior to the close
of the Acquisition and has obtained a waiver of the violation each quarter,
Markpoint has informed Management that it will continue to waive this violation,
but that each waiver shall be for the duration of only 90 days. Management has
requested that Markpoint rewrite this covenant in order to eliminate the
violation; however, to date Markpoint has not revised the covenant despite an
expressed willingness to do so.
Pyramid is a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid have been in violation of the Funded Debt to
EBITDA ratio in the Regions Bank Credit Facility
26
DANZER CORPORATION AND SUBSIDIARIES
since the inception of the loan. This is due to the fact that DW Leasing has
acquired eight additional new luxury coaches in the past six months, which
coaches are highly leveraged. At the time of the Acquisition, Regions Bank
granted a waiver of this violation and agreed to rewrite the covenant to
eliminate this continuing violation; however, since the time of such commitment,
Pyramid's loan officer has left the bank and to date there has not been an
acknowledgement on the part of the bank to rewrite the covenant or take other
action. In the event Regions Bank should declare a default, Management believes
the collateral supporting the Regions credit facility is readily financeable.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Danzer now consists of a business combination of Danzer Corporation and various
recently purchased manufacturing entities of Obsidian Capital Partners, L.P.
The management resources to date have been spent on purchasing, continuing
operations at preacquisition capability after the purchase, and integrating
subsidiary operations with Obsidian management. The date of purchase of each
entity by the current management:
Operating Entity Date of Purchase
---------------- ----------------
U.S. Rubber Reclaiming, Inc. December 29, 2000
Pyramid Coach, Inc. December 20, 1999
Champion Trailer, Inc. May 2, 2000
Danzer Industries, Inc. June 21, 2001
United Expressline, Inc. July 31, 2001
Management's attention to day-to-day operating issues and the solution of such
issues has just started to commence, because of the very recent dates of
purchase. Management's ability to successfully integrate these five operating
companies will be determinative of later success. Employee uncertainty and lack
of Management focus during the initial stages of purchase and continuing
integration is disruptive to the business of the Danzer subsidiaries. Retention
of employees through continued advancement, and support of the Company's ongoing
manufacturing capability, ongoing sales and marketing efforts will be required,
but is not assured.
Danzer's ability to stabilize operations and to eventually achieve growth of
each of its segments will require it to implement and continually expand its
operating and financial systems. This implementation will carry a significant
disproportionate cost to the operations in the next 12 to 18 months which will
have a negative impact on revenues Danzer expects any significant growth would
place a strain on its operational resoures and its financial systems. Failure
to effectively manage any growth would have a material adverse effect on
Danzer's business, financial condition, results of operations or cash flows.
Danzer's future success will depend in large part on retaining key subsidiary
management team personnel and its ability to train and incentivize such
personnel and to attract certain sales, marketing, accounting and management
personnel to the Company to effect the integration of the recently acquired
subsidiaries under the Danzer operating umbrella.
The Company is also exposed to market risk from interest rate changes associated
with the financing arrangements as part of these acquisitions.
27
DANZER CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
On June 21, 2001 ("Acquisition Date"), a change of control of the Registrant
occurred. Through an Acquisition Agreement and Plan of Reorganization dated
June 21, 2001 (the "Reorganization Agreement") by and among Danzer, Danzer
Industries, Inc., a wholly owned subsidiary of Danzer, and Obsidian Capital
Partners, LP ("Obsidian"), Tim Durham (the newly elected Chairman of the Board
of Danzer), and other individual owners of Pyramid and Champion. On the
Acquisition Date, Danzer acquired: all of the outstanding capital stock of
Pyramid in exchange for 810,099 shares of Danzer Preferred Stock ("Preferred");
all of the outstanding capital stock of Champion for 135,712 shares of Danzer
Preferred and all of the outstanding capital stock of U.S. Rubber for 1,025,151
shares of Danzer Preferred. On July 31, 2001, Danzer acquired all of the
outstanding capital stock of United from Obsidian for 2,206,893 shares of Danzer
Preferred.
Pursuant to the Reorganization Agreement, Danzer issued 4,177,855 shares of its
preferred stock to Obsidian Capital Partners, LP, Timothy Durham, and other
individual owners of Pyramid and Champion ("Obsidian shareholders"). The
Preferred Shares exchanged are Series C Convertible Preferred Stock, designated
$.001 per value per share, with voting rights equal to common shareholders based
upon the Preferred Shares conversion rights of exchange of 20 common shares for
each 1 preferred share owned. After the series of transactions were completed
on July 31, 2001, the Obsidian shareholders owned 75.42% of the total voting,
convertible capital stock (Preferred) of Danzer. The existing Danzer
shareholders own the remaining capital stock representing 24.58% of the total
voting capital stock (Common). In June 2001, Danzer issued an aggregate of
1,750,000 shares of Danzer unregistered common stock in connection with the
exchange of $350,000 of debt. Further, in July 2001, Danzer issued an aggregate
of 16,497,840 shares of Danzer unregistered common stock in exchange for 824,892
of Series C preferred stock. These shares were offered and sold in transactions
which were exempt from Securities Act registration under Section 4(2) of the
Securities Act, relating to sales by an issuer not involving a public offering.
No underwriters were involved in the sale of these shares.
The following schedule summarizes the security transactions as of and for the
nine-month period ended July 31, 2001.
28
DANZER CORPORATION AND SUBSIDIARIES
SCHEDULE OF SECURITY TRANSACTIONS
Common Stock
Beginning Ending as of Shares Shares Equivalent
11/01/00 Increases Decreases 7/31/01 Registered Unregistered 7/31/01
--------------------------------------------------------------------------------------
Registered Common Shares outstanding,
beginning 17,760,015 17,760,015 17,760,015 17,760,015
Common Stock (Unregistered)
Cadema $350,000 loan conversion 1,750,000 1,750,000 1,750,000
Conversion of Pyramid shareholders and
Mark Kennedy shares from preferred C
Timothy Durham 6,885,840 6,885,840 6,885,840
Terry Whitesell 6,885,840 6,885,840 6,885,840
Jeffrey Osler 810,100 810,100 810,100
Steve Blaising 810,100 810,100 810,100
Scott McKain 810,100 810,100 810,100
Marcus Kennedy 268,720 268,720 268,720
Durham Whitesell and Associates, LLC 27,140 27,140 27,140
---------------------------------------
Shares outstanding, end of period 36,007,855 17,760,015 18,247,840 36,007,855
=======================================
Convertible preferred
Pyramid shareholders 810,099 810,099 - -
Champion shareholders 135,712 14,793 120,919 120,919
U.S. Rubber Reclaiming shareholders 1,025,151 1,025,151 1,025,151
United shareholders 2,206,893 2,206,893 2,206,893
Huntington Capital 386,206 386,206 386,206
------------ --------------
Shares outstanding, end of period 3,739,169 3,739,169 74,783,386
============ ==============
(continued)
29
DANZER CORPORATION AND SUBSIDIARIES
SCHEDULE OF SECURITY TRANSACTIONS
Common Stock
Beginning Ending as of Shares Shares Equivalent
11/01/00 Increases Decreases 7/31/01 Registered Unregistered 7/31/01
--------------------------------------------------------------------------------------
Convertible Debentures
500000 @ .1 per - 500,000 500,000 5,000,000
==========
Stock Options
Mcglaughlin
10/01/00 at .1 90,000 90,000 90,000
11/01/00 @ .1 90,000 90,000 90,000
12/02/00 @ .05 75,000 75,000 75,000
Williams
11/01/00 @ .1 157,500 157,500 157,500
4/04/00 @ .1 600,000 600,000 600,000
12/02/00 @ .05 125,000 125,000 125,000
----------
Total Stock Options 1,137,500
==========
Warrants
8/02/00 @ .25 (Smith) 650,000 450,000 200,000 200,000
========== ------------
Total Common Stock Equivalents 117,128,741
============
30
DANZER CORPORATION AND SUBSIDIARIES
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
In August of 2000, a meeting of stockholders of the Company was held. At the
meeting Danzer's shareholders approved an increase in the Danzer's authorized
common stock from 20,000,000 to 40,000,000. An amendment to the Articles of
Incorporation of the Company effecting this change was filed July 5, 2001 with
the Secretary of State of New York.
Item 5. Other Information
As previously disclosed, management of Danzer has, since June 21, 2001 focused
its efforts on integrating the U.S. Rubber Companies, including the financial
reporting systems of these entities with those of Danzer. Among other
challenges faced by management in this effort, are record keeping systems at
Champion, Pyramid and United which may not be entirely consistent with public
company standards. To the extent that management is not able to bring the
reporting systems of these companies into compliance with Danzer's standards,
Danzer's reporting under the Securities Exchange Act of 1934, as amended, may be
delayed from time to time.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Acquisition Agreement and Plan of Reorganization, dated as of June
21, 2001, incorporated by reference to the Exhibit 2.1 to the
Registrant's Report on Form 8-K, filed on August 15, 2001.
99.1 Unaudited Balance Sheet and related footnotes for U.S. Rubber
Reclaiming as of December 29, 2000 (date of acquisition by Obsidian
Capital Partners)
99.2 Unaudited Balance Sheet and related footnotes for Champion Trailer
Company, L.P. as of January 1, 2001 (date of acquisition by Obsidian
Capital partners)
(b) Reports on Form 8-K
On July 6, 2001, the Company filed a Current Report on Form 8-K.
On August 15, 2001, the Company filed a Current Report on Form 8-K.
31
DANZER CORPORATION AND SUBSIDIARIES
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.
Danzer Corporation
By: /s/ Timothy S. Durham
Chairman and
Chief Executive Officer
Dated: September 4, 2001
32